SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K
For annual and transition reports
pursuant to sections 13 or 15(d) of the
Securities Exchange Act of 1934
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2004
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 No. 0-9624
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 (IRS Employer Identification No.)
of incorporation)
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)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock,
par value $2.00
Indicate by check mark whether 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 past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ X ]
Indicate by check as to whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes ___ No X
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of September 30, 2004 was approximately
$6,885,000. Shares of common stock held by each executive officer and director
and by each person who owns 10% or more of our outstanding common stock have
been excluded since such persons may be deemed affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of October 13, 2004, there were 10,565,204 outstanding shares of the
registrant's common stock.
TABLE OF CONTENTS
PART I
Item 1. Business 1
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 69
Item 9A. Controls and Procedures 69
Item 9B. Other Information 70
PART III
Item 10. Directors and Executive Officers of the Registrant 71
Item 11. Executive Compensation 74
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 76
Item 13. Certain Relationships and Related Transactions 78
Item 14. Principal Accountant Fees and Services 80
PART IV
Item 15. Exhibits and Financial Statement Schedules 81
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this Form 10-K, 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
elsewhere in this document, particularly under "Risk Factors," 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;
o competition;
o execution of our new business strategy;
o changes in laws regulating our industry;
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 a second vessel which we plan to place in service.
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
PART I
Item 1. Business.
General
International Thoroughbred Breeders, Inc., a Delaware corporation ("ITB" or
the "Company"), was incorporated on October 31, 1980. Until the January 1999
sale of Freehold Raceway and leasing to a third party of Garden State Park, we
were primarily engaged, through various operating subsidiaries, in the ownership
and operation of standardbred` and thoroughbred racetracks in New Jersey. For
the period of approximately 22 months after our January 1999 sale of Freehold
Raceway and our leasing of Garden State Park to a third party, our focus
concentrated upon working out the Company's debt problems, by selling our real
properties in an orderly fashion rather than permitting such assets to be lost
by foreclosure. Our efforts in that regard were successful, and in two
transactions, one in May 2000 and the other in November 2000, we sold all of our
real properties and paid our indebtedness in full. Since November 2000, we have
evaluated and continue to look for business opportunities. We are committed to
remaining as an operating company.
To that end, as of April 30, 2001, we acquired, by a bareboat charter,
operations of an offshore gaming vessel, the M/V Palm Beach Princess. This
vessel sails twice daily from the Port of Palm Beach, Florida and, once beyond
the state territorial water's limit, 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 business, to which end we entered into a second
operating agreement with the Port of Palm Beach District on December 18, 2003,
for the berthing of a second vessel, and, on July 6, 2004, we entered into a
bareboat charter for a second vessel, the Empress II. After refurbishing and
retrofitting that vessel, we expect to place the Empress II in service also from
the Port of Palm Beach.
Current Operations
The Palm Beach Princess and, effective July 7, 2004, the Empress II are
chartered by us from Palm Beach Maritime Corporation (formerly MJQ Corp.) and
Palm Beach Empress, Inc., two corporations which are controlled by Francis W.
Murray, our Chairman and Chief Executive Officer. See "PDS Transactions" below.
The Palm Beach Princess is a large, ocean going cruise ship with a
passenger capacity of approximately 850 persons for coastal voyages. The ship is
420 feet long, 6,659 gross tons, and registered in the Republic of Panama.
Originally built in 1964, the ship was substantially reconstructed, refurbished,
and upgraded in 1973, 1984 and 1997. The ship fully complies with the highest
standards of the International Convention on Safety of Life at Sea as applicable
to large passenger ships, and is regularly subjected to safety and health
inspections by the United States Coast Guard and the United States Public Health
Service.
We operate The Palm Beach Princess for 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.
As charterer of the vessel, we are responsible for maintaining the vessel,
all machinery, boilers and other equipment on the vessel, and are responsible
for making all necessary repairs.
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We are responsible for all expenses of operations, including all taxes payable
in respect thereof. As charterer, we have the use of all equipment on board the
vessel at the time it was delivered to us, and are responsible for re-delivery
of the vessel and equipment at the end of the charter period in the same
condition as when we received it, ordinary wear and tear excepted. We are also
responsible for replacing any items of equipment that need to be replaced and,
to the extent equipment may be leased, we are responsible for all rental and
other obligations under the applicable leases (including rental and other
obligations of Palm Beach Maritime Corporation during the term of the charter
under equipment leases in place at inception of our charter). We are to keep all
insurance in place for the vessel and equipment. Palm Beach Maritime Corporation
conductes for us certain administrative functions. All costs incurred are
reimbursed by us to Palm Beach Maritime Corporation.
The Empress II is a smaller vessel than the Palm Beach Princess, being 201
feet long and 4,178 gross tons. The Empress II is registered in the United
States. It was originally built in 1993. The vessel will be refurbished and
refitted for our use as an ocean going casino cruise ship, and is expected to be
placed in service during the fiscal year ending June 30, 2005. Once such work is
complete, the Empress II will have a passenger capacity of approximately 1,100
persons for coastal voyages, and will comply with the highest standards of the
United States Coast Guard regulations as applicable to ships of its class. It
will be subject to safety and health inspections by the United States Coast
Guard and the Florida Department of Public Health. Upon completion of the
improvements, expected to be in early January 2005, the casino space on board
the vessel will occupy approximately 30,000 square feet. We will offer full
casino services (slot machines and major table games), dining, a sports wagering
book, simulcasting, bars and lounges. As with the Palm Beach Princess, gaming
will be permitted only outside of the state's territorial water's limit.
2003 Chapter 11 Case
Effective April 30, 2001, we entered into our first bareboat charter with
Palm Beach Maritime Corporation, owner of the vessel Palm Beach Princess,
pursuant to which we chartered the Palm Beach Princess for the purpose of
operating a casino cruise business from the Port of Palm Beach, Florida. In
order to obtain the bareboat charter, we entered into a letter of intent as of
April 30, 2001, and then concluded a Master Settlement Agreement dated February
22, 2002, with the Chapter 11 Trustee for the Bankruptcy Estate of Robert E.
Brennan (the "Brennan Trustee"), Palm Beach Maritime Corporation and others,
including Francis W. Murray, our Chairman, who was at that time also a director
and officer of Palm Beach Maritime Corporation. (See Item 13, Certain
Relationships and Related Transactions.)
In accordance with the Master Settlement Agreement, through a subsidiary,
we entered into a Purchase and Sale Agreement which provided for our purchase
from the Brennan Trustee of the promissory note of Palm Beach Maritime
Corporation in the original principal amount of $12 million, secured by a ship
mortgage against the Palm Beach Princess (the "Ship Mortgage Obligation"). The
purchase price payable by us for the Ship Mortgage Obligation (including
interest accrued thereon) was $13.75 million. We also entered into a Stock
Purchase Agreement with the Brennan Trustee, pursuant to which we agreed to
repurchase 2,235,000 shares of our common stock controlled by the Brennan
Trustee plus any additional shares of our common stock over which the Brennan
Trustee might subsequently obtain control. With such additional shares, the
number of our shares to be repurchased eventually totaled 3,678,145, all at a
purchase price of $.50 per share (aggregate purchase price of $1,839,072.50).
Our transaction with the Brennan Trustee, including our agreement to
purchase the Ship Mortgage Obligation, was an opportunity which arose out of the
Brennan Trustee's claims against Palm Beach Maritime Corporation and others,
including Mr. Murray, alleging that Palm Beach Maritime Corporation had received
a loan (the Ship Mortgage Obligation) from an entity which, in turn, received
funds from offshore trusts created by Robert E. Brennan (the Company's
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former chairman). The Brennan Trustee acquired the Ship Mortgage Obligation
through a settlement of litigation which the Brennan Trustee brought against
those offshore trusts. We learned of the opportunity to acquire the Ship
Mortgage Obligation and of the opportunity to acquire, at least temporarily
(through the bareboat charter), the vessel and Palm Beach Maritime Corporation's
casino cruise business, through Mr. Murray's connection as a director of Palm
Beach Maritime Corporation.
We began making payments of the purchase price for the Ship Mortgage
Obligation 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. We obtained extensions of the maturity date (in consideration of
our payment of substantial extension fees to the Brennan Trustee) until January
6, 2003. On January 3, 2003, we did not have the funds to complete the purchase
by January 6, 2003 and the Brennan 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, our
subsidiary filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code. Palm Beach Maritime Corporation, the entity which owned the
vessel, also filed for relief under Chapter 11 of the Bankruptcy Code.
The Chapter 11 cases were brought by ITG Vegas, Inc., our subsidiary
operating the Palm Beach Princess, and Palm Beach Maritime Corporation, which
was owned by our Chairman and Chief Executive Officer Francis W. Murray (ITG
Vegas, Inc. and Palm Beach Maritime Corporation are hereinafter called the
"Debtors") 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 Chapter 11 cases did not cover the parent company, ITB,
nor any other of ITB's subsidiaries. ITG Vegas, Inc. 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. Our bareboat charter of the Palm Beach Princess continued
on a month to month basis throughout the Chapter 11 cases.
On September 12, 2003, the Bankruptcy Court issued an order confirming the
Amended Joint Chapter 11 Plan of Reorganization (the "Plan") in the Debtors'
Chapter 11 cases. The Plan was a plan of reorganization under Chapter 11 of the
Bankruptcy Code which was jointly proposed by the Debtors.
On the effective date of the Plan, October 15, 2003 (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 continued as
reorganized debtors.
The Plan included the following principal features:
1. On the Effective Date, all Allowed Administrative Expense Claims and all
Allowed Priority Tax Claims and Allowed Priority Non-Tax Claims were paid in
full (to the extent not already paid).
2. All pre-petition non-insider (non-affiliate), non-insured unsecured debt
of the Debtors was paid in two installments, one-half on the Effective Date and
one-half (with interest thereon at 8% per year from the Effective Date) six
months after the Effective Date.
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3. All non-insider claims covered by insurance were 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 were required to
pursue the insurance proceeds for payment, except with respect to the
deductible, for which the Debtors remained obligated.
4. The Debtors' principal creditor, the Brennan Trustee, was to receive
payment in full of all obligations over a period not to exceed three years.
Significantly, the Debtors' obligations to the Brennan Trustee were combined
with the parent company's (ITB's) indebtedness to the Brennan Trustee arising
out of the stock repurchase, for all of which the Debtors and ITB were jointly
and severally liable. All of the obligations to the Brennan Trustee were secured
by a ship mortgage against the Palm Beach Princess vessel and security interests
in all of the other assets of the Debtors.
5. The payment obligations to the Brennan Trustee consisted of the
following:
(a) The balance of the purchase price that had been payable by ITG Vegas
for the purchase of the Ship Mortgage Obligation, in the amount of $9,750,000;
(b) The balance of our indebtedness to the Brennan Trustee in respect of
our repurchase of stock in the principal amount of $1,511,035.70 (which included
interest accrued to December 13, 2002), plus interest thereon from December 13,
2002 until the Effective Date;
(c) A new obligation of ITB for the purchase of an additional 450,000
shares of our 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 accrued to
the Brennan Trustee on the Effective Date, of which $100,000 was paid on the
Effective Date and the balance ($250,000) was 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 monetized its
receivable from OC Realty, LLC, an affiliate of our Chairman and CEO.
The Payment Obligation accrued interest at 12% per annum. Monthly payments
of $400,000 were required to be made to the Brennan Trustee, to be applied first
to interest accrued and then to principal. In addition, the Brennan Trustee was
entitled to payment of a Stay Bonus in the amount of $200,000 if the Payment
Obligation was not paid in full within 12 months after the Effective Date, and
an additional $100,000 if the Payment Obligation was not 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 was to 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 were imposed under the Plan on ITG Vegas making payments to
affiliated entities, including ITB. Payments of indebtedness to affiliated
entities of ITG Vegas generally were subordinated to the prior payment of all
liabilities to the Brennan Trustee, and intercompany advances and transfers from
ITG Vegas to affiliated entities generally were prohibited, except that, if no
default existed in the obligations to the Brennan Trustee, (i) $50,000 per month
could be paid by ITG Vegas to Palm Beach Maritime Corporation in respect of the
bareboat charter fee for use of the Palm Beach Princess vessel and (ii) $100,000
per month was permitted to be paid by ITG Vegas to ITB under a Tax Sharing
Agreement between them. ITB entered into a Tax Sharing Agreement with ITG Vegas
effective on the Effective Date,
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pursuant to which ITG Vegas was to compensate ITB for the tax savings realized
as a result of ITG Vegas's inclusion in ITB's consolidated group of companies
for federal income tax purposes, in an amount up to $100,000 per month, provided
that no such payments were permitted to be made if any default existed in
respect of the obligations to the Brennan Trustee.
The maximum amount of funds permitted to be upstreamed by ITG Vegas to us
was $100,000 per month under the Tax Sharing Agreement (and, beginning in 2005,
25% of ITG Vegas' annual Free Cash Flow, as defined).
For further information about the Payment Obligations, the covenants of ITB
and the Debtors, and other terms agreed to among the Debtors, ITB and the
Brennan Trustee, reference is made to the Amended Plan of Reorganization, which
is an exhibit to this Report.
By reaching the foregoing consensual plan of reorganization by agreement
with the Brennan Trustee, the Debtors avoided the costs and delays of a
contested confirmation hearing with their largest creditor and developed a Plan
which was believed to be (and has proven to be) feasible. With the consummation
of the PDS Transactions described below, 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.
PDS Transactions
Overview: On July 7, 2004, Palm Beach Maritime Corporation ("PBMC"), its
affiliate Palm Beach Empress, Inc. ("PBE"), the Company and our subsidiaries ITG
Vegas and ITG Palm Beach, LLC closed on the $23 million transaction with PDS
Gaming Corporation, a publicly held company located in Las Vegas. The
transactions were structured as a sale/leaseback by PBMC and PBE, although, as
to $20 million of the $23 million total, it is effectively equivalent to a
secured loan against the Palm Beach Princess and Empress II vessels. Of the $23
million, $14 million was advanced to Palm Beach Maritime Corporation by an
affiliate of PDS as purchase price in purchasing the Palm Beach Princess. The
PDS affiliate leased and chartered the Palm Beach Princess back to Palm Beach
Maritime Corporation and Palm Beach Empress, Inc., which then subchartered the
vessel to our subsidiary, ITG Vegas, Inc. Another $6 million of the $23 million
was advanced for the benefit of Palm Beach Maritime Corporation and Palm Beach
Empress, Inc. for the purchase and retrofitting of the vessel Empress II, which
vessel PDS (through an affiliate) leased and chartered to Palm Beach Maritime
Corporation and Palm Beach Empress, Inc., who, in turn, subchartered the Empress
II vessel to ITG Vegas, Inc. and a new wholly-owned subsidiary of ITG Vegas, ITG
Palm Beach, LLC ("ITG Palm Beach"). The remaining $3 million of funding from PDS
is for ITG Vegas and ITG Palm Beach's lease of gaming equipment for use on the
Palm Beach Princess and Empress II vessels.
All of the outstanding capital stock of PBMC is owned by Francis W. Murray,
our Chairman and Chief Executive Officer. 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 us to secure certain debts
owed to us as described below under "Prior Operations - Sale of Las Vegas Note."
Such sale-leaseback and ensuing subcharters accomplished our purposes of
acquiring, by means of the Empress II subcharter, a second vessel which we plan
to operate from the Port of Palm Beach, and also paying off all of our
indebtedness to the Brennan Trustee. We had been attempting to obtain financing
for the purchase of the Empress II for several months, but were
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unable to obtain financing on our own since all potential lenders required a
mortgage against the Palm Beach Princess, which was owned by Palm Beach Maritime
Corporation. Palm Beach Maritime Corporation was willing to utilize its vessel,
the Palm Beach Princess, to obtain funds to acquire the Empress II and then
subcharter the Empress II and Palm Beach Princess to ITG Vegas and ITG Palm
Beach on a long term basis.
The investment in and operation of the Empress II required retiring all of
our debt to the Brennan Trustee, due to the negative covenants governing our
indebtedness to the Brennan Trustee. Palm Beach Maritime Corporation was willing
to utilize proceeds from its sale of the Palm Beach Princess to pay off all of
our indebtedness to the Trustee, which resulted in termination of our investment
in the Ship Mortgage Obligation held by the Brennan Trustee. In its place, we
(through ITG Vegas) have options to acquire the Palm Beach Princess and Empress
II vessels on terms which will credit our investment in the Ship Mortgage
Obligation against the option exercise prices for the vessels.
Sale-Leaseback of the Princess. Prior to the closing of the PDS Transaction
(the "Closing"), the Palm Beach Princess was owned by PBMC. PBMC was indebted
under the Ship Mortgage Obligation in a principal amount of $12,000,000 plus
accrued interest, the Brennan Trustee was the holder of the Ship Mortgage
Obligation, and our subsidiary, ITG Vegas, had agreed to purchase the Ship
Mortgage Obligation for a purchase price of $13,750,000 (the "Purchase
Obligation"). In addition, we were indebted to the Brennan Trustee in connection
with our repurchase of 3,678,145 shares of our 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 ITB were jointly and severally liable. At the Closing on July 7, 2004,
Cruise Holdings I, LLC ("Cruise I"), a subsidiary of PDS Gaming Corporation
("PDS"), purchased the Palm Beach 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 the 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 Palm Beach 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
Palm Beach Princess and the Empress II ("EBITDAR") is less than $10,000,000 per
year. Any Cash Flow Sweep payments to be made under the Princess Charter will
ultimately be made by ITG Vegas and ITG Palm Beach (as the operators of the
Princess), as described below.
The Princess Charter includes an option for PBMC to purchase the Palm Beach
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
Palm Beach 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 Palm Beach Princess to ITG Vegas and ITG
Palm Beach for the same five year period. ITG Vegas will operate the Princess,
with ITG Palm Beach having joined in the
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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 ITG Palm
Beach 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
Palm Beach Princess. Under the Princess Sub-Charter, PBMC granted to ITG Vegas
and ITG Palm Beach an option to purchase PBMC's right to acquire the Palm Beach
Princess at the end of the term, for an exercise price equal to the appraised
value of the Palm Beach 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 ITG Palm Beach 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 ITG Palm Beach 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 ITG Palm Beach will
be entitled to credits against the exercise price of the Princess Purchase
Option for (i) ITG Vegas' 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 Empress II under the Empress 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 of the Princess Purchase Option may be offset by any debts
owing by PBMC to ITG Vegas and/or ITG Palm Beach.
Acquisition of the Empress II. On March 1, 2004, PBE entered into an
agreement to purchase the vessel known as the M/V Empress II (the "Empress Sale
Agreement") from Empress Joliet Corporation at a purchase price of $3,800,000.
The Empress II 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, will be paid for 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 Empress II 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 Empress 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
operations of the Palm Beach Princess and Empress II as described in respect of
the Princess Charter above.
The Empress Charter includes an option for PBE to purchase the Empress II
at the end of the term and is structured the same as the Princess Charter in
that the monthly payments of
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charter hire under the Empress Charter will reduce the purchase price for the
Empress II to zero (assuming there are no payment defaults) and title will
automatically pass to PBE at (or, if Cash Flow Sweep payments are made, before)
the end of the term of the Empress Charter.
PBMC and PBE also entered into a Sub-Bareboat Charter (the "Empress
Sub-Charter") at Closing to charter the Empress II to ITG Vegas and ITG Palm
Beach for a five year period. ITG Palm Beach will operate the Empress, with ITG
Vegas having joined in the Sub-Bareboat Charter in order to be jointly and
severally liable with ITG Palm Beach for charter hire thereunder. The charter
hire payable by ITG Vegas and ITG Palm Beach under the Empress Sub-Charter is
$100,000 per month ($1.2 million per year) plus one percent (1%) of the gross
operating revenues of the Empress II. Under the Empress Sub-Charter, PBE granted
to ITG Vegas and ITG Palm Beach an option to purchase PBE's right to acquire the
Empress II at the end of the term, for an exercise price equal to the appraised
value of the Empress, to be determined upon the retrofitting and refurbishment
of the Empress II, to which certain amounts are to be credited as described
below (The "Empress Purchase Option"). As consideration for the Empress 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 Empress 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
Empress Purchase Option, ITG Vegas and ITG Palm Beach are to make payments of
$82,695 per month for the first 12 months and $171,702.54 for the remaining term
of the Empress Sub-Charter (i.e., the same amounts as the charter hire payable
by PBMC and PBE under the Empress Charter) (the "Empress Additional Payments").
If ITG Vegas and ITG Palm Beach fail to make any Empress Additional Payments
when due, PBE may terminate the Empress Purchase Option. Upon exercise of the
Empress Purchase Option, ITG Vegas and ITG Palm Beach will be entitled to
credits against the exercise price of the Empress 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 Palm Beach
Princess under the Princess Sub-Charter, described above), plus (ii) the amounts
of costs for the retrofit and improvements to the Empress II which are paid by
ITG Vegas or ITG Palm Beach plus (iii) the aggregate amount of all Cash Flow
Sweep payments made under the Empress Sub-Charter, plus (iv) the portion of the
Empress Additional Payments made for the 13th month through the 60th month of
the term of the Empress 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 of the Empress Purchase Option may be offset by any debts
owing by PBMC to ITG Vegas and/or ITG Palm Beach.
Lease of Gaming Equipment. At Closing, ITG Vegas and ITG Palm Beach 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 ITG Palm Beach. Aggregate rent for all gaming
equipment will be approximately $1.4 million per year. ITG Vegas and ITG Palm
Beach 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 the Company, ITG Vegas, ITG Palm Beach, PBMC and PBE to guaranty
performance
8
of certain of the PDS Transactions. The Company, ITG Vegas and ITG Palm Beach
entered into Guaranty Agreements guarantying the obligations of PBMC and PBE
under the Princess Charter, Princess Master Lease, Empress Charter and Empress
Master Lease. The Company, PBMC and PBE entered into a Guaranty Agreement
guarantying the obligations of ITG Vegas and ITG Palm Beach 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 Empress Sub-Charters,
ITG Vegas entered into a Collateral Assignment of the Maritime Office Complex
Lease and Operating Agreement and Other Lease as well as a Leasehold Mortgage,
pursuant to which it assigned as collateral to Cruise I and Cruise II its rights
under its lease for space, and its operating rights, at the Port of Palm Beach.
Limitation on Upstream Payments to the Corporation. Upstream payments by
ITG Vegas to the Company are limited under the Princess Sub-Charter and Empress
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 ITG
Palm Beach have made all payments due under the Princess Sub-Charter and Empress
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 Empress 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 bare boat charter fees) paid by ITG Vegas to
the Company, PBMC and PBE in any twelve-month period may not exceed $2,400,000.
Prior Operations
In April of 1998, our Board of Directors authorized the exploration of
strategic opportunities for our business, including a possible merger or sale of
all of our racetrack and hotel assets. The Board ultimately decided that a sale
of our assets was the preferred alternative.
On January 28, 1999, we completed the sale of Freehold Raceway, the sale of
a ten acre parcel at Garden State Park and the lease of Garden State Park
facilities to subsidiaries of Greenwood Racing, Inc. The purchase price was $46
million, plus up to an additional $10 million in Contingent Promissory Notes
which would become payable only upon, among other things, the New Jersey
Legislature's approval of off-track betting facilities or telephone account
pari-mutuel wagering on horse racing by certain dates and Greenwood's obtaining
necessary licenses to operate by January 24, 2002. Such contingency did not
occur.
On May 22, 2000, through our wholly-owned subsidiary, Orion Casino
Corporation, we closed on the sale of the non-operating former El Rancho Hotel
and Casino in Las Vegas, Nevada to Turnberry/Las Vegas Boulevard, LLC. The sale
price was $45 million and was paid by: (i) previous cash deposits totaling $2
million; and (ii) the balance of the sale price paid in cash at the closing. The
proceeds from the El Rancho sale were principally used by us to reduce the
outstanding balances on our loan from Credit Suisse First Boston Mortgage
Capital LLC to $14.7 million and to purchase a promissory note of the buyer in
the amount of $23 million (the
9
"Las Vegas Note"), secured by the rights to 100% of the distributable cash of
the buyer in the event of a default, which was convertible at our option into a
33 1/3% equity interest in the buyer. The interest payable under such note was
dependent upon, and payable solely out of, the buyer's net cash flow available
for distribution to its equity owners. 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 was to be paid to us. We were thereafter to receive payments
under the Las Vegas Note equal to 33 1/3% of all distributable cash until the
maturity date, which was to occur on the thirtieth anniversary of our purchase
of the Note. We elected to defer the gain on the sale of the real property until
such time that collectability, under the $23 million Las Vegas Note could be
determined. On June 16, 2004, we sold the Las Vegas Note, as described below
under "Sale of Las Vegas Note."
On November 30, 2000, through our wholly-owned subsidiary, GSRT, LLC, we
closed on the sale of our Garden State Park property, located in Cherry Hill,
New Jersey, to Realen-Turnberry/Cherry Hill, LLC. The purchase price was $30
million and was paid by: (i) previous cash deposits totaling $1 million; (ii) a
Promissory Note (the "Cherry Hill Note") in the face amount of $10 million; and
(iii) the balance of the purchase price paid in cash at the closing. The cash
proceeds from such sale were principally used by us to repay in full the
outstanding balances on our debt to Credit Suisse First Boston Mortgage Capital,
LLC of approximately $14.3 million and to repay in full approximately $3.75
million of principal and interest on the debt to the Chapter 11 Bankruptcy
Trustee for the estate of Robert E. Brennan which had been incurred to purchase
2,904,016 shares of our common stock.
Under the $10 million Cherry Hill Note, the interest payable will be
dependent upon, and payable solely out of, the buyer's net cash flow available
for distribution to its equity owners. After the equity investors in the buyer
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 Cherry Hill Note equal to 33 1/3% of all distributable cash until the
maturity date, which occurs on the fifteenth anniversary of the issuance of the
Note. We may convert the Cherry Hill Note, at our option, into a 33 1/3% equity
interest in Realen-Turnberry/Cherry Hill during the six-month period prior to
the fifteenth anniversary of the issuance of the Note. If not then converted,
the Note will be payable at maturity 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-Turnberry/Cherry Hill's assets over the sum of its liabilities (other
than the Note) and any unreturned equity investment of its owners. We have
elected to defer the gain on the sale until such time that collectability under
the $10 million Note from Realen-Turnberry/Cherry Hill can be determined.
During June 2001, we held auctions at which all of the personal property,
including equipment, furniture, furnishings and art work, that we owned at
Garden State Park was sold for approximately $1.2 million in cash.
Sale of Las Vegas Note
On June 16, 2004, we consummated the sale of the $23 million Las Vegas
Note. The purchaser of the Las Vegas Note was 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, we 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
10
"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 us. As further
consideration, we received the right to use aircraft owned or leased by the
Buyer or its affiliates, for up to 64 hours in total, which we value at
approximately $224,000. The consideration received by us in exchange for the Las
Vegas Note was negotiated at arms-length with the Buyer and the Buyers'
affiliates. To the extent such consideration resulted in the sale of the Las
Vegas Note at a discount, such discount reflected, among other things, our need
to monetize the Las Vegas Note in order to obtain working capital as a result of
the severe, creditor-imposed restrictions on the ability of our operating
subsidiary, ITG Vegas, to distribute profits from its operations to us.
We are not liable for repayment of the principal of the $5 million loan
included in the foregoing consideration. However, we are 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 us matures in 2015 and is similar
to the Las Vegas Note which was sold, in that both generally are payable prior
to maturity only from distributable cash of the maker. The Las Vegas Note was
payable prior to maturity from distributable cash of the entity which had
purchased, in May of 2000, the real property (the "El Rancho Property")
previously owned by our Orion Casino Corporation subsidiary in Las Vegas,
Nevada, which had been the site of the former El Rancho Hotel and Casino. Since
the maker of the Las Vegas Note has not yet finalized plans for development of
that property, the time at which we might have received payments under the Las
Vegas Note (had it not been sold) remained uncertain. The obligor under the
Second Cherry Hill Note is one of the principal partners in the entity which
purchased the Garden State Park real property from our 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, has been
delayed as a result of community opposition to certain elements of the
development plan, and, while we believe that the development plan is now moving
forward, the timing and amount of profits there also remain uncertain. We
already hold 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 we expect will be fully paid in time. While we expect the first
Cherry Hill Note to be fully paid, we are not optimistic that the Second Cherry
Hill Note will be fully paid, and accordingly, we have written down on our books
the amount of the Second Cherry Hill Note substantially below the $35,842,027
face amount thereof, to $4,778,651. See Note 4-A to our financial statements.
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 second vessel which, on July
7, 2004, was chartered to our subsidiary and we expect to operate that second
vessel as a casino cruise ship, similar to the operation of the casino "cruise
to nowhere" business conducted by our ITG Vegas subsidiary since April of 2001.
The other fifty percent (50%) of the stock in Palm Beach Empress, Inc. is owned
by Palm Beach Maritime Corporation, a corporation owned by Francis W. Murray,
our Chairman and Chief Executive Officer. See "PDS Transactions" above.
Significantly, Mr. Parello will have the right to acquire the Second Cherry
Hill Note from us 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 us in exchange for the Second Cherry Hill Note) will
effectively limit the value to us 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
11
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 our 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 Palm Beach
Maritime Corporation, 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 us 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.
Employees
As of June 30, 2004, the Parent Company employed 7 full-time corporate
executive, administrative and clerical personnel. ITG Vegas employs a crew of
approximately 265 and office and management personnel of 78 for the operations
of the Palm Beach casino business.
Competition
From July 1, 2001 to December 9, 2001 the M/V Palm Beach Princess was the
only vessel operating a coastal gaming business from the Port of Palm Beach and
our closest competition was approximately 50 miles away in Ft. Lauderdale,
Florida. From December 10, 2001 until April 29, 2002, when it returned to its
home port of Boston Massachusetts, another coastal gaming vessel, the S.S.
Horizon Edge, operated from Riviera Beach Marina, which is in close proximity to
the Port of Palm Beach. This vessel was 186 feet and had a passenger capacity of
500 people. The M/V Palm Beach Princess is considerably larger at 420 feet with
a passenger capacity of 850 people. The Horizon Edge operated on a similar
schedule as the Palm Beach Princess, that is, two five hour cruises per day, 7
days a week, however, due to its smaller size it canceled more cruises than the
Palm Beach Princess for inclement weather. From June, 2002 until February 15,
2003, the coastal gaming vessel Texas Treasure II (formerly the M/V Contessa)
was operating from the Port of Palm Beach in competition with the M/V Palm Beach
Princess. This vessel is approximately 400 feet, was built in 1968 and has a
passenger capacity of approximately 700 people. This vessel had previously
operated in competition with the Palm Beach Princess from May 13, 1999 until it
discontinued operations on May 15, 2000. We may compete with other vessels which
may from time to time be located in the port on the basis of cruise schedules,
passenger services, amenities, prices, and percentages of gaming win. Our
agreement with the Port of Palm Beach District (see Item 2 - Properties, below)
gives us a competitive advantage as to preferred cruise scheduling times and
convenience of passenger parking areas. A 300 passenger high-speed ferry is
scheduled to begin carrying passengers late in 2004 on daily round trips to
Freeport, Grand Bahamas where gaming is conducted.
There is no assurance that other competing vessels will not enter the
gaming business at
12
the existing Port of Palm Beach, at a new and larger port facility in Palm Beach
or at another port facility in the future. As a practical matter, however, owing
to our operating and dockage agreements with the Port of Palm Beach and City of
Riviera Beach and dock limitations, it will be difficult for competing vessels
to enter service at the Port of Palm Beach or the Riviera Beach City Marina.
In addition to competing with other vessels in the coastal gaming cruise
business, we compete with a variety of other entertainment activities in and
around Palm Beach, Florida, including, but not limited to, land-based Indian
gaming casinos, poker rooms, dog racing, state-sponsored lotteries, short-term
cruises, resort attractions, various sports activities and numerous other
recreational activities. There is no assurance that we will be able to
successfully compete with such other activities.
A referendum proposal will appear on Florida ballots in November, 2004
which, if enacted by a majority of voters statewide, will amend Florida's
Constitution to permit Miami-Dade and Broward Counties subsequently to hold
county-wide referendums on whether to authorize slot machines at pari-mutuel
facilities in those counties.
Weather and Seasonal Fluctuations
The success of our casino cruise business depends to significant extent on
the weather conditions. In particular, inclement weather, or the threat of such
weather, has a direct effect on passenger counts, potentially adversely
affecting our revenues. On relatively rare occasions, bad weather or sea
conditions may result in the cancellation of cruises. Our business is also
subject to seasonal fluctuations. Our peak seasons are the late fall, winter,
and early spring seasons due to the increased local population as well as
increased tourist populations. Subsequent to June 30, 2004, four major
hurricanes severly impacted the State of Florida, two of which directly struck
the Palm Beach area between August 13, 2004 and September 26, 2004. During that
period, tourist travel to our area was adversely effected and the lives of local
residences were significantly disrupted. We cancelled 29 cruises since August,
2004 as a result of the weather, loss of utilities and damage to the surrounding
areas.
Federal and State Regulations - Florida
The effect of amendments in 1994 to the Federal Gambling Ship Act and in
1992 to the Federal Johnson Act was to repeal the prior prohibition under
Federal law of gambling aboard ships performing coastal voyages beyond the
jurisdiction of state territorial waters (three miles on the United States
Atlantic coast), and to permit individual states to enact laws regulating or
prohibiting gambling aboard ships performing coastal voyages from ports located
in such states. From time to time in prior years, bills have been introduced in
the Florida legislature which, if enacted, would prohibit coastal gaming cruises
from Florida ports. No such bills have been enacted and no such bill is
currently pending. There is a risk that the State of Florida may at some future
date regulate or prohibit the coastal cruise gaming business. In addition, the
Federal government could determine to enact regulations or prohibition of
coastal gaming cruises.
Further, from time to time, bills have been introduced seeking to place
passenger surcharges on cruises originating from ports within the State of
Florida. Originally, this surcharge was intended to fund a trust fund to be used
for statewide beach restoration and management. Such bills were subsequently
amended so that the gaming cruise industry would not be taxed. However, there
can be no assurance that similar bills designed to tax passengers on cruises
such as those offered by us will not be introduced in the future. In addition,
while current law and regulations do not now prohibit casino advertising, from
time to time bills have been introduced which, in part, prohibit the
advertisement of any form of gambling in any
13
newspaper, circular, poster, pamphlet, radio, telegraph, telephone or otherwise.
There can be no assurance that such bills will not be reintroduced or enacted in
the future. There has also been litigation instituted in the State of Florida
against gaming cruise operators for allegedly causing a public nuisance. There
can be no assurance that further litigation will not be instituted in the future
which, if successful, could adversely affect the industry in which we operate.
Item 2. Properties.
We lease office space in Wilmington, Delaware which serves as our corporate
headquarters. This lease is for one year and is renewable from year to year. Our
subsidiary, ITB Management, Inc., leases approximately 4,000 square feet of
office space in Bellmawr, New Jersey which serves as an additional
administrative office. The lease is for a two year period, expiring on May 31,
2006, and provides for an option to extend such term for an additional two year
period commencing June 1, 2006. We also lease, on a month to month basis,
approximately 200 square feet of office space in Toms River, New Jersey which
serves as a satellite executive office.
Through our subsidiary, ITG Vegas, Inc. ("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, on May 5, 2003. The term of the
initial lease is five years at $183,200 per year payable monthly. We were also
required to make tenant improvements to the new space in a minimum amount of
$333,000, however the actual cost to make the improvements was approximately
$950,000. We will have the right to a credit of up to a minimum amount of
improvements required of $333,000 of construction costs against the initial term
of our five year lease.
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 Empress II.
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 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 Empress II from the Port, with subsequent renewal options of four and three
years. We are required to commence sailings on or before March 1, 2005. Under
this Operating Agreement, we have agreed to compensate the Port of Palm Beach as
follows:
1. From September 1, 2004 through the commencement of sailings, dockage at
the rate of $1.00 per foot of overall length per day, plus $7,192 for
accrued dockage from prior periods;
2. From September 1, 2004 through the commencement of sailings, wharfage at
the monthly rate of $14,000;
3. After the commencement of sailings, dockage at the rate of $1.00 per
foot of overall
14
length per day for six months, and thereafter at the rate of $1.85 per foot
per day;
4. After the commencement of sailings, wharfage at the rate of $3.50 per
passenger for the first 100,000 passengers per year, $3.00 per passenger
for the next 50,000 passengers per year, and $2.50 per passenger for those
in excess of 150,000 per year; and
5. Commencing six months after the commencement of sailings, a terminal
operating fee of $.75 per passenger for the first 80,000 passengers during
the first year; thereafter, $1.00 per passenger for the first 80,000
passengers per year, $.50 per passenger for the next 70,000 passengers, and
$.25 per passenger for those in excess of 150,000 per year.
Through our subsidiary Riviera Beach Entertainment LLC, we have negotiated
with the City of Riviera Beach, Florida a Dockage Space Agreement dated February
27, 2004, which permits us dockage at the 160 foot main dock at the City Marina
located north of the Port of Palm Beach. While the Agreement does not permit us,
absent further agreement with the City, to operate a day cruise gaming ship from
the dock, it prohibits the City from allowing the dock to be used by any other
day cruise gaming operator. The term of this Agreement is through February 28,
2005, subject to renewal at the discretion of the City. The Agreement provides
for our payment to the City of dockage and other fees totaling $11,000 per
month.
Item 3. 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 Item 1 under this section and Footnote 2). That Chapter 11
case was closed on July 17, 2004.
Item 4. Submission of Matters to a Vote of Security Holders.
We did not submit any matters to a vote of security holders during the
fourth quarter of fiscal year 2004.
15
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Our common stock has been traded infrequently on the Pink Sheets since
September 15, 1998. The following table sets forth, for the fiscal years
indicated, the high and low sales prices for each share of our common stock on
the Pink Sheets based upon information supplied by the Pink Sheets.
High Low
---- ---
2003
First Quarter .45 .16
Second Quarter .21 .16
Third Quarter .18 .14
Fourth Quarter .28 .15
2004
First Quarter .54 .25
Second Quarter 1.48 .20
Third Quarter 1.97 1.03
Fourth Quarter 1.80 1.50
On June 30, 2004, there were approximately 30,000 holders of record of the
shares of our outstanding common stock.
We have not paid any dividends since our inception. The declaration and
payment of dividends in the future will be determined by our board of directors
in light of conditions then existing, including our earnings, financial
condition and capital requirements. We do not anticipate paying dividends in the
foreseeable future.
There were no sales of unregistered securities made by the Company within
the fiscal year ended June 30, 2004.
There were no purchases of Common Stock made by the Company during the
fourth quarter of fiscal year 2004.
16
Item 6 - SELECTED FINANCIAL DATA
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
Years Ended June 30,
---------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------- ------------ ------------ ------------ -------------
Revenues From Operations (1) $ 32,962,239 $ 32,290,599 $ 25,473,777 $ 4,921,091 $ 446,588
Net Income Before Loss on Impairment (1)(4) $ 3,199,970 $ 5,233,826 $ 1,982,603 $ (2,402,142) $ (6,980,831)
(Loss) on Impairment of Note (2) $ (10,000,000) $ 0 $ 0 $ 0 $ 0
Net Income (Loss) $ (6,800,030) $ 5,233,826 $ 1,982,603 $ (2,402,142) $ (6,980,831)
Per Common Share - Basic and Diluted:
Net Income (Loss) Before Impairment $ 0.40 $ 0.54 $ 0.17 $ (0.24) $ (0.78)
Net Income (Loss) $ (0.86) $ 0.54 $ 0.17 $ (0.24) $ (0.78)
Weighted Average Number of Shares 7,933,691 9,720,275 11,480,272 9,987,114 8,980,244
June 30,
---------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------- ------------ ------------ ------------ -------------
Working Capital (Deficiency) (3) $ 556,675 $ (428,412) $ (2,200,346) $ (190,644) $ (17,792,740)
Total Assets $ 50,813,716 $ 54,822,023 $ 45,928,295 $ 41,391,208 $ 58,166,739
Long-Term Debt $ 6,339,396 $ 985,017 $ 0 $ 482,000 $ 482,000
Stockholders' Equity $ 30,566,037 $ 37,586,067 $ 33,961,313 $ 31,973,710 $ 33,870,852
(1) The Company commenced operation of a casino cruise vessel as of April 30,
2001 which materially affects the comparability of a portion of the
information reflected in the above data.
(2) The Company recognized an impairment loss in Fiscal 2004 in the amount of
$10 million which materially affects the comparability of a portion of the
information reflected in the above data.
(3) The working capital presentation in Fiscal 2002 reclassed to long term a
$750,000 deposit that was previously presented as current in Fiscal 2001.
(4) The Company did not pay cash dividends during any of the fiscal years shown
above.
(5) See Management's Discussion and Analysis of Financial Conditions and
Results of Operations and the consolidated financial statements and the
notes thereto for additional information for each of the three years in the
period ended June 30,2004.
17
Item 7.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-K, 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 this 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 general economic and business conditions affecting the tourism
business in Florida;
o competition;
o execution of our new business strategy;
o changes in laws regulating the gaming industry;
o fluctuations in quarterly operating results as a result of seasonal
and weather considerations;
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
a second vessel which we plan to place in service.
Liquidity and Capital Resources
During fiscal 2004, our operating subsidiary's Chapter 11 case severely
limited our ability to make timely payments of obligations owing by our parent
company to its corporate vendors and other creditors, including its CEO, which,
in turn, continued to affect the parent company's ability to procure goods and
services from third parties. On September 12, 2003, the Bankruptcy Court issued
an order confirming the Amended Joint Chapter 11 Plan of Reorganization in the
Chapter 11 case of our operating subsidiary, ITG Vegas, Inc. The Plan became
effective October 15, 2003. See Item 1 of this Report for details of the Plan.
The Plan limited distributions by ITG Vegas to $100,000 per month to the parent
company.
As a result of the parent company's cash flow shortage, in February 2004,
we committed to sell our Las Vegas Note, payable by Turnberry/Las Vegas
Boulevard, LLC in the original principal amount of $23 million, to an affiliate
of Turnberry. We received an initial payment of $1.4 million and a $5 million
non-recourse loan on account of such sale in February, 2004, and an additional
$1.4 million at closing of the sale in June 2004. Also, during the third
quarter, Turnberry paid $466,363 in full payment of another obligation which it
had owed to us. Such cash was used by us to pay down a significant portion of
the outstanding debts of our parent company and other subsidiaries outside of
the Chapter 11 case.
Operating revenues of ITG Vegas, derived from its Palm Beach Casino Line
business, were sufficient to pay its operating expenses and to meet its
obligations for payments of debts under its Chapter 11 Plan. As of June 30,
2004, all pre-petition non-insider (non-affiliate), non-insured unsecured debt
of ITG Vegas had been paid in full and our principal creditor, the Brennan
Trustee, was to receive payment under the Plan over three years from October of
2003, in monthly payments of $400,000 and additional sums as Stay Bonus and
Forbearance Fee, as well as prepayments equal to 75% of Free Cash Flow from the
operations of Palm Beach Casino Line, as more fully described in Item 1 of this
Report under the caption "2003 Chapter 11 Case". As of June 30, 2004, our parent
18
company had approximately $3.2 million in cash remaining from the sale of the
Las Vegas Note. However, the majority of these funds were then subsequently
placed in an account for the improvements to be made to the Empress II as part
of the PDS Transaction and the Company does not have any other source of funds
beyond the amounts permitted to be distributed to it by ITG Vegas.($100,000 per
month as of June 30, 2004; See Discussion of PDS Transaction for post- June 30
changes) The timing and amount of payments on obligations owing to the parent
company at June 30, 2004, comprised primarily of the First Cherry Hill Note and
the Second Cherry Hill Note, remain unpredictable.
The following table sets forth, at June 30, 2004, amounts of contractual
obligations becoming due over the periods indicated:
Year Ended June 30,
----------------------------------------------------------------
There-
2005 2006 2007 2008 2009 after Total
------------ ------------- --------- ---------- ---------- --------- --------------
Notes and Mortgages:
Principal $ 4,679,973 $ 4,095,827 $ -0- $ -0- $ -0- $ -0- $ 8,775,800
Interest 782,128 242,798 -0- -0- -0- -0- 1,024,926
Deferred Interest Payments 600,000 600,000 600,000 600,000 450,000 -0- 2,850,000
Employee Contracts 722,884 327,035 -0- -0- -0- -0- 1,049,919
Operating Leases 554,777 333,144 127,163 97,169 -0- -0- 1,112,252
Purchase Obligations 399,988 61,465 61,006 61,006 61,006 269,441 913,911
Other Long-Term Debt -0- 285,649 -0- -0- -0- -0- 285,649
------------ ------------- --------- ---------- ---------- --------- --------------
Total $ 7,739,750 $ 5,945,918 $ 788,168 $ 758,175 $ 511,006 $ 269,441 $ 16,012,459
============ ============= ========= ========== ========== ========= ==============
We are in default on payment of our indebtedness to Service America in the
principal amount of $160,000, plus interest accrued of $20,400. We are
attempting to negotiate new terms for payment of this obligation, but the
creditor may bring an action to collect this debt.
ITG Vegas'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 ITG Vegas'
operating costs, including charter fees payable to the vessel's owner, fuel
costs and wages, are fixed and cannot be reduced when passage loads decrease.
ITG Vegas is scheduled to place the Palm Beach Princess in wet dock beginning
early in January 2005. During the period of wet dock, it is anticipated that
approximately 10 cruises will be lost and that approximately $150,000 will be
spent on routine maintenance items. However, the extent and costs of repairs
required to be done during the wet dock cannot accurately be determined in
advance.
19
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 Item 1 of this Report, and we prepaid in full all indebtedness to the Brennan
Trustee. The following table sets forth our contractual obligations becoming due
on a pro forma basis, as of June 30, 2004, giving effect to the PDS Transaction
had it been closed by June 30, 2004.
Year Ended June 30,
----------------------------------------------------------------------
There-
2005 2006 2007 2008 2009 after Total
------------ ------------- ------------ ----------- ----------- ---------- -------------
Capital Leases $ 3,134,340 $ 6,761,586 $ 6,761,586 $ 6,761,586 $ 6,761,586 $ -0- $ 30,180,686
Charter Hire Fees 2,062,500 2,250,000 2,250,000 2,250,000 2,250,000 187,500 11,250,000
Vessel Improvements 6,000,000 -0- -0- -0- -0- -0- 6,000,000
Notes and Mortgages:
Principal 712,821 -0- -0- -0- -0- -0- 712,821
Interest 20,966 -0- -0- -0- -0- -0- 20,966
Deferred Interest Payments 600,000 600,000 600,000 600,000 450,000 -0- 2,850,000
Employee Contracts 722,884 327,035 -0- -0- -0- -0- 1,049,919
Operating Leases:
Casino Equipment 795,061 1,362,147 1,362,147 -0- -0- -0- 3,519,355
Administrative & Office 554,777 333,144 127,163 97,169 -0- -0- 1,112,252
Purchase Obligations 399,988 61,465 61,006 61,006 61,006 269,441 913,911
Other Long-Term Debt -0- 285,649 -0- -0- -0- -0- 285,649
------------ ------------- ------------ ----------- ----------- ---------- -------------
Total $ 15,003,337 $ 11,981,026 $ 11,161,904 $ 9,769,761 $ 9,522,592 $ 456,941 $ 57,895,559
============ ============= ============ =========== =========== ========== =============
The PDS Transaction involved, among other things, our chartering a second
vessel, the Empress II. We have committed $2,880,652 towards costs of
refurbishing and retrofitting the Empress II vessel. Start up costs associated
with refurbishing and retrofitting the Empress II vessel and placing it in
service (including marketing expenses and other soft costs), are expected to
amount to approximately $10 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 Empress II
vessel are expected to be provided from working capital of our ITG Vegas
subsidiary. 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 Empress II and by weather related
and other uncertainties affecting its operations. As indicated by the above
table, 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 Empress II. We are dependent upon the
expected additional revenue from the operations of the second vessel to cover
the increased financing costs.
The four hurricanes which have impacted Florida during the six weeks ending
September 30, 2004 have adversely affected our Palm Beach Casino Line operations
during the first quarter of Fiscal 2005, and may adversely affect our liquidity
in subsequent quarters of Fiscal 2005, since we are dependent on cash flow from
those operations for any unforeseen or additional working capital needs.
Outlook:
Based on our historical level of operations we believe that cash generated
from operations will be adequate to meet our anticipated debt service
requirements, capital expenditures 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 payments,
20
or to make anticipated capital expenditures. Our future operating performance
and our ability to service our debt will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond our control. For Fiscal 2005 results could be impacted for the following
reasons.
During the first 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.
Our daily cruises were cancelled during the period of time that the hurricane
threatened the area and for short periods after. Our first quarter results will
be negatively impacted because of the weather conditions and loss of cruises.
On July 7, 2004 we paid off the Brennan Trustee and entered into long term
subcharters in connection with capital lease transactions for two vessels and
equipment. As a result of these transactions, capital lease payments are at a
higher rate of interest (15.3% to 16.54%) than the interest that was being paid
to the Brennan Trustee (12%). Additionally the debt outstanding has increased
significantly. Therefore our subcharter payments predicated on capital lease
interest payments will be significantly higher than the payments to the Brennan
Trustee would have been.
Effective July 7, 2004 we began leasing a second vessel, the Empress II.
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 January 2005 in
time for the beginning of 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 combined operations of the other
vessel.
Results of Operations for the Years Ended June 30, 2004 and 2003
Overall
During the year ended June 30, 2004, the Company reported a net (loss) of
($6,800,030) or a (loss) per share of ($0.86) as compared to income for the
prior year of $5,233,826 or income per share of $0.54. During that year, the
Company recorded an impairment loss in the amount of $10 million on a new note
receivable on the Cherry Hill property (the Second Cherry Hill Note) taken in
exchange, together with cash, for the sale of its note receivable held in the
original amount of $23 million on the El Rancho property. Operationally, the
Company's net income, before the impairment loss, was $3,199,970 as compared to
net income for the prior year of $5,233,826, a decrease of $2,033,856.
Operating revenues for the fiscal year ended June 30, 2004 increased
approximately 5%, however, total expenses before the impairment loss increased
approximately 13% due primarily to an increase in interest expense, primarily in
connection with interest paid on a note for the purchase of the ship mortgage
and the purchase of treasury stock controlled by the Chapter 11 Trustee of the
Bankruptcy Estate of Robert E. Brennan. There were also increased costs of
gaming and fare expenses aboard the ship due to higher passenger counts and an
increase in the costs of operating the vessel. Corporate development costs and
amortization of leasehold improvements also increased substantially reflecting
the Company's search for additional business opportunities and reflecting
additional improvements made to our shore facilities and aboard the ship.
21
Vessel Operations for the Years Ended June 30, 2004 and 2003
During the year ended June 30, 2004, total revenue from vessel operations was
$32,601,396 as compared to $31,080,921 for the year ended June 30, 2003. Gaming
revenue increased $1,173,701 or 4% from $26,354,930 in Fiscal 2003 to
$27,528,631 in Fiscal 2004 primarily as a result of an increase in the passenger
count of 4%, and an increase in the number of cruises during the comparable
periods. Revenue per passenger increased slightly from $118.47 to $118.87. Net
fare and on board income increased $346,774 or 7% primarily associated with an
increase in passenger counts. Casino operating expenses which also includes
food, beverage and entertainment expenses increased $916,017 from $7,889,140 or
30% of casino revenue in Fiscal 2003 to $8,805,156 or 32% of casino revenue in
Fiscal 2004 primarily the result of the increased passenger count and the
increased number of cruises during the comparable periods. Sales, marketing and
advertising expenses increased $374,297 or 12% primarily associated with the
increased fare revenue. On board gift shop, catering and cabin expenses
increased $76,958 from $849,022 in Fiscal 2003 to $925,980 in Fiscal 2004.
Maritime and maintenance costs to operate the ship increased $836,065 from
$5,960,421 in Fiscal 2003 to $6,796,486 in Fiscal 2004 primarily as a result of
increases in the amortization of the dry dock maintenance expense performed in
Fiscal 2004 and our overall increase in operating costs. Finance and
administrative expenses decreased $389,247 or 7% in Fiscal 2004 primarily the
result of a decrease in costs of $440,810 associated with the Chapter 11 case.
Depreciation and amortization expenses increased $488,215 from $234,499 in
Fiscal 2003 to $722,714 in Fiscal 2004 due primarily to the amortization of the
leasehold improvements made to our offices. Total expenses before income taxes
for the comparable periods increased $2,302,305 or 9% from $23,742,058 for the
year ended June 30, 2003 to $26,044,363 for the year ended June 30, 2004
primarily as a result of the increase in the number of passengers and the number
of cruises which increased operating costs, increases in sales and marketing
expenses associated with increased passenger counts. Income before taxes from
operation of the vessel for the year ended June 30, 2004 was $6,557,033 as
compared to $7,338,863 for the year ended June 30, 2003. The ship completed 702
cruises as compared to 709 cruises during the corresponding period last year.
During the year ended June 30, 2004 the vessel was placed in wet dock for six
(6) days.
22
The following is a comparative summary of income and expenses of the Palm Beach
Princess operation for the years ended June 30, 2004 and 2003:
Years Ended
June 30,
---------------------------------------
Description 2004 2003 Change
- ---- ---------------------------------- ------------ ------------ ---------
Passenger Count 274,266 262,346 11,920
Number of Cruises 702 709 (7)
Operating Revenue:
Gaming $ 27,528,631 $ 26,354,930 $ 1,173,701
Fare 7,860,536 7,676,510 184,026
On Board 3,666,320 3,280,563 385,757
Less: Promotional Allowances
Fare (4,709,354) (4,724,444) 15,090
On Board (1,744,737) (1,506,638) (238,099)
------------ ------------ ----------
Net Operating Revenue 32,601,396 31,080,921 1,520,475
------------ ------------ ----------
Operating Costs and Expenses:
Gaming 8,805,157 7,889,140 916,017
Fare 3,546,153 3,171,856 374,297
On Board 925,980 849,022 76,958
Maritime and Legal Expenses 6,796,486 5,960,421 836,065
General and Administrative 3,738,114 3,732,126 5,988
Expenses
Interest and Financing Fees 1,109,221 1,063,646 45,575
Professional Fees - Bankruptcy 400,538 841,348 (440,810)
Depreciation and Amortization 722,714 234,499 488,215
------------ ------------ ----------
Total Operating Costs and Expenses 26,044,363 23,742,058 2,302,305
------------ ------------ ----------
Income Before Income Tax Expense $ 6,557,033 $ 7,338,863 $ (781,830)
============ ============ ==========
Vessel Operations for the Three Months Ended June 30, 2004 and 2003
During the three months ended June 30, 2004, total net revenue from vessel
operations was $8,415,074 as compared to $9,170,327 for the three months ended
June 30, 2003. The decrease in revenue of $755,253 during the comparable
quarters primarily resulted from a decrease in casino gaming revenue primarily
the result of a decrease in table revenue of approximately 16% and a decrease in
slot machine income of approximately 8% during the comparable periods. Net fare
and on board income increased $6,368 as a result of the increased passenger
count of 2%. Casino operating expenses which also includes food, beverage and
entertainment increased $207,761 from $2,109,205 or 27% of gross casino revenue
in Fiscal 2003 to $2,316,966 or 33% of gross casino revenue in Fiscal 2004.
Maritime and legal costs to operate the ship increased $232,500 from $1,513,867
in Fiscal 2003 to $1,746,367 in Fiscal 2004. Expenses incurred in the Chapter 11
proceeding decreased $529,438 as a result of our plan of re-organization being
approved on September 12, 2003. Interest and financing fees increased $399,483
as a result of the forbearance fees on the Trustee Note being recognized
effective October 15, 2003. Income before state income tax expense for the
fourth quarter of operation in Fiscal 2004 was $1,231,842 as compared to
$2,611,349 in the comparable quarter of Fiscal 2003, a decrease of $1,379,508
for the comparable quarters.
23
The following is a comparative summary of income and expenses of the Palm Beach
Princess operation for the three months ended June 30, 2004 and 2003:
Three Months Ended
June 30,
---------------------------------------
Description 2004 2003 Change
- ---- ---------------------------------- ------------ ---------- -----------
Passenger Count 73,741 71,959 1,782
Number of Cruises 182 182 0
Operating Revenue:
Gaming $ 7,095,835 $ 7,857,455 $ (761,620)
Fare 2,083,435 2,077,412 6,023
On Board 1,031,555 946,831 84,724
Less: Promotional Allowances
Fare (1,290,525) 1,243,497) (47,028)
On Board (505,226) (467,874) (37,352)
------------ ---------- -----------
Net Operating Revenue 8,415,074 9,170,327 (755,253)
------------ ---------- -----------
Operating Costs and Expenses:
Gaming 2,316,966 2,109,205 207,761
Fare 1,018,526 788,895 229,631
On Board 236,773 231,210 5,563
Maritime and Legal Expenses 1,746,367 1,513,867 232,500
General and Administrative 934,462 990,835 (56,373)
Expenses
Interest and Financing Fees 696,585 297,102 399,483
Professional Fees - Bankruptcy 11,780 541,218 (529,438)
Depreciation and Amortization 221,774 86,646 135,128
------------ ---------- -----------
Total Operating Costs and Expenses 7,183,233 6,558,978 624,255
------------ ---------- -----------
Income Before Income Tax Expense $ 1,231,841 $ 2,611,349 $(1,379,508)
============ ========== ===========
Results of Operations for the Years Ended June 30, 2003 and 2002
Overall
Revenue for the year ended June 30, 2003 increased $5,816,822 from
$25,473,777 in Fiscal 2002 to $31,290,599 in Fiscal 2003 primarily as a result
of increased gaming revenues generated by the Palm Beach Princess operations
during the comparable periods. Operating expenses increased $1,429,392 from
23,626,965 in Fiscal 2002 to $25,056,357 in Fiscal 2003 primarily the result of
an increase in Palm Beach Princess operating costs during the comparable periods
and costs in the amount of $841,348 associated with the bankruptcy filing,
partially offset by a decrease in development costs and a decrease in corporate
general and administrative expenses during the comparable periods. With respect
to Other Income (Expense), interest expense increased primarily as a result of
increased financing costs incurred during Fiscal 2003 primarily associated with
extension fees charged by the Brennan Trustee in the 1st and 2nd quarters of
Fiscal 2003and interest charges in the 3rd and 4th quarter of Fiscal 2003 in
connection with our liabilities to the Brennan Trustee.
During the year ended June 30, 2003, our net income was $5,233,826 or $.54
per share on weighted average outstanding shares of 9,720,275 as compared to net
income for the comparable period in prior fiscal year of $1,982,603 or $0.17 per
share on weighted average outstanding shares of 11,480,272. The change of
$3,251,223 was primarily the result of the increased revenues and expenses as
discussed above.
24
Vessel Operations for the Years Ended June 30, 2003 and 2002
During the year ended June 30, 2003, total revenue from vessel operations
was $31,080,921 as compared to $25,473,777 for the year ended June 30, 2002.
Gaming revenue increased $5,792,173 or 28% from $20,562,757 in Fiscal 2002 to
$26,354,930 in Fiscal 2003 primarily as a result of an increase in the passenger
count, an increase in the average revenue amount by each passenger, and an
increase in the number of cruises during the comparable periods. Net fare and on
board income decreased $185,028 or 4% primarily associated with competitive
pricing related to the ship competing with another gaming vessel for a portion
of operations in Fiscal 2003. Casino operating expenses which also includes
food, beverage and entertainment expenses increased $741,839 from $7,147,301 or
35% of casino revenue in Fiscal 2002 to $7,889,140 or 30% of casino revenue in
Fiscal 2003 primarily the result of the increased passenger count and the
increased number of cruises during the comparable periods. Sales, marketing and
advertising expenses increased $237,373 or 8% from $2,934,483 in Fiscal 2002 to
$3,171,856 in Fiscal 2003 primarily associated with the increased competition
discussed above. On board gift shop, catering and cabin expenses decreased
$22,871 from $871,893 in Fiscal 2002 to $849,022 in Fiscal 2003. Maritime and
maintenance costs to operate the ship decreased $191,229 from $6,151,650 in
Fiscal 2002 to $5,960,421 in Fiscal 2003 primarily as a result of dry dock
maintenance performed in the prior fiscal year. Finance and administrative
expenses increased $2,509,998 or 75% in Fiscal 2003 primarily the result of a
$600,000 increase in accrued employee bonus compensation costs related to our
full calendar year of operation, $869,760 in financing fees, costs of $841,348
associated with the bankruptcy filing and a decrease in other operating
expenses. Total expenses before income taxes for the comparable periods
increased $3,275,111 or 16% from $20,466,948 for the year ended June 30, 2002 to
$23,742,058 for the year ended June 30, 2003 primarily as a result of the
increase in the number of passengers and the number of cruises which increased
operating costs, increases in sales and marketing expenses associated with
competition and the increases in finance and administrative expenses as
discussed above. Income before taxes from operation of the vessel for the year
ended June 30, 2003 was $7,338,863 as compared to $5,006,829 for the year ended
June 30, 2002. Out of the 711 scheduled cruises during the year ended June 30,
2003, two (2) were cancelled for weather or mechanical difficulties as compared
to Fiscal 2002 where out of 710 scheduled cruises, thirteen (13) cruises were
cancelled for weather or mechanical difficulties. During the year ended June 30,
2003 the vessel was placed in wet dock for five (5) days, whereas the vessel was
placed in dry dock for six (6) days in fiscal 2002.
25
The following is a comparative summary of income and expenses of the Palm Beach
Princess operation for the years ended June 30, 2003 and 2002:
Years Ended
June 30,
--------------------------------------
Description 2003 2002 Change
- --------------------------------- ------------ ------------ ----------
Passenger Count 262,346 232,803 29,543
Number of Cruises 709 697 12
Operating Revenue:
Gaming $ 26,354,930 $ 20,562,757 $ 5,792,173
Fare 7,676,510 7,827,892 (151,382)
On Board 3,280,563 2,853,438 427,125
Less: Promotional Allowances
Fare (4,724,444) (4,628,503) (95,941)
On Board (1,506,638) (1,141,807) (364,831)
------------ ------------ -----------
Net Operating Revenue 31,080,921 25,473,777 5,607,144
------------ ------------ -----------
Operating Costs and Expenses:
Gaming 7,889,140 7,147,301 741,839
Fare 3,171,856 2,934,483 237,373
On Board 849,022 871,893 (22,871)
Maritime and Legal Expenses 5,960,421 6,151,650 (191,229)
General and Administrative 3,738,126 3,049,318 682,808
Expenses
Interest and Financing Fees 1,063,646 193,887 869,759
Professional Fees - Bankruptcy 841,348 0 841,348
Depreciation and Amortization 234,499 118,416 116,083
------------ ------------ -----------
Total Operating Costs and Expenses 23,742,058 20,466,948 3,275,110
------------ ------------ -----------
Income Before Income Tax Expense $ 7,338,863 $ 5,006,829 $ 2,332,034
============ ============ ===========
Vessel Operations for the Three Months Ended June 30, 2003 and 2002
During the three months ended June 30, 2003, total net revenue from vessel
operations was $9,170,327 as compared to $6,643,834 for the three months ended
June 30, 2002. The increase in revenue of $2,526,493 during the comparable
quarters primarily resulted from an increase in casino gaming revenue primarily
the result of an increase in the passenger count of 12% and an increase in the
average revenue per passenger during the comparable periods of 17%. Net fare and
on board income decreased $19,796 as a result of various promotional activities.
Casino operating expenses which also includes food, beverage and entertainment
increased $229,866 from $1,879,339 or 28% of gross casino revenue in Fiscal 2002
to $2,109,205 or 27% of gross casino revenue in Fiscal 2003. Maritime and legal
costs to operate the ship decreased $14,317 from $1,528,184 in Fiscal 2002 to
$1,513,867 in Fiscal 2003. Finance and administrative expenses increased
$442,589 or 52% in Fiscal 2003 primarily the result of an increase in accrued
employee bonus compensation costs related to our full calendar year of
operation, an increase in financing fees and a decrease in other operating
expenses. Costs of $541,218 associated with the bankruptcy filing also increased
expenses. Income before state income tax expense for the forth quarter of
operation in Fiscal 2003 was $2,611,349 as compared to $1,331,711 in the
comparable quarter of Fiscal 2002, an increase of $1,279,638 for the comparable
quarters.
26
The following is a comparative summary of income and expenses of the Palm Beach
Princess operation for the three months ended June 30, 2003 and 2002:
Three Months Ended
June 30,
------------------------------------
Description 2003 2002 Change
- ---------------------------------------- ----------- ----------- -----------
Passenger Count 71,959 61,338 10,621
Number of Cruises 182 176 6
Operating Revenue:
Gaming $ 7,857,455 $ 5,311,166 $ 2,546,289
Fare 2,077,412 2,140,410 (62,998)
On Board 946,831 771,097 175,734
Less: Promotional Allowances
Fare (1,243,497) (1,276,700) 33,203
On Board (467,874) (302,139) (165,735)
----------- ----------- -----------
Net Operating Revenue 9,170,327 6,643,834 2,526,493
----------- ----------- -----------
Operating Costs and Expenses:
Gaming 2,109,205 1,879,339 229,866
Fare 788,895 795,071 (6,176)
On Board 231,210 208,027 23,183
Maritime and Legal Expenses 1,513,867 1,528,184 (14,317)
General and Administrative 990,835 711,529 279,306
Expenses
Interest and Financing Fees 297,102 133,819 163,283
Professional Fees - Bankruptcy 541,218 0 541,218
Depreciation and Amortization 86,646 56,154 30,492
----------- ----------- -----------
Total Operating Costs and Expenses 6,558,978 5,312,123 1,246,855
----------- ----------- -----------
Income Before Income Tax Expense $ 2,611,349 $ 1,331,711 $ 1,279,638
=========== =========== ===========
Other Information - Risk Factors
You should consider the following risk factors that pertain to our
business. The realization of any of these risks could result in significant harm
to our results of operations, financial condition, cash flows, business or the
market price of our common stock. Keep these risk factors in mind when reading
"forward-looking" statements elsewhere in this Form 10-K.
We derive substantially all of our revenues from our offshore gaming operations.
Substantially all of our revenues are currently derived from our operation
of the M/V Palm Beach Princess. Certain of our 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. While we have
generated sufficient revenues from the M/V Palm Beach Princess to pay its
expenses, there is no guarantee that we will be able to continue to cover
operating expenses of that business as well as the new increased monthly debt
service and charter payments associated with the PDS Transaction and our failure
to do so could have materially adverse consequences. (See Item I, Liquidity and
Capital Resources section above)
27
Revenues from our investments in real estate developments are uncertain.
We hold two notes, one in the face amount of $10 million and a second in
the face amount of approximately $35 million, which we have written down to
approximately $4 million based on estimated fair value, payable solely from
distributable cash generated by the purchaser's development or sale of the
former Garden State Park racetrack in Cherry Hill, New Jersey. We could receive
less than the face amount of the $10 million note and less than the book value
of the Second Cherry Hill Note. The times and amounts of all payments under
these notes are uncertain and depend entirely upon the profitability of
Turnberry's development (or resale) of the subject real property.
We face competition to our gaming operations.
We currently compete with a variety of other vacation activities in and
around Palm Beach, Florida, including short-term cruises, resort attractions,
sporting and other recreational activities. We also expect competition in other
areas surrounding Palm Beach in the future. Within fifty miles of the Port of
Palm Beach, there are a number of smaller marinas that are capable of handling
other coastal gaming vessels, although any such vessels necessarily would be
substantially smaller than the Palm Beach Princess. Our operations could compete
directly with the other Palm Beach vessels and in the future we expect
competition to increase as new gaming operators enter our market, existing
competitors expand their operations, gaming activities expand in existing
jurisdictions and gaming is legalized in new jurisdictions.
In general, gaming activities include traditional land-based casinos,
dockside gaming, casino gaming on Indian land, state-sponsored lotteries, video
poker in restaurants, bars and hotels, pari-mutuel betting on horse racing, dog
racing and jai-alai and sports bookmaking. Our operations compete with all of
these forms of gaming and will compete with any new forms of gaming that may be
legalized in the future, as well as with other types of entertainment. Over the
past few years, there has been an attempt to legalize gaming throughout the
state of Florida. While this movement has yet to be successful, it is likely
that the gaming industry will continue to pursue legalization of gaming in
Florida, and we believe that the legalization of gaming in Florida would have a
material adverse impact on our operations. In addition, we are also subject to
competition from other gaming establishments in other jurisdictions, including
but not limited to Atlantic City, New Jersey, Las Vegas, Nevada, the Bahamas,
and riverboat gambling on the Mississippi river. Such competition could
adversely affect our ability to compete for new gaming opportunities and to
maintain revenues.
We are potentially subject to a number of gaming regulations and statutes.
Under Federal law, individual states are permitted to regulate or prohibit
coastal gaming. The state of Florida does not currently regulate coastal gaming.
However, from time to time in prior years, legislation has been introduced
which, if enacted, would prohibit the coastal gaming business. There is the risk
that Florida may at some future date regulate the coastal gaming business. Such
regulation could adversely harm our business.
In addition, the Federal government has also previously considered a
Federal tax on casino revenues and may consider such tax or other regulations
that would affect our gaming business in the future. From time to time,
legislators and special interest groups have proposed legislation that would
expand, restrict or prevent gaming operations in Florida and in other
jurisdictions throughout the country. Any such taxes, expansion of gaming or
restriction on or prohibition of our gaming operations could have a material
adverse effect on our operating results.
28
We are subject to non-gaming regulations.
The M/V Palm Beach Princess and any other vessels which we may operate in
the future must comply with various international and U.S. Coast Guard
requirements as to ship design, on-board facilities, equipment, personnel and
general safety. Our inability to maintain compliance with such regulations could
force us to incur additional costs to retain compliance or require us to buy new
vessels. In addition, we are subject to certain Federal, state and local safety
and health laws, regulations and ordinances that apply to non-gaming businesses
generally, such as the Clean Air Act, the Clean Water Act, and other
environmental rules and regulations. The coverage and compliance costs
associated with such laws, regulations and ordinances may result in future
additional costs to our operations.
We rely on patrons primarily from Florida and tourists from the Northeastern
United States.
We derive a substantial portion of our revenues from patrons from the
southern and central portions of Florida as well as from tourists visiting
Florida from other parts of the United States, particularly the Northeast.
Adverse economic conditions in any of these markets, or the failure of our
vessel to continue to attract customers from these geographic markets as a
result of increased competition in such markets, or other factors such as the
recent terrorist attacks which may lead to a decline in tourist travel, could
have a material adverse effect on our operating results. Conditions and other
factors beyond our control include competition from other amusement properties,
changes in regional and local population and disposable income composition,
seasonality, changes or cancellations in local tourism, athletic or cultural
events, changes in travel patterns or preferences which may be affected by
increases in gasoline prices, changes in airline schedules and fares, strikes
and weather patterns, and our need to make renovations, refurbishments and
improvements to our vessel.
Weather and other conditions could seriously disrupt our operations.
Our gaming operations are subject to unique risks, including loss of
service because of casualty, mechanical failure, extended or extraordinary
maintenance requirements, flood, hurricane or other severe weather conditions.
Our vessel faces additional risks from its movement and the movement of other
vessels on waterways. Palm Beach, Florida is subject to severe storms,
hurricanes and occasional flooding. As a result of such weather conditions, as
well as the ordinary or extraordinary maintenance requirements of our vessel, if
we are unable to operate our vessel, our results of operations will be harmed.
During the first 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. Our daily cruises were
cancelled during the period of time that the hurricanes threatened the area and
for short periods thereafter. The loss of our vessel from service for any period
of time has adversely effected and could in the future adversely affect our
revenues.
We depend on our management to execute our business plan.
Our success is dependent upon the efforts of our current management, in
particular that of our President and Chief Executive Officer, Francis W. Murray.
Since the business of gaming has expanded significantly over the past few years,
competition for qualified employees will be intense. There is no assurance that
such persons can be retained or readily replaced, and there is no assurance that
we will be able to continue to add qualified personnel as required. The loss of
the services of any of our executive officers could adversely affect our
business.
29
We experience quarterly fluctuations in operating results.
Our quarterly operating results are expected to fluctuate significantly
because of seasonality and other factors. We expect to generate the majority of
our income during our third and fourth fiscal quarters ending March 31 and June
30. Such fluctuations could affect our stock price, particularly during the
first and second fiscal quarters.
Our stock price faces volatility as a result of a number of factors.
The market price of our stock is dependent upon future operating results,
and therefore, is highly dependent on specific developments including, but not
limited to, successfully emerging from the ITGV bankruptcy, or defeat of
relevant gaming legislation or related initiatives, weather patterns, and the
general vibrancy of the economy and the Florida tourism industry. Announcements
concerning legislation approving or defeating gaming legislation, various
governmental actions, developments in the gaming industry generally,
announcements by our competition, weather patterns, and other general economic
matters or tourism industry may have a significant impact on the market price of
our common stock.
Terrorist Attacks of September 11, 2001.
The terrorist attacks of September 11, 2001 adversely impacted our
operations and affected our ability to borrow to refinance our debts. These
attacks as well as any similar attacks and/or future security alerts, both
nationally and locally, could have a material adverse effect on our future
operations.
There may be delays or cost overruns in readying the Empress II.
We are committed to refurbishing, refitting and placing into service the
Empress II vessel, expected to cost $10 million or $4 million in excess of
amounts escrowed for such purpose. (See Item I, "Liquidity and Capital
Resources.") We are dependent upon operating revenues to pay such excess costs.
Delays in commencing Empress II operations will adversely affect our cash flow
from operating results and cost overruns could jeopardize our ability to
complete the necessary work.
Item 7A Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable
Item 8 Financial Statements and Supplemental Data.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants .....31
Balance Sheets ...............................32
Statements of Operations .....................34
Statements of Stockholders' Equity ...........35
Statements of Cash Flow ......................36
30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
International Thoroughbred Breeders, Inc.
Wilmington, Delaware
We have audited the accompanying consolidated balance sheets of
International Thoroughbred Breeders, Inc. and subsidiaries as of June 30, 2004
and 2003 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years ended June 30, 2004, 2003 and
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
International Thoroughbred Breeders, Inc. and its subsidiaries as of June 30,
2004 and 2003 and the results of their operations and their cash flows for the
three years ended June 30, 2004, 2003 and 2002 in conformity with U.S. generally
accepted accounting principles.
STOCKTON BATES, LLP
Philadelphia, Pennsylvania
August 20, 2004
31
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 AND 2003
ASSETS
June 30,
-------------------------
2004 2003
----------- -----------
CURRENT ASSETS:
Cash and Cash Equivalents $ 7,508,632 $ 6,123,641
Accounts Receivable 223,411 193,689
Prepaid Expenses 738,504 488,414
Other Current Assets 153,625 390,458
Assets of Discontinued Operations 400,835 399,785
----------- -----------
TOTAL CURRENT ASSETS 9,025,007 7,595,987
----------- -----------
PLANT & EQUIPMENT:
Leasehold Improvements - Port of Palm Beach 944,371 953,110
Equipment 2,186,345 1,278,175
Vessel Not Placed in Service - Royal Star 1,321,494 0
----------- -----------
4,452,210 2,231,285
LESS: Accumulated Depreciation and Amortization 916,186 306,494
----------- -----------
TOTAL PLANT & EQUIPMENT - NET 3,536,024 1,924,791
----------- -----------
OTHER ASSETS:
Notes Receivable 14,778,651 33,000,000
Mortgage Contract Receivable - Related Party 13,750,000 0
Deposit on Mortgage Contract Receivable 0 4,000,000
Deposits and Other Assets - Related Parties 8,410,940 6,687,266
Deposits and Other Assets - Non-Related Parties 334,975 535,239
Spare Parts Inventory 978,119 1,078,740
----------- -----------
TOTAL OTHER ASSETS 38,252,685 45,301,245
----------- -----------
TOTAL ASSETS $ 50,813,716 $ 54,822,023
=========== ===========
See Notes to Consolidated Financial Statements.
32
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 AND 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
-------------------------
2004 2003
------------ ----------
CURRENT LIABILITIES:
Accounts Payable $ 1,104,721 $ 2,264,498
Accrued Expenses 2,169,197 2,341,209
Short-Term Debt 4,186,012 2,934,330
Deferred Interest - Short-Term 514,440 0
Short-Term Debt - Related Parties 183,164 183,164
Liabilities of Discontinued Operations 310,798 301,198
------------ ----------
TOTAL CURRENT LIABILITIES 8,468,332 8,024,399
------------ ----------
LONG-TERM LIABILITIES:
Long-Term Debt - Net of Current Portion 4,095,827 0
Deferred Interest - Long-Term 1,957,920 0
Long-Term Debt - Related Parties 285,649 985,017
------------ ----------
TOTAL LONG-TERM LIABILITIES 6,339,396 985,017
------------ ----------
DEFERRED INCOME 5,439,951 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
Outstanding,7,802,134 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) (46,989,638) (40,189,608)
------------ ----------
32,411,776 39,211,806
LESS:
Treasury Stock, 3,678,146 and 3,228,146
Shares, respectively, at Cost (1,839,073) (1,614,073)
Deferred Compensation, Net (6,666) (11,666)
------------ ----------
TOTAL STOCKHOLDERS' EQUITY 30,566,037 37,586,067
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 50,813,716 $ 54,822,023
============ ==========
See Notes to Consolidated Financial Statements.
33
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002
June 30,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
OPERATING REVENUES:
Gaming $ 27,528,631 $ 26,354,929 $ 20,562,757
Fare 3,151,182 2,952,066 3,199,389
On Board 1,921,583 1,773,926 1,711,631
Other 360,843 209,678 0
------------ ------------ ------------
NET OPERATING REVENUES 32,962,239 31,290,599 25,473,777
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Gaming 8,805,157 7,889,140 7,147,301
Fare 3,868,705 3,381,534 2,934,483
On Board 925,980 849,022 871,893
Maritime & Legal Expenses 6,796,486 5,960,421 6,151,650
General & Administrative Expenses 3,719,601 4,121,811 3,296,116
General & Administrative Expenses - Parent 1,658,761 1,452,047 2,147,414
ITG Vegas Bankruptcy Costs 417,454 841,348 0
Development Costs 700,580 306,952 933,814
Depreciation & Amortization 739,871 254,082 144,294
------------ ------------ ------------
TOTAL OPERATING COSTS AND EXPENSES 27,632,595 25,056,357 23,626,965
------------ ------------ ------------
OPERATING INCOME 5,329,644 6,234,242 1,846,812
------------ ------------ ------------
OTHER INCOME (EXPENSE):
(Loss) on Impairment of Note Receivable (10,000,000) 0 0
Interest and Financing Expenses (2,247,992) (1,338,649) (306,773)
Interest Income 79,320 81,039 124,789
Interest Income Related Parties 247,785 342,226 350,833
Other Income 19,713 60,468 106,192
------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (11,901,174) (854,916) 275,041
------------ ------------ ------------
INCOME (LOSS) BEFORE TAX PROVISION (6,571,530) 5,379,326 2,121,853
Less: Income Tax Expense 228,500 145,500 139,250
------------ ------------ ------------
NET INCOME (LOSS) $ (6,800,030) $ 5,233,826 $ 1,982,603
============ ============ ============
NET BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE $ (0.86) $ 0.54 $ 0.17
============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 7,933,691 9,720,275 11,480,272
============ ============ ============
See Notes to Consolidated Financial Statements.
34
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002
Preferred Common
------------------------- ---------------------------
Number of Number of
Shares Amount Shares Amount
---------- ------------- ------------- -------------
BALANCE - JUNE 30, 2001 362,487 $ 36,248,675 11,480,267 $ 22,960,533
Shares Issued for Fractional Exchanges
With Respect to the One-for-twenty Reverse
Stock Split effected on March 13, 1992 1 100 8 16
Amortization of Deferred Compensation Costs --- --- --- ---
Net Income for the Year Ended June 30, 2002 --- --- --- ---
---------- ------------- ------------- -------------
BALANCE - JUNE 30, 2002 362,488 $ 36,248,775 11,480,275 $ 22,960,549
Purchase of Shares for Treasury in connection
with REB Trustee --- --- --- ---
Shares Issued for Fractional Exchanges
With Respect to the One-for-twenty Reverse
Stock Split effected on March 13, 1992 1 100 3 6
Amortization of Deferred Compensation Costs --- --- --- ---
Net Income for the Year Ended June 30, 2003 --- --- --- ---
---------- ------------- ------------- -------------
BALANCE - JUNE 30, 2003 362,489 $ 36,248,875 11,480,278 $ 22,960,555
Purchase of Shares for Treasury in connection
with REB Trustee --- --- --- ---
Shares Issued for Fractional Exchanges
With Respect to the One-for-twenty Reverse
Stock Split effected on March 13, 1992 --- --- 1 2
Amortization of Deferred Compensation Costs --- --- --- ---
Net(Loss)for the Year Ended June 30, 2004 --- --- --- ---
---------- ------------- ------------- -------------
BALANCE - JUNE 30, 2004 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, 2001 $ 20,192,206 $ (47,406,037)$ 0 $ (21,667)$ 31,973,710
Shares Issued for Fractional Exchanges
With Respect to the One-for-twenty Reverse
Stock Split effected on March 13, 1992 (116) --- --- --- ---
Amortization of Deferred Compensation Costs --- --- 5,000 5,000
Net Income for the Year Ended June 30, 2002 --- 1,982,603 --- --- 1,982,603
------------- ------------- ----------- ---------- ------------
BALANCE - JUNE 30, 2002 $ 20,192,090 $ (45,423,434)$ 0 $ (16,667)$ 33,961,313
Purchase of Shares for Treasury in connection
with REB Trustee --- --- (1,614,073) --- (1,614,073)
Shares Issued for Fractional Exchanges
With Respect to the One-for-twenty Reverse
Stock Split effected on March 13, 1992 (106) --- --- --- ---
Amortization of Deferred Compensation Costs --- --- --- 5,001 5,001
Net Income for the Year Ended June 30, 2003 --- 5,233,826 --- --- 5,233,826
------------- ------------- ----------- ---------- ------------
BALANCE - JUNE 30, 2003 $ 20,191,984 $ (40,189,608)$ (1,614,073)$ (11,666)$ 37,586,067
Purchase of Shares for Treasury in connection
with REB Trustee --- --- (225,000) --- (225,000)
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 --- --- --- 5,000 5,000
Net(Loss)for the Year Ended June 30, 2004 --- (6,800,030) --- --- (6,800,030)
------------- ------------- ----------- ---------- ------------
BALANCE - JUNE 30, 2004 $ 20,191,982 $ (46,989,638)$ (1,839,073)$ (6,666)$ 30,566,037
============= ============= =========== ========== ============
See Notes to Consolidated Financial Statements.
35
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002
June 30,
-----------------------------------------------
2004 2003 2002
-------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
INCOME BEFORE DISCONTINUED OPERATIONS $ (6,800,030) $ 5,233,826 $ 1,982,603
Adjustments to reconcile income to net cash provided by
operating activities:
Depreciation and Amortization 739,871 254,082 144,294
Impairment of Note 10,000,000 0 0
(Gain) on Sale of Fixed Assets 0 0 (77,577)
Changes in Operating Assets and Liabilities -
(Increase) in Accounts Receivable (29,720) (156,010) 805,703
Decrease (Increase) in Other Assets 337,454 21,247 (304,316)
(Increase) Decrease in Prepaid Expenses (26,088) (297,773) 171,409
(Decrease) Increase in Accounts Payable and Accrued Expenses (1,331,785) 2,217,821 (151,167)
-------------- ------------- ------------
CASH PROVIDED BY OPERATING ACTIVITIES BEFORE
DISCONTINUED OPERATIONS 2,889,702 7,273,193 2,570,949
CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES 9,600 14,939 0
-------------- ------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,899,302 7,288,132 2,570,949
-------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits on Purchase of Palm Beach Princess Mortgage 0 (500,000) (2,750,000)
Purchase and Improvements of Royal Star (1,321,494) 0 0
Security Deposit on New Bareboat Charter - Related Party MJQ Corp. (880,782) 0 0
Proceeds from Auction of Garden State Park Fixed Assets 0 0 1,216,481
Refunds (Deposits) on Purchase of Additional Vessel - Majestic 300,000 (300,000) 0
Investment in Port Lease 0 (250,000) 0
Capital Expenditures (925,347) (1,363,809) (480,615)
Loans made on Development Projects (922,751)
(Increase) Decrease in Other Investment Activity (99,735) 314,846 (108,040)
(Increase) in Other Investment Activity - Related Parties (712,362) 0 0
-------------- ------------- ------------
CASH (USED IN) INVESTING ACTIVITIES
BEFORE DISCONTINUED INVESTING ACTIVITIES (3,639,720) (2,098,963) (3,044,925)
CASH PROVIDED BY DISCONTINUED INVESTING ACTIVITIES 0 0 0
-------------- ------------- ------------
NET CASH (USED IN) INVESTING ACTIVITIES (3,639,720) (2,098,963) (3,044,925)
-------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funds Received on Refinance of Note 7,800,000 0 0
Proceeds from Related Party Loans 0 183,164 0
Proceeds from Bank Financing 0 200,000 0
Principal Payments on Short Term Notes (5,099,519) (248,144) (100,000)
Principal Payments on Long Term Debt - Related Parties (574,022) 0 0
Decrease in Balances Due to/From Discontinued Subsidiaries 8,550 17,783 9,298
-------------- ------------- ------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
BEFORE DISCONTINUED FINANCING ACTIVITIES 2,135,009 152,803 (90,702)
CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES (8,550) (17,783) (9,298)
-------------- ------------- ------------
NET CASH PROVIDED (USED IN) BY FINANCING ACTIVITIES 2,126,459 135,020 (100,000)
-------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,386,041 5,324,189 (573,976)
LESS CASH AND CASH EQUIVALENTS FROM
DISCONTINUED OPERATIONS (1,050) 2,843 9,298
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 6,123,641 796,609 1,361,287
-------------- ------------- ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 7,508,632 $ 6,123,641 $ 796,609
============== ============= ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,440,262 $ 412,431 $ 13,200
Income Taxes $ 256,517 $ 118,983 $ -0-
Supplemental Schedule of Non-Cash Investing and Financing Activities:
On October 15, 2003, the Company issued a promissory note in the amount of
$9,750,000, reclassed a deposit of $4,000,000 and recorded an asset of
$13,750,000 to record the purchase of the Ship Mortgage Obligation associated
with the Palm Beach Princess.
On October 15, 2003, the Company issued a promissory note in the amount of
$225,000 to purchase an additional 450,000 shares of its Common Stock.
On June16, 2004, the Company recorded deferred interest payable in the amount
of $2,589,240 associated with the Turnberry financing
See Notes to Consolidated Financial Statements.
36
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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.
(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
icost. It is necessary that these parts be readily available so that the daily
cruise operations are not cancelled due to mechanical failures.
(E) Depreciation and Amortization - Depreciation of property and equipment
were computed by the straight-line method at rates adequate to allocate their
cost or adjusted fair value in accordance with U. S. generally accepted
accounting principles over the estimated remaining useful lives of the
respective assets. Amortization expense consists of the write off of major
vessel repairs and maintenance work normally completed at dry dock in the fall
of each year. These expenses are written off during a one year period following
the dry dock period. For the years ended June 30, 2004 and 2003, the amortized
expense was $125,179 and $55,650, respectively.
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
warrant such a review. The carrying value of a long-lived or amortizable
intangible asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than its carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset. Losses on long-lived assets
to be disposed of are determined in a similar manner, except that fair values
are reduced for the cost of disposition. Effective January 4, 2002, SFAS 142
requires an annual impairment review based on fair value for all intangible
assets with indefinite lives. The Company performed an impairment test of its
intangible assets with indefinite lives during the fiscal year 2004 and
concluded that there was no impairment beyond the $10 million impairment loss on
the Second Cherry Hill Note. (See Note 4.)
(F) Net Assets of Discontinued Operations - At June 30, 2004 and 2003, the
remaining net assets and liabilities of Garden State Park and Freehold Raceway
were classified as either "Assets of Discontinued Operations" or "Liabilities of
Discontinued Operations."
37
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
38
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Other
amounts included in Deferred Income are fees/charges 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 have been deferred until the first quarter of
Fiscal 2005 when we received payment for these charges. The deferred income
recorded as of June 30, 2003 on the gain from our sale of the El Rancho property
on May 22, 2000 in the amount of $2,786,589 was deferred until June 16, 2004
when it was used to offset, in part, the loss recorded on the Second Cherry Hill
Note.
(N) Net Income (Loss) per Common Share - In March 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 provides a different method
of calculating earnings per share than was used in APB Opinion 15. SFAS 128
provides for the calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share would reflect the
potential dilution of securities that could share in the earnings of an entity.
Income (Loss) per common share is computed by dividing net (loss) income by
the weighted average number of shares of common stock outstanding. On December
13, 2002, and on October 15, 2003 the Company purchased 3,228,146 and 450,000
shares respectively of its Common Stock from the Brennan Trustee and have
accounted for the transaction on the cost method of accounting for treasury
stock. Options and warrants to purchase 3,611,500 shares of Common Stock at
various prices per share, for the year ended June 30, 2004 were not included in
the computation of diluted loss per share as their effect would have been
anti-dilutive due to the net loss reported. Options and warrants to purchase
4,046,500 shares of Common Stock at various prices per share, for the years
ended June 30, 2003 and 2002 were not included in the computation of diluted
income per share because the exercise price of those options and warrants were
above market value at that time.
(2) 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 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 3 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
"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
39
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (the "Plan") 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 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 continued as reorganized debtors.
The Plan included the following principal features:
1. On the Effective Date, all Allowed Administrative Expense Claims
and all Allowed Priority Tax Claims and Allowed Priority Non-Tax Claims
were paid in full (to the extent not already paid).
2. All pre-petition non-insider (non-affiliate), non-insured unsecured
debt of the Debtors was paid in two installments, one-half on the Effective
Date and one-half (with interest thereon at 8% per year from the Effective
Date) six months after the Effective Date.
3. All non-insider claims covered by insurance were 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
were required to pursue the insurance proceeds for payment, except with
respect to the deductible, for which the Debtors remained obligated.
4. The Debtors' principal creditor, the Brennan Trustee, was to
receive payment in full of all obligations over a period not to exceed
three years. Significantly, the Debtors' obligations to the Brennan Trustee
were combined with the parent company's (ITB's) indebtedness to the Brennan
Trustee arising out of the stock repurchase, for all of which the Debtors
and ITB were jointly and severally liable. All of the obligations to the
Brennan Trustee were secured by a ship mortgage against the Palm Beach
Princess vessel and security interests in all of the other assets of the
Debtors.
5. The payment obligations to the Brennan Trustee consisted of the
following:
(a) The balance of the purchase price that had been payable by
ITG Vegas for the purchase of the Ship Mortgage Obligation, in the
amount of $9,750,000;
(b) The balance of our indebtedness to the Brennan Trustee in
respect of our repurchase of stock in the principal amount of
$1,511,035.70 (which included interest accrued to December 13, 2002),
plus interest thereon from December 13, 2002 until the Effective Date;
(c) A new obligation of ITB for the purchase of an additional
450,000 shares of our stock from the Brennan Trustee, at $0.50 per
share, or $225,000.
40
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts described in subparagraphs (a), (b) and (c) are
collectively called the "Payment Obligations". A forbearance fee of
$350,000 also accrued to the Brennan Trustee on the Effective Date, of
which $100,000 was paid on the Effective Date and the balance ($250,000)
was due on the earliest to occur: on 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 monetized its receivable from OC Realty, LLC, an
affiliate of our Chairman and CEO.
The Payment Obligation accrued interest at 12% per annum. Monthly
payments of $400,000 were required to be made to the Brennan Trustee, to be
applied first to interest accrued and then to principal. In addition, the
Brennan Trustee was entitled to payment of a Stay Bonus in the amount of
$200,000 if the Payment Obligation was not paid in full within 12 months
after the Effective Date, and an additional $100,000 if the Payment
Obligation was not 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 was to 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 were imposed under the Plan on ITG Vegas making
payments to affiliated entities, including ITB. Payments of indebtedness to
affiliated entities of ITG Vegas generally were subordinated to the prior
payment of all liabilities to the Brennan Trustee, and intercompany
advances and transfers from ITG Vegas to affiliated entities generally were
prohibited, except that, if no default existed in the obligations to the
Brennan Trustee, (i) $50,000 per month could be paid by ITG Vegas to Palm
Beach Maritime Corporation in respect of the bareboat charter fee for use
of the Palm Beach Princess vessel and (ii) $100,000 per month was permitted
to be paid by ITG Vegas to ITB under a Tax Sharing Agreement between them.
ITB entered into a Tax Sharing Agreement with ITG Vegas effective on the
Effective Date, pursuant to which ITG Vegas was to compensate ITB for the
tax savings realized as a result of ITG Vegas's inclusion in ITB's
consolidated group of companies for federal income tax purposes, in an
amount up to $100,000 per month, provided that no such payments were
permitted to be made if any default existed in respect of the obligations
to the Brennan Trustee.
The maximum amount of funds permitted to be upstreamed by ITG Vegas to
us was $100,000 per month under the Tax Sharing Agreement (and, beginning
in 2005, 25% of ITG Vegas' annual Free Cash Flow, as defined).
For further information about the Payment Obligations, the covenants
of ITB and the Debtors, and other terms agreed to among the Debtors, ITB
and the Brennan Trustee, reference is made to the Amended Plan of
Reorganization, which is an exhibit to this Report.
By reaching the foregoing consensual plan of reorganization by
agreement with the Brennan Trustee, the Debtors avoided the costs and
delays of a contested confirmation hearing with their largest creditor and
developed a Plan which was believed to be (and has proven to be) feasible.
With the consummation of the PDS Transactions described below, 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.
41
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See Note 24, Subsequent Events, for information on the satisfaction of the
debt to the Brennan Trustee.
(3) MORTGAGE CONTRACT RECEIVABLE - RELATED PARTY
Effective February 20, 2002 we entered into a Master Settlement Agreement
with the Chapter 11 Trustee (the "Brennan Trustee") for the Bankruptcy Estate of
Robert E. Brennan. In accordance with the Master Settlement Agreement, through
our Palm Beach Princess, Inc. subsidiary (which was merged into ITG Vegas) we
entered into a Purchase and Sale Agreement which provides for our purchase from
the Brennan Trustee of the promissory note of Palm Beach Maritime Corp.("PBMC")
(formerly MJQ Corp.) which is secured by a ship mortgage against the vessel M/V
Palm Beach Princess (the "Ship Mortgage Obligation") for a purchase price of
$13.75 million. Prior to the Effective Date of ITG Vegas's Plan of
Reorganization (described in Note 2 above), Palm Beach Princess, Inc. and its
successor by merger, ITG Vegas, were not obligated to complete the purchase of
the Ship Mortgage Obligation and were not liable for any failure to pay the
purchase price - the sole express remedy of the Brennan Trustee in the event of
a default was to terminate the Purchase and Sale Agreement, keep the Ship
Mortgage Obligation and cause forfeiture of our installment payments previously
made. We therefore did not accrue the purchase price as a liability on our
balance sheet. In negotiating a consensual Chapter 11 Plan among ITG Vegas,
PBMC, the Brennan Trustee and other creditors, the Company agreed to be liable
for payment of the balance of the purchase price of the Ship Mortgage Obligation
(which was $9.75 million as of the Effective Date of the Plan). The parent
company and ITG Vegas agreed to be jointly and severally liable for payment of
all obligations to the Brennan Trustee. As a result, the unpaid portion of the
purchase price of the Ship Mortgage Obligation and interest accrued to October
15, 2003 (which was capitalized) are recorded as liabilities on our balance
sheet, and the mortgage contract receivable is reflected as an asset, after
October 15, 2003.
(4) NOTES RECEIVABLE
(A) Las Vegas Note exchanged for 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 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 would have been 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 would have been
paid to us. We were to have received payments under the note equal to 33 % of
all Distributable Cash until the maturity date, which was to have occurred on
the 30th anniversary of our purchase of the note. We had the option to convert
the promissory note into a 33 % 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 % 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.
42
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 16, 2004, the Company consummated the sale of the Las Vegas Note.
The purchaser of the Las Vegas Note was 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
values 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 both generally are payable
prior to maturity only from distributable cash of the maker. The Las Vegas Note
was payable prior to maturity from distributable cash of the entity which had
purchased, in May of 2000, the real property (the "El Rancho Property")
previously owned by our Orion Casino Corporation subsidiary in Las Vegas,
Nevada, which had been the site of the former El Rancho Hotel and Casino. Since
the maker of the Las Vegas Note has not yet finalized plans for development of
that property, the time at which the Company might have received payments under
the Las Vegas Note (had it not been sold) remained uncertain. The obligor 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,
has been 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 was written
down to $4,778,651 which will result in an impairment write off of the new note
of $12,786,589, recorded in the 4th quarter of the Company's June 30, 2004
fiscal year. 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 will
be used to reduce the impairment write off to $10,000,000.
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 an entity formed to acquire a second vessel which will
43
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
be chartered to a subsidiary of the Company, and the Company expects to operate
that second vessel 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.
In its assessment of the fair value of the Second Cherry Hill Note, the
Company has estimated that its share of proceeds from the 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 would
take an additional impairment write down against the Cherry Hill Note of
approximately $500,000 in its fiscal year ending June 30, 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,
44
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the next $10 million of
Distributable Cash will be paid to us. We will thereafter receive payments under
the Note equal to 33 % 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 % 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 % of
any excess of the fair market value of Realen's assets over the sum of its
liabilities (other than the Note) and any unreturned equity investment of its
owners. Fair value and the collectability of this note was determined by a real
estate appraisal completed in March, 2002 for a bank in anticipation of
financing for Turnberry.
(C) Sculpture Note
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 (the "Brennan Trustee") 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 Trustee (together with
one-half of the interest paid by Realen under such note). 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 below) by the same principal amount, $350,000, given
up by us to the Brennan Trustee.
On February 20, 2004 Turnberry paid $466,363 to the Company in full
satisfaction of the note plus accrued interest due us for the sale of the horse
sculptures at Garden State Racetrack. As a result, on March 10, 2004, the
Company paid $176,970 in satisfaction of the note and accrued interest we owed
on our original purchase of the statues.
45
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) DEPOSITS AND OTHER ASSETS - RELATED PARTIES
The following items are classified as Deposits and Other Assets - Related Party
Transactions (See Note 22):
June 30,
---------------------------
2004 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
Deposits on new lease for M/V Palm Beach Princess
and the Empress II Palm Beach Maritime Corp.("PBMC")
(formerly MJQ Corp.) 880,783 -0-
Accounts Receivable from Francis W. Murray 32,751 35,099
Loans to Francis W. Murray 93,000 93,000
Advances to PBMC 616,534 -0-
Advances to OC Realty, LLC -0- 77,162
Accrued Interest on Loans to the Ft. Lauderdale
Project (OC Realty, LLC) 911,350 606,553
Accrued Interest Transferred from Golf Course
Project to OC Realty, LLC 287,327 287,327
Accounts Receivable from Frank Leo 24,512 23,441
Goodwill on Purchase of GMO Travel 193,946 193,946
----------- -----------
Total Deposits and Other Assets - Related Parties $ 8,410,941 $ 6,687,266
=========== ===========
- --------------------------------------------------------------------------------
* The note receivable from Francis W. Murray is non-recourse except to his stock
in PBMC which stock was previously owned by Michael J. Quigley and is now owned
by our CEO, Francis W. Murray, subject to our lien. This note was subsequently
paid in full on July 7, 2004.
(6) DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES
The following items are classified as deposits and other assets - non-related
parties:
June 30,
------------------------
2004 2003
----------- -----------
Port Lease Rights $ 250,000 $ 250,000
Deposit on Ship Purchase (See Note 10-D) -0- 200,000
Other Misc. Assets 84,975 85,239
----------- -----------
Total $ 334,975 $ 535,239
=========== ===========
46
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) DISCONTINUED OPERATIONS
On January 28, 1999, we completed the sale of the real property and certain
related assets at Freehold Raceway and a ten-acre parcel of land at the Garden
State Park facility. On November 30, 2000, the Company, through its wholly-owned
subsidiary, GSRT, LLC, closed on the sale (the "Garden State Transaction") of
the Garden State Park property (the "Garden State Park Property") in Cherry
Hill, New Jersey, to Realen-Turnberry/Cherry Hill, LLC ("Realen"). The purchase
price was $30 million and was paid by: (i) previous cash deposits totaling a
$1,000,000; (ii) a promissory note in the face amount of $10 million (the
"Note"); and (iii) the balance of the purchase price paid in cash at the
closing. The Company has elected to defer all the gain of $1,439,951 on the sale
of the property until such time that collectability under the $10,000,000 note
from Realen can be determined. The gain represented the sales price of cash and
notes in excess of our cost basis.
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 refund of the $100,000 payment 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.
The net assets of the operations to be disposed of included in the
accompanying consolidated balance sheets as of June 30, 2004 and 2003 consist of
the following:
June 30,
---------------------------
Classified As: 2004 2003
---- ----
Current Assets $ 400,835 $ 399,785
Current Liabilities (310,798) (301,197)
----------- ------------
Net Assets of Discontinued Operations $ 90,037 $ 98,588
=========== ============
47
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash flows from discontinued operations for the years ended June 30, 2004,
2003 and 2002 consist of the following:
June 30,
-------------------------------
2004 2003 2002
------- --------- ---------
Cash Flows From Discontinued Operating
Activities:
Income $ -0- $ -0- $ -0-
------- --------- ---------
Adjustments to reconcile income to net cash provided by discontinued operating
activities:
Changes in Operating Assets and Liabilities of Discontinued
Operations:
Decrease (Increase) in Accounts Receivable 9,600 12,539 -0-
Increase (Decrease) in Accounts and Purses
Payable and Accrued Expenses -0- 2,400 -0-
------- --------- ---------
Net Cash Provided by Discontinued Operating Activities 9,600 14,939 -0-
------- --------- ---------
Cash Flows from Discontinued Financing Activities:
(Decrease) in Balances Due To/From
Continuing Operations (8,550) (17,783) (9,298)
------- --------- ---------
Net Cash (Used In) Discontinued Financing Activities (8,550) (17,783) (9,298)
------- --------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents
From Discontinued Operations 1,050 (2,844) (9,298)
Cash and Cash Equivalents at Beginning of
Year From Discontinued Operations (317) 2,527 11,825
------- --------- ---------
Cash and Cash Equivalents at End of Year From
Discontinued Operations $ 733 $ (317) $ 2,527
======= ========= =========
(8) ACQUISITIONS AND DISPOSITIONS
Fiscal 2004
During the quarter ended December 31, 2003 our subsidiary, Royal Star
Entertainment, LLC, a Delaware limited liability company, purchased the vessel
M/V Royal Star ("Royal Star"). Depreciation will not be computed on the Royal
Star until it is placed in service. (See Note 12)
Fiscal 2003
On October 27, 2002 the Company purchased the operating agreement with the
Port of Palm Beach from Leo Equity Group, Inc. ("Leo Equity") for a purchase
price of $250,000 payable without interest. The purchase enabled us to obtain
the port lease which was then owned by Leo Equity.
Fiscal 2002
On July 18, 2001, we sold our condominium unit and an ownership interest in
the Ocala Jockey Club that was located in Reddick, Florida. The sales price was
$94,000 and the proceeds after closing
48
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fees and other expenses were $81,645. A gain of $77,577 was recognized during
the first quarter of Fiscal 2002.
(9) INVESTMENTS
Interest income for the fiscal years ended June 30, 2004, 2003, and 2002
was $79,320, $81,039, and $124,789, respectively. Related party interest income
for the fiscal years ended June 30, 2004, 2003, and 2002 was $247,785, $342,226,
and $350,833, respectively. There were no realized gains or losses resulting
from the sale of trading securities for fiscals 2004, 2003 and 2002.
(10) LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment are recorded at cost. Depreciation is being
computed over the estimated remaining useful lives using the straight-line
method.
Major classes of land, buildings and equipment consist of the following:
Estimated
Useful June 30,
------------------------
Lives in Years 2004 2003
- -------------------------------------- -------------- ---------- ------------
Leasehold Improvements 15-40 $ 944,371 $ 953,110
Vessel Not Placed in Service -
Royal Star N/A 1,321,494
Equipment 5-15 2,186,345 1,278,175
---------- ------------
Totals 4,452,210 2,231,285
Less Accumulated Depreciation
and Amortization 916,186 306,494
---------- ------------
$ 3,536,024 $ 1,924,791
========== ============
49
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) NOTES AND MORTGAGES PAYABLE
Notes and Mortgages Payable are summarized below:
June 30, 2004 June 30, 2003
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) 11% $ 4,038,838 $ 4,024,142 $ 1,511,036 $ -0-
Francis X. Murray (B) 8% 159,164 -0- 159,164 -0-
William H. Warner (B) 12% 24,000 -0- 24,000 -0-
Other Various 25,000 -0- 25,000 -0-
MCJEM, INC. (C) 15% -0- -0- 132,000 -0-
Michael J. Quigley, III (D) 10% -0- -0- 900,000 -0-
Florida Bank, N.A. (E) Prime + .25% -0- -0- 200,000 -0-
First Insurance Funding Corp 6.95% -0- -0- 28,117 -0-
ITG Vegas, Inc.:
- --------------------------------------
International Game Technology (F) 8% 122,174 71,685 16,709 -0-
Corporate Interiors (G) Prime + 2% -0- -0- 121,468 -0-
Garden State Park:
- --------------------------------------
Service America Corporation (H) 6% 160,000 -0- 160,000 -0-
----------- ------------ ------------ -----------
Totals $ 4,529,176 $ 4,095,827 $ 3,277,494 $ -0-
Net Assets of Discontinued
Operations - Long Term -0- -0- -0- -0-
Net Liabilities of Discontinued
Operations - Long Term (160,000) -0- (160,000) -0-
Related Party Notes (183,164) -0- (183,164) -0-
----------- ------------ ------------ -----------
Totals $ 4,186,012 $ 4,095,827 $ 2,934,330 $ -0-
=========== ============ ============ ===========
The effective Prime Rate at June 30, 2004 was 4%.
(A) Balance as of June 30, 2003: On December 13, 2002 we issued a twelve
month promissory note in the amount of $1,648,403 including interest of $34,330
to the Brennan Trustee for the Bankruptcy Estate of Robert E. Brennan for the
purchase of 3,228,146 shares of our common stock held or claimed by the Brennan
Trustee. The first principal payment of $137,367 was also paid on that date. The
Stock Purchase Note was secured by a security interest in proceeds and payments
receivable under the $10 million Realen Note.
50
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balance as of June 30, 2004: In connection with the Plan of Reorganization
we became liable for the purchase of the Ship Mortgage Obligation in the amount
of $9.75 million and that obligation was combined with the unpaid balance of the
Stock Purchase Note, and an additional obligation to purchase 450,000 shares for
$225,000 , plus accrued interest, for a total amount due the Brennan Trustee of
$11,623,414 ("The Payment Obligation"). Effective October 15, 2003 we became
jointly and severally liable with ITG Vegas for the payment of the Payment
Obligation. (See Notes 2 and 24).
(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 June 30, 2004 was $159,164 and accrued interest
was $16,142. In fiscal 2003, we issued promissory notes for $24,000 bearing
interest at 12% to William H. Warner, Secretary of the Company. The outstanding
balance on the notes at June 30, 2004 was $24,000. The proceeds from both notes
were used as working capital.
(C) On March 10, 2004 the Company paid the amount due on the Note to MCJEM,
Inc. in full from the proceeds of the Las Vegas Note. (See Note 4.)
(D) 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. On February 20, 2004 the Company paid in full its indebtedness to
Michael J. Quigley, III in the amount of $1,206,850 which included accrued
interest.
(E) 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 an escrow deposit in connection with a
proposed 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.
(F) 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, ITG Vegas, under Chapter 11 of the
bankruptcy code, payments have been delayed until the effective date of the Plan
of Reorganization (See Note 2). On December 22, 2003, ITG Vegas, Inc. issued a
twenty-four month promissory note in the amount of $231,716 bearing interest at
8.5% to International Game Technology for the purchase of gaming equipment. A
payment of $30,000 was paid on delivery of the equipment and 24 consecutive
monthly installments of $10,532.85 are to be paid on the balance. At June 30,
2004, the principal balance on the International Game Technology note was
$122,174.
(G) 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 were being
paid on the note.
(H) 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
51
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 2002 and December 28, 2003. The payments due on December 28, 2002
and 2003 have not been made as of September 30, 2004.
(12) PURCHASE OF M/V ROYAL STAR
During the quarter ended December 31, 2003 our subsidiary, Royal Star
Entertainment, LLC, a Delaware limited liability company, purchased the vessel
M/V Royal Star ("Royal Star"). As of March 31, 2004 the Company has capitalized
$1,084,163 for the purchase and improvements and for legal and professional fees
in connection with the vessel and has expensed an additional approximately
$136,000 for administrative start-up costs. The Royal Star is a 232 foot vessel,
built in 1985 and operates under the flag of St. Vincent and Grenadines. We
anticipate that the vessel will need extensive improvements and outfitting
costing between $5 and $6 million before being placed in service as a gaming
vessel. As of June 30, 2004, expenditures for improvements were restricted by
the Brennan Trustee and we were required to make simultaneous dollar for dollar
pre-payments to the Brennan Trustee for each dollar spent on improvements. In
December 2003 we paid the Brennan Trustee a prepayment of $1,200,000 on our
obligation to him in order to obtain his permission to purchase the Royal Star.
Depreciation will not be computed on the Royal Star until it is placed in
service.
(13) LONG TERM DEBT - RELATED PARTIES
The following items are classified as long-term debt (See Note 22 - Related
Party Transactions):
June 30,
----------------------------
2004 2003
----------- -------------
Loan from Francis W. Murray $ -0- $ 250,000
Accrued Wages due to and Advances
from Francis W. Murray -0- 404,204
Advances from OC Realty (FWM ownership) 36,000 -0-
Advances from Palm Beach Maritime Corp.
(formerly MJQ Corp.) (FWM ownership) 249,649 330,813
----------- -----------
Total Long Term Debt - Related Parties $ 285,649 $ 985,017
=========== ===========
(14) INCOME TAX EXPENSE
The Company's income tax expense for the year ended June 30, 2004 relates
to state income taxes for its Palm Beach Princess operations and a Federal
Alternative Minimum Tax on the Company's consolidated income before the
impairment loss on the sale of the El Rancho note. The income tax expense for
the years ended June 30, 2003 and 2002 relates only to state income taxes on the
Palm Beach Princess operations.
The Company has net operating loss carryforwards aggregating approximately
117,000,000 at June 30, 2004 expiring in the years June 30, 2005 through June
30, 2022. SFAS No. 109 requires the establishment of a deferred tax asset for
all deductible temporary differences and operating loss
52
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
carryforwards. Because of the uncertainty that the Company will generate income
in the future sufficient to fully or partially utilize these carryforwards,
however, the deferred tax asset of approximately $55,600,000 is offset by a
valuation allowance of the same amount. Accordingly, no deferred tax asset is
reflected in these financial statements.
Certain amounts of the net operating loss carryforward may be limited due
to possible changes in the Company's stock ownership. In addition, the sale of
Common Stock by the Company to raise additional operating funds, if necessary,
could limit the utilization of the otherwise available net operating loss
carryforwards. The grant and/or exercise of stock options by others would also
impact the number of shares which could be sold by the Company or by significant
stockholders without affecting the net operating loss carryforwards.
The Company has the following carryforwards to offset future taxable income
at June 30, 2004:
Net Operating Loss Year End
Carryforwards Expiration Dates
------------- ----------------
$ 11,700,000 6/30/2005
4,300,000 6/30/2006
9,000,000 6/30/2007
21,600,000 6/30/2008
70,400,000 6/30/2009
through 6/30/2015
-----------
$117,000,000
===========
(15) COMMITMENTS AND CONTINGENCIES
See Note 2 for additional commitments and contingencies with respect to the
Chapter 11 Bankruptcy filing.
See Note 22 for additional commitments and contingencies of the Company and
transactions with related parties.
See Note 24 for additional commitments and contingencies of the Company
with respect to subsequent events.
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. During the 3rd quarter all of the accrued but unpaid wages in the amount
of $662,154 were paid to Mr. Murray. On July 23, 2004 Mr. Murray exercised his
option for 2,000,000 shares at an exercise price of $0.26875 per share.
53
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
With the sale of our Freehold Raceway property on January 28, 1999 we
assumed full responsibility for the costs associated with the clean up of
petroleum and related contamination caused by the leakage of an underground
storage tank which was removed in 1990, prior to our purchase of Freehold
Raceway. In February 2000 the N.J. Department of Environmental Protection
approved our remedial investigation workplan ("RIW"). Under the RIW numerous
test wells were drilled and the soil tested and monitored to determine the
extent and direction of the flow of underground hazardous material and reports
and conclusions of the tests were prepared for the State of New Jersey. However,
prior to obtaining a remedial action workplan from the State of New Jersey, the
work was stopped due to a lack of funds resulting from the institution of
proceedings by our subsidiary, ITG Vegas, under Chapter 11 of the bankruptcy
code. At this time we are unable to predict the effects that such delay may
cause, but it is likely that some retesting of the wells may be necessary. Prior
to the delays it was estimated that the cost to remediate the site would be
approximately $750,000. As of June 30, 1999 we had accrued $362,000 and we
accrued an additional amount of approximately $388,000 during fiscal 2001 as the
scope of the project was further defined. Such accruals were made with the help
of the environmental consulting firm engaged by the Company. These costs include
drilling of test wells and monitoring, lab testing, engineering and
administrative reports, equipment and remediation of the site through a "pump
and treat" plan. The Company has made payments of approximately $93,600,
$200,000, and $323,000 during fiscal years 2000, 2001, 2002 respectively which
were charged against the accrued balances. As of June 30, 2004 the accrued
balance was $130,398. It is estimated that completion of the site clean up will
take approximately 18 months from the time the work is reinstated. It is
unlikely that the Company will receive any insurance reimbursement for our costs
of this remediation project.
In connection with the January 28, 1999 sale and lease transactions for the
Garden State Park facility, we purchased a liquor license owned by an
unaffiliated third party, Service America Corporation, for $500,000 financed by
a five (5) year promissory note at a 6% interest rate. At December 31, 2002, the
unpaid principal balance was $160,000. Yearly principal payments of $80,000 plus
interest 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 refund of the $100,000 payment 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. 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
54
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amended. This Operating Agreement will permit us to operate the Empress II 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 Empress II 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 Empress II.
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 $10,000 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.
In February 2003, an unrelated party deposited $200,000 to our escrow agent
on behalf of the Company for an option to charter a second gaming vessel which
would operate out of the Port of Palm Beach. These funds were replaced on March
19, 2003 by a loan obtained from the Florida Bank, N.A. in the amount of
$200,000. The Company assumed a Promissory Note negotiated by Francis W. Murray
in the amount of $25,000 due on May 24, 2003. This note was negotiated to cover
legal and transactions fees for the $200,000 escrow advance on the gaming
vessel.
The following summarizes commitments on non-cancelable contracts and leases
as of June 30, 2004:
Year Ended June 30,
---------------------------------------------------------------
There-
2005 2006 2007 2008 2009 after Total
------------ ---------- ---------- ---------- --------- --------- ------------
Employee Contracts $ 722,884 $ 327,035 $ -0- $ -0- $ -0- $ -0- $ 1,049,919
Operating Leases 554,777 333,144 127,163 97,169 -0- -0- 1,112,252
Casino Contracts 399,988 61,465 61,006 61,006 61,006 269,441 913,911
------------ ---------- ---------- ---------- --------- --------- ------------
Total $ 1,677,649 $ 721,644 $ 188,169 $ 158,175 $ 61,006 $ 269,441 $ 3,076,083
============ ========== ========== ========== ========= ========= ============
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, the disposition of these lawsuits will not have a
material adverse effect on our financial position, results of operations, or
cash flows.
55
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our subsidiary, ITG Vegas, Inc., successor by merger to Palm Beach
Princess, Inc., initiated proceedings under Chapter 11 of the Bankruptcy Code on
January 3, 2003. Such Chapter 11 case was closed on July 17, 2004. (See Note 2.)
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
As of June 30, 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 a $10 million impairment loss to
reflect the estimated current market value of this note. (See Note 4)
(17) RETIREMENT PLANS
Our parent company maintains a Retirement Plan under the provisions of
section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code")
covering all its non-union full time employees who have completed one year of
service. The Company's basic contribution under the plan is 4% of each covered
employee's compensation for such calendar year. In addition, the Company
contributes up to an additional 50% of the first 4% of compensation contributed
by any covered employee to the plan (an employee's maximum contribution is
$12,000 factored for inflation annually).
PBMC also maintained a Retirement Plan under the provisions of section
401(k) of the Internal Revenue Code of 1986, as amended (the "Code") covering
full time employees (approximately 265) who had completed one year of service.
In connection with the bareboat charter agreement, all of the employees of
our ITG Vegas subsidiary which operates the Palm Beach Princess were paid by
PBMC until January 1, 2004 when they were transferred to ITG Vegas. We
reimbursed PBMC for all of the employee costs incurred, including the costs
associated with the PBMC's 401(k) plan that covered those employees. As a result
of the Chapter 11 bankruptcy cases filed in January 2003, the seven executive
and administrative employees of the parent company were also paid by PBMC from
that date and were not eligible to participate in that plan. There may be
operational errors in the administration of the plans concerning these
employees, as a result of which the Company may have liabilities, the potential
amount of which has not yet been determined.
Our expense recorded for the fiscal years ended June 30, 2004, 2003 and
2002, respectively, totaled $52,170, $34,021 and $40,901.
56
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) STOCK OPTIONS AND WARRANTS
(A) EMPLOYEE AND NON-EMPLOYEE OPTIONS
The Company's 1994 Employees' Stock Option Plan ("Option Plan"), expired on
June 2, 2004. No options were outstanding under the Option Plan at the time of
expiration.
On January 1, 2000 and October 16, 2000, the Company awarded options to
purchase 5,000 and 6,500 shares respectively of the Company's Common Stock to
various employees as part of annual compensation. On January 7, 2002, Mr.
Francis W. Murray and Mr. William H. Warner were awarded options to purchase
2,000,000 and 75,000 shares, respectively, of the Company's Common Stock,
expiring December 31, 2010, with an exercise price of $0.26875 per share.
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
380,000 shares of common stock, at an exercise price of $.50 per share, to the
ITG Vegas, Inc. management team, which included 180,000 shares earmarked for
Francis X. Murray, son of the Company's Chairman, subject, however, to
confirmation of ITG Vegas' Plan of Reorganization and subject to the prior
payment of all obligations of the Company to the Bankruptcy Trustee.
Accordingly, no such options will be issued or granted until the Bankruptcy
Trustee shall have been paid in full, at which time the Company will be
authorized (but not obligated) to grant such options provided that the grantee
is still employed by the Company at that time.
Also at the September 11, 2003 meeting of the Company's Board of Directors,
the Board unanimously authorized the future grant of options to purchase an
additional 20,000 shares of common stock to Mr. Francis X. Murray, at $.50 per
share, subject to confirmation of ITG Vegas' Plan of Reorganization and the
prior payment of all obligations of the Company to the Bankruptcy Trustee. No
such options shall be granted or issued until the Bankruptcy Trustee shall have
been paid in full, at which time the Company will be authorized (but not
obligated) to grant such options. Such action was taken in order to compensate
Mr. Francis X. Murray for his having personally guaranteed a loan of $300,000
for the Company and for his providing to the Bankruptcy Trustee a personal
guaranty for portions of the Company's obligations.
At a meeting of the Board of Directors of the Company held on November 18,
2003, the Board authorized the future grant of options to purchase 25,000 shares
of common stock to each non-employee director, Mr. James Murray and Mr. Walter
ReDavid, at $.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 deferred
salaries upon their election if they continued to defer payment of their
deferred salary existing on November 18, 2003. Mr. Murray and Mr. Quigley's,
deferred salary since January 3, 2003 amounted to $344,865 and $36,669,
respectively, as of November 18, 2003. The Board also authorized payment of the
unpaid principal of a $24,000 loan to the Company by Mr. William H. Warner, the
Company's Secretary, in the form of a future grant of shares. The Company will
pay the deferred salary to Mr. Murray and Mr. Quigley and the unpaid loan
principal to Mr. Warner in shares of common stock, valued for such purpose at
$.50 per share provided that the grantees agree to accept such
57
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares (valued at $.50 per share) in payment of a portion, specified by the
grantee, of the Company's obligation to him. Subsequent to June 30, 2004, Mr.
Murray and Mr. Quigley elected to take their then deferred salary in the form of
shares. (See Note 24 (B))
At June 30, 2004, total employee options outstanding were 3,111,500 and
total non-employee options outstanding were 225,000. At June 30, 2004 all of the
employee and non-employee options were exercisable.
At June 30, 2004, total warrants outstanding were 275,000. All warrants
were exercisable at June 30, 2004.
On July 23, 2004 Mr. Murray exercised his 2,000,000 options at an exercise
price of $0.26875 per share. The Company issued 2,000,000 shares of Treasury
stock it held in exchange for proceeds of $537,500.
The following table contains information on stock options for options
granted for the three year period ended June 30, 2004:
Stock Options
----------------------------------------------
Exercise Weighted
Number Price Range Average
of Shares Per Share Price
------------- ------------------ ------------
Outstanding at June 30, 2001 3,436,500 $0.269- $5.00 $ 1.89
Canceled during FYE 6/02 (2,175,000) $0.269- $5.00 $ 0.489
Granted during FYE 6/02 2,075,000 $0.269 $ 0.269
-------------
Outstanding at June 30, 2002,
2003 and 2004 3,336,500 $0.269 - $5.00 $ 1.59
=============
Exercise Weighted
Price Range Average
Option shares Per Share Price
-------------- ----------------- ------------
Exercisable at June 30:
2002 3,336,500 $ 0.269 - $5.00 $ 1.59
-------------- ----------------- ------------
2003 3,336,500 $ 0.269 - $5.00 $ 1.59
-------------- ----------------- ------------
2004 3,336,500 $ 0.269 - $5.00 $ 1.59
-------------- ----------------- ------------
58
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
at June 30, 2004:
Ranges Total
--------------------------------------- -------------
Range of exercise prices $0.20 - 0.50 $1.00 - 4.625 $5.00 $0.20 - 5.00
------------- ------------- ------- -------------
Outstanding options:
- --------------------
Number outstanding at June 30, 2004 2,281,500 755,000 300,000 3,336,500
--------------------------------------- -------------
Weighted average remaining contractual life (years) 6.14 1.82 2.50 5.48
--------------------------------------- -------------
Weighted average exercise price 0.29 4.17 5 1.59
--------------------------------------- -------------
Exercisable options:
- --------------------
Number outstanding at June 30, 2004 2,281,500 755,000 300,000 3,336,500
--------------------------------------- -------------
Weighted average exercise price 0.29 4.17 5 1.59
--------------------------------------- -------------
Prior to July 1, 2002 we accounted for all stock option grants under the
recognition and measurement provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and related Interpretations. No stock-based employee
compensation cost is reflected in net income before fiscal 2003, as all stock
option grants had an exercise price equal or greater than the market value of
the underlying common stock on the date of grant. Effective July 1, 2002, we
adopted within our financial statements the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" by applying the fair value method
prospectively for stock options grants made on or after that date. Stock option
grants under the 1995 Plan vest over periods ranging from six months to three
years. Therefore, the cost related to stock-based employee compensation included
in the determination of net income for fiscal 2003 is less than that which would
have been recognized if the fair value based method had been applied to all
stock option grants since the original effective date of SFAS No. 123. As of
January 1, 2003, we adopted the provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". Accordingly, the
following table illustrates the effect on net income and net income per share if
the fair value method had been applied to all outstanding stock option grants in
each period including the options granted to Mr. Murray and Mr. Warner in
January 2002.
Years Ended June 30,
-------------------
004 2003 2002
---- ---- ----
Net Income (Loss): As Reported $ (6,800,030) $ 5,233,826 $ 1,982,603
------------ ---------- ----------
Pro Forma Net Income (Loss): Basic and Diluted $ (6,800,030) $ 5,233,826 $ 1,671,353
------------ ---------- ----------
Net Income (Loss) Per Share: As Reported $ (0.86) $ 0.54 $ 0.17
------------ ---------- ----------
Pro Forma Net Income (Loss) Per Share: Basic and Diluted $ (0.86) $ 0.54 $ 0.15
------------ ---------- ----------
(B) WARRANTS
During the fiscal years ended June 30, 1996, 1997 and 1999, the Company
issued 925,000, 746,847 and 932,153, respectively of warrants to purchase Common
Stock in connection with financing activities. During Fiscal 2002 and Fiscal
2004, 1,894,000 and 435,000 respectively of those warrants expired. All
outstanding warrants are exercisable at June 30, 2004. The fair value of
warrants issued during the year ended June 30, 1999 were accounted for as
financing expense.
59
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants have been granted to acquire Common Stock at various prices above,
below and at fair market value at the date of grant. The following table
contains information on warrants for the three-year period ended June 30, 2004:
Warrants
--------
Exercise Weighted
Number Price Range Average
Of Shares Per Share Price
--------- ------------- --------
Outstanding at June 30, 1999, 2000 and 2001 2,604,000 $2.50 - $5.25 $4.25
Expired During Fiscal 2002 (1,894,000) $4.375 - $5.25 $4.68
----------
Outstanding at June 30, 2002 and 2003 710,000 $2.50 - $4.00 $3.08
Expired During Fiscal 2004 (435,000) $2.50 $2.50
----------
Outstanding at June 30, 2004 275,000 $4.00 $4.00
==========
(19) DIVIDENDS
The Company was required to pay to the holders of the Company's Series A
Convertible Preferred Stock ("Preferred Stock") a cash dividend from any net
racetrack earnings, as defined, of Garden State Park. No dividends were required
for Fiscals 2003, 2002 and 2001. Since the Company has sold Garden State Park,
no dividends will ever be paid on the Preferred Stock. The Preferred Stock has a
liquidation preference of up to its par value of $100 per share.
(20) TREASURY SHARES PURCHASED
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 from the Chapter 11
Trustee for the bankruptcy estate of Robert E. Brennan. In connection with our
Chapter 11 Plan of Reorganization, effective October 15, 2003, we purchased an
additional 450,000 shares for $225,000, and the total amount of our debt for the
purchases of stock as of October 15, 2003 was $1,873,413 which also includes
accrued interest. Such indebtedness was combined with the obligations to
purchase the Ship Mortgage Obligation, and is payable over the next three years
together with interest at 12% per annum. (See Note 2). On July 7, 2004 the
Company paid in full the amount due under the Stock Purchase Agreement and the
Ship Mortgage Obligation.
(21) EXECUTIVE COMPENSATION
Effective December 1, 2000, we entered into a five-year employment contract
with Mr. Francis W. Murray as 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 contract, on December 28, 2000, Mr. Murray was awarded options to purchase
2,000,0000
60
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares of our common stock under an stock incentive plan which was subject to
stockholder approval. Such options terminated in fiscal 2002 since the Plan was
not submitted for shareholder approval, and replacement options were granted in
fiscal 2002 with an exercise price of $0.26875 per share, expiring December 31,
2010.
In connection with the bareboat charter with Palm Beach Maritime Corp
("PBMC") (formerly MJQ Corp.) we are obligated to honor several employment
contracts between key executives and PBMC. A contract for Francis X. Murray
which expired on December 31, 2003 provided for a base salary of $290,000,and
$310,000 respectively during calendar years 2002 and 2003. Additionally the
contract provides for an annual bonus of up to 30% of the executive's base
salary if certain EBITDA performance goals are met, membership to a golf club
and other expense allowances. The Company continues to honor the terms of the
contract from year to year.
(22) 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 June 30,
2004, we had lent $2,034,405 in total to MJQ Development and we have accrued
interest in the amount of $911,350 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
61
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
arrangements will vary from the arrangnments 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.
Effective April 30, 2001, we entered into a bareboat charter with Palm
Beach Maritime Corp. ("PBMC") (formerly MJQ Corp.), 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 PBMC. Francis W. Murray, our
Chairman, President and Chief Executive Officer has been an officer and director
of PBMC and in October 2002, purchased the stock of PBMC. Francis X. Murray, the
son of Francis W. Murray, is President and a director of PBMC and Vice President
of our subsidiary, ITG Vegas, Inc., which operates the vessel. Under the
bareboat charter agreement, in effect until July 7, 2004, we were obligated to
pay $50,000 per month as the charter hire fee to PBMC. All costs of operating
the vessel incurred by PBMC on our behalf were to be reimbursed by us to PBMC.
In addition, as described in Notes 3 and 11-A above, we entered into an amended
Master Settlement Agreement with the Chapter 11 Trustee of the Bankruptcy Estate
of Robert E. Brennan, PBMC and others to purchase from the Brennan Trustee the
Ship Mortgage Obligation of PBMC, having an original balance of principal and
interest outstanding at April 3, 2001 of approximately $15.7 million for a
purchase price of $13.75 million. Pursuant to the Master Settlement Agreement,
PBMC and its officers and directors (including Francis W. Murray) exchanged
mutual releases with the Brennan Trustee and others having claims to the Ship
Mortgage Obligation.
On November 13, 2002, the Company and PBMC signed an agreement and bill of
sale which transferred maintenance materials and spare parts inventory
previously maintained by PBMC 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 PBMC. Fair value of this
inventory was determined by actual invoice prices and estimates made by the Palm
Beach Princess ship engineers.
We entered into an agreement to purchase all of the shares of outstanding
stock of Leo Equity Group, Inc. Mr. Francis W. Murray had been a director of Leo
Equity Group, Inc. Closing on the Leo Equity Group, Inc. stock purchase occurred
effective October 27, 2002. As consideration, we agreed to reduce the exercise
price of previously granted options held by the seller, Frank A. Leo (our former
director and chairman), to purchase 200,000 shares of our common stock, from
$4.00 per share to $.50 per share, while conditioning exercise of such options
upon our first having consummated the purchase of the shares required to be
purchased by us from the
62
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brennan Trustee under the Stock Purchase Agreement. Due to the uncertainties at
June 30, 2003, the Company did not recorded any expense for the change in
exercise price. The purpose of such acquisition was to enable us to obtain the
lease and operating agreement with the Port of Palm Beach District which had
been owned by Leo Equity Group, Inc.
Through the purchase of Leo Equity, we also purchased the assets and
operations of GMO Travel which was a 100% owned subsidiary of Leo Equity. GMO
Travel provides reservations and travel services for our Palm Beach Princess
subsidiary and other non-ship related travel activities. Travel services for the
Palm Beach Princess include reservations and travel services for its numerous
foreign employees and our customers, many of which rely on air travel to reach
our location. The goodwill recorded in the amount of $193,946 represents the
fair value of GMO Travel based on its discounted cash flows and the synergies
and cost savings gained by the Palm Beach Princess.
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 Frank A. Leo, 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 $3,000,000 and PBMC $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 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 have deferred all income from these transactions until such time as payment
is received. That $2.6 million debt from Mr. Quigley is a non-recourse
obligation which is payable solely from pledged shares of his stock in PBMC (
The "PBMC Debt"). Mr. Francis W. Murray purchased PBMC stock subject to our lien
securing payment of the PBMC Debt. During the first quarter of Fiscal 2005, we
received payment in full of the PBMC debt.
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. On February 20, 2002 Mr. Quigley released his security interest in the
Realen note in connection with the Master Settlement Agreement. On May 8, 2002,
we made a payment of $100,000 against the note. On February 20, 2004 the Company
paid in full its indebtedness to Mr. Quigley in the amount of $1,206,850 which
included accrued interest.
On July 12, 2002, we borrowed $300,000 from Francis W. Murray at an annual
interest rate of 6%. During Fiscal 2003, we reduced the loan to $250,000.
Payment was made to Mr. Murray in full during the fourth quarter of Fiscal 2004.
Francis X. Murray, Vice President of our ITG Vegas, Inc. subsidiary and son
of Francis W. Murray, our President, CFO and CEO agreed to loan the company up
to $225,000 in the form of a line of credit. As of June 30, 2004 this loan
together with accrued interest at 8% totaled $175,306. (See Note 11-B)
On November 1, 2002 The Company employed Tanuja Murray, daughter-in-law of
Francis W. Murray. Mrs. Murray holds a law degree and is acting in the capacity
of assistant to the
63
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Chairman involving the Company's exploration of gaming related business
opportunities. Mrs. Murray earns $60,000 per year in addition to the regular
employee benefits paid by the Company.
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, under the terms described
in Part I, Item I above under the caption, PDS Transactions. 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 24 below.)
(23) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly financial data is unaudited, but in our opinion
includes all necessary adjustments for a fair presentation of the interim
results:
Fiscal 2004
----------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Revenues $ 8,689,364 $ 9,697,707 $ 7,000,011 $ 7,575,157
Income Before Impairment $ 212,818 $ 1,765,056 $ 363,036 $ 859,060
Impairment (Loss) $ (10,000,000) $ -0- $ -0- $ -0-
Net Income(Loss) $ (9,787,182) $ 1,765,056 $ 363,036 $ 859,060
Net Income (Loss) Per Share - Basic $ (1.24) $ 0.23 $ 0.05 $ 0.10
Net Income (Loss) Per Share -Diluted $ (1.24) $ 0.17 $ 0.04 $ 0.10
Fiscal 2003
----------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Revenues $ 9,073,913 $ 8,890,400 $ 6,907,111 $ 6,419,175
Net Income $ 2,347,240 $ 1,878,471 $ 595,001 $ 413,114
Net Income Per Share $ 0.21 $ 0.23 $ 0.06 $ 0.04
(24) SUBSEQUENT EVENTS
(A) 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
64
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the casino cruise ship Palm Beach Princess ("Princess"), PBE leased (as lessee)
the casino cruise ship Empress II ("Empress"), ITG Vegas and ITGPB obtained
long-term charters to operate, and options to purchase, the Princess and
Empress, and PBMC, ITG Vegas and the Company were able to extinguish their joint
debts. 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
certain debts as described in the Company's Report on Form 8-K filed on July 6,
2004.
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 Empress ("EBITDAR") is less than $10,000,000 per year. Any Cash
Flow Sweep payments to be made under the Princess Charter will ultimately be
made by ITG Vegas and ITGPB (as the operators of the Princess), as described
below.
The Princess Charter includes an option for PBMC to purchase the Princess
at the end of the term and is structured such that the monthly charter hire
payments under the Princess Charter will reduce the purchase price for the
Princess to zero in five years (assuming there are no payment
65
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Empress under the Empress 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 Empress. On March 1, 2004, PBE entered into an agreement
to purchase the vessel known as the M/V Empress II (the "Empress Sale
Agreement") from Empress Joliet Corporation at a purchase price of $3,800,000.
The Empress 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 will be paid for 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 Empress 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 Empress Charter. In
addition, PBMC and PBE are required to make annual Cash Flow Sweep payments
(equivalent to mandatory prepayments of
66
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
principal) based on the EBITDAR from operation of the Princess and Empress as
described in respect of the Princess Charter above.
The Empress Charter includes an option for PBE to purchase the Empress 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 Empress to zero (assuming there are no payment defaults)
and title will automatically pass to PBE at (or, if Cash Flow Sweep payments are
made, before) the end of the term of the Empress Charter.
PBMC and PBE also entered into a Sub-Bareboat Charter (the "Empress
Sub-Charter") at Closing to charter the Empress to ITG Vegas and ITGPB for a
five year period. ITGPB plan to operate the Empress 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 Empress
Sub-Charter is $100,000 per month ($1.2 million per year) plus one percent (1%)
of the gross operating revenues of the Empress. Under the Empress Sub-Charter,
PBE granted to ITG Vegas and ITGPB an option to purchase PBE's right to acquire
the Empress at the end of the term, for an exercise price equal to the appraised
value of the Empress, to be determined upon the retrofitting and refurbishment
of the Empress, to which certain amounts are to be credited as described below
(The "Empress Purchase Option"). As consideration for the Empress 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 Empress 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
Empress 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
Empress Sub-Charter (i.e., the same amounts as the charter hire payable by PBMC
and PBE under the Empress Charter) (the "Empress Additional Payments"). If ITG
Vegas and ITGPB fail to make any Empress Additional Payments when due, PBE may
terminate the Empress Purchase Option. Upon exercise of the Empress Purchase
Option, ITG Vegas and ITGPB will be entitled to credits against the exercise
price of the Empress 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 Empress which are paid by ITG Vegas or ITGPB plus (iii) the
aggregate amount of all Cash Flow Sweep payments made under the Empress
Sub-Charter, plus (iv) the portion of the Empress Additional Payments made for
the 13th month through the 60th month of the term of the Empress 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
67
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the Corporation, ITG Vegas, ITGPB, PBMC and PBE to guaranty
performance of certain of the PDS Transactions. The Corporation, ITG Vegas and
ITGPB entered into Guaranty Agreements guarantying the obligations of PBMC and
PBE under the Princess Charter, Princess Master Lease, Empress Charter and
Empress Master Lease. The Corporation, 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 Empress Sub-Charters,
ITG Vegas entered into a Collateral Assignment of the Maritime Office Complex
Lease and Operating Agreement and Other Lease as well as a Leasehold Mortgage
pursuant to which it assigned as collateral to Cruise I and Cruise II its rights
under its lease for space, and its operating rights, at the Port of Palm Beach.
Limitation on Upstream Payments to the Corporation. Upstream payments by
ITG Vegas to the Company are limited under the Princess Sub-Charter and Empress
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 Empress
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 Empress Sub-Charter, and (ii)
other payments to the Company in an amount which, together with charter hire
payments in excess of $100,000 per month to PBMC and PBE for the two vessels,
shall not exceed $200,000 per month (a "Restricted Payment"). If ITG Vegas is
prohibited from making any Restricted Payment for any month, once such payments
are again allowed, such Restricted Payment may be made to the Company, provided
that the total amount of Restricted Payments paid by ITG Vegas to the Company,
PBMC and PBE in any twelve-month period may not exceed $2,400,000.
(B) Options Exercised and Shares Issued
On July 23, 2004 Mr. Murray exercised his 2,000,000 options to purchase
2,000,000 shares of Common Stock at $.26875 per share. The Company issued
2,000,000 shares of stock held in treasury in exchange for proceeds of $537,500.
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 and Mr. Quigley. 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. In August 2004, Mr. Quigley elected to receive his salary of
$36,339 which had been deferred,from January 3, 2003 until November 18, 2003, in
the form of 72,678 shares of the Company's Common Stock.
(C) Hurricanes
During the first quarter of Fiscal 2005, the Palm Beach area was threatened
by several hurricanes passing over or near Florida. We suffered materially from
the effects of these hurricanes
68
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
"Frances" and "Jeanne" that left the area without power, resulting in curfews
and limited food, water and life resources that significantly contributed to the
evacuated population remaining out of the area. As a result of these hurricanes,
our business was severely affected by the loss in the pool of potential
passengers, both local residences and tourists, who needed a significant period
of time to recover. Tewenty Nine of our daily cruises were cancelled during the
period of time that the hurricanes affected the area. The loss of our vessel
from service for any period of time has adversely affected and could in the
future adversely affect our revenues.
(D) Chapter 11 Final Decree
On July 17, 2004, the Bankruptcy Court issued a final decree closing the
Debtor's Chapter 11 cases.
(E) Collection of Deferred Income
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 Chapter 11 Trustee for the
Bankruptcy Estate of Robert E. Brennan (the "Brennan Trustee"). 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.
(F) Issuance of Stock for Tax Consequences
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 9A. 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
69
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2004 in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
Item 9B. Other Information
Not applicable
70
Part III
Item 10. Directors and Executive Officers of the Registrant.
Set forth below is certain information regarding our directors and
executive officers:
Name Age Position
- ---- --- --------
Francis W. Murray 63 Chairman of the Board,
President and Chief Executive Officer
James J. Murray 65 Director
Walter ReDavid 78 Director
Robert J. Quigley 75 Director
- -------------------------------------------------------------------------------
Set forth below is certain biographical information with respect to each
director, including his principal occupation and employment during the past five
years.
Francis W. Murray. Mr. Murray has been a director since 1996 and our
President, Chief Executive Officer and Chairman of the Board since October 10,
2000. On October 15, 2002, Mr. Murray assumed the position of Chief Financial
Officer. From time to time from November 1995 until June 1999, Mr. Murray served
as President of the Company's subsidiaries International Thoroughbred Gaming
Development Corporation ("ITG") and Orion Casino Corporation. From November 1993
through June 1995, Mr. Murray served as a consultant to ITG. From December 1988
through November 1993, Mr. Murray was the co-owner and President of the New
England Patriots and co-founder of the St. Louis NFL Partnership, which
attempted to obtain an expansion NFL franchise for the city of St. Louis.
James J. Murray. Mr. Murray was elected by the Board of Directors on
February 22, 1999. Mr. Murray previously served as a director of the Company
from November 6, 1996 to January 15, 1997. Mr. Murray is a member of the Ronald
McDonald House of Charities Local Operations Advisory Council and past President
of Jim Murray, Ltd., a sports promotion and marketing firm. In 1969, Mr. Murray
joined the Philadelphia Eagles' public relations staff and two years later
became the NFL team's administrative assistant. In 1974, he was named the
Eagles' General Manager and spent more than nine years in that post, during
which the Eagles' appeared in Super Bowl XV. He also served as Director of
Marketing for our Garden State Park subsidiary from 1985-1987. Mr. Murray is the
brother of Francis W. Murray, who is a director and our President, Chief
Executive Officer and Chairman of the Board.
Walter ReDavid. Mr. ReDavid was elected to the board on July 3, 2001. Mr.
ReDavid is a past Registrar of Wills and has served on various Delaware County,
Pennsylvania township boards. Mr. ReDavid has been practicing general law as a
sole practitioner for over 50 years.
Robert J. Quigley. Mr. Quigley has been a director since 1980. Since 2002,
Mr. Quigley has served as an officer of one of our subsidiaries which was formed
to develop foreign gaming opportunities. From February 1996 until October 15,
1997, and again from 1999 until October 10, 2000, Mr. Quigley served as our
President. Mr. Quigley also served as President from 1988 until July 1992.
Between November 1995 and May 1996, Mr. Quigley served as our Chairman of the
Board and acting Chief Executive Officer. From July 1992 until November 1995,
Mr. Quigley was President and Chief Operating Officer of Retama Park
Association, Inc., a racetrack facility in San Antonio, Texas.
71
Executive and Other Key Officers
Our executive and other key officers, in addition to Mr. Francis W. Murray,
include:
- --------------------------------------------------------------------------------
Name Age Position
- ---- --- --------
William H. Warner 59 Secretary
Christine E. Rice Newell 58 Assistant Treasurer and Controller
Francis X. Murray 38 Vice President of ITG Vegas, Inc. (ITGV)
(surviving company of merger of Palm Beach
Princess, Inc. and ITGV)
Jerry Winters 44 Treasurer and CFO of ITG Vegas, Inc.
Stephen Flood 44 Vice President of Casino Operations,
ITG Vegas, Inc.
- --------------------------------------------------------------------------------
William H. Warner. Mr. Warner was appointed our Secretary in October 2000.
Mr. Warner served as Treasurer and Chief Financial Officer from 1983 until
October 15, 2002. Mr. Warner resigned from his Treasurer and CFO positions over
his concerns that the Company may not maintain its Director and Officer's
insurance policy in the future. The limits of the policy have been reduced
significantly from Fiscal 2001 levels due to cash flow shortages. Mr. Warner is
a certified public accountant, and prior to joining us, was employed in public
accounting for 11 years.
Christine E. Rice Newell. Ms. Rice Newell has been our Assistant Treasurer
and Controller since 1990. She has served as Secretary/Treasurer of our ITG
Vegas, Inc. subsidiary since its inception in December 2001. From 1986 until
1990, Ms. Rice Newell was our Corporate Accounting Manager. Ms. Rice Newell is a
certified public accountant.
Francis X. Murray. Mr. Murray, son of our Chairman and CEO, has, since
April 2001, been Vice President of our ITGV subsidiary (surviving company of the
merger of Palm Beach Princess, Inc. and ITGV) which operates the cruise ship M/V
Palm Beach Princess and related offshore gaming business. He has also been
President of Palm Beach Maritime Corp. (formerly MJQ Corp.) Corporation since
May of 1999, which corporation owns the M/V Palm Beach Princess and operated the
cruise and offshore gaming business from May 1999 until chartering the vessel to
Palm Beach Princess, Inc. in April, 2001. Prior thereto, Mr. Murray was
President (January 1999 to May 1999), and Vice President and General Manager
(February 1998 to January 1999) of Palm Beach Casino Line, a division of Leo
Equity Group, Inc. which operated the vessel M/V Palm Beach Princess; and in
1997-98 was a consultant for Leo Equity Group, Inc.
Jerry Winters. Mr. Winters has been Chief Financial Officer of our ITG
Vegas, Inc. subsidiary since its inception in April 2001. He has also been
Treasurer and CFO of Palm Beach Maritime Corp (formerly MJQ Corp.) Corporation
since March 1999. Prior thereto, Mr. Winters was CFO for Home Care America, Inc.
(March 1998 to March 1999) and regional CFO for Vencor, Inc. (March 1996 to
March, 1998). Mr. Winters is a certified public accountant.
Stephan Flood. Mr. Flood joined the previous owners of the Palm Beach
Princess in May 1994. From 1997 he served as a casino manager until January 2000
when he assumed his current position of Vice President, Casino Operations. In
that position, Mr. Flood is responsible for management and direction of all
aspects of the company's casino operations, including casino marketing, tracking
and customer service. Prior to joining the company Mr. Flood was employed
72
in a range of casino positions by Norwegian Cruise Line, Premier Cruises,
Lucayan Beach Casino and Charlie Chester's London Casino. He holds licenses
issued by British casino regulatory authorities.
The Company does not have an audit committee and, accordingly, its Board of
Directors acts as such. The Board also has not determined that any member of the
Board meets all of the requirements necessary to be considered an "audit
committee financial expert" as defined by SEC Rules. While the Company has
officers, directors and employees who have accounting and financial expertise,
during the period (until July of 2004) in which the Company's operating
subsidiary has been involved in its Chapter 11 case, due to the restrictions on
such subsidiary's providing funds to the Company, it was not feasible for the
Company to add directors, including those with a level of expertise to be
considered an "audit committee financial expert." Among other things, there was
no assurance that the Company could continue to pay premiums for directors'
liability insurance and the Company could not afford to pay any significant
amount of directors' fees. With the Chapter 11 case being dismissed in July of
2004 and the restrictions on its operating subsidiary upstreaming funds being
lessened as a result of the PDS Transaction, the Company expects to consider
adding one or more directors to its Board who would be an "audit committee
financial expert" as defined in SEC Rules.
The Company has adopted a code of ethics which applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. The Company will provide a
copy of its code of ethics to any person, free of charge, upon request. Any
request for a copy of the code of ethics should be made to our corporate
secretary, ITB 1105 N. Market Street, Wilmington, Delaware 19899.
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, our
executive officers and directors are required to file reports with the SEC
relating to their ownership of and transactions in our equity securities. Based
on our records and other information, we believe that all Section 16(a) filing
requirements were met for fiscal year 2004.
Involvement in Certain Legal Proceedings
In February, 2002, Robert J. Quigley and William H. Warner, without
admitting or denying the allegations, settled a cease and desist order
instituted by the Securities and Exchange Commission relating to filings made in
Fiscal 1997, which included findings by the Commission that Messrs. Quigley and
Warner committed and caused violations of the reporting, record keeping and
internal control provisions of the Securities Exchange Act of 1934 (the
"Exchange Act") by causing the Company to improperly disclose and account for
certain related party transactions involving the Company's former chief
executive officer. Without admitting or denying the Commission's findings, Mr.
Quigley consented to the issuance of an order that he cease and desist from
causing any violation or future violation of Section 13(a) of the Exchange Act
and Rules 12b-20 and 13a-13 thereunder and from committing any violation and any
future violation of Rule 13b2-2. Also without admitting or denying the
Commission's findings, Mr. Warner consented to the issuance of an order that he
cease and desist from causing any violation or future violation of Sections
13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and
13a-13 thereunder and from committing any violations and any future violations
of Rules 13b2-1 and 13b2-2.
73
Item 11. Executive Compensation
The following table sets forth the cash compensation as well as certain
other compensation paid or accrued during fiscal years 2003, 2002 and 2001 to
the individuals who served as our chief executive officer during fiscal year
2003 and other executive officers of the Company who earned more than $100,000
during fiscal year 2003 (collectively, the "Named Executives"):
Long-Term
Compensation
Annual Compensation Awards
------------------- ------
Securities All
Name and Other Annual Underlying Other
Principal Position Year Salary Bonus Compensation Options Compensation
($) ($) ($) (#) ($)
Francis W. Murray, 2004 395,000(1) -0- 17,701(2) -0- -0-
President, Chief 2003 402,596(1) -0- 11,503 -0- 14,733
Executive Officer 2002 387,404 -0- 17,049 2,000,000(3) 18,658
and Chief Financial
Officer
Francis X. Murray, 2004 290,122 88,628 23,367(4) -0- 1,399(5)
Vice President of 2003 301,154 88,628 11,647 -0- 21,137
ITG Vegas, Inc. 2002 277,885 135,320 11,423 -0- 21,930
William H. Warner, 2004 175,000 -0- 9,780(6) -0- 1,440(8)
Secretary 2003 171,635 -0- 9,780(6) -0- 10,717
2002 176,346 -0- 3,244 75,000(7) 18,650
(1) Consists of $395,000 in salary earned by Mr. Murray through June 30, 2004
but deferred. For fiscal 2003 consists of $212,692.48 in salary paid to Mr.
Maurray and $189,904 of salary earned through June 30, 2003 but deferred.
(2) Consists of automobile lease payments.
(3) Represents the number of shares under options granted in fiscal 2002. Such
options replaced options for the same number of shares which had been
granted in fiscal 2001 and terminated in fiscal 2002.
(4) Consists of automobile lease payments.
(5) Fiscal 2004 amounts consist of $877 of life insurance premiums paid by the
Company with respect to term life insurance payable to beneficiaries
designated by Mr. F. X. Murray, $521.55 contributed by the Company under
Palm Beach Maritime Corp.(PBMC) (formerly MJQ Corp.)'s 401(k) plan.
(6) Consists of monthly automobile allowance which was deferred by Mr. Warner.
(7) Represents the number of shares under options granted in fiscal 2002. Such
options replaced options for the same number of shares which had been
granted in fiscal 2001 and terminated in fiscal 2002.
(8) Fiscal 2004 amounts include $1,440 of life insurance premiums paid by the
Company with respect to term life insurance payable to beneficiaries
designated by Mr. Warner.
74
Stock Options Grants
There were no stock options granted to the Named Executives during Fiscal
Year 2004.
Stock Option Exercises and Holdings
The following table sets forth the value of options held by each of the
Named Executives at June 30, 2004. None of the Named Executives exercised any
options during fiscal year 2004.
Aggregated Option Exercises in 2004 and Option Values at June 30, 2004
- -----------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Optionsat June 30, 2004 at June 30, 2004
Shares Value (#) ($)(1)
Acquired on Realized --------------------------- --------------------------
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------- ------------ -------- ----------- -------------- ----------- -------------
Francis W. Murray -- -- 2,300,000 0 2,602,500 0
William H. Warner -- -- 75,000 0 97,593 0
- -----------------------------------------------------------------------------------------------
(1) The value of unexercised in-the-money options is based on the difference
between the last reported sale price per share of common stock as reported on
the Pink Sheets on June 28, 2004 ($1.57) and the exercise price of the options,
multiplied by the number of options.
Compensation of Directors
Outside directors are provided compensation of $1,000 for each regular or
special meeting of the Board in which each outside director participates either
in person or by telephone.
Employment Contracts
Effective December 1, 2000, we entered into a five-year employment contract
with Mr. Francis W. Murray as 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 contract, on December 28, 2000, Mr. Murray was awarded options to purchase
2,000,0000 shares of our common stock under an stock incentive plan which was
subject to stockholder approval. Such options terminated in fiscal 2002 since
the Plan was not submitted for shareholder approval, and replacement options
were granted in fiscal 2002 with an exercise price of $0.26875 per share,
expiring December 31, 2010.
In connection with the bareboat charter with Palm Beach Maritime Corp
("PBMC") (formerly MJQ Corp.) we are obligated to honor several employment
contracts between key executives and PBMC. A contract for Francis X. Murray
which expired on December 31, 2003 provided for a base salary of $290,000,and
$310,000 respectively during calendar years 2002 and 2003. Additionally the
contract provides for an annual bonus of up to 30% of the executive's base
salary if certain EBITDA performance goals are met, membership to a golf club
and other expense allowances. The Company continues to honor the terms of the
contract from year to year.
75
Compensation Committee Interlocks and Insider Participation
Mr. Francis W. Murray, a member of the Compensation Committee of the Board
of Directors, currently serves as our President and Chief Executive Officer. See
also "Item 13. Certain Relationships and Related Transactions" for additional
information with respect to Mr. Murray.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information with respect to the
beneficial ownership, as of September 13, 2004, of each person who we knew to be
the beneficial owner of more than 5% of our common stock. To the Company's
knowledge, each of the stockholders named below has sole voting and investment
power with respect to such shares, unless otherwise indicated. As of September
13, 2004 there were 10,565,203 shares of outstanding stock.
- --------------------------------------------------------------------------------
Common Stock
------------
Name and Address of
Beneficial Owner Number of Shares Percent
- ---------------- ---------------- -------
Francis W. Murray 5,489,730 (1) 52%
211 Benigno Boulevard
Suite 210
Bellmawr, NJ 08031
The Family Investment Trust 872,585 (2) 8.25%
Henry Brennan, Trustee
340 North Avenue
Cranford, NJ 07016
Frank A. Leo 736,201 (3) 7%
44 Minnbrook Rd
Colts Neck, NJ 07722
- --------------------------------------------------------------------------------
(1) Includes 300,000 shares of common stock issuable upon the exercise of stock
options at $5.00 per share.
(2) Henry Brennan is the brother of Robert E. Brennan, our former president,
whose adult sons are the beneficiaries of the trust.
(3) Includes 200,000 shares purchasable under stock options at $0.50 per share.
76
Security Ownership of Management
The following table sets forth certain information with respect to the
beneficial ownership, as of September 13, 2004, of (i) each director, (ii) the
Named Executives and (iii) all of our directors and executive officers as a
group. Each of the stockholders named below has sole voting and investment power
with respect to such shares, unless otherwise indicated.
- --------------------------------------------------------------------------------
Name of Beneficial Owner Number of Shares(1) Percent of Class
- ------------------------ ------------------- ----------------
Francis W. Murray 5,489,730 (1) 52%
James J. Murray 25,000 (2) *
Walter ReDavid 0 *
Robert J. Quigley 179,169 (3) 1.7%
William H. Warner 123,124 (4) 1.2%
Francis X. Murray 200,000 (5) 1.9%
All executive officers and
directors as a group 6,022,023 57%
(7 persons)
- --------------------------------------------------------------------------------
*Less than 1 percent.
(1) Includes 300,000 shares issuable upon the exercise of stock options.
(2) Consists of shares of common stock issuable upo the exercise of options.
(3) Includes 100,000 shares of common stock issuabl upon the exercise of
options.
(4) Includes 75,000 shares issuable upon the exercise of stock options and
48,000 shares issuable to Mr. Warner provided he agrees to accept such
shares as payment of obligations due him by the Company.
(5) Includes 200,000 shares issuable upon the exercise of stock options which
have been authorized by the Board of Directors for future grants.
Equity Compensation Plan Information
The following table contains information on Equity Compensation Plans that
have been and have not been approved by security holders at June 30, 2004:
Number of securities
remaining available for
Number of future issuance under
Securities to be Weighted average equity compensation
issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a)
Plan Category (a) (b) (c)
- ---------------------- ----------------------- --------------------- ------------------------
Equity compensation
plans approved by -0- N/A N/A
security holders
Equity compensation
plans not approved by 3,336,500 1.59 -0-
security holders
----------------------- --------------------- ------------------------
Total 3,336,500 1.59 -0-
======================= ===================== ========================
Set forth below is a summary of the material terms of stock options granted
by the Company which were not approved by the Company's security holders.
Pursuant to a Non-qualified Stock Option Agreement dated January 7, 2002
between the Company and each of Francis W. Murray and William H. Warner, the
Company granted an option to purchase 2,000,000 shares of Common Stock to Mr.
Murray and to purchase 75,000 shares of Common Stock to Mr. Warner, in each case
for a purchase price of $0.26875 per share. The options vested immediately and
expire December 31, 2010. The options are not transferable other than by will or
the laws of descent and distribution, and, during the lifetime of the optionee,
are exercisable
77
only by the optionee. The options remain exercisable following termination of
employment, until their scheduled expiration date. On July 28, 2004 Mr. Murray
exercised his 2,000,000 options.
In Fiscal 1997, the Company granted a non-qualified stock option to Frank
A. Leo, its then chairman, to purchase 200,000 shares of Common Stock at $4.00
per share. In fiscal 2002, in connection with the agreement to purchase Mr.
Leo's stock in Leo Equity Group, Inc., the Company agreed to reduce the purchase
price for shares under Mr. Leo's stock option to $0.50 per share. Mr. Leo's
option survived termination of his employment and expires December 20,2006.
Additionally, in connection with other prior agreements with former officers and
directors, the Company granted options to purchase 650,000 shares of Common
Stock at prices ranging from $4.00 to $5.00 per share. These options expire at
various times from January 2006 to January 2007.
In Fiscal 1996 the Company granted warrants to purchase 275,000 shares of
Common Stock at $4.00 per share as a finder's fee in connection with the
purchase of its El Rancho property. These warrants expire in April 2006.
Item 13. Certain Relationships and Related 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 Palm Beach Maritime Corp.("PBMC")
(formerly MJQ Corp.), which was owned by Michael J. Quigley III until December
26, 2002 when the property was acquired by OC Realty, LLC, the entity owned by
Mr. Murray. Mr. Quigley has no relationship to Robert J. Quigley, one of our
directors. OC Realty is developing a condominium hotel resort on the property as
discussed above. As of March 31, 2004 we had lent $2,034,405 in total to PBMC
and we have accrued interest in the amount of $842,704 on the loan. Upon the
acquisition of the property, OC Realty assumed PBMC's indebtedness to us. These
loans bear interest at 12% and will be repayable out of the first proceeds,
after payment of bank debts, generated by the sale of the condominiums. We will
also have the right to receive, as participation interest, from available cash
flow of OC Realty if the project is successful, a priority return of our
investment and a priority profits interest for up to three times our investment.
Repayment of these loans and our participation interest will be subject to
repayment of, first, bank debt of approximately $5.5 million (at present)
incurred in the purchase of the real property and, second, construction
financing expected to amount to $25 to $30 million and third, capital invested
by a joint venture partner (expected to be up to $6.5 million) plus a 15% per
annum return thereon. At the time the loans to PBMC were approved, Mr. Murray
stood to receive
78
a substantial contingent benefit from PBMC 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.
On January 26, 2001, the Company borrowed $1,000,000 from Michael J.
Quigley, III at an annual interest rate of 10%. Principal and interest on the
loan was due on or about April 25, 2001. On May 14, 2001, the loan was modified
to be due on demand. As collateral for the loan, the Company pledged the $33
million in notes receivable from the sale of the El Rancho and Garden State Park
properties. On May 8, 2002, we made a payment of $100,000 against the note. On
February 22, 2002, Mr. Quigley released his security interest in the Garden
State Park Note in connection with the Master Settlement Agreement. On February
20, 2004 the Company paid in full its indebtedness to Michael J. Quigley III in
the amount of $1,206,850 which included accrued interest.
Effective April 30, 2001, we entered into a bareboat charter with PBMC,
pursuant to which we are chartering the vessel M/V Palm Beach Princess for the
purpose of operating a casino cruise business from the Port of Palm Beach,
Florida. Michael J. Quigley, III was a principal of PBMC. In October, 2002
Francis W. Murray, our Chairman, President and Chief Executive Officer purchased
the stock of PBMC and has been an officer and director of PBMC. Francis X.
Murray, the son of Francis W. Murray, is President and a director of PBMC and
Vice President of our subsidiary, ITG Vegas, Inc., which operates the vessel.
Under the bareboat charter agreement in effect until July 7, 2004, we paid
$50,000 per month as the charter hire fee to PBMC. All costs of operating the
vessel incurred by PBMC on our behalf are to be reimbursed by us to PBMC. In
addition, as described in Notes 3 and 11-A above, we entered into an amended
Master Settlement Agreement with the Chapter 11 Trustee of the Bankruptcy Estate
of Robert E. Brennan, PBMC and others to purchase from the Trustee the Ship
Mortgage Obligation of PBMC, having an original balance of principal and
interest outstanding at April 30, 2001 of approximately $15.7 million for a
purchase price of $13.75 million. Pursuant to the Master Settlement Agreement,
PBMC and its officers and directors (including Francis W. Murray) exchanged
mutual releases with the Trustee and others having claims to the Ship Mortgage
Obligation.
On July 12, 2002, we borrowed $300,000 from Francis W. Murray at an annual
interest rate of 6%. During Fiscal 2003, we reduced the loan to $250,000.
Payment was made to Mr. Murray in full during the fourth quarter of Fiscal 2004.
On November 1, 2002 the Company employed Tanuja Murray, daughter-in-law of
Francis W. Murray. Mrs. Murray holds a law degree and is acting in the capacity
of assistant to the Chairman involving the Company's exploration of gaming
related business opportunities. Mrs. Murray earns $60,000 per year in addition
to the regular employee benefits paid by the Company.
On July 7, 2004, the Company entered into a five-year charter of two
vessels, the Palm Beach Princess and the Empress II, under the terms described
in Part I, Item I above under the caption, PDS Transactions. 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 24 to our financial
statements.)
79
Item 14. Principal Accountant Fees and Services.
The following table presents fees for professional audit services rendered
by Stockton Bates, LLP for the audit of the Company's annual financial
statements and fees billed for other services rendered by Stockton Bates for the
last two fiscal years.
The Audit Committee, consisting of the full Board of Directors, approved in
advance audit and non-audit services performed by the Company's independent
auditor. The Audit Committee considers Stockton Bates, LLP to be well qualified
to serve as the independent public accountants of the Company.
-----------------------
Year Ended June 30,
-----------------------
2004 2003
---- ----
Audit fees excluding audit related fees $ 55,000 $ 37,352
Audit related fees (1) $ 8,925 $ 7,600
--------- ---------
Total audit and audit related fees 63,925 44,952
Tax related fees 15,000 8,110
All other fees (3) 6,472 10,792
--------- ---------
Total fees $ 85,397 $ 63,854
========= =========
(1) Audit related fees consisted principally of review of our Forms 10-Q for
compliance.
(2) Tax fees include tax compliance, planning, research and return preparation
services.
(3) All other fees consisted of fees for other accounting services.
80
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report
1. Financial Statements.
See index to Financial Statements at Item 8 on page 30 of this report.
2. Financial Statement Schedules.
See index to Financial Statements at Item 8 on page 30 of this report.
3. Exhibits.
The following exhibits are filed as part of, or incorporated by reference
into, this report:
Exhibit
Number Description
3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3(a) to the Registrant's Registration
Statement on Form S-1, File No. 2-70153, filed December 5,
1980).
3.2 Amendment to the Certificate of Incorporation (incorporated by
reference to Exhibit 3(a)(11) to Amendment No. 3 to the
Registrant's Registration Statement on Form S-1, File No.
2-70153).
3.3 Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3.3 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997).
3.4# Amendment to the Certificate of Incorporation
10.1 Registration Rights Agreement dated as of May 23, 1997 between
the Registrant and CSFB (incorporated by reference to Exhibit
10.4 to the Registrant's Current Report on Form 8-K dated May
23, 1997).
10.2* Employment Agreement by and between the Registrant and Francis
W. Murray dated as of December 1, 2000 (incorporated by
reference to Exhibit 10.3 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2001)
10.3 Note Agreement between GSRT, LLC, and Realen-Turnberry/Cherry
Hill, LLC, as Issuer, dated as of November 29, 2000.
(incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated November 30, 2000)
10.4 $10,000,000 Promissory Note dated November 29, 2000, from
Realen-Turnberry/Cherry Hill, LLC to GSRT, LLC. (incorporated by
reference to Exhibit 10.2 to the Registrant's Current Report on
Form 8-K dated November 30, 2000)
10.5 Security Agreement, dated as of November 29, 2000, by and among
Realen-Turnberry/Cherry Hill, LLC, its sole member
Realen-Turnberry/Cherry Hill Associates and GSRT, LLC.
(incorporated by reference to Exhibit 10.3 to the Registrant's
Current Report on Form 8-K dated November 30, 2000)
10.6 Bareboat Charter dated as of April 30, 2001 between Palm Beach
Princess. Inc. and Palm Beach Maritime Corp (formerly MJQ Corp)
(incorporated by reference to Exhibit 10.17 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30,
2001)
81
Exhibit
Number Description
10.7 Master Settlement Agreement dated February 22, 2002, among the
Chapter 11 Trustee for the Bankruptcy Estate of Robert E.
Brennan, the Company, and, among others, Palm Beach Maritime
Corp.("PBMC") (formerly MJQ Corp.) , Leo Equity Group, Inc.,
Francis W. Murray, Frank A. Leo and Michael J. Quigley, III.
(incorporated by reference to Exhibit 10.13 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30,
2002)
10.8 Purchase and Sale Agreement dated February 22, 2002, between
Palm Beach Princess, Inc. and the Chapter 11 Trustee for the
Bankruptcy Estate of Robert E. Brennan. (incorporated by
reference to Exhibit 10.16 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2002)
10.9 Stock Purchase Agreement dated February 22, 2002, between the
Company and the Chapter 11 Trustee for the Bankruptcy Estate of
Robert E. Brennan. (incorporated by reference to Exhibit 10.17
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 2002)
10.10* Non-Qualified Stock Option Agreement dated January 7, 2002,
between the Company and Francis W. Murray. (incorporated by
reference to Exhibit 10.18 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2002)
10.11* Non-Qualified Stock Option Agreement dated January 7, 2002,
between the Company and William H. Warner. (incorporated by
reference to Exhibit 10.19 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2002)
10.12* Stock Option granted to Francis W. Murray on January 15, 1997.
(incorporated by reference to the Registrant's Current Report on
Form 8-K dated January 29, 1997)
10.13#* Stock Option granted to Frank A. Leo on December 20, 1996.
10.14 Joint Amended Plan of Reorganization of ITG Vegas, Inc. and Palm
Beach Maritime Corp.(PBMC) (formerly MJQ Corp.) (incorporated by
reference to Exhibit 2.1 on Form 8-K dated September 22, 2003)
10.15# Stock Put Agreement dated October 15, 2003 between the Company
and the Chapter 11 Trustee for the Bankruptcy Estate of Robert
E. Brennan.
10.16 Amended and Restated Bareboat Charter between Palm Beach
Princess, Inc. and Palm Beach Maritime Corp.(PBMC) (formerly MJQ
Corp.) (incorporated by reference to Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 2003)
10.17# Amended Bareboat Charter dated October 15, 2003 between ITG
Vegas, Inc. and Palm Beach Maritime Corp.(PBMC) (formerly MJQ
Corp.)
10.18 Guaranty Agreement (Palm Beach Princess Vessel) dated July 6,
2004 made by International Thoroughbred Breeders, Inc., ITG
Vegas, Inc. and ITG Palm Beach, LLC in favor of Cruise Holdings
I, LLC (incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated July 21, 2004)
10.19 Guaranty Agreement (Empress II Vessel) dated July 6, 2004 made
by International Thoroughbred Breeders, Inc., ITG Vegas, Inc.
and ITG Palm Beach, LLC in favor of Cruise Holdings II, LLC
(incorporated by reference to Exhibit 10.2 to the Registrant's
Current Report on Form 8-K dated July 21, 2004)
82
Exhibit
Number Description
10.20 Guaranty Agreement (Gaming Equipment) dated July 6, 2004 made by
Palm Beach Empress, Inc., Palm Beach Maritime Corporation and
International Thoroughbred Breeders, Inc. in favor of PDS Gaming
Corporation (incorporated by reference to Exhibit 10.3 to the
Registrant's Current Report on Form 8-K dated July 21, 2004)
10.21 Bareboat Charter and Option to Purchase of the Casino Cruise
Ship Palm Beach Princess dated as of July 6, 2004 among Cruise
Holdings I, LLC, Palm Beach Maritime Corporation and Palm Beach
Empress, Inc. (incorporated by reference to Exhibit 10.4 to the
Registrant's Current Report on Form 8-K dated July 21, 2004)
10.22 Master Lease Agreement dated as of July 6, 2004 among Cruise
Holdings I, LLC, Palm Beach Maritime Corporation and Palm Beach
Empress, Inc., together with Lease Schedule No. 1 thereto
(incorporated by reference to Exhibit 10.5 to the Registrant's
Current Report on Form 8-K dated July 21, 2004)
10.23 Sub-Bareboat Charter of the Casino Cruise Ship Palm Beach
Princess dated as of July 6, 2004 among Palm Beach Maritime
Corporation, Palm Beach Empress, Inc., ITG Vegas, Inc. and ITG
Palm Beach, LLC (incorporated by reference to Exhibit 10.6 to
the Registrant's Current Report on Form 8-K dated July 21, 2004)
10.24 Bareboat Charter and Option to Purchase of the Casino Cruise
Ship Empress II dated as of July 6, 2004 among Cruise Holdings
II, LLC, Palm Beach Maritime Corporation and Palm Beach Empress,
Inc. (incorporated by reference to Exhibit 10.7 to the
Registrant's Current Report on Form 8-K dated July 21, 2004)
10.25 Master Lease Agreement dated as of July 6, 2004 among Cruise
Holdings II, LLC, Palm Beach Maritime Corporation and Palm Beach
Empress, Inc., together with Lease Schedule No. 1 thereto
(incorporated by reference to Exhibit 10.8 to the Registrant's
Current Report on Form 8-K dated July 21, 2004
10.26 Sub-Bareboat Charter of the Casino Cruise Ship Empress II dated
as of July 6, 2004 among Palm Beach Maritime Corporation, Palm
Beach Empress, Inc., ITG Vegas, Inc. and ITG Palm Beach, LLC
(incorporated by reference to Exhibit 10.9 to the Registrant's
Current Report on Form 8-K dated July 21, 2004)
10.27 Warranty Bill of Sale and Transfer Agreement dated as of July 6,
2004 between ITG Vegas, Inc. and PDS Gaming Corporation
(incorporated by reference to Exhibit 10.10 to the Registrant's
Current Report on Form 8-K dated July 21, 2004)
10.28 Master Lease dated as of July 6, 2004 among PDS Gaming
Corporation, ITG Vegas, Inc. and ITG Palm Beach, LLC, together
with Lease Schedules T-3, T-4 and T-5 (incorporated by reference
to Exhibit 10.11 to the Registrant's Current Report on Form 8-K
dated July 21, 2004)
10.29 Promissory Note of Soffer/Cherry Hill Partners, LP dated June
16, 2004, in the principal amount of $35,842,027 (incorporated
by reference to Exhibit 10.1 to the Registrant's Current Report
on Form 8-K dated July 6, 2004)
10.30 Agreement dated June 16, 2004, among Orion Casino Corporation,
Turnberry/Las Vegas Boulevard., L.L.C. and Turnberry/Las Vegas
Boulevard., L.P. (incorporated by reference to Exhibit 10.2 to
the Registrant's Current Report on Form 8-K dated July 6, 2004)
10.31 Pledge Agreement dated June 16, 2004, between Raymond Parello
and Orion Casino Corporation (incorporated by reference to
Exhibit 10.3 to the Registrant's Current Report on Form 8-K
dated July 6, 2004)
10.32 Shareholders' Agreement dated June 16, 2004, among Palm Beach
Empress, Inc., Raymond Parello and MJQ Corporation (incorporated
by reference to Exhibit 10.4 to the Registrant's Current Report
on Form 8-K dated July 6, 2004)
83
Exhibit
Number Description
10.33 Letter Agreement dated June 16, 2004, between Cherry Hill at El
Rancho LP and Orion Casino Corporation (incorporated by
reference to Exhibit 10.5 to the Registrant's Current Report on
Form 8-K dated July 6, 2004)
21 Subsidiaries.
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------------------------------------------------------
* Constitutes a management contract or compensation plan.
# As filed as an exhibit herewith
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Bellmawr, New
Jersey, this 13th day of October, 2004.
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
By:/s/ Francis W. Murray
-------------------------------------------------------------
Francis W. Murray
Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Francis W. Murray Chairman of the Board, President October 13, 2004
- ---------------------- and Chief Executive Officer
Francis W. Murray (Principal Executive Officer)
/s/ Francis W. Murray Chief Financial Officer October 13, 2004
- ---------------------- (Principal Financial and
Francis W. Murray Accounting Officer)
/s/ James J. Murray Director October 13, 2004
- ----------------------
James J. Murray
/s/ Robert J. Quigley Director October 13, 2004
- ----------------------
Robert J. Quigley
/s/ Walter ReDavid Director October 13, 2004
- ----------------------
Walter ReDavid
85
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Francis W. Murray, certify that:
1. I have reviewed this annual report on Form 10-K of International
Thoroughbred Breeders, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Dated: October 13, 2004
Name: Francis W. Murray
Title: Chief Executive Officer
86
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Francis W. Murray, certify that:
1. I have reviewed this annual report on Form 10-K of International
Thoroughbred Breeders, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Dated: October 13, 2004
Name: Francis W. Murray
Title: Chief Financial Officer
87
Exhibit 32
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Annual Report of International Thoroughbred Breeders,
Inc., a Delaware corporation (the "Company"), on Form 10-K for the year ended
June 30, 2004, as filed with the Securities and Exchange Commission (the
"Report"), Francis W. Murray, Chief Executive Officer and Chief Financial
Officer of the Company, does hereby certify, pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350), that to his knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
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 result of operations of the
Company.
Dated: October 13, 2004
Name: Francis W. Murray
Title: Chief Executive Officer and Chief Financial Officer
88
EXHIBIT INDEX
Exhibit
Number Description
3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3(a) to the Registrant's Registration
Statement on Form S-1, File No. 2-70153, filed December 5,
1980).
3.2 Amendment to the Certificate of Incorporation (incorporated by
reference to Exhibit 3(a)(11) to Amendment No. 3 to the
Registrant's Registration Statement on Form S-1, File No.
2-70153).
3.3 Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3.3 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997).
3.4 # Amendment to the Certificate of Incorporation
10.1 Registration Rights Agreement dated as of May 23, 1997 between
the Registrant and CSFB (incorporated by reference to Exhibit
10.4 to the Registrant's Current Report on Form 8-K dated May
23, 1997).
10.2 * Employment Agreement by and between the Registrant and Francis
W. Murray dated as of December 1, 2000 (incorporated by
reference to Exhibit 10.3 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2001)
10.3 Note Agreement between GSRT, LLC, and Realen-Turnberry/Cherry
Hill, LLC, as Issuer, dated as of November 29, 2000.
(incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated November 30, 2000)
10.4 $10,000,000 Promissory Note dated November 29, 2000, from
Realen-Turnberry/Cherry Hill, LLC to GSRT, LLC. (incorporated by
reference to Exhibit 10.2 to the Registrant's Current Report on
Form 8-K dated November 30, 2000)
10.5 Security Agreement, dated as of November 29, 2000, by and among
Realen-Turnberry/Cherry Hill, LLC, its sole member
Realen-Turnberry/Cherry Hill Associates and GSRT, LLC.
(incorporated by reference to Exhibit 10.3 to the Registrant's
Current Report on Form 8-K dated November 30, 2000)
10.6 Bareboat Charter dated as of April 30, 2001 between Palm Beach
Princess. Inc. and Palm Beach Maritime Corp (formerly MJQ Corp)
(incorporated by reference to Exhibit 10.17 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30,
2001)
10.7 Master Settlement Agreement dated February 22, 2002, among the
Chapter 11 Trustee for the Bankruptcy Estate of Robert E.
Brennan, the Company, and, among others, Palm Beach Maritime
Corp.("PBMC") (formerly MJQ Corp.) , Leo Equity Group, Inc.,
Francis W. Murray, Frank A. Leo and Michael J. Quigley, III.
(incorporated by reference to Exhibit 10.13 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30,
2002)
10.8 Purchase and Sale Agreement dated February 22, 2002, between
Palm Beach Princess, Inc. and the Chapter 11 Trustee for the
Bankruptcy Estate of Robert E. Brennan. (incorporated by
reference to Exhibit 10.16 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2002)
10.9 Stock Purchase Agreement dated February 22, 2002, between the
Company and the Chapter 11 Trustee for the Bankruptcy Estate of
Robert E. Brennan. (incorporated by reference to Exhibit 10.17
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 2002)
89
Exhibit
Number Description
10.10 * Non-Qualified Stock Option Agreement dated January 7, 2002,
between the Company and Francis W. Murray. (incorporated by
reference to Exhibit 10.18 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2002)
10.11* Non-Qualified Stock Option Agreement dated January 7, 2002,
between the Company and William H. Warner. (incorporated by
reference to Exhibit 10.19 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2002)
10.12* Stock Option granted to Francis W. Murray on January 15, 1997.
(incorporated by reference to the Registrant's Current Report on
Form 8-K dated January 29, 1997)
10.13#* Stock Option granted to Frank A. Leo on December 20, 1996.
10.14 Joint Amended Plan of Reorganization of ITG Vegas, Inc. and Palm
Beach Maritime Corp.(PBMC) (formerly MJQ Corp.) (incorporated by
reference to Exhibit 2.1 on Form 8-K dated September 22, 2003)
10.15# Stock Put Agreement dated October 15, 2003 between the Company
and the Chapter 11 Trustee for the Bankruptcy Estate of Robert
E. Brennan.
10.16 Amended and Restated Bareboat Charter between Palm Beach
Princess, Inc. and Palm Beach Maritime Corp.(PBMC) (formerly MJQ
Corp.) (incorporated by reference to Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 2003)
10.17# Amended Bareboat Charter dated October 15, 2003 between ITG
Vegas, Inc. and Palm Beach Maritime Corp.(PBMC) (formerly MJQ
Corp.)
10.18 Guaranty Agreement (Palm Beach Princess Vessel) dated July 6,
2004 made by International Thoroughbred Breeders, Inc., ITG
Vegas, Inc. and ITG Palm Beach, LLC in favor of Cruise Holdings
I, LLC (incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated July 21, 2004)
10.19 Guaranty Agreement (Empress II Vessel) dated July 6, 2004 made
by International Thoroughbred Breeders, Inc., ITG Vegas, Inc.
and ITG Palm Beach, LLC in favor of Cruise Holdings II, LLC
(incorporated by reference to Exhibit 10.2 to the Registrant's
Current Report on Form 8-K dated July 21, 2004)
10.20 Guaranty Agreement (Gaming Equipment) dated July 6, 2004 made by
Palm Beach Empress, Inc., Palm Beach Maritime Corporation and
International Thoroughbred Breeders, Inc. in favor of PDS Gaming
Corporation (incorporated by reference to Exhibit 10.3 to the
Registrant's Current Report on Form 8-K dated July 21, 2004)
10.21 Bareboat Charter and Option to Purchase of the Casino Cruise
Ship Palm Beach Princess dated as of July 6, 2004 among Cruise
Holdings I, LLC, Palm Beach Maritime Corporation and Palm Beach
Empress, Inc. (incorporated by reference to Exhibit 10.4 to the
Registrant's Current Report on Form 8-K dated July 21, 2004)
10.22 Master Lease Agreement dated as of July 6, 2004 among Cruise
Holdings I, LLC, Palm Beach Maritime Corporation and Palm Beach
Empress, Inc., together with Lease Schedule No. 1 thereto
(incorporated by reference to Exhibit 10.5 to the Registrant's
Current Report on Form 8-K dated July 21, 2004)
90
Exhibit
Number Description
10.23 Sub-Bareboat Charter of the Casino Cruise Ship Palm Beach
Princess dated as of July 6, 2004 among Palm Beach Maritime
Corporation, Palm Beach Empress, Inc., ITG Vegas, Inc. and ITG
Palm Beach, LLC (incorporated by reference to Exhibit 10.6 to
the Registrant's Current Report on Form 8-K dated July 21, 2004)
10.24 Bareboat Charter and Option to Purchase of the Casino Cruise
Ship Empress II dated as of July 6, 2004 among Cruise Holdings
II, LLC, Palm Beach Maritime Corporation and Palm Beach Empress,
Inc. (incorporated by reference to Exhibit 10.7 to the
Registrant's Current Report on Form 8-K dated July 21, 2004)
10.25 Master Lease Agreement dated as of July 6, 2004 among Cruise
Holdings II, LLC, Palm Beach Maritime Corporation and Palm Beach
Empress, Inc., together with Lease Schedule No. 1 thereto
(incorporated by reference to Exhibit 10.8 to the Registrant's
Current Report on Form 8-K dated July 21, 2004
10.26 Sub-Bareboat Charter of the Casino Cruise Ship Empress II dated
as of July 6, 2004 among Palm Beach Maritime Corporation, Palm
Beach Empress, Inc., ITG Vegas, Inc. and ITG Palm Beach, LLC
(incorporated by reference to Exhibit 10.9 to the Registrant's
Current Report on Form 8-K dated July 21, 2004)
10.27 Warranty Bill of Sale and Transfer Agreement dated as of July 6,
2004 between ITG Vegas, Inc. and PDS Gaming Corporation
(incorporated by reference to Exhibit 10.10 to the Registrant's
Current Report on Form 8-K dated July 21, 2004)
10.28 Master Lease dated as of July 6, 2004 among PDS Gaming
Corporation, ITG Vegas, Inc. and ITG Palm Beach, LLC, together
with Lease Schedules T-3, T-4 and T-5 (incorporated by reference
to Exhibit 10.11 to the Registrant's Current Report on Form 8-K
dated July 21, 2004)
10.29 Promissory Note of Soffer/Cherry Hill Partners, LP dated June
16, 2004, in the principal amount of $35,842,027 (incorporated
by reference to Exhibit 10.1 to the Registrant's Current Report
on Form 8-K dated July 6, 2004)
10.30 Agreement dated June 16, 2004, among Orion Casino Corporation,
Turnberry/Las Vegas Boulevard., L.L.C. and Turnberry/Las Vegas
Boulevard., L.P. (incorporated by reference to Exhibit 10.2 to
the Registrant's Current Report on Form 8-K dated July 6, 2004)
10.31 Pledge Agreement dated June 16, 2004, between Raymond Parello
and Orion Casino Corporation (incorporated by reference to
Exhibit 10.3 to the Registrant's Current Report on Form 8-K
dated July 6, 2004)
10.32 Shareholders' Agreement dated June 16, 2004, among Palm Beach
Empress, Inc., Raymond Parello and MJQ Corporation (incorporated
by reference to Exhibit 10.4 to the Registrant's Current Report
on Form 8-K dated July 6, 2004)
10.33 Letter Agreement dated June 16, 2004, between Cherry Hill at El
Rancho LP and Orion Casino Corporation (incorporated by
reference to Exhibit 10.5 to the Registrant's Current Report on
Form 8-K dated July 6, 2004)
21 Subsidiaries.
91
Exhibit
Number Description
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------------------------------------------------------
* Constitutes a management contract or compensation plan.
# As filed as an exhibit herewith
92
Exhibit 21
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
EXHIBIT 21
The following table indicates the subsidiaries of International
Thoroughbred Breeders, Inc. and their states of incorporation. All of such
subsidiaries are wholly owned.
Name State of Incorporation
- ---- ----------------------
Atlantic City Harness, Inc. New Jersey
Circa 1850, Inc. New Jersey
Garden State Race Track, Inc. New Jersey
GSRT, LLC Delaware
Holdfree Racing Association New Jersey
ITB Management, Inc. New Jersey
International Thoroughbred Gaming Development Corporation New Jersey
ITG - Brazil, Inc. Delaware
ITG - Venezuela, Inc. Delaware
Olde English Management Co., Inc. New Jersey
Orion Casino Corporation Nevada
Palm Beach Princess, Inc.(merged into ITGV 1/2/03) Delaware
ITG Vegas, Inc Nevada
South America Thoroughbred Company, LLC Delaware
ITG Peru, LLC Delaware
Premier Lottery Co., LLC Delaware
Palm Beach Entertainment, Inc. Delaware
ITB Realty, Inc. Florida
GMO Travel, Inc. Florida
Leo Equity Group, Inc. Florida
Royal Star Entertainment, LLC Delaware
ITB Racing, Inc. Delaware
ITG Panama, S. A. Republic of Panama
Riviera Beach Entertainment Delaware
93