SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2005
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
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 December 31, 2004 (the registrant's most
recently completed second fiscal quarter) was approximately $6,435,000. 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, 2005, there were 10,567,487 outstanding shares of the
registrant's common stock.
TABLE OF CONTENTS
PART I
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 33
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 67
Item 9A. Controls and Procedures 67
Item 9B. Other Information 67
PART III
Item 10. Directors and Executive Officers of the Registrant 68
Item 11. Executive Compensation 72
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 75
Item 13. Certain Relationships and Related Transactions 79
Item 14. Principal Accountant Fees and Services 81
PART IV
Item 15. Exhibits and Financial Statement Schedules 82
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 affecting the tourism
business in Florida;
o competition;
o execution of our new business strategy;
o changes in laws regulating the gaming industry;
o the timing of the installation of slot machines in Broward County's
three race tracks and one jai-alai facilities as a result of a
referendum approved on March 8, 2005. Broward County is contiguous to
Palm Beach County where we conduct operations;
o fluctuations in quarterly operating results as a result of seasonal
and weather considerations; and
o events directly or indirectly relating to our business causing our
stock price to be volatile.
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 Big Easy. We have refurbished and
retrofitted that vessel and we expect to place the Big Easy in service also from
the Port of Palm Beach on October 16, 2005.
Current Operations
The Palm Beach Princess and, effective July 7, 2004, the Big Easy 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. 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
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of our charter). We are to keep all insurance in place for the vessel and
equipment.
The Big Easy is a smaller vessel than the Palm Beach Princess, being 201
feet long and 4,178 gross tons. The Big Easy is registered in the United States.
It was originally built in 1993. We have refurbished and refitted the vessel for
our use as an ocean going casino cruise ship, and we expect to place it in
service on October 16, 2005. The Big Easy has 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. 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 3 mile
territorial waters 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.
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 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.
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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.
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 Obligation". 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
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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.
For further information about the Payment Obligation, 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, as
filed as Exhibit 3.4 in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2004.
By reaching the 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
July 2004 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
During our year ended June 30, 2005 ITB and several of its subsidiaries,
along with Palm Beach Maritime Corporation ("PBMC") and Palm Beach Empress, Inc.
("PBE"), companies owned or controlled by Francis W. Murray, completed several
financial and lease transactions with PDS Gaming Corporation ("PDS"), a publicly
held company located in Las Vegas. On July 7, 2004, January 5, 2005 and April 5,
2005 we closed on various transactions with PDS. On June 30, 2005, we joined
with PBMC and PBE in borrowing from PDS $29,313,889 to refinance the
approximately $27 million in existing PDS debts and we borrowed an additional
$2.3 million. During the year ended June 30, 2005, we operated under the
following vessel and equipment leases and financing arrangements consummated
with PDS and the refinancing thereof dated June 30, 2005.
(A) On July 7, 2004 PBMC, PBE and the Company and our subsidiaries ITG
Vegas and ITG Palm Beach, LLC closed on $23 million in transactions with PDS.
The transactions were structured as a sale/leaseback by PBMC and PBE, although,
as to $20 million of the $23 million total, it was effectively equivalent to a
secured loan against the Palm Beach Princess and the Big Easy vessels. Of the
$23 million, $14 million was advanced to PBMC 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 PBMC and PBE, which then subchartered
the vessel to our subsidiary, ITG Vegas, Inc. Another $6 million of the $23
million was advanced for the benefit of PBMC and PBE for the purchase and
retrofitting of the vessel Big Easy, which vessel PDS (through an affiliate)
leased and chartered to PBMC and PBE, who, in turn, subchartered the Big Easy
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 Big Easy 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 Big Easy 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 Big Easy for several months, but were unable to obtain financing
on our own since all potential lenders required a mortgage against the Palm
Beach Princess, which was owned by PBMC. PBMC was willing to utilize its vessel,
the Palm Beach Princess, to obtain funds to acquire the Big Easy and then
subcharter the Big Easy and Palm Beach Princess to ITG Vegas and ITG Palm Beach
on a long term basis.
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The investment in and operation of the Big Easy required retiring all of
our debt to the Brennan Trustee, due to the negative covenants governing our
indebtedness to the Brennan Trustee. PBMC 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 Big Easy 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 July 7, 2004 closing of the
PDS Transaction, 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 July 7, 2004, 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 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 on July 7, 2004, 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 was $178,500 per month for the first 12 months
and $391,762.80 for the remaining term.
The Princess Charter included an option for PBMC to purchase the Palm
Beach Princess at the end of the term and was structured such that the monthly
charter hire payments under the Princess Charter would reduce the purchase price
for the Palm Beach Princess to zero in five years and title would automatically
pass to PBMC at the end of the term of the Princess Charter.
PBMC and PBE entered into a Sub-Bareboat Charter to charter the Palm
Beach Princess to ITG Vegas and ITG Palm Beach for the same five year period.
The charter hire payable by ITG Vegas and ITG Palm Beach to PBMC and PBE under
the Princess Sub-Charter was $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, including principal payments
made by ITG Vegas on the PDS lease were to be credited against the purchase
price.
Acquisition of the Big Easy. On March 1, 2004, PBE entered into an
agreement to purchase the Big Easy from Empress Joliet Corporation at a purchase
price of $3,800,000. On July 7, 2004, 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 Big Easy 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 Big Easy. Such deposit was funded
to the extent of $2,880,652 by ITG Vegas.
Also on July 7, 2004, Cruise II entered into a Bareboat Charter and
Option to Purchase (the "Big Easy Charter") and Big Easy Master Lease Agreement
to charter and lease the Big Easy to PBMC and PBE for a period of five years.
The charter hire was $82,695 for the first 12 months and $171,702.54 for the
remaining term.
The Big Easy Charter included an option for PBE to purchase the Big Easy
at the end of the term and was structured the same as the Princess Charter in
that the monthly payments of charter hire under the Big Easy Charter will reduce
the purchase price for the Big Easy to zero and title will automatically pass to
PBE.
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PBMC and PBE also entered into a Sub-Bareboat Charter to charter the Big
Easy to ITG Vegas and ITG Palm Beach for a five year period. The charter hire
payable by ITG Vegas and ITG Palm Beach under the Big Easy Sub-Charter was
$100,000 per month ($1.2 million per year) plus one percent (1%) of the gross
operating revenues of the Big Easy. Under the Big Easy Sub-Charter, PBE granted
to ITG Vegas and ITG Palm Beach an option to purchase PBE's right to acquire the
Big Easy at the end of the term, for an exercise price equal to the appraised
value of the Big Easy, to be determined upon the retrofitting and refurbishment
of the Big Easy, to which certain amounts are to be credited.
Lease of Gaming Equipment. On July 7, 2004, 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 and
then leased back pursuant to a Gaming Master Lease. Each Schedule of the Gaming
Equipment Lease had a term of three years. Aggregate rent during fiscal 2005 for
all gaming equipment was approximately $1.4 million per year under this
agreement. 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.
(B) On January 5, 2005, Royal Star Entertainment, LLC ("RSE"), a
wholly-owned indirect subsidiary of ITB, borrowed $2,850,000 from PDS. The Loan
was evidenced by the Note and was to be repaid on January 17, 2006. Interest on
the Loan was payable monthly at a rate of 10% per annum. At closing, RSE paid a
closing fee to the lender in an amount equal to $78,375, or 2.75% of the
principal amount of the Note. The proceeds of the loan were used to make
improvements to the vessels Royal Star and Big Easy.
Also on January 5, 2005, RSE entered into an equipment lease with PDS
providing for the lease by RSE of slot machines to be located on the vessel
Royal Star. The term of the Lease was three years, with rental payments of
$11,879 per month for the first four months and $95,351.73 for the next thirty-
two months. RSE paid a closing fee of $57,020.74, and a security deposit in the
amount of $95,351.73.
(C) On April 5, 2005, ITB and certain of its subsidiaries, together with
PBMC, PBE, Francis W. Murray and Francis X. Murray, executed and delivered as
joint and several co-borrowers, a promissory note payable to PDS in the amount
of $4,350,000. The note evidences a loan made by PDS to the Company, the
proceeds of which were used by us to cover the costs of improvements to the Big
Easy and thereby obtain the release of the vessel the Big Easy from dry dock.
The $4.35 million note bore interest at 20% per annum, until June 30, 2005 when
it was refinanced. As further consideration to PDS, ITG Vegas, Inc. and ITG Palm
Beach, LLC entered into a three-year lease of an additional $1.5 million of
gaming equipment. Rental payments under such lease were $50,000 per month for 36
months. On September 1, 2005, the gaming equipment lease was cancelled. (See
Note 26 B)
(D) On June 30, 2005, we entered into a new loan agreement with PDS, as
lender, pursuant to which we borrowed $29,313.889 to refinance the approximately
$27 million in existing indebtedness to PDS and we borrowed an additional $2.3
million. The additional $2.3 million advance was needed by our ITG Vegas
subsidiary for working capital due to the continuing delay in commencement of
operations of the Big Easy, for which the monthly carrying costs had escalated
to approximately $1.2 million per month during the quarter ended June 30, 2005.
As a result of the June 30, 2005 PDS transaction, structured as a loan
rather than continuing with the sale-leaseback transactions which had been
entered in July 2004, the ownership of the vessels Palm Beach Princess and Big
Easy reverted to PBMC and PBE (indirectly, since they acquired Cruise Holdings I
and Cruise Holdings II from PDS subject to the $27 million existing debt against
the vessels). The $29.3 million loan is secured by mortgages on the Palm Beach
Princess and Big Easy by Cruise I and Cruise II, and also is secured by
virtually all of the assets of ITG Vegas and its subsidiaries, including the
vessel Royal Star, pledges of our stock in ITG Vegas and its subsidiaries, and
collateral assignments of certain promissory notes payable to us. Our parent
company, ITB, together with PBMC and PBE, have guaranteed the loans.
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With the unwinding of the sale-leaseback transactions with PDS and
restructuring the indebtedness as loans, the bareboat charters by Cruise I and
Cruise II to PBMC and PBE, with ensuing subcharters to ITG Vegas and ITG Palm
Beach, have terminated. In their place, ITG Vegas and ITG Palm Beach charter the
Palm Beach Princess and Big Easy, respectively, directly from Cruise I and
Cruise II, which are in turn owned by PBMC and PBE. See "Related Party
Transactions." These new bareboat charters have substantially the same economic
terms as the prior subcharters they replaced.
Funding under the June 30, 2005 PDS loan agreement was completed on July
18, 2005, following satisfaction of certain conditions, including recording of
the ship mortgages. Effective August 1, 2005, our monthly interest and principal
payments are approximately $1.1 million. Our overall annual interest rate on the
new PDS loan is approximately 15.5% until January, 2006, at which time a portion
of the loan presently equal to approximately $2.8 million will increase to 20%
until ITG's Vegas' EBIDTA exceeds $17 million on an annualized basis. The
principal will be amortized to maturity on July 1, 2009. ITG Vegas is required
to maintain EBIDTA of at least $10.5 million for the 12 months ending January 1,
2006, increasing monthly to $12 million for the 12 months ending October 1,
2006.
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.
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. 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 and to purchase a promissory note of the buyer
in the amount of $23 million (the "Las Vegas Note"), which was convertible at
our option into a 33 1/3% equity interest in the buyer. All payments payable
under such note were 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 the buyer's Promissory Note (the "Cherry Hill Note") in
the face amount of $10 million and the balance of the purchase price was paid in
cash. The cash proceeds from such sale were principally used by us to repay in
full the outstanding balances on our debt.
Under the $10 million Cherry Hill Note, all payments 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
7
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.
Sale of Las Vegas Note
On June 16, 2004, we sold 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 "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 for our parent company 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 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. While we
expect the Cherry Hill Note we received in the principal amount of $10 million
from the sale of Garden State Park 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 $4,278,651. See Note 5-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 which owns (indirectly) the Big Easy. See "PDS
Transactions" above.
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 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
8
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).
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.
Employees
As of June 30, 2005, our parent company employed eight 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 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 competition would be 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 2005 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 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 Native
American Indian gaming casinos, poker rooms, horse and dog racing, off track
wagering, 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.
On March 8, 2005 the citizens of Broward County approved a referendum
that will amend Florida's Constitution to permit slot machines at pari-mutuel
facilities in Broward County. Currently there are three race tracks and one
jai-alai facility in the County. Broward County is contiguous to Palm Beach
County where we conduct operations. The referendum approved for Broward County
in March 2005 also sought approval for Miami-Dade County however, approval for
Miami-Dade County was defeated at that time. Neither the timing of the
installation of the slot machines, nor the impact to our Company, can be
predicted at this time. To date, the Florida legislature has not enacted
necessary enabling legislation to regulate the operation of slot machines
approved by the Broward County referendum.
9
The expansion of slot machines at pari-mutuel facilities in other
counties and/or the expansion of Native American tribe gaming in Florida could
also materially impact our operation in the near future.
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. During the first quarter of operations of Fiscal
2005, 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 33
cruises during the first and second quarters as a result of the weather, loss of
utilities and damage to the surrounding areas. During the first quarter of
Fiscal 2006, we cancelled only 6 crusies as a consequence of bad weather
including Hurricanes "Katrina" and "Rita".
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 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.
Our vessels are subject to the provisions of the International Convention
on Safety of Life at Sea as Amended ("SOLAS 74"), which was adopted in 1974 by
the International Maritime Organization, a specialized agency of the United
Nations that is responsible for measures to improve the safety and security of
international shipping, and to prevent marine pollution from ships. SOLAS 74 is
the current basic safety standard for all ships engaged in international
service. The Convention was substantially amended in 1992 and 2000 in order to
upgrade and improve shipboard fire safety standards. The Amendments are
applicable to all passenger ships engaged in international service, including
retroactively those ships such as the Palm Beach Princess that were built prior
to 1980. Under the terms of the Amendments, full compliance by older ships with
SOLAS 74 standards is to be phased in and implemented over the years and
completed no later than October 1, 2010. The Palm Beach Princess, in compliance
with the SOLAS 74 requirements to date, has previously completed substantial
upgrading and installation of fire sprinkler and smoke detection systems and
other fire safety construction standards. By 2010 the ship must comply with the
final phase of the implementation of the SOLAS 74 Amendments, most notably being
requirements that no combustible material be used in ships' structures and that
certain
10
other interior structure and space standards be met. The precise nature and
scope of necessary work will be determined in conjunction with the ship's
classification society, Det norske Veritas. To accomplish such work may entail
substantial cost in order to remove all wood and other combustible materials now
used in the structure of the Palm Beach Princess, to refit the ship with
non-combustible materials, and otherwise to upgrade interior structure and
spaces. We have not yet obtained an estimate of such cost.
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. Our subsidiary, International Thoroughbred
Gaming Development Corporation leases one office suite in Miami, Florida which
serves as a satellite executive office. The lease is for a one year period and
can be renewed annually.
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 Big Easy.
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 Big Easy in passenger service from the Cruise Terminal at the Port,
with certain berthing and scheduling priorities. The initial term of this
Operating Agreement is five years from the date of commencement of sailings by
the Big Easy from the Port, with subsequent renewal options of four and three
years. We are required to commence sailings on or before October 31, 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 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
11
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 2005.
12
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 on a limited and sporadic basis 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 and reflects inter dealer prices, without retail mark-up, mark-down or
commissions.
High Low
---- ----
Fiscal 2004
First Quarter .54 .25
Second Quarter 1.48 .20
Third Quarter 1.97 1.03
Fourth Quarter 1.80 1.50
Fiscal 2005
First Quarter 1.55 1.45
Second Quarter 1.31 .90
Third Quarter 3.25 1.20
Fourth Quarter 2.33 1.20
On June 30, 2005, 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 by the Company within the
fiscal year ended June 30, 2005.
There were no purchases of common stock by the Company during the fourth
quarter of fiscal year 2005.
See Footnote 26A in connection with the additional common shares which
will be issuable upon conversion of the Series B Preferred Stock.
For information to be provided under Item 201 (d) of this item (regarding
Equity Compensation Plan Information) see Part III, Item 12.
13
Item 6. SELECTED FINANCIAL DATA
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
Years Ended June 30,
--------------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- -------------- ------------ ------------ -------------
Revenue From Operations (1) $ 32,773,247 $ 32,962,239 $ 31,290,599 $ 25,473,777 $ 4,921,091
Net Income (Loss) Before Impairment
and Exrraordinary Item (1)(4) $ (3,533,356)$ 3,199,970 $ 5,233,826 $ 1,982,603 $ (2,402,142)
(Loss) on Impairment of Note (2) $ (500,000)$ (10,000,000) $ - $ - $ -
Net Income (Loss) Before Extraordinary Item $ (5,900,035)$ (6,800,030) $ 5,233,826 $ 1,982,603 $ (2,402,142)
Extraordinary Income $ 4,000,000 $ - $ - $ - $ -
Net Income (Loss) $ (1,900,035)$ (6,800,030) $ 5,233,826 $ 1,982,603 $ (2,402,142)
Per Common Share - Basic and Diluted:
Net Income (Loss) Before Impairment
and Extraordinary Item $ (0.52)$ 0.40 $ 0.54 $ 0.17 $ (0.24)
Net Income (Loss) $ (0.18)$ (0.86) $ 0.54 $ 0.17 $ (0.24)
Weighted Average Number of Shares 10,303,942 7,933,691 9,720,275 11,480,272 9,987,114
June 30,
--------------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- -------------- ------------ ------------ -------------
Working Capital (Deficiency) (3) $(13,083,678)$ 556,675 $ (428,412) $ (2,200,346) $ (190,644)
Total Assets $ 83,363,665 $ 50,813,716 $ 54,822,023 $ 45,928,295 $ 41,391,208
Long-Term Debt $ 33,813,301 $ 6,339,396 $ 985,017 $ - $ 482,000
Stockholders' Equity $ 29,550,451 $ 30,566,037 $ 37,586,067 $ 33,961,313 $ 31,973,710
(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, 2005.
14
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 the timing of the installation of slot machines in Broward
County's three race tracks and one jai-alai facility as a result
of a referendum approved on March 8, 2005. Broward County is
contiguous to Palm Beach County where we conduct operations;
o fluctuations in quarterly operating results as a result of
seasonal and weather considerations; and
o events directly or indirectly relating to our business causing our
stock price to be volatile.
Background
The Company, through its wholly owned subsidiary, operates an offshore
gaming vessel, the M/V Palm Beach Princess which we charter. This vessel sails
twice daily from the Port of Palm Beach, Florida and, once beyond the state's
territorial water limits, engages in a casino gaming business. The business of
operating the cruise vessel includes a variety of shipboard activities,
including dining, music and other entertainment as well as casino gaming. We are
expanding that line of business, for which on July 7, 2004 we entered into a
bareboat charter for a second vessel, the "Big Easy". We have refurbished and
retrofitted that vessel and we expect to place the Big Easy in service on
October 16, 2005. The Big Easy will be berthed and operated from the Port of
Palm Beach.
On July 7, 2004 the Company and several of our subsidiaries entered into
a lease and sub-bareboat charter and equipment lease transaction for the purpose
of operating and acquiring the vessels Palm Beach Princess and the Big Easy.
During the year the Palm Beach Princess charter was accounted for as a capital
lease. In April 2005 the improvements made to the Big Easy were substantially
completed and we are waiting for certification for passenger operations from the
U.S. Coast Guard. During the last quarter of the fiscal year the Big Easy sub
charter was recorded as a capital lease. Through these transactions, payments
were made on our behalf to prepay in full all indebtedness to the Brennan
Trustee. (This transaction is more fully described in footnote 2 of the
financial statements). We intend to expand our gaming operations by placing the
Big Easy in operations during our second quarter of fiscal 2006. Also we
continue to explore other gaming opportunities, both domestically and
internationally. During our 2004 fiscal year we purchased a third vessel, M/V
Royal Star. However, this ship will need extensive improvements and outfitting
before being placed in service. We are currently exploring possible locations
from which to operate the vessel and possible financing sources to permit us to
make the necessary improvements.
During the first quarter of Fiscal 2005, we re-entered the equine
business. We currently own 55 horses, a share of 15 horses, and are leasing 2
other horses, all of different ages. Several are currently racing and a few are
held as broodmares but the majority are yearlings and two year olds in training.
It is our plan to bring these horses into racing if we consider them competitive
following the training period to take advantage of the projected increase in
purses as a result of the introduction of slot machines in several state
jurisdictions. We are stabling and training the majority of these horses in New
Jersey and in Brazil.
On January 6, 2003 our subsidiary which operates the Palm Beach Princess
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code
because it did not have the funds to make the balloon payment for its purchase
of the Ship Mortgage on the Palm Beach Princess. On October 15, 2003 a Plan of
Reorganization under Chapter 11 was approved and on July 17, 2004 the court
issued a final decree closing the Chapter 11 case.
15
Liquidity and Capital Resources
The Company's cash flow from operations is primarily dependent upon the
cash flows from our wholly owned subsidiary ITG Vegas ("ITGV") which operates
the vessel, M/V Palm Beach Princess.
ITGV's cash flow from operations of the vessel is seasonal. The period
July 1 to December 31 is a seasonably slow period for vessel operations. The
period from January 1 to June 30 has been a period of increased activity and
profits for the Palm Beach Princess operation. Certain of ITGV's operating
costs, including leasing and charter fees, fuel costs and wages, are fixed and
cannot be reduced when passenger counts decrease.
During the first quarter and early in our second quarter of Fiscal 2005
our operating business was adversely affected by four hurricanes passing over or
near Florida. We suffered materially from the direct effects of hurricanes
"Frances" and "Jeanne" that left the area without power, resulting in curfews
and limited food, water and life resources. These two storms caused the
evacuation of the population in our area, and the four storms further affected
tourism in the area, severely reducing our pool of potential passengers, both
local residents and tourists. Twenty-nine (29) of our daily cruises during the
first quarter and four (4) of our daily cruises during the second quarter were
cancelled during the period of time that the hurricanes threatened the area and
for short periods thereafter. As a result of the seasonably slow period and the
hurricanes our revenues and cash flows from operations during our first and
second fiscal quarters were materially impacted. However, during the third and
fourth fiscal quarters our revenues and cash flows from vessel operations have
recovered to normal levels. For the fiscal year our operating revenue was
sufficient to cover operating expenses of the vessel, the capital lease payments
on the Palm Beach Princess vessel and the equipment lease payments on the
vessel. However the operating revenues were not sufficient to cover the start up
costs of the Big Easy, the improvements made and the charter fees on the Big
Easy, the Parent Company expenses and other development costs. We were able to
utilize a portion of the cash received from the sale of the Las Vegas Note,
which transaction closed in June, 2004, proceeds of several loans received from
PDS Gaming Corporation, loans from Francis W. Murrray, our Chairman, and we were
forced to extend our trade payables to help meet the remainder of our cash needs
during fiscal 2005.
Our cash flows during the fiscal year have also been materially impacted
by the delay in putting the vessel "Big Easy" in operation, caused by the dry
dock company not releasing the vessel due to disputed charges and cost overruns
and by delays in obtaining certification for passenger operations pursuant to
the United States Coast Guard's Alternative Compliance Program. Although the
Alternative Compliance Program certification procedure is less complex and time
consuming than regular Coast Guard certification, it is nevertheless a rigorous
process involving the jurisdiction of at least four separate departments of the
United States Coast Guard and the ship's classification society, Lloyd's
Register. In April 2005, we borrowed $4.35 million to obtain release of the
vessel, but the delays and increased interest expense on our loan have and will
continue to adversely affect our cash flows. We continue to extend timing of
payment of trade payables and since July 1, 2005 have deferred payment of
$150,000 per month in charter fees.
Costs associated with refurbishing and retrofitting the Big Easy vessel
and placing it in service (including marketing expenses and other soft costs)
are expected to amount to approximately $13.9 million. The Company has incurred
approximately $10.7 million of those costs and PBE has contributed approximately
$3.2 million (which funds were received by PBE from the PDS financing during
July 2004). Additional amounts necessary to begin operations of the Big Easy
vessel and amounts of approximately $800,000 per month are necessary to carry
the vessel until it begins operations and are expected to be provided from
working capital. The Company's ability to generate sufficient working capital
with which to pay such costs has been adversely affected by continued delays in
connection with Coast Guard approval. The costs associated with refurbishing and
retrofitting the Big Easy for placing it in service increased from our original
estimate due to upgrades to the vessel, expansion of our Mardi Gras theme build
out, and improvements required by the Coast Guard. Further delays in commencing
the Big Easy will materially and adversely affect our cash flow because of the
continuing costs of carrying the vessel of approximately $800,000 per month.
More than 150 crew members and other employees have been hired and trained to
operate the Big Easy, and employees who normally work exclusively for the Palm
Beach Princess are spending time completing assignments for the Big Easy and
putting a severe drain on our operational efforts and our cash flow. As
indicated by the table below, our debt service requirements have increased
significantly with the PDS financing due to the increase in amounts of debt and
rates involved. The increase in the amount is attributable in large part to
procurement, refurbishment, our operational efforts and delays in bringing the
Big Easy in service. We are dependent upon the expected additional revenue from
the operations of the second vessel to cover the increased financing costs.
16
We are taking steps to conserve cash flows such as extending terms of our
payables in addition to deferring payments of charter hire fees and not paying
discretionary employee bonuses which were previously accrued. We also obtained
loans from our Chairman and Secretary and deferred salary normally paid to them
for portions of the year.
The Company anticipates $2.5 million of capital expenditures for Port
improvements but we expect to defer making the improvements until financing is
in place.
During our 2004 fiscal year, the Company purchased a third vessel, the
Royal Star. We anticipate that the vessel will need extensive improvements and
outfitting costing between $5 and $6 million before being placed in service as a
gaming vessel. Delays in commencing the Royal Star operations have and will
continue to adversely affect our cash flows because of the continuing costs of
carrying the vessel.
The principal amount of our indebtedness increased over fiscal year 2005
from approximately $8 million to approximately $27 million at June 30, 2005 (and
subsequently $29.3 million in July, 2005), with interest accruing at 15.3%. We
may not be able to borrow any additional funds that may be needed, and our loan
agreement with PDS restricts our ability to do so.
Under the loan agreement signed on June 30, 2005 with PDS, upstream
payments by our operating subsidiaries to the parent company are limited to
$150,000 per month plus amounts of ITG Vegas's income tax savings attributed to
inclusion in the Parent Company tax return. These payments can only be made
provided no event of default has occurred and the Borrowers maintain an EBITDA
for the vessels of $7,500,000 for the nine months ending October 2, 2005,
increasing to $10,500,000 for the twelve months ending January 1, 2006 with
continual increases in EBITDA required increasing to $12,000,000 for the twelve
months ending October 1, 2006 and thereafter.
Our working capital as of June 30, 2005 was a negative ($13,083,678) as
compared to a positive amount of $556,675 at June 30, 2004. The decrease in
working capital of $13,640,343 during the past year was primarily due to the net
effect of cash used in the operating activities of $635,052 caused in part by
the expensing of vessel carrying costs of approximately $5.3 million.
Disbursements of approximately $16,133,000 were spent for improvements made to
the Big Easy and Royal Star vessels and for purchase of horse livestock and
equipment. These expenditures were partially offset by the payoff of the Brennan
Trustee on our behalf, of which approximately $4,000,000 was classified as a
current liability as of June 30, 2004.
On July 13, 2005 we began accepting subscriptions for the purchase of
shares of the Company's Series B Convertible Preferred Stock. We are offering up
to 500,000 shares of our Series B Preferred Stock, at a subscription price of
$15.00 per share ($7.1 million net if all 500,000 shares are sold). As of
September 30, 2005 we have accepted subscriptions for the purchase of 163,000
shares of Series B Preferred Stock and have received $2,322,750 in net proceeds.
No assurances can be given that we will be successful in selling all 500,000
shares of the Series B Preferred Stock. The proceeds from this offering are
expected to be used for working capital at the parent and subsidiary level.
17
The following table summarizes commitments on non-cancelable contracts
and leases as of June 30, 2005 and reflects the June 30, 2005 PDS transaction
where we refinanced approximately $27 million in existing debts and borrowed
approximately $2.3 million of additional funds.
Years Ended June 30,
---------------------------------------------------------------
There-
2006 2007 2008 2009 2010 after Total
----------- ----------- ----------- ----------- ---------- --------- -----------
Capital Leases:
P.B. Princess - Principal & Interest $ 4,487,891 $ 4,701,154 $ 4,701,154 $ 4,701,154 $ 391,763 $ - $18,983,116
Bare Boat Charter - Related Party 960,000 960,000 960,000 960,000 80,000 - 3,920,000
Big Easy - Principal & Interest 4,019,777 4,288,373 4,280,379 4,271,100 355,461 - 17,215,090
Bare Boat Charter - Related Party 1,560,000 1,560,000 1,560,000 1,560,000 130,000 - 6,370,000
Notes and Mortgages:
Principal & Interest 1,631,040 1,349,643 1,194,144 1,089,001 89,260 - 5,353,088
Interest Only 207,313 - - - - - 207,313
Deferred Interest Payments 600,000 600,000 600,000 450,000 - - 2,250,000
Employee Contracts - Related Party 327,035 - - - - - 327,035
Operating Leases:
Casino Equipment 3,106,367 3,106,367 2,353,930 - - - 8,566,664
Administrative & Office 999,845 186,629 109,103 2,028 2,028 845 1,300,478
Purchase Obligations - Big Easy 2,573,116 - - - - - 2,573,116
Purchase Obligations 750,848 181,006 61,006 61,006 61,006 208,436 1,323,308
----------- ----------- ----------- ----------- ---------- --------- -----------
Total $ 21,223,232 $16,933,172 $15,819,716 $13,094,289 $ 1,109,518 $ 209,281 $68,389,208
=========== =========== =========== =========== ========== ========= ===========
Outlook:
Based on our historical level of operations of the Palm Beach Princess
and additional revenues anticipated from the operation of the Big Easy, we
believe that if the Big Easy is placed in service by December 31, 2005, cash
generated from operations will be adequate to meet our anticipated loan payment
requirements and working capital needs for our fiscal year ending June 30, 2006.
If the Big Easy is not placed in service by December 31, 2005, it is likely that
we will need additional funds during our third fiscal quarter, and we have no
present plans or commitments to obtain such necessary funds. The failure to
obtain such funds on a timely basis may require us to curtail operations, sell
assets (such as the Royal Star) or cease operations, and may lead to default in
our debt service payments, which could lead to foreclosures on the vessels.
No assurances can be given that our business will generate sufficient
cash flow from operations or that future borrowings will be available to enable
us to service our lease/purchase and loan payments or to make anticipated
capital expenditures. Our future operating performance and our ability to make
payments under our leases and other debts will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond our control.
On July 7, 2004 we paid off the Brennan Trustee and entered into
long-term sub charters in connection with capital lease transactions for two
vessels and equipment. As a result of these transactions and further borrowing
in Fiscal 2005 from PDS, the debt outstanding has increased significantly from
$8 million to $29.3 million at June 30, 2005 and payments made to PDS are at a
higher rate of interest (over 15%) than the interest that was being paid to the
Brennan Trustee (12%) during Fiscal 2004. Additionally, we now make charter hire
payments for the Palm Beach Princess of $50,000 per month plus 1% of its gross
revenues and charter payments for the Big Easy of $100,000 per month plus 1% of
its gross revenues. The maturity of all the new indebtedness will be July 1,
2009. Beginning in July 2004 our payments to PDS were interest only for the
first six to twelve months on the various leases and loans. Effective August 1,
2005 we must make interest and principal payments to PDS in the amount of
approximately $1.1 million per month. Therefore our annual combined, charter
hire fees and loan payments and lease payments to PDS for vessel leases and
gaming equipment, will be significantly higher than those payments were for the
18
year ended June 30, 2005. Moreover, our charter hire fees, lease and loan
payments in Fiscal 2006 will be significantly higher than they were in Fiscal
2005.
Effective July 7, 2004 we began leasing a second vessel, the Big Easy. We
completed the refurbishing and retrofitting of this vessel for use as an ocean
going casino cruise ship and expect to place it in service on October 16,2005.
We will continue to incur substantial costs for the vessel and its personnel
while we are waiting for Coast Guard certifications and permits. We anticipate
operating the vessel from the same port as the Palm Beach Princess and it is
possible that competition from each vessel will have an adverse effect on the
operations of the other vessel.
We also continue to incur costs on the vessel, Royal Star. If we decide
to place the Royal Star in service, we will need additional financing to make
the improvements and we will incur additional fees and interest costs on such
financing. We are currently exploring locations from which to operate the vessel
when it is ready to be placed in service.
During the first quarter of this fiscal year, we re-entered the equine
business. We currently own 55 horses, own a share in 15 horses, and are leasing
2 other horses, all of different ages. Several are currently racing, and a few
are held as broodmares but the majority are yearlings and two year olds in
training. It is our plan to bring those horses into racing if we consider them
competitive after training is completed. Our horse operation has not produced
any significant revenue during the fiscal year. We have purchased livestock,
which includes stud fees which total $328,000 as of June 30, 2005 and our
training and operational expenses are approximately $50,000 per month. These
costs could increase substantially in the near future if additional horses are
purchased.
Results of Operations for the Years Ended June 30, 2005 and 2004
Consolidated
Revenue for the year ended June 30, 2005 decreased slightly by $188,992
from $32,962,239 in Fiscal 2004 to $32,773,247 in Fiscal 2005 primarily as a
result of a slight decrease in revenues generated by the Palm Beach Princess
operations during the comparable periods. Operating expenses increased
$6,917,332 from $27,632,595 in Fiscal 2004 to $34,549,927 in Fiscal 2005
primarily as the result of: 1) recording start up costs for the Big Easy of
$5,011,756 compared to last year when no start up costs were recorded; 2)
payments of other development costs of $970,836 as a result of our continued
search, both domestically and internationally, for additional gaming
opportunities, as compared to $700,580 spent on similar expenses during last
year; 3) expenses of $447,989 incurred as a result of our entry into the equine
business; 4) an increase in depreciation and amortization of $1,254,636 as a
result of depreciation being recorded on the Palm Beach Princess as a result of
capital leasing arrangements effective in July, 2004; and 5) an increase in the
Parent Company General and Administrative expenses of $321,129 due to an
increase in the salary and related benefit expenses due to the hiring of several
new employees and increases in health insurance coverage and 401-K expenses as
compared to last year when the Parent Company employees did not participate in a
401-K plan; offset by 1) a decrease in the Palm Beach Princess operating
expenses, before depreciation, of $255,238 due to salary and benefit costs of
approximately $1.3 million incurred on the Palm Beach Princess' payroll which
were allocated to the Big Easy during the period we were preparing the Big Easy
for use as a casino gaming vessel, partially offset by generally higher costs
incurred by the Palm Beach Princess and 2) a decrease in bankruptcy costs of
$417,454 due to the bankruptcy being completed at the end of fiscal 2004.
Operating (loss) for the year ended June 30, 2005 was a loss of
($1,776,679) as compared to income of $5,329,644 for last year. Operating income
before depreciation for the year was $217,828 as compared to $6,069,515 for the
comparative year.
Other net expenses decreased by $7,867,819 because during Fiscal 2005,
the Company recorded an impairment loss of $500,000 on the Second Cherry Hill
Note Receivable, whereas during Fiscal 2004 the Company recorded an impairment
loss of $10,000,000 on the same note, offset by an increase in the interest and
financing expenses of $1,597,895 due to the higher debt levels on the vessel
leases than that amount previously owed to the Brennan Trustee and an increase
in the rates of interest on such leases. In addition to the $3,845,887 of
interest expense recorded in the statement of operations, the Company incurred
additional interest which was capitalized to the Big Easy during that vessels'
re-construction period in the amount of $1,530,197 during the current Fiscal
year, and $896,297 of interest paid on the vessel capital lease which is
classified in the Big Easy development costs. The net (loss) before
extraordinary item for the year ended June 30, 2005 was ($5,900,035) as compared
to a (loss) of ($6,800,030) during Fiscal 2004.
19
During the first quarter of the 2005 Fiscal year the Company recorded
extraordinary income, net of tax, of $4,000,000. This was the result of the
collection of success fees charged to Leo Equity Group, Inc. and Palm Beach
Maritime Corporation (formerly MJQ) for our efforts in connection with the final
settlement with the Chapter 11 Trustee for the Bankruptcy Estate of Robert E.
Brennan. We had deferred all income from these transactions until such time as
payment was received.
The Net (Loss) for the year ended June 30, 2005 was ($1,900,035) or a
(loss) of ($.18) per diluted share as compared to a (loss) of ($6,800,030), or a
loss of ($.86) per diluted share for the year ended June 30, 2004.
For the year ended June 30, 2005 earnings before interest, taxes,
depreciation and amortization and our unusual items of extraordinary income,
impairment losses and vessel start up costs (Adjusted EBITDA) was $5,521,801 as
compared to $6,089,228 for the prior year. The decrease in Adjusted EBITDA of
$567,427 was primarily due to EBITDA levels for the Palm Beach Princess
decreasing from approximately $1.7 million in Fiscal 2004 to approximately $.6
million in Fiscal 2005 in the first quarter of the Fiscal year because of the
hurricanes, partially offset by better EBITDA results during our second and
third fiscal quarters for the Palm Beach Princess.
Reconciliation of Non-GAAP Measures to GAAP
Adjusted EBITDA or earnings before interest, taxes, depreciation and
amortization and unusual items is not a measure of performance or liquidity
calculated in accordance with generally accepted accounting principles. EBITDA
information is presented as a supplemental disclosure because management
believes that it is a widely used measure of such performance in the gaming
industry. In addition, management uses Adjusted EBITDA as the primary measure of
the operating performance of its operations, including the evaluation of
operating personnel. Adjusted EBITDA should not be construed as an alternative
to operating income, as an indicator of the Company's operating performance, or
as an alternative to cash flows from operating activities, as a measure of
liquidity, or as any other measure of performance determined in accordance with
generally accepted accounting principles. The Company has significant uses of
cash flows, including capital expenditures, interest payments, taxes, lease and
debt principal repayments, which are not reflected in Adjusted EBITDA. It should
also be noted that other gaming companies that report EBITDA information may
calculate EBITDA in a different manner than the Company. A reconciliation of the
Company's Adjusted EBITDA and unusual items to net income (GAAP), is shown
below.
Reconciliation of Adjusted EBITDA to Net Income (GAAP)
Years Ended June 30,
----------------------------------------------
2005 2004 2003
------------- -------------- -------------
Total Adjusted EBITDA $ 5,521,801 $ 6,089,228 $ 6,548,792
Depreciation & Amortization (1,994,507) (739,871) (254,082)
Interest & Financing ExpenseS (3,845,887) (2,247,992) (1,338,649)
Interest Income 304,571 327,105 423,265
Income Tax (90,000) (228,500) (145,500)
------------- -------------- -------------
Net Income (Loss) before
Unusual Items (104,022) 3,199,970 5,233,826
Extraordinary Item 4,000,000 - -
Start Up Costs for Vessels (5,296,013) - -
Impairment Loss (500,000) (10,000,000) -
------------- -------------- -------------
Net Income (Loss) $ (1,900,035) $ (6,800,030) $ 5,233,826
============= ============== =============
Vessel Operations for the Years Ended June 30, 2005 and 2004
During the year ended June 30, 2005 total net revenue from vessel
operations was $32,353,030 as compared to $32,601,396 for the comparative Fiscal
year of 2004. The decrease in revenue of $248,366 during the comparable year was
the result of a number of factors which offset one another. Our operations for
Fiscal 2005 were materially impacted by hurricanes and inclement weather which
struck Florida and the
20
Palm Beach area during our first quarter of operations. The negative effect of
those hurricanes on our operations during the first quarter is also reflected in
the financial results for the year ended June 30, 2005. During our first quarter
of operations net revenues decreased approximately $1,300,000, however this
decrease was partially offset by an increase in net revenues in each of the
following quarters as compared to the previous year. Additionally, the operating
subsidiary which operates the Palm Beach Princess ends its quarterly accounting
period on the last Sunday of each quarter. These end of the week cut offs
normally create more comparability of the Company's quarterly operations by
generally having an equal number of weeks (13) and weekend days in each quarter.
Periodically, this system necessitates a 14 week quarter and a 53 week year.
Consequently our March 31, 2005 was such a quarter and our Fiscal 2005 year a 53
week year. Therefore, the number of cruises, revenues and expenses reported for
the current Fiscal year includes one additional week of operations as compared
to Fiscal 2004. The average revenue per week during Fiscal 2005 was $610,343 as
compared to $626,949 during Fiscal 2004, or a decrease of 2.6%. This was the
result of a slight decrease in the average number of passengers per week and a
slight decrease in the revenue per passenger as compared to Fiscal 2004.
However, when the first quarter results are excluded, the average revenue per
week for the second through fourth quarter of Fiscal 2005 was $651,788 for the
40 weeks as compared to $641,698 for the 39 weeks for the second and fourth
quarters of Fiscal 2004.
Approximately 85% of the net revenues are from the gaming operations
aboard the vessel. These revenues fell $178,477 or less than .7% during the
current Fiscal year. Other income consists of fare revenues and on board
revenues. The fare and on board net revenues decreased $69,900 during Fiscal
2005, or 1.4%.
Casino operating expenses which also includes food, beverage and
entertainment increased $331,824 from $8,805,157, or 32% of casino revenue in
Fiscal 2004 to $9,136,981, or 33% of casino revenue in Fiscal 2005. The increase
in casino operating expenses was caused by operating an additional week in
Fiscal 2005 and a slight increase in the casino operating expenses.
During the current year a portion of the employee costs normally incurred
by the Palm Beach Princess for operational and administrative salary expenses
were allocated to the Big Easy start up operation. These allocations were made
to more accurately reflect the cost of preparing the Big Easy for use as a
casino gaming vessel. Approximately $1,103,600 of salaries allocated to the Big
Easy and expensed as developmental costs and approximately $203,900 of salary
and benefit costs were capitalized as part of the Big Easy vessel costs. These
capitalized costs reflect the value of vessel improvements completed by company
employees. This allocation should be taken into consideration when comparing
operating results from year to year for the Palm Beach Princess.
Fare expenses, which included sales, marketing and advertising expenses
increased $392,961 from $3,546,153 in Fiscal 2004 to $3,939,114 in Fiscal 2005.
The increase was the result of additional advertising and promotions to attract
customers after the cancellation of cruises due to the hurricanes, inclement
weather and curfews following the hurricanes in the quarter ending September 30,
2004 and subsequent quarters. Maritime and legal expenses decreased $375,357, or
5.6% primarily as a result of allocating departmental salaries to the Big Easy.
General and administration expenses increased $20,275 from $3,738,114 in
Fiscal 2004 to $3,758,389 in Fiscal 2005. During Fiscal 2005 the Company accrued
bonuses of only $12,260 as compared to bonus accrued during Fiscal 2004 of
$453,976. Bonuses were not accrued this year because of steps taken to reduce
expenses and payment of bonuses may be limited in the future due to covenants in
the PDS Agreements. The decrease in bonus accrual was offset by a write off
taken in the fourth quarter in the amount of $322,000 for payments we made on
behalf of the day cruise casino operating companies for lobby efforts concerning
slot machines to be placed at racetracks in Miami-Dade and Broward counties.
After repeated efforts of collection, the Company determined that the amounts
should be written off. The Company continues to pursue collection, however, one
company is now in bankruptcy and another has threatened bankruptcy.
Interest and finance expenses increased $949,905 from $1,109,221 in
Fiscal 2004 to $2,059,126 in Fiscal 2005 as a result of the interest paid on the
capital lease and the charter hire payments for the Palm Beach Princess which
was effective July 7, 2004 and subsequent loans from PDS during Fiscal 2005. As
a result of the capital leases arrangement and loans, the debt levels and the
rates of interest paid on our indebtedness are higher than the amount previously
owed to the Brennan Trustee.
Depreciation and amortization increased $1,254,374 from $722,714 in
Fiscal 2004 to $1,977,088 in Fiscal 2005. As a result of the capital lease
arrangement for the Palm Beach Princess the Company is recording depreciation on
the vessel as compared to last year when the Company did not record depreciation
on the vessel because it operated the vessel under an operating lease.
21
Income before income tax expense in Fiscal 2005 was $4,073,806 as
compared to income before income tax of $6,557,033 for Fiscal 2004.
The Palm Beach Princess performs fourteen cruises weekly, that is, a
daytime and an evening cruise each day. Each cruise is of five to six hours
duration. During each cruise, the Palm Beach Princess offers a range of
amenities and services to her passengers, including a full casino, sit-down
buffet dining, live musical shows, discotheque, bars and lounges, swimming pool
and sundecks. The casino occupies 15,000 square feet aboard the ship and is
equipped with approximately 400 slot machines, all major table games (blackjack,
dice, roulette and poker), and a sports wagering book. During Fiscal 2005 the
ship completed 699 cruises compared to 702 cruises during the same period last
year. During Fiscal year 2005, 37 cruises were cancelled due to inclement
weather. The majority of the cancellations occurred in the first and second
fiscal quarters. During fiscal 2004 the vessel was placed in wet dock for 6
days. During the current Fiscal year the vessel was not placed in dry dock or
wet dock. It is expected that the vessel will be placed in dry dock for
approximately one week on October 17, 2005.
The following is a comparative summary of income and expenses of the Palm
Beach Princess operation for the years ended June 30, 2005 and 2004:
Years Ended
June 30,
----------------------------
Description 2005 2004 Change
- --------------------------------------- ------------- ------------ ------------
Passenger Count 273,964 274,266 (302)
Number of Cruises 699 702 (3)
Average Number of Passengers per Cruise 392 391 1
Net Revenue per Passenger $ 118.09 $ 118.87 $ (0.78)
Operating Revenue:
Gaming $ 27,350,154 $ 27,528,631 $ (178,477)
Fare 7,946,897 7,860,536 86,361
On Board 4,038,149 3,666,320 371,829
Less: Promotional Allowances
Fare (4,947,767) (4,709,354) (238,413)
On Board (2,034,403) (1,744,737) (289,666)
------------- ------------ ------------
Net Operating Revenue 32,353,030 32,601,396 (248,366)
------------- ------------ ------------
Operating Costs and Expenses:
Gaming 9,136,981 8,805,157 331,824
Fare 3,939,114 3,546,153 392,961
On Board 987,397 925,980 61,417
Maritime and Legal Expenses 6,421,129 6,796,486 (375,357)
General and Administrative Expenses 3,758,389 3,738,114 20,275
Interest and Financing Fees 2,059,126 1,109,221 949,905
Professional Fees - Bankruptcy - 400,538 (400,538)
Depreciation and Amortization 1,977,088 722,714 1,254,374
------------- ------------ ------------
Total Operating Costs and Expenses 28,279,224 26,044,363 2,234,861
------------- ------------ ------------
Income Before Income Tax Expense $ 4,073,806 $ 6,557,033 $ (2,483,227)
============= ============ ============
Vessel Operations for the Three Months Ended June 30, 2005 and 2004
During the three months ended June 30, 2005 total net revenue from vessel
operations was $8,481,426 as compared to $8,415,074 for the comparative quarter
of 2004. The increase in net revenue of $66,352 during the comparable quarters
was the result of the net revenue per passenger increasing from $114.12 during
the fourth quarter of Fiscal 2004 to $120.80 for the comparable period in Fiscal
2005. Passenger counts decreased 4.8% and the number of cruises decreased from
182 cruises in Fiscal 2004 to
22
175 cruises in Fiscal 2005. The net increase in revenue per passenger was more
than enough to offset the declines in the number of passengers and number of
cruises.
Casino operating expenses which also includes food, beverage and
entertainment decreased $25,309 from $2,316,966, or 32.6% of casino revenue in
Fiscal 2004 to $2,291,657, or 31.8% of casino revenue in Fiscal 2005 primarily
the result of dividing costs, many of which are fixed by their nature, over
increased revenues.
During the quarter a portion of the employee costs normally incurred by
the Palm Beach Princess for operational and administrative salary expenses were
allocated to the Big Easy start up operation. These allocations were made to
more accurately reflect the cost of preparing the Big Easy for use as a casino
gaming vessel. Approximately $296,900 of salaries and benefits allocated to the
Big Easy and expensed as developmental costs and approximately $37,300 of salary
and benefit costs were capitalized as part of the vessel costs. These
capitalized costs reflect the value of vessel improvements completed by company
employees. This allocation should be taken into consideration when comparing
operating results from year to year for the Palm Beach Princess.
Fare expenses, which included sales, marketing and advertising expenses
decreased slightly from $1,018,526 in Fiscal 2004 to $1,014,790 in Fiscal 2005.
Maritime and legal expenses decreased $30,658, or 1.8%. General and
Administration expense increased $199,083 from $934,462 in Fiscal 2004 to
$1,133,545 in Fiscal 2005. During the fourth Fiscal quarter we wrote off an
amount of $322,000 for payment we made on behalf of the day cruise casino
operating companies for lobby efforts concerning slot machines to be placed at
racetracks in Miami-Dade and Broward counties. After repeated efforts of
collection, the Company determined that the amounts should be written off. The
Company continues to pursue collection, however, one company is now in
bankruptcy and another has threatened bankruptcy.
Interest and financing fees decreased $119,981from $696,585 in Fiscal
2004 to $576,604 in Fiscal 2005 as a result of forbearance fees recognized on
the Trustee note during Fiscal 2004, partially offset by the interest paid on
the capital lease and the charter hire payments for the Palm Beach Princess
which was effective July 7, 2004. Depreciation and amortization increased
$246,864 from $221,774 in Fiscal 2004 to $468,638 in Fiscal 2005. As a result of
the capital lease arrangement for the Palm Beach Princess the Company is
recording depreciation on the vessel as compared to last year when the Company
did not record depreciation on the vessel because it operated the vessel under
an operating lease.
Income before income tax expense for the fourth quarter of operation in
Fiscal 2005 was $1,031,721 as compared to income before income tax of $1,231,841
for the comparable quarter of Fiscal 2004.
During the fourth quarter of Fiscal 2005 the ship completed 175 cruises
compared to 182 cruises during the same period last year. During the current
quarter 4 cruises were cancelled due to inclement weather.
23
The following is a comparative summary of income and expenses of the Palm
Beach Princess operation for the fourth quarter of Fiscal 2005 and 2004:
Three Months Ended
June 30,
---------------------------
Description 2005 2004 Change
- --------------------------------------- ------------ -------------- -----------
Passenger Count 70,213 73,741 (3,528)
Number of Cruises 175 182 (7)
Average Number of Passengers per Cruise 401 405 (4)
Net Revenue per Passenger $ 120.80 $ 114.12 $ 6.68
Operating Revenue:
Gaming $ 7,213,088 $ 7,095,835 $ 117,253
Fare 2,088,912 2,083,435 5,477
On Board 1,025,472 1,031,555 (6,083)
Less: Promotional Allowances
Fare (1,334,388) (1,290,525) (43,863)
On Board (511,658) (505,226) (6,432)
------------ -------------- -----------
Net Operating Revenue 8,481,426 8,415,074 66,352
------------ -------------- -----------
Operating Costs and Expenses:
Gaming 2,291,657 2,316,966 (25,309)
Fare 1,014,790 1,018,526 (3,736)
On Board 248,762 236,773 11,989
Maritime and Legal Expenses 1,715,709 1,746,367 (30,658)
General and Administrative Expenses 1,133,545 934,462 199,083
Interest and Financing Fees 576,604 696,585 (119,981)
Professional Fees - Bankruptcy - 11,780 (11,780)
Depreciation and Amortization 468,638 221,774 246,864
------------ -------------- -----------
Total Operating Costs and Expenses 7,449,705 7,183,233 266,472
------------ -------------- -----------
Income Before Income Tax Expense $ 1,031,721 $ 1,231,841 $ (200,120)
============ ============== ===========
Results of Operations for the Years Ended June 30, 2004 and 2003
Consolidated
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.
24
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 of 4.5% 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.
25
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)
Average Number of Passengers per Cruise 391 370 21
Net Revenue per Passenger $ 118.87 $ 118.47 $ 0.40
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.
26
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
Average Number of Passengers per Cruise 405 396 9
Net Revenue per Passenger $ 114.12 127.44 $ (13.32)
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)
============ ============= =============
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 7, Liquidity and Capital Resources section above)
The Palm Beach Princess is scheduled to be placed in dry dock on October
17, 2005. At the time this work was scheduled, the Company had anticipated that
the Big Easy would be in operation. Due to the delays in commencing Big Easy
operation, it is possible that the Company will not have any vessel operating
during the Palm Beach Princess dry dock period scheduled for approximately one
week.
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 only been successful in Broward
County, 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.
On March 8, 2005 the citizens of Broward County approved a referendum
that will amend Florida's constitution to permit slot machines at pari-mutuel
facilities in Broward County. Currently there are three race tracks and one
jai-alai facility in the County. Broward County is contiguous to Palm Beach
County in which we conduct operations. The referendum approved for Broward
County in March 2005 also sought approval for Miami-Dade County. However,
approval for Miami-Dade County was defeated at that time. Neither the timing of
the installation of the slot machines, nor the impact to our Company, can be
predicted at this time. To date, the Florida legislature has not enacted
necessary enabling legislation to regulate the operation of slot machines
approved by the Broward County referendum.
We are potentially subject to new gaming laws, regulations and taxes.
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.
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,
28
equipment, personnel and general safety. An 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
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:
o competition from other amusement properties,
o changes in regional and local population and disposable income
composition,
o seasonality, changes or cancellations in local tourism, athletic
or cultural events,
o changes in travel patterns or preferences which may be affected by
increases in gasoline prices,
o changes in airline schedules and fares, strikes and weather
patterns,
o 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. During the first quarter of Fiscal 2006, we cancelled only 6 cruises
as a consequence of bad weather including Hurricanes "Katrina" and "Rita".
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. We do not have key man life insurance policies on Francis W. Murray or
Francis X. Murray.
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.
29
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 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. Other general
economic matters or tourism industry may have a significant impact on the market
price of our common stock and the issuance of additional common shares or the
exercise of options for common shares which would dilute our earnings on a per
share basis.
Delays, cost overruns in readying the Big Easy and disruptions in integrating
and managing the Big Easy operations.
We have a capitalized lease value of approximately $24.3 million on the
Big Easy. We are committed to refurbishing, refitting and placing into service
the Big Easy vessel. (See Item 7, "Liquidity and Capital Resources.") We are
dependent upon operating revenues to pay the operating costs, vessel and
equipment lease costs. Delays in commencing Big Easy operations have adversely
affected and may continue to adversely affect our cash flow. We could face
significant challenges in managing and integrating the combined operations of
the Big Easy and the Palm Beach Princess and any other properties we may
acquire. The integration of the Big Easy operation will require dedication of
management resources that may temporarily divert attention from our day-to-day
business. Additionally we plan to operate the Big Easy from the same port
location as the Palm Beach Princess. It is possible that competition from each
vessel will have an adverse effect on the operation of the other vessel.
Our vessels are subject to the provisions of the International Convention on
Safety of Life at Sea as Amended ("SOLAS 74"), which will require substantial
capital expenses in the future.
Our vessels are subject to the provisions of the International Convention
on Safety of Life at Sea as Amended ("SOLAS 74"), which was adopted in 1974 by
the International Maritime Organization, a specialized agency of the United
Nations that is responsible for measures to improve the safety and security of
international shipping, and to prevent marine pollution from ships. SOLAS 74 is
the current basic safety standard for all ships engaged in international
service. The Convention was substantially amended in 1992 and 2000 in order to
upgrade and improve shipboard fire safety standards. The Amendments are
applicable to all passenger ships engaged in international service, including
retroactively those ships such as the Palm Beach Princess that were built prior
to 1980. Under the terms of the Amendments, full compliance by older ships with
SOLAS 74 standards is to be phased in and implemented over the years and
completed no later than October 1, 2010. The Palm Beach Princess, in compliance
with the SOLAS 74 requirements to date, has previously completed substantial
upgrading and installation of fire sprinkler and smoke detection systems and
other fire safety construction standards. By 2010 the ship must comply with the
final phase of the implementation of the SOLAS 74 Amendments, most notably being
requirements that no combustible material be used in ships' structures and that
certain other interior structure and space standards be met. The precise nature
and scope of necessary work will be determined in conjunction with the ship's
classification society, Det norske Veritas. To accomplish such work may entail
substantial cost in order to remove all wood and other combustible materials now
used in the structure of the Palm Beach Princess, to refit the ship with
non-combustible materials, and otherwise to upgrade interior structure and
spaces. We have not yet obtained an estimate of such cost.
The Bareboat Charter and Option to Purchase Agreement for the Palm Beach
Princess permits us to purchase the vessel for $17.5 million at the end of the
charter period on July 1, 2009. We will be allowed credits for the payments made
on the PDS lease of $14.0 million, provided such payments are made and credits
of up to approximately $7.2 million against the purchase of the Palm Beach
Princess. (However, use of the $7.2 million as a credit toward the Palm Beach
Princess purchase would decrease the credit allowed for the purchase of the Big
Easy since the $7.2 million credit can be used for the purchase of either
vessel) We will need to make a determination if it will be economically feasible
to purchase the Palm Beach Princess at the end of the charter period considering
the costs which may be involved in readying the vessel for "SOLAS" requirements.
30
Compliance with changing regulation of corporate governance and public
disclosure may result in additional expenses and compliance risks.
New or changing laws and regulations relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC
regulations are creating uncertainty for companies. These new or changed laws
and regulations are subject to varying interpretations in many cases due to
their lack of specificity, recent issuance and/or lack of guidance. As a result,
their application in practice may evolve over time as new guidance is provided
by regulatory and governing bodies. This could result in continuing uncertainty
and higher costs regarding compliance matters. Our efforts to comply with
evolving laws, regulations and standards are likely to continue to result in
increased general and administrative expenses. A failure to comply with any of
these new laws or regulations, including Section 404 of the Sarbanes-Oxley Act
of 2002, could have a materially adverse effect on the company.
We are subject to environmental laws and potential exposure to environmental
liabilities.
We are subject to various international, federal, state and local
environmental laws and regulations that govern the operations of our company and
our ships, including emissions and discharges into the environment, and the
handling and disposal of hazardous and non-hazardous substances and wastes.
Failure to comply with such laws and regulations could result in costs for
corrective action or environmental clean up, penalties, or the imposition of
other liabilities or restrictions.
With the sale of our Freehold Raceway property on January 28, 1999 we
assumed full responsibility for the costs associated with the clean up of
petroleum and related contamination caused by the leakage of an underground
storage tank which was removed in 1990, prior to our purchase of Freehold
Raceway. In February 2000 the N.J. Department of Environmental Protection
approved our remedial investigation workplan ("RIW"). Under the RIW numerous
test wells were drilled and the soil tested and monitored to determine the
extent and direction of the flow of underground hazardous material and reports
and conclusions of the tests were prepared for the State of New Jersey. However,
prior to obtaining a remedial action workplan from the State of New Jersey, the
work was stopped due to a lack of funds resulting from the institution of
proceedings by our subsidiary, ITGV, under Chapter 11 of the bankruptcy code and
a continued shortage of funds due to the Big Easy start up expenses. At this
time we are unable to predict the effects that such delays have caused, but it
is likely that some retesting of the wells may be necessary.
We have a significant amount of indebtedness that we must service, which may
impact our financial condition and results of operations.
After the completion of our refinancing in June 2005, we now have $29.3
million of indebtedness outstanding. We may incur additional indebtedness in the
future. Our level of indebtedness will have several significant effects on our
future operations, including the following:
o we will be required to use a portion of our cash flow from
operations for the payment of any principal or interest due on our
outstanding indebtedness;
o our outstanding indebtedness and leverage will increase the impact
of negative changes in general economic and industry conditions,
as well as competitive pressures; and
o the level of our outstanding debt may affect our ability to obtain
additional financing for working capital, capital expenditures or
general corporate purposes.
General economic conditions, industry cycles and financial, business and
other factors affecting our operations, many of which are beyond our control,
may affect our future performance. As a result, these and other factors may
affect our ability to make principal and interest payments on our indebtedness.
If we cannot generate sufficient cash flow from operations in the future to
service our debt, we may, among other things:
o seek additional financing in the debt or equity markets;
o refinance or restructure all or a portion of our indebtedness;
o sell selected assets; or
o reduce or delay planned capital expenditures.
These measures might not be sufficient to enable us to service our
indebtedness. In addition, any financing, refinancing or sale of assets might
not be available on economically favorable terms.
31
We may need to raise substantial additional capital to fund our operations in
the future, and we do not have any future commitments for capital.
We are incurring losses from operations due to the start-up costs of the
Big Easy, have limited capital resources, and do not have access to a line of
credit or other debt facility. We expect to continue incurring losses until the
Big Easy is placed into service. Although we expect the Big Easy to commence
operations by the end of 2005, we can provide no assurance that this time frame
will be met. We may need additional capital in the future to execute our
business strategy, and if we are unsuccessful in raising such additional capital
we may be unable to fully execute our business strategy on a timely basis, if at
all. If we raise additional capital through the issuance of debt securities, the
interests of our stockholders would be subordinated to the interests of our debt
holders and any interest payments would reduce the amount of cash available to
operate and grow our business. If we raise additional capital through the sale
of equity securities, the ownership of our current stockholders would be
diluted. Additionally, we do not know whether any financing, if obtained, will
be adequate to meet our capital needs and to support our growth. If adequate
capital cannot be obtained on satisfactory terms, we may be required to sell
assets or cease business operations.
Energy and fuel price increases may adversely affect our costs of operations and
our revenues.
Our vessels use significant amounts of fuel and other forms of energy.
While no shortages of energy have been experienced, the recent increases in the
cost of fuel in the United States will negatively affect our results of
operations. In addition, energy and fuel price increases could result in a
decline in disposable income of potential customers and a corresponding decrease
in visitation to our vessels, which would negatively impact our revenues. The
extent of the impact is subject to the magnitude and duration of the energy and
fuel price increases, and this impact could be material.
Economic downturns, as well as other factors affecting discretionary consumer
spending, could reduce the number of our visitors or the amount of money
visitors spend on our vessels.
The strength and profitability of our business depends on consumer demand
for cruise trips and gaming in general and for the type of amenities we offer.
Changes in consumer preferences or discretionary consumer spending could harm
our business.
During periods of economic contraction, our revenues may decrease while
some of our costs remain fixed, resulting in decreased earnings. This is because
the gaming and other leisure activities we offer on our vessels are
discretionary expenditures, and participation in these activities may decline
during economic downturns because consumers have less disposable income. Even an
uncertain economic outlook may adversely affect consumer spending in our gaming
operations and related facilities, as consumers spend less in anticipation of a
potential economic downturn.
The terrorist attacks which occurred on September 11, 2001, the potential
for future terrorist attacks had and may again have a negative impact on travel
and leisure expenditures, including lodging, gaming and tourism. Leisure travel
remains particularly susceptible to global geopolitical events. Many of the
customers of our vessels travel by air, and the cost and availability of air
service can affect our business. We cannot predict the extent to which war,
future security alerts or additional terrorist attacks may interfere with our
operations.
Provisions in our charter documents could prevent or delay stockholders'
attempts to replace or remove current management.
Our charter documents provide that our Board of Directors is authorized
to issue "blank check" preferred stock, with designations, rights and
preferences as they may determine. Accordingly, our Board of Directors may,
without stockholder approval, issue shares of preferred stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of our common stock. This type of
preferred stock could also be issued to discourage, delay or prevent a change in
our control.
The ability to issue "blank check" preferred stock is a traditional
anti-takeover measure. These provisions in our charter documents make it
difficult for a majority stockholder to gain control of the Board of Directors
and of our company. These provisions may be beneficial to our management and our
Board of Directors in a hostile tender offer and may have an adverse impact on
stockholders who may want to participate in such a tender offer, or who may want
to replace some or all of the members of our Board of Directors.
32
Provisions in our bylaws provide for indemnification of officers and directors,
which could require us to direct funds away from our business.
Our bylaws provide for the indemnification of our officers and directors.
We may be required to advance costs incurred by an officer or director and to
pay judgments, fines and expenses incurred by an officer or director, including
reasonable attorneys' fees, as a result of actions or proceedings in which our
officers and directors are involved by reason of being or having been an officer
or director of our company. Funds paid in satisfaction of judgments, fines and
expenses may be funds we need for the operation of our business, thereby
affecting our ability to attain or maintain profitability.
There is a limited public trading market for our common stock.
There is a limited public trading market for our common stock. Without an
active trading market, there can be no assurance of any liquidity or resale
value of our common stock, and stockholders may be required to hold shares of
our common stock for an indefinite period of time.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable
Item 8. Financial Statements and Supplemental Data.
INDEX TO FINANCIAL STATEMENTS
Report of Registered Independent Public Accountants ..........34
Balance Sheets................................................35
Statements of Operations .....................................37
Statements of Stockholders' Equity ...........................38
Statements of Cash Flow ......................................39
33
REPORT OF REGISTERED 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, 2005
and 2004 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years ended June 30, 2005, 2004 and
2003. 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 standards of the Public
Company Accounting Oversight Board (United States). 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,
2005 and 2004 and the results of their operations and their cash flows for the
three years ended June 30, 2005, 2004 and 2003 in conformity with U.S. generally
accepted accounting principles.
STOCKTON BATES, LLP
Philadelphia, Pennsylvania
September 8, 2005
34
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2005 AND 2004
ASSETS
June 30,
-----------------------------
2005 2004
------------ ------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,204,384 $ 7,508,632
Accounts Receivable 1,879,088 223,411
Prepaid Expenses 1,392,315 738,504
Other Current Assets 443,481 153,625
Assets of Discontinued Operations 401,747 400,835
------------ ------------
TOTAL CURRENT ASSETS 5,321,015 9,025,007
------------ ------------
VESSELS, EQUIPMENT & LIVESTOCK:
Vessel - Palm Beach Princess -
under Capital Lease 17,500,000 -
Equipment 3,118,284 2,217,322
Leasehold Improvements - Port of Palm Beach 987,267 913,394
Livestock 328,247 -
Vessel Not Placed in Service - Big Easy -
under Capital Lease 24,318,989 -
Vessel Not Placed in Service - Royal Star 2,971,141 1,321,494
------------ ------------
49,223,928 4,452,210
LESS: Accumulated Depreciation and Amortization 2,625,763 916,186
------------ ------------
TOTAL VESSELS, EQUIPMENT & LIVESTOCK- NET 46,598,165 3,536,024
------------ ------------
OTHER ASSETS:
Notes Receivable 14,278,651 14,778,651
Mortgage Contract Receivable - Related Party - 13,750,000
Vessel Deposits - Related Parties 10,228,758 -
Deposits and Other Assets - Related Parties 4,482,171 8,410,940
Deposits and Other Assets - Non-Related Parties 1,435,923 334,975
Spare Parts Inventory 1,018,982 978,119
------------ ------------
TOTAL OTHER ASSETS 31,444,485 38,252,685
------------ ------------
TOTAL ASSETS $ 83,363,665 $ 50,813,716
============ ============
See Notes to Consolidated Financial Statements.
35
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2005 AND 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
--------------------------
2005 2004
----------- ------------
CURRENT LIABILITIES:
Accounts Payable $ 5,505,374 $ 1,104,721
Accrued Expenses 2,710,584 2,169,197
Short-Term Debt 1,090,479 4,186,012
Vessel Lease Payable - Current Portion 5,020,136 -
Current Advances From Related Parties 2,983,271 -
Deferred Interest - Short-Term 497,685 514,440
Short-Term Debt - Related Parties 196,164 183,164
Liabilities of Discontinued Operations 401,000 310,798
----------- -----------
TOTAL CURRENT LIABILITIES 18,404,693 8,468,332
----------- -----------
LONG-TERM LIABILITIES:
Vessel Lease Payable - Long Term Portion 29,530,585 -
Long-Term Debt - Net of Current Portion 2,683,432 4,095,827
Deferred Interest - Long-Term 1,501,185 1,957,920
Long-Term Advances From Related Parties 98,099 285,649
----------- -----------
TOTAL LONG-TERM LIABILITIES 33,813,301 6,339,396
----------- -----------
DEFERRED INCOME 1,595,220 5,439,951
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $100 Par Value,
Authorized 500,000 Shares, 362,844 and 362,489
Issued and Outstanding, respectively 36,284,375 36,248,875
Common Stock, $2 Par Value, Authorized 25,000,000
Shares, Issued, 11,482,564 and 11,480,279,
respectively, and Outstanding, 10,567,487 and
7,802,134, respectively 22,965,125 22,960,557
Capital in Excess of Par 20,112,328 20,191,982
(Deficit) (subsequent to June 30, 1993,
date of quasi-reorganization) (49,352,173) (46,989,638)
----------- -----------
30,009,655 32,411,776
LESS:
Treasury Stock, 915,077 and 3,678,146 Shares,
respectively, at Cost (457,538) (1,839,073)
Deferred Compensation, Net (1,666) (6,666)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 29,550,451 30,566,037
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 83,363,665 $ 50,813,716
=========== ===========
See Notes to Consolidated Financial Statements.
36
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003
June 30,
-----------------------------------------------
2005 2004 2003
------------- ------------ ------------
OPERATING REVENUES:
Gaming $ 27,350,154 $ 27,528,631 $ 26,354,929
Fare 2,999,130 3,151,182 2,952,066
On Board 2,003,746 1,921,583 1,773,926
Other 420,217 360,843 209,678
------------- ------------ ------------
NET OPERATING REVENUES 32,773,247 32,962,239 31,290,599
------------- ------------ ------------
OPERATING COSTS AND EXPENSES:
Gaming 9,136,981 8,805,157 7,889,140
Fare 4,310,927 3,868,705 3,381,534
On Board 987,397 925,980 849,022
Maritime & Legal Expenses 6,421,129 6,796,486 5,960,421
General & Administrative Expenses 3,007,640 3,722,984 4,121,811
General & Administrative Expenses - Parent 1,976,507 1,655,378 1,452,047
Ship Development Costs - Big Easy 5,011,756 - -
Ship Development Costs - Royal Star 284,257 - -
Equine Costs 447,989 - -
Development Costs - Other 970,836 700,580 306,952
Depreciation & Amortization 1,994,507 739,871 254,082
ITG Vegas Bankruptcy Costs - 417,454 841,348
------------- ------------ ------------
TOTAL OPERATING COSTS AND EXPENSES 34,549,926 27,632,595 25,056,357
------------- ------------ ------------
OPERATING INCOME (LOSS) (1,776,679) 5,329,644 6,234,242
------------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest and Financing Expenses (2,518,214) (2,232,119) (1,334,463)
Interest and Financing Expenses - Related Party (1,327,674) (15,873) (4,186)
(Loss) on Impairment of Note Receivable (500,000) (10,000,000) -
Interest Income 11,988 79,320 81,039
Interest Income Related Parties 292,583 247,785 342,226
Other Income 7,961 19,713 60,468
------------- ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (4,033,356) (11,901,174) (854,916)
------------- ------------ ------------
INCOME (LOSS) BEFORE TAX PROVISION
AND EXTRAORDINARY ITEM (5,810,035) (6,571,530) 5,379,326
Income Tax Expense 90,000 228,500 145,500
------------- ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (5,900,035) (6,800,030) 5,233,826
EXTRAORDINARY ITEM - Fees charged to related
parties for Master Settlement Agreement ( Note 12). 4,000,000 - -
------------- ------------ ------------
NET INCOME (LOSS) $ (1,900,035) $ (6,800,030) $ 5,233,826
============= ============ ============
NET BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ (0.18) $ (0.86) $ 0.54
============= ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - Basic and Diluted 10,303,942 7,933,691 9,720,275
============== ============ ============
See Notes to Consolidated Financial Statements.
37
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003
Preferred Common
--------------------------- ----------------------------
Number of Number of
Shares Amount Shares Amount
------------- ------------ -------------- ------------
BALANCE - JUNE 30, 2002 362,488 $ 36,248,775 11,480,275 $ 22,960,549
Purchase of Shares for Treasury in connection
with REB Trustee - - - -
Shares Issued for Fractional Exchanges With
Respect to the One-for-twenty Reverse Stock
Split effected on March 13, 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
Shares Issued for Fractional Exchanges With
Respect to the One-for-twenty Reverse Stock
Split effected on March 13, 1992 355 35,500 2,285 4,568
Shares Issued for Options Exercised - - - -
Options Issued at Less than Treasury Stock Cost - - - -
Cost of New Stock to be Issued - - - -
Amortization of Deferred Compensation Costs - - - -
Net (Loss) for the Year Ended June 30, 2005 - - - -
------------- ------------ -------------- ------------
BALANCE - JUNE 30, 2005 362,844 $ 36,284,375 11,482,564 $ 22,965,125
============= ============ ============== ============
Capital Treasury Deferred
in Excess Stock Compen-
of Par (Deficit) At Cost sation Total
--------------- -------------- ---------- --------- ----------
BALANCE - JUNE 30, 2002 $ 20,192,090 $ (45,423,434) $ - $ (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
Shares Issued for Fractional Exchanges With
Respect to the One-for-twenty Reverse Stock
Split effected on March 13, 1992 (40,068) - - - -
Shares Issued for Options Granted - - 919,035 - 919,035
Options Issued at Less than Treasury Stock Cost - (462,500) 462,500 - -
Cost of New Stock to be Issued (39,586) - - - (39,586)
Amortization of Deferred Compensation Costs - - - 5,000 5,000
Net (Loss) for the Year Ended June 30, 2005 - (1,900,035) - - (1,900,035)
--------------- -------------- ---------- --------- ----------
BALANCE - JUNE 30, 2005 $ 20,112,328 $ (49,352,173) $ (457,538) $ (1,666) $ 29,550,451
=============== ============== =========== ========= ============
See Notes to Consolidated Financial Statements.
38
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003
June 30,
---------------------------------------------
2005 2004 2003
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS $ (1,900,035) $ (6,800,030) $ 5,233,826
Adjustments to reconcile income(loss) to net
cash (used in) provided by operating activities:
Depreciation and Amortization 1,994,507 739,871 254,082
Impairment of Note 500,000 10,000,000 -
Increase in Deferred Income 155,269 - -
(Decrease) in Deferred Income -
Related Parties (4,000,000) - -
Changes in Operating Assets and Liabilities -
(Increase) in Accounts Receivable (1,655,672) (29,720) (156,010)
(Increase) Decrease in Other Assets (289,856) 337,454 21,247
(Increase) in Prepaid Expenses (653,812) (26,088) (297,773)
Increase (Decrease) in Accounts Payable
and Accrued Expenses 5,124,345 (1,331,785) 2,217,821
------------ ------------ -----------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
BEFORE DISCONTINUED OPERATIONS (725,254) 2,889,702 7,273,193
CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES 90,202 9,600 14,939
------------ ------------ -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (635,052) 2,899,302 7,288,132
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase and Improvements of Big Easy - Related Party (13,248,786) - -
Purchase and Improvements of Royal Star (1,649,647) (1,321,494)
Security Deposit on New Bare Boat Charter -
Related Party PBMC - (880,782) -
Refunds and (Deposits) on Purchase of Vessels - 300,000 (800,000)
Purchase Options in Big Easy - Related Party (2,973,575) - -
Investment in Port Lease - - (250,000)
Note Receivable Collected - Related Party 2,600,749
Advances Collected - Related Party 1,128,268 - -
Livestock Expenditures (328,247) - -
Capital Expenditures (905,980) (925,346) (1,363,809)
(Increase) Decrease in Other Investment Activity (435,787) (99,735) 314,846
(Increase) in Other Investment Activity -
Related Parties - (712,362) -
------------ ------------ -----------
NET CASH (USED IN) INVESTING ACTIVITIES (15,813,005) (3,639,719) (2,098,963)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funds Received from PDS Notes 10,829,417 - -
Funds Received from Related Parties 2,651,558 - -
Funds Received on Refinance of Note - 7,800,000 -
Proceeds from Related Party Loans - - 183,164
Proceeds from Bank Financing - - 200,000
Financing Costs (1,120,240) - -
Principal Payment on Stock Purchase Note (1,241,669) - -
Principal Payments on Short Term Notes (240,960) (5,099,519) (248,144)
Principal Payments on Long Term Notes (733,385) - -
Principal Payments on Long Term Debt -
Related Parties - (574,022) -
Decrease in Balances Due to/From Discontinued
Subsidiaries 89,290 8,550 17,783
------------ ------------ -----------
CASH PROVIDED BY FINANCING ACTIVITIES
BEFORE DISCONTINUED FINANCING ACTIVITIES 10,234,011 2,135,009 152,803
CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES (89,290) (8,550) (17,783)
------------ ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,144,721 2,126,459 135,020
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,303,336) 1,386,042 5,324,189
LESS CASH AND CASH EQUIVALENTS FROM
DISCONTINUED OPERATIONS (912) (1,050) 2,843
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 7,508,632 6,123,641 796,609
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 1,204,384 $ 7,508,633 $ 6,123,641
============ ============ ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 6,325,962 $ 1,440,262 $ 412,431
Income Taxes $ - $ 256,517 $ 118,983
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, reclassified 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 June 16, 2004, the Company recorded deferred interest payable in the amount
of $2,589,240 associated with the Turnberry transactions.
On July 7, 2004, the Company converted an outstanding promissory note in the
amount of $6,674,782 into an investment in options to purchase two vessels,
the Palm Beach Princess and the Big Easy and reclassed a deposit of
$3,500,000 and recorded a vessel capital lease in the amount of $17,500,000
and liability of $14,000,000 in connection with the PDS financing.
During the fourth quarter of Fiscal 2005, the Company recorded an aggregate
capital lease and related assets in the amount of $17,050,721 in connection
with the Big Easy vessel.
On June 29, 2005 the Company issued 724,143 Common Stock to Francis W. Murray to
reimburse him for his personal tax concequences in connection with the PDS
transactions.
See Notes to Consolidated Financial Statements.
39
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Operations - International Thoroughbred Breeders, Inc., a
Delaware corporation ("ITB" and together with its subsidiaries, the "Company"),
was incorporated on October 31, 1980. Its principal operating subsidiary, ITG
Vegas, Inc. ("ITG Vegas") 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.
Using the funding provided by the PDS Transactions (see Note 2) and
working capital, our subsidiary, ITG Palm Beach, LLC ("ITGPB") began making
alterations, retrofits and improvements to the Empress II (subsequently renamed
the Big Easy) in our second fiscal quarter (ended December 31, 2004) to prepare
it for use as a casino cruise ship. It is anticipated that the Big Easy will
begin passenger service from the Port of Palm Beach, Florida on October 16,
2005. The ship's reconstruction and refurbishment was completed in April, 2005,
and we are continuing to pursue certification for passenger operations pursuant
to the United States Coast Guard's Alternative Compliance Program. Although the
Alternative Compliance Program certification procedure is less complex and time
consuming than regular Coast Guard certification, it is nevertheless a rigorous
process involving the jurisdiction of at least four separate departments of the
United States Coast Guard and the ship's classification society, Lloyd's
Register. During the year ended June 30, 2005, the Company incurred
approximately $5,000,000 of start up costs which, according to the appropriate
accounting pronouncement, have been expensed as they have been incurred.
During the first quarter of Fiscal 2005, we re-entered the equine
business. We currently own 55 horses, a share of 15 horses, and lease 2 other
horses, all of different ages. Several are currently racing and a few are held
as broodmares but the majority are yearlings and two year olds in training. It
is our plan to bring these horses into racing if we consider them competitive
after completion of training.
(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) 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.
(E) Accounting Periods - ITG Vegas ends its quarterly accounting period
on the last Sunday of each quarter. These end of the week cut offs create more
comparability of the Company's quarterly operations, by generally having an
equal number of weeks (13) and week-end days in each quarter. Periodically, this
system necessitates a 14 week quarter which results in a 53 week year. The
quarter ending March 31, 2005 was such a quarter and the Company's current
fiscal year includes a 53 week year for its subsidiary, ITG Vegas, Inc.
(F) Spare Parts Inventory - Spare parts inventory consists of operating
supplies, maintenance materials and spare parts. The inventories are carried at
cost. It is necessary that these parts be readily available so that the daily
cruise operations are not cancelled due to mechanical failures. The inventory
was purchased from Palm Beach Maritime Corporation ("PBMC") at a time when we
were operating the Palm Beach Princess under a bare boat charter with PBMC. PBMC
is owned by Mr. Francis W. Murray. Fair value of this inventory was determined
by actual invoice prices and estimates made by the Palm Beach Princess
engineers.
40
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(G) Livestock - Livestock consists of thoroughbred horses and the assets
are stated at the lower of cost or market. Costs of maintaining horses and other
direct horse related costs are expensed in the period incurred. Stud fees are
capitalized and become the basis of the resulting foal.
(H) 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 includes the write off of major vessel
repairs and maintenance work completed at dry dock period. These expenses are
written off during a two year period following the dry dock period. For the year
ended June 30, 2005, 2004 and 2003, the amortized expense was $176,828, $125,179
and $55,650, respectively.
As a result of the PDS transactions (see Footnote 2) we are leasing the
vessel M/V Palm Beach Princess under a Capital lease arrangement. The Company
began depreciating the M/V Palm Beach Princess during our current fiscal year.
Financing fees in connection with the PDS financings, are being amortized over
the life of the loans. For the year ended June 30, 2005 the amortized expense
associated with these finance costs were $362,424.
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.
(I) Net Assets of Discontinued Operations - At June 30, 2005 and 2004,
the remaining net assets and liabilities of Garden State Park and Freehold
Raceway were classified as "Assets of Discontinued Operations." and "Liabilities
of Discontinued Operations."
(J) Recent Accounting Pronouncements - In December 2004, the FASB issued
Statement No. 123 (revised 2004), "Stock-Based Payment" (SFAS 123R). This
statement replaces SFAS 123, "Accounting for Stock-Based Compensation",
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and amends SFAS 95, "Statement of Cash Flows", to require that excess tax
benefits be reported as a financing cash inflow rather than as a reduction of
taxes paid. SFAS 123R is effective the first interim or annual reporting period
that begins after June 15, 2005, which will be for the period covered by the
Company's quarterly report on Form 10-Q for the first quarter of fiscal 2006.
The Company currently accounts for stock option grants using the intrinsic-value
method in accordance with APB 25. Under the intrinsic-value method, because the
exercise price of the Company's employee stock options is equal to the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. If the Company would have applied the fair value recognition
provisions of SFAS 123R, it would have had a charge to earnings of $951,066 for
stock-based employee compensation, net of related income taxes, for 2005. (See
Note 19 Stock-Based Compensation).
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.
(K) 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
41
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(L) Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
(M) 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.
(N) Use Of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
(O) Deferred Income - The gain from the sale of our Garden State Park
property on November 28, 2000 in the amount of $1,439,951 has been deferred
until such time as the note receivable on the sale has been collected. In
connection with the PDS Transaction we have deferred the gain on the sale of
equipment of $190,863 over the term of the equipment lease. The deferred income
recorded as of June 30, 2004 included fees charged to Leo Equity Group, Inc. in
the amount of $3,000,000 and to Palm Beach Maritime Corp. (formerly MJQ Corp.)
in the amount of $1,000,000 in connection with the final settlement with the
Brennan Trustee. These amounts were deferred until the first quarter of Fiscal
2005 when we recorded payment for these charges.
(P) Net Income per Common Share - Basic earnings per share is computed as
net income available to common shareholders divided by the weighted average
number of common shares outstanding during the quarter. Diluted earnings per
share reflects the potential dilution that could occur from common shares
issuable through stock options and warrants utilizing the treasury stock method.
Diluted earnings per share is calculated by using the weighted average number of
common shares outstanding adjusted to include the potentially dilutive effect of
these occurrences.
(Q) Capitalized Interest - during the fiscal year ended June 30, 2005, we
capitalized interest payments made under the Big Easy sublease in the amount of
$1,530,197. The Company has determined that under the provisions of the
Statement of Financial Accounting Standards No. 34 (FAS34) that interest
payments would be capitalized until March 31, 2005 and subsequently expensed.
(R) Goodwill - Through the purchase of Leo Equity, we 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.
(2) PDS TRANSACTIONS
During our year ended June 30, 2005 ITB and several of its subsidiaries,
along with Palm Beach Maritime Corporation ("PBMC") and Palm Beach
Entertainment, Inc ("PBE"),companies owned by Francis W. Murray, completed
several financial and lease transactions with PDS Gaming Corporation ("PDS"), a
publicly held company located in Las Vegas, along with several of its affiliated
companies. On July 7, 2004, January 5, 2005 and April 5, 2005 we closed on
various transactions with PDS. On June 30, 2005 the Company and several of its
subsidiaries, along with companies controlled by Francis W. Murray, borrowed
$29,313,889 to refinance the approximately $27 million in existing PDS debts,
with approximately $2.3 million of add-on financing being provided. During the
current year we operated under the vessel and equipment leases and financing
arrangements under the July 7, 2004, January 5, 2005 and April 5, 2005
transactions. Below is a summary of those transactions.
42
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) On July 7, 2004 PBMC and its affiliate company, Palm Beach Empress,
Inc. ("PBE"), the Company and our subsidiaries ITG Vegas and ITG Palm Beach, LLC
closed on a $23 million transaction with PDS. The transactions were structured
as a sale/leaseback by PBMC and PBE, although, as to $20 million of the $23
million total, it was effectively equivalent to a secured loan against the Palm
Beach Princess and the Big Easy vessels. Of the $23 million, $14 million was
advanced to PBMC 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 PBMC and PBE, which then subchartered the vessel to our subsidiary, ITG
Vegas, Inc. Another $6 million of the $23 million was advanced for the benefit
of PBMC and PBE for the purchase and retrofitting of the vessel Big Easy, which
vessel PDS (through an affiliate) leased and chartered to PBMC and PBE, who, in
turn, subchartered the Big Easy 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 Big Easy 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 had 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 Big Easy 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 Big Easy for several months, but were unable to obtain financing
on our own since all potential lenders required a mortgage against the Palm
Beach Princess, which was owned by PBMC. PBMC was willing to utilize its vessel,
the Palm Beach Princess, to obtain funds to acquire the Big Easy and then
subcharter the Big Easy and Palm Beach Princess to ITG Vegas and ITG Palm Beach
on a long term basis.
The investment in and operation of the Big Easy required retiring all of
our debt to the Brennan Trustee, due to the negative covenants governing our
indebtedness to the Brennan Trustee. PBMC 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 Big Easy 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 of the first PDS transaction on July 7, 2004, 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, 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 July 7, 2004 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 was $178,500 per month for the first 12 months
and $391,762.80 for the remaining term.
The Princess Charter included 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 would reduce the purchase price
for the Palm Beach Princess to zero in five years and title would automatically
pass to PBMC at the end of the term of the Princess Charter.
43
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PBMC and PBE entered into a Sub-Bareboat Charter to charter the Palm
Beach Princess to ITG Vegas and ITG Palm Beach for the same five year period.
The charter hire payable by ITG Vegas and ITG Palm Beach to PBMC and PBE under
the Princess Sub-Charter was $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, including principal payments
made by ITG Vegas on the PDS lease were to be credited against the purchase
price.
Acquisition of the Big Easy. On March 1, 2004, PBE entered into an
agreement to purchase the Big Easy from Empress Joliet Corporation at a purchase
price of $3,800,000. 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 Big Easy 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 Big Easy. 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 "Big Easy Charter") and a Master Lease Agreement to charter and
lease the Big Easy to PBMC and PBE for a period of five years. The charter hire
was $82,695 for the first 12 months and $171,702.54 for the remaining term.
The Big Easy Charter included an option for PBE to purchase the Big Easy
at the end of the term and was structured the same as the Princess Charter in
that the monthly payments of charter hire under the Big Easy Charter will reduce
the purchase price for the Big Easy to zero and title will automatically pass to
PBE.
PBMC and PBE also entered into a Sub-Bareboat Charter to charter the Big
Easy to ITG Vegas and ITG Palm Beach for a five year period. The charter hire
payable by ITG Vegas and ITG Palm Beach under the Big Easy Sub-Charter is
$100,000 per month ($1.2 million per year) plus one percent (1%) of the gross
operating revenues of the Big Easy. Under the Big Easy Sub-Charter, PBE granted
to ITG Vegas and ITG Palm Beach an option to purchase PBE's right to acquire the
Big Easy at the end of the term, for an exercise price equal to the appraised
value of the Big Easy, to be determined upon the retrofitting and refurbishment
of the Big Easy, to which certain amounts are to be credited.
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 and
then leased back pursuant to a Gaming Master Lease. Each Schedule of the Gaming
Equipment Lease had a term of three years. Aggregate rent during fiscal 2005 for
all gaming equipment was approximately $1.4 million per year under this
agreement. 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.
(B) On January 5, 2005, Royal Star Entertainment, LLC ("RSE"), a
wholly-owned indirect subsidiary of ITB, borrowed $2,850,000 from PDS. The Loan
was evidenced by the Note and was to be repaid on January 17, 2006. Interest on
the Loan was payable monthly at a rate of 10% per annum. At closing, RSE paid a
closing fee to the lender in an amount equal to $78,375, or 2.75% of the
principal amount of the Note. The proceeds of the loan were used to make
improvements to the vessels Royal Star and Big Easy. Also at the closing, RSE
entered into an equipment lease with PDS providing for the lease by RSE of slot
machines to be located on the vessel Royal Star. The term of the Lease was three
years, with rental payments of $11,879 per month for the first four months and
$95,351.73 for the next thirty-two months. RSE paid a closing fee of $57,020.74,
and a security deposit in the amount of $95,351.73.
(C) On April 5, 2005, ITB and certain of its subsidiaries, together with
PBMC, PBE., Francis W. Murray and Francis X. Murray, executed and delivered as
joint and several co-borrowers, a promissory note payable to PDS in the amount
of $4,350,000. The note evidences a loan made by PDS to the Company, the
proceeds of which were placed in escrow in order to obtain the release of the
vessel the Big Easy from dry dock. The $4.35 million note bore interest at 20%
per annum, until June 30, 2005 when it was refinanced. As further consideration
to PDS, ITG Vegas, Inc. and ITG Palm Beach, LLC entered into a three-year lease
44
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of an additional $1.5 million of gaming equipment. Rental payments under such
lease were $50,000 per month for 36 months.
(D) On June 30, 2005, the Company, together with its subsidiaries, ITG
Vegas, Inc. ("ITGV"), ITG Palm Beach, LLC ("ITGPB"), International Thoroughbred
Gaming Development Corporation ("ITGD") and Riveria Beach Entertainment, LLC
("RBE") and Royal Star Entertainment, LLC ("RSE"), entered into a Loan and
Security Agreement with PDS as lender, pursuant to which ITGV, RBE, RSE and
ITGPB (collectively, the "Borrowers"), borrowed $29,313,889 to refinance the
approximately $27 million in existing debts (whether in the form of loans, ship
leases or ship charters) to PDS, with approximately $2.3 million of add-on
financing being provided. The maturity of all of the new indebtedness will be
July 1, 2009. Our overall annual interest rate on the new PDS loan is 15.5%
until January 2006 at which time a portion of the loan presently equal to $2.8
million will increase to 20% until ITG Vegas' EBITDA exceeds $17 million on an
annualized basis.
Equipment leases taken during our fiscal year 2005 will remain the same
and the terms of the equipment leases and the loans, taken in January and April
will be extended until July 1, 2009.
Effective August 1, 2005 monthly interest and principal payments are due
in the amount of approximately $1,100,000 during the first 2 years, with the
remaining monthly payments decreasing slightly. The terms of the new loan
require the Company to maintain an EDITDA of $10.5 million for the twelve months
ending January 1, 2006, increasing to $12 million for the twelve months ending
October 1, 2006. If these levels are not maintained or if we should not be in
compliance with other various loan covenants we will be in default of the loan.
Under the Loan and Security Agreement signed on June 30, 2005 with PDS,
upstream payments by the Borrowers to the Company are limited to $150,000 per
month plus amounts of ITG Vegas' income tax savings attributted to inclusion in
the Parent Company tax return. These payments can only be made provided no event
of default has occurred and the Borrowers maintain an EBITDA for the vessels of
$7.5 million for the nine months ending October 2, 2005, increasing to $10.5
million for the twelve months ending January 1,2006 with continual increases in
EBITDA required increasing to $12 million for the twelve months ending October
1, 2006 and thereafter.
As a condition to entering into the PDS Transaction, PDS required the
Company, International Thoroughbred Gaming Development Corporation ("ITGDC"),
PBMC and PBE to guaranty performance of certain of the PDS Transactions. The
Company, ITGDC and PBMC and PBE entered into a Guaranty Agreement and Pledge
Agreements guaranteeing the obligations of the borrowers.
The PDS indebtedness is secured by mortgages on the Royal Star, the Big
Easy and the Palm Beach Princess, an assignment of our promissory note dated
November 29, 2000 made by Realen-Turnberry/Cherry Hill, LLC in favor of GSRT,
LLC, in the principal amount of $10 million, and an assignment of the promissory
note, dated May 1, 2002, made by OC Realty, LLC in favor of ITGV, in the
principal amount of $2,021,176 and stock in certain of our subsidiaries.
In connection with this refinancing, PBMC, an affiliate 100% owned by our
Chairman and CEO, Francis W. Murray, acquired all of the membership interests of
Cruise Holdings I, the owner of the casino cruise ship Palm Beach Princess, and
PBE, an affiliate 50% owned by Mr. Murray, acquired all of the membership
interests of Cruise Holdings II, the owner of the casino cruise ship the Big
Easy. As a result, the Bareboat Charters between PBMC and Cruise I, and PBE and
Cruise II, respectively, terminated, and, in place of the sub-Bareboat Charters
by ITGV and ITGPB, these subsidiaries will charter the vessels from Cruise I and
Cruise II under substantially the same economic terms as had applied under their
previous sub-Bareboat Charters in effect on July 7, 2004.
Funding was completed on July 18, 2005 following the satisfaction of
certain conditions, including the execution, delivery and recording of ship
mortgages and all other closing documents.
(3) DESCRIPTION OF LEASING ARRANGEMENTS
As mentioned in the footnote 2 above, the Company and several of its
subsidiaries have entered into charter transactions for two vessels and lease
transactions for equipment placed on three vessels.
45
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The charter for the Palm Beach Princess, which is currently in service,
has been accounted for as a capital lease. Principal payments on the Palm Beach
Princess portion of the loan ($14 million) will reduce the capital lease
purchase liability and the interest portion of each monthly payment will be
expensed. Depreciation expense will be recorded for the Palm Beach Princess
using an estimated useful life of 20 years. Charter hire fees of $50,000 per
month plus 1% of gross revenues of the Palm Beach Princess have been accounted
for as additional interest payments on the Capital lease and will be expensed as
incurred. The lease for the gaming equipment currently aboard the vessels and
the lease for new gaming equipment will be accounted for as an operating lease.
The transaction described in Note 2 also included the charter of the Big
Easy and a lease for gaming equipment aboard that vessel. As a result of June
30, 2005 PDS transaction, we have accounted for the Big Easy charter as a
capital lease. Principal payments on the Big Easy portion of the PDS loan of
$12.6 million will reduce the capital lease purchase liability and the interest
portion of each monthly payment will be expensed. The total costs of
improvements made together with the present value of the minimum lease payments
were used to calculate the capitalized vessel cost. Charter hire fees of
$100,000 per month plus 1% of gross revenues will be accounted for as additional
payments made on the capital lease. Depreciation expense will be recorded for
the Big Easy following the vessel being placed in service using an estimated
useful life of 20 years. The gaming equipment lease will be accounted for as an
operating lease.
The transaction described in Note 2(B) included a lease for gaming
equipment aboard the vessel, Royal Star. The gaming equipment lease will be
accounted for as an operating lease.
Vessels, plant and equipment at June 30, 2005 include the following
amounts for capitalized leases:
Vessel, Palm Beach Princess $ 17,500,000
Vessel, Big Easy 17,050,721
------------
Less: allowance for depreciation (1,191,687)
------------
Capital Leases $ 33,359,034
============
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum lease
payments as of June 30, 2005:
Period ending June 30,
2006 $ 8,507,668
2007 8,989,526
2008 8,981,533
2009 8,972,254
2010 747,224
-----------
Total minimum lease payments $ 36,198,205
Less: amount representing interest (9,598,205)
-----------
Present value of net minimum lease payment $ 26,600,000
===========
46
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a schedule of liabilities due to PDS as a result of the
June 30, 2005 transaction wherein we borrowed approximately $29 million to
refinance the vessel leases for vessel lease payables as shown on the Balance
Sheet:
June 30, 2005
-------------------------------------------
Vessel Short-Term Long-Term Total
- ----------------------------------------------- ------------ ------------- ------------
Palm Beach Princess $ 2,746,465 $ 11,253,535 $ 14,000,000
Big Easy 2,273,672 10,326,328 12,600,000
Royal Star 401,340 2,488,660 2,890,000
------------ ------------- ------------
Amount due to PDS for vessels 5,421,477 24,068,523 29,490,000
Less: Royal Star Note shown in Notes
Payable (See Note 12) (401,340) (2,488,660) (2,890,000)
Fair Market Valuation - Palm Beach Princess - 3,500,000 3,500,000
Capital Lease Charter Valuation - Big Easy - 4,450,722 4,450,722
------------ ------------- ------------
Total Short and Long Term Vessel Leases Payable $ 5,020,137 $ 29,530,585 $ 34,550,722
============ ============= ============
Operating Leases
The following is a schedule by years of future minimum rental payments
required under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year as of June 30, 2005:
Year ending June 30,
2006 $ 4,106,212
2007 3,292,996
2008 2,463,033
Future payments 4,901
-----------
Total minimum lease payments $ 9,867,142
===========
(4) ITG VEGAS, INC. CHAPTER 11 PLAN OF REORGANIZATION
On January 3, 2003, ITG Vegas, Inc. ("ITG Vegas"), our subsidiary
operating the Palm Beach Princess, and Palm Beach Maritime Corp.("PBMC")
(formerly MJQ Corp.), which owned the Palm Beach Princess vessel, an entity
owned by Francis W. Murray, filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the Southern District of Florida, Palm Beach
Division (the "Bankruptcy Court"), In re: ITG Vegas, Inc., Case No. 03-30038.
The petition did not cover the Parent company, ITB, nor any other of ITB's
subsidiaries. The Palm Beach Princess continued to operate as
"debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court. We had previously entered into a Master Settlement
Agreement to purchase from the Chapter 11 Trustee for the Bankruptcy Estate of
Robert E. Brennan (the "Brennan Trustee") the promissory note of Palm Beach
Maritime Corp. for $13.75 million. We did not have funds necessary to complete
that purchase by January 6, 2003, the date required for payment of the balance
of such purchase price. Therefore, on January 3, 2003, in order to protect our
invested deposits and operation of the vessel, ITG Vegas (together with Palm
Beach Maritime Corp) filed a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code.
On September 12, 2003, the Bankruptcy Court issued an order confirming
the Amended Joint Chapter 11 Plan of Reorganization in the Chapter 11 cases of
ITG Vegas, Inc. and Palm Beach Maritime Corp. (ITG Vegas, Inc. and Palm Beach
Maritime Corp. being hereinafter called the "Debtors"). The Plan was a plan of
reorganization (the "Plan") under Chapter 11 of the Bankruptcy Code which was
jointly proposed by the Debtors. As of October 15, 2003, the effective date of
the Plan, all claims, debts, liens, security interests and encumbrances of and
against the Debtors and against all property of their respective bankruptcy
estates, which arose before confirmation, were discharged, except as otherwise
provided in the Plan or confirmation order. Post-confirmation, each of the
Debtors continued as reorganized debtors.
47
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
With the consummation of the PDS Transactions described above in Note 2
(A), all of our and the Debtors' indebtedness to the Brennan Trustee was paid in
full.
On July 17, 2004, the Bankruptcy Court issued a final decree closing the
Debtors' Chapter 11 cases.
(5) NOTES RECEIVABLE
(A) Second Cherry Hill Note
A portion of the proceeds from the sale of the non-operating former El
Rancho Hotel and Casino in Las Vegas to Turnberry/Las Vegas Boulevard, LLC
("Turnberry") on May 22, 2000 was used by us to purchase a promissory note of
the buyer in the face amount of $23,000,000 (the "Las Vegas Note"). The interest
rate under such note was to be adjusted from time to time since the interest
actually payable was to be dependent upon, and payable solely out of, the
buyer's net cash flow available for distribution to its equity owners
("Distributable Cash"). After the equity investors in the buyer had received
total distributions equal to their capital contributions plus an agreed upon
return on their invested capital, the next $23 million of Distributable Cash was
to be paid to us. We were to receive payments under the note equal to 33 % of
all Distributable Cash until the maturity date, which was to occur on the 30th
anniversary of our purchase of the note. We had the option to convert the
promissory note into a 33 % 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 were determined by a real estate appraisal completed in July, 2003
for a bank in anticipation of financing for Turnberry.
On June 16, 2004, the Company sold the Las Vegas Note to Cherry Hill at
El Rancho LP (the "Buyer"), a limited partnership which is affiliated with the
maker of the Las Vegas Note.
In exchange for the Las Vegas Note, the Company received cash payments
from the Buyer of $2.8 million, a non-recourse loan from Turnberry Development,
LLC, an affiliate of the Buyer, in the amount of $5 million and a promissory
note issued by Soffer/Cherry Hill Partners, L.P. ("Cherry Hill Partners"),
another affiliate of the Buyer, in the principal amount of $35,842,027 (the
"Second Cherry Hill Note"). The principal amount of the Second Cherry Hill Note
equals the difference between the unpaid principal plus all accrued and unpaid
interest (at 22%) under the Las Vegas Note, less the $2.8 million in purchase
price payments and $5 million non-recourse loan paid to the Company. As further
consideration, the Company received the right to use aircraft owned or leased by
the Buyer or its affiliates, for up to 64 hours in total, which the Company
valued at approximately $224,000.
The Company is not liable for repayment of the principal of the $5
million loan included in the foregoing consideration. However, the Company is
obligated to pay interest and fees on such loan aggregating $600,000 per year
($50,000 per month) for five (5) years.
The Second Cherry Hill Note received by the Company matures in 2015 and
is similar to the Las Vegas Note which was sold, in that it generally is payable
prior to maturity only from distributable cash of the maker. The maker under the
Second Cherry Hill Note is one of the principal partners in the entity which
purchased the Garden State Park real property from a Company subsidiary in
November of 2000, and such obligor will only have funds with which to pay the
Second Cherry Hill Note out of its profits from the development of Garden State
Park. The development of Garden State Park, located in Cherry Hill, New Jersey,
was delayed as a result of community opposition to certain elements of the
development plan, and, while the Company believes that the development plan is
now moving forward, the timing and amount of profits there also remain
uncertain. The Company already holds a promissory note in the face amount of $10
million, received from the purchaser of Garden State Park in connection with the
sale of such real property, which the Company expects will be fully paid in
time. While the Company expects that note to be fully paid, it is not optimistic
that this Second Cherry Hill Note will be fully paid, and accordingly, the
Company has written down the Second Cherry Hill Note (defined above) on its
books. The interest portion of the Las Vegas Note amounting to approximately
$20,866,000 has never been included as income on the Company's books, therefore
the interest capitalized under the Second Cherry Hill Note is not subject to a
write down. The remaining portion of the Second Cherry Hill Note has been
written down to $4,278,651 which resulted in an impairment charge of the new
note of $12,786,589, recorded in the fourth quarter of the Company's June 30,
2004 fiscal year and additional impairment charges of $500,000 in Fiscal 2005.
The Company had previously recorded deferred income of $2,786,589 on the
original sale of the El Rancho property in May, 2000, which amount was used
48
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to reduce the impairment charge to $10,000,000 at June 30, 2004. 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
estimated that its share of proceeds from the sale of the El Rancho property
prior to July 31, 2005 would generate approximately $500,000. As of June 30,
2005 the Company recorded an additional impairment loss on this note of $500,000
because a sale did not occur prior to July 31, 2005.
The Second Cherry Hill Note is secured by a pledge of stock owned by
Raymond Parello, an affiliate of the Buyer, in Palm Beach Empress, Inc.,
representing fifty percent (50%) of the stock in that company. Palm Beach
Empress, Inc. is the entity formed to acquire the Big Easy, the second vessel
which is chartered to a subsidiary of the Company, and which the Company expects
to operate as a casino cruise ship, similar to the operation of the casino
"cruise to nowhere" business conducted by a subsidiary of the Company since
April of 2001. The other fifty percent (50%) of the stock in Palm Beach Empress,
Inc. is owned by PBMC, a corporation owned by Francis W. Murray, the Company's
Chief Executive Officer. PBMC presently owns and charters to a subsidiary of the
Company the Palm Beach Princess vessel, the operation of which is the Company's
primary operating business.
Mr. Parello will have the right to acquire the Second Cherry Hill Note
from the Company in exchange for his stock in Palm Beach Empress, Inc. Such
"put" option held by Mr. Parello (giving him the right to put his stock in Palm
Beach Empress, Inc. to the Company in exchange for the Cherry Hill Note) will
effectively limit the value to the Company of the Second Cherry Hill Note to the
value of Mr. Parello's one-half interest in Palm Beach Empress, Inc. Mr.
Parello's put right will be exercisable upon the later to occur of (1) payment
by or for the account of Cherry Hill Partners of $483,205.48 under the Second
Cherry Hill Note, and (2) payment of the entire principal balance of the
non-recourse loan received by our Orion subsidiary in the principal amount of $5
million, referred to above (upon which repayment the Company's obligation to pay
interest and fees of $600,000 per year on such loan would end). Such put option
is set forth in the Shareholders' Agreement among Palm Beach Empress, Inc.,
Raymond Parello and PBMC, to which our Orion subsidiary has joined solely for
the purpose of confirming its agreement to the put option.
In the event Mr. Parello receives any dividends or other distributions
on, or proceeds from any sale of, his shares in Palm Beach Empress, Inc., the
same will be applied as a mandatory prepayment of the Second Cherry Hill Note.
(B) Original Cherry Hill Note
A portion of the proceeds from the sale on November 30, 2000 of our
Garden State Park property in Cherry Hill, New Jersey, to
Realen-Turnberry/Cherry Hill, LLC ("Realen") was paid in the form of a
promissory note in the face amount of $10 million (the "Note.") Under the Note,
the interest rate will be adjusted from time to time since the interest actually
payable will be dependent upon, and payable solely out of, the buyer's net cash
flow available for distribution to its equity owners ("Distributable Cash").
After the buyer's equity investors have received aggregate distributions equal
to their capital contributions plus an agreed upon return on their invested
capital, the next $10 million of Distributable Cash will be paid to us. We will
thereafter receive payments under the Note equal to 33 % 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.
49
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES
The following items are classified as deposits and other assets -
non-related parties:
June 30,
---------------------------
2005 2004
------------ -----------
Long-Term Prepaid Loan Costs -
Net of amortization in the
amount of( $362,424) $ 959,563 $ -0-
Port Lease Rights 250,000 250,000
Other Misc. Assets 226,360 84,975
------------ -----------
Total $ 1,435,923 $ 334,975
============ ===========
(7) VESSEL DEPOSITS AND DEPOSITS AND OTHER ASSETS - RELATED PARTIES
(A) Vessel Deposits - Related Parties
Beginning on July 7, 2004, we entered into Sub-Bareboat Charters of the
vessels Palm Beach Princess and Big Easy with entities (Palm Beach Maritime
Corporation and Palm Beach Empress, Inc.) owned or controlled by our Chairman,
Francis W. Murray. Pursuant to our June 30, 2005 refinancing and restructuring
of the PDS transactions, we now charter the vessels, Palm Beach Princess and Big
Easy directly from Cruise Holdings I and Cruise Holdings II, respectively, which
companies are owned by Palm Beach Maritime Corporation and Palm Beach Empress,
Inc. Pursuant to the new charters, we pay Cruise Holdings I and Cruise Holdings
II, as owners of the vessels, charter fees of $50,000 per month for the Palm
Beach Princess and $100,000 per month for the Big Easy, plus 1% of our gross
revenues from operation of those vessels. We have the right to purchase either
or both vessels, at our option, for $17.5 million in the case of the Palm Beach
Princess (representing its appraised value at the time of $17.5 million and for
fair market value (to be determined by appraisal) in the case of the Big Easy.
Once we pay off the loans against the Palm Beach Princess and Big Easy, we will
be entitled to substantial credits against the purchase prices of the vessels: a
$14 million credit in the case of the Palm Beach Princess and a $12.6 million
credit in the case of the Big Easy, representing the original principal amounts
of the July 2004 sale - leaseback transactions involving those vessels, as well
as credits for our investment in the net Ship Mortgage Obligation of
approximately $7.2 million which can be applied to the purchase price of either
vessel, and a credit for the portions of the costs of refurbishing and
retrofitting the Big Easy which we paid, amounting to approximately $3 million,
that can be applied to the purchase price of the Big Easy.
(B) Deposits and Other Assets - Related Parties (See Note 24):
June 30,
-------------------------
2005 2004
----------- -----------
Loans to the Ft Lauderdale Project (OC Realty, LLC)$ 2,769,989 $ 2,769,989
Accrued Interest on Loans to the Ft. Lauderdale
Project (OC Realty, LLC) 1,485,080 1,198,677
Goodwill on Purchase of GMO Travel 193,946 193,946
Advances to PBMC 33,156 616,533
Note Receivable from Francis W. Murray - 2,600,749
Deposits on new lease for M/V Palm Beach Princess
and the Big Easy with Palm Beach Maritime Corp.
("PBMC") (formerly MJQ Corp.) - 880,783
Accounts Receivable from Francis W. Murray - 32,751
Loans to Francis W. Murray - 93,000
Accounts Receivable from Frank Leo - 24,512
----------- -----------
Total Deposits and Other Assets - Related Parties $ 4,482,171 $ 8,410,940
=========== ===========
50
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) 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, 2005 and 2004 consist of
the following:
June 30,
------------------------------
Classified As: 2005 2004
------------- -------------
Current Assets $ 401,747 $ 400,835
Current Liabilities (401,000) (310,798)
------------- -------------
Net Assets of Discontinued Operations $ 747 $ 90,037
============= =============
Cash flows from discontinued operations for the years ended June 30,
2005, 2004 and 2003 consist of the following:
June 30,
---------------------------------
2005 2004 2003
---------- --------- ---------
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 -0- -0- 12,539
Increase (Decrease) in Accounts and Purses
Payable and Accrued Expenses 90,202 9,600 2,400
---------- --------- ---------
Net Cash Provided by Discontinued Operating Activities 90,202 9,600 14,939
---------- --------- ---------
Cash Flows from Discontinued Financing Activities:
(Decrease) in Balances Due To/From Continuing Operations (89,290) (8,550) (17,783)
---------- --------- ---------
Net Cash (Used In) Discontinued Financing Activities (89,290) (8,550) (17,783)
---------- --------- ---------
51
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net (Decrease) Increase in Cash and Cash Equivalents From
Discontinued Operations 912 1,050 (2,844)
Cash and Cash Equivalents at Beginning of Year From
Discontinued Operations 733 (317) 2,527
---------- --------- ---------
Cash and Cash Equivalents at End of Year From
Discontinued Operations $ 1,645 $ 733 $ (317)
========== ========= =========
(9) ACQUISITIONS AND DISPOSITIONS
o Fiscal 2005
During the Fiscal 2005, we purchased livestock, including stud fees in
the amount of $328,247.
o 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 13)
o 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.
(10) VESSELS, EQUIPMENT AND LIVESTOCK
Vessels owned and leased, equipment and livestock consist of the
following: Depreciation is being computed over the estimated remaining useful
lives using the straight-line method.
June 30,
Estimated Useful----------------------------
Lives in Years 2005 2004
- ------------------------------------ ------- ------------ ------------
Leased Vessel - Palm Beach Princess 20 $ 17,500,000 $ -
Leased Vessel Not Placed in Service
- Big Easy N/A 24,318,989 -
Vessel Not Placed in Service -
Royal Star N/A 2,971,141 1,321,494
Equipment 5-15 3,118,284 2,186,345
Leasehold Improvements 15-40 987,267 944,371
Livestock N/A 328,247 -
---------- ------------
Totals 49,223,928 4,452,210
Less Accumulated Depreciation
and Amortization (2,625,763) (916,186)
---------- ------------
$ 46,598,165 $ 3,536,024
========== ============
(11) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
(A) The following table represents the aging of accounts payable as of
June 30, 2005 and 2004.
Total Current 31-60 Days 61-90 Days Over 91 Days
----------- ---------- ----------- ------------ -------------
June 30, 2005 $ 5,505,375 $ 1,472,681 $ 890,700 $ 1,382,776 $ 1,759,218
June 30, 2004 $ 1,104,721 $ 770,994 $ 141,689 $ 4,874 $ 187,164
52
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(B) Accrued expenses consisted of the following as of June 30, 2005 and
2004
June 30,
----------------------------
2005 2004
----------- ------------
Trade Payables $ 964,805 $ 940,221
Payroll and Related Obligations 915,177 479,260
Interest 161,040 11,040
Various State Taxes 330,157 399,270
Prior State Tax Audit 339,405 337,402
----------- ------------
Total $ 2,710,584 $ 2,169,197
=========== ============
(12) NOTES AND MORTGAGES PAYABLE
Notes and Mortgages Payable are summarized below:
June 30, 2005 June 30, 2004
Interest % --------------------------- ----------------------------
Per Annum Current Long-Term Current Long-Term
---------- ------------ ------------ ------------ -------------
International Thoroughbred Breeders,
Inc.:
- ------------------------------------
Chapter 11 Trustee (the "Brennan
Trustee") for the Bankruptcy
Estate of Robert E. Brennan (A) 11% $ -0- $ -0- $ 4,038,838 $ 4,024,142
Francis X. Murray (B) 8% 159,164 -0- 159,164 -0-
William H. Warner (B) 12% 37,000 -0- 24,000 -0-
Other Various 25,000 -0- 25,000 -0-
ITG Vegas, Inc.:
- ----------------
PDS Gaming (C) 10% 401,340 2,448,660 -0- -0-
Maritime Services, Corp. (D) 9% 410,187 -0- -0- -0-
International Game Technology (E) 8% 221,296 190,621 122,174 71,685
Others Various 32,656 44,151 -0- -0-
Garden State Park:
- ------------------
Service America Corporation (F) 6% 160,000 -0- 160,000 -0-
------------ ------------ ------------ -------------
Totals $ 1,446,643 $ 2,683,432 $ 4,529,176 $ 4,095,827
Net Liabilities of Discontinued
Operations - Long Term (160,000) -0- (160,000) -0-
Related Party Notes (196,164) -0- (183,164) -0-
------------ ------------ ------------ -------------
Totals $ 1,090,479 $ 2,683,432 $ 4,186,012 $ 4,095,827
============ ============ ============ =============
(A) In connection with the PDS transactions, on July 7, 2004 the
outstanding principal balance was paid by PBMC directly to the Brennan Trustee
to satisfy this obligation. (See Note 2)
(B) On March 1, 2003, we issued a promissory note for a line of credit up
to $225,000 bearing
53
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest at 8% to Francis X. Murray. The outstanding balance on the line of
credit note at June 30, 2005 was $159,164 and accrued interest was $29,052. In
fiscal 2003 and fiscal 2005, we issued promissory notes for $24,000 and $13,000
respectively, bearing interest at 12% to William H. Warner, Secretary of the
Company. The outstanding balance is due on demand. The proceeds from both notes
were used for working capital.
(C) On January 5, 2005, the Company and its subsidiary, Royal Star
Entertainment, LLC ("RSE"), executed and delivered a promissory note in the
original principal amount of $2,850,000 (the "Note"). The Note is secured by
RSE's Preferred Mortgage. The lender and holder of the Note and Mortgage is
Cruise Holdings IV, LLC, an affiliate of PDS Gaming Corporation. At closing, RSE
paid a closing fee to the lender in an amount equal to $78,375, or 2.75% of the
principal amount of the Note. The proceeds of the Loan were used to make
improvements to the vessel Royal Star or to the vessel Big Easy. The Note was
originally due on January 17, 2006, however, the PDS re-financing completed on
June 30, 2005 extended the terms of this note to July 1, 2009. The interest rate
in 10% until January 19, 2006 at which time the interest rate will be increased
to 20% until such time as the annualized EBITDA for the various vessels operated
by the Company reach $17 million at which time the interest rate will be reduced
to 15%
(D) On May 20, 2005, the Company's wholly owned subsidiary, ITG Palm
Beach, LLC ("ITGPB"), together with an affiliate, Palm Beach Empress, Inc.
("PBE") issued a seven month promissory note in the amount of $569,482 bearing
interest at 9% to Maritime Services, Corp. for drydock retrofit services
performed on the Big Easy. A payment of $83,813 was due and paid on June 1,
2005, five (5) consecutive monthly installments of $83,813 are to be paid on the
balance with a final Payment of $84,216 due on December 1, 2005. At June 30,
2005, the principal balance on the Maritime Services, Corp. note was $410,188.
(E) 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. In March 2005, ITG
Vegas, Inc. issued an additional thirty month promissory note in the amount of
$387,463 bearing interest at 8.15% to International Game Technology for the
purchase of fully reconditioned gaming equipment. Thirty consecutive monthly
installments of $14,319.49 are to be paid on the balance. At June 30, 2005, the
principal balance on the two notes to International Game Technology note was
$411,917 of which $221,296 was classified as short term and the balance of
$190,621 was classified as long term.
(F) In connection with the January 28, 1999 lease transactions for the
Garden State Park facility, the Company purchased a liquor license located at
Garden State Park owned by an unaffiliated third party, Service America
Corporation (the "Holder"), for $500,000 financed by a five (5) year promissory
note at a 6% interest rate. Yearly principal payments of $80,000 plus interest
were due on December 28, 2002 and December 28, 2003 and have not been paid. The
Company is continuing to negotiate new terms under this note and if successful
the creditor may seek to enforce payment of the note. In additional to the
principal amount due of $160,000 the accrued but unpaid interest is
approximately $30,000 as of June 30, 2005.
(13) 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 June 30, 2005 the Company has capitalized
$2,971,141 for the purchase and improvements and for legal and professional fees
in connection with the vessel and has expensed an additional approximately
$285,000 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. Depreciation will not be computed on the Royal Star until it is placed
in service.
54
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) RELATED PARTY DEBT
The following schedule represents related party debt (See Note 24 -
Related Party Transactions):
June 30, 2005 June 30, 2004
------------------------- -------------
Short-Term Long-Term Long-Term
------------- --------- ----------
Advances from OC Realty
(Francis W. Murray ownership) $ 2,800,964 $ -0- $ 36,000
Accrued Wages due to and Advances
from Francis W. Murray 182,308 -0- -0-
Advances from Palm Beach Maritime Corp.
(formerly MJQ Corp.)
(Francis W. Murray ownership) -0- 98,099 249,649
------------- -------- ----------
Total Long Term Debt -
Related Parties $ 2,983,272 $ 98,099 $ 285,649
============= ======== ==========
(15) INCOME TAX EXPENSE
The Company's income tax expense for the year ended June 30, 2005 and
2004 relates to state income taxes for its Palm Beach Princess operations and
from June 30, 2004 includes 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 relates only to
state income taxes on the Palm Beach Princess operations.
The Company has net operating loss carryforwards aggregating
approximately $111,300,000 at June 30, 2005 expiring in the years June 30, 2006
through June 30, 2026. SFAS No. 109 requires the establishment of a deferred tax
asset for all deductible temporary differences and operating loss 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 $44,500,000 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, 2005:
Net Operating Loss Year End
Carryforwards Expiration Dates
--------------- ----------------
$ 4,300,000 6/30/2006
9,000,000 6/30/2007
21,600,000 6/30/2008
5,280,000 6/30/2009
6/30/2010
71,120,000 through 6/30/2026
---------------
$ 111,300,000
===============
55
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) COMMITMENTS AND CONTINGENCIES
See Note 2 for additional commitments and contingencies with respect to
the PDS Transactions.
See Note 24 for additional commitments and contingencies of the Company
and transactions with related parties.
See Note 26 with respect to events and developments after June 30, 2005.
During the 2005 fiscal year, the Big Easy has been undergoing retrofit
and improvements and we had originally expected to place the Big Easy in service
during our third fiscal quarter. Cost overruns and delays in having the vessel
released from Dry Dock and in obtaining vessel certifications from the US Coast
Guard have adversely affected the working capital of the Company. We are
continuing to pursue certification for passenger operations pursuant to the
United States Coast Guard's Alternative Compliance Program. Although the
Alternative Compliance Program certification procedure is less complex and time
consuming than regular Coast Guard certification, it is nevertheless a rigorous
process involving the jurisdiction of at least four separate departments of the
United States Coast Guard and the ship's classification society, Lloyd's
Register. As indicated by the table at the end of this footnote, 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
the Big Easy. We are dependent upon the expected additional revenue from the
operations of the second vessel to cover the increased financing costs.
On June 30, 2005, the Company, together with its subsidiaries, ITG Vegas,
Inc. ("ITGV"), ITG Palm Beach, LLC ("ITGPB"), International Thoroughbred Gaming
Development Corporation ("ITGD"), Riveria Beach Entertainment, LLC ("RBE") and
Royal Star Entertainment, LLC ("RSE"), entered into a Loan and Security
Agreement with PDS as lender, pursuant to which ITGV, RBE, RSE and ITGPB
(collectively, the "Borrowers"), borrowed $29,313,889 to refinance the
approximately $27 million in existing debts (whether in the form of loans, ship
leases or ship charters) to PDS, with approximately $2.3 million of add-on
financing being provided. The maturity of all of the new indebtedness will be
July 1, 2009. The Company, ITGD, PBMC and PBE are guaranteeing the obligations
of the Borrowers. Monthly payments of approximately $1.1 million will be
required to fund the debt service on the new refinanced debt. (See Note 2)
Through ITG Vegas, we have an operating agreement and lease of space in
the office complex constructed at the Port of Palm Beach adjacent to a new
cruise terminal effective, as modified, May 5, 2003. The term of the initial
lease is five years at $183,200 per year payable monthly. Additionally, we have
the right to renew the lease for two (2) additional terms of 5 years each. We
were 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 the minimum amount of
improvements required of $333,000 of construction costs against the initial term
of our five year lease.
Through our subsidiary, Royal Star Entertainment LLC, we have negotiated
with the Port of Palm Beach District a second Operating Agreement dated December
18, 2003, as subsequently amended. This Operating Agreement will permit us to
operate the Big Easy in passenger service from the Cruise Terminal at the Port,
with certain berthing and scheduling priorities. The initial term of this
Operating Agreement is five years from the date of commencement of sailings by
the Big Easy from the Port, with subsequent renewal options of four and three
years. After the commencement of sailing, dockage charge is based upon $1.00 per
foot of the vessel per day for six months and thereafter at the rate of $1.85
per foot per day or approximately $11,160 per month and a wharfage and terminal
charge per passenger which is normally included in our admission fare.
On August 6, 2004 we amended the Lease and Operating Agreement with the
Port of Palm Beach in order to permit our construction of a passenger gangway
system and destination signage on Port property and our refurbishment and
upgrading of the passenger cruise terminal facilities, which measures, we
believe, will enhance our ability to promote and market our cruise services. We
will receive a wharfage credit from the Port of Palm Beach in the amount of
$75,000 with respect to our construction of the gangway. In addition, we agreed
to pay the Port of Palm Beach $.50 per vehicle parked in the passenger parking
lot at the Port, for a minimum period of six months beyond the commencement of
cruise services at the Port of Palm Beach by the Big Easy.
On March 1, 2004 we entered into a Dockage Space Agreement between the
Company and the City of Riviera Beach for approximately 160 feet of concrete
dock space at the City Marina. The term is for one year for a fee of $11,000 per
month. The lease is renewable subject to the approval of the City. This
Agreement is
56
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
During the period that our subsidiary, ITG Vegas was in bankruptcy
(January 3, 2003 to October 15, 2004) and thereafter, the 8 employees previously
paid by ITB were paid by PBMC, a company owned by Francis W. Murray, our CEO.
The wage expense was recorded by ITB and an accounts payable was recorded to
PBMC. PBMC was subsequently fully reimbursed by ITB for the wages. This
arrangement was the result of the restrictions placed on the flow of cash to ITB
from ITGV by the bankruptcy court. As a result, employer contributions and
employee deferrals to the ITB 401-K plan were suspended. The Company has not yet
decided what action, if any, should be taken with respect to the retirement
benefits.
Our vessels are subject to the provisions of the International Convention
on Safety of Life at Sea as Amended ("SOLAS 74"), which was adopted in 1974 by
the International Maritime Organization, a specialized agency of the United
Nations that is responsible for measures to improve the safety and security of
international shipping, and to prevent marine pollution from ships. SOLAS 74 is
the current basic safety standard for all ships engaged in international
service. The Convention was substantially amended in 1992 and 2000 in order to
upgrade and improve shipboard fire safety standards. The Amendments are
applicable to all passenger ships engaged in international service, including
retroactively those ships such as the Palm Beach Princess that were built prior
to 1980. Under the terms of the Amendments, full compliance by older ships with
SOLAS 74 standards is to be phased in and implemented over the years and
completed no later than October 1, 2010. The Palm Beach Princess, in compliance
with the SOLAS 74 requirements to date, has previously completed substantial
upgrading and installation of fire sprinkler and smoke detection systems and
other fire safety construction standards. By 2010 the ship must comply with the
final phase of the implementation of the SOLAS 74 Amendments, most notably being
requirements that no combustible material be used in ships' structures and that
certain other interior structure and space standards be met. The precise nature
and scope of necessary work will be determined in conjunction with the ship's
classification society, Det norske Veritas. To accomplish such work may entail
substantial cost in order to remove all wood and other combustible materials now
used in the structure of the Palm Beach Princess, to refit the ship with
non-combustible materials, and otherwise to upgrade interior structure and
spaces. We have not yet obtained an estimate of such cost. The Bareboat Charter
and Option to Purchase Agreement for the Palm Beach Princess permits us to
purchase the vessel for $17.5 million at the end of the charter period on July
1, 2009. We will be allowed credits for the payments made on the PDS lease of
$14 million, provided such payments are made, and credits of up to $7.2 million
against the purchase of the Palm Beach Princess. (However, use of the $7.2
million as a credit toward the Palm Beach Princess purchase would decrease the
credits allowed for the purchase of the Big Easy since the $7.2 million credit
can be used for the purchase of either vessel)(See Note 2 A) We will need to
make a determination if it will be economically feasible to purchase the Palm
Beach Princess at the end of the charter period considering the costs which may
be involved in readying the vessel for "SOLAS" requirements.
With the sale of our Freehold Raceway property on January 28, 1999 we
assumed full responsibility for the costs associated with the clean up of
petroleum and related contamination caused by the leakage of an underground
storage tank which was removed in 1990, prior to our purchase of Freehold
Raceway. In February 2000 the N.J. Department of Environmental Protection
approved our remedial investigation workplan ("RIW"). Under the RIW numerous
test wells were drilled and the soil tested and monitored to determine the
extent and direction of the flow of underground hazardous material and reports
and conclusions of the tests were prepared for the State of New Jersey. However,
prior to obtaining a remedial action workplan from the State of New Jersey, the
work was stopped due to a lack of funds resulting from the institution of
proceedings by our subsidiary, ITGV, under Chapter 11 of the bankruptcy code. At
this time we are unable to predict the effects that such delay may cause, but it
is likely that some 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. However, we now estimate that the total cost of clean up to be
approximately $830,000 including costs we have already spent according to the
environmental consulting firm handling this matter. 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 $617,000 during prior fiscal
years 2000, 2001 and 2002. As of June 30, 2005 we have accrued $211,000 for the
additional work. 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.
57
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes commitments on non-cancelable contracts
and leases as of June 30, 2005 and reflects the June 30, 2005 PDS transaction
where we refinanced approximately $27 million in existing debts and borrowed
approximately $2.3 million of additional funds.
Years Ended June 30,
--------------------------------------------------------------- There-
2006 2007 2008 2009 2010 after Total
----------- ----------- ----------- ----------- ---------- --------- -----------
Capital Leases:
P.B. Princess - Principal & Interest $ 4,487,891 $ 4,701,154 $ 4,701,154 $ 4,701,154 $ 391,763 $ - $18,983,116
Bare Boat Charter - Related Party 960,000 960,000 960,000 960,000 80,000 - 3,920,000
Big Easy - Principal & Interest 4,019,777 4,288,373 4,280,379 4,271,100 355,461 - 17,215,090
Bare Boat Charter - Related Party 1,560,000 1,560,000 1,560,000 1,560,000 130,000 - 6,370,000
Notes and Mortgages:
Principal & Interest 1,631,040 1,349,643 1,194,144 1,089,001 89,260 - 5,353,088
Interest Only 207,313 - - - - - 207,313
Deferred Interest Payments 600,000 600,000 600,000 450,000 - - 2,250,000
Employee Contracts - Related Party 327,035 - - - - - 327,035
Operating Leases:
Casino Equipment 3,106,367 3,106,367 2,353,930 - - - 8,566,664
Administrative & Office 999,845 186,629 109,103 2,028 2,028 845 1,300,478
Purchase Obligations - Big Easy 2,573,116 - - - - - 2,573,116
Purchase Obligations 750,848 181,006 61,006 61,006 61,006 208,436 1,323,308
----------- ----------- ----------- ----------- ---------- --------- -----------
Total $ 21,223,232 $16,933,172 $15,819,716 $13,094,289 $ 1,109,518 $ 209,281 $68,389,208
=========== =========== =========== =========== ========== ========= ===========
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.
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 4.)
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
As of June 30, 2005, 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 $10.5 million
impairment loss to reflect the estimated current market value of this note. (See
Note 5-A)
58
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) RETIREMENT PLANS
ITG Vegas maintains 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.
Our parent company adopted the ITG Vegas 401 (k) plan during the fiscal year
2005.
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. We have accrued $111,876 as of June
30, 2005 to cover all or part of this cost.
Our expense recorded for the fiscal years ended June 30, 2005, 2004 and
2003, respectively, totaled $141,305, $52,170 and $51,170 for the 401 (k) plan.
(19) STOCK-BASED COMPENSATION
(A) EMPLOYEE AND NON-EMPLOYEE OPTIONS
In June, 2005, the Company's Board of Directors adopted and approved the
2005 Stock Option and Award Plan (the "2005 Plan"). The 2005 Plan permits the
grant of options to purchase up to 1,300,000 shares of Common Stock at a price
per share no less than 100% of the fair market value of the Common Stock on the
date an option is granted with respect to incentive stock options only. The
price would be no less than 110% of fair market value in the case of an
incentive stock option granted to any individual who owns more than 10% of the
total combined voting power of all classes of outstanding stock. The 2005 Plan
will terminate unless approved by the shareholders within one year of the
Board's adoption. Under the 2005 Plan, in June 2005, the Board of Directors
approved the grant of options, expiring in 10 years, to purchase 300,000 shares
at $2,00 per share, and will vest at 20% per year for the first 5 years, subject
to shareholder approval of the Plan. 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. 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.
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 would be granted or issued until the Bankruptcy Trustee
was paid in full, at which time the Company would be authorized (but not
obligated) to grant such options. Such action was taken in order to compensate
Mr. F.X. Murray for his having personally guaranteed a loan of $300,000 for the
Company and for his providing to the Bankruptcy Trustee a personal guaranty for
portions of the Company's obligations. In June 2005 the Board of Directors
authorized replacing the authorized but un-granted options to Mr. Murray with a
cash payment of $.97 per option share which represented the difference between
the original option price of $.50 and the closing sales price on June 26, 2005
of $1.47
At a meeting of the Board of Directors of the Company held on June 29,
2004 the board authorized compensating Francis W. Murray for tax consequences he
would incur as a result of the PDS Transactions. The amount and form of such
compensation was to be determined by the full board of directors when data as to
such tax consequences became available. At its meeting on June 27, 2005 the
Board of Directors determined that the tax effect of the transaction to Mr.
Murray totaled $1,064,500 and that he should be compensated in that regard by
granting him an option to purchase 724,143 shares at an exercise price of $2 per
share. The number of option shares was determined by dividing the $1,064,500 by
the closing stock price on June 27, 2005 of $1.47.
59
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, Mr.
Robert J. Quigley 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. In June 2005, the Board of
Directors authorized replacing the authorized but un-granted options to Mr.
Murray, Mr. ReDavid and Mr. Quigley with a cash payment of $.97 per option share
which represented the difference between the original option price of $.50 and
the closing sales price on June 26, 2005 of $1.47.
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 unpaid loan principal to Mr. Warner in shares of common stock, valued
for such purpose at $.50 per share provided that he agrees to accept such shares
(valued at $.50 per share) in payment of a portion, specified by the grantee, of
the Company's obligation to him. In the first quarter of fiscal 2005, Mr. Murray
and Mr. Quigley elected to take their then deferred salary in the form of
shares.
At June 30, 2005, total options outstanding were 2,360,643 and 2,120,643
of these options were exercisable.
The following table contains information on stock options for options
granted for the three year period ended June 30, 2005:
Stock Options
-------------
Exercise Weighted
Number Price Range Average
of Shares Per Share Price
----------- -------------- ---------
Outstanding at June 30, 2003 and 2004 3,336,500 $0.269- $5.00 $1.59
Exercised during FYE 2005 (2,000,000) $0.269 $0.269
Granted during FYE 2005 1,024,143 $2.00 $2.00
-----------
Outstanding at June 30, 2005 2,360,643 $0.269 - $5.00 $2.89
==========
Exercise Weighted
Option Price Range Average
shares Per Share Price
------------ --------------- ---------
Exercisable at June 30:
2003 3,336,500 $ 0.269 - $5.00 $1.59
------------ --------------- ---------
2004 3,336,500 $ 0.269 - $5.00 $1.59
------------ --------------- ---------
2005 2,120,643 $ 0.269 - $5.00 $2.99
------------ --------------- ---------
60
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at June 30, 2005:
Ranges Total
------------------------------------- ------------
Range of exercise prices $0.27 - 2.00 $4.00 - 4.625 $5.00 $0.27 - 5.00
------------ ------------- ----- ------------
Outstanding options:
Number outstanding at June 30, 2005 1,310,643 750,000 300,000 2,360,643
------------------------------------- ------------
Weighted average remaining contractual
life (years) 8.40 0.80 1.50 5.11
------------------------------------- ------------
Weighted average exercise price 1.66 4.19 5.00 2.89
------------------------------------- ------------
Exercisable options:
Number outstanding at June 30, 2005 1,070,643 750,000 300,000 2,120,643
------------------------------------- ------------
Weighted average exercise price 1.59 4.19 5.00 2.99
------------------------------------- ------------
The Company accounts for stock option grants using the intrinsic-value
method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related Interpretations. Under the intrinsic-value
method, because the exercise price of the Company's employe stock options is
equal to the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company accounts for the plans under the recognition and measurement
principles of APB 25 and related interpretations. No stock-based employee
compensation cost is reflected in net income for options granted since all
options granted under the plan had an exercise price equal to the market value
of the underlying common stock on the date of grant. However, there are
situations that may occur, such as the accelerated vesting of options or the
issuance of restricted stock, that require a current charge to income.
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS") No. 123 (revised
2004), "Share-Based Payment" which revised Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation". This statement
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". The
revised statement addresses the accounting for share-based payment transactions
with employees and other third parties, eliminates the ability to account for
share-based compensation transactions using APB 25 and requires that the
compensation expense relating to such transactions be recognized in the
statement of operations. The revised statement is effective as of the first
interim period beginning after June 15, 2005.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of the
revised SFAS No. 123:
Years Ended June 30,
--------------------
2005 2004 2003
---- ---- ----
Net Income (Loss): As Reported $ (1,900,035) $ (6,800,030) $ 5,233,826
------------- ------------- ------------
Pro Forma Net Income (Loss): Basic and Diluted $ (2,851,101) $ (6,800,030) $ 5,233,826
------------- ------------- ------------
Net Income (Loss) Per Share: As Reported $ (0.18) $ (0.86) $ 0.54
------------- ------------- ------------
Pro Forma Net Income (Loss) Per Share: Basic and Diluted $ (0.28) $ (0.86) $ 0.54
------------- ------------- ------------
(B) WARRANTS
At June 30, 2003 the Company had 710,000 warrants outstanding to purchase
Common Stock in connection with financing activities. During Fiscal 2004,
435,000 of those warrants expired. All outstanding warrants are exercisable at
June 30, 2005. The fair value of warrants issued were accounted for as financing
expense.
61
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants have been granted to acquire Common Stock at various prices
above the fair market value at the date of grant. The following table contains
information on warrants for the three-year period ended June 30, 2005. The
warrants currently outstanding expire on April 23, 2006. See Note 26 for a
description of warrants.
Warrants
--------
Exercise Weighted
Number Price Range Average
Of Shares Per Share Price
----------- ------------- --------
Outstanding at June 30, 2003 710,000 $2.50 - $4.00 $3.08
Expired During Fiscal 2004 (435,000) $2.50 $2.50
-----------
Outstanding at June 30, 2004 and 2005 275,000 $4.00 $4.00
-----------
(20) 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 2005, 2004 and 2003. 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.
(21) EXTRAORDINARY ITEM
The Master Settlement Agreement with the Chapter 11 Trustee for the
Bankruptcy Estate of Robert E. Brennan (the "Brennan Trustee") included a final
settlement by the Brennan Trustee with numerous parties. Among those parties
were Leo Equity Group, Inc., Michael J. Quigley, III and Palm Beach Maritime
Corp. ("PBMC") (formerly MJQ Corp.). During the quarter ended March 31, 2002 the
Company charged Leo Equity Group $3 million and PBMC $1 million for their
portion of expenses incurred by us and a success fee for the efforts of
International Thoroughbred Breeders, Inc. in connection with the final
settlement with the Brennan Trustee. Prior to our acquisition of Leo Equity
Group, Inc., Leo Equity Group, Inc. assigned to us certain receivables in the
approximate amount of $3 million, including the receivables of approximately
$2.6 million due it from Michael J. Quigley III, in payment of this obligation.
We had deferred all income from these transactions until such time as payment
was received. During the first quarter of Fiscal 2005 we recorded the payment
for the previously deferred income in the amount of $4,000,000.
(22) TREASURY SHARES
As of July 1, 2004, we held 3,678,146 shares of Treasury Stock. On July
28, 2004 Mr. Francis W. Murray exercised his option to purchase 2 million shares
of our Common Stock at an exercise price of $0.26875 per share. The Company
issued 2 million shares of Treasury stock it held in exchange for proceeds of
$537,500. Also on July 28, 2004 the Company issued 689,730 Treasury shares to
Mr. Murray in payment of the deferred salary of $344,865 we owed to him for the
period from January 3, 2003 to November 18, 2003. On August 31, 2004 the Company
issued 73,339 Treasury shares to Robert Quigley in payment of the deferred
salary of $36,670 we owed to him for the period from January 3, 2003 to November
18, 2003. As of June 30, 2005 there were 915,077 shares of Treasury Stock held
by the Company.
(23) 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.
In April of 2001, when we acquired (under a bareboat charter) the vessel
operations of the entity now known as Palm Beach Maritime Corporation, we became
obligated to honor employment contracts between Palm Beach Maritime Corporation
and its employees. That included an Employment Agreement with Francis
62
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
X. Murray, the son of our CEO, Francis W. Murray. Mr. F.X. Murray had been the
president of Palm Beach Maritime Corporation and became vice president of our
subsidiary, which is now ITG Vegas, Inc. The employment agreement with Mr. F.X.
Murray (which had an initial term of three years which ended December 31, 2003)
automatically renews for one-year terms on January 1 of each year unless
previously terminated. The employment agreement with Mr. F.X. Murray provides
for a base salary of $310,000 per year and an annual bonus of up to 25% of the
executive's base salary if certain EBITDA performance goals are met, membership
to a golf club, life insurance for the benefit of the executive's dependents in
the amount of $1,000,000 and other expense benefits. In addition, the executive
is eligible for awards of stock options outside of his employment agreement, and
received in that respect options to purchase 90,000 shares of common stock on
June 27, 2005, at an exercise price of $2.00 per share.
(24) RELATED PARTY TRANSACTIONS
See Footnote 2 for related party transactions regarding the PDS
Transactions.
See Footnote 19 with respect to the stock options granted to related
parties.
During the third quarter of Fiscal 2001, we invested in two projects in
which our Chairman, President and Chief Executive Officer, Francis W. Murray,
also has a pecuniary interest. In connection with one such project, the Board of
Directors approved advances, as loans, of up to $1.5 million to a limited
partnership in which Francis W. Murray owned, at that time, an 80% equity
interest and owned the general partner, the proceeds of which were to be used to
pay costs and expenses for development of a golf course in Southern California.
In Fiscal 2003, the limited partnership's indebtedness to us, including
principal and accrued interest, in the amount of $929,541 was assumed by OC
Realty, LLC, a Florida limited liability company which is owned by Francis W.
Murray and which owns the second real estate project (Ocean Club) described
below. Such indebtedness was due December 31, 2004, but was extended by the
Board of Directors to December 31, 2007, and bears an interest rate of 6% and is
now scheduled to be paid upon the completion of the Ocean Club project.
In the second project, Mr. Murray (through OC Realty) 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. As of June 30,2005, we had lent $2,034,405 in total
to the project and we have accrued interest in the amount of $1,485,080 on the
loan. These loans bear interest at 12% and will be repayable out of OC Realty's
share of proceeds, after payment of bank debts, generated by the sale of
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 $14 million (at
present) and, second, construction financing expected to amount to $25 to $30
million and third, any capital invested by and fees payable to joint venture
partners including OC Realty. OC Realty's share of proceeds thereafter will
range from 22.5% to 45%. We have 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
condominium units will be adequate to meet its obligations and provide
sufficient return to OC Realty with which to pay OC Realty's debt to us.
Beginning on July 7, 2004, we entered into Sub-Bareboat Charters of the
vessels Palm Beach Princess and Big Easy with entities (Palm Beach Maritime
Corporation and Palm Beach Empress, Inc.) owned or controlled by our Chairman,
Francis W. Murray. Pursuant to our June 30, 2005 refinancing and restructuring
of the PDS transactions, we now charter the vessels, Palm Beach Princess and Big
Easy directly from Cruise Holdings I and Cruise Holdings II, respectively, which
companies are owned by Palm Beach Maritime Corporation and Palm Beach Empress,
Inc. Pursuant to the new charters, we pay Cruise Holdings I and Cruise Holdings
II, as owners of the vessels, charter fees of $50,000 per month for the Palm
Beach Princess and $100,000 per month for the Big Easy, plus 1% of our gross
revenues from operation of those vessels. We have the right to purchase either
or both vessels, at our option, for $17.5 million in the case of the Palm Beach
Princess (representing its appraised value at the time of $17.5 million and for
fair market value (to be determined by appraisal) in the case of the Big Easy.
Once we pay off the loans against the Palm Beach Princess and Big Easy, we will
be entitled to substantial credits against the purchase prices of the vessels: a
$14 million credit in the case of the Palm Beach Princess and a $12.6 million
credit in the case of the Big Easy, representing the original principal amounts
of the July 2004 sale - leaseback transactions involving those vessels, as well
as credits for our investment in the net Ship Mortgage Obligation of
approximately $7.2 million which can be applied to the purchase price of either
vessel, and a credit for the portions of the costs of
63
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
refurbishing and retrofitting the Big Easy which we paid, amounting to
approximately $3 million, that can be applied to the purchase price of the Big
Easy.
At a meeting in June 2005 the Board of Directors approved compensating
Messrs. F.W. Murray and F.X. Murray $43,500 each for their personal guarantees
which they were required to provide in order to complete the PDS loan on April
5, 2005. Messrs. Murray were required by PDS to personally guarantee the PDS
loan, the proceeds of which were used by ITG Vegas to obtain the release of the
Big Easy vessel from dry dock. The Board determined that a 1% guarantor
compensation percentage would be used and paid as a guarantee fee.
At its meeting on September 11, 2003 the Board of Directors authorized
the future grant of options to purchase an additional 20,000 shares of common
stock to Mr. F.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 were granted or issued until
the Bankruptcy Trustee shall have been paid in full, at which time the Company
will be authorized (but not obligated) to grant such options. Such action was
taken in order to compensate Mr. F.X. Murray for his having personally
guaranteed a loan of $300,000 for the Company and for his providing to the
Bankruptcy Trustee a personal guaranty for portions of the Company's
obligations. In June 2005 the Board of Directors authorized replacing the
unauthorized but un-granted options to Mr. Murray with a cash payment of $.97
per option share, or $19,400, which represented the difference between the
original option price of $.50 and the closing sale price on June 26, 2005 of
$1.47.
From time to time Francis W. Murray has advanced funds to the Company to
meet its operating expenses. Mr. Murray is normally reimbursed directly by the
Company or through miscellaneous advances it may make on his behalf. During our
fourth quarter ended June 30, 2005, Mr. Murray or companies owned or controlled
by him made advances to the Company in the amount of approximately $2,150,000 to
fund the Company's working capital needs. Additionally, the Company has deferred
making payments to Mr. Murray or his companies, the majority of which were
during the last quarter, for charter hire fees on the Palm Beach Princess and
Big Easy vessels and for deferred salary. As of June 30, 2005, the total
advances and deferred payments due him were $2,983,272. The timing of the
repayment is unknown at this time. Approximately $1.7 million is due from the
parent company and could be repaid if it were to receive sufficient funds from
the sale of the Series B Preferred Stock. The balance is due from the ITG Vegas
and its subsidiaries and repayment is restricted by the PDS loan agreement until
such time as ITG Vegas achieves certain EBITDA levels. Interest to Mr. Murray is
not being recorded at this time.
The Company employs 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 and horse related business. Mrs. Murray earns $60,000 per year in
addition to the regular employee benefits paid by the Company.
On December 1, 2004 the Company retained Rachael F. Murray, wife of
Francis X. Murray, as an outside consultant for ITG Palm Beach, LLC, the Company
operating the Big Easy. Mrs. Murray's responsibilities are to develop and
coordinate musical and other live entertainment for the Big Easy. Mrs. Murray
invoiced the Company $18,750 during the fiscal year. The Company did not pay a
fee in July, 2005 due to continued Big Easy delays.
During the first quarter of Fiscal 2005, the Company re-entered the
equine business. In addition to the purchase of horses from outside parties, the
Company has purchased horses, the majority being one and two year olds, from
Francis W. Murray at prices to be determined by an appraisal of their values.
Payment for such horses will only be made out of profits realized from the
horses purchased from Mr. Murray, if any. It is our plan to bring these horses
into racing if we consider them competitive following the training period, to
take advantage of the projected increase in purses as a result of the
introduction of slot machines in several state jurisdictions.
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 us up to
$225,000 in the form of a line of credit. As of June 30, 2005, this loan
together with accrued interest at 8% totaled $188,306. (See Note 12 B)
64
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(25) 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 2005
---------------------------------------------------------------------
4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter
Revenues $ 8,598,946 $ 10,280,985 $ 7,514,993 $ 6,378,322
Income (Loss) Before
Impairment& Extraordinary
Item $ (3,925,428) $ 749,117 $ (256,363) $ (1,777,360)
Impairment (Loss) $ (50,000) $ (100,000) $ (150,000) $ (200,000)
Extraordinary Item $ 440,000 $ 0 $ 0 $ 3,560,000
Net Income(Loss) $ (3,625,430) $ 649,117 $ (506,363) $ 1,582,640
Net Income (Loss) Per Share -
Basic $ (0.35) $ 0.06 $ (0.06) $ 0.16
Net Income (Loss) Per Share -
Diluted DiBasicluted $ (0.33) $ 0.06 $ (0.06) $ 0.15
Fiscal 2004
---------------------------------------------------------------------
4th 3rd 2nd 1st
Quarter Quarter Quarter 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 - $ (1.24) $ 0.17 $ 0.04 $ 0.10
Diluted DiBasicluted
Fiscal 2003
--------------------------------------------------------------------
4th 3rd 2nd 1st
Quarter Quarter Quarter 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
(26) SUBSEQUENT EVENTS
(A) Unregistered Sales of Equity Securities
On July 13, 2005 the Company began accepting subscriptions for the
purchase of shares of the Company's Series B Convertible Preferred Stock, par
value $10.00 per share (the "Series B Preferred Stock"). The subscriptions for
Series B Preferred Stock have been received by the Company as part of a private
offering of up to 500,000 shares of its Series B Preferred Stock, at a
subscription price of $15.00 per share ($7.5 million, in the aggregate, if all
500,000 shares of Series B Preferred Stock are sold in the offering). Under the
Subscription Agreement, each such subscriber will be entitled to receive, in
addition to shares of Series B Preferred Stock at $15.00 per share, a stock
purchase warrant for the purchase of 1.2 shares of the Company's common stock
for each share of Series B Preferred Stock purchased. Accordingly, if all
500,000 shares of Series B Preferred Stock are subscribed for, warrants to
purchase an aggregate of 600,000 shares of the Company's common stock would then
be issuable. The exercise price under each such warrant will be $3.25 per common
share, and the warrants issued to purchasers of the Series B Preferred Stock
will be exercisable for a term of three (3) years beginning one year
65
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
after issuance. As of September 30, 2005 the Company has accepted subscriptions
for the purchase of 163,000 shares of Series B Preferred Stock and has received
$2,322,750 in net proceeds.
The Series B Preferred Stock has been established by the Board of
Directors pursuant to its authority under the Company's Certificate of
Incorporation to fix the relative rights and preferences of the authorized but
unissued preferred stock of the Company. Upon accepting subscriptions for
purchases of the Series B Preferred Stock, the Company has entered into a
Registration Rights Agreement with the purchasers, pursuant to which the Company
has agreed to file a Registration Statement under the Securities Act of 1933, as
amended, in order to register the shares of common stock of the Company issuable
upon conversion of the Series B Preferred Stock and the shares of common stock
issuable upon exercise of the accompanying stock purchase warrants, and to use
its best efforts to cause such Registration Statement to be declared effective.
The Series B Preferred Stock will automatically be converted into common
stock upon the effective date of the Registration Statement covering the common
shares issuable upon conversion. The initial conversion price is $2.00 per share
of common stock, declining by $.02 for each full calendar quarter elapsing from
July 1, 2005 to the date on which the conversion shall occur. Upon conversion,
each share of Series B Preferred Stock will be converted into a number of shares
of common stock determined by dividing the subscription price, $15.00 per share,
by the conversion price then in effect. Based upon the initial conversion price
of $2.00 and the subscription price of $15.00 for each share of Series B
Preferred Stock, the number of common shares initially issuable upon conversion
is 7.5 shares of common stock for each share of Series B Preferred Stock, up to
3,750,000 additional new common shares if the Series B Preferred Stock offering
is fully subscribed.
The stock purchase warrants to be issued to purchasers of the Series B
Preferred Stock may be exercised, beginning one year after issuance, at any time
over the next three years, at an exercise price of $3.25 per share payable at
the time of exercise. In lieu of paying the exercise price, the holder has the
right to effectuate a cashless exercise in which the Company would issue to the
holder a number of shares of common stock computed by using the following
formula: X=Y (A-B)/A, where X equals the number of shares of common stock to be
issued to the holder; Y equals the number of shares of common stock for which
the warrant is being exercised; A equals the market price of one share of common
stock; and B equals the warrant exercise price. As a result, the holder may
receive a number of shares representing the unrealized appreciation in the
warrant.
Pursuant to the Subscription Agreement, the Company also agreed to
increase the size of its Board of Directors from four to seven members, and to
fill two of those vacancies with one person to be designated by MBC Global, LLC,
an Illinois limited liability company which introduced some of the purchasers of
the Series B Preferred Stock to the Company, and a second person to be
designated by another group of purchasers of the Series B Preferred Stock. As of
the date hereof, the Company has increased the size of its Board to seven
members and expects to fill the vacancies thereby created in due course.
The Company will pay a finder's fee of 5% of the purchase price of the
Series B Preferred Stock (in addition to fees payable to MBC Global as described
below). Accordingly, if all 500,000 shares of the Series B Preferred Stock
offered are purchased in the private offering, generating $7.5 million of gross
proceeds, a finder's fee of $375,000 would be payable. The Company plans to use
the net proceeds of the sale of Series B Preferred Stock for parent company
operating expenses and for working capital of the parent company and its
subsidiaries, including our ITG Vegas subsidiary.
Also on July 13, 2005, the Company entered into an Advisory Agreement
dated as of June 30, 2005, and an amendment thereto dated as of July 12, 2005,
with MBC Global, LLC, pursuant to which the Company retained the services of MBC
Global as financial advisor on a non-exclusive basis. The Advisory Agreement has
a minimum term of two (2) years, and requires the Company to pay a consulting
fee of $10,000 per month to MBC Global, a merger and acquisition fee of 2% of
the purchase price upon closing of a merger or acquisition transaction with a
target introduced by MBC Global, and an advisory fee upon closing of a financing
transaction with a source introduced by MBC Global equal to 7% of the gross
proceeds in the case of an equity transaction, 3% of the gross proceeds in the
case of any mezzanine debt, and 1% of the gross proceeds in the case of any
senior debt. MBC Global agreed to reduce its compensation in connection with the
sale of our Series B Preferred Stock to 5% of the gross proceeds of such sales
to investors introduced by MBC Global.
As additional compensation to MBC Global, the Company agreed to issue
three (3) stock purchase warrants to MBC Global, one for the purchase of up to
150,000 shares of the Company's common stock at $2.50 per share, a second
warrant for the purchase of up to 100,000 shares of the Company's common stock
at $3.50 per share, and a third warrant for the purchase of up to an additional
150,000 shares of the Company's common stock at $4.50 per share. The actual
number of common shares purchasable under each of these warrants will be
determined by the number of shares of Series B Preferred Stock, described above,
subscribed for in the Company's private
66
INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
offering by July 22, 2005 (or by such later date to which the Company may extend
its private offering of Series B Preferred Stock). All three stock purchase
warrants will have a term of four (4) years. In connection with the Advisory
Agreement and such warrants, the Company entered into a Registration Rights
Agreement with MBC Global pursuant to which the Company has agreed to file a
Registration Statement under the Securities Act of 1933, as amended, covering
the shares of common stock purchasable under such MBC Global warrants, and to
use its best efforts to cause such Registration Statement to be declared
effective.
(B) Placement Fee Agreement
On September 1, 2005 the Company entered into a Placement Fee Agreement
with PDS Gaming Corporation. In consideration of PDS providing $29.3 million in
funding and lease agreements to the Company during its 2005 Fiscal year, ITB
agreed to pay a Placement fee of $750,000 for such funding. ITB has made a
deposit of $50,000 and the balance will be paid monthly beginning March 1, 2006
with monthly payments of $58,333, without interest, until February 1, 2007. The
Placement Fee Agreement also permitted the Company to cancel an equipment lease
is had signed with PDS on April 5, 2005. The original amount of the equipment
lease was $1.5 million. Under the Placement Fee Agreement, the Company received
a credit of $500,000, the equipment was returned to PDS and the Placement Fee
Agreement was put in place of the lieu of the equipment lease.
(C) Deferral of Principal Payments on PDS Financing
The Loan and Security Agreement signed on June 30, 2005 permits the
Company to defer the principal portion of its scheduled payments of up to $3
million, providing the Company meets certain conditions. In order to conserve
working capital the Company began deferring principal payments of approximately
$450,000 on September 1, 2005 and $450,000 on October 3, 2005. This action was
necessary due to the continued delays in receiving the necessary approvals to
begin operating the Big Easy and the Company's current negative working capital
position.
(D) Commencement of the Big Easy Operation
On October 11, the United State Coast Guard completed its certification
of the Big Easy and issued its formal Certificate of Inspection. All other
certificates required for the ship's commencement of passenger service have been
received. The ship's first voyage has been scheduled for October 16,2005.
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.
As of the end of the period covered by this report, we completed an
evaluation, under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our chief executive officer and chief
financial officer concluded that the Company's disclosure controls and
procedures were effective.
There have not been any significant changes that occurred during the
fiscal quarter ended June 30, 2005 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
67
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 64 Chairman of the Board, President,
Chief Executive Officer and
Chief Financial Officer
James J. Murray 66 Director
Walter ReDavid 79 Director
Robert J. Quigley 76 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. Since September 2004 Mr. Quigley
has been president of our equine subsidiary. And 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
and. 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.
68
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 60 Secretary
Christine E. Rice Newell 60 Assistant Treasurer and Controller of ITB
and Treasurer of ITG Vegas, Inc.
Francis X. Murray 39 Vice President of ITG Vegas, Inc. (ITGV)
(surviving company of merger of Palm Beach
Princess, Inc. and ITGV)
Jerry Winters 45 Assistant Treasurer and CFO of ITG Vegas, Inc.
Stephen Flood 45 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 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).
Stephen 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 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.
We do not have an audit committee and, accordingly, our 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 we have officers,
directors and employees who have accounting and financial expertise, during the
period (until July of 2004) in which our 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
69
to be considered an "audit committee financial expert." Among other things,
there was no assurance that we could continue to pay premiums for directors'
liability insurance and we 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, we expect to consider adding one or more
directors to its Board who would be an "audit committee financial expert" as
defined in SEC Rules.
We have 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. We 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 2005.
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.
Stockholder Director Nominations
Stockholders meeting the following requirements who want to recommend a
director candidate may do so in accordance with our Bylaws and the following
procedures established by the Board. We will consider all director candidates
recommended to the Board by stockholders owning at least 5% of our outstanding
shares at all times during the year preceding the date on which the
recommendation is made that meet the qualifications established by the Board. To
make a nomination for director at an annual meeting, a written nomination
solicitation notice must be received by the Board at our principal executive
office not less than 120 days before the anniversary date our proxy statement
was mailed to stockholders in connection with our previous annual meeting. The
written nomination solicitation notice must contain the following material
elements, as well as any other information reasonably requested by us or the
Board:
o the name and address, as they appear on our books, of the
stockholder giving the notice or of the beneficial owner, if any,
on whose behalf the nomination is made;
o a representation that the stockholder giving the notice is a
holder of record of our common stock entitled to vote at the
annual meeting and intends to appear in person or by proxy at the
annual meeting to nominate the person or persons specified in the
notice;
o a complete biography of the nominee, a well as consents to permit
us to complete any due diligence investigations to confirm the
nominee's background, as we believe to be appropriate;
70
o the disclosure of all special interest and all political and
organizational affiliations of the nominee;
o a signed, written statement from the director nominee as to why
the director nominee wants to serve on our Board, and why the
director nominee believes that he or she is qualified to serve;
o a description of all arrangements or understandings between or
among any of the stockholder giving the notice, the beneficial
owner, if any, on whose behalf the notice is given, each nominee
and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by
the stockholder giving the notice;
o such other information regarding each nominee proposed by the
stockholder giving the notice as would be required to be included
in a proxy statement filed pursuant to the proxy rules of the SEC
had the nominee been nominated, or intended to be nominated, by
our Board of Directors; and
o the signed consent of each nominee to serve as a director if so
elected.
In considering director candidates, the Board will consider such factors
as it deems appropriate to assist in developing a board and committees that are
diverse in nature and comprised of experienced and seasoned advisors. Each
director nominee is evaluated in the context of the full Board's qualifications
as a whole, with the objective of establishing a Board that can best perpetuate
our success and represent stockholder interests through the exercise of sound
judgment. Each director nominee will be evaluated considering the relevance to
us of the director nominee's skills and experience, which must be complimentary
to the skills and experience of the other members of the Board.
71
Item 11. Executive Compensation
The following table sets forth the cash compensation as well as certain
other compensation paid or accrued during fiscal years 2005, 2004 and 2003 to
the individuals who served as our chief executive officer during fiscal year
2005 and other executive officers of the Company who earned more than $100,000
during fiscal year 2005 (collectively, the "Named Executives"):
Long-Term
Compensation
Annual Compensation Awards
------------------- ------
Securities All
Name and Other Annual Underlying Other
Principal Position Year Salary Bonus Compensation Options Compensation
($) ($) ($) (#) ($)
- ------------------ ---- --------- ----- ------------ ------- ------------
Francis W. Murray, 2005 395,000(1) -0- 13,615(2) 724,143 43,500(3)
President, Chief 2004 395,000 -0- 17,701 -0- -0-
Executive Officer and 2003 402,596 -0- 11,053 -0- 14,733
Chief Financial
Officer
Francis X. Murray, 2005 310,884 115,000 12,135(2) 90,000 65,795(3)(4)(5)
Vice President of ITG 2004 290,122 88,628 23,367 -0- 1,399
Vegas, Inc. 2003 301,154 88,628 11,647 -0- 21,137
William H. Warner, 2005 175,000(6) -0- 9,780(7) -0- 3,775(8)
Secretary 2004 175,000 -0- 9,780 -0- 1,440
2003 171,635 -0- 9,780 -0- 10,717
(1) In Fiscal 2005 consists of $395,000 in salary earned by Mr. Murray through
June 30, 2005 of which $182,307 was deferred. In Fiscal 2004 all the salary
earned by Mr. Murray was deferred. On July 28, 2004 the Company issued
689,730 Treasury Shares to Mr. Murray in payment of deferred salary in the
amount of $344,865 that was owed to him for the period from January 3, 2003
to November 18, 2003. For Fiscal 2003 consists of $212,692.48 in salary
paid to Mr. Murray and $189,904 of salary earned through June 30, 2003 but
deferred.
(2) Consists of automobile lease payments.
(3) At a meeting in June 2005 the Board of Directors awarded Messrs. F.W.
Murray and F.X. Murray $43,500 each for their personal guarantees which
they were required to provide in order to complete the PDS loan on April 5,
2005. After the Big Easy dry dock company refused to deliver the Big Easy
due to our having disputed some of its charges, Messrs. Murrays were
required by PDS to personally guarantee the April 2005 PDS loan, the
proceeds of which were used by ITG Vegas to obtain the release of the
vessel. The Board determined that a 2% guarantor compensation percentage
would be used and paid as a guarantee fee.
(4) At its meeting on September 11, 2003 the Board of Directors 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 were
to be granted or issued until the Bankruptcy Trustee shall have been paid
in full, at which time the Company was authorized (but not obligated) to
grant such options. Such action was taken in order to compensate Mr. F.X.
Murray for his having personally guaranteed a loan of $300,000 for the
Company and for his providing to the Bankruptcy Trustee a personal guaranty
for portions of the Company's obligations. In June 2005 the Board of
Directors authorized replacing the future option grants to Mr. Murray with
a cash payment of $.97 per option share or $19,400 which represented the
difference between the original option price of $.50 and the market price
on June 26, 2005 of $1.47.
(5) Fiscal 2005 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, $2,018 contributed by the Company under
Palm Beach Maritime Corp.(PBMC) (formerly MJQ Corp.)'s 401(k) plan.
72
(6) Consists of $175,000 in salary earned by Mr. Warner through June 30, 2005
of which $26,923 has been deferred.
(7) Fiscal 2005 amounts consist of monthly automobile allowance of $9,780, of
which $4,075 was deferred by Mr. Warner.
(8) Fiscal 2005 amounts include $2,160 of life insurance premiums paid by the
Company with respect to term life insurance payable to beneficiaries
designated by Mr. Warner and $1,615, contributed by the Company under its
401(K) plan.
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding stock
options granted during fiscal 2005 to the executive officers named in the
Summary Compensation Table.
Individual Grants
-----------------
Potential Realizable Value
at Assumed Annual Rates
Percentage of Total of Stock Price Appreciation
Number of Options Granted to for
Securities Employees in Fiscal Exercise Option Term
Underlying Year Price per Expiration --------------------------
NAME Options Granted 2005 (1) Share Date 5% (2) 10% (2)
- ---- --------------- ------------------- --------- ---------- -------- ------------
Francis W. Murray 724,143 71% 2.00 6/27/15 321,043 1,369,075
Francis X. Murray 90,000 9% 2.00 6/27/15 39,900 170,155
(1) Based on total number of options granted to employees during 2005 of
1,024,143
(2) Potential realization value is based on an assumption that the market price
of the Company's Common Stock appreciates at the stated rates compounded
annually, from the date of grant until the end of the respective option
term. These values are calculated based on requirements promulgated by the
Securities ans Exchange Commission and do not reflect the Company's
estimate of future stock price appreciation.
Aggregated Option Exercises in Last Fiscal Year and Option Values at June 30,
2005
The following table provides information with respect to the executive
officers shown in the Summary Compensation Table concerning stock options
exercised during fiscal 2005 and the value of vested and unvested unexercised
options held as of June 30, 2005.
- ---------------------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at June 30, 2005 (#) at June 30, 2005 ($)(2)
------------------------------- ----------------------------
Shares Value
Acquired on Realized
Name Exercise (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ --------- ----------- ------------- ----------- -------------
Francis W. Murray 2,000,000 2,462,500 1,024,143 - - -
William H. Warner - - 75,000 - 92,343 -
Francis X. Murray - - 18,000 72,000 - -
- ---------------------------------------------------------------------------------------------------------------
(1) On July 28, 2004 Mr. Francis W. Murray exercised his options for 2,000,000
shares at a time when the stock price was $1.50 per share.
73
(2) 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 30, 2005 ($1.50) 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. On occasion directors have been granted stock options
as compensation. Such grants have not been made under any standard compensation
arrangements. In September 2003 the Board authorized the future grant of options
for 25,000 shares of common stock to all Directors, other than our CEO, but did
not actually grant the options due to restrictions imposed by our primary
creditor. On June 27, 2005 the Board awarded compensation to the three
directors, other than our CEO in an amount equal to the difference between $.50
(the original option price) and $1.47 (the last sale price on the prior day), or
$.97 per option share, times 25,000, or $24,250 to each of the three directors.
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.
Mr. F.W. Murray's employment contract provides for the following payments
upon termination of his employment. If he is discharged with "cause" (other than
for death or permanent and total disability) or if he resigns for "good reason"
or because of a "change in control", Mr. Murray shall be entitled to receive an
amount equal to the lesser of 2.99 times his "base amount" within the meaning of
Section 280G(b)(3) of the Internal Revenue Code, as amended, or the balance of
his salary for the remaining term of the Agreement. In addition, during the
period in which Mr. Murray is entitled to receive post-termination compensation,
the Company will pay the premiums in connection with his continued participation
in the Company's group health plans pursuant to COBRA, subject to the terms and
conditions of such plans. In the event of Mr. Murray's death during the term of
his employment, his estate will be entitled to receive solely his salary through
the date of death and any amounts payable on account of his death under any
insurance or benefit plans or policies maintained by the Company, in addition to
any vested stock options that he may have. Upon termination for permanent and
total disability or as a result of his resignation within 12 months following a
"change in control", he will be entitled to a continuation of his base salary
for a period of one year, plus any amounts payable on account of his disability
or incapacity under any insurance or benefit plans or policies maintained by the
Company and any vested stock options. In the event Mr. Murray is discharged for
"cause" or resigns without "good reason", Mr. Murray's sole entitlement is the
receipt of base salary for any days worked through the date of termination and
any vested stock options.
In April of 2001, when we acquired (under a bareboat charter) the vessel
operations of the entity now known as Palm Beach Maritime Corporation, we became
obligated to honor employment contracts between Palm Beach Maritime Corporation
and its employees. That included an Employment Agreement with Francis X. Murray,
the son of our CEO, Francis W. Murray. Mr. F.X. Murray had been the president of
Palm Beach Maritime Corporation and became vice president of our subsidiary,
which is now ITG Vegas, Inc. The employment agreement with Mr. F.X. Murray
(which had an initial term of three years which ended December 31, 2003)
automatically renews for one-year terms on January 1 of each year unless
previously terminated. The employment agreement with Mr. F.X. Murray provides
for a base salary of $310,000 per year and an annual bonus of up to 25% of the
executive's base salary if certain EBITDA performance goals are met, membership
to a golf club, life insurance for the benefit of the executive's dependents in
the amount of $1,000,000 and other expense benefits. In addition, the executive
is eligible for awards of stock options outside of his employment agreement, and
received in that respect options to purchase 90,000 shares of common stock on
June 27, 2005, at an exercise price of $2.00 per share.
74
Under Mr. F.X. Murray's employment agreement, if the Company terminates
his employment other than for "cause", "death or disability", or if the
executive terminates his employment for "good reason" following a "change of
control" then in any such case the Company shall pay to the executive all
amounts of base salary and bonus, and shall maintain in effect all of his
benefits, which otherwise would have become due through the end of the term of
the agreement. If the executive's employment is terminated by the Company for
"cause", or if the executive voluntarily terminates his employment other than
for "good reason", then the Company shall have no further obligation other than
to pay him his base salary through the effective date of termination and any
other accrued compensation and benefits. If his employment terminates by reason
of "disability" then the Company will pay, for the balance of the term of the
contract, any difference between the amount of his base salary and any
disability payments he may be entitled to receive under any Company-sponsored
disability plan.
Compensation Committee Interlocks and Insider Participationf
The Company does not have a compensation committee of the Board of
Directors, and the full Board decides executive compensation. Mr. Francis W.
Murray, a member of the Board of Directors, currently serves as our President
and Chief Executive Officer and his son, Mr. Francis X. Murray, is Vice
President and Chief Operating Officer of our ITG Vegas subsidiary. Another
director, Mr. Robert J. Quigley is a former President and Chief Executive
Officer of the Company, and continues to serve as a part-time employee of one or
more Company subsidiaries. During the last fiscal year, none of our directors
has served on the Compensation Committee of any other company.
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 June 30, 2005, 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 June 30,
2005 there were 10,567,487 shares of outstanding stock.
- --------------------------------------------------------------------------------
Common Stock
------------
Name and Address of
Beneficial Owner Number of Shares Percent Of Class
- ---------------- ---------------- ----------------
Francis W. Murray 5,913,873 (1) 56%
211 Benigno Boulevard
Suite 210
Bellmawr, NJ 08031
Frank A. Leo 736,201 (2) 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 and 724,143 shares of common stock issuable upon
the exercises of stock options at $2.00 per share.
(2) Includes 200,000 shares purchasable under stock options at $0.50 per share.
Security Ownership of Management
The following table sets forth certain information with respect to the
beneficial ownership, as of June 30, 2005, 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.
75
- --------------------------------------------------------------------------------
Name of Beneficial Owner Number of Shares Percent of Class
- ------------------------ ---------------- ----------------
Francis W. Murray 5,913,873 (1) 56%
James J. Murray - -
Walter ReDavid - -
Robert J. Quigley 179,169 (2) 1.7%
William H. Warner 123,124 (3) 1.2%
Francis X. Murray 90,000 (4) .9%
All executive officers and
directors as a group 6,306,166 (4) 60%
(6 persons)
- --------------------------------------------------------------------------------
(1) Includes 1,024,143 shares issuable upon the exercise of stock options.
(2) Includes 100,000 shares of common stock issuabl upon the exercise of
options. Includes 75,000 shares issuable upon the exercise of stock options
and 48,000 shares issuable to
(3) Mr.Warner provided he agrees to accept such shares as payment of
obligations due him by the Company.
(4) Consists of shares of common stock issuable upo the exercise of options.
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, 2005:
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 2,635,643 3.00 1,000,000
security holders
--------------------- ------------------- -----------------------
Total 2,635,643 3.00 1,000,000
===================== =================== =======================
Set forth below is a summary of the material terms of stock opns granted
by the Company which were not approved by the Company's security holders.
In Fiscal 2005 the Board of Directors awarded Mr. Francis W. Murray a
non-qualified option to purchase 724,143 shares at $2.00 per share for
compensation of tax consequences incurred by Mr. Murray as a result of the PDS
Transactions and it awarded Francis X. Murray non-qualified options to purchase
30,000 shares at $2.00 per share as part of his employment contract extension
and options to purchase 60,000 shares at $2.00 per share under the 2005 Stock
Option and Award Plan it had adopted. The 2005 Stock Option and Award Plan is
subject to shareholder approval which must be obtained prior to June 26, 2006.
Additionally during the year the Board of Directors approved the issuance
options to purchase 210,000 shares also at $2.00 per share to various employees
under the 2005 Stock Option and Award Plan, subject to stockholder approval
which must be obtained prior to June 26, 2006.
Pursuant to a Non-qualified Stock Option Agreement dated January 7, 2002
between the Company and
76
William H. Warner, the Company granted an option to purchase 75,000 shares of
Common Stock to Mr. Warner, 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 only by the optionee. The
options remain exercisable following termination of employment, until their
scheduled expiration date.
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.
In connection with other prior agreements with former officers, directors
and employees, the Company granted non-qualified options to purchase 1,061,500
shares of Common Stock at prices that range from $.20 to $5.00 per share. All
the options were granted at prices equal to at least 100% of the fair market
value of the stock at the time of the grant. All the options vested immediately
and expire ten years after thier issuance. The options expire at various times
from January 2006 to October 2010.
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.
Summary of 2005 Stock Option and Award Plan
On June 27, 2005, the Board adopted a 2005 Stock Option and Award Plan
(the "Plan") and granted stock options to a number of employees for the purchase
of 300,000 shares of our common stock at $2 per share. The Plan provides that
all options will terminate, however, if the Plan is not approved by action of
our shareholders within one year (by June 26, 2006). The Plan provides for the
grant of stock options, including incentive stock options and non-qualified
stock options, and awards of common stock to employees, directors, consultants
and advisors of the Company and of the Company's affiliates. The options are
intended to provide such persons with additional incentive to devote themselves
to the future success of the Company, and to improve the ability of the Company
and its affiliates to attract, retain and motivate officers, employees,
directors, consultants and advisors.
Under the Plan, either the Board of Directors or a committee of the Board
charged with administering the Plan (the "Committee") may award shares of common
stock and may grant options to purchase shares of common stock. The Board or
committee will determine the number of shares subject to each award or option,
the conditions and restrictions applicable to shares awarded under the Plan, and
the manner and time of a stock option's exercise and the exercise price per
Share of stock subject to the option, all of which will be specified in the
applicable award agreement or option certificate. Options may be either
incentive stock options or non-qualified stock options for federal income tax
purposes. The options will be non-qualified options unless specifically
designated as an incentive stock option at the time of the grant. The Board or
Committee has the discretion to determine which type of option to grant.
Incentive options may be exercised by written notice to the Company, and
may not be exercised more than 90 days after an employee's employment terminates
for any reason other than death, retirement with the consent of the Board or in
accordance with a tax-qualified retirement plan. In the event of termination of
employment resulting from death, or retirement with the consent of the Board or
in accordance with a retirement plan, the incentive options may be exercised for
one year after the employee leaves the Company. The term of an option generally
may not exceed 10 years. The term of an incentive stock option granted to a 10%
shareholder, however, may not exceed five years.
Incentive stock options generally may not have an exercise price less
than the fair market value of the Common Stock on the date of grant, except that
the exercise price of an incentive stock option granted to a 10% shareholder
shall be at least 110% of the fair market value of the Common stock on the date
of grant. In any one calendar year, the aggregate fair market value, determined
as of the date of grant, of shares for which any employee may be granted
incentive stock options that first become exercisable, may not exceed $100,000.
The option
77
exercise price is payable in cash, by certified or cashier's check, or at the
discretion of the Committee, in shares of common stock having an aggregate fair
market value on the date of exercise equal to the option exercise price.
Awards of stock granted under the Plan will be in writing and will state
the number of shares of common stock awarded and the name of the grantee. The
Board or Committee may also specify conditions under which the grantee must
convey to the Company the shares covered which apply to an award granted under
the Plan. The Board or Committee may at its discretion require that shares with
such conditions be held in an escrow account under the grantee's name.
Term of Plan: The Plan became effective on June 27, 2005, after it was
approved by the Board of Directors. It does not have a termination date.
Administration of Plan: The Plan will be administered by the Board of
Directors or a committee of the Board consisting of two or more directors. At
the discretion of the Board of Directors, a separate committee consisting of
non-employee directors will administer the Plan for any person who is an officer
or director of the company. Subject to the terms of the Plan, the administrator
of the Plan will have authority to, among other things: (1) select the
individuals to receive awards; (2) determine the timing, form amount, or value
and term of grants and awards; (3) determine the conditions and restrictions, if
any, subject to which grants and awards will be made and become payable under
the Plan; and (4) interpret the Plan.
Eligibility: All employees and directors of the Company and its
subsidiaries are eligible to receive options and awards of stock under the Plan.
Consultants and advisors are also eligible, provided they perform bona fide
services to the company unrelated to the sale of securities. The selection of
participants from eligible employees is within the discretion of the Board or
Committee. The Company estimates that there are currently four directors of the
Company, two executive officers who are not directors, and approximately 30
other key employees and consultants of the Company and its subsidiaries who
would be eligible to receive options or awards under the Plan.
Shares Subject to Plan: A total of 1,300,000 shares of common stock are
authorized for issuance under the Plan. If shares purchasable under an option
are not issued because the option lapses or terminates, or if restricted shares
awarded under the Plan are forfeited, such shares would again be available for
inclusion in future awards or options. If there is a stock split, stock
dividend, recapitalization or other relevant change affecting the Company's
shares, appropriate adjustments will be made in the number of shares that may be
issued or transferred in the future and in the number of shares and the prices
of all outstanding options granted before such events.
Transferability: Incentive stock options may not be transferred, except
by will or the laws of descent and distribution. During the lifetime of the
participant stock options are exercisable only by the participant. Non-qualified
stock options may be transferred to family members, entities for the benefit of
family members, and other persons determined by the Board or Committee, provided
that no consideration is given for the transfer and that the option terms remain
unchanged. If a participant dies, the unexercised portion of an incentive option
may be exercised by the participant's estate, heirs or beneficiaries within
12months after the participant's death or until earlier lapse of the option.
Change of Control: If, during the term of any option or award the Company
is merged into, consolidated with or acquired by another entity or the Company
reorganizes or liquidates, the Board or Committee, in its discretion, may
declare all outstanding options then held by participants to be vested and the
restrictions on awards of stock to lapse. The Board may also terminate all
unexercised options, provided the owners of the options first are given an
opportunity to exercise them. Finally, the Board may require that owners of
options and awards surrender them in exchange for their fair market value.
Amendment of the Plan: The plan may be amended by the Board of Directors,
but shareholder approval will be required for any amendment which changes the
class of eligible participants in the plan or increases the aggregate number of
shares of stock that may be issued under the plan. Shareholder approval is
explicitly not required for amendments to the Plan made to (a) comply with
revisions to Rule 16b-3 of the Exchange Act that become effective after the plan
becomes effective or (b) provide the security holder with exemption from
potential liability under Section 16(b) of the Exchange Act.
78
Federal Income Tax Consequences Relating to Awards and Options: The
following summarizes the current U.S. federal income tax consequences generally
arising with respect to awards and stock options under the Plan.
Incentive Stock Options. A participant who is granted an incentive stock
option does not realize any taxable income at the time of the grant or at the
time of exercise, but in some circumstances may be subject to an alternative
minimum tax as a result of the exercise. Similarly, we are not entitled to any
deduction at the time of grant or at the time of exercise. If the participant
makes no disposition of the shares acquired pursuant to an incentive stock
option before the later of two years from the date of grant and one year from
the date of exercise, any gain or loss recognized on a subsequent disposition of
the shares will be treated as a long-term capital gain or loss. Under these
circumstances, we will not be entitled to an deduction for federal income tax
purposes. If the participant fails to hold the shares for that period, the
disposal is treated as a disqualifying disposition. The gain on the disposition
is ordinary income to the participant to the extent of the difference between
the option price and the fair market value on the exercise date (or, under
certain circumstances, the excess of the amount realized on the disposition over
the adjusted basis of the shares). Any excess is long-term or short-term capital
gain, depending on the holding period. Under these circumstances and subject to
Section 162(m) of the Code (which Code Section prohibits us from claiming
deductions on our federal income tax returns for compensation in excess
of$1,000,000 paid for a given fiscal year to the chief executive officer and the
four other most highly compensated officers at the end of the fiscal year), we
will be entitled to a tax deduction equal to the ordinary income amount the
participant recognizes in a disqualifying disposition.
Restricted Stock. A participant who has been granted an award of
restricted shares of common stock will not realize taxable income at the time of
the grant, and we will not be entitled to a tax deduction at the time of the
grant, unless the participant makes an election to be taxed at the time of the
award. When the restrictions lapse, the participant will recognize taxable
income in an amount equal to the excess of the fair market value of the shares
at that time over the amount, if any, paid for the shares. We would be entitled
to a corresponding tax deduction. Dividends paid to the participant during the
restriction period will also be compensation income to the participant and
deductible as compensation expense by us. The holder of a restricted stock award
may elect to be taxed at the time of grant of the restricted stock award on the
market value of the shares, in which case we will be entitled to a deduction at
the same time and in the same amount, dividends paid to the participant during
the restriction period will be taxable as dividends to the participant and not
deductible by us and there will be no further federal income tax consequences
when the restrictions lapse. Subject to Section 162(m) of the Code, we may
deduct in connection with any award any taxes required by law to be withheld.
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.
In Fiscal 2003, the limited partnership's indebtedness to us, including
principal and accrued interest, in the amount of $929,541 was assumed by OC
Realty, LLC, a Florida limited liability company which is owned by Francis W.
Murray and which owns the second real estate project (Ocean Club) described
below. Such indebtedness was due December 31, 2004, but was extended by the
Board of Directors to December 31, 2007, and bears an interest rate of 6%.
In the second project, Mr. Murray (through OC Realty) 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. As of June 30,2005, we had lent $2,034,405 in total
to the project and we have accrued interest in the amount of $1,485,080 on the
loan. These loans bear interest at 12% and will be repayable out of OC Realty's
share of proceeds, after payment of bank debts, generated by the sale of
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 $14 million (at
present) and, second, construction
79
financing expected to amount to $25 to $30 million and third, any capital
invested by and fees payable to joint venture partners including OC Realty. OC
Realty's share of proceeds thereafter will range from 22.5% to 45%. We have
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 condominium units will be adequate to
meet its obligations and provide sufficient return to OC Realty with which to
pay OC Realty's debt to us.
As described in Item 1 of this Report ("Business - PDS Transactions"),
beginning on July 7, 2004, we entered into Sub-Bareboat Charters of the vessels
Palm Beach Princess and Big Easy with entities (Palm Beach Maritime Corporation
and Palm Beach Empress, Inc.) owned or controlled by our Chairman, Francis W.
Murray. Reference is made to the summaries of the PDS transactions set forth in
Item 1. Pursuant to our June 30, 2005 refinancing and restructuring (as loans)
of the PDS transactions, we now charter the vessels, Palm Beach Princess and Big
Easy directly from Cruise Holdings I and Cruise Holdings II, respectively, which
companies are owned by Palm Beach Maritime Corporation and Palm Beach Empress,
Inc. Pursuant to the new charters, we pay Cruise Holdings I and Cruise Holdings
II, as owners of the vessels, charter fees of $50,000 per month for the Palm
Beach Princess and $100,000 per month for the Big Easy, plus 1% of our gross
revenues from operation of those vessels. We have the right to purchase either
or both vessels, at our option, for $17.5 million in the case of the Palm Beach
Princess (representing its appraised value as of Januuary 12, 2004 and for fair
market value (to be determined by appraisal) in the case of the Big Easy. The
charters are treated as capital leases since, once we pay off the loans against
the Palm Beach Princess and Big Easy, we will be entitled to substantial credits
against the purchase prices of the vessels: a $14 million credit in the case of
the Palm Beach Princess and a $6 million credit in the case of the Big Easy,
representing the original principal amounts of the July 2004 sale - leaseback
transactions involving those vessels, as well as credits for our investment in
the net Ship Mortgage Obligation of approximately $7.2 million which can be
applied to the purchase price of either vessel, and a credit for the portions of
the costs of refurbishing and retrofitting the Big Easy which we paid, amounting
to approximately $3 million, that can be applied to the purchase price of the
Big Easy.
At a meeting in June 2005 the Board of Directors approved compensating
Messrs. F.W. Murray and F.X. Murray $43,500 each for their personal guarantees
which they were required to provide in order to complete the PDS loan on April
5, 2005. Messrs. Murray were required by PDS to personally guarantee the PDS
loan, the proceeds of which were used by ITG Vegas to obtain the release of the
Big Easy vessel from dry dock. The Board determined that a 1% guarantor
compensation percentage would be used and paid as a guarantee fee.
At its meeting on September 11, 2003 the Board of Directors authorized
the future grant of options to purchase an additional 20,000 shares of common
stock to Mr. F.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 were to be granted or issued
until the Bankruptcy Trustee was paid in full, at which time the Company was to
be authorized (but not obligated) to grant such options. Such action was taken
in order to compensate Mr. F.X. Murray for his having personally guaranteed a
loan of $300,000 for the Company and for his providing to the Bankruptcy Trustee
a personal guaranty for portions of the Company's obligations. In June 2005 the
Board of Directors approved replacing the authorized but ungranted options to
Mr. Murray with a cash payment of $.97 per option share, or $19,400, which
represented the difference between the original option price of $.50 and the
prior day's closing price on June 26, 2005 of $1.47.
From time to time Francis W. Murray has advanced funds to the Company to
meet its operating expenses. Mr. Murray is normally reimbursed directly by the
Company or through miscellaneous advances it may make on his behalf. During our
fourth quarter ended June 30, 2005, Mr. Murray or companies owned or controlled
by him made advances to the Company in the amount of approximately $2,150,000 to
fund the Company's working capital needs. Additionally, the Company has deferred
making payments to Mr. Murray or his companies, the majority of which were
during the last quarter, for charter hire fees on the Palm Beach Princess and
Big Easy vessels and for deferred salary. As of June 30, 2005, the total
advances and deferred payments due him were $2,983,272. The timing of the
repayment is unknown at this time. Approximately $1.7 million is due from the
parent company and could be repaid if it were to receive sufficient funds from
the sale of the Series B Preferred Stock. The balance is due from the ITG Vegas
and its subsidiaries and repayment is restricted by the PDS loan agreement until
such time as ITG Vegas achieves certain EBITDA levels. Interest to Mr. Murray is
not being recorded at this time.
80
At a meeting of the Board of Directors of the Company held on June 29,
2004 the board authorized compensating Francis W. Murray for tax consequences he
would incur as a result of the PDS Transactions. The amount and form of such
compensation was to be determined by the full board of directors when data as to
such tax consequences became available. At its meeting on June 27, 2005 the
Board of Directors determined that the tax effect of the transaction to Mr.
Murray totaled $1,064,500 and that he should be compensated in that regard by
granting him an option to purchase 724,143 shares at an exercise price of $2 per
share. The number of option shares was determined by dividing the $1,064,500 by
the closing stock price on June 27, 2005 of $1.47.
We employ 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 and horse related business. Mrs. Murray earns $60,000 per year in
addition to the regular employee benefits paid by the Company.
During the first quarter of Fiscal 2005, we re-entered the equine
business. In addition to the purchase of horses from outside parties, we
purchased horses, the majority being one and two year olds, from Francis W.
Murray at prices to be determined by an appraisal of their values. Payment for
such horses will only be made out of profits realized from the horses purchased
from Mr. Murray, if any. It is our plan to bring these horses into racing if we
consider them competitive following the training period, to take advantage of
the projected increase in purses as a result of the introduction of slot
machines in several state jurisdictions.
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,
---------------------------
2005 2004
---- ----
Audit fees excluding audit related fees $ 52,816 $ 63,925
Audit related fees 0 0
------------- ------------
Total audit and audit related fees 52,816 63,925
Tax related fees (1) 14,575 15,000
All other fees (2) 13,491 6,472
------------- ------------
Total fees $ 80,882 $ 85,397
============= ============
(1) Tax fees include tax compliance, planning, research and return
preparation services.
(2) All other fees consisted of fees for other accounting services.
Pre-Approved Policies and Procedures
The 2005 and 2004 audit services provided by Stockton Bates LLP were
approved by the Board of Directors as we do not currently have an audit
committee. As we do not have an audit committee, we have not implemented any
pre-approved policies and procedures related to the provision of audit and
non-audit services.
81
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# Restated Certificate of Incorporation of International
Thoroughbred Breeders, Inc.
3.2 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).
4.1# Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock of International Thoroughbred
Breeders, Inc., dated June 29, 2005.
10.1* 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)
10.2 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)
10.3 $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)
10.4 Security Agreement, dated as of November 29, 2000, by and among
Realen-Turnberry/Cherr 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)
10.5* 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)
10.6* 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)
10.7* Stock Option granted to Frank A. Leo on December 20, 1996.
10.8 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)
10.9 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)
82
Exhibit
Number Description
------ -----------
10.10 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)
10.11 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)
10.12 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)
10.13 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)
10.14 Master Lease Agreement between Royal Star Entertainment, LLC and
PDS Gaming Corporation, dated January 6, 2005. (incorporated by
reference to Exhibit 10.3 to the Registrant's Current Report on
Form 8-K dated January 5, 2005)
10.15 Lease Schedule No. 1 between Royal Star Entertainment, LLC and PDS
Gaming Corporation, dated January 6, 2005. (incorporated by
reference to Exhibit 10.4 to the Registrant's Current Report on
Form 8-K dated January 5, 2005)
10.16 Guaranty (Lease) by International Thoroughbred Breeders, Inc.
dated January 6, 2005. . (incorporated by reference to Exhibit
10.5 to the Registrant's Current Report on Form 8-K dated January
5, 2005)
10.17# International Thoroughbred Breeders, Inc. 2005 Stock Option and
Award Plan adopted by the Board of Directors on June 27, 2005.
10.18# Advisory Agreement dated June 30, 2005 between International
Thoroughbred Breeders, Inc. and MBC Global, LLC for financial
consulting services.
10.19# Amendment to the Advisory Agreement dated as of June 30, 2005
between International Thoroughbred Breeders, Inc. and MBC Global,
LLC, dated July 12, 2005.
10.20# Registration Rights Agreement entered into as of June 30, 2005 by
and among International Thoroughbred Breeders, Inc. and the
purchaser of the Company's Series B Convertible Preferred Stock.
10.21# Amended and Restated Bareboat Charter and Option to Purchase of
the Casino Cruise Ship, Palm Beach Princess entered into as of
July 1, 2005 by and among Cruise Holdings I, LLC, the owner of the
casino cruise ship Palm Beach Princess, Palm Beach Maritime
Corporation, Palm Beach Empress, Inc., ITG Vegas, Inc., as
charterer of the vessel, and ITG Palm Beach, LLC.
10.22# Amended and Restated Bareboat Charter and Option to Purchase of
the Casino Cruise Ship, Big Easy, entered into as of July 1, 2005
by and among Cruise Holdings II, LLC, the owner of the casino
cruise ship Big Easy, Palm Beach Empress, Inc., Palm Beach
Maritime Corporation, ITG Palm Beach, LLC, as charterer of the
vessel, and ITG Vegas, Inc.
10.23# Loan and Security Agreement dated as of June 30, 2005 between PDS
Gaming Corporation, Cruise Holdings I, LLC, Cruise Holdings II,
LLC, Royal Star Entertainment, LLC, Riviera Beach Entertainment,
LLC, ITG Vegas, Inc., ITG Palm Beach, LLC, as the Borrower, and
International Thoroughbred Breeders, Inc., Palm Beach Maritime
Corporation, Palm Beach Empress, Inc., International Thoroughbred
Gaming Development Corporation, as Guarantor, for a loan in the
amount of $29,313,888.96.
83
Exhibit
Number Description
------ -----------
10.24# Preferred Mortgage on the Casino Cruise Ship Royal Star, dated
June 30, 2005 by Royal Star Entertainment, LLC to PDS Gaming
Corporation.
10.25# Guaranty Agreement made by International Thoroughbred Breeders,
Inc. In favor of Palm Beach Empress, Inc. And Palm Beach Maritime
Corporation as of June 30, 2005 for payment of all charter
payments and expenses required to be paid by ITGV or ITGPB under
their respective charters.
10.26# Guaranty Agreement made by International Thoroughbred Breeders,
Inc., ITGDC, Palm Beach Empress, Inc. And Palm Beach Maritime
Corporation, jointly and severally in favor of PDS Gaming
Corporation as of June 30, 2005 for payment of all principal and
interest and other costs required to be paid by borrower pursuant
to the terms of the Loan Documents.
10.27# Promissory Note of Borrowers in favor of PDS Gaming Corporation
dated June 30, 2005 in the amount of $29,313,888.96
10.28# Placement Fee Agreement made on September 1, 2005 between
International Thoroughbred Breeders, Inc, ITG-Vegas. and PDS
Gaming Corporation for payment of a placement fee to PDS.
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 adopte
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, 2005
----------------------- and Chief Executive Officer
Francis W. Murray (Principal Executive Officer)
/s/ Francis W. Murray Chief Financial Officer October 13, 2005
---------------------- (Principal Financial and
Francis W. Murray Accounting Officer)
/s/ James J. Murray Director October 13, 2005
-----------------------
James J. Murray
/s/ Robert J. Quigley Director October 13, 2005
-----------------------
Robert J. Quigley
/s/ Walter ReDavid Director October 13, 2005
-----------------------
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, 2005
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, 2005
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, 2005, 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, 2005
Name: Francis W. Murray
Title: Chief Executive Officer and Chief
Financial Officer
88
Exhibit
Number Description
------ -----------
3.1# Restated Certificate of Incorporation of International
Thoroughbred Breeders, Inc.
3.2 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).
4.1# Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock of International Thoroughbred
Breeders, Inc., dated June 29, 2005.
10.1* 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)
10.2 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)
10.3 $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)
10.4 Security Agreement, dated as of November 29, 2000, by and among
Realen-Turnberry/Cherr 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)
10.5* 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)
10.6* 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)
10.7* Stock Option granted to Frank A. Leo on December 20, 1996.
10.8 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)
10.9 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)
10.10 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)
10.11 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)
10.12 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)
10.13 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)
10.14 Master Lease Agreement between Royal Star Entertainment, LLC and
PDS Gaming Corporation, dated January 6, 2005. (incorporated by
reference to Exhibit 10.3 to the Registrant's Current Report on
Form 8-K dated January 5, 2005)
89
Exhibit
Number Description
------ -----------
10.15 Lease Schedule No. 1 between Royal Star Entertainment, LLC and PDS
Gaming Corporation, dated January 6, 2005. (incorporated by
reference to Exhibit 10.4 to the Registrant's Current Report on
Form 8-K dated January 5, 2005)
10.16 Guaranty (Lease) by International Thoroughbred Breeders, Inc.
dated January 6, 2005. . (incorporated by reference to Exhibit
10.5 to the Registrant's Current Report on Form 8-K dated January
5, 2005)
10.17# International Thoroughbred Breeders, Inc. 2005 Stock Option and
Award Plan adopted by the Board of Directors on June 27, 2005.
10.18# Advisory Agreement dated June 30, 2005 between International
Thoroughbred Breeders, Inc. and MBC Global, LLC for financial
consulting services.
10.19# Amendment to the Advisory Agreement dated as of June 30, 2005
between International Thoroughbred Breeders, Inc. and MBC Global,
LLC, dated July 12, 2005.
10.20# Registration Rights Agreement entered into as of June 30, 2005 by
and among International Thoroughbred Breeders, Inc. and the
purchaser of the Company's Series B Convertible Preferred Stock.
10.21# Amended and Restated Bareboat Charter and Option to Purchase of
the Casino Cruise Ship, Palm Beach Princess entered into as of
July 1, 2005 by and among Cruise Holdings I, LLC, the owner of the
casino cruise ship Palm Beach Princess, Palm Beach Maritime
Corporation, Palm Beach Empress, Inc., ITG Vegas, Inc., as
charterer of the vessel, and ITG Palm Beach, LLC.
10.22# Amended and Restated Bareboat Charter and Option to Purchase of
the Casino Cruise Ship, Big Easy, entered into as of July 1, 2005
by and among Cruise Holdings II, LLC, the owner of the casino
cruise ship Big Easy, Palm Beach Empress, Inc., Palm Beach
Maritime Corporation, ITG Palm Beach, LLC, as charterer of the
vessel, and ITG Vegas, Inc.
10.23# Loan and Security Agreement dated as of June 30, 2005 between PDS
Gaming Corporation, Cruise Holdings I, LLC, Cruise Holdings II,
LLC, Royal Star Entertainment, LLC, Riviera Beach Entertainment,
LLC, ITG Vegas, Inc., ITG Palm Beach, LLC, as the Borrower, and
International Thoroughbred Breeders, Inc., Palm Beach Maritime
Corporation, Palm Beach Empress, Inc., International Thoroughbred
Gaming Development Corporation, as Guarantor, for a loan in the
amount of $29,313,888.96.
10.24# Preferred Mortgage on the Casino Cruise Ship Royal Star, dated
June 30, 2005 by Royal Star Entertainment, LLC to PDS Gaming
Corporation.
10.25# Guaranty Agreement made by International Thoroughbred Breeders,
Inc. In favor of Palm Beach Empress, Inc. And Palm Beach Maritime
Corporation as of June 30, 2005 for payment of all charter
payments and expenses required to be paid by ITGV or ITGPB under
their respective charters.
10.26# Guaranty Agreement made by International Thoroughbred Breeders,
Inc., ITGDC, Palm Beach Empress, Inc. And Palm Beach Maritime
Corporation, jointly and severally in favor of PDS Gaming
Corporation as of June 30, 2005 for payment of all principal and
interest and other costs required to be paid by borrower pursuant
to the terms of the Loan Documents.
10.27# Promissory Note of Borrowers in favor of PDS Gaming Corporation
dated June 30, 2005 in the amount of $29,313,888.96
10.28# Placement Fee Agreement made on September 1, 2005 between
International Thoroughbred Breeders, Inc, ITG-Vegas. and PDS
Gaming Corporation for payment of a placement fee to PDS.
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.
90
Exhibit
Number Description
------ -----------
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 adopte
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-----------------------------------------------
* Constitutes a management contract or compensation plan.
# As filed as an exhibit herewith
91
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
ITG Palm Beach, LLC Delaware
Cruise Entertainment, LLC Delaware
92