FORM 10-Q/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2006
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-9624
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International Thoroughbred Breeders, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2332039
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 1300, 1105 N. Market Street, Wilmington, Delaware 19899-8985
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(Address of principal executive offices) (Zip Code)
(302) 427-7599
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes No X
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Indicate by check as to whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2).
Yes No X
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the latest practicable date.
Class Outstanding at August 19, 2006
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Common Stock, $ 2.00 par value 11,367,487 Shares
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
FORM 10-Q/A
AMENDMENT NO. 1
QUARTERLY REPORT
for the Six Months ended June 30, 2006
(Unaudited)
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A amends the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2006 as filed by the
Registrant on August 21, 2006 and is being filed to amend Footnote 4-J and the
Liquidity and Capital Resource section of Management's Discussion and Analysis
of Financial Condition and Results of Operations.
This amendment is being issued to correct a typographic error contained in
Footnote 4-J and in the Liquidity and Capital Resource section of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
In the first sentence of the sixth paragraph of Footnote 4-J and in the
first sentence of the eleventh paragraph of the Liquidity and Capital Resource
section on page 31 of Management's Discussion and Analysis of Financial
Condition and Results of Operations, it should be stated that "After expiration
of the forbearance period on August 29, 2006, we do not expect to be able to
make our monthly loan and lease payments unless, as a result of closing an
Alternative Transaction, our outstanding loan and lease payments are
substantially reduced."
No attempt has been made to this Form 10-Q/A to modify or update other
disclosures presented in the original report on Form 10-Q The Form 10-Q/A does
not reflect events occurring after the filing of the Form 10-Q or modify or
update those disclosures.
Table of Contents
Page No
PART I. FINANCIAL INFORMATION
Notes to Consolidated Financial Statements
Footnote 4-J.......................................................1-2
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........3-5
Part II. OTHER INFORMATION
Item 6. Exhibits ....................................................6
SIGNATURES...................................................................7
CERTIFICATIONS...............................................................8
FORM 10-Q/A
AMENDMENT NO. 1
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) (J) First Amended and Restated Forbearance Agreement
On July 14, 2006, International Thoroughbred Breeders, Inc. and certain of
its subsidiaries (collectively, the "Company") and certain other companies owned
or controlled by Francis W. Murray, our CEO (all being the same companies which
are parties to the Loan and Security Agreement dated as of June 30, 2005, with
PDS Gaming Corporation and being hereinafter collectively called the "Credit
Parties"), entered into a First Amended and Restated Forbearance Agreement (the
"New Agreement"). The New Agreement, which was effective June 1, 2006, amends
and restates the original Forbearance Agreement among the same parties dated
March 22, 2006, which had expired on May 31, 2006. Under the New Agreement, PDS
Gaming Corporation ("PDS") agreed, as lender and as lessor, that, as long as no
additional defaults occur under the New Agreement or under our loan and security
agreements or equipment leases with PDS, it will forbear, for a period expiring
August 29, 2006, from accelerating payment and enforcing its rights and remedies
against the Credit Parties due to the specified payment defaults and covenant
defaults presently existing on our part under our loan documents and equipment
leases. Notwithstanding expiration of the original Forbearance Agreement, PDS
has not accelerated payment of the balance of our indebtedness.
Also under the New Agreement, PDS deferred payment of monthly principal and
interest payments under our loan agreement and monthly rental payments under our
equipment leases which otherwise would become due during the forbearance period
ending August 29, 2006. In consideration of PDS' agreements in the New
Agreement, we agreed to pay a forbearance fee of $173,687 to PDS at maturity.
The Company also agreed to pay, as damages to PDS on account of default
interest that it in turn is required to pay to its financier, additional
interest at a rate of 2-1/2% per annum above the interest rate already being
charged to us on our principal and delinquent interest payments under our loan
agreement with PDS. Therefore, the effective rate of interest we are required to
pay on the unpaid principal balance plus delinquent interest payments which are
being capitalized totaling $33,238,091 as of June 30, 2006 is approximately 22%
per annum. As of June 30, 2006, the amount of such additional interest which we
agreed to pay to PDS is $526,565.
Under the New Agreement, the Credit Parties have agreed to retain a
financial advisor to analyze and pursue strategic alternatives, including the
sale of assets, and to retain a broker in connection with such asset sales, in
order to reduce indebtedness. The New Agreement requires the Credit Parties to
sell one or more assets with closing date(s) targeted to occur no later than
August 29, 2006, or otherwise refinance, and pay in full our obligations to PDS
by the end of the forbearance period, August 29, 2006.
Also pursuant to the New Agreement, the EBITDA requirements applicable to
the Company will be waived for the 12 month periods ending July 2, July 30 and
August 27, 2006. All disbursements by our operating subsidiary, ITG Vegas, Inc.,
will require written approval by an assigned Crisis Manager, and disbursements
may only be made in accordance with an approved budget as submitted by the
Company and approved by PDS.
1
FORM 10-Q/A
AMENDMENT NO. 1
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
After expiration of the forbearance period on August 29, 2006, we do not
expect to be able to make our monthly loan and lease payments unless, as a
result of closing an Alternative Transaction, our outstanding loan and lease
payments are substantially reduced. We also do not expect that we will be able
to consummate the sale of any of our vessels, the Original Cherry Hill Note or
our operating business before the expiration of the forbearance period on August
29, 2006 and will seek to negotiate a further amendment to the forbearance
agreement giving us additional time to consummate any such transactions based on
circumstance existing on August 29, 2006. No assurance can be given that PDS
will be willing to grant any further extension of time or otherwise agree to
forbear from exercising rights or remedies it may have due to our defaults.
2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
Our cash flow from operations is primarily dependent upon the cash flows
from ITG Vegas, which operates the vessel, M/V Palm Beach Princess. During the
six months ended June 30, 2006, the Palm Beach Princess operations generated
approximately $3.9 million of cash (which amount was only achieved by the
deferral of $2 million of interest payments due) which was insufficient for our
consolidated needs, thus we had to rely on other adjustments in our operations
to meet our cash requirements.
ITG Vegas' cash flow from operations is seasonal. The period from January 1
to June 30 has been a period of increased activity and revenues. The period July
1 to December 31 is a seasonably slow period for vessel operations and a period
during which we have suffered from hurricanes interrupting our business.
Therefore, we normally schedule dry dock or wet dock vessel work during this
period, which further negatively effects our operations during this six month
period. Many of ITG Vegas' operating costs, including leasing and charter fees,
fuel costs and wages, are fixed and cannot be reduced when passenger counts
decrease.
During the past few fiscal quarters, we extended the terms of our payables
and as a result, our accounts payable and accrued expenses exceeded our cash by
approximately $12 million as of June 30, 2006. We continued to defer payments on
vessel and equipment leases, on notes payable and charter hire fees and continue
to defer the salary of our Chairman.
Our cash flows were negatively impacted by the delay in putting the Big
Easy in full service, caused by delays in obtaining certification for passenger
operations pursuant to the United States Coast Guard's Alternative Compliance
Program. The costs associated with refurbishing and retrofitting the Big Easy
for placing it in service increased substantially due to upgrades to the vessel,
expansion of our Mardi Gras- theme build out, and improvements required by the
Coast Guard, further depleting our working capital from our original estimate
and required us to borrow additional funds which increased our interest expense.
These borrowings will continue to adversely affect our cash flows in the future.
More than 150 crew members and other employees were hired and trained during
this period and employees who normally worked exclusively for the Palm Beach
Princess spent time completing assignments for the Big Easy, putting a severe
drain on our operational efforts and our cash flow during this period.
On November 12, 2005 we placed the Big Easy vessel into limited scheduled
service from the Port of Palm Beach, Florida. The vessel received Coast Guard
approval to operate on October 11, 2005 but because of the continuing effects of
hurricane Wilma, inclement weather and rough seas, mechanical problems and our
inability to meet the minimum employee counts per Coast Guard regulations, we
did not begin regular, limited operations until mid November. The Big Easy did
not meet our expectations and with its poor performance together with continuing
Coast Guard licensing difficulties we were forced to remove the Big Easy from
service on February 1, 2006 in order to conserve working capital.
During the six months ended June 30, 2006, the operating loss for the Big
Easy for January 2006 and the carrying costs for the remaining five months were
$3.55 million before interest expense. We expect that future carrying costs
during the wet dock storage will be approximately $325,000 per month before
interest expense.
During our 2004 fiscal year, we 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. The vessel had been placed in wet storage and delays in commencing the
Royal Star operations have and will continue to adversely affect our cash flows
3
because of the continuing costs of carrying the vessel. During the six months
ending June 30, 2006, carrying costs for the Royal Star vessel and the gaming
equipment leases were approximately $900,000 before interest expense.
Our debt to PDS Gaming for the vessel leases was $29.3 million on June 30,
2005, with interest rates ranging from approximately 15.3% to 20%. We have not
made the required interest and principal payments since December 1, 2005 and the
PDS loan balances are approximately $33.8 million as of June 30, 2006 due to the
accrued interest accumulating at an interest default rate of an additional 2.5%
and fees for the Forbearance Agreements. We borrowed and additional $535,744 to
make the December 2005 interest payment. We did not make the required debt
service payments or the equipment lease payments to PDS from January through
June 2006. On June 1, 2006 we entered into the First Amended and Restated
Forbearance Agreement with PDS which will defer any payments due them until
August 29, 2006.
The new agreement requires us to sell the Big Easy vessel, the Royal Star
vessel and the $10 million Original Cherry Hill Note with a closing date
targeted to occur no later than August 29, 2006. While proceeding toward sales
of such assets, we also are required to retain a financial adviser to sell the
Palm Beach Princess vessel and our casino cruise business operating that vessel,
or otherwise refinance and pay in full our obligations to PDS, by the end of the
forbearance period, August 29, 2006. In that regard, (a) we were required to
provide to PDS, on or before July 28, 2006, an offering memorandum prepared by a
financial adviser and designed to seek the sale or refinancing of the Palm Beach
Princess assets and business; (b) not later than August 2, 2006 we were to
deliver the offering memorandum and all other relevant information to at least
15 third party lenders or third party purchasers identified by us as being
reasonably likely lenders or purchaser; and (c) no later than August 14, 2006,
we were required to have a written term sheet from a third party lender or
purchaser for the sale or refinancing of the Palm Beach Princess assets and
business. We do not believe that such time schedule is realistic and we are not
able to meet such time deadlines. Notwithstanding such provisions and others
which we may not be able to comply with under the terms of the new agreement, we
agreed to enter into the new agreement and make additional payments to PDS of a
forbearance fee of $173,687 and an additional 2.5% per annum default interest,
under duress, since we were faced with PDS' threats of imminent foreclosure on
substantially all of our assets.
Under the new agreement, PDS may elect to extend the deadlines provided in
such agreement for the sale of collateral after its due consideration of, among
other things, (a) purchase offers received from the third parties with respect
to the sale of the Big Easy, Royal Star or Cherry Hill Note, (b) the range of
values proposed by brokers and financial advisers, (c) the timing of such sales,
and (d) the net cash proceeds realizable from any alternative transaction to be
paid in reduction of our obligations to PDS.
After expiration of the forbearance period on August 29, 2006, we do not
expect to be able to make our monthly loan and lease payments unless, as a
result of closing an Alternative Transaction, our outstanding loan and lease
payments are substantially reduced. We also do not expect that we will be able
to consummate the sale of any of our vessels, the Original Cherry Hill Note or
our operating business before the expiration of the forbearance period on August
29, 2006 and will seek to negotiate a further amendment to the forbearance
agreement giving us additional time to consummate any such transactions based on
circumstance existing on August 29, 2006. No assurance can be given that PDS
will be willing to grant any further extension of time or otherwise agree to
forbear from exercising rights or remedies it may have due to our defaults.
Additionally the EBITDA requirements applicable to the Company will be
waived for the 12 month periods ending July 2, July 30, August 27, 2006 and
disbursements by our operating subsidiary, ITG Vegas, Inc., will require written
approval by an assigned crisis manager, and disbursements may only be made in
accordance with an approved budget as submitted by the us and approved by PDS.
4
The Company is seeking refinancing, has liquidated its equine holdings and
may be forced to sell other Company assets. We are also exploring opportunities
to profitably deploy the Big Easy or the sale of this vessel. Absent asset
sales, refinancing or the profitable deployment of the Big Easy, we will not be
able to make the debt service payments beginning on September 1, 2006. No
assurances can be given that the Company will be successful in these endeavors
prior to September 1, 2006 or thereafter.
Our working capital as of June 30, 2006 was a negative ($45.6 million). Our
cash flow and negative working capital circumstances worsened during the six
months ended June 30, 2006 due in part to:
o classifying all the debt due to our primary lender as current debt,
o operating losses suffered by the Big Easy from January 1st to January
31st due to her limited sailing schedule in which scheduled cruises
were cancelled due to Coast Guard restrictions, mechanical problems,
high seas, or scheduling conflicts with the Palm Beach Princess.
o costs to carry the Big Easy after the vessel was taken out of service
on February 1, 2006,
o costs to carry the Royal Star,
o expenses paid for costs of the Holding Company and other developmental
costs and
o a decrease in the net income before depreciation and taxes of the Palm
Beach Princess of approximately $1.34 million as compared to the
corresponding six month period of last year.
The following table summarizes commitments on non-cancelable contracts and
leases as of June 30, 2006.
Twelve Month Period Ended June 30,
--------------------------------------------------- There-
2007 2008 2009 2010 after Total
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Capital Leases:
P.B. Princess - Principal & Interest $ 21,080,158 $ - $ - $ - $ - $ 21,080,158
Bare Boat Charter - Related Party 960,000 960,000 960,000 80,000 - 2,960,000
Big Easy - Principal & Interest 20,325,907 - - - - 20,325,907
Bare Boat Charter - Related Party 1,200,000 1,200,000 1,200,000 100,000 - 3,700,000
Notes and Mortgages:
Principal & Interest 6,094,364 192,235 3,965 - - 6,290,564
Interest Only 173,135 173,135
Deferred Interest Payments 600,000 600,000 450,000 - - 1,650,000
Operating Leases:
Casino Equipment 3,201,719 572,110 681,820 - - 4,455,649
Administrative & Office 995,863 120,503 2,028 2,873 - 1,121,267
Purchase Obligations 345,890 45,056 10,592 - - 401,538
----------- ---------- ---------- --------- -------- -----------
Total $ 54,977,036 $ 3,689,904 $ 3,308,405 $ 182,873 $ 0 $ 62,158,218
=========== ========== ========== ========= ======== ===========
5
ITEM 6. EXHIBITS
Exhibit Description of Exhibit
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31.1 CEO Certification pursuant to rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934
31.2 CFO Certification pursuant to rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934
32 CEO & CFO Certification pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
6
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
August 22, 2006 /s/Francis W. Murray
----------------------------------------------------
Francis W. Murray, President, Chief Executive Officer and
Chief Financial Officer
7
Exhibit 31.1
CEO CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Francis W. Murray, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of International
Thoroughbred Breeders;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: August 22, 2006
/s/Francis W. Murray
----------------------------------------------------
Francis W. Murray, President, Chief Executive Officer and
Chief Financial Officer
8
Exhibit 31.2
CFO CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Francis W. Murray, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of International
Thoroughbred Breeders;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: August 22, 2006
/s/Francis W. Murray
----------------------------------------------------
Francis W. Murray, President, Chief Executive Officer and
Chief Financial Officer
9
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q/A of
International Thoroughbred Breeders, Inc. (the "Company") for the three and six
months ended June 30, 2006 as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), I, Francis W. Murray, Chief Financial Officer
of the Company, hereby certify pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of
my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Francis W. Murray
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Name: Francis W. Murray
Title: Chief Financial Officer
August 22, 2006
10