SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K
For annual and transition reports
pursuant to sections 13 or 15(d) of the
Securities Exchange Act of 1934
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-9624
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2332039
----------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
Suite 1300, 1105 N. Market Street, Wilmington, Delaware 19899-8985
------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(302) 427-7599
----------------------------------------------------
(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, 2006 was approximately
$383,000. 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 March 1, 2007, there were 11,367,487 outstanding shares of the
registrant's common stock.
TABLE OF CONTENTS
PART I
------
Item 1. Business 2
Item 1A. Risk Factors 7
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
-------
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters 14
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 38
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 68
Item 9A. Controls and Procedures 68
Item 9B. Other Information 68
PART III
--------
Item 10. Directors and Executive Officers of the Registrant 69
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 77
Item 14. Principal Accountant Fees and Services 79
PART IV
-------
Item 15. Exhibits and Financial Statement Schedules 79
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 future effects from our filing for Chapter 11 protection which
occurred between December 4, 2006 and December 7, 2006;
o the potential adverse impact of our Chapter 11 filing on our
operation, management and employees, and the risks associated with
operating businesses under Chapter 11 protection;
o our ability to develop, confirm and consummate a Chapter 11 plan of
reorganization;
o our ability to reduce our overall leveraged position;
o customer and vendor response to our Chapter 11 filing;
o limited access to capital resources;
o general economic and business conditions affecting the tourism
business in Florida;
o increased competition from new and existing forms of gaming;
o our ability to sell or reposition the Big Easy and the Royal Star on a
timely and cost effective manner in the future, or as an alternative,
sub charter the vessels to other parties;
o changes in laws regulating the gaming industry;
o fluctuations in quarterly operating results as a result of seasonal
and weather considerations;
o events directly or indirectly relating to our business causing our
stock price to be volatile; and
o the vessels we charter and the Royal Star are subject to the
provisions of the International Convention on Safety of Life at Sea
amended ("SOLAS 74"), which may require substantial capital expenses
in the future.
1
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
PART I
Item 1. Business.
Overview
In April 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. After
retrofitting and refurbishing the Big Easy, a second gaming vessel, we initially
placed into service on October 18, 2005, from the Port of Palm Beach Florida. We
did not commence regular (although limited) operations until November 12, 2005
and because we did not meet our expectations on February 1, 2006 we suspended
operations of the Big Easy.
International Thoroughbred Breeders, Inc., a Delaware corporation ("ITB" or
the "Company"), was incorporated on October 31, 1980. Until January 1999, we
were primarily engaged in the ownership and operation of standardbred and
thoroughbred racetracks in New Jersey. During the following two years, our focus
concentrated upon working out our debt problems by selling our real estate
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
remaining race track property and property in Las Vegas, Nevada and paid our
indebtedness in full.
Chapter 11 Proceedings
Between December 4, 2006 and December 7, 2006, the Company and six of its
subsidiaries, herein referred to as the Debtors, along with four companies owned
or controlled by our principal stockholder and Chairman of the Board, filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code in the U.S. Bankruptcy Court for the Southern District of Florida (Palm
Beach Division) (the "Chapter 11 Cases"). These cases were consolidated for the
purpose of joint administration and were assigned case number 06-16350-BKC-PGH.
We filed the Chapter 11 Case as a result of difficulties generating sufficient
cash flow from operations to meet our financial obligations under the Promissory
Notes and equipment leases with PDS Gaming Corporation after expiration of the
Forbearance Agreements.
Under Chapter 11, the Company is operating its businesses as a
debtor-in-possession ("DIP") under court protection from creditors and
claimants. Since the Chapter 11 filing, all orders sufficient to enable the
Company to conduct normal business activities, have been entered by the
Bankruptcy Court. While the Company is subject to Chapter 11, all transactions
not in the ordinary course of business require the prior approval of the
Bankruptcy Court.
As a consequence of the Chapter 11 filing, pending litigation against the
Company is generally stayed, and no party may take any action to collect its
pre-petition claims except pursuant to order of the Bankruptcy Court. April 18,
2007 was the last date by which holders of pre-filing date claims against the
Debtors could file such claims. Any holder of a claim that was required to file
such claim and did not do so may be barred from asserting such claim against the
Debtors and, accordingly, may not be able to participate in any distribution on
account of such claim. Differences between claim amounts identified by the
Debtors and claims filed by claimants will be investigated and resolved in
connection with the Debtors' claims resolution process, and only holders of
claims that are ultimately allowed for purposes of Chapter 11 case will be
entitled to distribution. The Company has not yet completed its analysis of all
the proofs of claim. Since the treatment, including payment, of allowed claims
is subject to a confirmed plan of reorganization, the ultimate distribution with
respect to allowed claims is not presently ascertainable.
Although we filed a timely motion to extend the exclusive period for the
Debtors to file a plan(s) of reorganization, our largest secured lender, PDS
Gaming Corporation, filed a motion on April 11, 2006 objecting to the proposed
extension. If the exclusivity period in not extended, other parties in interest,
including the Creditor's Committee, the secured lender or other creditors could
file a plan of reorganization.
Recent Developments
During the quarter ended March 31, 2007 passenger counts and revenues at
the Company's Palm Beach Princess operation have declined approximately 17% from
the comparative quarter of 2006. The Company attributes these declines to a
decrease in the marketing and advertising in the current quarter due to our cash
shortages, the effect of our bankruptcy filing on our customers and increased
competition from slot machines placed at racetracks in Broward County and
another day cruise casino vessel operating from the Port of Palm Beach since
January 15, 2007.
We anticipate receiving a commitment for a secured loan from a financial
institution in order to fund the majority of the proceeds necessary to create a
new special purpose subsidiary to own and operate the Palm Beach Princess
business. We anticipate that the commitment will be subject to bankruptcy court
approval, an additional equity infusion from us or a third-party and
satisfactory loan documentation. Proceeds from the financing will be
2
used to pay existing creditors and provide working capital to the Palm Beach
Princess business.
We are in the process of negotiating a series of transactions that will
allow for the redeployment of the Big Easy to a foreign jurisdiction. We
anticipate receiving a term sheet for a secured loan from a financial
institution in order to fund a portion of the proceeds necessary to fund a
special purpose affiliate of the company to own and operate the Big Easy in this
foreign location. We anticipate that the term sheet will be subject to an
additional equity investment from a third-party, successful negotiation of
operating agreements and satisfactory loan documentation. Closing of the
transactions will also be subject to bankruptcy court approval. Proceeds from
the transaction will be used to pay existing creditors and provide working
capital, including funding start up and relocation expenses, to the Big Easy
business. No assurances can be given that we will be successful in these
negotiations
Our Gaming Operations
The Palm Beach Princess
We operate the M/V Palm Beach Princess for fourteen cruises weekly,
consisting of a daytime and an evening cruise each day. Each cruise is of five
to six hours in duration. During each cruise, the M/V Palm Beach Princess offers
a range of amenities and services to her passengers, including a full casino
while outside Florida's 3- mile territorial waters limit, sit-down buffet
dining, live musical shows, discotheque, bars and lounges, and sundeck. The
casino occupies 15,000 square feet aboard the ship and is equipped with
approximately 425 slot machines, all major table games, including blackjack,
dice, roulette and poker, and a sports wagering book. The vessel 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 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.
The Big Easy
The Big Easy is 201 feet long and has a passenger capacity of approximately
1,100 persons for coastal voyages, and complies with the standards of the United
States Coast Guard regulations as applicable to ships of its class. It is
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
occupies approximately 30,000 square feet. The vessel contains slot machines and
major table games, dining, a sports wagering book, simulcasting, and multiple
bars and lounges. As with the M/V Palm Beach Princess, gaming is permitted only
outside of Florida's 3-mile territorial waters limit.
The United States Coast Guard issued the Big Easy her Certificate of
Inspection on October 11, 2005, following an extensive and unexpected delay in
receiving such certification. The vessel's first official cruise to
international waters was October 18, 2005. Due to the approaching Hurricane
Wilma, the vessel was ordered out of the Port for safe haven following her
afternoon cruise on October 19, 2005. Hurricane Wilma struck Florida on October
24, 2005. Due to the adverse effects of Hurricane Wilma, the Big Easy was unable
to sail commercially until November 6, 2005. The unexpected delays in receiving
the vessel's Certificate of Inspection and the local area damage caused by
Hurricane Wilma immediately following the maiden voyage had a compounding,
adverse effect on the Company's ability to retain personnel. As a result, the
Company experienced greater-than-normal attrition of Big Easy personnel,
particularly of those who carried Coast Guard-issued Merchant Marine Cards, also
known as z-cards, which are issued by Coast Guard and serve as required
documentation for those working on US-flagged vessels to fill Coast
Guard-mandated muster station requirements. As the number of Merchant Marine
Card personnel became increasingly inadequate, it became increasingly difficult
for management to meet muster station requirements, often forcing the
cancellation of many sailings, particularly in December and January. The Coast
Guard stopped issuing Merchant Marine Cards suddenly and unexpectedly sometime
in October, 2005. Sea conditions in November and December were generally
unfavorable for commercial sailing and were a contributing factor to several
missed sailings. As a result of these numerous challenges, the vessel was able
to make only nineteen sailings in November 2005, twenty-four sailings in
December 2005 and eight sailings in January 2006. On January 31, 2006, the Coast
Guard denied the Company's request to provide an extension to complete certain
mandated maintenance which was completed shortly thereafter and removed the
vessel's Certificate of Inspection. On January 31, 2006, approximately one
hundred Coast Guard Merchant Marine Card applications relating to the Big Easy
remained unprocessed by the Coast Guard twelve weeks or longer.
We were having challenges attracting customers to the Big Easy given her
inconsistent schedule of sailings. The initial delay in receiving a Certificate
of Inspection and subsequent inconsistencies in scheduling caused significant
negative cash flow and made advertising and promotional efforts difficult from
both a financial and practical planning perspective. The lack of a consistent
commercial service schedule inhibited customer support and resulted in
suspending the Big Easy operations indefinitely. Currently the Big Easy is in
wet dock storage.
The Royal Star
During our 2004 fiscal year we purchased a third vessel, the M/V Royal
Star. The Royal Star is currently in wet dock storage and we are limited by our
negative cash position in making any further improvements on the vessel. In the
past we have explored possible locations from which to potentially operate the
vessel, however additional financing is necessary before we move forward.
However, this ship will need additional improvements and outfitting before being
placed in service. We have retained a third-party ship broker who is marketing
the vessel for sale.
3
Bareboat Charters
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 ("PBMC") and Palm Beach Empress, Inc. ("PBE") owned or controlled by
our Chairman, Francis W. Murray).
In connection with our June 30, 2005 refinancing and restructuring of the
PDS transaction, PBMC, an affiliate 100% owned by our Chairman and CEO, Francis
W. Murray, acquired all of the membership interests of Cruise Holdings I,
(previously owned by PDS Gaming Corporation) the owner of the casino cruise ship
Palm Beach Princess, and PBE, an affiliate 50% owned by Mr. Murray, acquired all
the membership interests in Cruise Holdings II, (also previously owned by PDS
Gaming Corporation) the owner of the casino 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 now 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.
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 charter inception and for fair
market value (to be determined by appraisal) in the case of the Big Easy.
Provided that we satisfy the notes against the Palm Beach Princess and Big Easy,
we will be entitled to credits against the purchase prices of the vessels: a $14
million credit in the case of the Palm Beach Princess and up to approximately
$14 million, that can be applied to the purchase price of the Big Easy.
Marketing
Because of our ongoing financial difficulties and shortage of cash flow we
have been forced to dramatically reduce our marketing and advertising. In the
past we developed a marketing program intended to generate a loyal following of
repeat customers and to attract tourists who are visiting the area. We believe
we have positioned the Palm Beach Princess afternoon cruise for seniors who not
only enjoy slot machines and gaming but also the extensive buffet and Las Vegas
type shows presented on board. Younger professionals also enjoy the evening and
weekend cruises.
In the second quarter of fiscal 2006 we installed a player tracking system
on the vessel. Our members have the ability to play and accumulate points for
complimentary rewards. This system provides us with personal information and
preferences and tracks our customers level of play. In the future we expect to
utilize this information to expand our direct mail program for our customers,
hotels, travel agents, group leaders, local chambers, associations and others.
Our primary target for guests is in Palm Beach County, Broward County and
Martin County. We actively seek out marketing partners such as tour companies
who produce large volume groups. Our reservations and telemarketing are handled
in house. We utilize charter and line coach programs which reach out from
Melbourne in the North and Miami in the South and we actively seek out marketing
partnerships with major brand companies. We also utilize an in-house travel
agent to arrange airline and hotel reservations for our major customers.
PDS Gaming Transactions
Since July 2004, ITB and several of its subsidiaries, along with Cruise
Holdings I, LLC, Cruise Holdings II, LLC, Palm Beach Maritime Corporation
("PBMC") and Palm Beach Empress, Inc. ("PBE"), companies owned or controlled by
our chairman, Francis W. Murray, completed several financial and lease
transactions with PDS Gaming Corporation ("PDS"), a Las Vegas based gaming
finance company, along with several of its affiliated companies. On June 30,
2005 the Company and several of its subsidiaries, along with the 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.
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 payable by Realen-Turnberry/Cherry Hill, LLC in the principal
amount of $10 million, an assignment of our promissory note in the principal
amount of $2,021,176 dated May 1, 2002 payable by OC Realty, a company also
owned by Mr. Murray, and stock in certain of our subsidiaries. As a condition to
entering into the PDS Transaction, PDS required the Company, its subsidiary,
International Thoroughbred Gaming Development Corporation ("ITGDC"), PBMC and
PBE to enter into a Guaranty Agreement and Pledge Agreements guaranteeing the
obligations of the borrowers.
Beginning in January 2006, we ceased making our debt service and monthly
rental payments on the PDS obligations. In March and July 2006,we entered into
two consecutive forbearance agreements which subsequently expired on August 29,
2006 after which we were not able to make our monthly loan and lease payments
nor were we able to consummate any transactions to refinance or reduce our
indebtedness as contemplated under the forbearance agreement. On October 3,
2006, PDS accelerated the maturity of our obligations and declared all amounts
remaining unpaid under the Loan Agreements, Notes and equipment leases with PDS
immediately due and payable. We did not have the means to satisfy the creditor's
demands and as a result, between December 4 and 7, 2006, the parties to
4
the PDS financing filed petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code.
Other Assets
Cherry Hill Notes
In connection with the sale on November 30, 2000 of our Garden State Park
property in Cherry Hill, New Jersey, to Realen-Turnberry/Cherry Hill, LLC
("Realen") we hold a promissory note in the face amount of $10 million. All
payments are dependent upon, and payable solely out of, the buyer's net cash
flow available for distribution to its equity owners. 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 is to be paid to us along with 33 % of all
Distributable Cash plus accrued interest at 22% until maturity.
In connection with the sale on May 22, 2000 of our property in Las Vegas,
Nevada, the non-operating former El Rancho Hotel and Casino, to Turnberry/Las
Vegas Boulevard, LLC, we purchased a promissory note of the buyer in the face
amount of $23,000,000 . On June 16, 2004, the Company sold the Las Vegas Note to
Cherry Hill at El Rancho, LP, a limited partnership which was 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 Second Cherry Hill
Note matures in 2015 and is similar to the Las Vegas Note, 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 property 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 the Garden State Park property. 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. 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.
Subsequent to December 31, 2006, the Company began settlement negotiations
to sell the Cherry Hill Notes. Although these transactions have not consummated
before the filing of the Company's Form 10-K, the observable market price
representing the fair value of these notes is substantially lower than the
carrying values on our books. As a result of our recent negotiations to sell the
Cherry Hill Notes, the the Company recorded an impairment loss on the two Cherry
Hill Notes of $9,378,651 as of December 31, 2006 to more fully reflect
approximately $5.3 million estimated fair value of the notes in accordance with
the term sheet being negotiated.
We cannot guarantee that we will be successful or that we will receive the
necessary Bankruptcy Court approvals to complete the above contemplated
transactions
OC Realty Note - Related Party
We have made three loans in the approximate amount of $2.7 million to a
project (OC Realty) in which Mr. Murray is participating for the development of
an oceanfront parcel of land, located in Fort Lauderdale, Florida. This project
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. Two of these loans in the approximate amount of $2 million 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 our investment. Repayment of these loans and
our participation interest will be subject to repayment of, first, bank debt of
approximately $20 million (at present) and, second, construction financing
expected to amount to $50 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 Realty based on comparable sales of
like units in the marketplace which suggest a weakening demand for prospective
sales of the project's condominium units. At December 31, 2006, $2.8 million is
the estimated fair value of the note after recording a reserve allowance of
$2,235,523 for the year ended December 31, 2006 representing the amount of the
interest accrued to date and leaving an asset value we believe to be fully
realizable.
Employees
As of December 31, 2006, our parent company employed seven full-time
corporate executive, administrative and clerical personnel. The Palm Beach
Princess employs a crew of approximately 318 and office and management personnel
of 54 for the operations of its casino cruise business.
Competition
From June, 2002 until February 15, 2003, the coastal gaming vessel Texas
Treasure II was operating from the Port of Palm Beach in competition with the
M/V Palm Beach Princess. This vessel was 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.
5
From February 16, 2003 until January 15, 2007 we operated the Palm Beach
Princess without competition, except for our operation of the Big Easy from mid
November 2005 until February 2006. In mid January 2007, the coastal gaming
vessel Sun Cruz VI began operating from the Port of Palm Beach in competition
with the Palm Beach Princess. This vessel is a 165 foot catamaran and has a
passenger capacity of 600 people and has 38 table games and approximately 300
slot machines. The vessel is scheduled to make two cruises each day.
On March 8, 2005 the citizens of Broward County approved a referendum that
amended 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. The Florida legislature has passed
legislation which permits 1,500 slot machines at each of the four (4)
pari-mutuel facilities in Broward County. On November 15, 2006 Gulfstream Park
Racing and Casino opened with approximately 500 slot machines, now has 1,200
slot machines and is expected to have 1,500 slot machines in the near future,
Mardi Gras Racetrack & Gaming Center (formerly Hollywood Greyhound) operates
with 1,100 slot machines and Pampano Park Racing operates with 1,500 slot
machines. Neither the timing of the expansion of the slot machines at these
locations, the installation at the one other location nor the impact to our
Company, can be predicted at this time.
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. In August
2005 a 300 passenger high-speed ferry began carrying passengers on daily round
trips to Freeport, Grand Bahamas where gaming is conducted. This operation was
terminated in June 2006. There is no assurance that we will be able to
successfully compete with such other activities.
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 a significant extent,
on weather conditions. In particular, inclement weather, or the threat of such
weather, has a direct effect on passenger counts, potentially adversely
affecting our revenues. 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 winter and spring seasons due to the increased local
population as well as increased tourist populations.
During the first quarter of operations of our fiscal year ended June 30,
2005, four major hurricanes severely 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 of last year as a result of the
weather, loss of utilities and damage to the surrounding areas. During the 4th
quarter of our year ended December 31, 2005, we cancelled 18 Palm Beach Princess
cruises as a consequence of hurricanes "Katrina" and "Rita" and the resulting
bad weather. During our year ended December 31, 2006 we did not experience any
hurricanes and disruptions due to inclement weather were at a minimum.
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.
The vessels we lease and own are subject to the provisions of SOLAS 74,
which was adopted in 1974 by
6
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 is in compliance with the SOLAS 74 requirements to
date, and 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 maybe determined in conjunction with the ship's classification
society, Det norske Veritas. To accomplish such work will 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.
2003 Chapter 11 Case
In April 2001, in order to obtain rights to operate the Palm Beach Princess
under a bareboat charter, we entered into an agreement to purchase a promissory
note of Palm Beach Maritime Corporation (or PBMC) in the amount (including
accrued interest) of $13.75 million, which was secured by a mortgage against the
Palm Beach Princess, from the bankruptcy estate of one of our former affiliates
("Ship Mortgage Obligation"). In addition we agreed with the bankruptcy estate
to purchase shares of our common stock still held by this affiliate for an
aggregate purchase price of approximately $1.8 million, which was $.50 per
share.
We began making payments on the Ship Mortgage Obligation in monthly
installments of $250,000 until July 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) until January 2003.
On January 3, 2003, we did not have the funds to complete the purchase and after
our requests for further extension was denied, 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. PBMC, the entity which owned
the vessel, also filed for relief under Chapter 11 of the Bankruptcy Code. The
petition did not cover us or any of our other subsidiaries. The Palm Beach
Princess continued to operate as "debtor-in-possession."
In September 2003, the bankruptcy court issued an order confirming a plan
of reorganization under Chapter 11 of the Bankruptcy Code which was jointly
proposed by the debtors. The plan of reorganization included, among other items,
the payment of the amounts owing under the Ship Mortgage Obligation and the
amounts owing under the stock repurchase discussed above. All of these
obligations were secured by a ship mortgage against the Palm Beach Princess
vessel and security interests in all of the other assets of the debtors.
In July 2004, we and PBMC entered into certain financing transactions with
PDS Gaming. A portion of these funds was utilized by PBMC to pay in full our
obligations under the plan of reorganization. On July 17, 2004, the bankruptcy
court issued a final decree closing the Chapter 11 cases.
Item 1A. Risk Factors
This report contains certain statements that are forward-looking within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Actual outcomes and
results may differ materially from those expressed in, or implied by, our
forward-looking statements. Words such as "expects," "anticipates," "believes,"
estimates" and other similar expressions or future or conditional verbs such as
"will," "should," "would" and "could" are intended to identify such
forward-looking statements. Readers of this annual report of the Company (also
referred to as we, us or our) should not rely solely on the forward-looking
statements and should consider all uncertainties and risks throughout this
report. The statements are representative only as of the date they are made, and
we undertake no obligation to update any forward-looking statement.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from those set
forth in our forward-looking statements. We face risks that are inherent in the
businesses and the market places in which we operate. Factors that might cause
our future financial performance to vary from that described in our
forward-looking statements include the market, credit, operational, regulatory,
strategic, liquidity, capital and economic risks, among others, as discussed in
the MD&A and in other periodic reports filed with the SEC. In addition, the
following discussion sets forth certain risks and uncertainties that we believe
could cause actual future results to differ materially from expected results.
However, other factors besides those listed below or discussed in our reports to
the SEC also could adversely affect our results, and the reader should not
consider any such list of factors to be a complete set of all potential risks or
uncertainties.
7
Bankruptcy Related Risks
Upon filing our Plan of Reorganization it must be confirmed by the Bankruptcy
Court and must be consummated.
Our future results are dependent upon successfully filing our plan,
obtaining approval, confirmation and implementation of our plan of
reorganization. There can be no assurance that our plan of reorganization will
be confirmed by the Bankruptcy Court. Currently, it is not possible to predict
with certainty the length of time we will operate under the protection of
Chapter 11, the outcome of the Chapter 11 proceedings in general, or the effect
of the proceedings on our business or on the interests of the various creditors
and stockholders.
The Creditors' Committee and other parties in interest may not support our
positions in the Chapter 11 proceedings.
The Creditors' Committee appointed in the bankruptcy proceedings has the
right to be heard on all matters that come before the Bankruptcy Court. There
can be no assurance that the secured lender, the Creditors' Committee, our
equity holders or other parties in interest will support our positions in the
bankruptcy proceeding or the plan of reorganization once proposed, and
disagreements between us and such entities could protract the bankruptcy
proceedings, could negatively impact our ability to operate during bankruptcy,
and could delay our emergence from bankruptcy.
Our Chapter 11 proceedings may result in a negative public perception of us that
may adversely affect our relationships with customers and suppliers, as well as
our business, results of operations and financial condition.
Even if we submit a plan of reorganization that is confirmed by the
Bankruptcy Court and consummated by us, our Chapter 11 filing and the resulting
uncertainty regarding our future prospects may hinder our ongoing business
activities and its ability to operate, fund and execute our business plan by (i)
impairing relations with existing and potential customers; (ii) negatively
impacting our ability to attract, retain and compensate key executives and
associates and to retain employees generally; (iii) limiting our ability to
obtain trade credit; and (iv) impairing present and future relationships with
vendors and service providers.
We have incurred, and expect to continue to incur, significant costs associated
with the Chapter 11 proceedings.
We have incurred and will continue to incur significant costs associated
with the reorganization. The amount of these costs, which are being expensed as
incurred, are expected to have a significant adverse affect on the results of
operations and cash flows.
Our ability to continue as a going concern is dependent on a number of factors.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. As a result of
the bankruptcy filing and related events, there is no assurance that the
carrying amounts of assets will be realized or that liabilities will be
liquidated or settled for the amounts recorded. In addition, a plan of
reorganization, or rejection thereof, could change the amounts reported in the
financial statements.
The company incurs substantial expenses to carry the Big Easy and the Royal
Star in wet dock storage. As part of our plan of reorganization and/or future
financial stability we must find a way to deploy these vessel asssets or sell
the Big Easy in order to reduce the wet dock storage costs which are draining
the company of needed cash.
Company Specific Risks
Access to funds from subsidiaries.
The parent company is a separate and distinct legal entity from our
operating and non-operating subsidiaries. We therefore depend on distributions
and other payments from our subsidiaries to fund our parent company overhead and
administrative obligations. Our subsidiaries were and could in the future be
subject to credit agreements that severely limited the flow of funds from those
subsidiaries to the parent company and currently are limited by approvals being
obtained from the Bankruptcy Court.
We derive substantially all of our revenues from our offshore gaming operations
of the Palm Beach Princess vessel that has substantial fixed costs.
Substantially all of our revenues are currently derived from our operation
of the M/V Palm Beach Princess. Many of our operating costs, including the
charter fee payable to the vessels' owners, 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
8
through to customers. Passenger and gaming revenues earned from the vessel must
be high enough to cover these expenses.
We Charter the vessels the Palm Beach Princess and the Big Easy
We charter the vessels we use in our operating business. The Amended and
Restated Bareboat Charters and Option to Purchase which allows for the charter
of Palm Beach Princess and Big Easy and for a option to purchase the vessels at
the end of the lease expire on July 1, 2009. Currently, there are no renewal
periods and if we should be delayed in making charter hire payments or payments
on the PDS debt we could lose the ability to continue chartering the vessels or
the option to purchase the vessels.
We have agreed to issue warrants that may be exercisable at our common stock's
market price on the date the warrants are issuable, and these warrants may cause
severe dilution to our stockholders.
In connection with our borrowing of $400,000 on November 9, 2005 we agreed
to issue additional penalty warrants, exercisable for a period of three years,
if the loan was not paid by January 9, 2006; we agreed to issue warrants for the
purchase of 200,000 shares of common stock each month at a price per share of
the lower of $2.50, on the market value on the day of issue in each month for
each additional month until the loan is paid. During 2006, we have issued or
reserved penalty warrants for the issuance of 2.2 million shares of common stock
as a result of this borrowing at prices between $.10 and $2.50. As of our
bankruptcy filing date this loan has not been paid.
We face competition to our off-shore gaming operations from non-gaming
activities in Florida, as well as traditional land-based casinos and other
gaming activities.
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 sixty miles of the Port of
Palm Beach, there are a number of smaller marinas that are capable of handling
other coastal gaming vessels. In the future, we expect competition to increase
as:
o new gaming operators enter our market,
o existing competitors expand their operations to the Port of Palm Beach
and other ports in Florida.
o gaming activities expand in existing jurisdictions, and
o if gaming is legalized in new jurisdictions.
In general, we compete with gaming activities including:
o traditional land-based casinos,
o casino gaming on Indian land,
o state-sponsored lotteries,
o pari-mutuel betting on horse racing and jai-alai
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.
Our competition may increase in the future if the State of Florida legalizes
additional gaming activities.
Over the past few years, there has been an attempt to legalize gaming
throughout the State of Florida. 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 Atlantic City, New Jersey, Las
Vegas, Nevada, the Bahamas, riverboat gambling on the Mississippi river and
gambling in the pan handle area and Mississippi Coast. 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
amended 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. The Florida legislature has passed
legislation which permits 1,500 slot machines at each of the four (4)
pari-mutuel facilities in Broward County. On November 15, 2006 Gulfstream Park
Racing and Casino opened with approximately 500 slot machines, now has 1,200
slot machines and is expected to have 1,500 slot machines in the near future,
Mardi Gras Racetrack & Gaming Center (formerly Hollywood Greyhound) operates
with 1,100 slot machines and Pampano Park Racing operates with 1.500 slot
machines. Neither the timing of the expansion of the slot machines at these
locations, the installation at the one other location nor the impact to our
Company, can be predicted at this time.
9
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, 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 effect our business.
In addition, the Federal government has previously considered a Federal tax
on casino revenues and may consider such tax or other regulations that would
affect our gaming business. 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 a variety of non-gaming regulations.
The M/V Palm Beach Princess, the Big Easy, and any other vessels which we
may operate in the future must comply with various international and U.S. Coast
Guard requirements as to ship design, on-board facilities, equipment, personnel
and general safety. 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 state and local safety
and health laws, regulations and ordinances that apply to non-gaming businesses,
such as the Clean Air Act, the Clean Water Act, and other environmental rules
and regulations. The coverage and compliance costs associated with these laws,
regulations and ordinances will result in future additional costs to our
operations.
We rely on patrons primarily from Florida and tourists from the Northeastern
United States, and are therefore particularly sensitive to adverse economic
events in these regions.
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
vessels to continue to attract customers from these geographic markets as a
result of increased competition in local markets, or other factors such as
future 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 changes or cancellations in local tourism;
o changes in travel patterns or preferences which may be affected by
increases in gasoline prices;
o changes in airline schedules and fares, or airline strikes
o weather events; and
o our need to make renovations, refurbishments and improvements to our
vessels to continue to attract tourists.
Weather conditions could seriously disrupt our operations.
Our gaming operations are subject to unique risks, including loss of
service because of flood, hurricane or other severe weather conditions. Our
vessels face additional risks from their 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 severe weather
conditions, as well as the ordinary or extraordinary maintenance requirements of
our vessels, if we are unable to operate our vessels, our results of operations
will be harmed.
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
and our Vice President of ITG Vegas, Inc., Francis X. Murray. Since the business
of gaming has expanded significantly over the past few years, so has the
competition for qualified employees. There is no assurance that such persons can
be retained or readily replaced. Furthermore, there is no assurance that we will
be able to continue to add qualified personnel as needed. The loss of the
services of any of our executive officers could adversely affect our business.
Our business is seasonal and we experience significant quarterly fluctuations in
operating results.
Our quarterly operating results are expected to fluctuate significantly
because of seasonality. We expect to generate the majority of our income during
the quarters ending March 31 and June 30. If our operations are shut down for
any periods of time during these quarters in particular, our results of
operations will be adversely affected.
10
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, which was adopted in 1974 by the
International Maritime Organization, a specialized agency of the United Nations
that is responsible for improving the safety and security of international
shipping, and preventing 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 (the "Amendments") 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 M/V 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 completed no later than October
1, 2010.
The M/V Palm Beach Princess, in compliance with the SOLAS 74 requirements
to date, and has 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, the Amendments require
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.
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 M/V 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 M/V Palm
Beach Princess permits us to purchase the vessel at the end of the charter
period on July 1, 2009. We will need to make a determination if it will be
economically feasible to purchase the M/V Palm Beach Princess at the end of the
charter period considering the costs which may be involved in readying the
vessel for SOLAS 74 requirements.
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 our operations 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 in New Jersey in January
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, removed in 1990, prior to our purchase of Freehold Raceway. In
February 2000, the New Jersey Department of Environmental Protection approved
our remedial investigation workplan. Under the workplan, numerous test wells
were drilled and soil tests were preformed to determine the extent and direction
of the flow of underground hazardous material. Reports and conclusions of the
tests were prepared for the State of New Jersey. However, prior to obtaining the
workplan from the State of New Jersey, the work was stopped due to a lack of
funds. 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.
Energy and fuel price increases may adversely affect our cost 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.
We hold two notes from our sale of real property the repayment of which is
dependent on revenues derived from these properties.
We hold two notes. One in the face amount of $10 million and a second in
the face amount of approximately $35 million. We have written down these notes
to approximately $5.3 million based upon a term sheet we are negotiating for the
sale of the notes. Both notes are payable from distributable cash generated by
the development or sale of the former Garden State Park racetrack in Cherry
Hill, New Jersey, which we sold. If the sale is not consummated all payments
under these notes are uncertain and depend entirely upon the profitability of
the development or resale of the subject real property.
Economic downturns, as well as other factors affecting discretionary consumer
spending, could reduce the number of 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,
11
resulting in decreased earnings. This is because the gaming and other leisure
activities we offer on our vessels are discretionary expenditures. 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, and the
potential for future terrorist attacks had and may again have a negative impact
on travel and leisure expenditures. 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 will 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.
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 and our Stock
Transfer Agent is no longer performing services.
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. Additionally our Stock
Transfer Company is no longer performing services on behalf of the Company
because of overdue, unpaid bills. Thus, shareholders owning shares in
Certificate form are not able to transact their shares.
The requirements of being a public company may strain our resources and distract
our management.
As a public company, we are subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act, and the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. These requirements place
a strain on our systems and resources. The Exchange Act requires that we file
annual, quarterly and current reports with respect to our business and financial
condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure
controls and procedures and internal controls for financial reporting. In the
future, we will be required to document and test our internal control procedures
in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act,
which requires annual management assessments of the effectiveness of our
internal controls over financial reporting and a report by our independent
registered public accountants addressing these assessments. During the course of
our testing, we may identify deficiencies which we may not be able to remediate
in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance
with the requirements of Section 404. If we fail to achieve and maintain the
adequacy of our internal controls, as such standards are modified, supplemented
or amended from time to time, we may not be able to ensure that we can conclude
on an ongoing basis that we have effective internal controls over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act.
In order to maintain and improve the effectiveness of our disclosure
controls and procedures and internal control over financial reporting,
significant resources and management oversight will be required. This may divert
management's attention from other business concerns, which could have a material
adverse effect on our business, financial condition, results of operations and
cash flows. In addition, we may need to hire additional accounting and financial
staff with appropriate public company experience and technical accounting
knowledge, and we cannot assure you that we will be able to do so in a timely
fashion.
We have no intention of paying dividends.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future.
12
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 month to month and cancellable by either
party upon 90 days notice. We also lease one office suite in Miami, Florida
which serves as a satellite executive office. The lease is for one year and can
be renewed annually.
Through ITG Vegas, we have negotiated with the Port of Palm Beach District
an operating agreement and a lease of space in a new office complex constructed
at the Port of Palm Beach adjacent to a new cruise terminal effective May 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 our agreement with the Port of Palm Beach in
order to permit the 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.
From February 2004 to December 2006 we held an agreement with the City of
Riviera Beach, Florida that permitted us dockage at the 160 foot main dock at
the City Marina located north of the Port of Palm Beach. While the agreement did
not permit us 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. This agreement was terminated by us in December 2006. The Agreement
provided for our payment to the City of dockage and other fees totaling $11,000
per month.
Item 3. Legal Proceedings
As discussed above on page 2, the Parent Company and 6 of its subsidiaries
initiated proceedings under Chapter 11 of the Bankruptcy Code on December 4th
and 7th, 2006.
Through our subsidiary, Royal Star Entertainment LLC, we had negotiated
with the Port of Palm Beach District a second agreement that would 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
agreement was 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
were required to commence sailings on or before October 31, 2005. Due to the
suspension of the Big Easy operations, the Port of Palm Beach District voted on
April 10, 2006 to terminate this agreement, and on April 19, 2006 the District
filed suit in Florida Circuit Court for declaratory judgement of termination of
the agreement and for other relief. Royal Star Entertainment, LLC filed its
answer denying that the District was entitled to terminate the agreement. This
lawsuit was stayed upon Royal Star Entertainment, LLC's filing of a voluntary
petition for reorganization under Chapter 11 of the Bankruptcy Code on December
4, 2006.
On November 17, 2006 a Complaint was filed in the United States District
Court for the Northern District of Illinois by Westminster Investments, LLC and
certain other plaintiffs against International Thoroughbred Breeders, Inc., its
Chairman Francis W. Murray, its Vice President Scott Kaplan, and its subsidiary
ITG Vegas' Chief Executive Officer Francis X. Murray, alleging non-payment to
the plaintiffs by International Thoroughbred Breeders of a promissory note dated
November 9, 2005 in the amount of four hundred thousand dollars plus interest,
and alleging fraud by the individual defendants in connection with the
promissory note. This lawsuit was stayed against International Thoroughbred
Breeders upon its filing of a voluntary petition for reorganization under
Chapter 11 of the Bankruptcy Code on December 7, 2006. The automatic stay,
however, was not applicable to the individual defendants; accordingly, with the
permission of the Bankruptcy Court, International Thoroughbred Breeders engaged
counsel for the limited purpose of filing a motion to transfer the lawsuit to
the United States District Court for the Southern District of Florida. That
motion is now pending before the Court of Illinois.
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
our opinion, the disposition of these lawsuits will not have a material adverse
effect on our financial position, results of operations or cash flows.
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
quarter ended December 31, 2006.
13
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer or Purchaser 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
Year Ended June 30, 2004 -------- ------
First Quarter $ 0.54 $ 0.25
Second Quarter 1.48 0.20
Third Quarter 1.97 1.03
Fourth Quarter 1.80 1.50
Year Ended June 30, 2005
First Quarter 1.55 1.45
Second Quarter 1.31 0.90
Third Quarter 3.25 1.20
Fourth Quarter 2.33 1.20
Six Months Ended December 31, 2005
Quarter ended September 30, 2005 3.55 1.33
Quarter ended December 31, 2005 3.45 1.75
Year Ended December 31, 2006
First Quarter 3.00 1.02
Second Quarter 1.15 0.33
Third Quarter 1.00 0.22
Fourth Quarter $ 0.39 $ 0.02
On December 31, 2006, there were approximately 27,000 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 purchases of common stock by the Company during the last
quarter of the year ended December 31, 2006.
For information to be provided under Item 201 (d) of this item (regarding
Equity Compensation Plan Information) see Part III, Item 12.
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 500,000 shares of its Series B Preferred Stock, at a subscription
price of $15.00 per share. Subscribers also received warrants for the purchase
of 1.2 shares of the Company's common stock for each share of Series B Preferred
Stock purchased (an aggregate of 600,000 shares of the Company's common stock
based on purchases of all 500,000 shares of the Series B Preferred Stock). The
exercise price under each such warrant is $3.25 per common share, and the
warrants issued to purchasers of the Series B Preferred Stock are exercisable
for a term of three (3) years beginning one year after issuance. As of December
28, 2005 the Company had accepted subscriptions for the purchase of 295,033
shares of Series B Preferred Stock and had received approximately $4 million in
net cash proceeds. On December 29, 2005 our Chairman, Francis W. Murray,
purchased all of the remaining Series B Preferred Stock which had not previously
been sold in the private offering, amounting to 204,966 shares of Series B
Preferred Stock, on the same terms as the private offering. Since we sold the
Series B Preferred Stock to Mr. Murray in payment of $3,074,500 of debt which
the Company had owed to Mr. Murray, this amount has not been included in the net
cash proceeds amount of $4 million indicated above.
14
The Series B Preferred Stock was 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 agreed to file a Registration
Statement under the Securities Act of 1933, as amended, in order to register the
resale of 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. On
December 30, 2005 we filed the Form S-1 Registration Statement with the
Securities & Exchange Commission. Such registration statement is not yet
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. If we are able to issue the common stock
during the quarter ending December 31, 2008, during which the conversion price
will be $1.82, the outstanding shares of Series B Preferred Stock are
convertible into 4,120,880 shares of additional new common shares.
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 has served as a financial advisor 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 majority of the net proceeds of the sale of Series B Preferred Stock
was used for working capital of the subsidiary companies which operate the Big
Easy and the Palm Beach Princess, and a portion of the proceeds was used for the
Parent Company operating expenses.
The shares of Series B Preferred Stock (including the common shares into
which they are convertible) and the warrants (including the common shares
purchasable under the warrants) were sold in a private offering believed to be
exempt from registration under Section 4(2) and Rule 506 under the Securities
Act of 1933, as amended. Among other things, all purchasers were accredited
investors and all conditions under SEC Rules 501, 502 and 506 are believed to
have been satisfied.
During the quarter ended December 31, 2005, we also issued three 4-year
warrants to MBC Global, LLC, for the purchase of (i) up to 88,500 shares of
common stock at $2.50 per share, (ii) up to 59,000 shares of common stock at
$3.50 per share, and (iii) up to 88,500 shares of common stock at $4.50 per
share, as compensation for advisory services rendered by MBC Global. In
connection with our issuance to four entities of $400,000 aggregate principal
amount of promissory notes during the quarter ended December 31, 2005, we issued
3-year warrants to purchase 200,000 shares of common stock exercisable at $2.50
per share, and we agreed to issue additional warrants to such note holders to
purchase 200,000 shares of common stock per month exercisable at the lesser of
$2.50 per share or the market price on the date of issue, for each month after
December 2005 until the notes are paid. Durning 2006 we have issued or reserved
for issuance 2,200,000 warrants for the purchase of 2,200,000 shares at prices
between $.10 and $2.45. The issuance of additional shares after November 9, 2006
has been suspended due to our Bankruptcy filing.
Additionally, during the quarter ended December 31, 2005, we issued 800,000
shares of common stock to our primary lender, PDS Gaming Corporation, in payment
of $1,600,000 of our obligations to it.
The shares of Series B Preferred Stock (including the common shares into
which they are convertible) and the warrants related thereto (including the
common shares purchasable under such warrants) were sold in a private offering
believed to be exempt from registration under Section 4(2) and Rule 506 under
the Securities Act of 1933, as amended. Among other things, all purchasers were
accredited investors and all conditions under SEC Rules 501, 502 and 506 are
believed to have been satisfied. The issuance of 800,000 shares of common stock
to PDS Gaming, our primary lender, the issuance of warrants as compensation to
our final advisor (MBC Global) and the issuance of warrants to the four note
holders (MBC Global and three entities which had previously purchased shares of
Series B Preferred Stock) are believed to have been exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended.
15
Item 6 - SELECTED FINANCIAL DATA
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
Year Ended Six Months Ended Years Ended June 30,
December 31, December 31, ----------------------------------------------
2006 2005 2005 2004 2003
------------- ----------------- ------------- ------------- -------------
Revenue From Operations $ 30,955,562 $ 13,976,650 $ 32,773,247 $ 32,962,239 $ 31,290,599
Net Income (Loss) (1) (3) $ (25,513,839)$ (12,232,985) $ (1,900,035) $ (6,800,030) $ 5,233,826
Income (Loss) Per Common Share
Basic & Diluted $ (2.24)$ (0.57) $ (0.18) $ (0.86) $ 0.54
Weighted Average Number of Shares 11,367,487 10,303,942 10,303,942 7,933,691 9,720,275
June 30,
December 31, December 31, ----------------------------------------------
2006 2005 2005 2004 2003
------------- ----------------- ------------- ------------- -------------
Total Assets $ 62,035,722 $ 77,111,578 $ 83,363,665 $ 50,813,716 $ 54,822,023
Long-Term Debt $ 808,164 $ 5,486,288 $ 33,813,301 $ 6,339,396 $ 985,017
Stockholders' Equity $ 2,525,048 $ 26,269,386 $ 29,550,451 $ 30,566,037 $ 37,586,067
(1) The Company recognized impairment losses in Fiscal 2004 in the amount of
$10 million and in fiscal 2005 in the amount of $0.5 million which
materiallly affect the comparability of a portion of of the information
reflected in the above data.
(2) The Company did not pay cash dividends during any of the fiscal years shown
above.
(3) The Company recognized an impairment loss and a reserve for bad debts in
the Year Ended December 31, 2006 in the approximate amount of $11.6 million
which materially affects the comparability of a portion of the information
reflected in the above data.
(4) 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 the year ended December 31,
2006, the six months ended December 31, 2005 and each of the three years in
the period ended June 30, 2005 and 2004.
See Notes to Consolidated Financial Statements.
16
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
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 Future effects from our filing for Chapter 11 protection which
occurred on December 4, 2006;
o the potential adverse impact of our Chapter 11 filing on our
operation, management and employees, and the risks associated with
operating businesses under Chapter 11 protection;
o our ability to develop, confirm and consummate a Chapter 11 plan of
reorganization;
o our ability to reduce our overall leveraged position;
o customer and vendor response to our Chapter 11 filing;
o limited access to capital resources;
o general economic and business conditions affecting the tourism
business in Florida;
o increased competition from new and existing forms of gaming;
o our ability to sell or reposition the Big Easy and the Royal Star on a
timely and cost effective manner in the future, or as an alternative,
sell or sub charter the vessels to other parties;
o changes in laws regulating the gaming industry;
o fluctuations in quarterly operating results as a result of seasonal
and weather considerations;
o events directly or indirectly relating to our business causing our
stock price to be volatile; and
o the vessels we charter and the Royal Star are subject to the
provisions of the International Convention on Safety of Life at Sea
amended ("SOLAS 74"), which may require substantial capital expenses
in the future.
Overview
Our financial condition has been significantly and negatively affected by
the poor performance, extensive delays and cost overruns of the Big Easy, that
was initially placed into service on October 18, 2005, the significant carry
costs of the vessel after it was taken out of service on February 1, 2006 and
our significant indebtedness. On March 22, 2006 and again on July 14, 2006 we
entered into Forbearance Agreements with PDS Gaming Corporation. The second
agreement expired on August 29, 2006 and after the expiration, we did not make
our monthly loan and equipment lease payments. We also were not able to
consummate the sale of any of our vessels, the Original Cherry Hill Note or our
operating business within the time period permitted by the Forbearance
Agreement. We ultimately decided to seek to reorganize under Chapter 11 of the
Federal Bankruptcy Code.
Between December 4, 2006 and December 7, 2006, the Company and 6 of its
subsidiaries (the "Debtors") filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
Southern District of Florida (Palm Beach Division) (the "Chapter 11 Cases"). The
cases were consolidated for the purpose of joint administration and were
assigned case number 06-16350-BKC-PGH. We filed the Chapter 11 Cases because we
were experiencing difficulties generating sufficient cash flow from operations
to meet our financial obligations under the Promissary Notes and equipment
leases with PDS Gaming Corporation after the expiration of Forbearance
Agreements.
Under Chapter 11, the Company is operating its businesses as a
debtor-in-possession ("DIP") under court protection from creditors and
claimants. Since the Chapter 11 filing, all orders sufficient to enable the
Company to conduct normal business activities, have been entered by the
Bankruptcy Court. While the Company is subject to Chapter 11, all transactions
not in the ordinary course of business require the prior approval of the
Bankruptcy Court.
As a consequence of the Chapter 11 filing, pending litigation against the
Company is generally stayed, and no party may take any action to collect its
pre-petition claims except pursuant to order of the Bankruptcy Court. April 18,
2007 was the last date by which holders of pre-filing date claims against the
Debtors could file such claims. Any holder of a claim that was required to file
such claim and did not do so may be barred from asserting such claim against the
Debtors and, accordingly, may not be able to participate in any distribution on
account of such claim. Differences between claim amounts identified by the
Debtors and claims filed by claimants will be investigated and resolved in
connection with the Debtors' claims resolution process, and only holders of
claims that are ultimately allowed for purposes of Chapter 11 case will be
entitled to distribution. The Company has not yet completed its analysis
17
of all the proofs of claim. Since the treatment, including payment, of allowed
claims is subject to a confirmed plan of reorganization, the ultimate
distribution with respect to allowed claims is not presently ascertainable.
Although we filed a timely motion to extend the exclusive period for the
Debtors to file a plan(s) of reorganization, our largest secured lender, PDS
Gaming Corporation, filed a motion on April 11, 2006 objecting to the proposed
extension. If the exclusivity period in not extended, other parties in interest,
including the Creditor's Committee, the secured lender or other creditors could
file a plan of reorganization.
We anticipate receiving a commitment for a secured loan from a financial
institution in order to fund the majority of the proceeds necessary to create a
new special purpose subsidiary to own and operate the Palm Beach Princess
business. We anticipate that the commitment will be subject to bankruptcy court
approval, an additional equity infusion from us or a third-party and
satisfactory loan documentation. Proceeds from the financing will be used to pay
existing creditors and provide working capital to the Palm Beach Princess
business. We are in the process of negotiating a series of transactions that
will allow for the redeployment of the Big Easy to a foreign jurisdiction. We
anticipate receiving a term sheet for a secured loan from a financial
institution in order to fund a portion of the proceeds necessary to fund a
special purpose affiliate of the company to own and operate the Big Easy in this
foreign location. We anticipate that the term sheet will be subject to an
additional equity investment from a third-party, successful negotiation of
operating agreements and satisfactory loan documentation. Closing of the
transactions will also be subject to bankruptcy court approval. Proceeds from
the transaction will be used to pay existing creditors and provide working
capital, including funding start up and relocation expenses, to the Big Easy
business.
Our ability to continue as a going concern is predicated upon numerous
issues, including our ability to achieve the following:
o having a plan of reorganization confirmed by the Bankruptcy Court in a
timely manner;
o being able to successfully implement our business plans and otherwise
offset the negative effects that the Chapter 11 filing has had and may
continue to have on our business, including the impairment of vendor
relations;
o operating within the framework of our DIP Facility, including
limitations on capital expenditures and financial covenants, our
ability to generate cash flows from operations or seek other sources
of financing and
o attracting, motivating and/or retaining key executives and associates.
These challenges are in addition to those operational, regulatory and other
challenges that we face in connection with our business.
On December 7, 2006 following first day hearings of December 6, 2006, the
Bankruptcy Court entered orders granting us authority to, among other things,
pay certain pre-petition and post-petition employee wages, salaries, benefits
and other employee obligations, pay selected critical vendors and other
providers for the post-petition delivery of goods and services.
We lease through a bareboat charter and operate, through our wholly owned
subsidiary, ITG Vegas, Inc. ("ITGV"), the gaming vessel, M/V Palm Beach
Princess. The M/V Palm Beach Princess sails twice daily from the Port of Palm
Beach, Florida. Once beyond the state's territorial water limits the vessel
engages in a casino gaming business. The business of operating the cruise vessel
includes a variety of shipboard activities, such as dining, music, casino gaming
and other entertainment.
We also lease through a bareboat charter and on a limited basis operated,
through our wholly owned subsidiary, ITG Palm Beach, LLC ("ITGBP"), the gaming
vessel, Big Easy. After retrofitting and refurbishing the Big Easy, this vessel
was initially placed into service on October 18, 2005, also from the Port of
Palm Beach Florida, although we did not commence regular (although limited)
operations until November 12, 2005. We were having challenges attracting
customers to the Big Easy given her inconsistent schedule of sailings. The
initial delay in receiving a Certificate of Inspection and subsequent
inconsistencies in scheduling caused significant negative cash flow and made
advertising and promotional efforts difficult from both a financial and
practical planning perspective. The lack of a consistent commercial service
schedule inhibited customer support and resulted in suspending the Big Easy
operations indefinitely. Currently the Big Easy is in wet dock storage.
ITGV charters the M/V Palm Beach Princess from Cruise Holdings I, LLC, a
company owned by PBMC, for a five year period ending July 2009. The charter
provides for the payment to Cruise Holdings I, LLC of $50,000 per month plus 1%
of the gross operating revenues of the M/V Palm Beach Princess. Under the
charter, ITG Vegas has the option to purchase the M/V Palm Beach Princess at the
end of the term, for an exercise price equal to the appraised value of the M/V
Palm Beach Princess, $17,500,000, to which certain amounts are to be credited
against the purchase price.
ITGPB charters the Big Easy from Cruise Holdings II, LLC, a company owned
by PBE, for a five year period ending July 2009. The charter provides for
payments to Cruise Holdings II, LLC of $100,000 per month plus 1% of the gross
operating revenues of the Big Easy. Under the Big Easy charter, PBE granted
ITGPB an option to purchase the Big Easy at the end of the term, for an exercise
price equal to the appraised value of the Big Easy,
18
which is yet to be determined, following the retrofitting and refurbishment of
the Big Easy, to which certain amounts are to be credited against the purchase
price. The Big Easy is currently in wet dock storage following a brief period of
operations as described below in Liquidity and Capital Resources. We continue to
explore possible locations from which to potentially operate the Big Easy,
however, our negative cash position has restricted our efforts to re-position
the vessel.
During our 2004 fiscal year we purchased a third vessel, the M/V Royal
Star. The Royal Star is currently in wet dock storage and we are limited by our
negative cash position to make any further improvements on the vessel.
During the quarter ended September 30, 2004, we re-entered the equine
business, however on December 31, 2005 we ceased our horse operations and
divested our interest in the racehorse assets.
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
twelve months ended December 31, 2006, the Palm Beach Princess operations
generated approximately $6.2 million of cash which was insufficient for our
consolidated cash needs, thus we had to rely on other adjustments in our
operations to meet our cash requirements. During the past few fiscal years, we
extended the terms of our vendor payables and as a result, our accounts payable
and accrued expenses exceeded our cash by approximately $11 million as of
December 31, 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.
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. However, in 2006 there was no dry or wet dock work completed. 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.
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. On November 12, 2005 we placed the Big Easy vessel into limited
scheduled service from the Port of Palm Beach, Florida, however we were forced
to remove the Big Easy from service on February 1, 2006 in order to conserve
working capital. During the twelve months ended December 31, 2006, the operating
loss for the Big Easy for January 2006 and the carrying costs for the remaining
eleven months were $4.7 million before interest expense. We expect that future
carrying costs for the wet dock storage and slot machine leases will be
approximately $200,000 per month before interest expense.
During our 2004 fiscal year, we purchased a third vessel, the Royal Star.
We anticipate that the vessel will require additional improvements and
outfitting before being placed in service as a gaming vessel. The vessel has
been placed in wet storage and 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. During the twelve months ending
December 31, 2006, carrying costs for the Royal Star vessel and the gaming
equipment leases were approximately $1.5 million before interest expense.
Effective December 2006, we terminated the gaming equipment lease which is
projected to reduce the monthly lease payments by approximately $95,000. We have
retained a third-party ship broker who is marketing the vessel for sale.
As of December 31, 2006 Cash and Cash Equivalents were $871,236 as compared
to $1,846,239 as of December 31, 2005.
As a result of our Chapter 11 filings in December 2006, our commitments and
non-cancellable contracts are not able to be determined in that most of our
contracts and leases are stayed by the bankruptcy filing, the current amounts
are being approved and paid by orders of the Bankruptcy Court and future amounts
due cannot be reasonably determined.
Outlook:
We intend to reorganize around our successful Palm Beach Princess
operation. We consider this operation to be a viable foundation for the future
expansion of our Company. We believe we will: (i) require additional financing;
and/or (ii) may be forced to sell other company assets; and/or (iii) re-position
or sell the Big Easy and the Royal Star vessels in order to reduce or payoff the
PDS debt.
We anticipate receiving a commitment for a secured loan from a financial
institution in order to fund the majority of the proceeds necessary to create a
new special purpose subsidiary to own and operate the Palm Beach Princess
business. We anticipate that the commitment will be subject to bankruptcy court
approval, an additional equity infusion from us or a third-party and
satisfactory loan documentation. Proceeds from the financing will be used to pay
existing creditors and provide working capital to the Palm Beach Princess
business.
We are in the process of negotiating a series of transactions that will
allow for the redeployment of the Big Easy to a foreign jurisdiction. We
anticipate receiving a term sheet for a secured loan from a financial
institution in order to fund a portion of the proceeds necessary to fund a
special purpose affiliate of the company to own and operate the Big Easy in this
foreign location. We anticipate that the term sheet will be subject to an
additional
19
equity investment from a third-party, successful negotiation of operating
agreements and satisfactory loan documentation. Closing of the transactions will
also be subject to bankruptcy court approval. Proceeds from the transaction will
be used to pay existing creditors and provide working capital, including funding
start up and relocation expenses, to the Big Easy business. No assurances can be
given that we will be successful in these negotiations
At this time, however, it is impossible to predict accurately the effect of
the Chapter 11 reorganization on the Company, when we may emerge from Chapter 11
and what our capital structure will be. The rights and claims of various
creditors and security holders will be determined by our plan of reorganization.
No assurance can be given as to what values, if any, will be ascribed in the
bankruptcy proceedings to each of these constituencies. We anticipate that, in
any plan of reorganization ultimately confirmed by the Bankruptcy Court, our
common and preferred stock could be negatively effected, diluted or cancelled.
Accordingly, we urge that appropriate caution be exercised with respect to
existing and future investments in any of such securities and claims.
Critical Accounting Policies and Estimates
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods and estimates used in the
preparation of financial statements. We prepare our Consolidated Financial
Statements in conformity with accounting principles generally accepted in the
United States. Certain of our accounting policies, including the estimated lives
assigned to our assets, asset impairment, and the calculation of our income tax
liabilities, require that we apply significant judgment in defining the
appropriate assumptions for calculating financial estimates. By their nature,
these judgments are subject to an inherent degree of uncertainty. Our trends in
the industry and information available from other outside sources, are used as
appropriate. There can be no assurance that actual results will not differ from
our estimates. Note 2 to the Consolidated Financial Statements describes the
significant accounting policies we have selected for use in the preparation of
our financial statements and related disclosures. We believe the following to be
the most critical accounting estimates and assumptions affecting our reported
amounts and related disclosures.
Notes Receivable
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" as amended, requires management judgments
regarding the future collectability of notes receivable and the underlying fair
market value of collateral. Estimates are required to be used by management to
assess the recoverability of our notes receivable. We regularly review our
receivables to determine if there has been any decline in value. These reviews
require management judgments that often include estimating the outcome of future
events and determining whether factors exist that indicate impairment has
occurred. In the past, we evaluated real estate appraisals and financial balance
sheets, earnings and cash forecasts. Our returns are also subject to factors
affecting the profitability and saleability of the project. Our assumptions,
estimates and evaluations are subject to the availability of reliable data and
the uncertainty of predictions concerning future events. Accordingly, estimates
of recoverable amounts and future cash flows are subjective and may not
ultimately be achieved. Should the underlying circumstances change, the
estimated recoverable amounts and future cash flows could change by a material
amount.
(A) Cherry Hill Notes
As a result of the sale of the Garden State Park Racetrack property in
Cherry Hill NJ, and the sale of the non- operating former El Rancho Hotel and
Casino in Las Vegas, NV, portions of the proceeds from each sale were paid in
the form of promissory notes. During the fiscal year ended June 30, 2004 we sold
the note receivable we held on the Las Vegas, NV property for cash and other
future benefits including a second note payable solely from profits of the
Cherry Hill, NJ property. We had previously received a note receivable from the
sale of the Garden State Park property in the amount of $10 million and
together, these notes were classified on the Balance Sheet as Long Term Notes
Receivables in the amount of $14,278,651 as of December 31, 2005.
Subsequent to December 31, 2006, the Company began negotiations to sell the
Cherry Hill Notes. Although these transactions have not consummated before the
filing of the Company's Form 10-K, the offered price made to us for these notes
is substantially lower than the carrying values on our books. In prior years,
the fair value and the collectability of these notes was determined by financial
statements and financial projections by the developer of the property based upon
the future development of the site incorporating an office park and hotel.
Recent economic conditions have forced the developer to reconsider their plans
for the remaining property which resulted in cash flow projections for the
property being substantially lower than in prior years. As a result of our
recent negotiations to sell the Cherry Hill Notes the Company recorded an
impairment loss on the two Cherry Hill Notes of $9,378,651 as of December 31,
2006 to more fully reflect in the loan's observable market value.
(B) OC Realty Note - Related Party
We have made three loans in the approximate amount of $2.7 million to a
project (OC Realty) in which Mr. Murray is participating for the development of
an oceanfront parcel of land, located in Fort Lauderdale, Florida. This project
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. Two of these loans in the approximate amount of $2 million 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 our investment. Repayment of these loans and
our participation interest will be subject to repayment of, first, bank debt of
approximately $20 million (at present) and, second, construction financing
expected to amount to $50 million and
20
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
Realty based on comparable sales of like units in the marketplace which suggest
a weakening demand for prospective sales of the project's condominium units. At
December 31, 2006, $2.8 million is the estimated fair value of the note after
recording a reserve allowance of $2,235,523 for the year ended December 31, 2006
representing the amount of the interest accrued to date and leaving an asset
value we believe to be fully realizable.
Valuation of Vessels and Vessel Deposits - Related Parties
We charter vessels, the Palm Beach Princess and the Big Easy, directly from
companies owned or controlled by our Chairman and CEO. The Amended and Restated
Bareboat Charter and Option to Purchase Agreement for the Palm Beach Princess
has been accounted for as a capital lease. In accordance with our lease and
purchase agreement for the Palm Beach Princess we have the right to purchase the
vessel for $17,500,000 at the end of the lease term, and up to $14 million of
principal payments made by us and allocable to the Palm Beach Princess debt will
be credited toward the purchase price. The Company determined that it would
capitalize; 1) costs it had incurred for improvements it had made to the Big
Easy; 2) all payments required under the PDS Gaming loans for the Big Easy of
$12.6 million; and 3) all payments required under the charter hire fees, for a
total capitalized amount as of June 30, 2005 of $24,318,989.
Effective November 1, 2005 we determined that the amount and timing of the
receipt of the charter hire fees of $100,000, plus 1% of the gross revenues,
which we had estimated to be $30,000 per month could not be reasonably
determined considering the problems with the Big Easy operation and the
suspension from service on February 1, 2006. Therefore the capitalized value of
the Big Easy was reduced, effective November 1, 2005, by $4 million to $20.3
million and the liability for payments due were also reduced by $4 million. The
charter hire fees are being expensed as incurred effective November 1, 2005.
The Company has credits in the amount of $9,726,377 which are available to
use against the purchase costs for the vessels. See footnote 7 to our financial
statements with respect to the credits which are available against the purchase
costs of the vessels. Should the Company lose its ability to purchase either or
both of the vessels due to the bankruptcy filing or elect not to purchase one or
both of the vessel at the end of the lease, the Company could lose some or all
of the value of the credits unless other terms are negotiated with the owner of
the vessels.
Results of Operations for the Year Ended December 31, 2006 and 2005
The following are the most important factors and trends that affect our
operating performance:
o We are currently exclusively dependent upon operating revenues from
the Palm Beach Princess to pay the wet dock storage, interest, debt
service and equipment lease costs of the Big Easy, the Royal Star and
the expenses of the parent company.
o On March 8, 2005 the citizens of Broward County approved a referendum
amended 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. In a special
session in early December 2005, the Florida legislature passed
legislation which would permit 1,500 slot machines at each of the four
(4) pari-mutuel facilities in Broward County. Neither the timing of
the installation of the slot machines, nor the impact to our Company,
can be predicted at this time. Over the past few years, there has been
an attempt to legalize gaming throughout the State of Florida. 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 could have a material adverse impact on our operations.
o The impact of Hurricanes also may affect our operating performance.
During the first quarter of the fiscal year ended June 30, 2005 and
the second quarter of the fiscal year ended December 31, 2005 we were
adversely affected by several hurricanes passing over or near Florida.
During the quarter ended September 30, 2004, our operations were
negatively impacted by the direct effects of hurricanes "Frances" and
"Jeanne," and during the three months ended December 31, 2005 our
operations were negatively impacted by the direct effect of hurricane
Wilma. These hurricanes left the area without power, resulting in
curfews and limited food, water and life resources, the evacuation of
the population in our area, and further affected tourism in the area,
severely reducing our pool of potential passengers.
o From February 16, 2003 until January 15, 2007 we operated the Palm
Beach Princess without competition, except for our operation of the
Big Easy from mid November 2005 until February 2006. In January 2007,
the coastal gaming vessel Sun Cruz VI began operating from the Port of
Palm Beach in competition with the Palm Beach Princess. This vessel is
a 165 foot catamaran and has a passenger capacity of 600 people and
has 38 table games and approximately 300 slot machines. The vessel is
scheduled to make two cruises each day.
21
Consolidated
The table below separately identifies and compares the revenues, expenses
and net income before taxes for our two vessels and other operating subsidiary
companies as shown on the Consolidated Statement of Operations for year ended
December 31, 2006 as compared to an unaudited Consolidated Statement of
Operations for the twelve months ended December 31, 2005.
Year Ended
December 31, 2006
--------------------------------------------------
Holding Co.
Palm Beach &
Princess Big Easy Other Subs Total
($) ($) ($) ($)
------------ ----------- ----------- ------------
Operating Revenues:
Gaming 26,239,833 62,738 - 26,302,571
Fare 2,501,765 6,332 - 2,508,097
On Board 1,687,903 9,418 - 1,697,321
Other - - 447,573 447,573
------------ ----------- ----------- ------------
Net Operating
Revenues 30,429,501 78,488 447,573 30,955,562
------------ ----------- ----------- ------------
Operating Costs and
Expenses:
Gaming 9,132,841 527,282 - 9,660,123
Fare 2,320,512 81,561 392,683 2,794,756
On Board 811,770 13,358 825,128
Maritime & Legal 7,384,568 352,983 - 7,737,551
G & A Expense 2,608,758 249,475 2,099,174 4,957,407
Development & Carrying
Costs - 3,148,782 419,145 3,567,927
Royal Star Development
Costs - - 601,599 601,599
Equine Development
Costs - - - -
Bankruptcy Costs 191,485 - - 191,485
Impairment of Notes and
Allowance for Doubtful
Accounts 1,464,146 - 10,149,830 11,613,976
Depreciation &
Amortization 2,451,916 411,104 6,493 2,869,513
------------ ----------- ----------- ------------
Total Operating Costs &
Expenses 26,365,996 4,784,545 13,668,924 44,819,465
------------ ----------- ----------- ------------
Operating Income (Loss) 4,063,505 (4,706,057) (13,221,351) (13,863,903)
------------ ----------- ----------- ------------
Other Income (Expense)
Interest & Financing
Expenses (2,881,141) (3,207,119) (1,843,583) (7,931,843)
Cost of Warrants
Granted - - (1,828,287) (1,828,287)
Interest & Financing
Expenses -
Related Party (972,752) (1,200,000) (9,505) (2,182,257)
Interest Income - 54 - 54
Interest Income -
Related Party 263,178 - 29,219 292,397
------------ ----------- ----------- ------------
Total Other Income(Expenses) (3,590,715) (4,407,065) (3,652,156) (11,649,936)
------------ ----------- ----------- ------------
Income (Loss) Before Tax 472,790 (9,113,122) (16,873,507) (25,513,839)
============ =========== =========== ============
Twelve Month Ended
December 31, 2005
(Unaudited)
----------------------------------------------------
Holding Co.
Palm Beach &
Princess Big Easy Other Subs Total
($) ($) ($) ($)
------------- ----------- ---------- ------------
Operating Revenues:
Gaming 26,764,038 518,609 - 27,282,647
Fare 2,968,254 40,035 - 3,008,289
On Board 1,959,122 90,287 - 2,049,409
Other - - 516,236 516,236
------------- ----------- ---------- ------------
Net Operating
Revenues 31,691,414 648,931 516,236 32,856,581
------------- ----------- ---------- ------------
Operating Costs and
Expenses:
Gaming 9,043,899 1,022,228 - 10,066,127
Fare 3,585,935 187,129 406,627 4,179,691
On Board 971,717 65,942 - 1,037,659
Maritime & Legal 7,119,264 1,081,411 - 8,200,675
G & A Expense 2,879,983 1,038,992 2,218,518 6,137,493
Development & Carrying
Costs - 7,213,224 948,025 8,161,249
Royal Star Development
Costs - - 439,514 439,514
Equine Development
Costs - - 846,501 846,501
Bankruptcy Costs - - - -
Impairment of Notes and
Allowance for Doubtful
Accounts - - 150,000 150,000
Depreciation &
Amortization 2,204,840 312,359 16,113 2,533,312
------------- ----------- ---------- ------------
Total Operating Costs &
Expenses 25,805,638 10,921,285 5,025,298 41,752,221
------------- ----------- ---------- ------------
Operating Income (Loss) 5,885,776 (10,272,354) (4,509,062) (8,895,640)
------------- ----------- ---------- ------------
Other Income (Expense)
Interest & Financing
Expenses (2,469,167) (1,750,082) (1,430,918) (5,650,167)
Cost of Warrants
Granted - - (86,590) (86,590)
Interest & Financing
Expenses -
Related Party (915,909) (206,489) (25,482) (1,147,880)
Interest Income 9,011 - - 9,011
Interest Income -
Related Party 273,508 - 29,463 302,971
------------- ----------- ---------- ------------
Total Other Income (Expenses) (3,102,557) (1,956,571) (1,513,527) (6,572,655)
------------- ----------- ---------- ------------
Income (Loss) Before Tax 2,783,219 (12,228,925) (6,022,589) (15,468,295)
============= =========== ========== ============
At December 31, 2005 the Company changed it's accounting year from June
30th to December 31st. Therefore the accounting period December 31, 2005
represents a six month period whereas December 31, 2006 represents a twelve
month accounting period. In order to more appropriately compare the results of
operations the table above includes the results of operations for the twelve
months ended December 31, 2005 (unaudited) as compared to the audited financial
statements for the twelve months ended December 31, 2006.
22
Revenue for the year ended December 31, 2006 decreased from $32,856,581 for
the twelve months ended December 31, 2005 to $30,955,562 in the year ended
December 31, 2006 primarily as a result of decrease in the revenues generated by
the Palm Beach Princess and the Big Easy which was put in limited service on
November 12, 2005 and operated only one month in fiscal 2006.
Operating expenses increased approximately $7 million, from $41,752,221 in
the twelve months ended December 31, 2005 to $45,772,982 for the year ended
December 31, 2006 primarily the result of:
o an impairment of the Cherry Hill Notes in the amount of $9,228,651 and
recording an allowance for doubtful accounts on the OC Realty Note of
$2,235,325
o an increase in the carrying costs for our Royal Star vessel of
$162,085, which the vessel has been in wet dock storage since its
purchase.
o an increase in the bankruptcy costs of $191,485
o an increase in Depreciation and Amortization of $336,201; offset by
o a decrease in the development, operating and carry costs of the Big
Easy of $6,136,740. On February 1, 2006 we took the vessel out of
service and during the majority of 2006 only paid for the costs to
keep the vessel at wet dock.
o a decrease in the operating costs of the Palm Beach Princess of
$1,342,349
o a decrease in our equine costs of $846,501, primarily the result of
ceasing the equine operations effective December 31, 2005.
o a decrease in the Parent Company administrative expense of 119,344
o a decrease in other development costs of $528,880
The Operating (loss) for the year ended December 31, 2006 was ($13,863,903)
as compared to a loss of ($8,895,640) (unaudited) for the comparative twelve
month period of last year.
Other expenses increased by approximately $5.3 million as a result of an
increase in the interest and financing expense due to addition interest expense
primarily the result of : (1) higher interest rates on the PDS loans due to the
penalty interest accrued because of the Forbearance Agreement in 2006 (2)
interest recorded as an expense in the year ended December 31, 2006 for the Big
Easy as compared to interest being capitalized during a portion of re-
construction period in the prior twelve month period and (3) an increase in the
costs of warrants issued in the amount of $1,597,263.
The Net (Loss) for the year ended December 31, 2006 was ($25,513,839) as
compared to a loss of ($15,237,271) (unaudited) for the twelve months ended
December 31, 2005.
Vessel Operations
Palm Beach Princess
During the current year net operating revenue from vessel operations was
$30,429,500 as compared to $31,691,414 for the twelve months ended December 31,
2005. The decrease in revenue of approximately $1.3 million during the
comparable period we believe is due to a decrease passenger count resulting from
a decrease in our advertising and marketing expenses of approximately $1.3
million as discussed below and, in part, to comparing the 52 weeks of operations
during 2006 to 53 weeks of operations during 2005. 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 operations by generally having an equal
number of weeks and weekend days in each year. Periodically, this system
necessitates an extra week in the year. The twelve month period ending December
31, 2005 was such a year, therefore the number of cruises, revenues and expenses
reported for 2005 included one additional week of operations as compared to
2006.
During the first three quarters of 2006 passenger counts decreased
approximately 10% each quarter. However, during the forth quarter our passenger
counts increase by 5% as compared to the prior year because during the last
quarter of 2005 the Palm Beach Princess went in to dry dock for approximately 2
weeks. The decrease in passenger counts was partially offset by an increase in
the revenue per passenger which increased from $118.91 to $122.57 or 3%.
During 2005 and 2006 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 operation. These allocations were made to more
accurately reflect the cost of the Big Easy used as a casino gaming vessel.
Approximately $162,000 of salaries were allocated to the Big Easy during the
twelve months of 2006 as compared to approximately $1,540,000 of salary costs
that were allocated during the twelve months ended December 31, 2005. This
allocation should be taken into consideration when comparing operating results
from year to year for the Palm Beach Princess.
Casino operating expenses which also includes food, beverage and
entertainment increased $88,941 from $9,043,899 or 34% of casino revenue to
$9,132,840 or 35% of casino revenue.
23
Sales, marketing and advertising expenses decreased $1,265,423 or 35%. The
amounts incurred for marketing and advertising decreased because the company did
not have sufficient funds to spend due to our negative cash position. On Board
expenses decreased by $159,947 as a result of fewer passengers during the
current year.
Maritime, legal, administrative expenses and bareboat charter increased
$255,317 which reflects in part the decrease in the allocation of salaries to
the Big Easy since the allocation was only done for one month in the current
year.
Finance expenses increased $738,429 as a result of the higher interest rate
due to default interest being charged and a forbearance fees recorded during the
year. Depreciation and amortization increased $247,075 as a result of amortizing
the dry dock expenses incurred in October 2005.
The income before income tax expense for the year ended December 31, 2006
was $472,791 as compared to income before income tax of $3,225,495 (unaudited)
in the comparable twelve month period ended December 31, 2005.
The following is a comparative summary of income and expenses of the Palm
Beach Princess operation for the 52 weeks ended December 31, 2006 and the 53
weeks ending January 1, 2006:
Twelve Months Ended
--------------------------------
December 31, January 1, 2006
Description 2006 (unaudited) Change
------------------------------------ -------------- ---------------- -------------
Passenger Count 248,495 266,527 (18,032)
Number of Cruises 699 676 23
Average Number of Passengers per Cruise 355 394 (39)
Net Revenue per Passenger $ 122.57 $ 118.91 $ 3.66
Revenue:
Gaming $ 26,239,833 $ 26,764,038 $ (524,205)
Fare 7,095,927 7,715,198 (619,271)
On Board 3,587,910 3,871,572 (283,662)
Less: Promotional Allowances
Fare (4,594,163) (4,746,944) 152,781
On Board (1,900,007) (1,912,450) 12,443
-------------- ---------------- -------------
Net Operating Revenue 30,429,500 31,691,414 (1,261,914)
-------------- ---------------- -------------
Expenses:
Gaming 9,132,840 9,043,899 88,941
Fare 2,320,512 3,585,935 (1,265,423)
On Board 811,770 971,717 (159,947)
Maritime and Legal Expenses 7,384,568 7,119,120 265,448
Administrative 2,414,876 2,481,851 (66,975)
Bare Boat Charter - Related Party 972,752 915,909 56,844
Finance Expenses - Net 2,881,140 2,142,648 738,492
Allowance for Doubtful Accounts 1,419,673 - 1,419,673
Depreciation and Amortization 2,451,916 2,204,840 247,075
Bankruptcy Fees 166,662 - 166,662
-------------- ---------------- -------------
Total Expenses 29,956,709 28,465,919 1,490,790
-------------- ---------------- -------------
Net Income Before Income Tax Expense $ 472,791 $ 3,225,495 $ (2,752,705)
============== ================ =============
Big Easy
The United States Coast Guard issued the Big Easy her Certificate of
Inspection on October 11, 2005, following an extensive and unexpected delay in
receiving such certification. The vessel's first official cruise to
international waters was October 18, 2005. Due to the approaching Hurricane
Wilma, the vessel was ordered out of the Port for safe haven following her
afternoon cruise on October 19, 2005. Hurricane Wilma struck Florida on October
24, 2005. Due to the damages caused by Hurricane Wilma and vessel schedule
conflicts, the Big Easy was unable to sail commercially until November 6, 2005.
The unexpected delay in receiving the vessels' Certificate of Inspection, and
the subsequent delays, damage and inconveniences caused by Hurricane Wilma
immediately following the maiden voyage had a compounding adverse effect on the
Company's ability to retain personnel. As a result, the Company experienced
greater than normal attrition of Big Easy personnel, particularly those who
carried
24
Coast Guard-issued Merchant Marine cards (i.e. also known as z-cards). These are
issued by Coast Guard and serve as required documentation for those working on
US flagged vessels to fill Coast Guard mandated muster station requirements). As
the number of Merchant Marine card personnel became increasingly inadequate, it
became increasingly difficult for management to meet muster station
requirements, often forcing the cancellation of many sailings, particularly in
December and January. The Coast Guard stopped issuing Merchant Marine cards
suddenly and unexpectedly sometime in October, 2005. Adverse sea conditions in
November and December were generally unfavorable for commercial sailing and were
a contributing factor to several missed sailings. As a result of these numerous
challenges the vessel was able to make only nineteen sailings in November 2005;
twenty-four sailings in December 2005 and eight sailings in January. On January
31, 2006 the Coast Guard denied the Company's request to provide an extension to
complete certain mandated work and removed the vessels' Certificate of
Inspection. On January 31, 2006, approximately one hundred Coast Guard Merchant
Marine card applications relating to the Big Easy remained unprocessed by the
Coast Guard for twelve weeks or longer.
We were having challenges attracting customers to the Big Easy, given her
inconsistent schedule of sailings. The initial delay in receiving a Certificate
of Inspection and subsequent inconsistencies in scheduling caused significant
negative cash flow and made advertising and promotional efforts difficult from
both a financial and practical planning perspective. The lack of a consistent
commercial service schedule caused insignificant customer support resulting in
negative results. On February 1, 2006 we suspended operations indefinitely.
During the twelve month period ending December 31, 2005 the Big Easy sustained
losses of approximately $12.2 million (unaudited) as compared to a loss of
approximately $9.1 million for the year ended December 31, 2006.
Horse Operations
During the quarter ended December 31, 2005 we determined to liquidate our
stock of horses on December 31, 2005. On that date we transferred our entire
stock of horses to Francis W. Murray at our cost. Payment was made by Mr. Murray
by offsetting $328,000 in amounts he had previously loaned the Company. This
action was taken to conserve operating funds. Our horse operation did not
produce any significant revenue during the 15 month period we owned the horses.
25
Results of Operations for the Three Months Ended December 31, 2006 and 2005
Consolidated
The table below separately identifies and compares the revenues, expenses
and income before taxes of our vessels and other operating subsidiary companies
as shown on the Consolidated Statement of Operations for the three months ended
December 31, 2006 as compared to the three months ended December 31, 2005.
Three Months Ended
December 31, 2006
---------------------------------------------------
Holding Co.
Palm Beach &
Princess Big Easy Other Subs Total
($) ($) ($) ($)
------------ ---------- ------------ ------------
Operating Revenues:
Gaming 5,273,015 - - 5,273,015
Fare 415,977 - - 415,977
On Board 420,186 - - 420,186
Other - - 92,283 92,283
------------ ---------- ------------ ------------
Net Operating
Revenues 6,109,178 - 92,283 6,201,461
------------ ---------- ------------ ------------
Operating Costs and
Expenses:
Gaming 2,130,736 - - 2,130,736
Fare 577,196 - 75,793 652,989
On Board 189,862 - - 189,862
Maritime & Legal 1,819,285 - - 1,819,285
G & A Expense 332,022 - 610,057 942,079
Development & Carrying
Costs - 517,933 77,643 595,576
Royal Star Development
Costs - - 237,595 237,595
Equine Development
Costs - - - -
Bankruptcy Costs 191,485 - - 191,485
Impairment of Notes and
Allowance for Doubtful
Accounts 1,464,146 - 9,749,830 11,213,976
Depreciation &
Amortization 604,799 - - 604,799
------------ ---------- ------------ ------------
Total Operating Costs &
Expenses 7,309,531 517,933 10,750,918 18,578,382
------------ ---------- ------------ ------------
Operating Income (Loss) (1,200,353) (517,933) (10,658,635) (12,376,921)
------------ ---------- ------------ ------------
Other Income (Expense)
Interest & Financing
Expenses (86,265) (159,701) (107,761) (353,727)
Cost of Warrants
Granted - - (317,985) (317,985)
Interest & Financing
Expenses -
Related Party (233,011) (300,000) - (533,011)
Interest Income (4,479) 54 - (4,425)
Interest Income -
Related Party 69,557 - 7,325 76,882
Other Income (Expense) - - - -
------------ ---------- ------------ ------------
Total Other Income(Expenses) (254,198) (459,647) (418,421) (1,132,266)
------------ ---------- ------------ ------------
Income(Loss)Before Tax (1,454,551) (977,580) (11,077,056) (13,509,187)
============ ========== ============ ============
Three Months Ended
December 31, 2005
(Unaudited)
--------------------------------------------------
Palm Holding Co.
Beach &
Princess Big Easy Other Subs Total
($) ($) ($) ($)
------------ ----------- ------------ -----------
Operating Revenues:
Gaming 4,828,775 518,609 - 5,347,384
Fare 510,327 40,035 - 550,362
On Board 378,314 90,287 - 468,601
Other - - 219,235 219,235
------------ ----------- ------------ -----------
Net Operating
Revenues 5,717,416 648,931 219,235 6,585,582
------------ ----------- ------------ -----------
Operating Costs and
Expenses:
Gaming 2,017,312 1,022,228 - 3,039,540
Fare 535,191 187,129 117,229 839,549
On Board 217,828 65,942 - 283,770
Maritime & Legal 1,743,509 1,081,411 - 2,824,920
G & A Expense 690,358 1,038,992 559,596 2,288,946
Development & Carrying
Costs - 497,759 345,469 843,228
Royal Star Development
Costs - - 284,257 284,257
Equine Development
Costs - - - -
Bankruptcy Costs - - - -
Impairment of Notes and
Allowance for Doubtful
Accounts - - - -
Depreciation &
Amortization 600,875 295,139 - 896,014
------------ ----------- ------------ -----------
Total Operating Costs &
Expenses 5,805,073 4,188,600 1,306,551 11,300,224
------------ ----------- ------------ -----------
Operating Income (Loss) (87,657) (3,539,669) (1,087,316) (4,714,642)
------------ ----------- ------------ -----------
Other Income (Expense)
Interest & Financing
Expenses (524,592) (1,285,253) (1,012,972) (2,822,817)
Cost of Warrants
Granted - - - -
Interest & Financing
Expenses -
Related Party (429,424) (206,489) (9,505) (645,418)
Interest Income (63,116) - (7,405) (70,521)
Interest Income -
Related Party 129,081 - 14,811 143,892
Other Income (Expense) - - (8,348) -
------------ ----------- ------------ -----------
Total Other Income(Expenses) (888,051) (1,491,742) (1,023,419) (3,403,212)
------------ ----------- ------------ -----------
Income(Loss)Before Tax (975,708) (5,031,411) (2,110,735) (8,117,854)
============ =========== ============ ===========
26
Revenues decreased by $384,121 primarily as a result of the revenues
generated by the Big Easy decreasing by $648,931 since it was taken out of
service on February 2, 2006 offset by an increase in the revenue generated by
the Palm Beach Princess increasing by $391,762.
Operating expenses increased approximately $7.3 million from $11,300,224 in
the three months ended December 31, 2005 to $18,578,382 in the three months
ended December 31, 2006 primarily the result of:
o an impairment of Notes Receivable and allowances for doubtful accounts
in the amount of $11,213,976 offset by;
o a decrease in the operating costs of the Big Easy of $3,670,667;
o a decrease in operating expenses for the Palm Beach Princess of
$155,097;
o a decrease in other development costs of $267,826 since the Company
was forced to reduce its costs in search of new gaming opportunities;
offset by,
o a decrease in the carrying costs for our Royal Star vessel of $46,662,
which the vessel has been in wet dock storage since its purchase.
The operating (loss) before other income and expenses including interest
expense for the quarter ended December 31, 2006 was ($12,376,921) as compared to
an operating (loss) of $(4,714,642) for the comparative quarter, an increase in
loss of $(7,662,279) for the reasons stated above. Interest and financial
expenses decreased approximately $2.3 million. As a result of our Bankruptcy
filing during the 2006 quarter we are no longer accruing interest on our debt to
various parties holding secured and unsecured debt.
The Net (loss) for the quarter ended December 31, 2006 was ($13,509,187) as
compared to a (loss) of ($8,117,854) for the quarter ended December 31, 2005.
Vessel Operations
Palm Beach Princess
During the three months ended December 31, 2006 net operating revenue from
vessel operations was $6,109,178 as compared to $5,717,386. The increase in
revenue of $391,792 during the comparable quarter is due in part to an increase
in the passenger counts from 48,412 in 2005 to 51,035 for the three months ended
December 31, 2006. An increase in the revenue per passenger from $118.10 to
$120.26 during the current period, also helped to increase our revenues for this
quarter.
This increase in passenger count occurred because last year we were
materially impacted by a scheduled dry dock period of 12 days and by hurricane
Wilma and its resulting inclement weather which struck Florida and the Palm
Beach area during October 2005. During the dry dock period we lost 24 cruises,
and we lost 2 cruises due to the hurricane.
Casino operating expenses which also includes food, beverage and
entertainment increased $113,375 from $2,017,311 or 42% of casino revenue in
2005 to $2,130,686 or 40% of casino revenue in 2006.
Maritime and legal expenses increased $64,201 due to an increase in the
number of cruises.
Administrative expenses decreased $110,099.
During the quarter we incurred $191,485 in bankruptcy fees.
Finance expenses decreased $867,009 as a result of not accruing interest
after December 4, 2006 as a result of our bankruptcy filing.
During the quarter we recorded an allowance for doubtful accounts for the
OC Realty Notes held by us in the amount of $1,440,859.
The loss before income tax expense for the three months ended December 31,
2006 was ($1,454,549) as compared to a loss before income tax of ($968,737) in
the comparable three month period of 2005.
27
The Palm Beach Princess 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 weekend days in each quarter. The following is a comparative
summary of income and expenses of the Palm Beach Princess operation for the 13
weeks ended December 31, 2006 and January 1, 2006;
Three Months Ended
--------------------------------------
December 31, 2006 January 1, 2006
Description (Unaudited) (Unaudited) Change
------------------------------------- ------------------- ------------------ --------------
Passenger Count 51,035 48,412 2,623
Number of Cruises 177 146 31
Average Number of Passengers per Cruise 288 332 (55)
Net Revenue per Passenger $ 120.26 $ 118.10 $ 2.16
Revenue:
Gaming $ 5,273,015 $ 4,828,775 $ 444,240
Fare 1,496,055 1,464,117 31,938
On Board 680,265 778,061 (97,796)
Less: Promotional Allowances
Fare (1,002,444) (953,820) (48,624)
On Board (337,713) (399,747) 62,034
------------------- ------------------ --------------
Net Operating Revenue 6,109,178 5,717,386 391,792
------------------- ------------------ --------------
Expenses:
Gaming 2,130,686 2,017,311 113,375
Fare 577,196 535,191 42,005
On Board 189,862 217,828 (27,966)
Maritime and Legal Expenses 1,807,566 1,743,365 64,201
Administrative 367,077 477,176 (110,099)
Bare Boat Charter 233,011 206,182 26,829
Finance Expenses - Net 21,186 888,195 (867,009)
Allowance for Doubtful Accounts 1,440,859 - 1,440,859
Depreciation and Amortization 604,799 600,875 3,924
Bankruptcy Fees 191,485 - 191,485
------------------- ------------------ --------------
Total Expenses 7,563,727 6,686,123 877,604
------------------- ------------------ --------------
Income (Loss) Before Income
Tax Expense $ (1,454,549) $ (968,737) $ (485,812)
=================== ================== ==============
Results of Operations for the Six Months Ended December 31, 2005 and 2004
The following are the most important factors and trends that affect our
operating performance:
We are currently dependent upon operating revenues from the Palm Beach
Princess to pay the wet dock storage, interest, debt service and equipment lease
costs of the Big Easy. Big Easy operational losses have adversely affected our
cash flow. We could face significant challenges in managing and integrating the
combined operations of the Big Easy and the M/V Palm Beach Princess should we
re-locate the Big Easy to a different port or reinstate its operation in Palm
Beach. Any future integration of the Big Easy operation will require dedication
of management resources that may temporarily divert attention from our
day-to-day business.
After receiving proceeds of $2.3 million in June 2005 and subsequent
additional PDS debt financing, we have approximately $30 million of indebtedness
outstanding to PDS as of December 31, 2005. We have been unable to make the
required monthly principal payments required under the PDS loans since September
1, 2005 and have borrowed additional funds in order to make several interest
payments due under the debt agreement. We have extended payment terms of our
accounts payable in order to conserve working capital. This action could
jeopardize the relationships with our vendors and we may be forced to find
alternative sources for some of our suppliers, further disrupting our
operations. 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 the majority of our cash flow from
operations for the payment of any principal or interest due on our
outstanding indebtedness or may need additional working capital in
addition to our cash flow for payment of principal and interest due;
28
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 effect our ability to obtain
additional financing for working capital, capital expenditures or
general corporate purposes.
If we cannot generate sufficient cash flow from operations in the future to
service our debt, we may, among other things be forced to:
o seek additional financing in the debt or equity markets;
o refinance or restructure all or a portion of our indebtedness; or
o sell selected assets.
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.
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. In a special session in early December
2005, the Florida legislature passed legislation which would permit 1,500 slot
machines at each of the four (4) pari-mutuel facilities in Broward County.
Neither the timing of the installation of the slot machines, nor the impact to
our Company, can be predicted at this time. Over the past few years, there has
been an attempt to legalize gaming throughout the State of Florida. 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 could have a
material adverse impact on our operations.
The impact of Hurricanes also may affect our operating performance. During
the first quarter of the fiscal year ended June 30, 2005 and the second quarter
of the fiscal year ended December 31, 2005 we were adversely affected by several
hurricanes passing over or near Florida. During the quarter ended September 30,
2004, our operations were negatively impacted by the direct effects of
hurricanes "Frances" and "Jeanne," and during the three months ended December
31, 2005 our operations were negatively impacted by the direct effect of
hurricane Wilma. These hurricanes left the area without power, resulting in
curfews and limited food, water and life resources, the evacuation of the
population in our area, and further affected tourism in the area, severely
reducing our pool of potential passengers.
29
Consolidated
The table below separately identifies and compares the revenues, expenses
and net income before taxes of our two vessels and other operating subsidiary
companies as shown on the Consolidated Statement of Operations for the six
months ended December 31, 2005 as compared to an unaudited Consolidated
Statement of Operations for the six months ended December 31, 2004.
Six Months Ended
December 31, 2005
-----------------------------------------------------
Palm Beach Big Holding Co &
Princess Easy Other Subs Total
($) ($) ($) ($)
----------- ------------ ------------- ------------
Operating Revenues:
Gaming 11,061,370 518,609 - 11,579,979
Fare 1,137,407 40,035 - 1,177,442
On Board 845,844 90,287 - 936,131
Other - - 283,098 283,098
----------- ------------ ------------- ------------
Net Operating
Revenues 13,044,621 648,931 283,098 13,976,650
----------- ------------ ------------- ------------
Operating Costs and
Expenses:
Gaming 4,159,341 1,022,228 - 5,181,569
Fare 1,425,782 187,130 202,269 1,815,181
On Board 436,123 65,942 - 502,065
Maritime & Legal 3,590,470 1,081,412 - 4,671,882
G & A Expenses 1,297,488 1,038,992 1,321,832 3,658,312
Development Costs - 2,830,532 582,154 3,412,686
Royal Star
Development Costs - - 261,675 261,675
Equine Development
Costs - - 517,486 517,486
Impairment of Note - - - -
Depreciation &
Amortization 1,183,981 312,357 7,568 1,503,906
----------- ------------ ------------- ------------
Total Operating
Costs & Expenses 12,093,185 6,538,593 2,892,984 21,524,762
----------- ------------ ------------- ------------
Operating Income (Loss) 951,436 (5,889,662) (2,609,886) (7,548,112)
----------- ------------ ------------- ------------
Other Income (Expense):
Interest &
Financing Expenses (1,321,358) (1,750,082) (1,119,594) (4,191,034)
Interest & Financing
Expenses -
Related Party (429,424) (206,489) (9,505) (645,418)
Interest Income 7,687 - - 7,687
Interest Income -
Related Party 129,081 - 14,811 143,892
Extraordinary Item - - - -
Other Income(Expense) - - - -
----------- ------------ ------------- ------------
Total Other Income
(Expense) (1,614,014) (1,956,571) (1,114,288) (4,684,873)
----------- ------------ ------------- ------------
Income (Loss) Before Tax (662,578) (7,846,233) (3,724,174) (12,232,985)
=========== ============ ============= ============
Six Months Ended
December 31, 2004
(Unaudited)
-----------------------------------------------
Palm Beach Big Holding Co &
Princess Easy Other Subs Total
($) ($) ($) ($)
------------ --------- ----------- -----------
Operating Revenues:
Gaming 11,647,486 - - 11,647,486
Fare 1,168,282 - - 1,168,282
On Board 890,468 - - 890,468
Other - - 187,079 187,079
------------ --------- ----------- -----------
Net Operating
Revenues 13,706,236 - 187,079 13,893,315
------------ --------- ----------- -----------
Operating Costs and
Expenses:
Gaming 4,252,422 - - 4,252,422
Fare 1,778,961 - 167,455 1,946,416
On Board 451,803 - - 451,803
Maritime & Legal 2,892,336 - - 2,892,336
G & A Expenses 1,484,240 - 1,009,006 2,493,246
Development Costs 77,318 629,064 539,365 1,245,747
Royal Star
Development Costs - - 106,418 106,418
Equine Development
Costs - - 118,975 118,975
Impairment of Note - - 350,000 350,000
Depreciation &
Amortization 956,230 - 8,871 965,101
------------ --------- ----------- -----------
Total Operating
Costs & Expenses 11,893,310 629,064 2,300,090 14,822,464
------------ --------- ----------- -----------
Operating Income (Loss) 1,812,926 (629,064) (2,113,011) (929,149)
------------ --------- ----------- -----------
Other Income (Expense):
Interest &
Financing Expenses (1,119,227) - (268,663) (1,387,890)
Interest & Financing
Expenses -
Related Party (409,812) - - (409,812)
Interest Income 8,027 - - 8,027
Interest Income -
Related Party 127,480 - 16,411 143,891
Extraordinary Item - - 3,560,000 3,560,000
Other Income(Expense) - - 211 211
------------ --------- ----------- -----------
Total Other Income
(Expense) (1,393,532) - 3,307,959 1,914,427
------------ --------- ----------- -----------
Income (Loss) Before Tax 419,394 (629,064) 1,194,948 985,278
============ ========= =========== ===========
30
Revenue for the six months ended December 31, 2005 increased slightly from
$13,893,315 for the six months ended December 31, 2004 to $13,976,650 in the six
months ended December 31, 2005 primarily as a result of the net effect of the
revenues generated by the Big Easy which was put in limited service on November
12, 2005 partially offset by a decrease in revenues generated by the Palm Beach
Princess operations during the comparable periods.
Operating expenses increased approximately $7 million, or 31%, from
$14,822,464 in the six months ended December 31, 2004 to $21,524,762 in the six
months ended December 31, 2005 primarily the result of:
o an increase in recording start up costs for the Big Easy of
approximately $2.2 million for carrying costs incurred from July 1,
2005 to October 17, 2005, and approximately $3.4 million in operating
expenses from October 17 to December 31, 2005. During the prior fiscal
year we only incurred start-up costs for a portion of the 6 month
period;
o an increase in the carrying costs for our Royal Star vessel of
$155,257, which the vessel has been in wet dock storage since its
purchase. The increase was primarily caused by the payments we are
making on the gaming equipment placed aboard the vessel in January
2005;
o an increase in our equine costs of $398,511, primarily the result of
an increase in the number of livestock owned during this period as
compared to the same period in the prior fiscal year and increased
expenses primarily associated the equine operation in effect for the
full six months of the current fiscal year as compared to only three
months of operations in the prior fiscal period;
o an increase in Depreciation and Amortization of $538,805 primarily as
a result of depreciation being recorded on the Big Easy; and
o an increase in the Parent Company administrative expense of $122,008;
partially offset by
o the decrease of the impairment of a note in the amount of $350,000
which expense was recognized last year.
The Operating (loss) for the six months ended December 31, 2005 was
($7,548,112) as compared to a loss of ($929,149) for the comparative period of
last year.
Other expenses increased by approximately $3 million as a result of an
increase in the interest and financing expense of $3,038,750 due to the higher
debt level on the vessel leases, equipment leases and the additional funds
loaned to the Company from its primary lender and other loans taken during the
current period as compared to debt levels during the same period last year
primarily the result of; (1) interest recorded as an expense in the six months
ended December 31, 2005 for the Big Easy as compared to interest being
capitalized during the six months re- construction period in the prior fiscal
period; and (2) expensing warrants issued during the last six months which
include: (i) 236,000 warrants issued to MBC Global in the amount of $51,088;
(ii) the 600,000 warrants issuable to the purchasers of our Series B Preferred
Stock in the amount of $67,900; (iii) the 200,000 warrants issued to the parties
who loaned the Company $400,000 in the amount of $93,000, and (iv) expensing of
the Beneficial Conversion Feature in the amount of $231,024 in connection with
the sale of 500,000 shares of Series B Convertible Preferred Stock.
For the six months ended December 31, 2005 the (loss) before an
extraordinary item (reported in the comparative period) was ($12,232,985) as
compared to a (loss) before an extraordinary item of ($2,574,722) for the six
months ended December 31, 2004. During the six months ended December 31, 2004
the Company recorded extraordinary income, net of tax, of $3,560,000. This was
the result of the collection of success fees charged to Leo Equity Group, Inc.
and Palm Beach Maritime Corporation (formerly MJQ) for our efforts in connection
with the final settlement with the Chapter 11 Trustee for the Bankruptcy Estate
of Robert E. Brennan. We had deferred all income from these transactions until
such time as payment was received.
The Net (Loss) for the six months ended December 31, 2005 was ($12,232,985)
or ($1.16) per diluted share as compared to income of $1,076,278 or $.13 per
diluted share for the six months ended December 31, 2004.
For the six months ending December 31, 2005 the (loss) before interest,
taxes, depreciation and amortization and our unusual items of extraordinary
income and the Big Easy start up costs (Adjusted EBITDA) was a negative
($6,044,206) as compared to adjusted EBITDA of $386,163 for the corresponding
period. The decrease in Adjusted EBITDA of $6.4 million was primarily due to the
losses sustained in the six months ended December 31, 2005 as detailed above
caused in part due to hurricane Wilma hitting our area, dry dock of the Palm
Beach Princess, start up costs of the Big Easy and negative operating results of
the Big Easy for the six months ended December 31, 2005. See the reconciliation
of Adjusted EBITDA to net income for the six and three month periods ended
December 31st below.
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
31
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)
Six Months Ended December 31, Three Months Ended December 31,
------------------------------ -----------------------------
2005 2004 2005 2004
-------------- ------------- -------------- ------------
Total Adjusted EBDITA $ (6,044,206) $ 386,163 $ (3,867,933) $ 717,369
Depreciation & Amortization (1,503,906) (965,101) (846,708) (566,222)
Interest & Financing Expenses (4,836,452) (1,797,702) (3,468,235) (630,111)
Interest Income 151,579 151,918 65,023 73,601
Tax Benefit (Expense) on Income -0- 91,000 7,000 49,000
Net Income (Loss) before Unusual Items (12,232,985) (2,133,722) (8,110,853) (356,363)
Extraordinary Item -0- 3,560,000 -0- 0
Impairment Loss -0- (350,000) -0- (150,000)
-------------- ------------- -------------- ------------
Net Income (Loss) $ (12,232,985) $ 1,076,278 $ (8,110,853) $ (506,363)
============== ============= ============== ============
Vessel Operations
Palm Beach Princess
Operations for the six months ended December 31, 2005 were materially
impacted by a scheduled dry dock period of 12 days and by hurricane Wilma and
its resulting inclement weather which struck Florida and the Palm Beach area
during our second quarter of operations. Fortunately the dry dock period
overlapped the date hurricane Wilma struck and during a portion of the time we
were suffering from the hurricane's continuing effects. During the dry dock
period we lost 24 cruises, additionally we lost 2 cruises due to the hurricane
and 6 cruises due to weather related problems or scheduling conflicts with the
Big Easy. As a result of the decrease in the number of cruises our passenger
counts also decreased by 6,080, or 5%. During the six month period our revenue
per passenger increased slightly from $116.55 to $116.97. During the six months
ended December 31, 2004 we also suffered from two hurricanes which materially
negatively impacted our operations and affect the comparisons from year to year.
During the six months ended December 31, 2005, total net operating revenue
from vessel operations was $13,044,621 as compared to $13,706,236 for the six
months ended December 31, 2004. The decrease in revenue of $661,615 during the
comparable six months was due to a decrease in the number of cruises which
resulted in a decrease in passenger counts. The decrease in the number of
cruises was offset slightly by an increase in the revenue per passenger from
$116.55 during the six months ended December 31, 2004 to $116.97 in the current
six month period. During the current six month period gaming revenues decreased
$586,116 from $11,647,486 for the six months of 2004 to $11,061,370 for the six
months of 2005.
Net fare and on board income decreased $75,500, or 3.7%. Casino operating
expenses which also includes food, beverage and entertainment decreased $93,081
from $4,252,422 or 36.5% of casino revenue in 2004 to $4,159,341 or 37.6% of
casino revenue in 2005 primarily the result of dividing costs, many of which are
fixed by their nature, over reduced revenues.
During the six month period ending December 31, 2005 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 $875,000
of salaries allocated to the Big Easy were expensed as operating costs during
the six months ended December 31, 2005 as compared to approximately $511,000 of
salary costs which were capitalized as part of the vessel costs during the six
months ended December 31, 2004. This allocation should be taken into
consideration when comparing operating results from year to year for the Palm
Beach Princess.
Sales, marketing and advertising expenses decreased $353,179 from
$1,778,961 in 2004 to $1,425,782 for the first six months ended December 31,
2005. The amounts incurred for marketing and advertising decreased because the
Company did not have sufficient funds to spend due to our negative cash
position. Maritime and legal expenses increased $698,104 or 24% primarily as a
result of increased fuel costs during the current six month period.
Administrative expenses decreased $264,040 from $1,561,528 in 2004 to
$1,297,488 in 2005 due to steps taken to reduce expenses during this quarter,
and the allocation of salary expenses as stated above.
Finance expenses increased $220,482 as a result of the interest paid on the
capital lease payments for the Palm Beach Princess which was effective July 7,
2004. Depreciation and amortization increased $227,751 from $956,230 for the six
months ended December 31 2004 to $1,183,981 for the six months ended December
31, 2005.
32
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 recorded depreciation for a portion of the six month period.
The loss before income tax expense for the six months ended December 31,
2005 was a loss of ($662,578) as compared to income before income tax of
$419,394 in the comparable six month period of 2004.
The Palm Beach Princess performs fourteen cruises weekly, that is, a
daytime and an evening cruise each day. Each cruise is of five to six hours
duration. During each cruise, the Palm Beach Princess offers a range of
amenities and services to her passengers, including a full casino, sit-down
buffet dining, live musical shows, discotheque, bars and lounges, swimming pool
and sundecks. The casino occupies 15,000 square feet aboard the ship and is
equipped with approximately 400 slot machines, all major table games (blackjack,
dice, roulette and poker), and a sports wagering book. During the six months
ended December 31, 2005 the ship completed 305 cruises and 49 cruises were
missed due to dry dock, hurricane Wilma, inclement weather and scheduling
conflicts with the Big Easy. Whereas during the six months ended December 31,
2004 the ship completed 328 cruises and 33 cruises were cancelled due to
hurricanes and inclement weather.
The Palm Beach Princess 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 weekend days in each quarter. The following is a comparative
summary of income and expenses of the Palm Beach Princess operation for the 26
weeks ended January 1, 2006 and December 26, 2004:
Six Months Ended
----------------------------
January 1, December 26,
Description 2006 2004 Change
-------------------------------- ------------ ------------ -----------
Passenger Count 111,523 117,603 (6,080)
Number of Cruises 305 328 (23)
Average Number of Passengers
per Cruise 366 358 8
Net Revenue per Passenger $ 116.97 $ 116.55 $ 0.42
Revenue:
Gaming $ 11,061,370 $ 11,647,486 $ (586,116)
Fare 3,087,363 3,177,007 (89,644)
On Board 1,694,636 1,861,213 (166,577)
Less: Promotional Allowances
Fare (1,949,957) (2,008,725) 58,768
On Board (848,791) (970,745) 121,954
------------ ------------ -----------
Net Operating Revenue 13,044,621 13,706,236 (661,615)
------------ ------------ -----------
Expenses:
Gaming 4,159,341 4,252,422 (93,081)
Fare 1,425,782 1,778,961 (353,179)
On Board 436,123 451,803 (15,680)
Maritime and Legal Expenses 3,590,470 2,892,366 698,104
Administrative 1,297,488 1,561,528 (264,040)
Finance Expenses - Net 1,614,014 1,393,532 220,482
Depreciation and Amortization 1,183,981 956,230 227,751
Total Expenses 13,707,199 13,286,842 420,357
------------ ------------ -----------
Income (Loss) Before
Income Tax Expense $ (662,578) $ 419,394 $ (1,081,972)
============ ============ ===========
Big Easy
The United States Coast Guard issued the Big Easy her Certificate of
Inspection on October 11, 2005, following an extensive and unexpected delay in
receiving such certification. The vessel's first official cruise to
international waters was October 18, 2005. Due to the approaching Hurricane
Wilma, the vessel was ordered out of the Port for safe haven following her
afternoon cruise on October 19, 2005. Hurricane Wilma struck Florida on October
24, 2005. Due to the damages caused by Hurricane Wilma and vessel schedule
conflicts, the Big Easy was unable to sail commercially until November 6, 2005.
The unexpected delay in receiving the vessels' Certificate of Inspection, and
the subsequent delays, damage and inconveniences caused by Hurricane Wilma
immediately following the maiden voyage had a compounding adverse effect on the
Company's ability to retain personnel. As a result, the Company experienced
greater than normal attrition of Big Easy personnel, particularly those who
carried Coast Guard- issued Merchant Marine cards (i.e. also known as z-cards).
These are issued by Coast Guard and serve as required
33
documentation for those working on US flagged vessels to fill Coast Guard
mandated muster station requirements). As the number of Merchant Marine card
personnel became increasingly inadequate, it became increasingly difficult for
management to meet muster station requirements, often forcing the cancellation
of many sailings, particularly in December and January. The Coast Guard stopped
issuing Merchant Marine cards suddenly and unexpectedly sometime in October,
2005. Adverse sea conditions in November and December were generally unfavorable
for commercial sailing and were a contributing factor to several missed
sailings. As a result of these numerous challenges the vessel was able to make
only nineteen sailings in November; twenty-four sailings in December and eight
sailings in January. On January 31, 2006 the Coast Guard denied the Company's
request to provide an extension to complete certain mandated work and removed
the vessels' Certificate of Inspection. On January 31, 2006, approximately one
hundred Coast Guard Merchant Marine card applications relating to the Big Easy
remained unprocessed by the Coast Guard for twelve weeks or longer.
We were having challenges attracting customers to the Big Easy, given her
inconsistent schedule of sailings. The initial delay in receiving a Certificate
of Inspection and subsequent inconsistencies in scheduling caused significant
negative cash flow and made advertising and promotional efforts difficult from
both a financial and practical planning perspective. The lack of a consistent
commercial service schedule caused insignificant customer support resulting in
negative results for the six months ending December 31, 2005. During the
operating period we were losing approximately $1.2 million per month. These
losses continued into January, 2006. On February 1, 2006 we suspended operations
indefinitely. During the six month period ending December 31, 2005 the Big Easy
sustained an operational loss of approximately $5 million and start up costs of
approximately $2.8 million.
The following is a summary of income and expenses of the Big Easy operation
from October 18th to January 1, 2006:
For the Period
Description October 18, 2005 to
January 1,2006
--------------------------------------------- -----------------------
Passenger Count 5,214
Number of Cruises 45
Average Number of Passengers per Cruise 116
Net Revenue per Passenger $ 137
Revenue:
Gaming $ 518,609
Fare 102,111
On Board 90,287
Less: Promotional Allowances
Fare (62,076)
-----------------------
Net Operating Revenue 648,931
-----------------------
Expenses:
Gaming 1,022,228
Fare 187,129
On Board 65,942
Maritime and Legal Expenses 1,081,411
Administrative 1,038,994
Finance Expenses - Net 1,956,571
Depreciation and Amortization 312,357
Total Expenses 5,664,632
-----------------------
Net (Loss) from Operations $ (5,015,701)
=======================
Horse Operations
During the quarter ended December 31, 2005 we determined to liquidate our
stock of horses on December 31, 2005. On that date we transferred our entire
stock of horses to Francis W. Murray at our cost. Payment was made by Mr. Murray
by offsetting $328,000 in amounts he had previously loaned the Company. This
action was taken to conserve funds since the operational expenses had been
approximately $45,000 per month. Our horse operation did not produce any
significant revenue during the 15 month period we owned the horses.
34
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 decreased
$2,582,669 from $37,632,595 in Fiscal 2004 to $35,049,926 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 impairment loss as a result of the
Company recording an impairment loss of $500,000 on the Second Cherry Hill Note
Receivable in Fiscal 2005, whereas during Fiscal 2004 the Company recorded an
impairment loss of $10,000,000 on the same note; (2) 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 (3) 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
($2,276,679) as compared to a loss of ($4,670,356) for last year. Operating loss
before depreciation for the year was ($282,172) as compared to ($3,930,485) for
the comparative year.
Other net expenses increased by $1,632,182 primarily as a result of an
increase in the interest and financing expenses of $1,597,896 primarily due to:
(1) classifying $1,186,297 of bareboat charter hire fees as related party
interest expense in Fiscal 2005 as compared capitalizing these costs in the case
of the Big Easy in Fiscal 2004 and classifying these costs as an operating
expense of the Palm Beach Princess in Fiscal 2004; and (2) 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 $3,845,888 of interest expense recorded in the statement of operations, the
Company incurred additional interest which was capitalized to the Big Easy
during that vessel's re-construction period in the amount of $1,530,197 during
the Fiscal 2005, 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.
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.
35
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 $ 225,788 $ 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 (5,400,035) 3,199,970 5,233,826
Extraordinary Item 4,000,000 - -
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 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.
36
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.
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 fiscal year ended June 30, 2005. the vessel was not placed in
dry dock or wet dock. The vessel was placed in dry dock for approximately one
week on October 17, 2005.
37
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 3,720,275
Interest and Financing Fees 2,059,126 1,109,221 949,905
Professional Fees - Bankruptcy 0 400,538 (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)
========== ============ ===========
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 ........40
Balance Sheets..............................................41
Statements of Operations ...................................43
Statements of Stockholders' Equity..........................44
Statements of Cash Flow ....................................45
38
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 December 31,
2006 and December 31, 2005 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
ended December 31, 2006, June 30, 2005 and 2004 and for the six months ended
December 31, 2005. 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 December
31, 2006 and 2005 and the results of their operations and their cash flows for
the three years ended December 31, 2006, June 30, 2005 and 2004 and for the six
months ended December 31, 2005 in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 1, International Thoroughbred Breeders, Inc. filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code on December 4,
2006. The accompanying financial statements do not purport to reflect or provide
for the consequences of the bankruptcy proceedings. In particular, such
financial statements do not purport to show (a) as to assets, their realizable
value on a liquidation basis or their availability to satisfy liabilities; (b)
as to pre-petition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to shareholder
accounts, the effect of any changes that may be made in the capitalization of
International Thoroughbred Breeders, Inc. and Subsidiaries; or (d) as to
operations, the effect of any changes that may be made in its business.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company's
recurring losses from operations, negative working capital, minimal
stockholders' equity, and defaults under terms of its long-term debt agreements
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include adjustments that might result from the
outcome of this uncertainty.
STOCKTON BATES, LLP
Philadelphia, Pennsylvania
April 16, 2007
39
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2005
ASSETS
December 31,
--------------------------
2006 2005
------------ ------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 871,236 $ 1,846,239
Accounts Receivable 335,500 218,087
Prepaid Expenses 1,520,613 1,697,034
Other Current Assets 153,136 524,200
Assets of Discontinued Operations 436 401,672
------------ ------------
TOTAL CURRENT ASSETS 2,880,921 4,687,232
------------ ------------
VESSELS & EQUIPMENT
Vessel - Palm Beach Princess -
under Capital Lease 17,500,000 17,500,000
Equipment 3,912,135 3,334,079
Leasehold Improvements 921,899 988,625
Vessel - Big Easy - under Capital Lease -
Not in Service 20,305,348 20,305,348
Vessel Not Placed in Service - Royal Star 3,054,735 3,007,216
------------ ------------
45,694,117 45,135,268
LESS: Accumulated Depreciation and Amortization 6,562,315 4,024,434
------------ ------------
TOTAL VESSELS & EQUIPMENT - NET 39,131,802 41,110,834
------------ ------------
OTHER ASSETS:
Notes Receivable 5,300,000 14,278,651
Vessel Deposits - Related Parties 9,733,136 9,726,377
Deposits and Other Assets - Related Parties 2,978,340 4,541,125
Deposits and Other Assets - Non-Related Parties 993,191 1,734,756
Spare Parts Inventory 1,018,332 1,032,603
------------ ------------
TOTAL OTHER ASSETS 20,022,999 31,313,512
------------ ------------
TOTAL ASSETS $ 62,035,722 $ 77,111,578
============ ============
See Notes to Consolidated Financial Statements.
40
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2005
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
--------------------------
2006 2005
------------ ------------
CURRENT LIABILITIES:
Accounts Payable $ 213,206 $ 7,310,569
Accrued Expenses 1,655,542 4,519,508
Accrued Expenses -Bareboat Charter -
Related Party - 129,425
Short-Term Debt - 859,057
Notes Payable PDS - Current Portion - 29,530,379
Deferred Interest - Short-Term - 510,423
Short-Term Debt - Related Parties - 531,353
Liabilities of Discontinued Operations 415,400 405,802
------------ ------------
TOTAL CURRENT LIABILITIES 2,284,148 43,796,516
------------ ------------
LONG-TERM LIABILITIES:
Accrued Expenses - Related Parties 808,164 653,571
Vessel Capital Lease Payable -
Long Term Portion - Related Party - 3,500,000
Long-Term Debt - Net of Current Portion - 93,108
Deferred Interest - Long-Term - 1,239,609
------------ ------------
TOTAL LONG-TERM LIABILITIES 808,164 5,486,288
------------ ------------
LIABILITIES SUBJECT TO COMPROMISE:
Notes Payable PDS 35,429,982 -
Equipment Operating Lease Payable - PDS 2,125,530 -
Notes Payable 888,639 -
Accounts Payable & Accrued Expenses 9,592,895 -
Vessel Capital Lease Payable -
Long Term Portion - Related Party 3,500,000 -
Deferred Interest 1,239,618 -
Accrued Expenses - Bareboat Charter -
Related Party 1,531,472 -
Related Party Liabilities 622,500 -
------------ ------------
TOTAL LIABILITIES SUBJECT TO COMPROMISE: 54,930,636 -
------------ ------------
TOTAL LIABILITIES 58,022,948 49,282,804
------------ ------------
DEFERRED INCOME 1,487,726 1,559,388
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $100 Par Value,
Authorized 500,000 Shares, 362,844
Issued and Outstanding 36,284,375 36,284,375
Series B Convertible Preferred Stock,
$10 Par Value,
Authorized 500,000 Shares, 500,000
Issued and Outstanding 5,000,000 5,000,000
Common Stock, $2 Par Value, Authorized
25,000,000 Shares,
12,282,564, Issued and Outstanding 24,565,125 24,565,125
Capital in Excess of Par 24,232,083 22,462,582
(Deficit) (87,098,997) (61,585,158)
------------ ------------
2,982,586 26,726,924
LESS:
Treasury Stock, 915,077 Shares (457,538) (457,538)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,525,048 26,269,386
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 62,035,722 $ 77,111,578
============ ============
See Notes to Consolidated Financial Statements.
41
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2006 AND THE SIX MONTHS ENDED DECEMBER 31, 2005
AND FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
Six Months Ended
December 31, December 31, June 30,
--------------- --------------- ---------------------------------
2006 2005 2005 2004
--------------- --------------- --------------- ---------------
OPERATING REVENUES:
Gaming $ 26,302,571 $ 11,579,979 $ 27,350,154 $ 27,528,631
Fare 2,508,097 1,177,442 2,999,130 3,151,182
On Board 1,697,321 936,131 2,003,746 1,921,583
Other 447,573 283,098 420,217 360,843
--------------- --------------- --------------- ---------------
NET OPERATING REVENUES 30,955,562 13,976,650 32,773,247 32,962,239
--------------- --------------- --------------- ---------------
OPERATING COSTS AND EXPENSES:
Gaming 9,660,123 5,181,569 9,136,981 8,805,157
Fare 2,794,756 1,815,181 4,310,927 3,868,705
On Board 825,128 502,065 987,397 925,980
Maritime & Legal Expenses 7,737,551 4,671,882 6,421,129 6,796,486
General & Administrative Expenses 2,970,090 2,407,295 3,007,640 3,722,984
General & Administrative Expenses - Parent 2,015,553 1,131,014 1,976,507 1,655,378
Ship Carrying/Development Costs - Big Easy 3,148,782 2,830,532 5,011,756 -
Ship Carrying Costs - Royal Star 601,599 261,675 284,257 -
Development Costs - Other 390,910 582,157 970,836 700,580
Equine Costs - 637,486 447,989 -
Depreciation & Amortization 2,869,513 1,503,906 1,994,507 739,871
Loss on Impairment of Assets 11,613,976 - 500,000 10,000,000
Bankruptcy Costs 191,485 - - 417,454
--------------- --------------- --------------- ---------------
TOTAL OPERATING COSTS AND EXPENSES 44,819,465 21,524,762 35,049,926 37,632,595
--------------- --------------- --------------- ---------------
OPERATING (LOSS) (13,863,903) (7,548,112) (2,276,679) (4,670,356)
--------------- --------------- --------------- ---------------
OTHER INCOME (EXPENSE):
Interest and Financing Expenses (7,931,843) (4,104,444) (2,518,214) (2,232,119)
Interest and Financing Expenses - Related Party (2,182,257) (645,418) (1,327,674) (15,873)
Cost of Warrants Granted for Financing (1,828,287) (86,590) - -
Interest Income 54 7,687 11,988 79,320
Interest Income Related Parties 292,397 143,892 292,583 247,785
Other Income - - 7,961 19,713
--------------- --------------- --------------- ---------------
TOTAL OTHER INCOME (EXPENSE) (11,649,936) (4,684,873) (3,533,356) (1,901,174)
--------------- --------------- --------------- ---------------
(LOSS) BEFORE TAX PROVISION
AND EXTRAORDINARY ITEM (25,513,839) (12,232,985) (5,810,035) (6,571,530)
Income Tax Expense - - 90,000 228,500
--------------- --------------- --------------- ---------------
(LOSS) BEFORE EXTRAORDINARY ITEM (25,513,839) (12,232,985) (5,900,035) (6,800,030)
EXTRAORDINARY ITEM - Fees charged to related
parties for Master Settlement Agreement. - - 4,000,000 -
--------------- --------------- --------------- ---------------
NET (LOSS) $ (25,513,839) $ (12,232,985) $ (1,900,035) $ (6,800,030)
=============== =============== =============== ===============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
(Loss) before Extroardinary Item $ (2.24) $ (1.16) $ (0.57) $ (0.86)
Extraordinary Item - - 0.39 -
--------------- --------------- --------------- ---------------
Net (Loss) $ (2.24) $ (1.16) $ (0.18) $ (0.86)
=============== =============== =============== ===============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - Basic and Diluted 11,367,487 10,567,487 10,303,942 7,933,691
=============== =============== =============== ===============
See Notes to Consolidated Financial Statements.
42
INTERNATIONAL THOROUGHBRED BREEDERS, INC
AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2006 AND THE SIX MONTHS ENDED DECEMBER 31, 2005
AND FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
Series A Series B Convertible
Preferred Preferred
----------------------- ------------------------
Number of Number of
Shares Amount Shares Amount
--------- ------------ ---------- ------------
BALANCE - JUNE 30, 2003 362,489 $ 36,248,875 - $ -
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 - - - -
Amortization of Deferred Compensation Costs - - - -
Net (Loss) for the Year Ended June 30, 2004 - - - -
--------- ------------ ---------- ------------
BALANCE - JUNE 30, 2004 362,489 36,248,875 - -
Shares Issued for Fractional Exchanges With Respect to the
One-for-twenty Reverse Stock Split effected on March 13, 1992 355 35,500 - -
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 - -
Series B Convertible Shares Issued - - 500,000 5,000,000
Common Shares Issued - - - -
Options Issued at Less than Treasury Stock Cost - - - -
Cost of New Stock to be Issued - - - -
Amortization of Deferred Compensation Costs - - - -
Net (Loss) for the Six Months Ended December 31, 2005 - - - -
--------- ------------ ---------- ------------
BALANCE - DECEMBER 31, 2005 362,844 36,284,375 500,000 5,000,000
Warrants Issued as Compensation - - - -
Net (Loss) for the Year Ended December 31, 2006 - - - -
--------- ------------ ---------- ------------
BALANCE - DECEMBER 31, 2006 362,844 $ 36,284,375 500,000 $ 5,000,000
========= ============ ========== ============
Common
-------------------------------
Number of
Shares Amount
------------- --------------
BALANCE - JUNE 30, 2003 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 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 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 11,482,564 22,965,125
Series B Convertible Shares Issued - -
Common Shares Issued 800,000 1,600,000
Options Issued at Less than Treasury Stock Cost - -
Cost of New Stock to be Issued - -
Amortization of Deferred Compensation Costs - -
Net (Loss) for the Six Months Ended December 31, 2005 - -
------------- --------------
BALANCE - DECEMBER 31, 2005 12,282,564 24,565,125
Warrants Issued as Compensation - -
Net (Loss) for the Year Ended December 31, 2006 - -
------------- --------------
BALANCE - DECEMBER 31, 2006 12,282,564 $ 24,565,125
============= ==============
Capital Treasury Deferred
in Excess Stock Compen-
of Par (Deficit) At Cost sation Total
------------ ------------ ----------- ---------- -----------
BALANCE - JUNE 30, 2003 $ 20,191,984 $(40,189,608) $(1,614,073) $ (11,666) $37,586,067
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 Exercised - - 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
Series B Convertible Shares Issued 2,263,664 - - - 7,263,664
Common Shares Issued - - - - 1,600,000
Options Issued at Less than Treasury Stock Cost 86,590 - - - 86,590
Cost of New Stock to be Issued - - - - -
Amortization of Deferred Compensation Costs - - - 1,666 1,666
Net (Loss) for the Six Months Ended December 31, 2005 - (12,232,985) - - (12,232,985)
------------ ------------ ----------- ---------- ------------
BALANCE - DECEMBER 31, 2005 22,462,582 (61,585,158) (457,538) - 26,269,386
Warrants Issued as Compensation 1,769,501 - - - 1,769,501
Net (Loss) for the Year Ended December 31, 2006 - (25,513,839) - - (25,513,839
------------ ------------ ----------- ---------- ------------
BALANCE - DECEMBER 31, 2006 $ 24,232,083 $(87,098,997) $ (457,538) $ - $ 2,525,048
============ ============ =========== ========== ============
See Notes to Consolidated Financial Statements.
43
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2006 AND THE SIX MONTHS ENDED DECEMBER 31, 2005
AND FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
Six Months Ended
December 31, December 31, June 30,
------------ ------------ --------------------------
2006 2005 2005 2004
------------ ------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
(LOSS) BEFORE DISCONTINUED OPERATIONS $(25,513,839) $(12,232,985) $ (1,900,035) $ (6,800,030)
Adjustments to reconcile income (loss) to net cash (used in)
provided by operating activities:
Depreciation and Amortization 2,869,513 1,503,906 1,994,507 739,871
Compensation for Options Granted - 86,590 - -
Stock Issued for Payment of Expenses - 1,600,000 - -
Expense of Options/Warrants Granted 1,828,287 - - -
Interest Added to Capital Lease Debt - PDS 5,560,140 - - -
Impairment of Assets 400,000 - - -
Impairment of Note 11,213,976 - 500,000 10,000,000
Increase (Decrease) in Deferred Income (71,662) (35,832) 155,269 -
Changes in Operating Assets and Liabilities -
(Increase) Decrease in Accounts Receivable (117,413) 1,660,998 (1,655,672) (29,720)
(Increase) Decrease in Other Assets 371,064 (80,717) (289,856) 337,454
(Increase) Decrease in Prepaid Expenses 176,421 (304,719) (653,812) (26,088)
Increase (Decrease) in Accounts Payable and
Accrued Expenses 3,221,501 3,743,544 5,124,345 (1,331,785)
------------ ------------ ------------ -----------
CASH (USED IN) OPERATING ACTIVITIES BEFORE
DISCONTINUED OPERATIONS (62,012) (4,059,215) (725,254) 2,889,702
CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES 9,600 4,801 90,202 9,600
------------ ------------ ------------ -----------
NET CASH (USED IN) OPERATING ACTIVITIES (52,412) (4,054,415) (635,052) 2,899,302
------------ ------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase and Improvements of Big Easy - Related Party - - (13,248,786) -
Purchase and Improvements of Royal Star - (36,075) (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
Purchase Options in Big Easy - Related Party - - (2,973,575) -
Note Receivable Collected - Related Party - - 2,600,749 -
Note Receivable Collected - Related Party - - 1,128,268 -
Advances - Related Party - (157,881) - -
Livestock Expenditures - - (328,247) -
Capital Expenditures (506,185) (202,173) (905,980) (925,346)
(Increase) Decrease in Other Investment Activity (336) (426,922) (435,787) (99,735)
(Increase) in Other Investment Activity - Related Party - - - (712,362)
------------ ------------ ------------ -----------
NET CASH (USED IN) INVESTING ACTIVITIES (506,521) (823,051) (15,813,005) (3,639,719)
------------ ------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funds Received from PDS Notes & Other Lenders 100,000 700,000 10,829,417 -
Proceeds from Sale of Series B Preferred Stock - 4,425,500 - -
Fees Paid on Sale of Series B Preferred Stock - (328,850) - -
Funds Received on Refinance of Note - - 2,651,558 -
Proceeds from Related Party Loans - - - 7,800,000
Principal Payment on Stock Purchase Note - - (1,120,240) -
Advances (Paid) Received (to) From Related Parties 387,640 1,310,169 (1,241,669) -
Principal Payments on Short Term Notes (505,935) (11,597) (240,960) (5,099,519)
Principal Payments on Long Term Notes (99,346) (247,214) (733,385) -
Principal Payments on Capital Leases - (120,542) - -
Principal Payments on Long Term Debt - Related Parties (300,000) - - (574,022)
Decrease in Balances Due to/from Discontinued Subsidiaries 10,836 4,875 89,290 8,550
------------ ------------ ------------ -----------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
BEFORE DISCONTINUED FINANCING ACTIVITIES (406,805) 5,732,341 10,234,011 2,135,009
CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES (10,836) (4,875) (89,290) (8,550)
------------ ------------ ------------ -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (417,641) 5,727,466 10,144,721 2,126,459
------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (976,574) 850,001 (6,303,336) 1,386,042
LESS CASH AND CASH EQUIVALENTS FROM
DISCONTINUED OPERATIONS 1,572 74 (912) (1,050)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 1,846,239 1,204,384 7,508,632 6,123,641
------------ ------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 871,237 $ 2,054,459 $ 1,204,384 $ 7,508,633
============ ============ ============ ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 47,257 $ 2,280,793 $ 6,325,962 $ 1,440,262
Income Taxes $ - $ - $ - $ 256,517
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the Year Ended December 31, 2006, the PDS interest expense for the
period in the amount of $5,560,140 added to the principal balance of the
respective leases.
See Notes to Consolidated Financial Statements.
44
INTERNATIONAL THOROUGHBRED BREEDERS,INC
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) CHAPTER 11 FILING, AND BASIS OF PRESENTATION
Between December 4, 2006 and December 7, 2006, the Company and six of its
subsidiaries, herein referred to as the Debtors, along with four companies owned
or controlled by our principal stockholder and Chairman of the Board filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code in the U.S. Bankruptcy Court for the Southern District of Florida (Palm
Beach Division) (the "Chapter 11 Cases"). These cases were consolidated for the
purpose of joint administration and were assigned case number 06-16350-BKC-PGH.
We filed the Chapter 11 Case because we were experiencing difficulties
generating sufficient cash flow from operations to meet our financial
obligations under the Promissory Notes and equipment leases with PDS Gaming
Corporation after expiration of the Forbearance Agreements.
Under Chapter 11, the Company is operating its businesses as a
debtor-in-possession ("DIP") under court protection from creditors and
claimants. Since the Chapter 11 filing, all orders sufficient to enable the
Company to conduct normal business activities, have been entered by the
Bankruptcy Court. While the Company is subject to Chapter 11, all transactions
not in the ordinary course of business require the prior approval of the
Bankruptcy Court.
As a consequence of the Chapter 11 filing, pending litigation against the
Company is generally stayed, and no party may take any action to collect its
pre-petition claims except pursuant to order of the Bankruptcy Court. April 18,
2007 was the last date by which holders of pre-filing date claims against the
Debtors could file such claims. Any holder of a claim that was required to file
such claim and did not do so may be barred from asserting such claim against the
Debtors and, accordingly, may not be able to participate in any distribution on
account of such claim. Differences between claim amounts identified by the
Debtors and claims filed by claimants will be investigated and resolved in
connection with the Debtors' claims resolution process, and only holders of
claims that are ultimately allowed for purposes of Chapter 11 case will be
entitled to distribution. The Company has not yet completed its analysis of all
the proofs of claim. Since the treatment, including payment, of allowed claims
is subject to a confirmed plan of reorganization, the ultimate distribution with
respect to allowed claims is not presently ascertainable.
Although we filed a timely motion to extend the exclusive period for the
Debtors to file a plan(s) of reorganization, our largest secured lender, PDS
Gaming Corporation, filed a motion on April 11, 2006 objecting to the proposed
extension. If the exclusivity period in not extended, other parties in interest,
including the Creditor's Committee, the secured lender or other creditors could
file a plan of reorganization.
We anticipate receiving a commitment for a secured loan from a financial
institution in order to fund the majority of the proceeds necessary to create a
new special purpose subsidiary to own and operate the Palm Beach Princess
business. We anticipate that the commitment will be subject to bankruptcy court
approval, an additional equity infusion from us or a third-party and
satisfactory loan documentation. Proceeds from the financing will be used to pay
existing creditors and provide working capital to the Palm Beach Princess
business.
We are in the process of negotiating a series of transactions that will
allow for the redeployment of the Big Easy to a foreign jurisdiction. We
anticipate receiving a term sheet for a secured loan from a financial
institution in order to fund a portion of the proceeds necessary to fund a
special purpose affiliate of the company to own and operate the Big Easy in this
foreign location. We anticipate that the term sheet will be subject to an
additional equity investment from a third-party, successful negotiation of
operating agreements and satisfactory loan documentation. Closing of the
transactions will also be subject to bankruptcy court approval. Proceeds from
the transaction will be used to pay existing creditors and provide working
capital, including funding start up and relocation expenses, to the Big Easy
business. No assurances can be given that we will be successful in these
negotiations
The consolidated financial statements have been prepared on a "going
concern" basis accordance with GAAP. The "going concern" basis of presentation
assumes that we will continue in operation for the foreseeable future and will
be able to realize our assets and discharge our liabilities in the normal course
of business. Because of the Chapter 11 case and the circumstances leading to the
filing thereof, our ability to continue as a "going concern" is subject to
substantial doubt and is dependent upon, among other things, confirmation of a
plan of reorganization, our ability to comply with the terms of the DIP
Facility, and our ability to generate sufficient cash flows from operations,
asset sales and financing arrangements to meet our obligations. There can be no
assurance that this can be accomplished and if it were not, our ability to
realize the carrying value of our assets and discharge our liabilities would be
subject to substantial uncertainty. Therefore, if the "going concern" basis were
not used for the Financial Statements, then significant adjustments could be
necessary to the carrying value of assets and liabilities, the revenues and
expenses reported, and the balance sheet classifications used.
Beginning in the fourth quarter of 2006, the consolidated financial
statements have been prepared in accordance with the American Institute of
Certified Accountants' Statement of Position (SOP) 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" and on a going concern
basis, which contemplates continuity of operations, realization of assets, and
liquidation of liabilities in the ordinary course of business. As a result of
our Chapter 11 filing, the realization of assets and liquidation of liabilities
are subject to uncertainty. Under SOP 90-7, certain liabilities existing prior
to the Chapter 11 filing are classified as Liabilities
45
Subject to Compromise on the Consolidated Balance Sheets. Additionally,
professional fees and expenses directly related to the Chapter 11 proceeding are
reported separately as reorganization items.
(2) 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 from the Port of Palm Beach, Florida, 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, bars and lounges, swimming pool and sundecks. The casino occupies
approximately 15,000 square feet aboard the ship and is equipped with
approximately 425 slot machines, 24 table games, including blackjack, craps and
roulette, 5 poker tables, and a sports wagering book.
Using the funding provided by the PDS Transactions (see Note 3) and working
capital, our subsidiary, ITG Palm Beach, LLC, began making alterations,
retrofits and improvements to a second vessel, the Big Easy, to prepare it for
use as a casino cruise ship. After numerous delays caused by start up problems
and hurricane Wilma, we began limited regular passenger service also from the
Port of Palm Beach, Florida on November 12, 2005. On February 1, 2006 we
indefinitely suspended operations of the Big Easy after two and one half months
of operations because the Coast Guard removed the vessel's Certificate of
Inspection until the installation of an insulating bulkhead was completed. The
February 1, 2006 Coast Guard decision was the last in a series of unforeseen
business circumstances which limited management's ability to introduce the Big
Easy to the market and necessitated the suspension of Big Easy commercial cruise
operations indefinitely.
(B) Principles of Consolidation - The accounts of all subsidiaries are
included in the consolidated financial statements. All significant inter-company
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; although, to a limited extent, we do grant
credit to our customers. 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 activities and skeet shooting. These revenues are
recognized on the date they are earned.
(E) Accounting Periods - During the six months ended December 31, 2005 the
Company changed its year end period from a June 30th year end to a December 31
year end. Therefore, the period ended December 31, 2005 was a transition period
of six months. The period ending December 31, 2006 is for a twelve month period.
The subsidiaries which operate the Palm Beach Princess and operated the Big Easy
until February 1, 2006 end their quarterly accounting periods on the last Sunday
of each quarter. These end of the week cut offs create more comparability of the
Company's operations, by generally having an equal number of weeks (13) and
week-end days in each quarter. From time to time an additional week is included
our accounting period due to this April 4, 2005 week quarter. The year ended
December 31, 2006 consists of 52 weekly accounting periods.
(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.
(G) Deferred Financing Costs - Deferred financing costs that are incurred
by the Company in connection with the issuance of Debt are deferred and
amortized to interest expense over the life of the underlying indebtedness using
the straight-line method.
(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 December 31, 2006 and 2005, the amortized expense was $329,766 and
$193,652.
As a result of the PDS transactions (see Footnote 3) we are leasing the
vessel M/V Palm Beach Princess and the Big Easy under capital lease
arrangements. The Company began depreciating the M/V Palm Beach Princess during
our previous fiscal year end of June 30, 2005 and began depreciating the Big
Easy when it was placed in service on October 18, 2005. As a result of the Big
Easy being removed from service during the quarter ended March 31, 2006 and the
unlikelihood that the vessel will be returned to service in the immediate
future, we suspended depreciating the vessel.
46
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. Beginning with fiscal years starting
after December 15, 2001, 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 December 31, 2006 and 2005,
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 July 2002, the FASB issued SFAS No. 148, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Management recognized the costs incurred associated with the suspension of the
Big Easy operations on February 1, 2006 in our quarter ended March 31, 2006 and
future carrying costs will be recognized as incurred.
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", and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). SFAS 123R is now effective for public
companies for the first interim or annual reporting period of the registrant's
first fiscal year beginning on or after June 15, 2005. In accordance with the
new rule, the Company will begin to expense the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award, effective July 1, 2005. Until July 1, 2005 the Company
accounted 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
stock options granted was equal to or greater than the market price of the
underlying stock on the date of the grant, no compensation expense was
recognized. No options were granted during the year ended December 31, 2006.
(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 are determined based on the difference
between the financial statement carrying amounts and tax basis 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. The Company has provided
a valuation reserve against the full amount of the net operating loss benefit
because in the opinion of management based upon the earnings history of the
Company, it is more likely than not that the benefits will not be realized.
(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/leaseback of equipment of $101,522 over the term of the equipment lease.
(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. When applicable, 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) 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, some of which rely on air travel to reach
our location. The goodwill recorded in the amount of $193,946 represents the
fair value of GMO Travel based on its discounted cash flows and the synergies
and cost savings gained by the Palm Beach Princess. The Company accounts for
goodwill in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets". In accordance with SFAS No.
142, amortization of goodwill is not required. Goodwill is tested at least
annually for impairment by comparing the fair value of the recorded assets to
their carrying amount. If the carrying amount of the goodwill exceeds its fair
value, an impairment loss is recognized.
(3) PDS TRANSACTIONS
Since July 2004, ITB and several of its subsidiaries, along with Cruise
Holdings I, LLC, Cruise Holdings II, LLC, Palm Beach Maritime Corporation
("PBMC") and Palm Beach Empress, Inc. ("PBE"), companies owned or controlled by
our chairman, 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 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. We have been operating under the vessel and
equipment leases and financing arrangements consummated on at various times
since July 7, 2004. Below is a summary of those transactions.
(A) On July 7, 2004 PBMC and its affiliate company, PBE, the Company and
our subsidiaries ITG Vegas and ITG Palm Beach, LLC closed on a $23 million
transaction with PDS which was re-financed on June 30, 2005. Additionally 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. 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 which was
refinanced on June 30, 2005. 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. In January 2007 the gaming equipment was
returned and the lease was cancelled.
(C) On June 30, 2005, the Company, together with its subsidiaries, ITG
Vegas, Inc. ("ITGV"), ITG Palm Beach, LLC ("ITGPB"), International Thoroughbred
Gaming Development Corporation ("ITGDC") and Riviera 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, ITGDC, 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 was to be
July 1, 2009. Our overall annual interest rate on the new PDS loan was to be 17%
until ITG Vegas' EBITDA exceeds $17 million on an annualized basis, at which
time the interest rate would have been 15.5%. 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.
In accounting for the add-on financing, we applied guidance as set forth in
EITF 96-19, "Debtor's Accounting for a Modification of Exchange of Debt
Instruments". We believe this add-on financing was a modification of the
existing debt rather than an extinguishment of the old debt. The present value
of the cash flows required to fund the new debt has not increased by more than
10%. Therefore, in accordance with EITF 96-19 the new debt has been treated as
an exchange or modification of the debt. We did not write off any deferred
financing costs which were on the books at that time.
Effective August 1, 2005 monthly interest and principal payments were
scheduled to be due in the amount of approximately $1,100,000 during the first 2
years, with the remaining monthly payments decreasing slightly. We made the
first monthly payment in August 2005 and then began deferring principal payments
which was permitted in accordance to the loan documents. The terms of the new
loan required the Company to maintain an EBITDA of $7.5 million for the nine
months ending October 2, 2005, $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 were not maintained or if we were not in compliance
with other various loan covenants we would 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 Parent Company were limited to
$150,000 per month plus amounts of ITG Vegas' income tax savings attributed to
inclusion in the Parent Company tax return.
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 payable by Realen-Turnberry/Cherry Hill, LLC in the principal
amount of $10 million, an assignment of our promissory note, dated May 1, 2002,
payable by OC Realty in the principal amount of $2,021,176, and stock in certain
of our subsidiaries.
(D) December 2005 Transactions
In December 2005, the Company borrowed from and issued a note payable in
the amount of $541,102 to PDS Gaming in order to cover our required debt service
interest payment on December 10, 2005.
(E) Forbearance Agreements
We entered into two consecutive forbearance agreements which subsequently
expired on August 29, 2006 after which we were not able to make our monthly loan
and lease payments nor were we able to consummate any transactions to refinance
or reduce our indebtedness as contemplated under the forbearance agreement.
(F) Default Notice from PDS Gaming Corporation.
On October 3, 2006, the parties to the PDS leases received notice from PDS
that it has accelerated the maturity of our obligations and declared all amounts
remaining unpaid under the Loan Agreement and the Note dated June 30, 2005, and
all amounts payable under our equipment leases with PDS immediately due and
payable.
We did not have the means to satisfy the creditor's demands and on December
4 and 7, 2006 the parties to the PDS financing filed petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. PDS has indicated by way of its
proof of claim filed with the Bankruptcy Court that they believe to be owed
amounts in excess of what we have recorded. We do not believe that the penalty
interest is enforceable under a bankruptcy filing.
(4) DESCRIPTION OF LEASING ARRANGEMENTS
The Company and several of its subsidiaries have entered into charter
transactions for two vessels and lease transactions for equipment placed on
three vessels.
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.
We also charter the Big Easy and lease gaming equipment aboard that vessel.
As a result of the June 30, 2005 PDS transaction and the Amended and Restated
Bareboat Charter and Option to Pruchase Agreement with Cruise II, a company
controlled by Francis W. Murray, 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 transaction described in
note 3 also permits the Company to purchase the Big Easy for the appraised value
of the vessel which shall be determined upon the refitting and refurbishing of
the vessel. The Company has determined the value of the Big Easy by capitalizing
the total of: 1) the costs it had incurred for improvements it had made to the
Big Easy; and 2) the present value of the payments required under the PDS Gaming
loans on the date we recorded the capital lease.
The transaction described in Note 3 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 December 31, 2006 include the following
amounts for capitalized leases:
Vessel, Palm Beach Princess $ 17,500,000
Vessel, Big Easy 20,305,348
-----------------
Less: allowance for depreciation (3,284,410)
-----------------
Capital Leases $ 34,520,938
=================
The following is a schedule of capital lease liabilities due at December
31, 2006:
December 31, 2006
-----------------------------------------
Vessel Short-Term Long-Term Total
- --------------------------------- ------------- ------------ ------------
Palm Beach Princess $ 16,367,756 - $ 16,367,756
Big Easy 15,113,357 - 15,113,357
Royal Star 3,335,039 - 3,335,039
------------- ------------ ------------
Amount due to PDS for vessels 34,816,152 - 34,816,152
Less: Royal Star Note shown in
Notes Payable (See Note 10) (3,335,039) - (3,335,039)
Fair Market Valuation -
Palm Beach Princess - 3,500,000 3,500,000
------------- ------------ ------------
Total Short and Long Term Vessel
Leases Payable $ 31,481,113 $ 3,500,000 $ 34,981,113
============= ============ ============
(5) SERIES B PREFERRED STOCK
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 were received by the Company as part of a private offering of
500,000 shares of its Series B Preferred Stock, at a subscription price of
$15.00 per share. As of December 28, 2005 the Company had accepted subscriptions
for the purchase of 295,033 shares of Series B Preferred Stock and had received
approximately $4 million in net cash proceeds. On December 29, 2005 our
Chairman, Francis W. Murray, purchased all of the remaining Series B Preferred
Stock which had not previously been sold in the private offering, amounting to
204,966 shares of Series B Preferred Stock, on the same terms as the private
offering. We sold the Series B Preferred Stock to Mr. Murray in payment of
$3,074,500 of debt which the Company had owed to Mr. Murray. This amount has not
been included in the net cash proceeds amount of $4 million as indicated above.
Subscribers also received warrants for the purchase of 1.2 shares of the
Company's common stock for each share of Series B Preferred Stock purchased (an
aggregate of 600,000 shares of the Company's common stock based on purchases of
all 500,000 shares of the Series B Preferred Stock). The exercise price under
each such warrant is $3.25 per common share, and the warrants issued to
purchasers of the Series B Preferred Stock are exercisable for a term of three
(3) years beginning one year after issuance.
The Series B Preferred Stock will automatically be converted into common
stock upon the effective date of a Registration Statement covering the common
shares issuable upon conversion which was filed with the Securities and Exchange
Commission on December 30, 2005. 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. The Company will need to file an Amended
Form S-1 in the future and if the registration statement becomes effective
during the quarter ended December 31, 2008, the conversion price will be $1.82
and the outstanding Series B Preferred Stock will be convertible into 4,032,258
shares of additional new common shares.
During the year our net loss was increased by a non-cash expense of
$509,800 as the result of the accounting for the sale of Series B convertible
preferred stock. This non-cash item, known as a "Beneficial Conversion Feature",
is the result of the application of the Emerging Issues Task Force's (EITF)
Issues 98-5 and 00-27. The beneficial conversion feature was calculated as the
difference between the effective conversion price and the fair value of the
common stock, multiplied by the estimated number of common shares into which the
security is convertible. 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 of $15 per share by the conversion price then in effect.
If these shares are issued before December 31, 2008 a total of 4,120,880 shares
of Common Stock would be issued upon conversion of all the Series B Preferred
Stock, which represents an additional 370,880 shares above the original number
had the price been $2. The value assigned to the beneficial conversion feature
on the Preferred Stock was credited to paid in capital and charged to earnings
as interest expense.
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 has served as a financial advisor to
the Company, and a second person to be designated by another group of purchasers
of the Series B Preferred Stock.
The majority of the net proceeds of the sale of Series B Preferred Stock
was used for working capital of the subsidiary companies which operate the Big
Easy and the Palm Beach Princess.
(6) NOTES RECEIVABLE
(A) 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.") All payments are dependent upon, and payable solely
out of, the buyer's net cash flow available for distribution to its equity
owners. 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 is to be paid to us
along with 331/3% of all Distributable Cash plus accrued interest until
maturity.
(B) 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"). 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 equaled
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.
The Company is not liable for repayment of the principal of the $5 million
loan, 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. Due to our
negative cash position, we have not made the $50,000 per month payment since
January 2005.
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. While the Company expected the $10,000,000 note to be fully paid, it was
not optimistic that this Second Cherry Hill Note will be fully paid, and
accordingly, during the fiscal years ended June 30, 2004 and 2005 the Company
wrote down the Second Cherry Hill Note on its books to $4,278,651.
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. 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.
(C) Impairment of Cherry Hill Notes
Subsequent to December 31, 2006, the Company began negotiations to sell the
Cherry Hill Notes. Although these transactions have not consummated before the
filing of the Company's Form 10-K, the observable market price representing the
fair value of these notes is substantially lower than the carrying values on our
books. In prior years, the fair value and the collectability of these notes
determined by financial statements and financial projections by the developer of
the property based upon the future development of the site incorporating our
office park and hotel. Recent economic conditions have forced the developer to
reconsider their plans for the remaining property which resulted in cash flow
projections for the property being substantially lower than in prior years. As a
result of our recent negotiations to sell the Cherry Hill Notes the Company
recorded an impairment loss on the two Cherry Hill Notes of $9,378,651 as of
December 31, 2006 to more fully reflect the observable market value of the
loans.
(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 $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 in excess of $6 million which we paid, amounting to
approximately $2.5 million, that can be applied to the purchase price of the Big
Easy.
(B) Deposits and Other Assets - Related Parties and Allowance for Doubtful
Accounts:
We have invested in two projects in which our Chairman, President and Chief
Executive Officer, Francis W. Murray, also has a pecuniary interest. The first
of these investments was to pay costs and expenses for development of a golf
course in Southern California. In Fiscal 2003, the loans made by us, including
principal of $735,584 and accrued interest, in the amount of $193,957 was
assumed by OC Realty, LLC, a Florida limited liability company in which Francis
W. Murray also has a primary interest.
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 December 31, 2006, we had lent $2,704,617 in
total to the project and we have accrued interest in the amount of $2,235,325 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 the golf course project and to OC Realty based on comparable
sales of like units in the marketplace which suggests a weakening of the real
estate market for condominium projects in the Fort Lauderdale area. Therefore,
at December 31, 2006 we recorded an allowance for doubtful accounts on the OC
Realty project of $2,235,325 to more fully reflect the observable market value
of the loans.
December 31, December 31,
2006 2005
------------- -------------
Loans to the Ft Lauderdale Project (OC Realty, LLC) $ 2,784,394 $ 2,769,989
Accrued Interest on Loans to the Ft. Lauderdale
Project (OC Realty, LLC) - 1,577,190
Goodwill on Purchase of GMO Travel 193,946 193,946
------------- -------------
Total Deposits and Other Assets - Related Parties $ 2,978,340 $ 4,541,125
============= =============
(8) DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES
The following items are classified as deposits and other assets -
non-related parties:
December 31, December 31,
2006 2005
-------------- -------------
Long-Term Prepaid Loan Costs - Net of amortization $ 700,333 $ 1,411,976
Port Lease Rights 250,000 250,000
Other Misc. Assets 42,858 72,780
-------------- -------------
Total $ 993,191 $ 1,734,756
============== =============
(9) 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. (See Footnote 6)
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. 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
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 we believe the lessee/buyer did not have a use for the liquor license
at that property. By the terms of the contract it was the Company's position
that we had the right to re-acquire the liquor license for $100,000 and
exercised such right, however the lessee/buyer refused to perform. On January
18, 2006 the Company filed a Complaint in Camden County Superior Court of NJ,
Chancery Division, (Civil Action No. C-7-06) against the defendants to protect
our interests in the license. In May 2006 the judge ruled against us in a bench
ruling. The Company is appealing this matter. The carrying value of the liquor
license was $400,000 and during 2006 we recognized an impairment of $400,000 as
a result of the court's preliminary ruling.
The net assets of the operations to be disposed of included in the
accompanying consolidated balance sheets as of December 31, 2006 and 2005
consist of the following:
December 31, December 31,
Classified As: 2006 2005
-------------- -------------
Current Assets $ 436 $ 401,672
Current Liabilities (415,400) (405,802)
-------------- -------------
Net (Liabilities) Assets of
Discontinued Operations $ (414,964) $ (4,130)
============== =============
Cash flows from discontinued operations for the year ended December 31,m
2006, the six months ended December 31, 2005 and the years ended June 30, 2005
and 2004 consist of the following:
June 30,
December 31, December 31, ---------------------
2005 2005 2005 2004
------------ ------------ --------- --------
Cash Flows From Discontinued Operating Activities:
Income $ -0- $ -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 (336) -0- -0- -0-
Increase (Decrease) in Accounts and Purses
Payable and Accrued Expenses 10,836 4,802 90,202 9,600
------------ ------------ --------- --------
Net Cash Provided by Discontinued Operating Activities 10,500 4,802 90,202 9,600
------------ ------------ --------- --------
Cash Flows from Discontinued Financing Activities:
(Decrease) in Balances Due To/From Continuing Operations (10,836) (4,875) (89,290) (8,550)
------------ ------------ --------- --------
Net Cash (Used In) Discontinued Financing Activities (10,836) (4,875) (89,290) (8,550)
------------ ------------ --------- --------
Net (Decrease) Increase in Cash and Cash Equivalents From
Discontinued Operations (336) (73) 912 1,050
Cash and Cash Equivalents at Beginning of Year From
Discontinued Operations 1,572 1,645 733 (317)
------------ ------------ --------- --------
Cash and Cash Equivalents at End of Year From Discontinued
Operations $ 1,236 $ 1,572 $ 1,645 $ 733
============ ============ ========= ========
(10) VESSELS, EQUIPMENT AND LIVESTOCK
Vessels owned and/or leased and equipment consist of the following:
Depreciation is being computed over the estimated remaining useful lives using
the straight-line method.
Estimated
Useful
Lives in December 31, December 31,
Years 2006 2005
- --------------------------------------- --------- -------------- -------------
Leased Vessel - Palm Beach Princess 20 $ 17,500,000 $ 17,500,000
Leased Vessel - Big Easy 20 20,305,348 20,305,348
Vessel Not Placed in Service -
Royal Star N/A 3,054,735 3,007,216
Equipment 5-15 3,912,135 3,334,079
Leasehold Improvements 15-40 921,899 988,625
-------------- -------------
45,135,268 45,694,117
Less Accumulated Depreciation
and Amortization (6,562,315) (4,024,434)
-------------- -------------
$ 39,131,802 $ 41,110,834
============== =============
(11) ACQUISITIONS AND DISPOSITIONS
o Year ended December 31, 2006 - none
o Six Months Ended December 31, 2005 - during the six months ended
December 31, 2005 we divested our interest in the livestock owned at
December 31, 2005.
o Fiscal Year Ended June 30, 2005 - During the Fiscal 2005, we purchased
livestock, including stud fees in the amount of $328,247.
o Fiscal Year Ended June 30, 2004 - Royal Star Entertainment, LLC, a
wholly owned subsidiary registered as a Delaware limited liability
company, purchased the vessel M/V Royal Star ("Royal Star"). As of
December 31, 2006 the Company has capitalized $3,054,735 for the
purchase and improvements and for legal and professional fees in
connection with the vessel. 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 additional improvements and
outfitting before being placed in service as a gaming vessel.
Depreciation will not be computed on the Royal Star until it is placed
in service.
(12) LIABILITIES SUBJECT TO COMPROMISE
As discussed in Note 1, International Thoroughbred Breeders, Inc. has been
operating as a debtor-in- possession under Chapter 11 of the Bankruptcy Code
since December 4, 2006. The Company has been authorized by the Bankruptcy Court
overseeing the proceeding to operate its business in the ordinary course.
As a result of the Chapter 11 filing, all actions to collect the payment of
pre-petition indebtedness are subject to compromise or other treatment under a
plan of reorganization. Generally, actions to enforce or otherwise effect
payment of pre-Chapter 11 liabilities are stayed. Although pre-petition claims
are generally stayed, as part of the first day orders and subsequent motions
granted by the Bankruptcy Court, the Bankruptcy Court approved the Company's
motions to pay certain pre-petition obligations including, but not limited to,
employee wages and other related benefits.
These amounts represent the Company's estimate of known or potential
pre-petition claims to be resolved in connection with the bankruptcy
proceedings. Such claims remain subject to future adjustments, based on such
things as (i) negotiations; (ii) actions taken by the Bankruptcy Court; (iii)
further developments with respect to any disputed claims; (iv) rejection of
executory contracts and leases; (v) the determination of the value of collateral
securing claims; or (vi) other events. Payment terms for these claims will be
established in connection with the Company's confirmed plan of reorganization.
(13) NOTES AND MORTGAGES PAYABLE
(a) Notes and Mortgages Payable - Subject to Compromise
Notes and Mortgages Payable Subject to Compromise are summarized below. The
capital lease transactions with PDS other than the Royal Star loan are carried
under lease liabilities (See Note 4).
Interest December 31, 2006 December 31, 2005 *
% ----------------- ---------------------
Per Current Long- Current Long-
Annum Term Term
-------- ----------- ----- ----------- -------
International Thoroughbred
Breeders,Inc.:
PDS Gaming (A) 20% $ 541,102 $ -0- $ 541,102 $ -0-
Francis X. Murray (B) 8% 382,864 -0- 459,164 -0-
William H. Warner (B) 12% 37,000 -0- 37,000 -0-
MBC Global (C) 9% 200,000 -0- 200,000 -0-
Westminister Investments (C) 9% 150,000 -0- 150,000 -0-
Ryan Moore Trust (C) 9% 25,000 -0- 25,000 -0-
James B. Moore Trust (C) 9% 25,000 -0- 25,000 -0-
Other Various 38,654 -0- 36,595 -0-
ITG Vegas, Inc.:
PDS Gaming (A) various 31,174,482 -0- 26,255,439 -0-
PDS Gaming (A) 22.5% 3,271,628 -0- 2,733,838 -0-
Maritime Services, Corp. 9% -0- -0- 166,156 -0-
International Game
Technology (D) 8% 404,928 -0- 221,297 59,568
Others Various 45,057 -0- 35,009 33,540
----------- ----- ----------- -------
Totals 36,295,715 -0- 30,885,600 93,108
PDS Gaming (A) (34,987,212) -0- (29,530,379) -0-
----------- ----- ----------- -------
Related Party Notes (419,864) -0- (496,164) -0-
----------- ----- ----------- -------
Totals $ 888,639 $ -0- $ 859,057 $ 93,108
=========== ===== =========== =======
* Carried as amounts not subject to compromise at December 31, 2005.
(A) During the year ended December 31, 2006, we entered into various loan
agreements with our primary lender, PDS, which had the effect of reclassing our
capital leasing arraignments on two vessels to promissory notes. The outstanding
balance, subject to compromise, on the vessel promissory notes is $31,174,482 at
various interest rates. On December 9, 2005, the Company executed and delivered
a promissory note in the original principal amount of $541,102 to PDS Gaming.
The proceeds of the note were used to make several December 9, 2005 interest
payments due on the PDS Transactions. The interest rate is 20% until such time
as the annualized EBITDA for the various vessels operated by the Company reach
$20 million at which time the interest rate will be reduced to 15%. 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 Ship 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 is 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%. We are currently
paying a default interest rate of 22.5%. At December 31, 2006, the balance
represents the unpaid principal and the interest added to the debt totaling
$3,271,628. (See Note 3)
(B) On March 1, 2003, we issued a promissory note for a line of credit
bearing interest at 8% to Francis X. Murray. The outstanding balance on the line
of credit note at December 31, 2005 was $459,164 and accrued interest was
$29,052. On September 19, 2005 Mr. Murray lent an additional $300,000 to the
Parent Company. At September 30, 2006 the outstanding balance on the line of
credit was $382,864 and accrued interest was $45,216. 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 proceeds
from both notes were used for working capital.
(C) On November 9, 2005, we borrowed $400,000 from four (4) private parties
and agreed to issue our promissory notes evidencing the loans. In consideration
of the loans we also agreed to issue 3-year warrants to purchase 100,000 shares,
in the aggregate of our common stock, exercisable at $2.50 per share. The loans,
bearing interest at 9% per year, and the principal were due on December 9, 2005.
The terms of the note required the Company to issue penalty warrants on December
9, 2005 to purchase 100,000 shares of our common stock at an exercise price of
$2.50 per share. Furthermore, if the notes are not paid by the 9th day of each
month thereafter, we are required to issue additional penalty warrants to
purchase 200,000 shares of common stock at the lesser of $2.50 per share or the
then current market price per share for each month beginning January 9, 2006
until these notes are paid. As of December 31, 2006, we have reserved or issued
warrants for the issuance of 2.4 million shares of common stock as a result of
this borrowing. Proceeds of the loans were used to pay interest then due on our
secured indebtedness for borrowed money to PDS Gaming Corporation.
(D) 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 were 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 were to be paid on the balance. At December 31, 2006,
the principal balance on the two notes to International Game Technology was
$404,928 which was classified as short term. At December 31, 2006 the balance on
the notes includes past due payments. The Company is negotiating new terms under
these notes and if unsuccessful the creditor may seek to enforce payment of the
notes.
(b) Notes and Mortgages Payable - Not subject to Compromise
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 has
been unsuccessful in negotiating new terms under this note and 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 $42,000 as of
December 31, 2006. These amount are classified in the Liabilities of
Discontinued Operations in the current liability section of the Balance Sheet.
(14) RELATED PARTY DEBT
The following schedule represents related party debt (See Note 25- Related
Party Transactions):
December 31, 2006 December 31, 2005
------------------------ ----------------------
Short-Term Long-Term Short-Term Long-Term
----------- ---------- ---------- ---------
Related Party Notes $ - $ - $ 496,164 $ -
Accrued Wages due to and
Advances from Francis W.
Murray - 808,164 35,189 395,000
Accrued Expenses Subject
to Compromise - 622,500 - -
Advances from Palm Beach
Maritime Corp. (Francis W.
Murray ownership) - - - 258,571
----------- ---------- ---------- ---------
Total Debt - Related
Parties $ - $ 1,430,664 $ 531,353 $ 653,571
=========== ========== ========== =========
(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.
During the year ended June 30, 2005, the Company recognized $4 million of
extraordinary income. Federal and state income taxes were not recognized on the
income because the Company has Net Operating Loss deductions to offset any
federal taxes accrued. Additionally, this income was reported in the Company's
state income tax return in a prior year and the extraordinary item amount was
offset by state net operating loss carryforwards.
At December 31, 2006 the Company has available net operating loss
carryforwards aggregating approximately $119,000,000, which can be used to
offset future federal taxable income. These unused net operating losses expire
2006 through 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 $43.4 million has been offset by a valuation
allowance of the same amount. Accordingly, no deferred tax asset is reflected in
these financial statements.
Components of deferred tax assets as of December 31, 2006 and 2005 are as
follows:
December 31, 2006 December 31, 2005
------------------- -------------------
Non Current:
Net operating loss carryforward $ 43,400,000 $ 41,650,000
Valuation allowance (43,400,000) (41,650,000)
------------------- -------------------
Net deferred tax asset $ 0 $ 0
=================== ===================
In accordance with Section 382 of the Internal Revenue Code, as amended,
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 December 31, 2006:
Net Operating
Loss Year End
Carryforwards Expiration Dates
------------- ----------------
$ 21,600,000 12/31/2007
5,280,000 12/31/2008
5,600,000 12/31/2009
8,750,000 12/31/2009
82,770,000 12/31/2010
through 12/31/2027
-------------
$ 124,000,000
=============
(16) LEGAL PROCEEDINGS
As a consequence of our Chapter 11 Filing, all pending litigation against
the Debtors was stayed automatically by Section 362 of the Bankruptcy Code and,
absent further order of the Bankruptcy Court, no party may take any action to
recover on pre-petition claims against the Debtors. In addition, pursuant to
Section 365 of the Bankruptcy Code, the Debtors may reject or assume
pre-petition executory contracts and unexpired leases, and other parties to
contracts or leases that are rejected may assert rejection damages claims as
permitted by the Bankruptcy Code.
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. 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
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 we believe the lessee/buyer did not have a use for the liquor license
at that property. By the terms of the contract it was the Company's position
that we had the right to re-acquire the liquor license for $100,000 and
exercised such right, however the lessee/buyer refused to perform. On January
18, 2006 the Company filed a Complaint in Camden County Superior Court of NJ,
Chancery Division, (Civil Action No. C-7-06) against the defendants to protect
our interests in the license. In May 2006 the judge ruled against us in a bench
ruling. The Company is appealing this matter. The carrying value of the liquor
license was $400,000 and during 2006 we recognized an impairment of $400,000 as
a result of the court's preliminary ruling.
Through our subsidiary, Royal Star Entertainment LLC, we had negotiated
with the Port of Palm Beach District a second agreement that would 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
agreement was 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
were required to commence sailings on or before October 31, 2005. Due to the
suspension of the Big Easy operations, the Port of Palm Beach District voted on
April 10, 2006 to terminate this agreement, and on April 19, 2006 the District
filed suit in Florida Circuit Court for declaratory judgement of termination of
the agreement and for other relief. Royal Star Entertainment, LLC filed its
answer denying that the District was entitled to terminate the agreement. This
lawsuit was stayed upon Royal Star Entertainment, LLC's filing of a voluntary
petition for reorganization under Chapter 11 of the Bankruptcy Code on December
4, 2006.
On November 17, 2006 a Complaint was filed in the United States District
Court for the Northern District of Illinois by Westminster Investments, LLC and
certain other plaintiffs against International Thoroughbred Breeders, Inc., its
Chairman Francis W. Murray, its Vice President Scott Kaplan, and its subsidiary
ITG Vegas' Chief Executive Officer Francis X. Murray, alleging non-payment to
the plaintiffs by International Thoroughbred Breeders of a promissory note dated
November 9, 2005 in the amount of four hundred thousand dollars plus interest,
and alleging fraud by the individual defendants in connection with the
promissory note. This lawsuit was stayed against International Thoroughbred
Breeders upon its filing of a voluntary petition for reorganization under
Chapter 11 of the Bankruptcy Code on December 7, 2006. The automatic stay,
however, was not applicable to the individual defendants; accordingly, with the
permission of the Bankruptcy Court, International Thoroughbred Breeders engaged
counsel for the limited purpose of filing a motion to transfer the lawsuit to
the United States District Court for the Southern District of Florida. That
motion is now pending before the Court of Illinois.
(17) COMMITMENTS AND CONTINGENCIES
See Note 3 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 27 with respect to events and developments after December 31,
2006.
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, we agreed to issue three (3)
stock purchase warrants to MBC Global, one for the purchase of up to 88,500
shares of the Company's common stock at $2.50 per share, a second warrant for
the purchase of up to 59,000 shares of the Company's common stock at $3.50 per
share, and a third warrant for the purchase of up to an additional 88,500 shares
of the Company's common stock at $4.50 per share. 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 filed a Registration
Statement, Form S-1 on December 30, 2005, under the Securities Act of 1933, as
amended, covering the resale of 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. The agreements with MBC Global are currently
stayed due to our Bankruptcy filing.
The vessels we lease and the Royal Star 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 4A) 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 December 31, 2006 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. The Company
will not receive any insurance reimbursement for our costs of this remediation
project.
As a result of our Chapter 11 filings in December 2006, our commitments and
non-cancellable contracts are not able to be determined in that most of our
contracts and leases are stayed by the bankruptcy filing, the current amounts
are being approved and paid by orders of the Bankruptcy Court and future amounts
due cannot be reasonably determined.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
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 recorded a $10.5 million impairment loss during the fiscal year
ended June 30, 2004 and 2005 to reflect the estimated current market value of
this note. (See Note 6-B). As of December 31, 2006 we recorded a $9,378,651
impairment loss on the original and second Cherry Hill Notes to more accurately
reflect the current market value of these notes (see footnote 6 - C). As of
December 31, 2006 we recorded an allowance for doubtful accounts in the amount
of $2,235,525 on the OC Realty Note. (See footnote 7 - B)
(19) 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 may have been 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 $370,639 as of
December 31, 2006 to cover all or part of this cost.
Our expense recorded for the year ended December 31, 2006, the six months
ended December 31, 2005 and the years ended June 30, 2005 and 2004 totaled
$271,230, $52,031, $141,305 and $52,170, respectively, for the 401 (k) plan.
(20) STOCK-BASED COMPENSATION
(A) EMPLOYEE AND NON-EMPLOYEE OPTIONS
In June, 2005, the Company's Board of Directors adopted and approved a 2005
Stock Option and Award Plan (the "2005 Plan"). The 2005 Plan permitted 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 2005 Plan terminated
because it was not 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 to purchase 300,000 shares at $2.00 per share, however they
expired in June 2006.
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 (2003
Chapter Case) 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 26, 2005 of $1.47.
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. To date, these payments have been
accrued but not paid.
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 quarter ended September 30, 2004, Mr.
Murray and Mr. Quigley elected to take their then deferred salary in the form of
shares.
At December 31, 2006, total options outstanding were 1,110,643 and all of
these options were exercisable.
The following table contains information on stock options for options
granted for periods ended June 30, 2005, 2003, 2004, six months ended December
31, 2005 and the year ended December 31. 2006
Stock Options
-----------------------------------------------
Number of Exercise Price Weighted
Shares Range Per Share Average Price
-------------- ----------------- --------------
Outstanding at
June 30, 2003 and 2004 3,336,500 $0.269 - $5.00 $1.59
Exercised during the fiscal
year ended June 30, 2005 (2,000,000) 0.269 0.269
Options granted to employees
during the fiscal year
ended June 30, 2005 1,024,143 2.00 2.00
-------------
Outstanding at June 30, 2005
and December 31, 2005 2,360,643 0.269 - 5.00 2.00
Options canceled during 2006 (1,250,000) .50 - 4.62 3.07
-------------
Outstanding at December 31, 2006 1,110,643 $0.269 - $5.00 $2.68
=============
Exercise Price Weighted
Option Shares Range Per Share Average 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
-------------- ------- ------- -------------
Exercisable at December 31:
2005 2,180,643 0.269 - 5.00 2.96
-------------- ------- ------- -------------
2006 1,110,643 $0.269 - $5.00 $2.68
============== ------- ------- -------------
The following table summarizes information about stock options outstanding
at December 31, 2006:
Ranges Total
------------------------------------- ------------
$0.27 - 0.50 $1.00 - 2.00 $5.00 $0.27 - 5.00
------------ ------------ ------- ------------
Outstanding and exercisable
options:
Number outstanding at
December 31, 2006 81,500 729,143 300,000 1,110,643
------------ ------------ ------- ------------
Weighted average remaining
contractual life (years) 4.00 9.46 0.00 5.85
------------ ------------ ------- ------------
Weighted average exercise price $0.287 $1.990 $5.000 $2.680
------------ ------------ ------- ------------
For our fiscal year ended June 30, 2005 and prior to that date we account
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 employee stock options is equal to the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
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, as amended by the SEC is effective for our
six month period ended December 31, 2005. We did not issue any options to
employees during the six months ended December 31, 2005 or the twelve months
ended December 31, 2006, thus there is no effect on our earnings due to this
change.
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 (R ) during the the year end December 31, 2006 and six
months ended December 31, 2005 and the years ended June 30, 2005 and 2004.
Six Months
Year End Ended June 30,
December 31, December 31, -------------------------
2006 2005 2005 2004
------------- ------------ ------------- -----------
Net Income (Loss):
As Reported $(25,513,839) $(1,900,035) $(6,800,030) $5,233,826
------------- ------------ ------------- -----------
Pro Forma Net Income (Loss):
Basic and Diluted $(25,513,839) $(2,851,101) $(6,800,030) $5,233,826
------------- ------------ ------------- -----------
Net Income (Loss) Per Share:
As Reported $ (0.24) $ (0.18) $ (0.86) $ 0.54
------------- ------------ ------------- -----------
Pro Forma Net Income (Loss) Per Share:
Basic and Diluted $ (0.24) $ (0.28) $ (0.86) $ 0.54
------------- ------------ ------------- -----------
(B) WARRANTS
In connection with our borrowing of $400,000 on November 9, 2005 (See Note
14(c)) we agreed to issue additional penalty warrants, exercisable for a period
of three years, if the loan was not paid by January 9, 2006; we agreed to issue
warrants for the purchase of 200,000 shares of common stock each month at a
price per share of the lower of $2.50, or the market value on the day of issue
in each month for each additional month until the loan is paid. As of December
31, 2006, we reserved warrants for the issuance of 2.2 million shares of common
stock as a result of this borrowing as a result of our Chapter 11 filing future
issuance of additional warrants has been stayed. The following table summarizes
our stock prices for each month that the warrants were reserved or issued.
Date of Issue Price Date of Issue Price
------------- ----- ------------- -----
January 8, 2006 $2.45 July 9, 2006 $0.70
February 9, 2006 1.50 August 9, 2006 0.41
March 9, 2006 1.25 September 9, 2006 0.23
April 9, 2006 0.75 October 9, 2006 0.25
May 9, 2006 0.80 November 9, 2006 $0.10
June 9, 2006 $0.55
During the year ended December 31, 2006, we recognized a non-cash expense
for the 2,200,000 warrants issued in the amount of $1,828,287. As of the filing
of our Chapter 11 filing, the loan had not been repaid.
The fair value of the warrants was estimated on the date of each grant
using the Black-Scholes model utilizing the assumptions shown in the following
table:
Twelve Months Ended
December 31, 2006
Expected volatility 20% to 140%
Risk-free interest rate 4.7%
Expected term 3 Years
In determining expected volatility, we based the assumptions using a
ceiling of the highest prices quoted for our stock over the last two years. Our
stock is traded on the "Pink Sheets" of the over-the-counter market and our
stock prices and number of shares traded have historically been very erratic.
In connection with the Series B Preferred Stock issued during the six
months ended December 31, 2005 the Company granted 600,000 warrants to holders
of the Preferred Stock to purchase 600,000 shares of Common Stock at $3.25 per
share, and we granted 236,000 warrants to MBC Global, our investment advisor, to
purchase 236,000 shares of Common Stock at prices that range from $2.50 to
$4.50.
In November, 2005 we issued 200,000 warrants to various parties involved
with loaning the Company $400,000. These warrants permit the purchase of 200,000
Common shares at $2.50 per share.
The fair value of warrants issued were accounted for as financing expense.
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 $4.00 $4.00
(expiring April 23, 2006) 275,000
Issued during the six month period
to non-employees
Outstanding at December 31, 2005 1,036,000 $2.50 - $4.50 $3.16
-----------
Outstanding at December 31, 2005 1,311,000 $2.50 - $4.50 $3.34
Expired during - 2006 (275,000) $4.00 $4.00
Issued during 2006 to non-employees 2,200,000 $ .10 - $2.45 $0.81
-----------
Outstanding at December 31, 2006 3,236,000 $ .10 - $4.50 $1.01
===========
(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 December 31, 2005 there were 915,077 shares of Treasury Stock held by the
Company.
(23) EXECUTIVE COMPENSATION
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. On June 26, 2006 these
options were cancelled because the stock option plan from which they were issued
expired on June 26, 2006.
(24) RELATED PARTY TRANSACTIONS
See Footnote 3 for related party transactions regarding the PDS
Transactions.
We have invested in two projects in which our Chairman, President and Chief
Executive Officer, Francis W. Murray, also has a pecuniary interest. The first
of these investments was to pay costs and expenses for development of a golf
course in Southern California. In Fiscal 2003, the loans made by us, including
principal of $735,584 and accrued interest, in the amount of $193,957 was
assumed by OC Realty, LLC, a Florida limited liability company in which Francis
W. Murray also has a primary interest.
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 December 31, 2006, we had lent $2,034,405 in
total to the project and we have accrued interest in the amount of $2,235,325 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 the golf course project and to OC Realty based on comparable
sales of like units in the marketplace which suggests a weakening of the real
estate market for condominium projects in the Fort Lauderdale area. Therefore,
at December 31, 2006 we recorded an allowance for doubtful accounts on the OC
Realty project of $2,235,325 to more fully reflect the observable market value
of the loans.
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 or accrue to 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
$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 in excess of $6 million which we
paid, amounting to approximately $14 million, that can be applied to the
purchase price of the Big Easy.
From time to time Francis W. Murray has advanced funds to the Company to
meet its operating expenses. During our quarter which 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 salary payments to Mr.
Murray and payments to his companies, the majority of which were during the last
quarter, for charter hire fees on the Palm Beach Princess and Big Easy vessels.
As of September 30, 2005, the total advances and deferred payments due him were
$3,277,000. On December 29, 2005 Mr. Murray purchased 204,966 shares of Series B
Preferred Stock at a cost of $3,074,490. These shares were paid for by
offsetting advances made to the Company by Mr. Murray. No interest expense was
accrued for the period of time from the advances by Mr. Murray until shortly
afterward when he converted the advances into equity of the Company.
During fiscal 2006 Mr. Murray continued to defer his yearly salary of
$395,000 and certain of the charter fees due on the Palm Beach Princess and the
Big Easy. During the year we accrued charter fees on the Palm Beach Princess in
the amount of $1,102,177 and accrued charter fees on the Big Easy in the amount
of $1,200,000.
During 2006 we made payments against the charter fees to Mr. Francis W.
Murray in the amount of $668,059. Additionally, during 2006 we made payments to
Francis X. Murray against the charter fees owed in the amount of $167,646. Mr.
Francis W. Murray has agreed that payments to his son (Francis X. Murray)
constitute payments on his behalf .
During the fiscal year ended June 30, 2005, the Company re-entered the
equine business. In addition to the purchase of horses from outside parties, the
Company purchased horses from Francis W. Murray at prices which were to be
determined by an appraisal of their values. On December 31, 2005 we liquidated
our stock of horses. On that date we transferred our entire stock of horses to
Francis W. Murray. The horses originally purchased from Mr. Murray were returned
to him since the Company never paid him for our purchase and the horses the
Company purchased from outside parties were sold to Mr. Murray for our original
cost. Payment was made by Mr. Murray by offsetting $328,000 in amounts he had
previously loaned the Company.
On September 19, 2005, Francis X. Murray, Vice President of our ITG Vegas,
Inc. subsidiary and son of Francis W. Murray, our President, CFO and CEO loaned
the Company an additional $300,000 which amount is due on demand and bears
interest at 8%. These amounts were re-paid to Mr. Murray subsequent to December
31, 2005. During 2006, Mr. Murray loaned the Company $223,000. This loan has not
been repaid.
The Company employs Tanuja Murray, daughter-in-law of Francis W. Murray.
Ms. Murray holds a law degree and is acting in the capacity of assistant to the
Chairman. Ms. Murray earns $60,000 per year in addition to the regular employee
benefits paid by the Company.
(25) DEBTORS' FINANCIAL STATEMENTS
The Company's bankruptcy filing included the Company and seven of it's
operating subsidiaries and excluded several inactive or non-material
subsidiaries. Presented below are the condensed combined financial statements of
the Debtors. These statements reflect the financial position, results of
operations and cash flows of the combined Debtors, including certain
transactions and resulting assets and liabilities between the Debtors and non-
Debtor subsidiaries of the Company, which are eliminated in the Company's
consolidated financial statements.
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
(Debtor-in-Possession)
CONDENSED COMBINED FINNANCIAL INFORMATION OF
ENTITIES IN REORGANIZATION PROCEEDINGS
BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2005
ASSETS
December 31,
-------------------------------
2006 2005
-------------- --------------
TOTAL CURRENT ASSETS $ 2,847,060 $ 4,249,365
-------------- --------------
-------------- --------------
TOTAL VESSELS & EQUIPMENT - Net 39,131,803 41,110,835
-------------- --------------
-------------- --------------
TOTAL OTHER ASSETS 19,654,302 31,279,312
-------------- --------------
-------------- --------------
INVESTMENTS IN AND AMOUNTS DUE FROM
WHOLLY OWNED SUBSIDIARIES 203,179,529 203,446,147
-------------- --------------
TOTAL ASSETS $ 264,812,694 $ 280,085,659
============== ==============
LIBILITIES AND STOCKHOLDERS' EQUITY
-------------- --------------
CURRENT LIABILITIES: $ 1,366,580 $ 46,400,870
-------------- --------------
-------------- --------------
LIABILITIES SUBJECT TO COMPROMISE: 54,930,635 -
-------------- --------------
-------------- --------------
LONG-TERM DEBT - Net of Current Portion - 1,960,722
-------------- --------------
DEFERRED INCOME 47,775 119,437
COMMITMENTS AND CONTINGENCIES - -
-------------- --------------
STOCKHOLDERS' EQUITY: 208,467,704 231,604,630
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 264,812,694 $ 280,085,659
============== ==============
CONDENSED COMBINED FINNANCIAL INFORMATION OF
ENTITIES IN REORGANIZATION PROCEEDINGS
FOR THE YEAR ENDED DECEMBER 30, 2006 AND THE SIX MONTHS ENDED DECEMBER 2005
AND FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
STATEMENT OF OPERATIONS
Six Months
Ended
December 31, December 31, June 30,
-------------- -------------- -----------------------------
2006 2005 2005 2004
-------------- -------------- ------------- -------------
OPERATING REVENUES $ 30,507,989 $ 13,693,552 $ 32,353,030 $ 32,601,396
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
OPERATING COSTS AND EXPENSES: 44,315,110 20,079,655 33,668,751 37,304,338
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
OTHER INCOME (EXPENSE): (10,696,419) (4,683,747) (3,540,455) (1,900,723)
-------------- -------------- ------------- -------------
(LOSS) BEFORE TAX PROVISION
AND EXTRAORDINARY ITEM (24,503,540) (11,069,850) (4,856,176) (6,603,665)
Income Tax Expense - - 90,000 228,500
-------------- -------------- ------------- -------------
(LOSS) BEFORE EXTRAORDINARY ITEM (24,503,540) (11,069,850) (4,946,176) (6,832,165)
EXTRAORDINARY ITEM - Fees charged to related
parties for Master Settlement Agreement ( Notes 15 & 21). - - 4,000,000 -
-------------- -------------- ------------- -------------
(LOSS) BEFORE EQUITY IN NET INCOME (LOSS) OF SUBSIDIARIES (24,503,540) (11,069,850) (946,176) (6,832,165)
Equity in Net Income (Loss) of Subsidiaries - - - -
-------------- -------------- ------------- -------------
NET (LOSS) $ (24,503,540) $ (11,069,850) $ (946,176) $ (6,832,165)
============== ============== ============= =============
STATEMENT OF CASH FLOWS
-------------- -------------- ------------- -------------
CASH FLOWS (USED IN) OPERATING ACTIVITIES $ 588,005 $ (3,294,853) $ (40,969) $ 2,870,539
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES (525,428) (829,778) (15,485,856) (3,218,766)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES (987,669) 4,777,933 9,189,934 1,729,024
-------------- -------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (925,092) 653,302 (6,336,891) 1,380,797
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,819,700 1,166,398 7,503,289 6,122,492
-------------- -------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 894,608 $ 1,819,700 $ 1,166,398 $ 7,503,289
============== ============== ============= =============
See Notes to Consolidated Financial Statements.
(26) 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:
Year Ended December 31, 2006
-----------------------------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Revenues $ 6,201,461 $ 6,932,550 $ 8,427,956 $ 9,393,596
Net Income (Loss) (13,509,188) (3,579,428) (4,478,924) (3,946,299)
Net (Loss) Per Share - Basic and Diluted $ (1.19) $ (0.31) $ (0.39) $ (0.35)
Six Months Ended December 31, 2005
-----------------------------------------
2nd Quarter 1st Quarter
Revenues $ 6,585,583 $ 7,391,067
Net (Loss) (8,110,852) (4,122,130)
Net (Loss) Per Share - Basic and Diluted $ (0.76) $ (0.40)
Year Ended December 31, 2005
-----------------------------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Revenues $ 8,598,946 $ 10,280,985 $ 7,514,993 $ 6,378,322
Income (Loss) before Extraordinary Item (4,065,430) 649,117 (506,363) (1,977,360)
Extraordinary Item 440,000 3,560,000
Net Income (Loss) (3,625,430) 649,117 (506,363) 1,582,640
Net Basic Income (Loss) per Share
---------------------------------
Income (Loss) before Extraordinary Item (0.38) 0.06 (0.06) (0.19)
Extraordinary Item 0.04 0.00 0.00 0.35
Net Income (Loss) (0.34) 0.06 (0.06) 0.16
Net Diluted Income (Loss) per Share
-----------------------------------
Income (Loss) before Extraordinary Item (0.37) 0.06 (0.06) (0.22)
Extraordinary Item 0.04 0.00 0.00 0.37
New Income (Loss) $ (0.33) $ 0.06 $ (0.06) $ 0.15
Year Ended June 30, 2004
-----------------------------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Revenues $ 8,689,364 $ 9,697,707 $ 7,000,011 $ 7,575,157
Net Income (Loss) 9,787,182 1,765,056 363,036 859,060
Net Income (Loss) Per Share - Basic (1.24) 0.23 0.05 0.10
Net Income (Loss) Per Share - Diluted $ (1.24) $ 0.17 $ 0.04 $ 0.10
(27) SUBSEQUENT EVENTS
(A) During the quarter ended March 31, 2007 passenger counts have declined
approximately 22% and revenues have declined approximately 18.5% at the
Company's Palm Beach Princess operation from the comparative quarter of 2006.
The Company attributes these declines to a decrease in the marketing and
advertising in the current quarter due to our cash shortages, the effect of our
bankruptcy filing on our customers and increased competition from slot machines
placed at racetracks in Broward County and another day cruise casino vessel
operating from the Port of Palm Beach since January 15, 2007.
(B) On April 2, 2007 the debtors files a motion in the Bankruptcy Court to
extend the time during which they have the exclusive right to file a plan of
reorganization. In Chapter 11, a debtor has an initial 120-day period during
which only they may file a plan of reorganization, which may be extended to up
18 monthss after the date of the Chapter 11 filing. Other parties may object to
the requested extention, and PDS has filed such an objection. In the event that
the Bankruptcy Court does not grant the Debtors' request to extend exclusivity,
the other parties in interest, including PDS, may have the ability to file and
seek confirmation of their own plan of reorganization..
(C) On April 12, 2007, Robert J. Quigley retired and resigned as a Director
of the Company and as an officer of several dormant subsidiaries.
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 year
ended December 31, 2006 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
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 66 Chairman of the Board, President,
Chief Executive Officer
and Chief Financial Officer
James J. Murray 68 Director
Walter ReDavid 81 Director
Robert J. Quigley 77 Director (retired and resigned April 12,2007)
William H. Warner 62 Secretary
Francis X. Murray 41 Vice President of ITG Vegas
Scott Kaplan 36 Vice President of Strategic
Development & Capital Markets
Set forth below is certain biographical information with respect to each
director and other listed officers, 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 was a director since 1980. Since 2002, Mr.
Quigley served as an officer of one of our subsidiaries which was formed to
develop foreign gaming opportunities. Since September 2004 Mr. Quigley was 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. On April 12,
2007, Robert J. Quigley retired and resigned as Director of the Company and as
an officer of several dormant subsidiaries.
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.
Francis X. Murray. Mr. Murray, son of our Chairman and CEO, has, since
April 2001, been Vice President of our ITG Vegas subsidiary (surviving company
of the merger of Palm Beach Princess, Inc., and ITG Vegas) which operates the
cruise ship M/V Palm Beach Princess and related offshore gaming business. He has
also been President of Palm Beach Maritime Corporation (formerly MJQ
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.
Scott Kaplan. Mr. Kaplan joined the Company on January 1, 2005 as Vice
President - Strategic Development and Capital Markets. Prior to joining the
company, Mr. Kaplan served as an outside financial advisor to the Company since
November 2002 with Maximillian Advisors, LLC and Churchill Capital, LLC, both
New York based gaming-focused financial advisory boutique firms. Mr. Kaplan also
spent 10 years in the New York- based Gaming, Lodging and Real Estate Investment
Banking Group of Deustche Bank, prior to founding Maximillian Advisors, LLC.
Other Key Officers
Name Age Position
---- --- ------------------------
Christine E. Rice Newell 61 Assistant Treasurer and
Controller of ITB and
Secretary/Treasurer of ITG Vegas, Inc.
Stephen Flood 46 Vice President of Casino
Operations, ITG Vegas, Inc.
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.
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.
Audit Committee
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, due to the restrictions
on of our subsidiary's providing funds to the Company, it was not feasible for
the Company to add directors, including those with a level of expertise to be
considered an "audit committee financial expert."
Code of Ethics
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
is 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.
Involvement in Certain Legal Proceedings
None of the directors/officers have been involved in any material legal
proceeding of any type as described in Regulation S-K which occurred within the
last five years from the date of filing of this report.
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, as well as consents to permit us
to complete any due diligence investigations to confirm the nominee's
background, as we believe to be appropriate;
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.
Item 11. Executive Compensation
Compensation Discussion and Analysis:
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 Chairman of the Board of Directors. Mr. Robert J. Quigley was a director of
the Company until his resignation on April 12, 2007. Mr. Quigley was a former
President and Chief Executive Officer of the Company, and continued to serve as
a part-time employee until December 2006. Mr. James Murray, a member of the
Board of Directors is the brother of Mr. Francis W. Murray. Mr. Walter ReDavid
is an outside, independent member of the Board of Directors.
Objectives of our Compensation Program
The primary objective of our compensation program for our chief executive
officer and our other three executive officers named in the Summary Compensation
Table of this section (together with the CEO, the "Named Executive Officers") is
to retain the Named Executive Officers. We have accomplish this in the past
through a mix of base salary and cash bonuses or the issuance of stock options.
Our Chapter 11 bankruptcy filings in 2003 and in 2006 together with limitations
placed on the Company by our primary creditor have limited and amount of salary
increases, and bonus we could pay to our Named Executive Officers.
Stock Option and Award Plan
In June, 2005, the Company's Board of Directors adopted and approved a 2005
Stock Option and Award Plan (the "2005 Plan"). The 2005 Plan permitted the grant
of options to purchase up to 1,300,000 shares of Common Stock to Named Executive
Officers and employees. This plan terminated because the Company was unable to
have a stockholder's meeting, due to financial difficulties, for the
shareholders to approve the 2005 Plan.
Retirement, Health and Welfare Benefits
We offer a variety of health and welfare programs to all eligible
employees. The Named Executive Officers are eligible for the same benefit
programs on the same basis as the rest of our administrative employees. Our
health and welfare programs include medical, pharmacy, dental insurance for all
the Named Executive Officers and life insurance for certain of the Named
Executive Officers. We offer these programs at no cost to the employees.
We offer a qualified 401(K) savings and retirement plan. All of our
employees, including the Named Executive Officers, are generally eligible for
the 401(K) plan. Our contribution to the 401(K) plan is a percentage of the
participants salary (50% of the participants contribution up to a maximum of
6%).
Salary deferred by our Named Executive Officers
Our Chairman and CEO, Mr. Francis W. Murray is currently and has from time
to time deferred his salary in order to conserve working capital. In 2004, Mr.
Murray accepted treasury stock as compensation in lieu of this deferred salary
in the amount of $344,865. Mr. Murray also paid for a portion of the Series B
preferred stock purchased by him in December 2005 by off setting salary due to
him. Mr. Warner has deferred salary in 2005 and 2006 in the amount of $ ,which
remains outstanding, in order to conserve working capital for the Company. Mr.
Scott Kaplan was awarded a bonus in the amount of $ effective December 31, 2006.
This bonus remains outstanding because payment has not been approved by the
bankruptcy court. Performance Bonus
During fiscal 2004 and 2005 we paid to Francis X. Murray, in accordance
with his employment contract, a bonus for achieving certain EBITDA performance
goals. Due to the Company's weakening financial position, we did not achieve the
performance goals nor has the Compensation Committee re-set any performance
goals.
The following table sets forth the cash compensation as well as certain
other compensation paid or accrued during the year ended December 31, 2006, the
six months ended December 31, 2005, ("**") the fiscal years ended ("FYE") June
30, 2005 and 2004 to the individuals who served as our chief executive officer
during fiscal year 2006 and other executive officers of the Company who earned
more than $100,000 during fiscal year 2006 (collectively, the "Named
Executives"):
Summary Compensation Table
- --------------------------------------------------------------------------------------------------------------------------
Name and Principal Option All Other
Position Year Salary Bonus Awards Compensation Total
- -------- ---- ------ ----- ------ ------------ -----
Francis W. Murray 2006 $ 395,000 (1) $ 0 $ 0 $ 27,839 (2) $ 422,839
President, Chief ** 2005 197,500 (1) 0 0 12,948 (2) 210,448
Executive Officer and FYE 2005 395,000 (1) 0 1,064,500 (9) 57,115 (3) 1,516,615
Chief Financial Officer FYE 2004 395,000 (1) 0 0 17,701 (2) 412,701
Francis X. Murray, 2006 291,041 0 0 28,237 (13) 319,278
Vice President of ** 2005 155,442 0 0 6,517 (4,13) 161,959
ITG Vegas, Inc. FYE 2005 310,884 115,000 0 77,930 (3,5,13) 503,814
FYE 2004 290,122 88,628 0 24,766 (13) 403,516
William H. Warner, 2006 175,000 (10) 0 0 19,193 (13) 194,193
Secretary ** 2005 87,500 0 0 8,235 (6,8) 95,735
FYE 2005 175,000 (7) 0 0 13,555 (13) 188,555
FYE 2004 175,000 0 0 11,220 (13) 186,220
Scott Kaplan, 2006 130,000 (11) 105,000 (12) 0 0 235,000
Vice President of Strategic ** 2005 $ 101,538 $ 0 $ 0 $ 0 $ 101,538
Development & Capital
Markets
(1) For the year ended December 31, 2006 consists of 395,000 in salary
earned by Mr. Murray which was deferred. In the six months ended
December 30, 2005, consists of $197,500 in salary earned by Mr. Murray
which was deferred. In the year ended June 30, 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.
(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) In the six months ended December 31, 2005, consists of $449 of life
insurance premiums paid by the Company with respect to term life
insurance payable to beneficiaries designated by Mr. F. X. Murray.
(5) 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, 2006 of $1.47.
(6) In the six months ended December 31, 2005 consists of monthly
automobile allowance of $9,780, of which $4,075 was deferred by Mr.
Warner.
(7) Consists of $175,000 in salary earned by Mr. Warner through June 30,
2005 of which $26,923 has been deferred.
(8) In the six months ended December 31, 2005 includes $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.
(9) 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 26, 2005 of
$1.47.
(10) Consists of $175,000 in salary earned by Mr. Warner through June 30,
2006, of which 40,385 has been deferred.
(11) Consists of $ 130,000 in salary earned by Mr. Kaplan through June 30,
2006, of which $11,539 has been deferred.
(12) Mr. Kaplan was awarded a bonus of $105,000. This bonus has not been
paid as of December 31, 2006 because it has not been approved by the
Bankruptcy Court.
(13) Consists of automobile allowance and our matching contribution under
our 401(k) plan.
Option Grants during the Year Ended December 31, 2006
There were no stock options granted to the Named Executives during the year
ended December 31, 2006.
Aggregated Option Exercises during the Year Ended December 31, 2006
Aggregated Option Exercises during the Year Ended December 31, 2006
Options Awards
- ---------------------------------------------------------------
Number of
Securities
Underlying
Unexercised Option
Options (#) Exercise Option
Name Exercisable Price($) Expiration Date
- ----------------- ----------- -------- -----------------
Francis W. Murray 724,143 (1) 2.00 June 26, 2015
300,000 (2) 5.00 January 14, 2007
William H. Warner 75,000 (3) 0.26875 December 31, 2010
(1) The option was granted on June 27, 2005. The option is fully vested and
exercisable.
(2) The option was granted on January 15, 1997. The option is fully vested and
exercisable
(3) The option was granted on January 7, 2002. The option is fully vested and
exercisable
The following table provides information with respect to the executive
officers shown in the Summary Compensation Table concerning stock options
exercised during the year ended December 31, 2006 and the value of vested and
unvested unexercised options held as of December 31, 2006.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Share Options at December 31, Options at December 31,
Acquired on Value 2006 (#) 2006 ($)(1)
Name Exercised Realized ---------------------------- ---------------------------
(#) ($) Exercisable Unexercisable Exercisable Unexercisable
---------- ----------- -------- ------------ ------------- ----------- -------------
Francis W.
Murray -- -- 1,024,143 -0- $-0- $-0-
William H.
Warner -- -- 75,000 -0- $-0- $-0-
(1) The value of unexercised in-the-money options is based on the difference
between the last reported sale price per share of common stock as reported
on the Pink Sheets on December 31, 2006 ($0.06) 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
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. On June 26, 2006 these
options were cancelled because the stock option plan from which they were issued
expired on June 26, 2006.
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 Participation
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. 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 December 31, 2006, 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 December
31, 2006, there were 11,367,487 shares of outstanding stock.
Common Stock
--------------------------------------
Amount and Nature of Percent
Name and Address of Beneficial Owner Beneficial Ownership Of Class
------------------------------------ -------------------- --------
Francis W. Murray
211BenignoBlvd.Suite210
Bellmawr, NJ 08031 7,903,436 (1)(4) 51%
PDS Gaming Corporation
6280 Annie Oakley Drive
Las Vegas, NV 89120 800,000 7%
MBC Global 269 Market Square
269 Market Square
Lake Forest, IL 60045 1,436,000 (2) 12.6%
Westminster Investments, LLC
420 N. Western Ave.
Lake Forest, IL 60045 941,209 (3) 8.3%
* except as footnoted, the number of shares treated as outstanding is equal
to 11,367,487
(1) Includes 300,000 shares of common stock issuable upon the exercise of stock
options at $5.00 per share, 724,143 shares of common stock issuable upon
the exercises of stock options at $2.00 per share and 1,689,560 shares
issuable upon conversion of Series B Preferred Stock.
(2) Includes warrants exercisable at the following prices and 41,209 common
shares issuable upon conversion of Series B Preferred Stock:
# Amount # Amount
------------ ----------------- ----------------- -----------------
188,500 4.50 100,000 0.80
59,000 3.50 100,000 0.55
88,500 2.50 100,000 0.70
100,000 2.45 100,000 0.41
100,000 1.50 100,000 0.23
100,000 1.25 100,000 0.25
100,000 0.75 100,000 0.10
(3) Includes warrants exercisable at the following prices:
# Amount # Amount
------------- ----------------- ----------------- -----------------
75,000 2.50 75,000 0.55
75,000 2.45 75,000 0.70
75,000 1.50 75,000 0.41
75,000 1.25 75,000 0.23
75,000 0.75 75,000 0.25
75,000 0.80 75,000 0.10
(4) Based on conversion of all 500,000 shares of Series B Preferred Stock into
4,120,880 shares of common stock.
Security Ownership of Management
The following table sets forth certain information with respect to the
beneficial ownership, as of December 31, 2006, of (i) each director, (ii) the
Named Executives and (iii) all of our directors and executive officers as a
group. Each of the stockholders named below has sole voting and investment power
with respect to such shares, unless otherwise indicated.
Name of Beneficial Owner Number of Shares Percent of Class
------------------------ ---------------- ----------------
Francis W. Murray 7,903,436 (1) (4) 51%
James J. Murray - -
Walter ReDavid - -
Robert J. Quigley 179,169 (2) 1.2%
William H. Warner 123,124 (3) .8%
All executive officers and
directors as a group (5 persons) 8,205,729 (4) 53%
* except footnoted, the number of shares treated as outstanding is
equal to 11,367,487
(1) Includes 1,024,143 shares issuable upon the exercise of stock options and
1,689,560 shares issued upon conversion Series B Preferred Stock.
(2) Includes 100,000 shares of common stock issuable upon the exercise of
options.
(3) Includes 75,000 shares issuable upon the exercise of stock options and
48,000 shares issuable to Mr. Warner provided he agrees to accept such
shares as payment of obligations due him by the Company.
(4) Based on conversion of 500,000 shares of Series B Preferred Stock into
3,826,530 of common stock.
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 was not approved by
the shareholders terminated on June 26, 2006 and the options that were issued
were cancelled.
Set forth below is a summary of the material terms of stock options granted
by the Company which were not approved by the Company's security holders.
During the fiscal year ended June 30, 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. Pursuant to a Non-qualified Stock Option
Agreement dated January 7, 2002 between the Company and 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 decent 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 addition to the options described in the prior paragraph options have
been issued in connection with other prior agreements with officers and
employees. The Company has granted non-qualified options to purchase 311,500
shares of Common Stock at prices that range from $.50 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 their issuance. The options expire at various times
from January 2007 to October 2010.
In connection with the Series B Preferred Stock issued during the six
months ended December 31, 2005 the Company granted 600,000 warrants to holders
of the Preferred Stock to purchase 600,000 shares of Common Stock at $3.25 per
share, and we granted 236,000 warrants to MBC Global, our investment advisor, to
purchase 236,000 shares of Common Stock at prices that range from $2.50 to
$4.50.
In November, 2005 we issued 200,000 warrants to various parties involved
with loaning the Company $400,000.
We agreed to issue additional penalty warrants, exercisable for a period of
three years, if the loan was not paid by January 9, 2006. We agreed to issue
warrants for the purchase of 200,000 shares of common stock each month at a
price per share of the lower of $2.50, or the market value on the day of issue
in each month for each additional month until the loan is paid. As of December
31, 2006, we issued or reserved warrants for the issuance of 2.2 million shares
of common stock at prices between $.10 and $2.45 as a result of this borrowing.
Item 13. Certain Relationships and Related Transactions.
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 January 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 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
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. During our quarter which 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 salary payments to Mr.
Murray and payments to his companies, the majority of which were during the last
quarter, for charter hire fees on the Palm Beach Princess and Big Easy vessels.
As of September 30, 2005, the total advances and deferred payments due him were
$3,277,000. On December 29, 2005 Mr. Murray purchased 204,966 shares of Series B
Preferred Stock at a cost of $3,074,490. These shares were paid for by
offsetting advances made to the Company by Mr. Murray. No interest expense was
accrued for the period of time from the advances by Mr. Murray until shortly
afterward when he converted the advances into equity of the Company.
During fiscal 2006 Mr. Murray continued to defer his yearly salary of
$395,000 and certain of the charter fees due on the Palm Beach Princess and the
Big Easy. During the year we accrued charter fees on the Palm Beach Princess in
the amount of $1,102,177 and accrued charter fees on the Big Easy in the amount
of $1,200,000.
During 2006 we made payments against the charter fees to Mr. Francis W.
Murray in the amount of $668,059. Additionally, during 2006 we made payments to
Francis X. Murray against the charter fees owed in the amount of $167,646. Mr.
Francis W. Murray has agreed that payments to his sone (Francis X. Murray)
constitute payments on behalf of himself.
During the fiscal year ended June 30, 2005, the Company re-entered the
equine business. In addition to the purchase of horses from outside parties, the
Company purchased horses from Francis W. Murray at prices which were to be
determined by an appraisal of their values. On December 31, 2005 we liquidated
our stock of horses. On that date we transferred our entire stock of horses to
Francis W. Murray. The horses originally purchased from Mr. Murray were returned
to him since the Company never paid him for our purchase and the horses the
Company purchased from outside parties were sold to Mr. Murray for our original
cost. Payment was made by Mr. Murray by offsetting $328,000 in amounts he had
previously loaned the Company or amounts due to him for accrued but unpaid
salary.
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. The Employment Agreement between ITGV and Francis X. Murray,
the son of our CEO, Francis W. Murray automatically renews on January 1st of
each fiscal year. 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
or 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.
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
if "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.
We employ Tanuja Murray, daughter-in-law of Francis W. Murray. Ms. Murray
holds a law degree and is acting in the capacity of assistant to the Chairman.
Ms. Murray earns $60,000 per year in addition to the regular employee benefits
paid by the Company.
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 Six Months Ended Year Ended
December 31, 2006 December 31, 2005 June 30, 2005
----------------- ----------------- -----------------
Audit fees excluding
audit related fees $ 35,000 $ 41,378 $ 57,199
Audit related fees 0 0 0
----------------- ----------------- -----------------
Total audit and audit
related fees 35,000 41,378 57,199
Tax related fees (1) 0 17,395 22,856
All other fees (2) 6,197 3,463 10,751
----------------- ----------------- -----------------
Total fees $ 41,197 $ 62,236 $ 90,806
================== ================== ==================
(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 December 31, 2006 and 2005 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.
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 41 of this report.
2. Financial Statement Schedules.
Schedule I
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
(Debtor-in-Possession)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2005
ASSETS
December 31,
-----------------------------
2006 2005
----------- -------------
TOTAL CURRENT ASSETS $ 154,946 $ 89,788
----------- -------------
----------- -------------
TOTAL EQUIPMENT - Net 77,046 83,539
----------- -------------
TOTAL OTHER ASSETS 6,702,486 14,934,113
----------- -------------
----------- -------------
INVESTMENTS IN AND AMOUNTS DUE FROM
WHOLLY OWNED SUBSIDIARIES 84,663 14,374,107
----------- -------------
TOTAL ASSETS $ 7,019,141 $ 29,481,547
=========== =============
LIBILITIES AND STOCKHOLDERS' EQUITY
----------- -------------
CURRENT LIABILITIES: $ 381,937 $ 2,668,506
----------- -------------
----------- -------------
LIABILITIES SUBJECT TO COMPROMISE: 3,322,157 -
----------- -------------
----------- -------------
LONG-TERM DEBT - Net of Current Portion 790,000 543,657
----------- -------------
COMMITMENTS AND CONTINGENCIES - -
----------- -------------
STOCKHOLDERS' EQUITY: 2,525,048 26,269,386
----------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,019,141 $ 29,481,549
=========== =============
See Notes to Consolidated Financial Statements.
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
(Debtor-in-Possession)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
FOR THE YEAR ENDED DECEMBER 30, 2006 AND THE SIX MONTHS ENDED DECEMBER 2005
AND FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
STATEMENT OF OPERATIONS
Six Months
Ended
December 31, December 31, June 30,
------------- ------------- ---------------------------
2006 2005 2005 2004
------------- ------------- ------------ ------------
OPERATING COSTS AND EXPENSES: $ 10,164,650 $ 1,137,244 $ 1,819,304 $ 1,576,879
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
OTHER INCOME (EXPENSE): (1,962,902) (441,256) (259,571) (928,278)
------------- ------------- ------------ ------------
INCOME (LOSS) BEFORE TAX PROVISION
AND EXTRAORDINARY ITEM (12,127,552) (1,578,500) (2,078,875) (2,505,157)
Income Tax Expense - - - 76,500
------------- ------------- ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (12,127,552) (1,578,500) (2,078,875) (2,581,657)
EXTRAORDINARY ITEM - Fees charged to related
parties for Master Settlement Agreement ( Notes 15 & 21). - - 4,000,000 -
------------- ------------- ------------ ------------
INCOME (LOSS) BEFORE EQUITY IN NET INCOME (LOSS) OF SUBSIDIARIES (12,127,552) (1,578,500) 1,921,125 (2,581,657)
Equity in Net Income (Loss) of Subsidiaries (13,386,287) (10,654,485) (3,821,160) (4,218,373)
------------- ------------- ------------ ------------
NET INCOME (LOSS) $ (25,513,839) $ (12,232,985) $ (1,900,035) $ (6,800,030)
============= ============= ============ ============
STATEMENT OF CASH FLOWS
------------- ------------- ------------ ------------
CASH FLOWS (USED IN) OPERATING ACTIVITIES $ (995,357) $ (1,307,186) $ (2,505,776) $ (873,302)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES 8,330 (162,600) 11,776 (417,236)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES 961,637 1,419,378 2,490,190 1,304,952
------------- ------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (25,389) (50,405) (3,810) 14,414
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,007 6,981 10,790 (3,625)
------------- ------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ (23,382) $ 2,007 $ 6,981 $ 10,790
============= ============= ============ ============
See Notes to Consolidated Financial Statements.
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.(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 dated December 30, 2005)
3.2 Amended and Restated By-Laws of the Registrant (incorporated by reference
to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 dated
December 30, 2005)
4.1 Certificate of Designation, Preferences and Rights of Series B Convertible
Preferred Stock of International Thoroughbred Breeders, Inc., dated June
29, 2005. (Incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 10-K dated June 30, 2005.
10.1 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 Registration Statement on Form S-1 filed
December 30, 2005)
10.2 $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 Registration Statement on Form S-1
filed December 30, 2005)
10.3 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 Registration Statement on Form S-1 filed December 30,
2005)
10.4 * 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)
10.5 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)
10.6 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)
10.7 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)
10.8 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)
10.9 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)
10.10 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)
10.11 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)
10.12 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)
10.13 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)
Exhibit
Number Description
------- -----------
10.14 Advisory Agreement dated June 30, 2005 between International Thoroughbred
Breeders, Inc. and MBC Global, LLC for financial consulting
services.2005.(incorporated by reference to Exhibit 10.18 to the
Registrant's Current Report on Form 10-K dated June 30, 2005)
10.15 Amendment to the Advisory Agreement dated as of June 30, 2005 between
International Thoroughbred Breeders, Inc. and MBC Global, LLC, dated July
12, 2005.(incorporated by reference to Exhibit 10.19 to the Registrant's
Current Report on Form 10-K dated June 30, 2005)
10.16 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.(incorporated by reference
to Exhibit 10.20 to the Registrant's Current Report on Form 10- K dated
June 30, 2005)
10.17 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.(incorporated by reference to Exhibit 10.14 to the Registrant's
Registration Statement on Form S-1 filed December 30, 2005)
10.18 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 (incorporated by reference to
Exhibit 10.15 to the Registrant's Registration Statement on Form S-1 filed
December 30, 2005)
10.19 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. (incorporated by reference to
Exhibit 10.23 to the Registrant's Current Report on Form 10-K dated June
30, 2005)
10.20 Preferred Mortgage on the Casino Cruise Ship Royal Star, dated June 30,
2005 by Royal Star Entertainment, LLC to PDS Gaming Corporation.
(incorporated by reference to Exhibit 10.24 to the Registrant's Current
Report on Form 10-K dated June 30, 2005)
10.21 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. (incorporated by
reference to Exhibit 10.25 to the Registrant's Current Report on Form 10-K
dated June 30, 2005)
10.22 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.
(incorporated by reference to Exhibit 10.26 to the Registrant's Current
Report on Form 10-K dated June 30, 2005)
10.23 Promissory Note of Borrowers in favor of PDS Gaming Corporation dated June
30, 2005 in the amount of $29,313,888.96 (incorporated by reference to
Exhibit 10.27 to the Registrant's Current Report on Form 10-K dated June
30, 2005)
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 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit
Number Description
------- -----------
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
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 17th day of April, 2007.
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 April 17, 2007
---------------------- and Chief Executive Officer
Francis W. Murray (Principal Executive Officer)
/s/ Francis W. Murray Chief Financial Officer April 17, 2007
--------------------- (Principal Financial and
Francis W. Murray Accounting Officer)
/s/ James J. Murray Director April 17, 2007
----------------------
James J. Murray
/s/ Francis W. Murray Director April 17, 2007
---------------------
Francis W. Murray
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: April 17, 2007
/s/Francis W. Murray
-----------------------
Name: Francis W. Murray
Title: Chief Executive Officer
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: April 17, 2007
/s/Francis W. Murray
-----------------------
Name: Francis W. Murray
Title: Chief Executive Officer
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 year ended
December 31, 2006, 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: April 17, 2007
/s/Francis W. Murray
---------------------------------
Name: Francis W. Murray
Title: Chief Executive Officer and Chief
Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation of International Thoroughbred
Breeders, Inc.(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 dated December 30, 2005)
3.2 Amended and Restated By-Laws of the Registrant (incorporated by reference
to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 dated
December 30, 2005)
4.1 Certificate of Designation, Preferences and Rights of Series B Convertible
Preferred Stock of International Thoroughbred Breeders, Inc., dated June
29, 2005. (Incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 10-K dated June 30, 2005.
10.1 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 Registration Statement on Form S-1 filed
December 30, 2005)
10.2 $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 Registration Statement on Form S-1
filed December 30, 2005)
10.3 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 Registration Statement on Form S-1 filed December 30,
2005)
10.4 * 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)
10.5 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)
10.6 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)
10.7 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)
10.8 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)
10.9 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)
10.10 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)
10.11 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)
10.12 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)
10.13 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)
Exhibit
Number Description
- ------- -----------
10.14 Advisory Agreement dated June 30, 2005 between International Thoroughbred
Breeders, Inc. and MBC Global, LLC for financial consulting
services.2005.(incorporated by reference to Exhibit 10.18 to the
Registrant's Current Report on Form 10-K dated June 30, 2005)
10.15 Amendment to the Advisory Agreement dated as of June 30, 2005 between
International Thoroughbred Breeders, Inc. and MBC Global, LLC, dated July
12, 2005.(incorporated by reference to Exhibit 10.19 to the Registrant's
Current Report on Form 10-K dated June 30, 2005)
10.16 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.(incorporated by reference
to Exhibit 10.20 to the Registrant's Current Report on Form 10- K dated
June 30, 2005)
10.17 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.(incorporated by reference to Exhibit 10.14 to the Registrant's
Registration Statement on Form S-1 filed December 30, 2005)
10.18 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 (incorporated by reference to
Exhibit 10.15 to the Registrant's Registration Statement on Form S-1 filed
December 30, 2005)
10.19 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. (incorporated by reference to
Exhibit 10.23 to the Registrant's Current Report on Form 10-K dated June
30, 2005)
10.20 Preferred Mortgage on the Casino Cruise Ship Royal Star, dated June 30,
2005 by Royal Star Entertainment, LLC to PDS Gaming Corporation.
(incorporated by reference to Exhibit 10.24 to the Registrant's Current
Report on Form 10-K dated June 30, 2005)
10.21 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. (incorporated by
reference to Exhibit 10.25 to the Registrant's Current Report on Form 10-K
dated June 30, 2005)
10.22 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.
(incorporated by reference to Exhibit 10.26 to the Registrant's Current
Report on Form 10-K dated June 30, 2005)
10.23 Promissory Note of Borrowers in favor of PDS Gaming Corporation dated June
30, 2005 in the amount of $29,313,888.96 (incorporated by reference to
Exhibit 10.27 to the Registrant's Current Report on Form 10-K dated June
30, 2005)
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 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit
Number Description
- ------- -----------
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
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
Broadwater Real Estate, LLC Delaware
Circa 1850, Inc. New Jersey
Cruise Entertainment, LLC Delaware
Garden State Race Track, Inc. New Jersey
GMO Travel, Inc. Florida
GSRT, LLC Delaware
Holdfree, Inc. New Jersey
International Thoroughbred Gaming
Development Corporation New Jersey
ITB Management, Inc. New Jersey
ITB Racing, Inc. Delaware
ITB Realty, Inc. Florida
ITG Brazil, Inc. Delaware
ITG Guatemala, LLC Delaware
ITG Palm Beach, LLC Delaware
ITG Panama, S. A. Republic of Panama
ITG Peru, LLC Delaware
ITG Vegas, Inc Nevada
ITG Venezuela, Inc. Delaware
Leo Equity Group, Inc. Florida
Olde English Management Inc. New Jersey
Orion Casino Corporation Nevada
Palm Beach Entertainment, Inc. Delaware
Premier Lottery Co., LLC Delaware
Riviera Beach Entertainment, LLC Delaware
Royal Star Entertainment, LLC Delaware
South America Thoroughbred Company, LLC Delaware