FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2007
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-9624
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International Thoroughbred Breeders, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2332039
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 1300, 1105 N. Market Street, Wilmington, Delaware 19899-8985
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(Address of principal executive offices) (Zip Code)
(302) 427-7599
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes No X
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Indicate by check as to whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2).
Yes No X
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the latest practicable date.
Class Outstanding at May 1, 2007
- ----------------------------- ------------------------------
Common Stock, $2.00 par value 11,367,487 Shares
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
(DEBTOR-IN-POSSESSION)
FORM 10-Q
QUARTERLY REPORT
for the Three Months ended March 31, 2007
(Unaudited)
TABLE OF CONTENTS
PAGE
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
as of March 31, 2007 and December 31, 2006............1-2
Consolidated Statements of Operations
for the Three Months ended March 31, 2007 and 2006....3
Consolidated Statement of Stockholders' Equity
for the Three Months ended March 31, 2007.............4
Consolidated Statements of Cash Flows
for the Three Months ended March 31, 2007 and 2006....5
Notes to Consolidated Financial Statements.....................6-19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........20-29
Item 3. Quantitative and Qualitative Disclosures About Market Risk......30
Item 4. Controls and Procedures.........................................30
PART II.
OTHER INFORMATION
Item 6. Exhibits ......................................................31
SIGNATURES ......................................................32
CERTIFICATIONS..........................................................33-35
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2007 AND DECEMBER 31, 2006
ASSETS
March 31,
2007 December 31,
(UNAUDITED) 2006
--------------- ---------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,628,550 $ 871,236
Accounts Receivable 280,938 335,500
Prepaid Expenses 2,090,332 1,520,613
Other Current Assets 199,730 153,136
Assets of Discontinued Operations 436 436
--------------- ---------------
TOTAL CURRENT ASSETS 4,199,986 2,880,921
--------------- ---------------
VESSELS & EQUIPMENT
Vessel - Palm Beach Princess - under Capital Lease 17,500,000 17,500,000
Equipment 4,008,459 3,912,135
Leasehold Improvements 921,899 921,899
Vessel - Big Easy - under Capital Lease - Not in Service 20,305,348 20,305,348
Vessel - Royal Star - Not Placed in Service 3,054,735 3,054,735
--------------- ---------------
45,790,441 45,694,117
LESS: Accumulated Depreciation and Amortization 7,081,967 6,562,315
--------------- ---------------
TOTAL VESSELS & EQUIPMENT - NET 38,708,474 39,131,802
--------------- ---------------
OTHER ASSETS:
Notes Receivable 5,300,000 5,300,000
Vessel Deposits - Related Parties 9,733,136 9,733,136
Deposits and Other Assets - Related Parties 2,996,302 2,978,340
Deposits and Other Assets - Non-Related Parties 937,236 993,191
Spare Parts Inventory 997,187 1,018,332
--------------- ---------------
TOTAL OTHER ASSETS 19,963,861 20,022,999
--------------- ---------------
TOTAL ASSETS $ 62,872,321 $ 62,035,722
=============== ===============
See Notes to Consolidated Financial Statements.
1
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2007 AND DECEMBER 31, 2006
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
2007 December 31,
(UNAUDITED) 2006
------------------- -------------
CURRENT LIABILITIES:
Accounts Payable $ 408,035 $ 213,206
Accrued Expenses 1,898,549 1,655,542
Liabilities of Discontinued Operations 417,800 415,400
------------------- -------------
TOTAL CURRENT LIABILITIES 2,724,384 2,284,148
LIABILITIES SUBJECT TO COMPROMISE:
Notes Payable PDS 38,334,810 35,429,982
Equipment Operating Lease Payable - PDS 2,125,530 2,125,530
Notes Payable 888,639 888,639
Accounts Payable & Accrued Expenses 9,395,549 9,396,731
Vessel Capital Lease Payable - Long Term Portion -
Related Party 3,500,000 3,500,000
Deferred Interest 1,239,618 1,239,618
Accrued Expenses -Bareboat Charter - Related Party 2,071,532 1,531,472
Related Party Liabilities 1,691,898 1,626,828
------------------- -------------
TOTAL LIABILITIES SUBJECT TO COMPROMISE: 59,247,576 55,738,800
------------------- -------------
TOTAL LIABILITIES 61,971,960 58,022,948
------------------- -------------
DEFERRED INCOME 1,469,810 1,487,726
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 24,232,083
(Deficit) (90,193,494) (87,098,997)
------------------- -------------
(111,911) 2,982,586
LESS:
Treasury Stock, 915,077 Shares (457,538) (457,538)
------------------- -------------
TOTAL STOCKHOLDERS' EQUITY (569,449) 2,525,048
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 62,872,321 $ 62,035,722
=================== =============
See Notes to Consolidated Financial Statements.
2
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
March 31,
--------------------------------
2007 2006
--------------- --------------
OPERATING REVENUES:
Gaming $ 6,578,907 $ 7,853,325
Fare 588,668 961,016
On Board 376,436 428,032
Other 176,675 151,223
--------------- --------------
NET OPERATING REVENUES 7,720,686 9,393,596
--------------- --------------
OPERATING COSTS AND EXPENSES:
Gaming 2,300,278 3,207,918
Fare 745,788 794,972
On Board 193,692 242,451
Maritime & Legal Expenses 1,964,175 2,760,359
General & Administrative Expenses 680,317 855,612
General & Administrative Expenses - Parent 419,367 607,864
Ship Carrying Costs - Big Easy 458,740 -
Ship Carrying Costs - Royal Star 114,303 385,956
Development Costs - Other 23,348 73,074
Depreciation & Amortization 602,417 1,055,418
Loss on Impairment of Assets - 400,000
Bankruptcy Costs 112,250 -
--------------- --------------
TOTAL OPERATING COSTS AND EXPENSES 7,614,675 10,383,624
--------------- --------------
OPERATING INCOME (LOSS) 106,011 (990,028)
--------------- --------------
OTHER INCOME (EXPENSE):
Interest and Financing Expenses (2,664,107) (1,984,440)
Interest and Financing Expenses - Related Party (540,060) (550,965)
Cost of Warrants Granted for Financing - (493,300)
Interest Income 3,659 649
Interest Income Related Parties - 71,785
--------------- --------------
TOTAL OTHER INCOME (EXPENSE) (3,200,508) (2,956,271)
--------------- --------------
(LOSS) BEFORE TAX PROVISION (3,094,497) (3,946,299)
Income Tax Expense - -
--------------- --------------
NET (LOSS) $ (3,094,497) $ (3,946,299)
=============== ==============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE: $ (0.27) $ (0.35)
=============== ==============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - Basic and Diluted 11,367,487 11,367,487
=============== ==============
See Notes to Consolidated Financial Statements.
3
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2007
(UNAUDITED)
Series A Series B Convertible
Preferred Preferred Common
------------------------- ---------------------- -------------------------
Number of Number of Number of
Shares Amount Shares Amount Shares Amount
---------- ------------ -------- ----------- ----------- ------------
BALANCE - DECEMBER 31, 2006 362,844 $36,284,375 500,000 $5,000,000 12,282,564 $24,565,125
Warrants Issued as Compensation - - - - - -
Net (Loss) for the Three Months
Ended March 31, 2007 - - - - - -
---------- ------------ -------- ----------- ----------- ------------
BALANCE - MARCH 31, 2007 362,844 $36,284,375 500,000 $5,000,000 12,282,564 $24,565,125
========== ============ ======== =========== =========== ============
Capital Treasury
in Excess Stock
of Par (Deficit) At Cost Total
-------------- --------------- ------------ -----------
BALANCE - DECEMBER 31, 2006 $24,232,083 $ (87,098,997) $ (457,538) $2,525,048
Warrants Issued as Compensation - - - -
Net (Loss) for the Three Months
Ended March 31, 2007 - (3,094,497) - (3,094,497)
-------------- --------------- ------------ -----------
BALANCE - MARCH 31, 2007 $24,232,083 $ (90,193,494) $ (457,538) $ (569,449)
============== =============== ============ ===========
See Notes to Consolidated Financial Statements.
4
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
March 31,
-----------------------------
2007 2006
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
(LOSS) BEFORE DISCONTINUED OPERATIONS $ (3,094,497) $ (3,946,299)
Adjustments to reconcile income (loss)
to net cash (used in)provided by
operating activities:
Depreciation and Amortization 602,417 1,055,418
Expense of Options/Warrants Granted - 493,300
Impairment of Assets - 400,000
Interest Added to Capital Lease Debt - PDS 2,538,270 -
Increase (Decrease) in Deferred Income (17,916) (17,915)
Changes in Operating Assets and Liabilities -
(Increase) Decrease in Accounts Receivable 69,477 (10,269)
(Increase) Decrease in Other Assets (46,595) 307,248
(Increase) Decrease in Prepaid Expenses (569,719) (795,602)
Increase (Decrease) in Accounts
Payable and Accrued Expenses 1,326,413 2,392,521
------------- -------------
CASH (USED IN) OPERATING ACTIVITIES BEFORE
DISCONTINUED OPERATIONS 807,850 (121,598)
CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES 2,400 2,400
------------- -------------
NET CASH (USED IN) OPERATING ACTIVITIES 810,250 (119,198)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (75,179) (45,901)
(Increase) Decrease in Other Investment Activity 55,955 (27,192)
(Increase) in Other Investment Activity - Related Party - (242,956)
------------- -------------
NET CASH (USED IN) INVESTING ACTIVITIES (19,224) (316,049)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funds Received from PDS Notes & Other Lenders - 124,883
Advances (Paid) Received (to) From Related Parties (9,609) (683,097)
Principal Payments on Short Term Notes (24,103) (41,311)
Principal Payments on Long Term Notes - (26,715)
Decrease in Balances Due to/from Discontinued Subsidiaries 2,400 2,400
------------- -------------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
BEFORE DISCONTINUED FINANCING ACTIVITIES (31,312) (623,840)
CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES (2,400) (2,400)
------------- -------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (33,712) (626,240)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 757,314 (1,061,487)
LESS CASH AND CASH EQUIVALENTS FROM
DISCONTINUED OPERATIONS - 336
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 871,236 1,846,239
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 1,628,550 $ 785,088
============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 9,086 $ 8,276
Income Taxes $ - $ -
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the Three Months Ended March 31, 2007, the PDS interest expense for
the period in the amount of $2,538,270 added to the principal balance of
the respective leases.
See Notes to Consolidated Financial Statements.
5
INTERNATIONAL THOROUGHBRED BREEDERS, INC
AND SUBSIDIARIES
(DEBTOR-IN-POSSESION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 is not extended, other parties in interest,
including the Creditor's Committee, the secured lender or other creditors could
file a plan of reorganization. The companies have reached an agreement that will
give the companies and the Official Committee of Unsecured Creditors the
exclusive right to file a Chapter 11 plan through August 1, 2007, subject,
however, to the qualification that PDS and one other specified group of
creditors will also have the right to file a plan upon the earlier of June 21,
2007, or the filing of a plan or motion seeking approval of a sale or refinance
transaction to which PDS objects.
A financial institution has provided a commitment for a secured loan to
fund the majority of the proceeds needed to create a new special purpose
subsidiary to own and operate the Palm Beach Princess business, with the
proceeds from the financing to be used to pay existing creditors and provide
working capital to the Princess business. Such commitment will be subject to
Bankruptcy Court approval, an additional equity infusion, and satisfactory loan
documentation.
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
6
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.
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 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 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 - The subsidiary which operates the Palm Beach
Princess ends its 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
in our accounting period.
(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.
7
(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
quarter ended March 31, 2007 and 2006, the amortized expense was $82,765 and
$84,635.
As a result of the PDS transactions 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.
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 March 31, 2007 and 2006, 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 or
quarter ended March 31, 2007.
(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
8
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) 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 expense to related parties 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 Purchase 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. Charter hire fees of $100,000
per month have been accounted for as additional interest expense to related
parties and will be expensed as incurred. The transaction 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.
We also were leasing the gaming equipment aboard the vessel, Royal Star. In
November 2006 this lease was terminated.
9
Vessels, plant and equipment at March 31, 2007 include the following
amounts for capitalized leases:
Vessel, Palm Beach Princess $ 17,500,000
Vessel, Big Easy 20,305,348
-----------------
Less: allowance for depreciation (3,379,187)
-----------------
Capital Leases $ 34,426,161
=================
The following is a schedule of capital lease liabilities due at March 31,
2007:
March 31, 2007
---------------------------------------
Vessel Short-Term Long-Term Total
- ------------------------------------- ------------- ----------- -------------
Palm Beach Princess $ 17,449,263 $ - $ 17,449,263
Big Easy 16,311,612 - 16,311,612
Royal Star 3,590,063 - 3,590,063
------------- ----------- -------------
Amount due to PDS for vessels 37,350,938 - 37,350,938
Less: Royal Star Note shown in Notes
Payable (See Note 10) (3,590,063) - (3,590,063)
Fair Market Valuation -
Palm Beach Princess - 3,500,000 3,500,000
------------- ----------- -------------
Total Short and Long Term
Vessel Leases Payable $ 33,760,875 $ 3,500,000 $ 37,260,875
============= =========== =============
(4) 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 4,120,880
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.
10
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.
(5) 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 on April 17, 2007, 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.
11
(6) 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:
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 March 31, 2007, we had lent $2,784,394 in total to the
project. These loans 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%.
At December 31, 2006, we assessed the collectability of the advances made to OC
Realty based on comparable sales of like units in the marketplace which
suggested 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.
March 31, December 31,
2007 2006
------------ -------------
Loans to the Ft Lauderdale Project (OC Realty, LLC) $ 2,784,394 $ 2,784,394
Goodwill on Purchase of GMO Travel 193,946 193,946
Other Deposits 17,962 -
------------ -------------
Total Deposits and Other Assets - Related Parties $ 2,996,302 $ 2,978,340
============ =============
(7) DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES
The following items are classified as deposits and other assets -
non-related parties:
March 31, December 31,
2007 2006
----------- --------------
Long-Term Prepaid Loan Costs - Net of amortization $ 683,692 $ 700,333
Port Lease Rights 250,000 250,000
Other Misc. Assets 3,544 42,858
----------- --------------
Total $ 937,236 $ 993,191
=========== ==============
12
(8) VESSELS AND EQUIPMENT
Vessels owned and/or leased and equipment consist of the following:
Depreciation is being computed over the estimated remaining useful lives as
indicated using the straight-line method. Depreciation on the Big Easy was
suspended during the March 2006 quarter.
Estimated Useful March 31, December 31,
Lives in Years 2007 2006
- ------------------------------- ---------------- -------------- -------------
Leased Vessel -
Palm Beach Princess 20 $ 17,500,000 $ 17,500,000
Leased Vessel - Not in Service -
Big Easy N/A 20,305,348 20,305,348
Vessel Not Placed in Service -
Royal Star N/A 3,054,735 3,054,735
Equipment 5-15 4,008,459 3,912,135
Leasehold Improvements 15-40 921,899 921,899
-------------- -------------
Total 45,790,441 45,694,117
Less Accumulated Depreciation
and Amortization (7,081,967) (6,562,315)
-------------- -------------
$ 38,708,474 $ 39,131,802
============== =============
(9) 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
(10) 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.
March 31, 2007 December 31, 2006
Interest % ----------------------- ----------------------
Per Annum Current Long-Term Current Long-Term
----------- ----------- ---------- ----------- ---------
International Thoroughbred
Breeders, Inc.:
PDS Gaming (A) 20% $ 541,102 $ -0- $ 541,102 $ -0-
Francis X. Murray (B) 8% 382,864 -0- 382,864 -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- 38,654 -0-
ITG Vegas, Inc.:
PDS Gaming (A) various 34,173,092 -0- 31,617,252 -0-
PDS Gaming (A) 22.5% 3,620,616 -0- 3,271,628 -0-
International Game Technology (D) 8% 404,928 -0- 404,928 -0-
Others Various 45,057 -0- 45,057 -0-
----------- ---------- ----------- ---------
Totals 39,643,313 -0- 36,738,485 -0-
PDS Gaming (A) (38,334,810) -0- (35,429,982) -0-
----------- ---------- ----------- ---------
Related Party Notes (419,864) -0- (419,864) -0-
----------- ---------- ----------- ---------
Totals $ 888,639 $ -0- $ 888,639 $ -0-
=========== ========== =========== =========
(A) On June 30, 2005, we entered into various loan agreements with our
primary lender, PDS, which had the effect of reclassing our capital leasing
arrangements on two vessels to promissory notes. At March 31, 2007, the
outstanding balance represents the unpaid principal, interest and fees added to
the debt, subject to compromise, on the vessel promissory notes was $34,068,272
at various interest rates. 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 deffered financing costs which were on the books at that time.
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 our December 9, 2005 interest payment 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%. At March 31, 2007, accrued interest on
the debt is $104,820.
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 March 31,
2007, the balance represents the unpaid principal, interest and fees added to
the debt totaling $3,620,616.
14
(B) On March 1, 2003, we issued a promissory note for a line of credit
bearing interest at 8% to Francis X. Murray. At March 31, 2007 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. Due to our
Bankruptcy filing we have not accrued interest on the notes or issued additional
penalty warrants.
(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 March 31, 2007 and
December 31, 2006, the principal balance on the two notes to International Game
Technology was $404,928 which was classified as short term. At March 31, 2007
and 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 and $46,000 as of March 31, 2007. These amount are classified
in the Liabilities of Discontinued Operations in the current liability section
of the Balance Sheet.
(11) RELATED PARTY DEBT
The following schedule represents related party debt (See Footnote 15 -
Related Party Transactions):
March 31, 2007 December 31, 2006
-------------------- --------------------
Short- Long- Short- Long-
Term Term Term Term
-------- ----------- -------- -----------
Accrued Wages due to and
Advances from Francis W. Murray $ 0 $ 899,318 $ 0 $ 808,164
Accrued Expenses Subject to Compromise 0 792,580 0 818,664
Accrued Bareboat Charter Fees 0 2,071,532 0 1,531,472
-------- ----------- -------- -----------
Total Debt - Related Parties $ 0 $ 3,763,430 $ 0 $ 3,158,300
======== =========== ======== ===========
(12) 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.
15
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, and will be adjudicated in the course of our reorganization.
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. This
motion was denied on May 2, 2007, and the defendants are considering their
options.
(13) COMMITMENTS AND CONTINGENCIES
See Footnote 15 for additional commitments and contingencies of the Company
and transactions with related parties.
See Footnote 17 with respect to events and developments after March 31,
2007.
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 6A) 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
16
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 March 31, 2007 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 the orders of the Bankruptcy Court and future
amounts due cannot be reasonably determined.
(14) 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 5-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 5 - 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 6 - B)
(15) RELATED PARTY TRANSACTIONS
See Footnote 6 Regarding Vessel Deposits, Deposits and Other Asset
Transactions with Mr. Francis W. Murray
During the quarter ended March 31, 2007 Mr. Murray continued to defer his
yearly salary of $395,000 and the majority of the charter fees due on the Palm
Beach Princess and the Big Easy. During the quarter we accrued charter fees on
the Palm Beach Princess in the amount of $254,550 and accrued charter fees on
the Big Easy in the amount of $300,000. Additionally, we accrued interest
expense on the unpaid charter fees for the Palm Beach Princess in the amount of
$8,612.
During the March 31, 2007 quarter we made payments against the charter fees
to Mr. Francis W. Murray in the amount of $23,102.
17
(16) DEBTORS' FINANCIAL STATEMENTS
The Company's bankruptcy filing included the Company and six 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 FINANCIAL INFORMATION OF ENTITIES
IN REORGANIZATION PROCEEDINGS
AS OF MARCH 31, 2007 AND DECEMBER 31, 2006
BALANCE SHEETS
ASSETS
March 31, December 31,
2007 2006
------------- --------------
Total Current Assets $ 4,127,567 $ 2,847,060
Total Vessels & Equipment - Net 38,708,474 39,131,803
Total Other Assets 19,595,164 19,654,302
------------- --------------
Total Assets 62,431,205 61,633,165
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities 1,888,971 1,366,580
Liabilities Subject to Compromise 59,247,577 54,930,635
Deferred Income 29,859 47,775
Stockholders' Equity 1,264,798 5,288,175
------------- --------------
Total Liabilities and Stockholders' Equity $ 62,431,205 $ 61,633,165
============= ==============
CONDENSED COMBINED FINANCIAL INFORMATION OF ENTITIES
IN REORGANIZATION PROCEEDINGS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
STATEMENT OF OPERATIONS
March 31,
-----------------------------
2007 2006
------------- --------------
Operating Revenues $ 7,544,012 $ 9,242,373
Operating Costs and Expenses (7,128,538) (9,942,171)
Other Income (Expense) (3,200,508) (2,956,271)
------------- --------------
Net (Loss) (2,785,034) (3,656,069)
============= ==============
STATEMENT OF CASH FLOWS
Cash Flows From (Used In) Operating
Activities $ 1,201,653 $ 133,516
Cash Flows Provided by (Used In) Investing
Activities (19,224) (314,573)
Cash Flows (Used In) Provided by Financing
Activities (463,890) (841,880)
------------- --------------
Net Increase (Decrease) In Cash and Cash
Equivalents 718,539 (1,022,937)
Cash and Cash Equivalents at
Beginning of Year 894,609 1,819,699
------------- --------------
Cash and Cash Equivalents at
End of Year $ 1,613,148 $ 796,762
============= ==============
18
(17) SUBSEQUENT EVENTS
(A) The companies have reached an agreement that will give the companies
and the Official Committee of Unsecured Creditors the exclusive right to file a
Chapter 11 plan through August 1, 2007, subject, however, to the qualification
that PDS and one other specified group of creditors will also have the right to
file a plan upon the earlier of June 21, 2007, or the filing of a plan or motion
seeking approval of a sale or refinance transaction to which PDS objects.
(B) Subsequent to March 31, 2007, a financial institution has provided a
commitment for a secured loan to fund the majority of the proceeds needed to
create a new special purpose subsidiary to own and operate the Palm Beach
Princess business, with the proceeds from the financing to be used to pay
existing creditors and provide working capital to the Princess business. Such
commitment will be subject to Bankruptcy Court approval, an additional equity
infusion, and satisfactory loan documentation.
(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.
19
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
Forward-Looking Statements
We have made forward-looking statements in this Form 10-Q, including the
information concerning possible or assumed future results of our operations and
those preceded by, followed by or that include words such as "anticipates,"
"believes," "expects," "intends," or similar expressions. For those statements,
we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. You should
understand that the following important factors, in addition to those discussed
elsewhere in this document and other factors particularly under "Risk Factors"
as discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2006 filed with the United States Securities and Exchange
Commission 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
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,
20
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.
The companies have reached an agreement that will give the companies and
the Official Committee of Unsecured Creditors the exclusive right to file a
Chapter 11 plan through August 1, 2007, subject, however, to the qualification
that PDS and one other specified group of creditors will also have the right to
file a plan upon the earlier of June 21, 2007, or the filing of a plan or motion
seeking approval of a sale or refinance transaction to which PDS objects.
A financial institution has provided a commitment for a secured loan to
fund the majority of the proceeds needed to create a new special purpose
subsidiary to own and operate the Palm Beach Princess business, with the
proceeds from the financing to be used to pay existing creditors and provide
working capital to the Princess business. Such commitment will be subject to
Bankruptcy Court approval, an additional equity infusion, and satisfactory loan
documentation.
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
21
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, 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. 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.
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
three months ended March 31, 2007, our operations generated approximately
$750,000 of cash which was only possible by deferring our interest payments due
to PDS and our bareboat charter fees. 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 $12 million as of March
31, 2007. We continued to defer payments on the vessel leases, on notes payable,
charter hire fees and continue to defer the salary of our Chairman.
During the current quarter our Palm Beach Princess operation generated
approximately $2.1 million in cash flow. The majority of these funds were used
to support the other subsidiaries and holding company operations. During the
quarter approximately $700,000 was advanced to the subsidiary operating the Big
Easy and approximately $790,000 was advanced to the holding company and other
subsidiaries in Chapter 11 reorganization. The funds remaining resulted in a net
increase in Cash and Cash Equivalents of $757,314.
During the quarter ended March 31, 2006 the Palm Beach Princess operation
generated approximately $1.96 million cash flow. During the quarter
approximately $2.1 million was advanced to the subsidiary operating the Big Easy
and approximately $300,000 was advanced to the holding company and other
subsidiaries. For the quarter ended March 31, 2006 the Company sustained a
decrease in cash of approximately $1.1 million.
The condensed, consolidated cash flow table presented below compares the
cash generated or (used) by the Palm Beach Princess, the Big Easy and the other
companies in Chapter 11 reorganization as compared to the quarter ended March
31, 2006.
Three Months Ended
March 31, 2007
--------------------------------------------------
Palm Holding Co.
Beach &
Princess Big Easy Other Subs Total
($) ($) ($) ($)
--------------------------------------------------
Cash Flows from Operating
Activities:
Net Income (Loss) (160,140) (2,052,489) (881,868) (3,094,497)
Adjustments to reconcile income
(loss) to net cash (used in)provided
by operating activities:
Depreciation & Amortization 600,687 - 1,730 602,417
Compensation for Options
Granted - - - -
Impairment of Assets - - - -
OtherIncrease in Deferred Income (17,916) - - (17,916)
Interest Added to Capital
Lease Debt - PDS 1,061,758 1,190,934 285,578 2,538,270
Changes in Assets and Liabilities:
Decrease (Increase) in
Accounts Receivable 62,490 (3,798) 10,785 69,477
(Increase) Decrease in Other
Assets (46,595) - - (46,595)
(Increase) in Prepaid Expenses (317,629) (222,378) (29,712) (569,719)
(Decrease) Increase in
Accounts Payable & Accrued
Expenses 1,045,436 369,781 (88,804) 1,326,413
----------- ------------ ------------ ------------
Cash (Used In) Provided by
Operating Activities 2,228,091 (717,950) (702,291) 807,850
----------- ------------ ------------ ------------
Cash Flows from Investing Activities:
Fare Capital Expenditures (75,022) (507) 350 (75,179)
(Increase) Decrease in Other
Investment Activity - 53,887 2,068 55,955
(Increase) Decrease in Other
Investment Activity - Related
Party - - - -
----------- ------------ ------------ ------------
Cash Provided by (Used In)
Investing Activities: (75,022) 53,380 2,418 (19,224)
----------- ------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from PDS & Other
Lenders - - - -
Funds (to) from Related
Parties 547 - (10,156) (9,609)
Principal Payments on Short
Term Notes (10,451) - (13,652) (24,103)
Principal Payments on Long
Term Notes - - - -
----------- ------------ ------------ ------------
Cash Provided by (Used In)
Financing Activities (9,904) - (23,808) (33,712)
----------- ------------ ------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents From Discontinued
Operations - - 2,400 2,400
----------- ------------ ------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents Before
Inter-Company Transfers 2,143,165 (664,570) (721,281) 757,314
=========== ============ ============ ============
Three Months Ended
March 31, 2006
--------------------------------------------------
Palm Holding Co.
Beach &
Princess Big Easy Other Subs Total
($) ($) ($) ($)
--------------------------------------------------
Cash Flows from Operating
Activities:
Net Income (Loss) 2,028,520 (3,793,236) (2,181,583) (3,946,299)
Adjustments to reconcile income
(loss) to net cash (used in)provided
by operating activities:
Depreciation & Amortization 641,435 411,104 2,879 1,055,418
Compensation for Options
Granted - - 493,300 493,300
Impairment of Assets - - 400,000 400,000
OtherIncrease in Deferred Income (17,915) - - (17,915)
Interest Added to Capital
Lease Debt - PDS - - - -
Changes in Assets and Liabilities:
Decrease (Increase) in
Accounts Receivable 6,667 8,575 (25,511) (10,269)
(Increase) Decrease in Other
Assets 28,932 278,316 - 307,248
(Increase) in Prepaid Expenses (596,778) (116,303) (82,521) (795,602)
(Decrease) Increase in
Accounts Payable & Accrued
Expenses 837,876 731,799 822,846 2,392,521
---------- ------------ ------------- ------------
Cash (Used In) Provided by
Operating Activities 2,928,737 (2,479,745) (570,590) (121,598)
---------- ------------ ------------- ------------
Cash Flows from Investing Activities:
Fare Capital Expenditures (45,901) - - (45,901)
(Increase) Decrease in Other
Investment Activity (99,975) 33,328 39,456 (27,191)
(Increase) Decrease in Other
Investment Activity - Related
Party (29,972) - (212,985) (242,957)
---------- ------------ ------------- ------------
Cash Provided by (Used In)
Investing Activities: (175,848) 33,328 (173,529) (316,049)
---------- ------------ ------------- ------------
Cash Flows from Financing Activities:
Proceeds from PDS & Other
Lenders - - 124,883 124,883
Funds (to) from Related
Parties (744,544) (4,798) 66,245 (683,097)
Principal Payments on Short
Term Notes (18,218) (23,093) - (41,311)
Principal Payments on Long
Term Notes (25,869) (846) - (26,715)
---------- ------------ ------------- ------------
Cash Provided by (Used In)
Financing Activities (788,631) (28,737) 191,128 (626,240)
---------- ------------ ------------- ------------
Net Increase (Decrease) in Cash and
Cash Equivalents From Discontinued
Operations - - 2,400 2,400
---------- ------------ ------------- ------------
Net Increase (Decrease) in Cash and
Cash Equivalents Before
Inter-Company Transfers 1,964,258 (2,475,154) (550,591) (1,061,487)
========== ============ ============= ============
We continue to pay the carrying costs to maintain the Big Easy and the
Royal Star in wet dock storage. We expect that the future carrying costs for the
wet dock storage and slot machine leases for machines on the Big Easy to be
approximately $200,000 per month. We have retained a third-party slip broker who
is marketing these vessels for sale.
As of March 31, 2007 Cash and Cash Equivalents were $1,628,550 as compared
to $871,236 as of December 31, 2006. Our working capital at March 31, 2007 was
$1,475,602. This amount represents working capital generated since our
Bankruptcy filing on December 4, 2006. Prior to our Bankruptcy filing we had
working capital deficiency however, we are currently showing working capital
available only because the liabilities which caused the deficiency are now
classified in the Liabilities Subject to Compromise section of the Balance Sheet
and not considered a current liability.
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 the orders of the Bankruptcy Court and future
amounts due cannot be reasonably determined. As of March 31, 2007, monthly court
approved commitments for the vessels total approximately $570,000
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
22
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.
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 on April 17, 2007, 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 ongoing 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.
23
(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 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 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.
For the Big Easy 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 $9,733,136 which are available to
use against the purchase costs for the vessels. See footnote 6 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 Quarter Ended March 31, 2007 and 2006
The following are the most important factors and trends that affect our
operating performance:
o The impact of our filing of voluntary petitions for reorganization
under Chapter 11 of the U. S. Bankruptcy Code. See Footnote 1.
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. The cash currently generated by
the Palm Beach Princess is insufficient to pay these costs.
o Increased Competition:
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
Florida legislature has passed legislation which permits
24
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 1,500 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.
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 , has a passenger capacity of 600 people, has 38
table games and approximately 300 slot machines. The vessel is
scheduled to make two cruises each day.
During the period January 1, 2007 through May 13, 2007 passenger
counts have declined approximately 22% and revenues have declined
approximately 21% at the Company's Palm Beach Princess operation from
the comparative period of 2006. The Company attributes these declines
to a lack of funds for marketing and advertising during the last
approximately year and one half due to our cash shortages, increased
competition from slot machines placed at the three racetracks in
Broward County, another day cruise casino vessel operating from the
Port of Palm Beach since January 15, 2007, and the effect of our
bankruptcy filing on our customers.
o The impact of hurricanes and inclement weather 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.
25
Consolidated
The table below compares the revenues, expenses and net (Loss) before tax
provision for the Palm Beach Princess and the Big Easy vessels and other
operating subsidiary companies as shown on the Consolidated Statement of
Operations for quarter ended March 31, 2007 as compared to the quarter ended
March 31, 2006. This table separately identifies the vessel operations since the
Big Easy operated during a portion of the quarter ended March 31, 2006.
Three Months Ended
March 31, 2007
----------------------------------------------
Holding Co.
Palm Beach &
Princess Big Easy Other Subs Total
($) ($) ($) ($)
---------- ----------- ---------- ----------
Operating Revenues:
Gaming 6,578,907 - - 6,578,907
Fare 588,668 - - 588,668
On Board 376,436 - - 376,437
Other - - 176,674 176,674
---------- ----------- ---------- ----------
Net Operating Revenues 7,544,012 - 176,674 7,720,686
---------- ----------- ---------- ----------
Operating Costs and Expenses:
Gaming 2,300,279 - - 2,300,279
Fare 582,469 - 163,319 745,788
On Board 193,692 - - 193,692
Maritime & Legal 1,964,175 - - 1,964,175
General & Administrative
Expense 648,196 - 451,487 1,099,683
Development & Carrying Costs - 458,740 23,348 482,088
Royal Star Carrying Costs - - 114,303 114,303
Bankruptcy Costs 80,000 15,250 17,000 112,250
Impairment of Notes - - - -
Depreciation & Amortization 600,687 - 1,730 602,417
---------- ----------- ---------- ----------
Total Operating Costs &
Expenses 6,369,498 473,990 771,187 7,614,675
---------- ----------- ---------- ----------
Operating Income (Loss) 1,174,514 (473,990) (594,513) 106,011
---------- ----------- ---------- ----------
Other Income (Expense)
Interest & Financing
Expenses (1,098,252) (1,278,499) (287,356) (2,664,107)
Cost of Warrants Granted - - - -
Interest & Financing
Expenses-Related Party (240,060) (300,000) - (540,060)
Interest Income 3,659 - - 3,659
Interest Income -
Related Party - - - -
---------- ----------- ---------- ----------
Total Other Income (Expenses) (1,334,653) (1,578,499) (287,356) (3,200,508)
---------- ----------- ---------- ----------
(Loss) Before Tax Provision (160,139) (2,052,489) (881,869) (3,094,497)
========== =========== ========== ==========
Three Months Ended
March 31, 2006
-----------------------------------------------
Holding Co.
Palm Beach &
Princess Big Easy Other Subs Total
($) ($) ($) ($)
---------- ----------- ----------- -----------
Operating Revenues:
Gaming 7,790,587 62,738 - 7,853,325
Fare 954,684 6,332 - 961,016
On Board 418,614 9,418 - 428,032
Other - - 151,223 151,223
---------- ----------- ----------- -----------
Net Operating Re venues 9,163,885 78,488 151,223 9,393,596
---------- ----------- ----------- -----------
Operating Costs and Expenses:
Gaming 2,338,677 869,241 - 3,207,918
Fare 599,192 86,804 108,976 794,972
On Board 220,734 21,717 - 242,451
Maritime & Legal 1,803,439 956,920 - 2,760,359
General & Administrative
Expense 514,981 329,282 619,213 1,463,476
Development & Carrying Costs - - 73,074 73,074
Royal Star Carrying Costs - - 385,956 385,956
Bankruptcy Costs - - - -
Impairment of Notes - - - 400,000 400,000
Depreciation & Amortization 641,435 411,104 2,879 1,055,418
---------- ----------- ----------- -----------
Total Operating Costs &
Expenses 6,118,458 2,675,068 1,590,098 10,383,624
---------- ----------- ----------- -----------
Operating Income (Loss) 3,045,427 (2,596,580) (1,438,875) (990,028)
---------- ----------- ----------- -----------
Other Income (Expense)
Interest & Financing
Expense (840,636) (895,657) (248,147) (1,984,440)
Cost of Warrants Granted - - (493,300) (493,300)
Interest & Financing
Expenses - Related Party (241,460) (300,000) (9,505) (550,965)
Interest Income 649 - - 649
Interest Income -
Related Party 64,541 - 7,244 71,785
---------- ----------- ----------- -----------
Total Other Income (Expenses) (1,016,906) (1,195,657) (743,708) (2,956,271)
---------- ----------- ----------- -----------
(Loss) Before Tax Provision 2,028,521 (3,792,237) (2,182,583) (3,946,299)
========== =========== =========== ===========
26
Revenue for the quarter ended March 31, 2007 decreased from $9,393,596 for
the quarter ended March 31, 2006 to $7,720,686 in the quarter ended March 31,
2007 primarily as a result of decrease in the revenues generated by the Palm
Beach Princess. The Big Easy which was put in limited service on November 12,
2005 only operated the month of January during the March 2006 quarter.
Operating expenses decreased approximately $2.8 million, from $10,383,624
during the three months ended March 31, 2006 to $7,614,675 for the three months
ended March 31, 2007 primarily the result of:
o a decrease in the operating cost of the Big Easy of $2,201,078 during
the quarter because during the 2007 quarter we paid only the carrying
costs of keeping the vessel in wet dock as compared to the 2006
quarter when we operated the vessel for the month of January 2006 and
incurred operating losses and expenses to terminate the operations;
o a decrease in the carry costs for our Royal Star vessel of $271,653,
which the vessel has been in wet dock storage since its purchase;
o a decrease in Depreciation and Amortization of $453,001 since we are
no longer recording depreciation on the Big Easy vessel during its wet
dock period;
o a decrease in impairment on the Cherry Hill Notes of $400,000. Last
year we recorded an impairment where as this year there was none;
o a decrease in the Parent Company administrative expense of $167,726 ;
o a decrease in other development costs of $49,726; offset by
o an increase in the operating costs of the Palm Beach Princess of
$211,788;
o an increase in the bankruptcy costs of $112,250.
The Operating Income for the quarter ended March 31, 2007 was $106,011 as
compared to a loss of ($990,028) for the comparative three month period of last
year.
Other expenses increased by approximately $244,237 as a result of an
increase in the interest and financing expense due to addition interest expense
primarily the result of higher interest rates on the PDS loans due to the
penalty interest being accrued. We continued to accrue interest during our
Debtor-in-Possession operation in accordance with the American Institute of
Certified Accountants Statement of Position (SOP) 90-7.
The Net (Loss) for the quarter ended March 31, 2007 was ($3,094,497) as
compared to a loss of ($3,946,299) for the three months ended March 31, 2006.
Palm Beach Princess
During the current quarter net operating revenue from vessel operations was
$7,544,012 as compared to $9,163,885 for the quarter ended March 31, 2006. The
decrease in revenue of approximately $1.6 million or 18% is due to a decreased
passenger count partially offset by an increase in the net revenue per passenger
of $6.78. Passenger counts have decreased 17,573 or 22% from the compared period
of last year. We believe this is due in part to our continued lack of
advertising and marketing. Beginning in approximately October 2005 we curtailed
our advertising and marketing because we were experiencing financial
difficulties in bringing the Big Easy vessel into service.
During the first quarter of 2006 we operated the Palm Beach Princess
without any major direct competition, (except for competing against our Big Easy
vessel during January 2006 on a limited basis) in close proximity to our
operation. In late 2006 three racetracks in Broward County began installing slot
machines which are now permitted by legislation. Broward County is contiguous to
Palm Beach County in which we conduct operations. The legislation 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. Additionally, 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
that has a passenger capacity of 600 people, with 38 table games and
approximately 300 slot machines. The vessel is scheduled to make two cruises
each day.
27
During the month of March 2007 we experienced unusual rough seas. Although
we did not lose any cruises during the month passenger counts were off by 31% as
compared to the previous year. Passenger counts were down approximately 15%
during January and February but the large decrease in March further negatively
impacted our results for the quarter.
During January 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
three months of 2006. There was no allocation during the 2007 quarter. 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 decreased $38,398 from $2,338,677 or 30% of casino revenue to
$2,300,279 or 35% of casino revenue.
Sales, marketing and advertising expenses decreased $16,723. 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 $27,042 as a result of fewer passengers
during the current quarter.
Maritime and legal expenses increased $160,736 as we incurred additional
expenses for fuel, engine parts and repairs, dockage and fees for harbor pilots.
Administrative expenses increased $127,493. During the 2006 quarter we
reversed accrued bonuses of approximately $235,000 which had the effect of
decreasing administrative expenses for 2006. Without considering this
adjustment, administrative expenses actually decreased by approximately
$107,000.
Finance expenses increased $324,870 as a result of the higher interest rate
due to default interest being charged. 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" we continue to accrue
interest expense on the PDS secured debt.
Depreciation and amortization decreased $40,748 as a result of less
amortization the dry dock expenses as compared to 2006.
As a result of our Bankruptcy, the subsidiary which operates the Palm Beach
Princess incurred Bankruptcy fees of $80,000 during the current quarter.
The loss before income tax provision for the quarter ended March 31, 2007
was ($160,140) as compared to income before income tax provision, of $2,028,521
in the comparable three month period ended March 31, 2006.
28
The following is a comparative summary of income and expenses of the Palm
Beach Princess operation for the 13 weeks ended April 1, 2007 and April 2, 2006:
13 Weeks Ended
------------------------------------------
Description April 1, 2007 April 2, 2006 Change
- ------------------------------------ ------------- -------------- ------------
Passenger Count 61,498 79,071 (17,573)
Number of Cruises 178 173 5
Average Number of Passengers
per Cruise 345 457 (112)
Net Revenue per Passenger $ 122.67 $ 115.89 $ 6.78
Revenue:
Gaming $ 6,578,907 $ 7,790,587 $ (1,211,680)
Fare 1,988,553 2,450,167 (461,614)
On Board 832,438 1,109,233 (276,795)
Less: Promotional Allowances
Fare (1,399,885) (1,495,483) 95,598
On Board (456,001) (690,619) 234,618
------------- -------------- ------------
Net Operating Revenue 7,544,012 9,163,885 (1,619,873)
------------- -------------- ------------
Expenses:
Gaming 2,300,279 2,338,677 (38,398)
Fare 582,469 599,192 (16,723)
On Board 193,692 220,734 (27,042)
Maritime and Legal Expenses 1,964,175 1,803,439 160,736
Administrative 642,474 514,981 127,493
Bare Boat Charter -
Related Party 240,060 241,460 (1,400)
Finance Expenses - Net 1,100,316 775,446 324,870
Depreciation and Amortization 600,687 641,435 (40,748)
Bankruptcy Fees 80,000 - 80,000
------------- -------------- ------------
Total Expenses 7,704,152 7,135,364 568,788
------------- -------------- ------------
Net (Loss) Income Before Income
Tax Provision $ (160,140) $ 2,028,521 $ (2,188,661)
============= ============== ============
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not subject to material interest rate risk, foreign currency
exchange rate risk, commodity price risk or other relevant market rate or price
risks.
ITEM 4. CONTROLS AND PROCEDURES
Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As of the end of the period covered by this report, we completed an
evaluation, under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our chief executive officer and chief
financial officer concluded that the Company's disclosure controls and
procedures were effective.
There have not been any significant changes that occurred during the fiscal
quarter ended March 31, 2007 in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
30
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
Part II
OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit Description of Exhibit
31.1 CEO Certification pursuant to rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934
31.2 CFO Certification pursuant to rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934
32 CEO & CFO Certification pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
31
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
May 18, 2007 /s/ Francis W. Murray
-----------------------------------------------------
Francis W. Murray, President, Chief Executive Officer and Chief
Financial Officer
32
Exhibit 31.1
CEO CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Francis W. Murray, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International
Thoroughbred Breeders;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 18, 2007
- ------------------
/s/ Francis W. Murray
----------------------------------
Chairman/Chief Executive Officer
33
Exhibit 31.2
CFO CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Francis W. Murray, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International
Thoroughbred Breeders;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 18, 2007
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/s/ Francis W. Murray
---------------------------------
Chief Financial Officer
34
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q of
International Thoroughbred Breeders, Inc. (the "Company") for the three months
ended March 31, 2007 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Francis W. Murray, Chief Financial Officer of the
Company, hereby certify pursuant to 18 U.S.C. ss.1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Francis W. Murray
- ----------------------
Name: Francis W. Murray
Title: Chief Financial Officer
May 18, 2007
35