UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
- - ---------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 33-67738
SAM HOUSTON RACE PARK, LTD.
(Exact name of Registrant as Specified in its Charter)
TEXAS Offices)
(State or other jurisdiction
of incorporation or organization) 76-0313877
(I.R.S. Employer
ONE SAM HOUSTON PLACE Identification Number)
7575 NORTH SAM HOUSTON PARKWAY
WEST 77064
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive
Registrant s telephone number, including area code: (281) 807-8700
- - ---------------
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
None.
- - ---------------
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 past 90 days.
Yes /X/ No / /
- - ---------------
TABLE OF CONTENTS
PART I
Item 1. Business
General3
Industry Overview3
Racing Schedules4
Sources of Revenue 4
Purses and Horsemen s Agreements6
Marketing and Business Development7
Competition8
Seasonality of Racing 10
Employees10
Regulation and Taxation10
Item 2. Properties12
Item 3. Legal Proceedings14
Item 4. Submission of Matter to a Vote of Security Holders14
PART II
Item 5. Stockholder Matters15
Item 6. Selected Financial Data16
Item 7. Management s Discussion and Analysis of Financial Condition and
Results of Operations17
Item 7a. Quantitative and Qualitative Disclosures About Market Risk20
Item 8. Financial Statements and Supplementary Data
Report of Independent Public Accountants21
Consolidated Balance Sheets22
Consolidated Statements of Operations23
Consolidated Statements of Partners Capital (Deficit)24
Consolidated Statements of Cash Flows25
Notes to Consolidated Financial Statements26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure35
PART III
Item 10. Directors and Executive Officers36
Item 11. Executive Compensation39
Item 12. Security Ownership of Certain Beneficial Owners and
Management41
Item 13. Certain Relationships and Related Transactions41
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form
8-K42
PART I
ITEM 1. BUSINESS
GENERAL Sam Houston Race Park, Ltd., a Texas limited
partnership (the"PARTNERSHIP"), owns and operates Sam Houston Race Park,
a Class 1 horse
racing facility located within the greater Houston metropolitan area (the
"RACE PARK"). The Race Park offers pari-mutuel wagering on live
thoroughbred and quarter horse racing and on horse and greyhound races
simulcast from other racetracks. The managing general partner of the
Partnership is SHRP General Partner, Inc. (the "MANAGING GENERAL
PARTNER"), a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). The
Partnership is also comprised of an additional general partner, SHRP
Equity, Inc. (the "ADDITIONAL GENERAL PARTNER") and limited partner
interests. As of March 1, 1999, various wholly owned subsidiaries of
MAXXAM held, directly or indirectly, an aggregate of 98.3% of the equity
in the Partnership and 97.5% of the Partnership s 11% Senior Secured
Extendible Notes (the "EXTENDIBLE NOTES").
This Annual Report on Form 10-K contains statements which
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in the
sections to this Item entitled "Sources of Revenue-Simulcasting,"
"-Marketing and Business Development," "-Competition" and "-Regulation
and Taxation-Regulations on Simulcasting" and "-Taxation." These
statements also appear in a number of other places (see Item 3. "Legal
Proceedings," Item 5. "Stockholder Matters" and Item 7. "Management s
Discussion and Analysis of Financial Condition and Results of
Operations-Results of Operations," "-Liquidity and Capital Resources" and
"-Year 2000"). Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans" or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and
involve significant risks and uncertainties, and that actual results may
vary materially from those in the forward-looking statements as a result
of various factors. These factors include the effectiveness of
management s strategies and decisions, general economic and business
conditions, new or modified statutory or regulatory requirements, and
changing prices and market conditions. This report identifies other
factors that could cause such differences. No assurance can be given
that these are all of the factors that could cause actual results to vary
materially from the forward-looking statements.
INDUSTRY OVERVIEW
Pari-mutuel wagering is pooled wagering, under which bettors
wager against each other, not the racetrack. Wagering pools are regular
wagering pools, multiple two wagering pools and multiple three or more
wagering pools. Examples of regular wagers include win (a wager on a
specific horse to finish first), place (a wager on a specific horse to
finish first or second) and show (a wager on a specific horse to finish
first, second or third). Examples of multiple two wagers include daily
double (a wager in which the bettor selects the horses that will win two
separate races), quinella (a wager in which the bettor selects the horses
that will finish first and second, in any order) and exacta (a wager in
which the bettor selects the horses that will finish first and second, in
the correct order). Examples of multiple three or more wagers include
trifecta (a wager in which the bettor selects the horses that will finish
first, second and third, in order), superfecta (a wager in which the
bettor selects the horses that will finish first, second, third and
fourth, in order), and the pick three (a wager in which the bettor
selects the winner of three consecutive races). A computerized
totalisator system is used to total the amounts wagered and calculate the
payouts for each pool based on the amounts wagered on various horses and
on the possible outcomes.
Pari-mutuel wagering is conducted in a majority of states in
the United States and all provinces in Canada. The industry includes
racetracks which conduct thoroughbred, quarter horse, harness and
greyhound racing and off-track wagering facilities which receive
simulcast broadcasts from various racetracks but do not conduct live
racing. Off-track wagering is regulated by the individual states in the
United States and is not legal in Texas and certain other states.
Simulcasting is the process by which live races held at one racing
facility are broadcast simultaneously to other locations at which
additional wagers may be placed on the race being broadcast. Guest
simulcasting is the process whereby the Race Park receives broadcasts
from other racetracks. Host simulcasting is the process whereby other
racetracks receive broadcasts from the Race Park. Simulcasting is
regulated by individual states in the United States and is authorized in
Texas but is not currently authorized in all states.
For every dollar wagered at the Race Park, a percentage, as
defined by state law, is returned to the winning bettors, and the
remaining percentage, referred to as the "takeout," is collected by the
racetrack. As discussed in more detail below, a percentage of the
takeout is reserved for purses to be paid to the owners of future winning
horses, as fees and taxes to the state of Texas and as contributions to
organizations whose purpose is the furtherance of horse breeding in
Texas. The takeout remaining after these deductions is retained by the
racetrack and constitutes the racetrack s primary source of revenue. The
Partnership s Consolidated Financial Statements and Notes thereto
appearing in Item 8 contain additional information regarding the
Partnership s revenues and costs of pari-mutuel operations.
RACING SCHEDULES
The Race Park currently conducts live thoroughbred or quarter
horse racing four days a week during meets while simulcasting seven days
a week. The Texas Racing Commission (the "RACING COMMISSION") must
approve the number of live race days that may be offered at the Race Park
each year. The number and scheduling of race days at the Race Park will
depend upon a number of factors, including scheduling of live race days
at other Texas Class 1 horse racing facilities. Under the Rules of
Racing for the state of Texas (the "RULES OF RACING"), Class 1 racetracks
may not have overlapping live race schedules for the same breed of horse
with other Class 1 racetracks unless each track with overlapping
schedules consents. The Racing Commission has licensed two other Class 1
horse racetracks: Retama Park near San Antonio and Lone Star Park at
Grand Prairie near Dallas.
The Race Park conducted 129 days of live racing during 1998,
consisting of 86 days of thoroughbred racing and 43 days of quarter horse
racing. For the 1999 calendar year, the Race Park has obtained approval
to conduct live racing on 134 days consisting of (i) 57 days of
thoroughbred racing beginning on January 1, 1999 and concluding on April
11, 1999, (ii) 44 days of quarter horse racing beginning on July 2, 1999
and concluding on September 12, 1999 and (iii) 33 days of thoroughbred
racing beginning on October 28, 1999 and concluding on December 30, 1999.
The Race Park has not yet determined what race dates it will request in
2000 and years thereafter. The Race Park also expects to continue
offering simulcast wagering 364 days a year.
SOURCES OF REVENUE
Wagering on Live Races
The Texas Racing Act (the "RACING ACT") provides for the
takeout percentage on live races depending on the type of wager. The
total takeouts are approximately 18%, 21% and 25% from regular wagering
pools, multiple two wagering pools and multiple three or more wagering
pools, respectively. The Racing Act also provides that a minimum of 7%
of all live regular wagering pools and live multiple two wagering pools
and a minimum of 8.5% of all live multiple three wagering pools be
reserved for purses to be paid to the owners of future winning horses.
Furthermore, through December 31, 1998, the state of Texas received 1% of
the first $100 million wagered on live racing at each racetrack each year
(plus higher percentages for wagering over $100 million). Subsequent to
December 31, 1998, this tax was eliminated on the first $100 million
wagered. Finally, 1% of live multiple wagering pools is required to be
set aside for Texas horse breeding programs. Through December 31, 1998,
the Race Park retained, on the first $100 million wagered on live horse
racing, 10% of regular wagers, 12% of wagers involving two horses and
14.5% of wagers involving three or more horses after giving effect to the
foregoing payments. The betting patterns experienced by the Race Park
during its operating history have averaged approximately 41%, 33% and 26%
of dollars wagered in the regular, multiple two and multiple three or
more wagering pools, respectively.
Simulcasting
The Race Park currently offers guest simulcast wagering on
horse races seven days a week throughout the year and intends to continue
doing so. As of March 1, 1999, the Race Park had agreements with
approximately 50 racetracks pursuant to which it, at various times,
receives simulcast signals. The maximum takeout percentages on guest
simulcast racing broadcasts from Texas racetracks are the same as those
for live racing. The takeout percentages on guest simulcast racing
broadcasts from out-of-state tracks are established by each state but are
generally within a few percentage points of the takeout percentages in
Texas. The Race Park sets aside amounts from each wagering pool for
purses to be paid to the owners of future winning horses in varying
amounts. See "Purses and Horsemen s Agreements" below. Furthermore, as
of September 1, 1997, the Racing Act required the allocation of 1.25% of
all simulcast wagering pools for the state of Texas, 0.25% for the state
of Texas for funds previously appropriated to administer and enforce the
Racing Act, and 1% of all simulcast multiple wagering pools for Texas
horse breeding programs. As of January 1, 1999, the allocation to the
state of Texas was reduced by .25% to 1.0%. The Race Park also pays
broadcasting racetracks a fee which averages approximately 3% of the
amount wagered by its patrons on the broadcast races. After giving
effect to the foregoing, the Race Park receives net commissions normally
ranging from 6% to 10% on guest simulcast betting at the Race Park.
The Race Park also began offering guest simulcast wagering on
greyhound races broadcast from a greyhound track in Corpus Christi during
March 1998 under cross-breed simulcasting provisions contained in the
amendments to the Racing Act enacted during the 1997 legislative session
(the "1997 AMENDMENTS"). In June, 1998, the Race Park began offering
wagering on races broadcast from certain out-of-state greyhound tracks
and in July, 1998, the Race Park began offering wagering on races
broadcast from the greyhound track located in the greater Houston
metropolitan area ("GULF GREYHOUND"), which generated the highest
wagering handle among the greyhound tracks being offered. During
December 1998, Gulf Greyhound notified the Race Park that it would no
longer send its simulcast signal to the Race Park. Accordingly, the Race
Park no longer offers wagering on races broadcast from Gulf Greyhound,
but intends to continue to offer wagering on broadcasts from Corpus
Christi and certain out-of-state greyhound tracks. Wagering on greyhound
signals accounted for 14.5% of the guest handle and 12.3% of total net-
pari mutuel commissions for 1998.
The maximum takeout percentages on cross-breed simulcast racing
broadcast from Texas racetracks and out-of-state racetracks are
approximately equal to those percentages used for horse racing described
above. In accordance with the 1997 Amendments, 5.5% of each wagering
pool is set aside for greyhound purses. In addition, the 1997 Amendments
require the allocation of 1.5% of all simulcast wagering pools for the
state of Texas, 0.25% for the state of Texas for funds previously
appropriated to administer and enforce the Racing Act and 1% of all
simulcast multiple wagering pools for Texas greyhound breeding programs.
As of January 1, 1999, the 1.5% allocation for the state of Texas was
reduced to 1.25%. Also, the Race Park receives 1.5% of wagering on
out-of-state horse racing placed at Gulf Greyhound. The Race Park is
required to pay 1.5% of amounts wagered on out-of-state greyhound tracks
to Gulf Greyhound. Broadcasting race tracks are paid a fee by the Race
Park that normally ranges from 2.5% to 3.0% of amounts wagered. After
giving effect to the foregoing, the Race Park expects to receive net
commissions normally ranging from 10% to 13% on cross-breed simulcast
wagering at the Race Park.
The Race Park receives commissions from host simulcasting
averaging approximately 3% of the amount wagered at the receiving track
on the Race Park s races. A portion of this fee is reserved for purses
to be paid to the owners of future winning horses, as described in
"Purses and Horsemen s Agreements" below. The Race Park also receives
4.5% of the amount wagered at greyhound tracks located in Texas on races
conducted at the Race Park which is to be reserved for purses. Through
October 1, 1999, the Race Park also receives 80% of the purse funds
generated from interstate wagering on horse racing at greyhound tracks
located in Texas under a ruling by the Texas Racing Commission. As of
March 1, 1999, the Race Park had agreements with approximately 230
racetracks and off-track wagering outlets pursuant to which the Race
Park, at various times, broadcasts its races.
Simulcasting is an important component of the Race Park s
revenues. Guest simulcasting and host simulcasting accounted for
approximately 64% and 20%, 63% and 20%, and 63% and 13%, respectively, of
the Race Park s net commission revenues during the years ended December
31, 1998, 1997 and 1996, respectively.
Food and Beverage Sales
Food and beverage sales are another major source of revenue and
include catering, restaurant and concession sales. A broad selection of
food is available to the patrons of the Race Park, from table dining at
the clubhouse level to food court fare at various concession stands
throughout the Race Park.
Other Revenues
Other major sources of revenue include admission, program and
parking fees as well as sponsorship agreements and sales of finish line
boxes, tables and luxury suites. An admission fee is charged for entry
to the Race Park. Preferred and valet parking are available for a fee
during live racing. The Race Park also sells programs for live and
simulcast racing, various editions of The Daily Racing Form and "tip"
sheets. The clubhouse level contains finish line boxes, finish line
reserved tables and reserved seating available for sale on a daily or
seasonal basis. Luxury suites are also available for rental on a
long-term or daily basis. The clubhouse level also contains the Jockey
Club which has a capacity of approximately 300 people. Individual and
corporate memberships to the Jockey Club are available for sale.
PURSES AND HORSEMEN S AGREEMENTS
Under the Rules of Racing, the Racing Commission has recognized
the Texas Horsemen s Partnership, L.L.P. (the "THP") as the official
horsemen s organization for the state of Texas. The recognized
horsemen s organization is responsible for negotiating with the
Partnership on behalf of all horsemen at the Race Park regarding, among
other things, the distribution of purses and guest and host simulcasting
agreements. The THP is comprised of two partners, the Texas Thoroughbred
HBPA, Inc. and the Texas Horsemen s Benevolent and Protective Association
which represents owners of quarter horses. The Partnership has entered
into agreements with each partner (the "THP AGREEMENTS"), which expire on
December 31, 1999. Under the terms of the contracts, during 1997, the
Race Park reserved 30% of the takeout from guest simulcasting and 30% of
the commissions received from host simulcasting for purses to be paid to
the owners of future winning horses. The percentage reserved for purses
increased to 31% during 1998. In accordance with the 1997 Amendments,
the amount reserved for purses was mandated by law as of January 1, 1999.
The amounts specified in the amended Racing Act approximate 7% of all
regular and multiple two horse wagering pools and 8.5% of all multiple
three horse wagering pools. The Partnership estimates that net
pari-mutuel commissions will decrease by approximately $1.0 million as a
result of this provision of the 1997 Amendments. The percentage reserved
for purses from host simulcasting increased to 32.5% of commissions
received in 1999 and will increase to 34.5% in 2000 and 37.0% thereafter,
in accordance with the THP Agreements and Texas Racing Commission rules.
Both contracts specify that all guest and host simulcasting agreements
are approved by the horsemen. The horsemen have the right to withdraw
this approval only for matters involving the integrity or best interests
of racing.
In accordance with industry practice, the Race Park establishes
purses nearly one month in advance of a race, based on the expected
wagering pool. These established purses are published in a condition
book which generally covers fifteen days of racing. Horsemen then enter
their horses in the proposed races based on the conditions of the race,
including the purse offered. At any given time, purses generated from
wagering may be higher or lower than the amounts included in the
projections used to complete the condition book. Therefore, during a
live race meet, purses may be over or under paid. Under the terms of the
THP Agreements, the Partnership has the ability to manage the level of
purses paid so that purses paid are approximately equal to purses
generated from wagering within a certain period of time; however, there
can be no assurance that any adjustments necessary will be sufficient.
When purses paid exceed purses generated within a certain period of
time, the excess payments become an additional expense to be paid by the
Partnership. During 1994, the Partnership paid purses in excess of
purses generated aggregating approximately $4.0 million. Under various
amendments to the agreement in effect during 1994, the Partnership has
recovered $1.0 million of these purse overpayments. The agreement
between the Partnership and the Texas Thoroughbred HBPA, Inc. provides
for the recovery of purse overpayments of $0.7 million and $0.6 million
during the years ended December 31, 1999 and 2000, respectively. The
Partnership will record any future recoveries only as they are earned.
During the years ended December 31, 1998, 1997 and 1996, the
Race Park has paid purses of approximately $11.1 million, $9.4 million
and $9.1 million, respectively. The average daily thoroughbred purse
paid increased from $65,000 to $92,000 during the three-year period. The
average daily quarter horse purse paid increased from $37,000 to $40,000
during the three-year period.
MARKETING AND BUSINESS DEVELOPMENT
Management of the Race Park believes that the majority of the
patrons for the Race Park reside within a 20 mile radius of the Race
Park, which includes the greater Houston metropolitan area, and that a
secondary market of occasional patrons can be developed outside the 20
mile radius but within a 50 mile radius of the Race Park. Management
recognizes the challenge of introducing pari-mutuel wagering to customers
in the greater Houston metropolitan area and has established the
following marketing goals to increase attendance and the wagering handle:
(i) promote the excitement of horse racing and wagering, (ii) support and
expand the existing group of core bettors, (iii) attract new fans
currently unfamiliar with horse racing, and (iv) pursue a program of fan
education to teach these new fans how to wager. Management uses a number
of marketing strategies to have potential customers consider the Race
Park as an entertainment alternative. These strategies are designed to
bring people to the Race Park for specific promotional events with a view
of turning infrequent visitors into occasional visitors and more frequent
visitors into regular visitors. Other marketing programs have been
developed to appeal to simulcasting customers and the more serious
horseplayers.
Management utilizes a variety of marketing techniques in
support of these objectives including: (i) maintaining a public relations
program to distribute news, information, features, handicapping tips and
results in local and national broadcast and print media, (ii) maintaining
an advertising presence in the market, primarily through newspaper,
television and radio campaigns, (iii) coordinating promotional efforts in
cooperation with sponsors, suppliers and vendors, (iv) developing a
strong group sales program, to appeal to large corporate, civic and
affinity groups, (v) holding specialized promotions and on-going programs
that are designed to attract unique demographic and/or cultural groups,
(vi) providing support for Houston area community events, (vii) focusing
attention to customer service and refinements to the Race Park s
facilities, (viii) holding handicapping seminars and tournaments both to
educate fans and promote the excitement of wagering, and (ix) producing
direct mail both to introduce the track to new groups and communicate
with existing customers.
Racetracks in certain states have begun offering alternative
forms of gaming, such as slot machines and video lottery machines, in
order to increase both revenues and purses, thereby strengthening both
the operations and the racing programs. In 1997, the Race Park invested
significant effort and monies lobbying the Texas legislature to authorize
additional forms of gaming at racetracks in Texas; however these efforts
were not successful. Management intends to continue to invest in efforts
to change existing legislation for the benefit of pari-mutuel license
holders in the current legislative session, which began in early 1999.
There can be no assurance that these efforts will result in legislative
changes.
Approximately 90 of the Race Park s 300 acres of land remain
undeveloped. Management continues to research and study the economic
viability of proposals for the commercial development of this property.
Future development plans could include the construction and operation of
businesses such as restaurants, night clubs, retail shops, hotels or
other types of entertainment facilities.
During March 1999, the Race Park formed SHRP Valley LLC, a
wholly-owned limited liability company, which then entered into a six
year agreement with a company to lease a greyhound track located in
Harlingen, Texas. A management agreement was also entered into between
the parties in connection with the management of the associated pari-
mutuel wagering license. The Race Park also has an option to purchase
100% of the equity interest in the company that owns the greyhound track
and the wagering license for the term of the lease , subject to certain
conditions. The agreements are contingent upon the satisfactory
completion of a 90 day due diligence and feasibility study currently
being conducted by the Race Park. If the due diligence study is
satisfactory, Race Park management plans to re-open the facility and
conduct year around horse and dog simulcasting and a season of live
greyhound racing at the track. The transaction is also subject to the
approval of the Texas Racing Commission.
COMPETITION
The Partnership faces competition from a variety of wagering
and gaming sources, including Gulf Greyhound, the Texas State Lottery,
numerous charity operated bingo facilities located in the Houston area
and Louisiana casinos located approximately 125 to 150 miles from
Houston.
Although the Race Park competes with Gulf Greyhound for pari-
mutuel wagering dollars, prior to September 1, 1997, the Race Park had
the exclusive right to simulcast horse racing in the greater Houston
metropolitan area. During 1997, the Texas Legislature authorized cross-
breed simulcasting between horse tracks and greyhound tracks at Texas
pari-mutuel facilities. This now allows greyhound tracks to display and
accept wagers on races broadcast from horse tracks and horse tracks to
display and accept wagers on races broadcast from greyhound tracks. Gulf
Greyhound began simulcasting horse races as of September 1, 1997 when the
legislation became effective. Therefore, the Race Park now competes with
Gulf Greyhound for horse racing customers in the Houston market.
Management believes that although the competition from Gulf Greyhound has
negatively impacted and will continue to negatively impact commissions
generated from wagering on horse racing, these negative impacts have been
and will continue to be more than offset by the additional commissions
generated from wagering on simulcast greyhound racing.
The Race Park also competes for wagering dollars with the Texas
State Lottery and charity operated bingo facilities. Both the lottery
and bingo are relatively easy games to learn versus the more complex
nature of handicapping and wagering on horse racing, which places the
Race Park at a competitive disadvantage to these forms of wagering. The
Race Park attempts to mitigate these factors by providing various fan
education programs for customers.
The Race Park also competes for wagering dollars with casinos
located in the state of Louisiana. Publicly available information
indicates that the majority of the customers at riverboat casinos located
in Lake Charles, Louisiana come from Houston. Management believes that
the location of the Race Park, within a one hour drive of the majority of
the population of Houston, is a competitive advantage for the Race Park
over the casinos, which are located two hours away for most Houston
residents. However, as with the Lottery and bingo, many casino gaming
opportunities are easier to learn than horse racing.
The Race Park also competes for customers with other forms of
entertainment, including the Houston Livestock Show and Rodeo, held
annually in February and March, and a wide range of live and televised
professional, collegiate and high school sporting events that are
available in the Houston area. The Race Park could, in the future, also
compete with other forms of gambling in Texas, including casino gambling
or other forms of gaming on Indian reservations.
Races broadcast from the Race Park compete for wagering dollars
and commissions with races simulcast from other racetracks throughout the
United States and around the world. The ability of the Race Park to
compete with other racetracks for these wagering dollars is dependent on
several factors, including the quality and quantity of horses and the
timing of live meets. The quality and quantity of the Race Park s horses
is dependent on the Race Park s ability to pay purses at a high enough
level to attract the highest quality of horses in a sufficient quantity
to fill the races conducted by the Race Park. Races broadcast from the
Race Park compete with races broadcast from other racetracks where the
quality of horses is often higher than the quality of horses racing at
the Race Park. However, management believes that the increase in
simulcasting activity, which has resulted in increased purses paid, has
been improving the quality of the racing program conducted at the Race
Park over the past three years. The mild winter conditions in the
Houston area also assists the Race Park in attracting horses as it
ensures uninterrupted training and racing for horsemen compared to
racetracks in the Midwest and East Coast regions, which may be closed
temporarily due to inclement weather. By conducting thoroughbred racing
during the winter season, the Race Park also faces less competition for
simulcast wagering dollars at locations across the country as fewer
racetracks conduct live racing during this time of year. Thus, during
the winter season, the Race Park has a competitive advantage in
attracting higher quality horses which increases the ability of the Race
Park to expand the simulcast handle wagered on its thoroughbred races.
The Race Park has annually conducted a summer quarter horse
meet. Although quarter horse racing does not command the same level of
wagering across the United States as thoroughbred racing, the Race Park
has been able to export its quarter horse racing signal to approximately
90 racetracks and off-track facilities around the country. This is
primarily due to the fact that the level of quarter horse purses paid
puts the Race Park among the top quarter horse race tracks in the United
States. This level of purse payments enables the Race Park to attract
high quality quarter horses.
The Race Park conducts its live racing for all thoroughbred and
quarter horse races in the evenings. As the majority of racetracks in
the United States conduct racing during the day, management believes that
night racing significantly increases the ability of the Race Park to
export its racing signal to simulcasting facilities at racetracks and
off-track locations. Also, the nighttime performances have historically
drawn higher attendance than daytime performances.
Another competitive factor faced by the Race Park includes the
allocation of a sufficient number of live race days by the Racing
Commission. While the Class 1 racetracks in Texas are each entitled to
approximately 17 weeks of live racing per breed (thoroughbred and quarter
horse), many factors are considered in the actual granting of race days.
Input is solicited by the Racing Commission from the racetracks,
racehorse owners and trainers, and horse breeding organizations.
Management works closely with all of the individuals and groups involved
in order to try to obtain a schedule that contains an optimal number of
live race days and that is in the best economic interest of the Race
Park.
SEASONALITY OF RACING
Handle and commissions from live racing and host simulcasting
are affected by the breed of horse running at the Race Park. Generally,
revenues generated from thoroughbred racing are higher than revenues
generated from quarter horse racing. More than 80% of the Race Park s
net pari-mutuel commissions from live racing and host simulcasting are
derived from thoroughbred racing. Increased revenues from thoroughbred
racing are primarily due to two factors, the overall popularity of
thoroughbred races and the timing of the Race Park s thoroughbred meets.
Also, as discussed above, the Race Park conducts a winter thoroughbred
meet during which the Race Park is able to broadcast its racing signal to
a large number of facilities. Races broadcast during the summer quarter
horse meet must compete with much stronger thoroughbred signals from
around the country.
Guest simulcast wagering at the Race Park is also affected by
the seasonality of racing throughout the United States. The Triple Crown
races in May and June and the Breeders Cup program in the fall, in
addition to the high quality racing programs held at United States
racetracks throughout the spring, summer and early fall, help to increase
guest wagering and attendance during those time periods. As a result,
the Partnership s net pari-mutuel commissions from guest simulcast
wagering on horse racing have been highest in the second quarter of the
year.
Thoroughbred and quarter horse racing are conducted in all
types of weather; however, racing may be canceled due to extreme local
weather conditions. Although the Race Park has rarely been forced to
cancel live racing, inclement weather does negatively effect the level of
attendance at the Race Park.
EMPLOYEES
As of March 1, 1999, the Race Park had approximately 115
year-round full-time employees, approximately 75 year-round part-time
employees and, due to the seasonal nature of the business, up to
approximately 450 seasonal employees. The number of seasonal employees
utilized depends principally on whether or not the Race Park is
conducting live racing and varies based upon attendance levels.
Certain individuals employed by MAXXAM and its wholly owned
subsidiaries provide management, legal, financial, corporate development
and other services to the Partnership from time to time. These
affiliates are reimbursed for their estimated actual costs incurred in
providing these services to the Partnership. The Race Park continuously
monitors its staffing levels and its use of services provided by MAXXAM
employees.<PAGE>
REGULATION AND TAXATION
Texas Racing Act
Under the Racing Act, horse racetracks are classified as Class
1, Class 2, Class 3 or Class 4 racetracks. A Class 1 racetrack must
operate in a county with a population of at least 750,000. Only three
Class 1 racetracks may be licensed in the state of Texas. The Racing
Commission does not limit the number of Class 2 racetracks that may be
licensed and operated in Texas or where those racetracks may be located.
A Class 2 racetrack is entitled to conduct 60 days of live racing in a
calendar year. Class 3 and Class 4 racetracks are generally operated by
county fairs for short periods of time.
Ownership and operation of horse racetracks in Texas are
subject to significant regulation as set forth in the Racing Act and
administered by the Racing Commission. The Racing Act provides, among
other things, for the allocation of each wagering pool among betting
participants, the state of Texas, purses, special equine programs and
racetracks. The Racing Act also empowers the Racing Commission to
license and regulate substantially all aspects of horse racing in the
state. The Racing Commission, among other things, licenses all employees
and workers at a racetrack (including jockeys, trainers and
veterinarians); regulates the transfer of ownership interests; allocates
live race days; approves race programs; regulates the conduct of races;
oversees the administration of drugs to horses; sets specifications for
the racing surfaces, animal facilities, employee quarters and public
areas of racetracks; regulates the types of wagers on horse races and
approves all material contracts with racetracks, including management
agreements, simulcast agreements, totalisator contracts and
concessionaire agreements. The ability of the Race Park to conduct live
racing and pari-mutuel wagering is dependent on continued governmental
approval of these activities as legalized forms of gaming.
Restrictions on Ownership
The Racing Act requires that a majority of the ownership
interests of a license holder be held at all times by persons who are
United States citizens and who have been continuous residents of the
state of Texas for the preceding ten years. Additionally, it is illegal
under the Racing Act for any person to own a 5% or greater interest in
more than two racetrack licenses in the state of Texas (both horse tracks
and greyhound tracks are grouped together for this purpose). The Race
Park s license (the "LICENSE") is not transferable but is subject to a
negative pledge (as security for the Partnership s Extendible Notes). In
the event of a foreclosure by the Trustee for the Extendible Notes (the
"TRUSTEE") or the holders of Extendible Notes (the "NOTEHOLDERS")
following an event of default, a number of restrictions and procedural
requirements apply to any proposed or subsequent transfer or use of the
License. The Racing Act generally requires pre-approval by the Racing
Commission of all transfers or issuances of "pecuniary interests" in the
holder of a racetrack license. Interests in the Partnership constitute
"pecuniary interests" and generally any transfer of an interest in the
Partnership would require the prior approval of the Racing Commission.
Regulations on Simulcasting
The Race Park is authorized to conduct guest and host
simulcasting under the Racing Act and the Federal Interstate Horseracing
Act of 1978. In Texas, simulcast broadcasts may only be sent to licensed
racetracks, as the Racing Act does not provide for off-track wagering.
All simulcast contracts must be approved by the Racing Commission. In
accordance with the Rules of Racing, all guest and host simulcasting
contracts must also be approved by the horsemen. Since the Race Park is
unable to conduct simulcast wagering without the approval of the Racing
Commission and the horsemen, the revocation or non-renewal of the
approval of either the Racing Commission or the horsemen could have a
material adverse effect on the Race Park s consolidated financial
position, results of operations or liquidity.
Class 1 and Class 2 horse tracks must take signals from Texas
Class 1 horse tracks when such signals are made available to them, in
preference to signals from other tracks. Class 1 racetracks are not
required to take simulcast signals from Class 2 racetracks. Under the
Racing Act, a Texas horse track that offers wagering on greyhounds, must
take all signals available from Texas greyhound tracks in preference to
out-of-state greyhound signals. Likewise, a Texas greyhound track that
offers wagering on horses, must take all signals made available from
Texas horse tracks in preference to out-of-state horse signals.
Taxation
The Partnership is subject to significant taxes and fees from
state and local agencies. These taxes and fees may be increased at any
time as the prospect of significant additional revenue is one of the
primary reasons that taxing jurisdictions allow legalized gaming. From
time to time, various taxing jurisdictions, including the Texas
Legislature, have proposed and enacted changes in the laws and the
administration of such laws affecting the taxes and fees paid by the Race
Park. Prior to September 1, 1997, the Partnership was required to set
aside 0.25% of each simulcast wagering pool for the Texas Commission on
Alcohol and Drug Abuse. Under amendments to the Racing Act enacted
during 1997, this 0.25% was designated to repay the state of Texas for
funds previously appropriated to administer and enforce the Racing Act.
This tax will be eliminated during 1999 when all amounts due to the State
of Texas, including interest, have been repaid. Also, in accordance with
amendments to the Racing Act, the pari-mutuel wagering tax on guest
simulcast wagering on horse racing was increased from 1% to 1.25% and the
tax on guest wagering on greyhound racing was reduced from 1.5% to 1.25%.
Also, as of January 1, 1999, the 1% pari-mutuel wagering tax due to the
state of Texas from live racing was eliminated on the first $100 million
wagered. The Partnership estimates that the elimination of this tax will
increase net pari-mutuel commissions for 1999 and future years by
approximately $224,000 per year based on 1998 levels of wagering. There
can be no assurance that further changes to the taxes and fees assessed
on the Race Park will not be made or that such charges will not have a
material adverse effect on the Race Park s consolidated financial
position, results of operations or liquidity.
Other Regulations
The Race Park is required to file certain reports with the
Internal Revenue Service regarding certain cash transactions and certain
wagering winnings by patrons. The Race Park is also subject to a variety
of environmental and other laws and regulations, including laws and
regulations dealing with animal waste management and wetlands. The Race
Park is subject to other federal, state and local regulations and, on a
periodic basis, must obtain various licenses and permits. The Race Park
also has an agreement with a company related to the sale of alcoholic
beverages. The Race Park derives significant revenues from the sale of
alcoholic beverages. The interruption or failure of this company to
maintain valid permits and licenses to sell alcoholic beverages could
have a material adverse effect on the Race Park s consolidated financial
position, results of operations or liquidity.<PAGE>
ITEM 2. PROPERTIES
The Race Park is located on approximately 300 acres of land
(the "SITE") owned by the Partnership. The Site is located in Harris
County approximately 18 miles from downtown Houston and approximately 15
miles from Bush Intercontinental Airport. The Site currently includes
approximately 90 acres of undeveloped land. The Race Park fronts Sam
Houston Parkway, a major tollway, providing ready access to residents of
the greater Houston metropolitan area. In 1998, the Race Park added an
80 foot tall electronic message center.
The Race Park s buildings and grounds have an aggregate
capacity of approximately 18,000 patrons and 10,000 cars. The Grandstand
building at the Race Park is an air-conditioned, fully-enclosed structure
of approximately 196,700 square-feet with a variety of viewing and
simulcasting facilities on three levels. The Grandstand has seating for
6,000 patrons and is designed to accommodate approximately 10,000 total
patrons. There are numerous television monitors, an electronic message
board, video walls, video replay libraries and odds information boards
throughout the Grandstand to increase the flow of information to bettors.
Simulcast races are shown on designated television monitors. Each
Grandstand level has numerous pari-mutuel betting windows, automated
betting machines and concession areas.
In addition to the Grandstand, there are three additional areas
from which patrons can watch the races: the standee ramp or apron between
the Grandstand and the racing ovals; the 30,000 square foot enclosed,
air-conditioned simulcast pavilion which is located immediately north of
the Grandstand; and the infield area of the racetrack. The simulcast
pavilion is typically the only portion of the Race Park that is open to
the public on days that only simulcasting is being conducted. The
simulcast pavilion was renovated during 1998. These other areas have
concession stands and pari-mutuel facilities nearby. A tunnel provides
access to the infield.
The Race Park has two racing ovals - a one and one-quarter mile
dirt track and a one and one-eighth mile turf course. Each racing oval
features straightaways or "chutes" to accommodate varying race lengths.
The surface of the tracks and the rails have been designed to lessen the
risk of injuries to horses and jockeys and are generally considered to be
of high quality. The backside contains 16 barns capable of housing a
total of approximately 1,200 horses. Each barn contains stalls for
onsite stabling, tack rooms, hay and feed storage areas, grooms
quarters, wash racks and four outdoor walkers. The Race Park also has a
stakes barn for visiting horses, a receiving barn, a holding barn and an
isolation facility. An equine veterinary facility is also located at the
Race Park.
Under the indenture governing the Partnership s Extendible
Notes (the "INDENTURE"), substantially all of the Partnership s assets,
including the Partnership s properties, are pledged as collateral on the
Extendible Notes. The racing license held by the Partnership is also
subject to a negative pledge for the benefit of the holders of the
Extendible Notes.
ITEM 3. LEGAL PROCEEDINGS
This section contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. See Item 1. "Business-General" for
cautionary information with respect to such forward-looking statements.
1995 Plan of Reorganization
On April 17, 1995, SHRP, Ltd. and two affiliates (the
"DEBTORS") filed voluntary petitions to reorganize under the provisions
of Chapter 11 of the United States Bankruptcy Code. On September 22,
1995, the Bankruptcy Court entered an order confirming the Debtors plan
of reorganization (the "PLAN"). All transactions called for by the Plan
were completed on October 6, 1995 (the "EFFECTIVE DATE") and the case was
closed on December 19, 1996. The Plan called for, among other things, a
reduction in the Partnership s long-term debt, a significant cash
infusion, contribution of additional property and a reorganization of the
Partnership.
Under the terms of the Plan, the Extendible Notes were issued
in exchange for the Partnership s 11-3/4% Senior Secured Notes. The
Extendible Notes had an initial aggregate principal amount of $37.5
million, mature on September 1, 2001 and bear interest at the rate of 11%
per annum. The maturity date of the Extendible Notes may be extended to
September 1, 2003 (with an increase in the rate of interest to 13% per
annum) if the Texas legislature passes significant gaming legislation (as
defined) between January 1, 2001 and August 15, 2001. Interest on the
Extendible Notes accrues in-kind and is not payable in cash until a
certain level of cash flow from operations has been achieved. Once cash
interest payments commence, interest payments may not thereafter be paid
in-kind. The Indenture limits the Partnership s ability to incur
additional indebtedness and liens, to engage in transactions with
affiliates, to make investments and to make distributions, although the
Indenture does allow the Partnership to become involved in certain
gaming, entertainment and other ventures.
On the Effective Date, a new investor group (the "NEW INVESTOR
GROUP") made a capital contribution of cash in the aggregate amount of
$5.9 million. Additionally, a wholly owned subsidiary of MAXXAM
contributed an approximately 87 acre tract of adjoining land having a
fair market value of $2.3 million. Each member of the New Investor Group
also provided its pro rata share of a $1.7 million line of credit. This
line of credit would be used to fund future cash flow requirements should
the cash infusion be insufficient.
The Plan provided for the elimination of all existing
partnership interests. The Partnership has issued 33.3% of the equity in
the Partnership to certain holders of allowed unsecured bankruptcy claims
(the "CREDITOR EQUITY"), a majority of which relates to the unsecured
deficiency claims attributable to the Original Notes. The Creditor
Equity is held in the form of common stock in the Additional General
Partner. On the Effective Date, the New Investor Group received 66.7% of
the equity in the Partnership. The Managing General Partner was issued a
1% interest in the Partnership in exchange for contributing its pro rata
share of the investment made by the New Investor Group. See Note 3 to
the Partnership s Consolidated Financial Statements appearing in Item 8
for further information concerning the bankruptcy proceedings.
From time to time, the Partnership is involved in various other
claims, lawsuits and other proceedings relating to a variety of matters.
While uncertainties are inherent in the final outcome of such matters and
while it is presently impossible to determine the actual costs that
ultimately may be incurred, management believes that the resolution of
such uncertainties and the incurrence of such costs should not have a
material adverse effect on the Partnership s consolidated financial
position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. STOCKHOLDER MATTERS
This section contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. See Item 1. "Business-General" for
cautionary information with respect to such forward-looking statements.
There is no established public trading market for the
Partnership s ownership interests. The Partnership has eight limited
partners in addition to the two general partners. The Partnership
interests are not transferable without the consent of the Managing
General Partner. Under the Indenture, distributions are restricted
except for amounts necessary to pay taxes on income of the Partnership
allocated to a partner. The Partnership has not made distributions to
its partners since the commencement of operations and it is doubtful that
the Partnership will be able to make any distributions to its partners
for at least the foreseeable future. See "Item 7. Management s
Discussion and Analysis of Financial Condition and Results of Operations"
and "Item 8. Financial Statements and Supplementary Data."
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Partnership for each of the
years in the five-year period ended December 31, 1998 presented below,
should be read in conjunction with "Item 7. Management s Discussion and
Analysis of Financial Condition and Results of Operations" and with the
Partnership s Consolidated Financial Statements and Notes thereto
appearing in Item 8.
<TABLE>
<CAPTION> Years Ended December 31,
------------
1998 1997 1996 1995 1994)
------- -------- -------- -------- --------
(In thousands of dollars, except for
attendance)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Revenues $ 24,195 $ 20,027 $ 20,752 $ 19,679 $ 20,565
Cost and expenses
(b) (c) (23,345) (22,250) (23,342) (24,144) (32,463)
Income (loss)
before depreciation
(c) 1,826 (1,295) (1,704) (2,193) (9,875)
Income (loss)
before reorganization
items and
other income
(expense) 850 (2,223) (2,590) (4,465) (11,898)
Reorganization
items (d) - - (83) (48,915) -
Income (loss) from
operations (d) 850 (2,223) (2,673) (53,380) (11,898)
Extraordinary item
(e) - - - 63,780 -
Net income (loss) (6,858) (8,406) (7,622) 5,608 (20,154)
Balance Sheet Data (at
end of period):
Current assets $ 9,990 $ 9,030 $ 7,797 $ 8,384 $ 7,257
Total assets (d) 35,489 34,534 33,937 34,956 77,640
Current liabilities 7,505 8,345 6,456 5,645 16,297
Notes payable
(including
notes to
affiliates),
less current
portion (e) 41,081 33,393 27,162 22,171 73,244
Partner s equity
(deficit) (15,923) (9,065) (659) 6,963 (11,901)
Distributions paid to
partners $ - $ - $ - $ - $ -
Other Data:
Total attendance 665,576 608,120 684,122 665,981 805,648
Live handle $ 22,352 $ 20,175 $ 25,620 $ 27,983 $ 49,961
Guest handle 112,139 93,543 88,579 82,381 30,455
Host handle 162,965 128,252 109,648 51,451 35,945
Net pari-mutuel
commissions 16,180 13,276 12,917 10,566 8,910
<FN>
(a) The Race Park began operations on April 29, 1994, therefore amounts
for 1994 represent eight months of operations.
(b) Includes depreciation expense of $976, $928, $886, $2,272 and $2,023
for 1998, 1997, 1996, 1995 and 1994, respectively.
(c) Includes accrued management fees of $750, $750, $750 and $183 for
1998, 1997, 1996 and 1995, respectively, which cannot be paid until
two consecutive interest payments on the Extendible Notes have been
paid in cash.
(d) Reorganization items recorded to implement the Plan. Adjustment of
assets to fair value represents the reduction of property and
equipment and other assets to their estimated recoverable amounts
and reorganization expenses represent the professional fees and
expenses necessary to implement the Plan.
(e) Extraordinary gain on discharge of liabilities recorded in
connection with the Plan represents the gain recognized due to the
discharge of current liabilities and long-term debt.<PAGE>
</TABLE>
ITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the
Partnership s Consolidated Financial Statements and Notes thereto
appearing in Item 8.
This section contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. See Item 1. "Business General" for
cautionary information with respect to such forward-looking statements.
INCOME (LOSS) FROM OPERATIONS
The following table presents selected operational
information for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION> December 31,
------------
1998 1997 1996
---- ----- ----
<S> <C> <C> <C>
Number of live race days 129 143 146
Simulcast only days 235 221 218
Average daily attendance - live race days 3,610 3,176 3,624
Average daily attendance - simulcast only days 849 694 708
Average live per capita wager $ 48 $ 44 $ 48
Average combined live and guest per capita 161 145 139
wager - live race days
Average guest per capita wager - simulcast 298 310 263
only days
(Amounts in millions)
Live handle $ 22.4 $ 20.2 $ 25.6
Guest simulcasting handle - horses 95.9 93.5 88.6
Guest simulcasting handle - greyhounds 16.2 - -
Host simulcasting handle 163.0 128.3 109.6
Net pari-mutuel commissions:
Live $ 2.7 $2.4 $ 3.0
Guest - horses 8.3 8.3 8.2
Guest - greyhounds 2.0 - -
Host 3.2 2.6 1.7
---- ----- ----
Total net pari-mutuel commissions $ 16.2 $ 13.3 $ 12.9
==== ==== ====
/TABLE
<PAGE>
Revenues. The Partnership s principal source of revenues is
net pari-mutuel commissions earned on live thoroughbred and quarter horse
racing and on simulcast racing as both a guest and host track. During
periods between the live racing dates, the Partnership s principal source
of revenues is from wagering by Race Park patrons on simulcasts of horse
and greyhound racing being conducted at other tracks. Other sources of
revenue are food and beverage sales, admission and parking fees,
corporate sponsorships and advertising, club memberships, suite rentals
and other miscellaneous items.
Total revenues for the years ended December 31, 1998, 1997, and
1996 were $24.2, $20.0 and $20.8 million, respectively. Handle and
commissions generated from both guest and host simulcasting have
continued to increase over the three year period. The increase in handle
and commissions from live racing during 1998 as compared to 1997 levels
was primarily due to higher average daily attendance and an increase in
the live per capita wager. The increase in average daily attendance was
partially due to the deletion of Wednesday racing during the spring
thoroughbred meet, which generates lower average daily attendance than
weekend race days. Management expects handle and commissions from live
racing to increase further during 1999 as compared to 1998 due to the
allocation by the Racing Commission of five more race days during 1999.
Also, in 1999, the Partnership s share of net pari-mutuel commissions
from live racing will increase by 1% due to the elimination of the
wagering tax on the first $100 million wagered on live racing. Although
wagering on live racing decreased during 1997, the combined average live
and guest per capita wager has continued to increase over the three year
period. Per capita wagering on guest simulcasting is typically higher
than per capita wagering on live racing due to increased wagering
opportunities from guest simulcasting as compared to live racing. The
average combined live and guest per capita wager increased 11% from 1997
to 1998 and 4% from 1996 to 1997.
Guest simulcasting handle increased by 20% during 1998 as
compared to 1997 due primarily to the introduction of greyhound
simulcasting discussed in Item 1, above. Guest simulcasting horse handle
increased by 2.5% during 1998 as compared to 1997; however, net
pari-mutuel commissions from guest horse simulcasting decreased by .2%
for the same time period. This decrease in the ratio of net pari-mutuel
commissions to handle is primarily due to incremental, annual increases
in the allocation to purses in accordance with the THP Agreement which
became effective on January 1, 1997 and extends through 1999, and to a
temporary .25% increase in the pari-mutuel wagering tax, which became
effective on September 1, 1997 and extended through December 31, 1998.
From 1996 to 1997, net pari-mutuel commissions from guest simulcasting
increased by 2% due to a 6% increase in guest handle which was
substantially offset by the increased pari-mutuel wagering tax and by
increases in the allocation of takeout to purses. In 1999 and 2000, net
pari-mutuel commissions from guest simulcasting are expected to increase
as a result of having a full year of greyhound simulcasting, reductions
in the pari-mutuel wagering taxes and a recovery of previously overpaid
purses as allowed under the THP Agreement. However, commissions from
guest simulcast wagering on horse racing as a percentage of handle will
decrease significantly during 1999 and 2000 due to increases in the
allocations of takeout to purses of approximately 1% of handle mandated
by amendments to the Racing Act as discussed in Item 1, "Purses and
Horsemen s Agreements."
Net pari-mutuel commissions from host simulcasting increased by
23% from 1997 to 1998 due to increased wagering at the majority of the
racetracks and off-track wagering facilities receiving the Race Park's
simulcast signal. Net pari-mutuel commissions from host simulcasting
increased by 50% from 1996 to 1997 primarily due to an increase in the
number of racetracks and off-track facilities receiving the Partnership s
simulcast signal and a beneficial change in the commission allocation to
purses from host wagering. Management expects average daily host handle
to continue to increase during 1999; however, commissions from host
simulcasting as a percentage of handle will decrease due to increases in
the purse allocations discussed in Item 1, "Purses and Horsemen s
Agreements."
Revenues generated from food and beverage sales during the year
ended December 31, 1998 increased from 1997 levels by 22% primarily due
to the increase in average daily attendance on live and simulcast only
race days. Revenues generated from admission and parking fees, program
sales and other miscellaneous sources have also increased during 1998
compared to 1997 primarily due to the increased average daily attendance
and due to increases in group sales and sponsorship revenue. During 1997
these revenues declined compared to 1996 primarily due to a decrease in
sponsorship revenue and to a decrease in the number of and prices of
sales of luxury suites and seasonal boxes and seat packages. Many of the
agreements signed prior to or during the initial thoroughbred meeting in
1994 have expired or have been renewed at lower prices.
Income (Loss) From Operations. For the year ended December 31,
1998, the Partnership reported income from operations of $850,000 which
is $3.1 million higher than the $2.2 million operating loss for the same
period in 1997, despite conducting 14 fewer days of live racing. This
improvement is the result of the substantial increase in revenues
discussed above as well as the Partnership s continued efforts to reduce
and control operating costs and expenses. In particular, salaries and
wages and marketing and advertising costs remained virtually unchanged
for the year ended December 31, 1998 versus 1997. Overall, revenues
increased approximately 21% during 1998 compared to 1997 while costs and
expenses increased by 5%.
The improvement in 1997 operating losses from 1996 levels is
due to the continued decrease in operating costs and expenses, especially
salaries and wages and marketing and advertising. Salaries and wages
decreased in 1997 over 1996 primarily due to the reduction in staffing in
several operating departments and positions that went unfilled during the
year. Marketing and advertising decreased in 1997 over 1996 as the
advertising program curtailed spending on or eliminated several high cost
promotions. These decreases were offset by an increase in management and
other professional fees. Management and other professional fees
increased primarily due to the cost of lobbying efforts undertaken in
1997 in connection with the 1997 session of the Texas state legislature.
Other Income (Expense). Other income (expense) reflects
interest earned net of interest expense, including amortization of the
original issue and the re-issue discounts on the Original Notes and the
Extendible Notes. Interest expense has continued to increase over the
three year period due to the increasing balance of the Extendible Notes
related to the payment in-kind of accrued interest and the amortization
of the discount on the Extendible Notes.
Net Loss. Net loss from operations reflects the loss before
other income (expense). Other income (expense) is described above.
LIQUIDITY AND CAPITAL RESOURCES
The net cash provided by operating activities during 1998 of $2
million was $1.5 million more than in 1997 and $3.3 million more than the
$1.3 million used in operating activities in 1996. Cash provided by
operating activities improved during 1998 compared to 1997 and 1996
primarily due to the increase in income from operations discussed above.
Restricted cash consists of deposits held for the benefit of
horsemen and funds held for the payment of property taxes. The decrease
in restricted cash from December 31, 1997 to December 31, 1998 is due to
a decrease in the deposits held for the benefit of horsemen related to
the difference in timing of the thoroughbred meets from 1997 to 1998.
The Partnership had cash and cash equivalents of $3.8 million
and a $1.7 million line of credit at December 31, 1998 available to fund
the operating activities of the Partnership. Also, the Partnership is
able to defer cash interest payments on the Extendible Notes until
certain conditions are met and to defer the payment of management fees
until two consecutive interest payments on the Extendible Notes have been
paid in cash. The deferral of these items has significantly improved the
liquidity of the Partnership.
The Partnership is continuing to put forth marketing efforts to
increase attendance and pari-mutuel handle at the Race Park in order to
generate operating income. Also, management intends to continue to
initiate legislative efforts to legalize additional forms of gaming at
the Race Park in order to increase revenues. Further, management is
analyzing various proposals to develop new forms of businesses at the
Race Park in an effort to raise new sources of income and to draw
additional attendance to the Race Park. Nonetheless, there can be no
assurance that any of these efforts will be successful.
The Extendible Notes, together with accrued interest, must be
retired in September 2001, unless the applicable extension provisions
apply. To the extent the Partnership is unable to repay or refinance the
Extendible Notes, alternative sources of funding will be necessary.
Although 97.5% of the Extendible Notes are owned by MAXXAM, there can be
no assurance that the Partnership will be able to repay or refinance the
Extendible Notes or that alternative sources of funding will be available
to the Partnership, if needed.
YEAR 2000
The Partnership is currently in the process of assessing both
its information technology systems and its embedded technology in order
to determine that they are, or will be, Year 2000 compliant. Management
has already determined that its financial data processing hardware and
software are compliant and is presently working with certain key third
parties and support groups of its embedded technology to ensure that they
are taking appropriate measures to assure compliance. Management
believes that the total cost of remediation to the Partnership will not
exceed $100,000. The most significant area still being evaluated
pertains to certain key third parties, in particular, the firm that
provides computerized totalisator services to it and others in the horse
racing industry. These totalisator services are required by the Texas
Racing Commission in order for the Race Park to conduct pari-mutuel
wagering. Management, as well as the national thoroughbred racing
industry s association, has received assurances that such systems will be
compliant by the second quarter of 1999. However, management is
evaluating other third party providers of these and other services and
equipment in the event that any such vendors cannot provide evidence of
Year 2000 compatibility.
While the Partnership believes that its program is sufficient
to identify the critical issues and associated costs necessary to address
possible year 2000 problems in a timely manner, there can be no assurance
that the program, or underlying steps implemented, will be successful in
resolving all such issues prior to the year 2000. If the steps taken by
the Partnership (or critical third parties) are not made in a timely
manner, or are not successful in identifying and remedying all
significant year 2000 issues, business interruptions or delays could
occur and could have a material adverse impact of the Partnership s
results of operations and financial condition. However, based on the
information available, the Partnership believes that it will not
experience significant business interruptions that would have a material
adverse impact on its results of operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Partners of Sam Houston
Race Park, Ltd.
We have audited the accompanying consolidated balance sheets of
Sam Houston Race Park, Ltd. (a Texas limited partnership referred to
herein as the "PARTNERSHIP") as of December 31, 1998 and 1997 and the
related consolidated statements of operations, partners capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of
the Partnership s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position
of the Partnership as of December 31, 1998 and 1997, and the results of
its operations and cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
March 8, 1999
Houston, Texas
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION> December 31,
------------
1998 1997
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,764 $ 2,728
Restricted cash 3,608 4,841
Accounts receivable, net of allowance for
doubtful accounts of $51 and $163,
respectively 2,126 1,133
Prepaid expenses and other current assets 492 328
------ -------
Total current assets 9,990 9,030
------- -------
Property and equipment, net of accumulated ------- -------
depreciation of $2,996 and $2,020, respectively 25,499 25,504
$35,489 $34,534
======= =======
LIABILITIES AND PARTNERS DEFICIT
Current liabilities:
Accounts payable $ 2,232 $ 2,104
Property taxes payable 1,040 1,118
Other liabilities 1,938 1,593
Amounts due to horsemen 2,295 3,530
------- -------
Total current liabilities 7,505 8,345
------- -------
Long term liabilities:
Notes payable 41,081 33,393
Deferred management fees 2,826 1,861
------- -------
Total liabilities 51,412 43,599
------- -------
Commitments and contingencies (Notes 1 and 10)
Partners deficit (15,923 (9,065)
------) -------
$35,489 $34,534
====== ======
/TABLE
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION> Years Ended December
------------ 31,
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Revenues:
Pari-mutuel commissions, net $16,180 $13,276 $12,917
Food and beverage sales 4,110 3,366 3,577
Admissions, parking and other 3,905 3,385 4,258
------- ------- -------
24,195 20,027 20,752
------- ------- -------
Costs and expenses:
Cost of pari-mutuel operations 1,846 1,756 1,811
Cost of food and beverage 1,971 1,531 1,544
operations
Other operating 3,029 2,433 2,565
Salaries and wages 8,349 8,314 8,624
Management and other professional 1,660 2,266 2,019
fees
Marketing and advertising 1,968 1,946 2,457
Utilities 1,261 1,143 1,307
State and local taxes 1,293 1,113 1,185
Depreciation and amortization 976 928 886
General and administrative 992 820 944
------- ------- -------
23,345 22,250 23,342
------ ------- -------
Income (loss) before reorganization 850 (2,223) (2,590)
expenses and other income (expense)
Reorganization expenses - - (83)
------ ------- -------
Income (loss) from operations 850 (2,223) (2,673)
Other income (expense):
Interest income 207 214 203
Interest expense (7,915) (6,397) (5,152)
------ ------- -------
(7,708) (6,183) (4,949)
------ ------- -------
Net loss $(6,858) $(8,406) $(7,622)
======= ======= =======
</TABLE>
CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL (DEFICIT)
(IN THOUSANDS OF DOLLARS)
TABLE
<PAGE>
<CAPTION> Managing Addition Limited Total
General al Partners ------
Partner General -----
---- Partner
-----
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 70 $ 2,318 $ 4,575 $ 6,963
Net loss (729) (2,318 (4,575 (7,622
----- -----) -----) -----)
Balance at December 31, 1996 (659) - - (659)
Net loss (8,406 - - (8,406
-----) ------ ----- -----)
Balance at December 31, 1997 (9,065) - - (9,065)
Net loss (6,858 - - (6,858
-----) ------ ------ ----)
Balance at December 31, 1998 $(15,923 $ - $ - $(15,923=
====) ====== ====== ===)
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION> Years Ended December
------------ 31,
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(6,858) $(8,406) $(7,622)
Adjustments to reconcile net loss
to net cash providedby (used
in)operating activities:
Depreciation and amortization 976 928 886
Amortization of deferred
financing costs and discounts
on long-term debt 2,258 1,360 682
(Increase) decrease in
restricted cash 1,233 (1,282) (555)
Increase in accounts
receivable (993) (102) (356)
(Increase) decrease in prepaid
expenses and other (164) 249 (302)
Increase in accounts payable 128 559 309
Increase in due to affiliates 965 883 729
Increase in accrued interest 5,442 4,886 4,391
Increase in other liabilities 267 142 665
Increase (decrease) in amounts
due to horsemen (1,235) 1,257 445
Decrease in accrued
reorganization costs - - (526)
------- ------- ------
Net cash provided by
(used in) operating
activities 2,019 474 (1,254)
------- ------- -------
Cash flows from investing activities:
Additions to property and equipment (971) (296) (455)
------- ------- -------
Net cash used in
investing activities (971) (296) (455)
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (12) (84) (91)
------- ------- ------
Net cash used in
financing activities (12) (84) (91)
------ ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,036 94 (1,800)
Cash and cash equivalents at beginning
of year 2,728 2,634 4,434
------- ------- -------
Cash and cash equivalents at end of year $ 3,764 $ 2,728 $ 2,634
======= ======= =======
Supplemental disclosure of cash flow
information:
Interest paid, net of amounts
capitalized $ 13 $ 8 $ 19
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITIES
See Notes 3, 6 and 8
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. BASIS OF PRESENTATION AND ORGANIZATION, USE OF ESTIMATES AND
FUTURE CASH REQUIREMENTS
BASIS OF PRESENTATION AND ORGANIZATION
The accompanying consolidated financial statements include the
accounts of Sam Houston Race Park, Ltd. (the "PARTNERSHIP"), a Texas
limited partnership, and its wholly-owned subsidiary, New SHRP Capital
Corp. ("NEW CAPITAL"). The Partnership was formed on June 17, 1990 to
apply to the Texas Racing Commission (the "RACING COMMISSION") for a
license to acquire, construct and operate a pari-mutuel horse racing
facility in Harris County, Texas (the "RACE PARK"), in accordance with
the Texas Racing Act (the "RACING ACT").
The Partnership was organized under the laws of the state of
Texas and will terminate on December 31, 2090 unless it is earlier
dissolved pursuant to the Texas Revised Limited Partnership Act or any
provision of its Third Amended and Restated Limited Partnership Agreement
(the "AMENDED PARTNERSHIP AGREEMENT"). The managing general partner of
the Partnership is SHRP General Partner, Inc. (the "MANAGING GENERAL
PARTNER"), a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). The
Partnership is also comprised of an additional general partner, SHRP
Equity, Inc. (the "ADDITIONAL GENERAL PARTNER") and limited partner
interests. As of December 31, 1998, wholly owned subsidiaries of MAXXAM
held, directly or indirectly, an aggregate 98.3% interest in the
Partnership consisting of a 33.5% general partner interest (including a
32.5% interest by virtue of its ownership of 97.5% of the common stock of
the Additional General Partner) and a 64.8% limited partner interest.
Certain reclassifications of prior period information were made
in order to conform with the current presentations. All significant
intercompany transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of estimates
and assumptions that affect (i) the reported amounts of assets and
liabilities, (ii) disclosure of contingent assets and liabilities known
to exist as of the date the financial statements are published, and (iii)
the reported amount of revenues and expenses recognized during each
period presented. The Partnership reviews all significant estimates
affecting its consolidated financial statements on a recurring basis and
records the effect of any necessary adjustments prior to their
publication. Adjustments made with respect to the use of estimates often
relate to improved information that was not previously available.
Uncertainties with respect to such estimates and assumptions are inherent
in the preparation of the Partnership s consolidated financial
statements; accordingly, it is possible that the subsequent resolution of
the liquidity issues, described in "Future Cash Requirements" below,
could differ in material respects from current estimates. The results of
an adverse resolution of such uncertainty could have a material effect on
the reported amounts of the Partnership s consolidated assets and
liabilities.
FUTURE CASH REQUIREMENTS
The Partnership generated income from operations of $850 in
1998. In addition, the Partnership had cash and cash equivalents of $3.8
million and a $1.7 million line of credit at December 31, 1998 available
to fund the operating activities of the Partnership. Also, the
Partnership is able to defer cash interest payments on the Extendible
Notes until September 1, 2001 or until certain conditions are met, and to
defer the payment of management fees until two consecutive interest
payments on the Extendible Notes have been paid in cash. The deferral of
these items has significantly improved the liquidity of the Partnership.
The Partnership is continuing to put forth marketing efforts to
increase attendance and pari-mutuel handle at the Race Park in order to
generate operating income. Also, management intends to continue to
initiate legislative efforts to legalize additional forms of gaming at
the Race Park in order to increase revenues. Further, management is
analyzing various proposals to develop new forms of businesses at the
Race Park in an effort to raise new sources of income and to draw
additional attendance to the Race Park. Nonetheless, there can be no
assurance that any of these efforts will be successful.
The Extendible Notes, together with accrued interest, must be
retired in September 2001, unless the applicable extension provisions
apply. To the extent the Partnership is unable to repay or refinance the
Extendible Notes, alternative sources of funding will be necessary.
Although 97.5% of the Extendible Notes are owned by MAXXAM, there can be
no assurance that the Partnership will be able to repay or refinance the
Extendible Notes or that alternative sources of funding will be available
to the Partnership, if needed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restricted Cash
The Partnership s restricted cash, as shown on the accompanying
consolidated balance sheets at December 31, 1998 and 1997, includes
amounts designated for the payment of the items listed in the following
table:
<TABLE>
<CAPTION> December 31,
------------
1998 1997
------- -------
<S> <C> <C>
Deposits held for the benefit of horsemen $ 2,320 $ 3,510
Property taxes and other 1,288 1,331
------- -------
$ 3,608 $ 4,841
======= =======
</TABLE>
Cash Equivalents and Concentration of Credit Risk
Cash equivalents consist of highly liquid money market
instruments with original maturities of three months or less. A
substantial portion of the Partnership s cash equivalents ($3,707) at
December 31, 1998 was invested in various short-term investment grade
marketable securities. The Partnership also holds other amounts in banks
and other financial institutions wherein some of the balances exceed
federally insured deposit levels. In the event of nonperformance by such
financial institutions, the Partnership s exposure to credit loss is
represented by the amounts deposited plus any unpaid accrued interest
thereon minus the federally insured deposit limitation. The Partnership
mitigates its concentration of credit risk with respect to the funds in
such accounts by maintaining them at high credit quality financial
institutions and monitoring the credit ratings of such institutions.
Property and Equipment
Property and equipment were written down to estimated fair
value as reflected in the sixth amended consolidated plan of
reorganization ("the PLAN") as of October 6, 1995 ("the EFFECTIVE DATE").
Additions to property and equipment subsequent to the Effective Date are
stated at cost. Prior to the Effective Date, property and equipment were
stated at cost. Depreciation is computed principally utilizing the
straight-line method at rates based upon the estimated useful lives of
the various classes of assets. In accordance with the Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," the
Partnership reviews long-lived assets, which include property and
equipment, for impairment whenever events or changes in circumstances
indicate the carrying amounts of the Partnership s assets may not be
fully recoverable. No adjustments for impairment were recorded in 1998
or 1997.
Notes Payable
Notes payable includes accrued interest on the Extendible Notes
which is allowed to be paid in-kind until a certain level of cash flow
from operations has been achieved.
Other Liabilities
Other liabilities include net liabilities for unclaimed winning
pari-mutuel tickets. Unclaimed winning tickets are valid for ninety days
after the end of the year in which they are generated. Once the tickets
are no longer valid, the remaining amounts held to pay unclaimed winning
tickets, net of allowable reimbursements, are transferred to the Texas
Racing Commission.
The Partnership receives advance payments with respect to
private suite and box rentals, Jockey Club memberships and corporate
sponsorship agreements. The payments are recorded as deferred revenue
and are recognized as income over the term of the respective agreements.
Purses and Awards
The Racing Act, certain other agreements, and the rules
promulgated by the Racing Commission stipulate percentages of the
pari-mutuel handle which must be used for the payment of purses and
awards depending upon the type of wagers placed. The term "pari-mutuel
handle" means the aggregate amounts wagered. Purses are established
nearly one month in advance, based on expected pari-mutuel handle and
published in a condition book which generally covers fifteen days of live
racing. Horsemen then enter their horses in proposed races based upon
the conditions of the race being entered, including the purses being
offered. In certain circumstances, the Partnership may pay purses and
awards in excess of the amounts provided by the pari-mutuel handle. The
Partnership may adjust the amounts to be paid for future races during the
course of a given meet in order to minimize or eliminate any differences
between the amounts provided by the pari-mutuel handle and the actual
amounts of purses and awards paid. The agreement between the Partnership
and the Texas Thoroughbred HBPA, Inc. also allows the Partnership to
recoup various amounts of the previous purse overpayments from certain
future meets. The Partnership expenses all purse overpayments when they
occur. Recoveries of these amounts are recorded as revenue as they are
earned.
Income Taxes
The Partnership has not made any provisions for income taxes in
its Consolidated Statement of Operations as they are the responsibility
of its partners. The carrying value of the Partnership s net assets for
financial statement purposes was less than the carrying value for income
tax reporting purposes by approximately $18,690 at December 31, 1998.
The difference primarily results from (i) the adjustment of long-term
assets to estimated fair value for financial statement purposes but not
for income tax purposes and (ii) the capitalization of costs for income
tax purposes that were expensed for financial reporting purposes, a
substantial portion of which relates to costs incurred during the
start-up period and the reorganization pursuant to the Plan described in
Note 3.
Fair Value of Financial Instruments
The carrying amounts of the Partnership s cash and cash
equivalents (including restricted and designated cash) and other notes
payable approximate their fair value. The Extendible Notes had a face
value of $52,120 and $46,828, a carrying amount of $39,436 and $31,886
and an estimated fair value of $39,116 and $27,160 as of December 31,
1998 and 1997, respectively. Market prices for the Extendible Notes at
December 31, 1998 were estimated based on trades that occurred during
September 1998. Market prices for the Extendible Notes at December 31,
1997 were estimated based on a trade which occurred during February 1998.
3. 1995 PLAN OF REORGANIZATION
Plan of Reorganization
On April 17, 1995, the Partnership, SHRP Capital Corp. and SHRP
Acquisition, Inc., the Partnership s largest limited partner, filed for
reorganization under Chapter 11 of the United States Bankruptcy Code. On
September 22, 1995, the United States Bankruptcy Court for the Southern
District of Texas, Houston Division entered an order confirming the Plan.
The transactions called for by the Plan were completed on the Effective
Date and the case was closed on December 19, 1996.
Under the terms of the Plan, the Extendible Notes were issued
in exchange for the Partnership s 11-3/4% Senior Secured Notes (the
"ORIGINAL NOTES"). The Original Notes had an aggregate principal amount
of $75,000, would have matured on July 15, 1999 and bore interest at the
rate of 11-3/4% per annum. The Extendible Notes had an initial aggregate
principal amount of $37,500, mature on September 1, 2001 and bear
interest at the rate of 11% per annum. Interest on the Extendible Notes
accrues in-kind and is not payable in cash until a certain level of cash
flow from operations has been achieved. See Note 6 for further
information concerning the terms of the Extendible Notes.
On the Effective Date, a new investor group (the "NEW INVESTOR
GROUP") made a capital contribution of cash and other consideration
described below. Each member of the New Investor Group also provided its
pro rata share of the $1,700 line of credit. This line of credit would
be used to fund future cash flow requirements should the cash infusion
prove to be insufficient. Each member of the New Investor Group has
secured such investor s portion of the line of credit with cash held in
an escrow account (other than MAXXAM s wholly owned subsidiaries, whose
portion of the line of credit is secured by the guaranty of MAXXAM).
Borrowings on the line of credit would bear interest at 11% per annum and
would be subordinate to the Extendible Notes. Also, a wholly owned
subsidiary of MAXXAM provided the holders of the Extendible Notes with
Instruments of Adherence ("INSTRUMENTS OF ADHERENCE") having an agreed
value of $500. The Instruments of Adherence were executed by MAXXAM and
Mr. Charles Hurwitz, Chairman of the Board and Chief Executive Officer of
MAXXAM and provide that MAXXAM and Mr. Hurwitz will not, in certain
circumstances, make certain investments in specified gaming ventures in
the Houston area unless certain holders of the Extendible Notes are
afforded a specified opportunity to make an investment in such ventures
in an amount at least equal to 19.9% of the aggregate investment made in
such ventures by MAXXAM, Mr. Hurwitz and such holders.
The Plan provided for the elimination of all existing
partnership interests. The Partnership has issued 33.3% of the equity in
the Partnership to certain holders of allowed unsecured bankruptcy claims
(the "CREDITOR EQUITY"), a majority of which relates to the unsecured
deficiency claims attributable to the Original Notes. The
Creditor Equity is held in the form of common stock in the Additional
General Partner. On the Effective Date, the New Investor Group received
66.7% of the equity in the Partnership. The Managing General Partner was
issued a 1% interest in the Partnership in exchange for contributing its
pro rata share of the investment made by the New Investor Group.
4. PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follows:
<TABLE>
<CAPTION> Estimated December 31,
Useful ------------
Lives 1998 1997
------- -------
<S> <C> <C> <C>
Buildings 5 - 30
years $15,075 $14,390
Equipment, furniture and fixtures 3 - 15
years 2,428 2,127
Race track and other land improvements 5 - 30
years 3,049 3,049
Land 7,943 7,958
------- -------
28,495 27,524
Less accumulated depreciation (2,996) (2,020)
------- -------
$25,499 $25,504
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1998,
1997 and 1996 was $976, $928 and $886, respectively. The Partnership
reduced the net carrying value of property and equipment by $40,390 as of
the Effective Date, in accordance with the estimated fair asset values
described in the Plan. Additionally, the Partnership received an
approximately 87 acre tract of land valued at $2,300 as part of the
contribution of the New Investor Group.
5. RACING OPERATIONS
The Partnership conducted 129, 143 and 146 days of live racing
during 1998, 1997 and 1996, respectively. Under the Racing Act, the
Partnership s commission revenue is a designated portion of the
pari-mutuel handle. The Race Park receives broadcasts of live racing
from other racetracks under various guest simulcasting agreements. The
Race Park also provides broadcasts of live racing conducted at the Race
Park to other racetracks under various host simulcasting agreements.
Under these contracts, the Partnership receives pari-mutuel commissions
of varying percentages of simulcast pari-mutuel handles.
A summary of the pari-mutuel handle, commissions and deductions
for the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION> 1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Live handle $ 22,352 $ 20,175 $ 25,620
Return to public (17,506) (15,830) (20,113)
Purses and breeders awards (1,801) (1,608) (2,043)
State taxes and fees (224) (202) (256)
Breakage (148) (150) (181)
------- ------- ------
Net commissions from live racing 2,673 2,385 3,027
------- ------- -------
Guest handle 112,139 93,543 88,579
Return to public (88,471) (74,252) (70,650)
Purses and breeders awards (7,765) (6,237) (5,282)
Host fee (3,537) (2,982) (2,836)
State taxes and fees (1,545) (1,246) (1,107)
Breakage (509) (526) (539)
------ ------- -------
Net commissions from guest 10,312 8,300 8,165
simulcasting ------- ------- -------
Host handle 162,965 128,252 109,648
Receiving track expenses (158,308) (124,096) (105,887)
Purses and breeders awards (1,462) (1,565) (2,036)
------- ------- -------
Net commission from host simulcasting 3,195 2,591 1,725
------- ------- -------
Total pari-mutuel commissions, net $ 16,180 $ 13,276 $ 12,917
======= ======= =======
</TABLE>
Non-statutory Purse Funding
On November 26, 1996, the Race Park entered into a new
agreement with the Texas Thoroughbred HBPA, Inc. (the "TTHBPA"). The
TTHBPA is a partner of the Texas Horsemen s Partnership, L.L.P. (the
"THP"), the official horsemen s organization currently recognized by the
Racing Commission. This new agreement provides for the recovery of purse
overpayments of $660 and $631 during the years ended December 31, 1999
and 2000, respectively. The Partnership will record any future
recoveries only as they are earned.
6. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION> December, 31
------------
1998 1997
-------- --------
<S> <C> <C>
11% Senior Secured Extendible Notes due
September 1, 2001 (net of unamortized
discount of $12,684 and $14,942 as of
December 31, 1998 and 1997, respectively) $ 39,436 $ 31,886
Accrued interest to be paid in-kind 1,433 1,288
-------- ---------
40,869 33,174
Unsecured promissory notes 197 205
Equipment leases - 3
Payable to Limited Partners 23 23
-------- ---------
Total 41,089 33,405
Less current portion, included in Other
Liabilities (8) (12)
-------- ---------
$ 41,081 $ 33,393
========= ========
</TABLE>
The Extendible Notes had an initial aggregate principal amount
of $37,500, mature on September 1, 2001, bear interest at the rate of
11% per annum and are secured by substantially all the assets of the
Partnership. The maturity date of the Extendible Notes may be extended
to September 1, 2003 (with an increase in the rate of interest to 13% per
annum) if the Texas legislature passes significant gaming legislation (as
defined) between January 1, 2001 and August 15, 2001. The indenture
governing the Extendible Notes (the "INDENTURE") limits the Partnership s
ability to incur indebtedness and liens, to engage in transactions with
affiliates, to make investments and to make distributions, although the
Indenture does allow the Partnership to become involved in certain
gaming, entertainment and other ventures.
The Partnership is amortizing the difference between the
aggregate principal amount of the Extendible Notes and their estimated
fair value as additional interest expense using the effective interest
method.
Interest on the Extendible Notes accrues in-kind and is not
payable in cash until a certain level of cash flow from operations has
been achieved. Once cash interest payments commence, interest payments
may not thereafter be paid in-kind. The Partnership issued $5,292 and
$4,755 of Extendible Notes during the years ended December 31, 1998 and
1997, respectively, as payment in-kind for accrued interest. Interest
payments are due on the Extendible Notes on April 1 and October 1 of each
year until the Extendible Notes mature.
The Partnership has entered into an unsecured promissory note.
The note earns interest at 6-1/2% per annum and is due and payable in
thirty equal annual installments to the Harris County Toll Road
Authority, operator of the Sam Houston Parkway. This note represents
one-half of the costs incurred to construct the entrance and
exit ramps adjacent to the Race Park. Payments of approximately $8 plus
accrued interest are due annually on April 30 through the year 2024.
THE NEW INVESTOR GROUP HAS PROVIDED THE PARTNERSHIP WITH A
$1,700 LINE OF CREDIT. THIS LINE OF CREDIT WOULD BE USED TO FUND FUTURE
CASH FLOW REQUIREMENTS SHOULD THE PARTNERSHIP REQUIRE IT. EACH MEMBER OF
THE NEW INVESTOR GROUP, OTHER THAN MAXXAM WHOLLY OWNED SUBSIDIARIES, HAS
SECURED THEIR PORTION OF THE LINE OF CREDIT WITH CASH IN THE AMOUNT OF
$23, WHICH IS HELD IN AN ESCROW ACCOUNT. THE PORTION OF THE LINE OF
CREDIT PROVIDED BY WHOLLY OWNED SUBSIDIARIES OF MAXXAM IS SECURED BY THE
GUARANTEE OF MAXXAM. BORROWINGS ON THE LINE OF CREDIT WOULD BEAR
INTEREST AT 11% PER ANNUM AND WOULD BE SUBORDINATE TO THE EXTENDIBLE
NOTES. THE CASH COLLATERAL FOR THE LINE OF CREDIT IS REFLECTED AS
RESTRICTED CASH IN THE BALANCE SHEET.
THE SCHEDULED MATURITIES FOR THE PARTNERSHIP S NOTES PAYABLE
OUTSTANDING AT DECEMBER 31, 1998 ARE AS FOLLOWS: DECEMBER 31, 1999 - $8;
2000 - $8; 2001 - $53,584; 2002 - $8; 2003 - $8; THEREAFTER $157. IN THE
EVENT THE PARTNERSHIP CONTINUES TO ISSUE ADDITIONAL EXTENDIBLE NOTES AS
PAYMENT IN-KIND FOR ACCRUED INTEREST, THE TOTAL AMOUNT DUE ON THE
EXTENDIBLE NOTES AT MATURITY IN SEPTEMBER 2001 WILL BE $71,242.
7. PARTNERS DEFICIT
The Partnership is currently comprised of the Managing General
Partner, the Additional General Partner and eight limited partners.
The profits and losses of the Partnership are allocated to the
partners in accordance with their percentage interests, after giving
effect to certain special allocations. However, all net losses (other
than nonrecourse deductions) in excess of the positive capital account
balance of any limited partner or the Additional General Partner are to
be allocated to the Managing General Partner. Income is to be specially
allocated to restore a partner s deficit capital account prior to
allocating net profits based on the partner s percentage interest.
In the event of a capital call by the Partnership to fund
operating losses, holders of the Extendible Notes may contribute
Extendible Notes in lieu of cash in order to maintain their equity
position in the Partnership. So long as the Extendible Notes are
outstanding, the Board of Directors of the Additional General Partner are
entitled to designate at least one-third of the directors of the Managing
General Partner (the "CREDITOR DIRECTORS"), subject to the reasonable
approval of the owner of the Managing General Partner. Certain
significant events (e.g. mergers, consolidations, the sale of all or the
substantial portion of the Partnership s assets, reorganizations,
incurrence of debt in excess of $5,000 and voluntary acts of insolvency)
require the approval of a majority of all of the directors, including a
majority of the Creditor Directors voting as a separate class.
8. MANAGEMENT AGREEMENTS
As of the Effective Date, the Managing General Partner began
managing the Partnership and the Race Park in accordance with the Amended
Partnership Agreement. Annual management fees will be the greater of (a)
$750 or (b) an incentive fee equal to .65% of all gross revenues (as
defined). Management fees are deferred until two consecutive semi-annual
cash interest payments have been made to the holders of the Extendible
Notes. Unpaid management fees accrue interest at the rate of 11% per
annum. All such management fees are subordinated to the Extendible
Notes. As of December 31, 1998 and 1997, the Partnership has accrued
$2,826 and $1,861 of management fees, including interest of $399 and
$184, respectively, due to the Managing General Partner.
9. RELATED PARTY TRANSACTIONS
Management and other professional fees for the years ended
December 31, 1998, 1997 and 1996 include $425, $488 and $511 related to
costs incurred for services provided by MAXXAM and certain of its
subsidiaries. Included in accounts payable at December 31, 1998 and
1997, were obligations to MAXXAM for such costs of $45 and $34,
respectively.
Management and other professional fees for the years ended
December 31, 1998, 1997 and 1996 include $32, $147 and $120 of costs
incurred by an affiliate for legal services and to coordinate legislative
efforts of the Partnership. Additionally, the Partnership engages
affiliates for legal and other consulting services in the normal course
of business. During the years ended December 31, 1998, 1997 and 1996,
the Partnership incurred fees of $54, $70 and $41, respectively, with
respect to these services.
10. COMMITMENTS AND CONTINGENCIES
During the 1997 session of the Texas Legislature, the Racing
Act was amended to, among other things, implement various tax changes.
The pari-mutuel wagering tax on guest simulcasting was increased from 1%
to 1.25% through December 31, 1998. The increased wagering tax decreased
net pari-mutuel commissions by approximately $280 during 1998. The
legislation also eliminated the 1% pari-mutuel wagering tax on the first
$100,000 wagering on live racing subsequent to December 31, 1998. The
Partnership estimates that the elimination of this wagering tax on live
racing will increase net pari-mutuel commissions by $224 based on 1998
live handle. In addition, the 0.25% previously paid to the Texas
Commission on Alcohol and Drug Abuse was reallocated to the Racing
Commission to repay funds previously appropriated by the state of Texas
for the administration and enforcement of the Racing Act. This tax will
be eliminated during 1999 when all amounts due to the state of Texas,
including interest, have been repaid.
In addition, the legislation mandated an increase in the amount
of purses to be reserved for the owners of future winning horses from
guest simulcasting. This increase is effective as of January 1, 1999.
These amounts will no longer be determined under contract with the
recognized horsemen s organization and are to be set at an amount that
approximates the percentages used for live racing. The Partnership
estimates that net pari-mutuel commissions will decrease by approximately
$1 million based on 1998 pari-mutuel wagering handle when this provision
becomes effective. This loss of net pari-mutuel commissions is expected
to be partially offset by recoveries of previously overpaid purses
allowed under the Partnership s contract with the recognized horsemen s
organization in the amount of $660 and $631 during 1999 and 2000,
respectively.
The Partnership has entered into noncancellable service and
operating lease agreements with several vendors to provide services in
addition to agreements for the use of equipment. Certain of these
agreements call for contingent rentals based upon a variety of factors,
the most significant of which are the number of live racing days and
specified percentages of amounts wagered. Future minimum lease and
commitment payments under such noncancellable service and lease
agreements, having a remaining term in excess of one year at December 31,
1998, are as follows: years ending December 31, 1999 - $479; 2000 - $186;
2001 - $178; 2002 - $178; 2003 - $178; thereafter $78. The Partnership
incurred approximately $462, $1,384, and $1,409, including contingent
fees and rentals, for the years ended December 31, 1998, 1997 and 1996
for such services and operating lease obligations.
The Partnership is contingently liable for liquidating damages
to one vendor with respect to a lease for services for approximately $104
at December 31, 1998. The amount of the contingency decreases by
approximately $8 for each month the Partnership conducts live or
simulcast racing operations.
The Partnership is involved in claims and litigation arising in
the ordinary course of business. While there are uncertainties inherent
in the ultimate outcome of such matters and it is impossible to presently
determine the ultimate costs that may be incurred, management believes
that the outcome of such matters should not have a material adverse
effect upon the Partnership s consolidated financial position, results of
operation or liquidity.
11. SUBSEQUENT EVENT
During March 1999, the Race Park formed SHRP Valley LLP, a
wholly-owned limited liability company, which then entered into a six
year agreement with a company to lease a greyhound track located in
Harlingen, Texas. A management agreement was also entered into between
the parties in connection with the management of the associated pari-
mutuel wagering license. The Race Park also has an option to purchase
100% of the equity interest in the company that owns the greyhound track
and the wagering license for the term of the lease, subject to certain
conditions. Lease payments under the terms of the agreement total $300
annually. The agreements are contingent upon the satisfactory completion
of a 90 day due diligence and feasibility study currently being conducted
by the Race Park. If the due diligence study is satisfactory, Race Park
management plans to re-open the facility and conduct year around horse
and dog simulcasting and a season of live greyhound racing at the track.
The transaction is also subject to the approval of the Texas Racing
Commission.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information, as of March
1, 1999, with respect to the executive officers of the Partnership and
the directors of the Managing General Partner.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
James D. Noteware 46 President (1)
Robert L. Bork 60 Senior Vice President and General
Manager (2)
Ann M. McGovern 38 Vice President of Operations
James H. Paulin, 55 Vice President
Jr.
Michael J. Vitek 36 Vice President of Accounting
</TABLE>
THE MANAGING GENERAL PARTNER
<TABLE>
<CAPTION>
Name Age Position
- - ------------ ------- ------------<PAGE>
<S> <C> <C>
Charles E. 58 Chairman of the Board
Hurwitz
D. Kent Anderson 57 Director (3)
J. Kent Friedman 55 Director (3)
James D. Noteware 46 Director
Paul N. Schwartz 52 Director
<FN>
(1) Mr. Noteware is not an employee of the Partnership, the Race Park or
the Managing General Partner.
(2) Principal Executive Officer of the Partnership
(3) Until such time as the Extendible Notes are repaid, the Additional
General Partner is entitled to designate at least one-third of the
directors of the Managing General Partner (the "AGP DIRECTORS"). D.
Kent Anderson and J. Kent Friedman currently serve as AGP Directors.
A majority vote of the AGP Directors is required with respect to
certain significant events (e.g. mergers, consolidations, the sale
of all or the substantial portion of the Partnership s assets,
reorganizations, incurrence of debt in excess of $5 million, and
voluntary acts of insolvency).
</TABLE>
James D. Noteware has served as President of the Partnership
since August 1994. Mr. Noteware is also President and a Director of the
Managing General Partner. Mr. Noteware previously served as interim
General Manager of the Partnership from November 1994 through October
1995. Mr. Noteware has served as President and Chief Executive Officer
of MAXXAM Property Company ("MPC"), a wholly owned subsidiary of MAXXAM,
since January 1993. From November 1990 through December 1992, Mr.
Noteware was Chairman, President and Chief Executive Officer of Phoenix
Consulting, Inc., a real estate management and consulting company. Mr.
Noteware served as a national director in the Real Estate Advisory
Services Department of Price Waterhouse from April 1991 through January
1993. Prior to November 1990, Mr. Noteware served as National Director
in the Real Estate Advisory Services Department at Laventhol & Horwath.
Robert L. Bork has served as Senior Vice President and General
Manager of the Partnership since October 1995. Mr. Bork previously
served four years as Vice President-General Manager and Chief Operating
Officer of Arlington International Racecourse, Inc. in Arlington Heights,
Illinois. Prior to such time, Mr. Bork served as Vice President-General
Manager of Philadelphia Park in Benslem, Pennsylvania and Garden State
Park in Cherry Hill, New Jersey. Mr. Bork is a director and Secretary of
the Thoroughbred Racing Association of America, a director of the
Thoroughbred Racing Protective Bureau, Chairman of the Thoroughbred
Racing Association Technology Committee and a director of the Cy-Fair
Chamber of Commerce.
Ann M. McGovern has served as Vice President of Operations of
the Partnership since September 1994. Ms. McGovern previously served for
11 years with the Racing Division of the Edward J. De Bartolo
Corporation, most recently as Director of Operations at Remington Park in
Oklahoma City, Oklahoma from April 1991 to October 1994 and prior to that
as the Assistant Director of Operations since 1988.
James H. Paulin, Jr. has served as Vice President of the
Partnership since November 1993. Mr. Paulin has been the Secretary-
Treasurer of Federated Development Company ("FEDERATED") from May 1983 to
December 31, 1998, and Secretary of Federated from March 1977 to December
31, 1998. Federated is a New York business trust primarily engaged in
the management of real estate investments and, through its position as a
significant stockholder of MAXXAM, in the businesses conducted by MAXXAM.
Michael J. Vitek has served as Vice President of Accounting of
the Partnership since November 1994. Mr. Vitek previously served from
April 1994 to November 1994 as Vice President, Finance and Chief
Financial Officer of Hysan Corporation, a chemical manufacturing and
distribution company and a subsidiary of Wedge Group, Inc., a private
investment company. Mr. Vitek previously served as Corporate Controller
of Wedge Group, Inc. from October 1991 to March 1994. He previously
served for six years with the public accounting firm of KPMG Peat
Marwick, most recently as a Senior Manager.
Charles E. Hurwitz is a Director and the Chairman of the Board
and President of the Managing General Partner. Mr. Hurwitz has served as
a member of the Board of Directors and the Executive Committee of MAXXAM
since August 1978 and was elected as Chairman of the Board and Chief
Executive Officer of MAXXAM in March 1980. Mr. Hurwitz also served
MAXXAM as President from January 1993 to January 1998. Mr. Hurwitz has
served as a director of Kaiser Aluminum Corporation ("KAISER"), a
majority-owned subsidiary of MAXXAM, since October 1988, and as a
director of Kaiser Aluminum & Chemical Corporation ("KACC"), a fully
integrated aluminum producer that is a subsidiary of Kaiser, since
November 1988. Mr. Hurwitz is Chairman of the Board, Chief Executive
Officer and President of MAXXAM Group Inc. ("MGI"), a wholly owned
subsidiary of MAXXAM which is engaged in forest products operations, and
MGI s parent, MAXXAM Group Holdings Inc. ("MGHI"). Mr. Hurwitz has been,
since January 1974, Chairman of the Board and Chief Executive Officer of
Federated.
D. Kent Anderson is a Director of the Managing General Partner
per the designation of the Additional General Partner. Mr. Anderson has
been the Executive Banking Officer of Compass Bank since its April 1996
merger with Post Oak Bank. From 1991 until the merger, Mr. Anderson was
Chairman of the Board and Chief Executive Officer of Post Oak Bank. From
1988 through October 1991, Mr. Anderson held several executive positions,
including Chairman of the Board, with First Interstate Bank of Texas,
N.A. Mr. Anderson is currently a Trustee and member of the Board of
Governors of Rice University. He has served on several State of Texas
committees and on the Board of the Greater Houston Partnership, the Texas
Chamber of Commerce, and the Texas Research League.
J. Kent Friedman is a Director of the Managing General Partner
per the designation of the Additional General Partner. Mr. Friedman has
been a partner of Mayor, Day, Caldwell & Keeton, L.L.P., a Houston law
firm, since 1982. Prior to such time Mr. Friedman was a partner at
Butler & Binion, a Houston law firm. Mr. Friedman is a member of the
Executive Committee of the Board of Directors of the Houston Symphony,
President of the Friends of Hermann Park and Co-President of the
Foundation for Jones Hall.
Paul N. Schwartz is a Director and Vice President of the
Managing General Partner. Mr. Schwartz was named a director, President
and Chief Operating Officer of MAXXAM in January 1998. Mr. Schwartz has
served as Chief Financial Officer of MAXXAM since January 1995. From
January 1995 to January 1998 he also served as Executive Vice President
of MAXXAM. Prior to that he served as Senior Vice President-Corporate
Development of MAXXAM from June 1987 to January 1995, as Vice
President-Corporate Development from July 1985 to June 1987 and as Vice
President since 1982. Mr. Schwartz also serves as a director and a Vice
President and Chief Financial Officer of MGHI, MGI, and Scotia Pacific
Company LLC, a subsidiary of MGI engaged in forest products operations.
Directors of the Managing General Partner are elected annually
to serve for one year and until their successors are duly elected,
qualified, and approved by the Racing Commission. Each director of the
Managing General Partner is required to be approved by the Racing
Commission. The current directors of the Managing General Partner have
received the approval of the Racing Commission.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth compensation information, cash
and non-cash, for each of the Partnership s last three completed fiscal
years with respect to (a) all individuals serving as the Partnership s
chief executive officer during the last fiscal year, and (b) the other
most highly compensated executive officers of the Partnership (other than
the current chief executive officer) who were serving as executive
officers of the Partnership at the end of 1998 and who received over
$100,000 in aggregate salary and bonus in respect of 1998.
<TABLE>
<CAPTION> Annual Compensation
(a) (b) (c) (d) (e) (f)
Name and Year Salary Bonus Other (1)
- - ------------ ----- ($) ($) Annual All
Principal ------- -------- Compensa Other
Position tion (1) Compensa
($) tion
------- ($)
-------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Bork
(2) 1998 216,320 63,333 - -
Senior Vice
President and 1997 208,000 35,000 - -
General Manager 1996 200,000 41,250 - 4,806(3)
Ann McGovern 1998 119,000 28,333 - -
Vice President
of 1997 114,400 15,000 - -
Operations 1996 110,000 15,000 - -
Michael J. Vitek 1998 107,000 28,333 - -
Vice President
of 1997 93,600 15,000 - -
Accounting 1996 90,000 15,000 - -
<FN>
(1) Excludes perquisites and other personal benefits because the
aggregate amount of such compensation is the lesser of either
$50,000 or 10% of the total of annual salary and bonus reported
for the named executive officer.
(2) Mr. Bork served as chief executive officer of the Partnership
during 1996, 1997 and 1998. Mr. Bork commenced his employment
with the Partnership on October 25, 1995.
(3) Reflects reimbursement of moving related expenses.
</TABLE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
Agreements have been entered into with each of Messrs. Bork and
Vitek and Ms. McGovern regarding their employment. Mr. Bork s agreement
provides for a base annual salary of $200,000 and a bonus of $25,000 on
the first anniversary date of his employment. The agreement further
provides that commencing the second year of employment he will
participate in an executive compensation plan of the Partnership. Mr.
Bork s agreement also provided for payment of certain relocation
expenses. The incentive compensation plan referred to above was provided
for in general terms pursuant to the bankruptcy reorganization plan;
however, no specific details have been proposed or formulated to date
with respect to such an incentive plan. Ms. McGovern s agreement
provides for a base annual salary of $110,000 per year, a discretionary
bonus of $10,000 in the first year of employment and the payment of
certain relocation expenses. The agreement also indicated that Ms.
McGovern would be considered for inclusion in the prior employee
incentive program of the Partnership. Mr. Vitek s agreement provides for
a base annual salary of $90,000 and a discretionary bonus of $15,000
after the first year of employment.
On December 30, 1998, Messrs. Bork and Vitek, along with Ms.
McGovern, were each awarded a one-time bonus with respect to the
Partnership s 1998 operating results. Each of these bonuses is payable
in three equal annual installments, with the first of such installments
having been received by each of the executives on December 31, 1998, and
with the remaining two installments of like amount being due and payable
on December 31, 1999 and December 31, 2000 respectively. Each of the
executives will receive the remaining installments of the bonus so long
as he or she continues to be employed by the Partnership as of the
respective payment dates.
COMPENSATION OF DIRECTORS AND POLICY COMMITTEE MEMBERS
Messrs. Anderson and Friedman receive $25,000 per year, plus
reimbursement of expenses, as compensation for their services. The other
directors of the Managing General Partner are reimbursed for their
expenses but are not otherwise compensated by the Partnership for their
services as such.
COMPENSATION COMMITTEE REPORT
SHRP General Partner, Inc. is the managing general partner of
the Partnership, and the names appearing below are all of the directors
of SHRP General Partner, Inc. The Board of Directors of SHRP General
Partner, Inc. (the "BOARD") acts with respect to compensation matters, as
a compensation committee has not been appointed.
The executive officers named in the Summary Compensation Table
have been retained and are compensated in accordance with their
respective individual employment letter agreements. In reaching those
agreements, the customary levels and types of pay prevalent for such
positions in the horse racing industry were considered and served as
guidelines. The individual salary histories and previous experience of
the executives were also considered as was the timing within which the
Partnership needed to replace previously discharged executives. Other
than participation in a group health insurance program which is partially
employer-provided, the only non-salary direct compensation being provided
to such executives are incentive bonuses. Executives may be considered
for a discretionary bonus on an annual basis. The President of the
Partnership outlines functions and goals for each executive officer and
formulates bonus levels for executive officers (with the advice and
consent of the Board in certain instances).
D. Kent Anderson
J. Kent Friedman
Charles E. Hurwitz
James D. Noteware
Paul N. Schwartz
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
THE PARTNERSHIP
The following table sets forth the beneficial ownership of
partnership interests in the Partnership as of March 1, 1999 of (i) each
person known by the Partnership to beneficially own five percent or more
of the outstanding partnership interests, (ii) each director of the
Managing General Partner who owns a partnership interest, and (iii) all
directors and officers of the Managing General Partner and the
Partnership as a group. Except as otherwise indicated below, each of the
persons named in the table has sole voting and investment power with
respect to the partnership interest shown as beneficially owned by him.
<TABLE>
<CAPTION>
Name and Address of Type of Interest Aggregate
Beneficial Owner ------------ Partnership
- - ------------ Interest
<S> <C> <C>
New SHRP Acquisition, Limited Partner 64.8%
Inc. (1)
SHRP Equity, Inc. (2) Additional General 33.3%
Partner
<FN>
(1) MAXXAM owns all of the issued and outstanding shares of common
stock of New SHRP Acquisition, Inc. Mr. Charles E. Hurwitz and
affiliates of Federated Development Company ("FEDERATED")
collectively own 99.2% and 37.7% of MAXXAM s Class A preferred
stock and common stock, respectively (resulting in a combined
voting control of approximately 68.9%). Mr. Hurwitz is the
Chairman of the Board and Chief Executive Officer of MAXXAM and
Chairman and Chief Executive Officer of Federated. Federated
is wholly owned by Mr. Hurwitz, members of his immediate family
and trusts for the benefit thereof.
(2) The outstanding shares of stock of SHRP Equity, Inc. were
issued to the holders of allowed unsecured claims in connection
with the bankruptcy proceedings of the Partnership. Wholly
owned subsidiaries of MAXXAM, beneficially own 97.5% of the issued and
outstanding stock of SHRP Equity, Inc. which equates
to a 32.5% interest in the Partnership.
</TABLE>
THE MANAGING GENERAL PARTNER
Sam Houston Entertainment Corp., a wholly owned subsidiary of
MAXXAM, owns all of the Common Stock of the Managing General Partner of
which 3,000 shares are currently issued and outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain individuals employed by MAXXAM and its wholly owned
subsidiaries provide management, legal, financial, corporate development
and other services to the Partnership from time to time. These
affiliates are reimbursed for their estimated actual costs incurred in
providing services to the Partnership. As of March 1, 1999, MAXXAM and
its subsidiaries have received an aggregate of $424,590 in respect of
such services performed in 1998.
J. Kent Friedman, AGP Director, is a partner of a law firm that
has provided services to the Partnership. In addition, such law firm has
represented MAXXAM in various matters not related to the Partnership.
The Partnership had an agreement with Mr. Friedman s law firm to
coordinate legislative efforts. As of March 1, 1999, Mr. Friedman s law
firm has received an aggregate of $31,492 in respect of such services
performed in 1998.
See also Notes 8 and 9 to the Consolidated Financial Statements
appearing in Item 8.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(A) INDEX TO FINANCIAL STATEMENTS PAGE
1. FINANCIAL STATEMENTS (APPEARING IN ITEM 8):
Report of Independent Certified Public Accountants 21
Consolidated balance sheets at December 31, 1998 and
199722
Consolidated statements of operations for the three years
ended December 31, 199823
Consolidated statements of partners capital (deficit) for
the three years ended
December 31, 199824
Consolidated statements of cash flows for the three years
ended December 31, 199825
Notes to consolidated financial statements26
2. FINANCIAL STATEMENT SCHEDULES:
All schedules are inapplicable or the required information
is included in the financial statements or the notes
thereto.
(B) REPORTS ON FORM 8-K
None.<PAGE>
(C) EXHIBITS
Reference is made to the Index of Exhibits immediately
preceding the exhibits hereto (beginning on page 44) which
index is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SAM HOUSTON RACE PARK, LTD.
Date: March 30, 1999 By: /S/ MICHAEL J. VITEK
Michael J. Vitek, Vice
President of Accounting
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Date: March 30, 1999 By: /S/ ROBERT L. BORK
Robert L. Bork, General Manager
(Principal Executive Officer)
Date: March 30, 1999 By: /S/ MICHAEL J. VITEK
Michael J. Vitek, Vice
President of Accounting
(Principal Financial and
Accounting Officer)
SAM HOUSTON RACE PARK, LTD.
By: SHRP General Partner, Inc.
its Managing General Partner
Date: March 30, 1999 By:/S/ CHARLES E. HURWITZ
Charles E. Hurwitz, Chairman of
the Board
Date: March 30, 1999 By:/S/ PAUL N. SCHWARTZ
Paul N. Schwartz, Director
Date: March 30, 1999 By:/S/ JAMES D. NOTEWARE
James D. Noteware, Director
Date: March 30, 1999 By:/S/ D. KENT ANDERSON
D. Kent Anderson, Director
Date: March 30, 1999 By:/S/ J. KENT FRIEDMAN
J. Kent Friedman, Director
Exhibit Description
Number
3.1 Third Amended and Restated Limited Partnership Agreement
of Sam Houston Race Park, Ltd. dated October 6, 1995
(incorporated herein by reference to Exhibit 3.1 to the
Partnership s Form 10-Q dated September 30, 1995)
4.1 Amended and Restated Indenture dated October 6, 1995 by
and among the Partnership, New SHRP Capital Corp., SHRP
General Partner, Inc. and First Bank National
Association, Trustee, including the related form of Note
(incorporated herein by reference to Exhibit 4.1 to the
Partnership s Form 10-Q dated September 30, 1995)
Amended and Restated Deed of Trust, Assignment, Security
Agreement and Financing Statement dated October 6, 1995
4.2 among the Partnership, Richard Prokosch, as Trustee, and
First Bank National Association, as Mortgagee
(incorporated herein by reference to Exhibit 4.2 to the
Partnership s Form 10-Q dated September 30, 1995)
Deed of Trust, Assignment, Security Agreement and
Financing Statement dated October 6, 1995 among the
4.3 Partnership, Richard Prokosch, as Trustee, and First Bank
National Association, as Mortgagee (incorporated herein
by reference to Exhibit 4.3 to the Partnership s Form
10-Q dated September 30, 1995)
Amended and Restated License Negative Pledge dated
October 6, 1995 executed by the Partnership in favor of
4.4 Trustee (incorporated herein by reference to Exhibit 4.4
to the Partnership s Form 10-Q dated September 30, 1995)
Amended and Restated Real Estate Tax Escrow and Security
Agreement dated July 1, 1997 among the Partnership,
4.5 Trustee and Southwest Bank of Texas
9 Voting Agreement dated October 6, 1995 among SHRP General
Partner, Inc., Sam Houston Entertainment Corp., SHRP
Equity, Inc. and MAXXAM Inc. (incorporated herein by
reference to Exhibit 9 to the Partnership s Form 10-Q
dated September 30, 1995)
10.1 Form of Line of Credit Agreement dated October 6, 1995
between the Partnership and certain lenders (the "LINE OF
CREDIT AGREEMENT") (incorporated herein by reference to
Exhibit 10.1 to the Partnership s Form 10-Q dated
September 30, 1995)
Form of Cash Escrow Agreement with respect to the Line of
Credit Agreement (incorporated herein by reference to
10.2 Exhibit 10.2 to the Partnership s Form 10-Q dated
September 30, 1995)
Guaranty of MAXXAM Inc. dated October 6, 1995 in favor of
the Partnership with respect to the obligations of SHRP
10.3 General Partner, Inc. under the Line of Credit Agreement
(incorporated herein by reference to Exhibit 10.3 to the
Partnership s Form 10-Q dated September 30, 1995)
Exhibit Description
Number
Registration Rights Agreement dated October 6, 1995 among
the Partnership, SHRP Equity, Inc. and First Bank
10.4 National Association (incorporated herein by reference to
Exhibit 10.5 to the Partnership s Form 10-Q dated
September 30, 1995)
10.5
Instrument Adherence of MAXXAM Inc. dated October 6,
of 1995 (incorporated herein by reference to Exhibit 10.7 to
the Partnership s Form 10-Q dated September 30, 1995)
10.6
Instrument dated
of October 6, 1995 (incorporated herein by reference to
Adherence Exhibit 10.8 to the Partnership s Form 10-Q dated
of Charles September 30, 1995)
E. Hurwitz
Horsemen s Agreement dated November 26, 1996 between
Texas Thoroughbred HBPA, Inc. and the Partnership
10.7 (incorporated herein by reference to Exhibit 10.13 to the
Partnership s Form 10-K dated December 31, 1996)
Addendum dated December 1, 1997 to Horsemen s Agreement
10.8 between the Texas Thoroughbred HBPA, Inc. and the
Partnership
Horsemen s Agreement dated March 6, 1997 between the
10.9 Texas Horsemen s Benevolent and Protective Association
and the Partnership
Addendum dated December 1, 1997 to Horsemen s Agreement
10.10 between the Texas Horsemen s Benevolent and Protective
Association and the Partnership
10.11
Totalisato r Services Agreement dated September 8, 1997
between 10.1 to the
Autotote Partnership Form 10-Q for the quarter ended September 30,
Systems, 1997)
Inc. and
the
Partnershi
p
(incorpora
ted herein
by
reference
to Exhibit
10.12 Promissory Note dated December 13, 1994 by the
Partnership in favor of Harris County, Texas
(incorporated herein by reference to Exhibit 10.41 to the
Partnership s Form 10-K for the year ended December 31,
1994)
10.13
Satellite on Agreement dated February 24, 1998
Transmissi between Autotote Communications Services, Inc. and the
Partnership
Agreement dated December 30, 1993 between the Partnership
and International Sound Corporation (incorporated herein
10.14 by reference to Exhibit 10.45 to the Partnership s Form
10-K for the year ended December 31, 1994)
Amendment to Agreement dated December 30, 1993 between
the Partnership and International Sound Corporation
10.15 (incorporated herein by reference to Exhibit 10.1 to the
Partnership s Form 10-Q dated June 30, 1997)
Exhibit Description
Number
10.16 Alcoholic Beverage Concession Agreement dated September
19, 1996 between 97, Inc. and the Partnership
(incorporated herein by reference to the Partnership s
Form 10-K dated December 31, 1996)
*10.17 Lease Agreement dated March 3, 1999 between Valley Racing
Association and SHRP Valley LLC.<PAGE>
*10.18 Management Agreement dated March 3, 1999 between Valley
Racing Association and SHRP Valley LLC.
Executive Compensation Plans and Arrangements
Employment Agreement, dated November 24, 1992 between
MAXXAM Property Company and James D. Noteware
10.19 (incorporated herein by reference to Exhibit 10.33 to the
Partnership s Form 10-K for the year ended December 31,
1994)
10.20
Letter 1994 between the
Agreement, Partnership and Ann M. McGovern (incorporated herein by
dated reference to Exhibit 10.34 to the Partnership s Form 10-K
August 19, for the year ended December 31, 1994)
10.21 Letter Agreement, dated November 11, 1994 between the
Partnership and Michael J. Vitek (incorporated herein by
reference to Exhibit 10.35 to the Partnership s Form 10-K
for the year ended December 31, 1994)
Agreement between the Partnership and Robert L. Bork
(incorporated herein by reference to Exhibit 10.10 to the
10.22 Partnership s Form 10-Q dated September 30, 1995)
* Included with this filing.
LEASE AGREEMENT
BETWEEN
VALLEY RACING ASSOCIATION
AND
SHRP VALLEY LLC
LEASE AGREEMENT
This Lease ("Lease") is made this 3rd day of March, 1999 between
Valley Racing Association, a joint venture comprised of Ladbroke Racing
Texas Corporation, a Texas corporation and Ladbroke Racing Management Texas
Corporation, a Texas corporation ("Lessor")and SHRP Valley LLC ("Lessee").
If Lessor reorganizes as a corporate entity as described in Section 5(c) of
this Agreement any reference to Lessor in this Agreement shall include that
corporate entity.
1. Premises. Lessor, for and in consideration of the covenants and
agreements of the Lessee contained in this Lease hereby grants, demises and
leases to Lessee, and Lessee for and in consideration of the covenants and
agreements of the Lessor contained in this Lease and the Management
Agreement (defined in Section 4(d) of this Lease), hereby leases and takes
from Lessor, for the Rent and upon the terms and conditions provided in
this Lease, the following described Property:
(a) The land described in Exhibit "A" to this Lease
(collectively, the "Land"), together with all of the buildings,
improvements and fixtures on the Land, and all of Lessee's
improvements that are constructed in accordance with the terms of this
Lease (together the "Improvements") and all appurtenances and rights
relating to the Land and the Improvements, including also all interest
of Lessor in and to adjacent streets, alleys, easements, rights-of-way
and rights of ingress and egress to the Land and all other land owned
or claimed by Lessor that is adjacent, contiguous to or a part of the
Land, whether owned or claimed by deed, limitations or otherwise and
whether or not located inside or outside the metes and bounds
description of the Land or whether or not held under fence by Lessor
(the Land, Improvements, appurtenances and other rights are referred
to collectively as the "Premises").
(b) All of the Personal Property described on Exhibit "A-1" to
this Lease and all other equipment and personal property owned by
Lessor and located in, on or used in connection with the Premises
including, without limitation the right to use the name "Valley
Greyhound Race Park" and other names used for the Premises, sign
rights, all telephone numbers related to the operation of the
Premises, all keys and all goodwill relating to the Premises, all of
Lessor's right, title and interest in all water, waste water,
drainage, telephone and other utilities, utility lines, utility
connections, utility commitments, utility capacity and reservations,
and other rights, capital recovery charges and other fees paid or
deposits made by Lessor, and any reimbursements or other rights
belonging to Lessor which pertain to any utilities or utility services
provided, to be provided, or available to all or any part of the
Property (collectively the "Personal Property").
2. Use. Lessee may use the Premises and Personal Property for
conducting pari-mutuel racing operations pursuant to the pari-mutuel
greyhound race track license granted to Lessor by the Texas Racing
Commission (the "Commission") for Cameron County, Texas as more fully
described in the Management Agreement (the "License") and any and all other
uses which will not violate the terms of the License or otherwise prevent
Lessor from conducting pari-mutuel wagering at the Premises.
3. Term and Renewal Options.
(a) The term of this Lease ("Term") shall begin on the date of
this Agreement (the "Commencement Date") and terminate at midnight on
the last day of the 72nd calendar month after the Rent Commencement
Date (defined in Section 4(b) below), unless sooner terminated in
accordance with this Lease.
(b) Lessee shall have and is hereby granted a total of eight
successive options to extend the term of this Lease for any period of
time not exceeding six years for each option, upon the same terms,
covenants and conditions as are provided in this Lease, except that
the Base Rent shall be $1,000.00 per month. If Lessee shall elect to
exercise one or more of these options it shall do so by giving Lessor
written notice at least 180 days prior to the expiration of the
primary term, or at least 180 days prior to the then current option
term, and in that notice Lessee shall state the date to which it
elects to extend the Term. Any reference in this Lease to the "Term"
shall include any option term exercised in accordance with the terms
of this Lease.
4. Rent.
(a) Initial Rent. Unless Lessee terminates this Lease in
accordance with Section 5(b) below, Lessee shall pay to Lessor the sum
of $100,000.00 within 10 days after the Due Diligence Period expires.
(b) Base Rent. Subject to the terms and conditions provided in
this Lease, Lessee shall pay to Lessor as rent ("Rent") for each Lease
Year during the term of this Lease, commencing on the first day of the
first month following the expiration of 60 days after the expiration
of the Due Diligence Period (defined below) ("Refurbishment Period"),
unless the Lease is terminated during the Due Diligence Period (the
"Rent Commencement Date"), $300,000.00 per Lease Year, as defined
below, in advance and in equal monthly payments of $25,000.00 on or
before the first day of each month during the Term.
A "Lease Year" shall consist of a 12-month period beginning on the Rent
Commencement Date or any anniversary of the Rent Commencement Date.
(c) Consideration to Lessee. Lessor and Lessee acknowledge and
agree that a material consideration for Lessee's agreement to Lease
the Premises from Lessor is Lessor's compliance with the Management
Agreement pertaining to the License (the "Management Agreement")
between Lessor and Lessee dated the same date as this Lease. A
default by Lessor under the Management Agreement shall be deemed to be
a default by Lessor under this Lease. A default by Lessee under the
Management Agreement shall be deemed to be a default by Lessee under
this Lease.
(d) Payment. All payments of Rent, Initial Rent and other
amounts payable to Lessor under this Lease shall be paid to Lessor at
the office of Lessor at 3260 Blume Drive, Suite 500, Richmond,
California 94806, or at such other place as Lessor may designate.
(e) Late Charge. If any payment of rent is not paid by Lessee
when due and such failure to pay is not cured by Lessee within three
business days after Lessee receiving written notice from Lessor that
it has not received the payment, that payment shall be considered late
and an administrative charge of $250.00 shall be due and payable by
Lessee to Lessor on demand from Lessor. Lessor and Lessee agree that
this administrative charge represents a reasonable estimate of costs
and expenses incurred by Lessor and is fair compensation to Lessor for its
loss suffered by the late payment by Lessee. The date the payment
is received by Lessor shall be considered the effective date for
purposes of determining the late charge. Any payments made by check
shall not be deemed received if such check is not paid upon
presentation to Lessee's indicated bank. Lessor shall immediately
notify Lessee if a check is not honored. Acceptance by Lessor of a
late rent payment and late charge shall not constitute a waiver of any
Lessor's rights and remedies available in connection with any
subsequent failure of Lessee to pay rent or to make any other payment
due Lessor under this Lease in the manner or time provided for in this
Lease.
5. Due Diligence Period.
(a) Inspection by Lessee. Lessee and Lessee's representatives
and contractors shall have until the expiration of 90 days (the "Due
Diligence Period") after Lessee receives the Records (defined below)
to determine the feasibility of the Premises for Lessee's purposes and
to visit and inspect (including without limitation having engineering
and/or environmental tests, soil, and other tests and studies made)
the Premises. During the Due Diligence Period, Lessee shall be
allowed to inspect the following records (the "Records") pertaining to
the Premises, which shall be provided by the Lessor to the extent they
are available to Lessor: ad valorem tax and sales and use statements
and receipts for the last five years, real and personal property tax
renditions, filings and returns for the last five years, utility
statements for the last five years, any leases affecting the Premises
or the Personal Property, operating statements for the last three
years in which the Premises was an operating facility, all pleadings
and judgments in any law suit and a brief description of all
litigation to which Lessor or the Premises has been named a party and
all pending or threatened litigation or claims or administrative or
governmental proceedings during the five years immediately preceding
the date of this Lease, insurance policies, all contracts and
agreements, publications and advertisements, all available plans and
specifications for the Improvements, environmental, soil, structural
and engineering tests, reports and studies, repairs and capital
improvement records, all franchises, business licenses, permits,
certificates and evidence of any governmental approvals, and a
complete itemized schedule of all debts, obligations and liabilities
which affect or relate to the Premises and/or the Personal Property or
the operation of the Premises, certified as to its accuracy by Lessor
and any other documents relating to the Premises and/or the Personal
Property, or any part of the Premises and/or the Personal Property, or
to the operation of the Premises. If requested to do so by Lessee,
Lessor shall certify to the correctness of any other such document or
to the completeness of any such document or production of documents.
(b) Termination During Due Diligence. If Lessee, in its sole
discretion, is dissatisfied with the condition of the Premises and/or
the Personal Property, with the results of the tests and studies, or
with the information in any of the Records or other documents, or for
any other reason determines that the Premises are not suitable then
Lessee shall have the absolute right and option to terminate this
Lease, which must be exercised by giving written notice to Lessor
prior to the expiration of the Due Diligence Period. In the event of
such a termination, the parties shall have no other or further
obligation or liability to each other. In the event that no notice of
termination is given within the Due Diligence Period, then this Lease
shall continue to be binding and in full force and effect against Lessee
and Lessor. Lessor hereby acknowledges the receipt from Lessee
of $50.00 as consideration for this option.
(c) Approvals During Due Diligence. During the Due Diligence
Period, Lessor and Lessee shall use their best efforts to obtain the
approval from the Commission to issue a resolution approving this
Lease, and the Management Agreement, including, without limitation
specific approval of Lessee's rights to continue racing operations
under the License if it purchases Lessor in accordance with the terms
of the Management Agreement and authorizing Lessor to reorganize its
business entity status from a joint venture to a corporation (and
Lessor shall reorganize) as more specifically described in the
Management Agreement.
6. Survey. Within 30 days after the date of this Lease, Lessor
shall furnish to Lessee an on-the-ground survey(the "Survey"), including
six copies of the survey plat and field notes, of the Land and
Improvements, which survey shall be prepared, dated after the date of this
Lease, Date, bear the official seal of and be signed and certified (as to
all matters in this Section 6(a) through (e) in form reasonably acceptable
to Lessee) by a licensed Texas land surveyor who is acceptable to the Title
Company (defined below) and to Lessee, in form and substance acceptable to
the Title Company for deleting from the Leasehold policy of title insurance
at Lessor's expense the printed exceptions pertaining to boundaries and
encroachments (other than "shortage in area"). The cost of the Survey
shall be split equally between Lessor and Lessee. The Survey shall show
(a) the exact location of the Improvements including all parking areas
(including the number of parking spaces), fences, walls, and other
improvements along the property lines and that they are all located within
the boundaries of the Land, and of any setback lines, easements,
rights-of-way, roadways, traversing, adjoining or bounding the Land; (b)
the number of square feet within the boundaries of the Land and within any
easements, rights-of-way and encroachments; (c) that all of the parcels
comprise a single contiguous parcel of land with no intervening strips,
parcels or easements (except the permitted exceptions) between the Land and
the public roads adjacent to the Land and that there is full and complete
access to and from the Premises from and to those roads; (d) that none of
the Premises lies within the 100 year flood plain (or identify by metes and
bounds any portion of the Premises, if any, that may lie within the 100
year flood plain); and (e) that there are no encroachments on the Premises.
The surveyor's certificate shall read as follows:
"TO LESSEE, LESSOR, TITLE COMPANY AND OTHER PARTIES INTERESTED IN THE
TITLE TO THE PROPERTY SURVEYED: The undersigned hereby certifies that
this survey was this day made on the ground of the property described
hereon and is correct; that there are no discrepancies, conflicts or
shortages in area or boundary lines, or any encroachments, or any
overlapping of improvements, or any easements or rights of way except
as shown hereon; that such property has access to and from Ed Carey
Drive and ___ Road, dedicated roadways, as shown hereon; that such
property is entirely outside the 100 year flood plain; that, except as
shown hereon, there are no visible easements, rights-of-way, drainage
ditches, power lines, set back and/or building lines and that this
survey conforms to the current Texas Surveyors Association Standards
and Specifications for a Category 1A, Condition II Survey."
7. Title Matters.
(a) Leasehold Policy of Title Insurance. Lessor shall deliver on
or before 10 days after the expiration of the Due Diligence Period ("Policy
Issuance Date") a Leasehold Policy of Title Insurance (on a form prescribed
by the State Board of Insurance of the State of Texas) (the "Title Policy")
issued through Title Agency of Houston, Inc., 5251 Westheimer, Suite 150,
Houston, Texas, (the "Title Company"), insuring Lessee's leasehold interest
in title to the Land and Improvements in Lessee in the amount of
$2,800,000.00 and containing the following exceptions, and none other: (1)
standby fees and taxes for the year of the Closing and subsequent years;
(2) the standard printed exception pertaining to boundaries and
encroachments shall be deleted except for "shortage in area," and (3) other
matters which become permitted exceptions under the terms of this Lease
(collectively the "Permitted Exceptions"). The cost of the Title Policy
shall be split equally between Lessor and Lessee.
(b) Title Commitment; Review of Instruments and Survey. Within
15 days after the date of this Lease, Lessor shall obtain and deliver to
Lessee (i) a written commitment (the "Commitment") from the Title Company
to issue the Leasehold Policy of Title Insurance, which commitment shall be
dated after the date of this Lease, and (ii) legible copies of all
instruments (the "Instruments") that are referred to in that Commitment.
(1) Review of Title. Lessee shall have 30 days after Lessor's
receipt of the Commitment, the Instruments and the Survey, in which to
review those items. If Lessee fails to give notice to Lessor of an
objection to any of the Instruments, the Commitment or the Survey
within this 30 day period after all of these items have been received
by Lessee, Lessee shall be deemed to have no objection to the
Instruments or the Survey and the matters not objected to shall become
"Permitted Exceptions."
(2) Title Exceptions. If the Commitment, the Instruments or the
Survey, or any revisions to the Commitment or Survey disclose any
leases, liens, easements, reservations, restrictions, or other
exceptions or encumbrances to Lessor's title other than the Permitted
Exceptions, those additional exceptions or encumbrances shall be
deemed to be defects in or objections to Lessor's title. Subject to
the limitations in subsection (4) below, if Lessee gives notice of
objection to Lessor, Lessor shall cure or remove the objections prior
to the end of the Due Diligence Period.
(3) Additional Exceptions. In addition, Lessor shall promptly
notify Lessee at or prior to the Closing of any claims or other
additional exceptions or encumbrances upon the Premises, or of any
threats or notices of intention to condemn all or any part of the
Premises, made known to Lessee prior to the Closing and which are not
specifically listed in the Commitment (all of which shall also be
deemed to be additional exceptions or encumbrances for purposes of
this subparagraph). Lessor shall have until the Policy Issuance Date
to cure or remove any additional exceptions or encumbrances, in order
that the Leasehold Policy of Title Insurance will be issued to Lessee
without the additional exceptions or encumbrances, and at or prior to
the Policy Issuance Date shall deliver to Lessor a revised Commitment
and Survey showing that the additional exceptions or encumbrances have
been removed.
(4) Cure Obligations. Lessor shall use due diligence in curing
or removing any and all objections to the Instruments and any additional
exceptions or encumbrances, provided, however, Lessor shall not be required
to institute any suit or to spend more than $25,000.00 to remove any
exceptions or encumbrances other than additional exceptions or encumbrances
caused or created by Lessor after the date of this Lease which Lessee shall
cure. If Lessee fails to cure or remove all of those additional exceptions
or encumbrances and any objections to the instruments, then Lessee may
waive any such exceptions, encumbrances or objections or shall have in
addition to all rights and remedies permitted by law, the right to
terminate this Lease.
8. Representations of Lessor. Lessor represents and warrants to
Lessee that:
(a) Title. Lessor is the owner of fee simple title to the
Premises and the Personal Property, subject only to the matters that
are listed in Exhibit "B" to this Lease, and has the right to lease
the Premises and the Personal Property. Lessor hereby warrants and
defends the title to the Premises and the Personal Property.
(b) Claims. The Premises and the Personal Property are not
subject to any prior lease or claims of parties in possession or
claims for unpaid labor or materials.
(c) Condemnation. There is no pending or threatened
condemnation action or agreement in lieu thereof which affects the
Premises. Additionally, except as otherwise shown on Exhibit "B,"
there are no monetary liens or encumbrances upon the Premises and/or
the Personal Property that are or may be prior to this Lease.
(d) Legal Proceedings. There is no action, suit or proceeding,
pending or threatened against or affecting Lessor's title to the
Premises.
(e) Authorization. The execution, delivery and performance of
this Lease by Lessor has been duly authorized and this Lease is valid
and enforceable in accordance with its terms and will not be in
conflict with any mortgage, indenture or other agreement binding upon
Lessor.
(f) Zoning. Lessor has no knowledge of any fact, action or
proceeding, whether actual, pending or threatened, which could result
in the modification or termination of the present zoning
classification of the Premises, or the termination of full, free and
adequate access to and from the Premises from all adjoining public
highways and roads.
(g) Improvements. The existing improvements and utilities on
the Premises are in full compliance with all applicable building,
health and zoning laws and ordinances, including, without limitation,
the Americans with Disabilities Act and the Texas Architectural
Barriers Act. Lessor knows of no latent or material structural
defects in the Premises.
(h) Notices. Lessor has not received any notice from any
governmental authority having jurisdiction over the Premises requiring
or specifying any work to be done on or to the Premises
(i) Interference With Use. Lessor has no knowledge of any
existing, threatened or contemplated action, circumstances or
conditions (including, but not limited to subsurface conditions) which
would materially interfere with the use of the Premises for the
purposes for which it is intended to be used.
(j) Access. The Premises have public access by roadways
dedicated to and accepted by the State, City or County where the
Premises are located.
(k) Environmental. No hazardous waste or substances have been
dumped, deposited, buried or otherwise exist on the Premises, and
Lessor has no knowledge of any leaks of petroleum or hazardous
materials.
(l) Flood Plain. The Land is not located in a flood plain or a
flood hazard area.
(m) Taxes. All ad valorem real and personal property taxes,
excise taxes, income taxes and sales and use taxes applicable to the
Premises have been paid in full.
(n) Books and Records. All books, records, financial statements
and other such information provided by Lessor to Lessee are true and
correct.
9. Quiet Enjoyment. Lessor hereby agrees that Lessee, upon paying
the Rent and upon keeping and performing the covenants and agreements to be
kept and performed by Lessee under this Lease, shall and may peaceably and
quietly have, hold and enjoy the Premises during the Term.
10. Improvements to the Premises. Lessee may construct upon the
Premises, improvements necessary to Lessee's use of the Premises in
accordance with this Lease (collectively, "Lessee's Improvements"). All
Lessee's Improvements that are from time to time constructed upon the
Premises by Lessee or any sublessees shall be and remain the property of
Lessee and the sublessees until the expiration of the term of this Lease,
upon which the Lessee's Improvements (except for removables as provided in
this Lease) that are then located upon the Premises shall become the
property of Lessor. All construction by Lessee shall be subject to the
following conditions:
(a) Approvals. Lessee shall not make or cause to be made, any
alterations of or improvements to the Premises which could compromise
the structural integrity of the Premises or which will cost in excess
of $150,000.00 (as to the improvements then made, not in the
aggregate) to complete, without the prior written consent of the
Lessor which consent shall not be unreasonably withheld or delayed.
If Lessor fails to respond to a request for approval within 10 days of
such request, that request shall be deemed approved. All other
alterations and improvements shall be permitted without the necessity
of Lessee obtaining the consent of Lessor.
(b) Expenses. All costs, expenses and charges incurred in
connection with any construction shall be Lessee's sole and exclusive
obligation and Lessee hereby holds Lessor harmless and indemnifies
Lessor from any of such costs, expenses and charges. With respect to
any contract for any labor performed or materials delivered to the
Premises in accordance with those construction contracts, Lessee may
not act as the agent of Lessor. Lessee agrees to indemnify and hold
Lessor harmless from all claims arising or alleged to arise from any
act or omission of Lessee or Lessee's agents, employees, contractors,
subcontractors, laborers, materialmen or invitees or arising from any
bodily injury or property damage occurring or alleged to have occurred
incident to Lessee's work at the Premises.
(c) Liens. At all times prior to, during and subsequent to
construction of Lessee's Improvements, Lessee shall keep Lessor's
title to the Premises free and clear of all liens and encumbrances
including but not limited to those filed by mechanics, laborers, and
materialmen and all other security interests; provided, however, that
Lessee shall have the right to mortgage and encumber its leasehold
interest, but not Lessor's fee title to the Premises.
(d) Compliance. All of Lessee's construction at the Premises
shall be performed in a good and workmanlike manner in accordance with
applicable building codes, regulations and all other legal
requirements.
(e) Permits. No alterations or construction shall commence
until the Lessee has obtained all required permits and authorizations
of all municipal departments and governmental subdivisions having
jurisdiction. The Lessor shall join, but without expense to the
Lessor, in the application for those permits or authorizations
whenever such action is necessary and is required by Lessee.
(f) Insurance. Workmen's compensation insurance covering all
persons employed in connection with the work and with respect to whom
death or bodily injury claims could be asserted against the Lessor,
the Lessee or the Premises and, to the extent that the insurance
required under this Lease does not adequately protect the Lessor with
respect to those alterations, general liability insurance for the
mutual benefit of the Lessor and the Lessee, with reasonable limits
and deductible, shall be maintained by or on behalf of the Lessee at
the Lessee's sole cost and expense at all times when any substantial
work is in progress in connection with any alterations. Lessee shall
also obtain and maintain, or cause the contractor(s) under its
construction contract(s) to obtain and maintain, all risk builder's
risk insurance to the full insurable value of the improvements to be
constructed and materials stored at the Premises in connection with
that construction. The builder's risk insurance shall name Lessor as
an additional insured and shall be non-cancelable with respect to
Lessor without at least 15 days notice from the insurer. All such
insurance policies shall be in standard form and shall be in such
responsible companies selected in good faith by Lessee. Certificates
evidencing liability and workmen's compensation insurance issued by
the respective insurers, bearing notations evidencing the payment of
premiums or accompanied by other evidence reasonably satisfactory to
the Lessor of payment, shall be delivered to the Lessor prior to the
commencement of any alterations. Any loss or damage not covered by
insurance provided by the Lessee will be borne and paid by the Lessee.
11. Taxes. During the Term, Lessee will pay or caused to be paid to
Lessor (or as otherwise provided below), as and when the same shall become
due, the following amounts:
(a) Real Estate Taxes. Lessee agrees to pay directly to the
taxing authorities all current taxes and assessments against the
Premises during the term of this Lease after receipt by Lessee
directly from the taxing authorities or presentation to Lessee by
Lessor, of current tax statements from the applicable taxing
authorities. Lessee, however, will pay only the lowest discounted
amount and will not be required to pay any penalty, interest or cost
accruing by reason of Lessor's failure to secure tax statements from
the taxing authorities. Lessor shall upon the Rent Commencement Date
direct the taxing authorities to send all tax statements directly to
Lessee. Any tax or assessment payable in installments shall be paid in
installments and Lessee shall only be responsible for the part that is
payable during the term of this Lease. Lessee shall be responsible for
the preparation and filing of all real and personal property
renditions and/or tax returns relating to the Premises and Personal
Property. Lessee, in the name of Lessor but at Lessee's sole expense,
may protest any tax levied before any taxing authority or maintain any
necessary legal action in reference to tax levied or for the recovery
of any taxes paid by Lessee. Taxes for any period less than a calendar
year shall be prorated on a daily basis.
(b) Personal Property Taxes. Lessee shall pay prior to
delinquency all taxes against and levied upon fixtures, furnishings,
equipment, inventory and all other personal property of Lessee
contained in or upon the Premises. Taxes for any period less than a
calendar year shall be prorated on a daily basis.
12. Insurance.
(a) Liability Insurance. Lessee shall, at its sole cost and
expense, obtain and maintain in full force and effect, for the mutual
benefit of Lessor and Lessee, comprehensive public liability insurance
in the amount of $25,000,000.00 combined single limit coverage (with a
deductible not in excess of $100,000.00), against claims for bodily
injury, death or property damage arising out of the use and occupancy
of the Premises. A certificate of that insurance shall be furnished
to Lessor at the Rent Commencement Date and each renewal certificate
of this policy shall be furnished to Lessor within five days after the
expiration of the policy it renews. Each policy of insurance shall
contain an agreement by the insurer, if obtainable, that the policy
shall not be canceled without at least 10 days prior written notice to
Lessor. This insurance may be in the form of a general coverage,
floater policy or blanket policy issued by insurers of recognized
responsibility. This policy shall include the Lessor as additional
insured, shall contain cross-liability, severability of interest, and
products liability endorsements, shall state that this insurance is
primary insurance with respect to other insurance carried by Lessor,
and shall include the following coverages:
(1) Premises/Operations;
(2) Contractual Liability;
(3) Property Damage; and
(4) Personal Injury Liability.
(b) Property Insurance. Lessee shall, at its option, either (A)
insure the Improvements covered by this Lease in an amount equal to
their full replacement value (exclusive of the cost of excavations,
foundations and footings) against loss or damage by fire and such
other hazards as are currently found in the standard extended coverage
endorsement, in the jurisdiction where the Premises are located, which
policy shall include Lessor as an additional insured, and/or (B) elect
to be a self-insurer for some or all of such property insurance with
extended coverage.
(c) General Insurance Requirements. All insurance policies
carried by Lessee shall be issued in the name of Lessee and Lessor, as
their respective interests may appear. Lessee shall have the right to
adjust all losses and execute all proofs of loss in its name and/or in
Lessor's name. The proceeds of that insurance shall be payable to and
used by Lessee as provided in subsection (d) below. Lessee, in its
discretion, may carry any insurance under a blanket fire and other hazards
insurance policy or policies. However, a certificate or copy
of the certificate evidencing the insurance shall be delivered to
Lessor upon written request, unless Lessee has given Lessor notice of
self-insurance as permitted under this Lease. At Lessee's option, any
of the insurance which Lessee is required to procure under the
provisions of this Section 12, may include a deductible for any loss
as Lessee deems reasonable.
(d) Proceeds of Property Insurance. Upon any property loss
involving any of the Improvements, Lessee shall use the proceeds of
its property insurance to reconstruct the Improvements in
substantially the same design and configuration or, at Lessee's
option, in such other design and configuration that is not materially
less than the estimated replacement cost of the Improvements
immediately prior to the date of the property loss; provided, however,
that Lessee may, at its option, terminate this Lease upon any property
loss to the Improvements exceeding 50% of the replacement cost in
which event all insurance proceeds shall become payable solely to
Lessor. During any period of reconstruction or repair of the
Premises, this Lease shall continue in full force and effect except
that Rent shall be abated for the length of time necessary for the
reconstruction or repairs to be completed in proportion to the amount
of floor area of the Premises rendered unusable.
(e) Subrogation Waiver. Lessor and Lessee do hereby mutually
waive as against one another all rights of recovery for damage
sustained by either caused by the other, to the extent that the damage
is compensated for by insurance maintained by the damaged party, and
Lessor and Lessee agree that no party shall have any claim against the
other by way of subrogation or assignment.
13. Indemnification.
(a) Lessee. Lessee agrees that Lessor shall not be liable or
accountable for any loss, theft, injury, death or damage to persons or
property, from any cause or causes whatsoever and relating to events
occurring during the Term, which at any time may be suffered or
sustained by Lessee, or by any person using, occupying, or visiting
the Premises and Lessee agrees to indemnify and save Lessor harmless
from any and all claims, liabilities, losses, damages, costs and
expenses whatsoever arising therefrom. Lessee agrees to pay for all
damages done to the Premises by Lessee or any person permitted on the
Premises by Lessee.
(b) Lessor. Lessor hereby agrees to indemnify Lessee against
any damage and expense Lessee may suffer as a result of any defect in
title to the Premises which materially impairs Lessee's rights as a
Lessee under this Lease, any liability relating to environmental
contamination of the Premises or other events that occurred prior to
the date of this Lease, and any liability relating to its default
under or misrepresentations of Lessor contained in this Agreement.
14. Surrender on Termination. Lessee shall, upon expiration of the
Term or upon earlier termination of this Lease for any reason, quit and
surrender the Premises and the Improvements in good order, condition and
repair, reasonable wear and tear and damage by fire, casualty or other
causes not required under this Lease to be repaired by Lessee excepted.
15. Maintenance and Repairs. By acceptance of the Premises during
the Due Diligence Period Lessee shall be deemed to have accepted the
Premises in its "AS IS" condition. Lessee agrees to maintain the Premises
and to keep both the interior and the exterior of the Improvements in good
repair consistent with the condition in which the Premises are delivered to
Lessee under this Lease, to maintain the surface of any parking area, if
any, on the Premises to at least the condition as it exists on the
Commencement Date, and be responsible for all glass and casualty damage,
reasonable wear and tear excepted. Lessee will make all repairs and
replacements at the Premises as it reasonably deems necessary for the
operation of the Premises. All damage to the Premises, not caused by
Lessor will be the responsibility of Lessee to repair and all maintenance
will be performed and replacements and renewals will be made by Lessee at
Lessee's cost and expense. In addition, Lessee will have professional
preventive maintenance performed on all heating, ventilation and air
conditioning equipment in the Premises at least once every 12 months during
the term of this Lease and provide Lessor documentation satisfactory to
Lessor that such maintenance has been performed upon written request by the
Lessor. Lessor, and its agents (and any mortgagee or Deed of Trust
beneficiary as to the Premises) will have a right to enter the Premises, at
reasonable times which do not disturb or interfere with Lessee's business
on the Premises, to inspect the condition of the Premises.
16. Use and Occupancy. Lessee may use and occupy the Premises for
any and all lawful purposes. Lessee may, from time to time, grant easements
over the Premises and obtain zoning changes and conditional use permits
with respect to the Premises, provided they are limited to the term of this
Lease.
17. Compliance with Laws.
(a) Compliance. Lessee shall comply with all Applicable Laws
(defined below) relating to the Premises with respect to Lessee's use
of the Premises after the Commencement Date; provided, however, Lessee
shall not be obligated to make any structural changes to existing
improvements, incur expenses of a capital nature or remediate any
environmental contamination of the Premises existing prior to the
Commencement Date in order to comply with Applicable Laws.
(b) Environmental Compliance. Lessee shall not cause the
Premises, or permit the operation of any business or other activity on
the Premises, or any occupancy or use of the Premises, to violate any
applicable law, statute, ordinance, rule, regulation, order or
determination of any federal, state or local governmental authority or
any board of fire underwriters (or other body exercising similar
function), or any restrictive covenant or deed restriction (recorded
or otherwise affecting the Premises, including without limitation, all
applicable zoning ordinances and buildings codes, flood disaster laws
and health, industrial hygiene, and environmental laws, statutes,
ordinances, rules and regulation, the Comprehensive Environmental
Response Compensation and Liability Act of 1980, 42 U.S.C. Section
9601 et. seq., as amended from time to time, and regulations
promulgated thereunder ("CERCLA"), the Resource Conservation and
Recovery Act of 1976, 42 U.S.C. Section 6901 et seq., as amended from
time to time ("RCRA"), and regulations promulgated thereunder
("Applicable Laws"). Lessee shall obtain or cause to be obtained any
permits, licenses or similar authorizations required by Applicable
Laws to occupy, operate or use any buildings, improvements, fixtures
and equipment now or hereafter located on the Premises and Lessor
shall cooperate with Lessee in order to obtain them. Lessee shall not
cause or allow any of its employees, licensees or invitees to cause
the Release (defined below) of any Hazardous Substance (defined below) at,
on or under any of the Premises. Notwithstanding the foregoing,
Lessee may keep or permit to be stored, kept and/or used on the
Premises Hazardous Substances relating to the operations conducted on
the Premises provided they are stored, kept and/or used in compliance
with all Applicable Laws. Lessee shall inform Lessor of any pending
or threatened investigation, administrative order, or litigation with
respect to the Release of a Hazardous Substance on the Premises of
which it has actual knowledge, and promptly notify Lessor if Lessee
shall receive any written communication from or on behalf of any
governmental authority regarding an environmental condition on the
Premises which violates any Applicable Laws. Lessee agrees (i) not to
release, discharge or dispose of, on or under the Premises, any
Hazardous Substance or authorize any other person or entity to do so,
(ii) not to cause the Premises to be in violation of, any Applicable
Laws, (iii) to give prompt written notice to Lessor upon Lessee's
acquiring actual knowledge of (A) the presence of any Hazardous
Substance at, on or under the Premises, or any Release occurring at
the Premises, with a full description thereof, (B) any proceeding or
inquiry by a governmental authority with respect to the presence of
any Hazardous Substance on or under the Premises or the migration
thereof from the Premises to other property or from other property to
the Premises, (C) all claims made or threatened by any third party in
writing against Lessor, Lessee or the Premises relating to any loss or
injury resulting from any Hazardous Substance or Release, and (iv) to
promptly comply with any governmental requirements or Applicable Laws
requiring the removal, treatment or disposal of a Hazardous Substance
from the Premises or responding to a Release if caused by or
attributable to Lessee or any of Lessee's employees, servants, agents,
partners, directors, officers, shareholders, licensees,
concessionaires, sublessees, contractors, subcontractors,
(collectively a "Lessee Responsible Party"). In the event that the
Premises is affected by any Release caused by or attributable to
Lessee's use, release, deposit, discharge, collection, storage,
handling, management of, on, or under, or any Release by Lessee or a
Lessee Responsible Party, then Lessee shall perform or cause to be
performed at Lessee's cost all necessary Remedial Work (defined below)
related thereto, by contractors approved in advance by Lessor, and
under the supervision of a consulting engineer approved by Lessor. In
the event Lessee fails to timely commence, or cause to be commenced,
or fails to diligently prosecute the Remedial Work to be performed,
and such failure continues after the applicable cure period under this
Lease, Lessee shall be in default under this Lease, Lessor may perform
such Remedial Work and all reasonable costs and expenses to perform
that work which are incurred by Lessor shall be payable on demand by
Lessee to Lessor. Lessor shall have the right to join and participate
in, as a party if it so elects, in any legal proceedings or action
initiated with respect to the Premises in connection with any
Applicable Laws, provided it shall bear the cost of its own attorneys'
fees in connection therewith. The terms "Hazardous Substance" and
"Release" shall be defined in this Lease to have the same meaning as
ascribed to them under CERCLA and RCRA. The term "Remedial Work"
shall mean any investigation, site monitoring, containment, cleanup,
removal, restoration, or other work of any kind or nature required
under any Applicable Law in connection with the then current presence
or release of a Hazardous Substance in or into the air, soil, ground
water, surface water, or soil vapor at, on, under, or within the
Premises, or any part thereof.
(c) Right to Contest. Lessee shall have the right to contest by
appropriate legal proceedings which shall be conducted diligently and in
good faith in the name of Lessor or Lessee or both, and without
cost or expense to Lessor, the validity or applicability of any law,
ordinance, order, rule or regulation relating to Lessee's use or
operation of the Premises and Lessee shall have the right to delay
observance thereof and compliance therewith until the contest is
finally determined and is no longer subject to appeal, provided that
observance and compliance pending the prosecution of that proceeding
may be legally delayed without subjecting Lessor to any liability or
fine.
18. Eminent Domain.
(a) Taking of Premises. If the whole of the Premises shall be
taken under the power of eminent domain, the Term shall cease as of
the day possession shall be so taken. If any part of the Premises
shall be taken under the power of eminent domain, and the portion
remaining after the taking will not be adequate, in Lessee's
reasonable judgment, for the operation of Lessee's business, Lessee
shall have the right to elect either to terminate this Lease or to
remain in possession of the remainder of the Premises not so taken.
(b) Notice of Election. Lessee shall notify Lessor within 60
days after a taking, of Lessee's election under Section 18(a). If
Lessee elects to remain in possession, all of the terms of this Lease
shall continue in effect, except that the Rent shall be equitably
reduced.
(c) Condemnation Award. All damages awarded for taking under
the power of eminent domain, whether for the whole or part of the
Premises, shall be apportioned between Lessor and Lessee in order to
compensate them for the fair value of the Land and Lessee's
Improvements, respectively, that are so taken, and the fair value of
Lessee's leasehold interest in and to the Premises. On any taking,
Lessor and Lessee shall pursue, in their respective individual and
separate names and rights, unless otherwise required by law, those
remedies and those claims as they may have against the authority
exercising the right of eminent domain or other lawful taking as if
this Lease and the Term had not expired (whether or not the expiration
occurred because of the taking). The award of damages for the taking,
if made payable to Lessor and Lessee jointly, shall be apportioned
between the parties on equitable and just principles in accordance
with their respective fee and leasehold interests, it being understood
that Lessee shall be entitled to that award or portion of award for
damages to its leasehold, non-removable fixtures, improvements made to
the Premises by Lessee and for the loss of value of its leasehold
estate for the unexpired Lease term, including renewals. Rent shall be
apportioned to the date this Lease terminates.
(d) Adjustment to Rent. If Lessee shall not cancel the Lease as
provided in Section 18(a) above, this Lease shall not terminate, but
the Rent for the Premises shall be reduced, in proportion to the value
of the Premises before the taking bears to the value of the Premises
after the taking, as of the date when title shall vest in the
appropriate authority.
19. Assignment and Subletting.
(a) Assignment. Lessee shall not assign this Lease, or any
interest therein, and shall not (except as expressly provided in this
Agreement) sublet the Premises or any part thereof, or any right or
privilege appurtenant thereto, or permit any other person (the agents
and servants of Lessee excepted) to occupy or use the Premises, or any
portion thereof, without first obtaining the written consent of
Lessor, which shall not be unreasonably withheld or delayed. Consent
by Lessor to any assignment, subletting, occupation, or use by another
person shall not be a consent to any subsequent assignment,
subletting, occupation, or use by another person. Consent to an
assignment, subletting or other use or occupancy of the Premises by
another person shall not release the original named Lessee from
liability for the continued performance of the terms and provisions on
the part of Lessee to be kept and performed, unless Lessor
specifically and in writing releases the original named Lessee from
liability or Lessee assigns this Lease to a creditworthy tenant of
sufficient financial ability to perform the obligations under the
Lease which has the same or better financial ability as Lessee. Any
assignment and subletting or consent by Lessee to some other person's
use or lease occupancy of the Premises without the prior written
consent of Lessor shall be void. This Lease shall not, nor shall any
interest therein, be assignable, as to the interest of Lessee, by
operation of law without the prior written consent of Lessor.
Notwithstanding the foregoing, Lessee shall be permitted without
Lessor's consent to sublet or grant concessions as to minor portions
of the Premises where consistent with the development and operation of
Lessee's continuing business on the Premises.
(b) Consent. In the event Lessor consents to an assignment or
subletting of the Premises, such assignment or subletting shall not
become effective until execution of a formal agreement executed by
Lessor, Lessee and the proposed assignee/sublessee. Lessee shall
reimburse Lessor's fees and expenses in reviewing and approving the
assignment or sublet, such sum not to exceed $1,000.00 upon execution
of the required documents.
(c) Additional Consideration. If substantially all of Lessee's
rights under this Lease are subleased by Lessee to a third party not
affiliated with Lessee and the Base Rent payable by the Sublessee
exceeds the Base Rent provided for in this Lease, that portion of the
rent received by Lessee from the Sublessee in excess of the Base Rent
shall be shared equally between Lessor and Lessee.
20. Non-Disturbance; Subordination; Leasehold Mortgages.
(a) Non-Disturbance. With respect to any mortgages currently
affecting title to the Premises, Lessor shall obtain from the
applicable mortgagee, a non-disturbance agreement in form and content
reasonably acceptable to Lessee that provides that for as long as
Lessee is not in default (beyond any time period given Lessee in the
Lease to cure the default) in the payment of any Rent or in the
performance of any of the other terms, covenants or conditions of the
Lease to be performed by Lessee, Lessee's possession of the Premises
and rights and privileges under the Lease shall not be diminished or
interfered with by the mortgagee and Lessee's occupancy of the
Premises shall not be disturbed during the term of the Lease. If the
interests of the Lessor are acquired by the mortgagee or another third
party, by reason of the foreclosure of the liens evidenced by the
mortgage or other proceedings brought to enforce the rights of the
holder of the liens evidenced by deed in lieu of foreclosure or other
method and mortgagee or other third party succeeds to the interest of
the Lessor under the Lease, the Lease and the rights of Lessee under
the Lease shall continue in full force and effect and shall not be
terminated or disturbed except in accordance with the terms of the
Lease. Additionally, if the mortgagee or any third party succeeds to
the interest of Lessor under the Lease, the mortgagee or such third
party shall be bound to Lessee under all the terms, covenants and
conditions of the Lease, as if that party were named as the Lessor
under the Lease, and Lessee shall have the same remedies against that
party for the breach of any term, covenant, condition or agreement
contained in the Lease that Lessee might have had under the Lease
against the Lessor.
(b) Fee Mortgage. Any mortgage hereafter placed upon the
Premises by Lessor may only encumber Lessor's interest in the Land and
this Lease, and it shall be subject and subordinate to this Lease. If
Lessor defaults, at any time, in the performance of the obligations of
any mortgage or other lien affecting the Premises, Lessee may remedy
such default in whole, or in part, charge to Lessor all costs incurred
thereby, and be subrogated to the rights of the holder of such
mortgage or other lien.
(c) Leasehold Mortgage. Lessee may, at its option, from time
to time subject its leasehold interest in and to the Premises to the
lien of leasehold mortgages not encumbering Lessor's fee title. The
holder of that leasehold mortgage is referred to in this Lease as the
"Mortgagee."
(d) Notice to Mortgagee. When giving notice to the Lessee with
respect to any default, the Lessor will also serve a copy of each
notice upon the Mortgagee, and no notice to the Lessee shall be
effective unless a copy of that notice is served upon the Mortgagee;
(e) Mortgagee's Right to Cure. If the Lessee defaults under any
of the provisions of this Lease, the Mortgagee shall have the right to
cure that default whether the default consists of the failure to pay
Rent or the failure to perform any other obligation the Lessee is
required to perform, and the Lessor shall accept such payment or
performance on the part of a Mortgagee as though the payment or
performance had been by the Lessee.
(f) Cure Period. The Mortgagee will have the same period after
receiving the notice of default to cure the default or causing the
default to be cured for the account of Lessee or of the Mortgagee (as
the Mortgagee may elect) as is given the Lessee after notice to it,
plus an additional period of 10 days for defaults involving payments
of money. In the case of any default by the Lessee, other than in the
payment of money, the Lessor will take no action to effect a
termination by reason of that default without first giving to the
Mortgagee reasonable time within which either (i) to obtain possession
of the Premises (including possession by a receiver) and cure the
default in the case of a default which is susceptible of being cured
when the Mortgagee has obtained possession, or (ii) to institute
foreclosure proceedings and complete foreclosure, or otherwise acquire
the Lessee's interest under this Lease.
(g) Injunction, Stay, etc. In the event any Mortgagee is
prohibited by any injunction or any bankruptcy or insolvency
proceedings involving the Lessee from commencing or completing
foreclosure, the time period specified above during which a Mortgagee
may commence foreclosure shall be extended for the time period during
which such injunction or other prohibition is in force provided that
the Mortgagee shall diligently attempt to remove any such prohibition.
(h) Foreclosure by Mortgagee. Any Mortgagee may become the
legal owner and holder of this Lease by foreclosure of its Mortgage or
as a result of the assignment of this Lease in lieu of foreclosure,
whereupon the Mortgagee shall immediately become and remain liable
under this Lease but only with respect to the period of its ownership
of this Lease and only to the extent attributable to that period. Any
such Successor may, upon acquiring the leasehold, without further
consent of the Lessor, sell and assign this Lease on such terms and to
such persons as it deems acceptable and thereafter such purchaser at
foreclosure shall be relieved of all obligations under this Lease,
provided that the transferee has delivered to the Lessor its written
agreement to be bound by all of the provisions of this Lease from and
after its acquisition of the Leasehold. Nothing contained herein
shall require any Mortgagee or any other person as a condition to its
exercise of rights hereunder to cure any default under this Lease not
reasonably susceptible of being cured by such person.
(i) Further Assurances. The parties agree that the Lessee may
secure financing through one or more Mortgagees. The Lessor agrees to
cooperate on a reasonable basis with any requirements imposed by a
Mortgagee or any other prospective owner or holder of a leasehold
mortgage with respect to such certificates, agreements and other
matters as may be necessary or appropriate to facilitate the
financing.
21. Default; Termination.
(a) Defaults. If Lessee defaults in payment of any installment
of rent or any other sum to be paid by Lessee and the default
continues for 20 days after written notice from Lessor that the
payment has become past due; or if Lessees defaults in the performance
of a material covenant, agreement or other obligation on its part to
be performed under this Lease and the default continues for 30 days
after written notice from Lessor specifying the default (provided,
however if a default not susceptible of being cured by Lessee within
the 30 days, the time to cure shall be extended for such time as may
be necessary to cure the default with due diligence); or if Lessee
files a voluntary petition in bankruptcy or is adjudicated a bankrupt
or insolvent; of if a receiver is appointed for, or execution is
levied upon, all or substantially all of Lessee's business or assets
or Lessee's leasehold interest hereunder, of if a trustee is appointed
for Lessee after a petition has been filed for Lessee's reorganization
under the Bankruptcy Act of the United States; or if Lessee shall make
an assignment for the benefit of its creditors, Lessor may, by written
notice given to Lessee either terminate this Lease effective as of the
day of the event of default, or terminate Lessee's right to possession
of the Premises, without terminating this Lease, effective as of the
date of the event of default.
(b) Surrender of Premises. Upon any termination of this Lease
or Lessee's right of possession or occupancy of the Premises, Lessee
shall promptly surrender and deliver possession of the Premises to
Lessor and Lessee hereby grants the Lessor full and free license to
enter into and upon the Premises in that event, and, with process of
law, to repossess the Premises and to expel or remove Lessee and any
others who may be occupying the Premises, without relinquishing any
right given to Lessor under this Lease or by operation of law.
(c) Damages. If this Lease shall be terminated as provided
above, Lessor shall be entitled to recover from Lessee all sums due and
payable to Lessor up to the date of the termination, and damages
which accrue by reason of Lessee's default under this Lease but in no
event shall Lessor be entitled to recover damages for future rents or
other compensation due or that might become due under the Lease from
and after the date of termination, except for the Termination Fee
(defined below).
(d) Possession. If Lessee's right to possession only shall be
terminated, Lessor at its option, may enter upon, take and hold
possession of the Premises without releasing Lessee in whole or in
part from its obligation to pay all Rent payable for the Term, and in
that case Lessee shall continue to pay to or for the account of Lessor
the Rent and other sums payable by Lessee for the remainder of the
Term (subject to Lessee's termination rights in (f) below). Lessor,
after entry and possession, shall and in good faith take reasonable
steps to relet the Premises. If any rental collected by Lessor upon
such reletting is insufficient to pay monthly the full amount of the
Rent reserved in this Lease and the cost of any repairs necessary for
such reletting, Lessee shall pay to Lessor the amount of each monthly
deficiency upon demand.
(e) Leasehold Mortgagee. Anything contained in this Lease to
the contrary notwithstanding, if Lessor receives notice of a mortgage
encumbering Lessee's leasehold, the Mortgagee shall be given copies of
all notices required to be given to Lessee under this Lease and Lessor
shall not attempt to terminate this Lease for any default not
involving the payment of money without giving the mortgagee a
reasonable time to obtain possession of the Premises.
(f) Termination Rights. At any time during the first five years
of the Term, Lessee may terminate this Lease and the Management
Agreement for any or no reason by giving written notice of termination
to Lessor not less than 90 days prior to the termination date and
payment of the applicable Termination Fee (defined below), in which
event the Lease shall terminate and Lessee and Lessor shall have no
further liability under this Lease. In the event Lessee elects to
terminate this Lease during the first five years of the Term for
reasons other than a default by Lessor or other termination right of
Lessee under this Lease, Lessee shall pay to Lessor within 10 days
after the effective date of termination, an amount equal to
$225,000.00 less a credit against this amount equal to the actual cost
of any improvements made to the Premises and fixtures installed in the
Premises from and after the date of this Lease, including also costs
incurred for carpet, tile, window coverings, wall coverings,
electrical work, plumbing work, racetrack surface improvements,
furniture and equipment purchases that remain with the Premises,
parking lot repairs (crack filling, paving, sealing), rebuilding
and/or repairing the tote board, roof and other structural repairs,
permanent landscaping, construction of buildings, construction of
roads, wiring for telecommunications including for computer systems
and any other item that would qualify as a capital expenditure under
GAAP. The credit for these actual costs incurred shall be reduced by
10% per year from the date they are incurred. This credit shall in no
event exceed $75,000.00 ("Termination Fee").
(g) Remedies Non-Exclusive. In addition to the above-described
remedies, Lessor will also have all other remedies provided by law or
equity in the event of any default by Lessee.
22. Memorandum. Lessor and Lessee shall execute a Memorandum of
Lease in the form attached to this Lease as Exhibit "C" and Lessee may
cause that Memorandum to be recorded against the Land.
23. Lessor's Information and Assistance. Lessor shall reasonably
assist Lessee and execute any necessary applications or letters of
authorization for Lessee to obtain all necessary permits and zoning changes
from appropriate governmental authorities.
24. Fixtures. Lessee shall provide, and maintain at its own expense
all fixtures of a special nature that may be required by Lessee's business.
All trade and other fixtures, equipment and furniture placed on the
Premises by Lessee shall remain the property of Lessee, if removal can be
done so as not to materially damage the Premises. Lessee may not remove
those trade and other fixtures later than 30 days after the expiration of
the Term. Any such fixtures, equipment and furniture not so removed shall
become Lessor's property.
25. Holding Over. Any hold over after the expiration of the Term of
this Lease with the prior written consent of Lessor shall be construed to
be a tenancy from month-to-month, cancelable upon 30 days written notice,
and at a rental and upon terms and conditions as existed during the last
year of the Term. Any holding over after the expiration of the Term of
this Lease without the prior written consent of Lessor shall be construed
to be a tenancy from month-to-month cancelable upon 30 days written notice
(even though such 30 day period includes portions of more than one calendar
month), upon the same terms and conditions as existed during the last month
of the term of this Lease, except that the Base Rent shall be 150% of the
amount payable by Lessee.
26. Notices. Whenever under the terms of this Lease a written notice
is required, or whenever a written notice or communication is sent, the
same shall be accomplished by certified mail, return receipt requested,
postage prepaid, addressed as follows:
<TABLE>
<CAPTION>
<S> <C>
To Lessor: Ladbroke Racing Corporation
3260 Blume Drive, Suite 500
Richmond, California 94806
Attn: General Counsel
Facsimile: 510/243-9734
With copy to: Winstead Sechrest & Minick P.C.
100 Congress, Suite 800
Austin, Texas 78701
Attn: Timothy E. Young
Facsimile: 512/370-2850
To Lessee: c/o Sam Houston Race Park, Ltd.
7575 N. Sam Houston Parkway West
Houston, Texas 77064
Attn: President
With copy to: MAXXAM Inc.
Attn: General Counsel
5847 San Felipe, Suite 2600
Houston, Texas 77057<PAGE>
Notices served by mail shall be deemed complete when deposited with the
United States Postal Service. Any change of address shall not be effective
unless served upon the parties in the same manner as a notice.
27. Unenforceable Terms. If any term, covenant, condition or
provision of this Lease or the application thereof to any person or
circumstances shall, to any extent, be invalid or unenforceable, the
remainder of this Lease, or the application of that term or provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected, and each term and provision of this
Lease shall be valid and be enforced to the fullest extent permitted by
law.
28. Estoppel Certificates. Lessor and Lessee shall within 15 days
after the request of the other, execute and deliver to each other, at such
time or times as either Lessor or Lessee may request, a certificate
evidencing whether or not (a) the Lease is in full force and effect; (b)
the Lease has been modified or amended in any respect and describing those
modifications or amendments, if any; and (c) there are any existing
defaults under the Lessee to the knowledge of the party executing the
certificate, and specifying the nature of the defaults, if any. If either
party fails to deliver a certificate within 15 days from the date it is
requested, it shall be deemed that the Lease is in full force and effect,
unmodified and without default (provided such party shall not be excused
from its obligation to provide such certificate).
29. Lessor-Lessee Relations. The relation created by this Lease
Agreement is that of Lessor and Lessee. No provision contained in this
Lease shall be construed in such a way as to constitute Lessor and Lessee
joint venturers or co-partners or to make Lessee the agent of Lessor or to
make Lessor liable for this debts of Lessee.
30. Consents. Wherever in this Lease the consent or approval of
either party is required, the consent or approval shall not be unreasonably
withheld nor delayed, except where otherwise specifically provided.
31. Choice of Law. This Lease shall be governed by and construed in
accordance with the law of the state of Texas.
32. Entire Agreement. This Lease contains the entire agreement of
the parties hereto with respect to the Lease of the Premises and may not be
amended, modified, released, or discharged, in whole or in part except by
an instrument in writing signed by the parties to this Lease, their
respective successors or assigns.
33. Binding on Successors and Assigns. Except as otherwise provided
in this Lease, all covenants, agreements, provisions and conditions of this
Lease shall be binding on and inure to the benefit of the parties to this
Lease, their respective personal representatives, successors, and assigns.
In the event of any assignment of this Lease by Lessee, Lessee shall be and
hereby is, entirely freed and relieved of all obligations of Lessee under
this Lease which subsequently accrue, except as otherwise specifically
provided in this Lease.
34. Attorney's Fees. The prevailing party in any litigation under
this Lease, as determined by the Court, shall be entitled to the recovery
of its reasonable attorney's fees, as determined by the Court, and court
costs, from the other party.
35. Force Majeure. Whenever a period of time is provided in this
Lease for either party to do or perform any act or thing, that party shall
not be liable or responsible for any delay due to strikes, lockouts,
casualties, Acts of God, governmental regulation or control, or other
causes beyond the reasonable control of that party, and in any such event
the time for performance shall be extended for the amount of time that
party is delayed.
36. Brokers. Lessee represents that Lessee has dealt with no broker
in connection with this Lease. Lessor hereby agrees to hold Lessee
harmless from and against any claim made by any person or entity claiming a
commission or fee through or under Lessor or any person or entity
affiliated with Lessor in connection with or relating to this Lease,
including, without limitation, attorney's fees incurred in defense of such
a claim.
37. Landlord's Lien. To secure the payment of all Rent due and to
become due under this Lease and the faithful performance of this Lease by
Lessee, Lessee hereby gives to Lessor a lien and security interest on all
property (including fixtures, equipment, chattels and merchandise) which
may be placed in the Premises and also upon all proceeds of any insurance
which may accrue to Lessee by reason of destruction of or damage to that
property. This lien and security interest is given in addition to the
Lessor's statutory lien and may be foreclosed with or without court
proceedings by public or private sale, provided Lessor gives Lessee at
least 15 days notice of the time and place of the sale. Lessor shall have
the right to become the purchaser, upon being the highest bidder at that
sale. Contemporaneous with the execution of this Lease (and if requested
hereafter by Lessor), Lessee shall execute and deliver to Lessor a Texas
Uniform Commercial Code Financing Statement and/or instruments in
sufficient form to reflect the existence or extension of this lien and
security interest. Lessor shall, in addition to all of the rights
hereunder, also have all of the rights and remedies of a secured party
under the Texas Uniform Commercial Code (the Texas Business and Commerce
Code). Notwithstanding the foregoing, Lessor agrees upon request from time
to time by Lessee, to subordinate both its contractual and statutory
Landlord's liens to the liens of any third party lender of Lessee making a
loan to Lessee relating to the Premises or any seller of personal property
to be placed in the Premises, for which such Seller retains a purchase
money security interest.
Valley Racing Association By: Ladbroke Racing
Management Texas
By: Ladbroke Racing Texas Corporation, venturer
Corporation, venturer
By: /S/ GEORGE P. HARBISON
By:/S/GEORGE P. HARBISON Name: George P. Harbison
Name:George P. Harbison As Its:VP/CFO
As Its:VP/CFO
SHRP Valley LLC
By:/S/ JAMES D. NOTEWARE
Name:James D. Noteware
As Its:President<PAGE>
</TABLE>
MANAGEMENT AGREEMENT
This Management Agreement (the "Management Agreement"), is entered
into by and between VALLEY RACING ASSOCIATION, a Texas joint venture
("Owner") comprised of Ladbroke Racing Texas Corporation, a Texas
corporation ("LRT") and Ladbroke Racing Management Texas Corporation, a
Texas corporation ("LRM") and SHRP VALLEY LLC, a Texas limited liability
company ("Manager"). If the Owner reorganizes its business status as a
corporation in accordance with Section 3.2 below, any reference to Owner
shall include that corporation.
WHEREAS, contemporaneously herewith, Owner and Manager have entered
into that certain Lease Agreement (the "Lease Agreement") by which Owner
has leased to Manager the Valley Greyhound Park, a pari-mutuel greyhound
racetrack owned by Owner located in Cameron County, Texas (the "Track");
WHEREAS, the Texas Racing Commission (the "Commission"), as
established pursuant to the Racing Act (defined below) issued to Owner,
a license authorizing it to conduct greyhound racing, with pari-mutuel
wagering, in accordance with the Racing Act (the "License"). A copy of
the License is attached to this Agreement as Exhibit "A";
WHEREAS, during the term of the Lease Agreement ownership of the
Track and the License will remain with Owner;
WHEREAS, during the term of the Lease Agreement upon the terms and
conditions hereinafter set forth, Owner desires to engage Manager to
manage all aspects of racing operations of the Track;
NOW, THEREFORE, in consideration of the premises and the respective
undertakings of the parties hereinafter set forth and in the Lease
Agreement, it is hereby agreed as follows:
1. DEFINITIONS
a. Terms Defined. When used in this Agreement, the following terms
shall have the meanings set forth below:
"Racing Act" shall mean Texas Civil Statutes, Article 179e,
and any rules and regulations promulgated pursuant thereto, as
such act, rules and regulations may be amended from time to time.
"Term" as to this Management Agreement shall have the meaning
set forth in Section 7.1.
b. Number and Gender. Whenever the context requires, references in
this Agreement to the singular number shall include the plural, and the
plural number shall include the singular, and words denoting gender
shall include the masculine, feminine and neuter.
2. APPOINTMENT OF MANAGER;
APPROVAL
a. Manager for Track Operations. Owner hereby engages Manager, as an
independent contractor, and not as an agent, servant, employee, partner
or joint venturer, to manage the day-to-day operations of the Track
during the Lease Term, including, the right to conduct dog racing
operations and simulcasting under the License at the Track and exercise
all other rights under the License during the Term, in accordance with
terms and conditions hereinafter set forth.
b. Approval. During the Due Diligence Period, as defined in the Lease
Agreement, Owner and Manager shall use their best efforts to obtain
approval of this Agreement by the Commission and the issuance by the
Commission of a resolution evidencing its determination that Manager is
authorized to exercise all of the rights granted to it under this
Agreement, and specifically approving the Management Agreement such that
Manager, if it exercises the Option (defined in Article X), shall be
entitled, as the transferee of the License, to continue all operations
authorized under the License. At the same time that approval of the
Management Agreement and the Lease Agreement is sought from the
Commission, Owner shall use its best efforts to obtain approval from the
Commission to reorganize its business entity status from a joint venture
entity to a corporate entity by having LRM convey its joint venture
interest in Owner to LRT. If such approval is obtained, Owner shall
promptly take all action necessary to reorganize as a corporate entity,
in a manner reasonably satisfactory to Manager. In the event either of
these approvals is not obtained by Owner, Manager may terminate this
Agreement within the later to occur of 15 days after receiving written
notice that the approval cannot be obtained or the expiration of the Due
Diligence Period.
c. Internal Approvals. Owner's rights and obligations under this
Agreement and the Lease, until March 10, 1999, shall be subject to and
conditioned upon Owner conducting an internal review of Manager and its
owners, to verify that, in Owner's reasonable determination, Owner does
not currently have reason to exercise its rights under Section 8.5(b) of
this Agreement. If Owner reasonably determines it is currently entitled
to give the notice specified in Section 8.5(b), it shall notify Manager
of the reasons therefore and the action required to remove Owner's
objection. If Manager fails to cure that objection to Owner's
reasonable satisfaction within the Due Diligence Period, Owner may
terminate this Agreement. However, if Owner is so entitled and fails to
terminate this Agreement on or before March 10, 1999, Manager shall be
deemed approved and Owner shall have no further rights to terminate this
Agreement under this Section 2.3.
3. RIGHTS OF MANAGER
a. Rights Under License. Manager shall have all of the privileges,
rights and beneficial and pecuniary interest, now or hereafter arising,
in and under the License, that relate to dog racing to be conducted at
the Track, simulcasting of dog and horse racing for either races to be
conducted at the facility (as to dog racing only) or at other
facilities, as either a "guest" or "host" track and other rights granted
by or associated with the License.
b. Operational Control. Manager shall have exclusive control during
the Term of this Agreement relating to all matters associated with
conducting dog racing and simulcasting of any kind at the Track and
other rights granted by or associated with the License. Manager shall
have the right to exercise and control all matters and incidental rights
associated with the issuance, maintenance, ownership and continued
effectiveness of the License, including, without limitation, preparing
and submitting any and all applications and other submittals to be made
to the Commission in connection with the issuance and maintenance of the
License, application fees, license fees, license certificates and other
license credentials and all security deposits and other financial
assurances posted with the Commission in connection with the issuance of
the License. Any deposits and other assurances made by Manager shall
remain the property of Manager upon the termination of this Agreement.
4. OBLIGATIONS OF MANAGER
a. Compliance with Laws. Subject to the exceptions in Section 17(a)
of the Lease, Manager shall operate the Track in compliance with all
applicable governmental laws, rules, ordinances, regulations, orders and
decrees of all applicable jurisdictions, governmental authorities and
courts (including, without limitation, the rules and regulations of the
Commission) (collectively, "Applicable Laws") and shall furnish the
Owner promptly with any and all notices of and from any governmental
authority which are served upon or received by the Manager, legal or
otherwise, relating to the Track, Track operations, and/or the License
and which impact the ability of Owner or Manager to maintain the License
in good standing, would expose the Owner or Manager to liability or give
rise to an enforcement action against the Owner or Manager by the
Commission.
b. Licenses and Permits. Manager shall acquire and keep in full force
and in good standing all licenses and certificates and permits required
for the Track operations, including the License.
c. Expenses. Manager shall incur and pay all normal and proper
operating expenses of the Track, including all ad valorem taxes on the
Track, all fees and expenses of any kind including licensing fees,
imposed by the Commission.
d. Liability Insurance. Manager shall, at its sole cost and expense,
obtain and maintain in full force and effect, for the mutual benefit of
Owner and Manager, comprehensive public liability insurance in
accordance with the terms of the Lease Agreement.
e. Reports. Manager shall provide Owner with a copy of all filings
made by Manager with the Commission concerning the Track, Track
operations and the License which impact the ability of Owner or Manager
to maintain the License in good standing, would expose the Owner or
Manager to liability or give rise to an enforcement action against the
Owner or Manager by the Commission within ten (10) days of the filing of
same with the Commission. In addition, Manager shall, within ten (10)
days of receipt from the Commission or any other governmental or
regulatory agency, provide Owner copies of all material documentation
relating to the Track, Track Operations and the License which impact the
ability of Owner or Manager to maintain the License in good standing,
would expose the Owner or Manager to liability or give rise to an
enforcement action against the Owner or Manager by the Commission.
f. Other Information. Upon request from Owner, Manager shall provide
Owner and/or Ladbroke (defined in Section 4.8) with reasonable details
and the identity of the immediate, intermediate and ultimate
shareholders, partners or other owners of Manager and such other
information relating to Manager and such owners, as may be reasonably
requested of Owner and/or Ladbroke by any Gaming Authority (defined in
Section 8.5(a)) to which Owner and/or Ladbroke (and its subsidiaries and
affiliates) may be subject from time to time, but this shall not require
Manager to provide details of or relating to the owners of any company
within its group of companies which is quoted on any international stock
exchange.
g. Disclosures. Ladbroke shall be entitled to provide to any Gaming
Authority such financial and other information relating to the Track and
Manager that any Gaming Authority may reasonably require from time to
time and Manager shall provide that information as may be reasonably
required of it from time to time so that Owner and/or Ladbroke (and its
subsidiaries and affiliates) may properly respond to any request or
demand of that Gaming Authority in a timely manner.
h. Requests for Changes. Owner may at any time request that Manager
make changes in and to the operation of the Track as it may consider
necessary and/or desirable from time to time in order to comply with
Applicable Laws. Additionally, Owner may make similar requests for
modifications relating to laws applicable to Owner, the ultimate parent
corporation of Owner, Ladbroke Group PLC ("Ladbroke"), or any affiliate
of Ladbroke including, without limitation, any legislation, statute,
statutory instrument, by-law, any public or governmental or statutory or
regulatory authority or person, the Ladbroke Betting and Gaming Division
Compliance Manual, any directive, guidance and/or advice of any
regulatory or governing authority or body to which Ladbroke (or any
subsidiary or affiliate of Ladbroke) may be subject wheresoever situated
and shall include, but shall not be limited to, membership rules and
regulations, terms of admittance, tax or other
governmental/statutory/regulatory, reporting and/or filing, gaming
license (personal or corporate), liquor license, business and other
licenses (whether like or unlike the foregoing), conduct of gaming and
house rules, banking, cage and gaming reserves, audit and accounting,
credit policies and procedures, security and currency rules and
regulations. Notwithstanding the foregoing, although Manager may
consider these requests, it shall have no obligation to comply with any
such request made by Owner; provided nothing in this Section shall be
construed to diminish Owner's rights under Section 8.5 of this
Agreement.
5. RESTRICTIONS ON AND
OBLIGATIONS OF OWNER AND
SHAREHOLDERS
a. Documentation and Appearances. Owner shall execute all
documentation relating to operations at the Track, as required by the
Commission from time to time, as the Owner of the License, in the form
of and in accordance with the reasonable direction of Manager, unless
such action would expose Owner to liability or jeopardize the license.
Owner shall also make any appearances necessary or desirable relating to
operations at the Track or as required by the Commission. Upon the
request of Manager and subject to the approval of the Commission, a
representative of Manager shall be given signatory authority, on behalf
of the Owner, to execute applications, reports and other communications
relating to the License that relate to operations to be conducted at the
Facility and to conduct any oral and written communication with the
Commission.
b. Relinquishment of Control. Owner shall have no discretionary
authority to exercise any control over the License that relates to
operations to be conducted at the Track or to execute any written
instruments in any way relating to the License that relates to
operations to be conducted at the Track and shall not take any such
action except as directed by Manager.
c. Notices. Owner shall immediately forward to Manager any notice,
correspondence, forms, reports or other communication received by Owner
from the Commission or any other entity which relates to or affects the
operations at the Track or the License.
d. Communications. Unless otherwise instructed by the Commission, all
communications with third parties concerning the License, including
those that relate to operations to be conducted at the Track shall be
done in the name of and by the Manager.
e. Organizational Restrictions. Owner shall not dissolve, liquidate,
merge, terminate or in any way transfer ownership of the License or any
interest in the Owner in a manner that would result in the termination,
cancellation, revocation of the License or otherwise impede Manager's
operation at the Track.
f. Duty to Cooperate. Owner will provide full and complete
cooperation and assistance to Manager in its efforts to comply with the
Racing Act and any and all orders or other requirements of the
Commission and to maintain the continued existence of the License.
g. Limitations on Manager's Authority. If, pursuant to the provisions
of the Racing Act, the scope of Manager's responsibilities or duties
under this Agreement violate the Racing Act, Owner and Manager agree to
make reasonable modifications to this Agreement, so as to allow
operations at the Racetrack to continue in compliance with the Racing
Act.
h. Limitations on Owner's Actions. Except pursuant to the provisions
of Article X, the Owner, LRT and LRM and each of their shareholders
shall not, during the Term of this Agreement, sell, assign, transfer,
pledge, encumber, charge or in any way dispose of the outstanding
venture interests of the Owner or the outstanding capital stock of LRT
or LRM.
6. INDEMNIFICATION
a. Indemnity by Manager. Subject to the matters for which Owner
hereby indemnifies Manager under Section 6.2 below, Manager hereby
agrees to indemnify and hold harmless Owner, the venture partners of
Owner, the parent corporation of the venture partners, and their
employees and agents from and against all losses, costs, damages,
expenses and liabilities of whatsoever nature, including, but not
limited to, attorneys' fees, costs of litigation, court costs, amounts
paid in settlement and amounts paid to discharge judgments relating to
any claim, lawsuit, cause of action, or other legal action or proceeding
brought against Owner or to which Owner may be a party, even if
groundless, false or fraudulent, directly or indirectly resulting from,
or arising out of the terms and provisions of or be based upon any claim
by any party relative to the management, operation and control by
Manager of the Track, the Track operations, and the License. This
indemnity provision shall be deemed to be continuing in nature and shall
remain in full force and effect and shall survive the expiration or
termination of the Management Agreement and the Lease Agreement.
b. Indemnity by Owner. Owner hereby agrees to indemnify Manager
against any damage and expense Manager may suffer as a result of failure
of Owner, LRT, LRM or their shareholders to comply with the terms of
this Agreement including, without limitation, the failure of the
representations, warranties and covenants in this Agreement and the
Lease to be true and correct and/or Owner's gross negligence or
intentional misconduct relating to the License or operations at the
Track.
7. TERM OF AGREEMENT
This Management Agreement shall be effective as of the date hereof
and the term hereof shall be conterminous with the Lease Agreement and
shall remain in effect for the term of the Lease Agreement (the "Term").
8. DEFAULT, TERMINATION AND
OTHER REMEDIES
a. Termination by Owner. Notwithstanding the provisions of Article
VII above, Owner may terminate this Agreement:
i. in the event of a default in payment due under the Management
Agreement or the Lease Agreement by Manager which remains uncured for a
period of twenty (20) days after receipt of written notice of default
from Owner to Manager, or in the event of a material breach of a
non-monetary provision of this Management Agreement or the Lease
Agreement by Manager which remains uncured for a period of thirty (30)
days following receipt of written notice from Owner to Manager of such
material breach (which shall be given promptly after discovery by Owner
of such material breach and shall specify in detail the facts
constituting such material breach); provided, however, that the
foregoing time period for curing a non-monetary material breach shall be
extended for so long as may be reasonably required to cure such non-
monetary material breach provided Manager commences to cure same within
such thirty (30) day period and proceeds diligently to cure same;
ii. in the event of a final adjudication by a court of competent
jurisdiction, with respect to which all appeals have been exhausted,
that Manager has committed acts of fraud against the Owner in connection
with the performance of its duties hereunder; or
iii. in the event the License is terminated and is not subject to
reinstatement.
b. Termination by Manager. Notwithstanding the provisions of Article
VII above, Manager may, at any time, terminate this Agreement in the
event of a material breach (including misrepresentations hereunder or
the Lease) of this Management Agreement or the Lease Agreement by Owner,
LRT or LRM which remains uncured for a period of thirty (30) days
following receipt of written notice from Manager to Owner of such
material breach (which shall be given promptly after discovery by
Manager of such material breach and shall specify in detail the facts
constituting such material breach); provided, however, that the
foregoing time period for curing a non-monetary material breach shall be
extended for so long as may be reasonably required to cure such non-
monetary material breach provided Owner, LRT or LRM commences to cure
same within such thirty (30) day period and proceeds diligently to cure
same.
c. Termination by Owner or Manager. If either Owner, LRT or LRM or
Manager is in default under the Lease Agreement (beyond any applicable
cure period) the non-defaulting party may terminate this Agreement upon
30 days written notice delivered to the defaulting party.
d. Specific Performance. If Owner, LRT or LRM fail to comply with
this Agreement or have made false representations and warranties in this
Agreement, and Manager is not otherwise in default hereunder, in
addition to Manager's right to terminate this Agreement, Manager may
enforce specific performance of the terms of this Agreement. If Owner
exercises the Put Option, satisfies all of its obligations relating to
the Put Option and Manager fails to close in accordance with the terms
of the Put Option, Owner shall have the right to specifically enforce
the terms and conditions of the Put Option.
e. Other Remedies.
i. Manager understands and acknowledges that Ladbroke (and its
subsidiaries and affiliates) now and may hereafter conduct gaming
operations in various countries throughout the world and are and may
become subject to the jurisdiction and regulation of various local
regulatory authorities throughout the world (each a "Gaming Authority")
relating to those gaming operations as are now and may hereafter be
conducted by Ladbroke (and its subsidiaries and affiliates). If
Ladbroke or any of its affiliates (i) is ordered or required in writing
by a Gaming Authority to terminate its relationship with Manager, or
(ii) is advised in writing by a Gaming Authority that its relationship
with Manager or any director, officer, shareholder or principal of
Manager jeopardized its registrations, licenses, findings of
suitability, or approvals (collectively "Approvals") or any application
by Ladbroke or any of its affiliates for an Approval (an "Application")
unless Owner terminates its relationship with Manager or any directors,
officers, shareholders or principals of Manager, then Owner shall notify
Manager in writing of that order or notice from the Gaming Authority and
provide Owner a copy of that order or notice and advise Owner of the
steps necessary to remove the objection. Upon receipt of the notice
Manager shall have 30 days (or such shorter period as has been ordered
or advised by the Gaming Authority) to take steps to eliminate the
objection of the Gaming Authority. If Manager has not removed that
objection, as determined by Owner in Owner s sole but reasonable
judgment, then Owner shall be entitled to require Manager to and Manager
shall either:
(A) terminate this Agreement and the Lease in exchange
for a cash payment from Owner equal to $225,000.00 plus the actual
cost of any improvements made to the Premises (defined in the
Lease) and fixtures installed in the Premises from and after the
date of the Lease and this Management Agreement, including also
costs incurred for carpet, tile, window coverings, wall coverings,
electrical work, plumbing work, racetrack surface improvements,
furniture and equipment purchases that remain with the Premises,
parking lot repairs (crack filling, paving, sealing), rebuilding
and/or repairing the tote board, roof and other structural repairs,
permanent landscaping, construction of buildings, construction of
roads, wiring for telecommunications including for computer systems
and any other item that would qualify as a capital expenditure
under GAAP. The payment due to Manager for these actual costs
incurred shall be reduced by 10% per year from the date they are
incurred; or
(B) exercise the Purchase Option at the Option Price
less $225,000.00
ii. If (a)(i) or (a)(ii) above have not occurred but the Owner
determines in its reasonable judgment that its relationship with Manager
or any directors, officers, shareholders or principals of Manager does
or may jeopardize its Approvals or an Application, then Owner shall have
the right, but not the obligation, to deliver a written notice to
Manager specifying the relevant event or situation and Manager shall
have 30 days (or a shorter period if Owner is so advised by the Gaming
Authority, but in no event less than 14 days) to take steps to eliminate
Owner s objection to Owner s sole but reasonable satisfaction. If
Manager has not removed Owner s objection under this subsection (b)
within this 30-day period (as may be adjusted as provided above), then
Owner shall be entitled to require and Manager shall either:
(i) terminate this Agreement and the Lease in exchange
for a cash payment equal to $300,000.00 plus the actual cost of any
improvements made to the Premises (defined in the Lease) and
fixtures installed in the Premises from and after the date of the
Lease and this Management Agreement, including also costs incurred
for carpet, tile, window coverings, wall coverings, electrical
work, plumbing work, racetrack surface improvements, furniture and
equipment purchases that remain with the Premises, parking lot
repairs (crack filling, paving, sealing), rebuilding and/or
repairing the tote board, roof and other structural repairs,
permanent landscaping, construction of buildings, construction of
roads, wiring for telecommunications including for computer systems
and any other item that would qualify as a capital expenditure
under GAAP. The payment due to Manager for these actual costs
incurred shall be reduced by 10% per year commencing after the
expiration of the second lease year, (i.e., years three, four and
five); or
(ii) Exercise the Purchase Option provided the Option
Price shall be as follows:
Prior to and until the expiration of Year 2 -
$1,350,000.00
Commencing in Year 3 - $1,620,000.00
Commencing in Year 4 - $1,940,000.00
Commencing in Year 5 - $2,330,000.00
Commencing in Year 6 - $2,800,000.00
In all instances this price shall be reduced by (A) the amount of
any condemnation awards paid to Owner as described in the Lease (B)
any insurance proceeds paid to Owner as described in the Lease and
(C) one-half of the Management Fee paid under this Agreement.
iii. If Manager intentionally and affirmatively acts in a manner and
with the sole purpose of causing Owner to exercise its rights under
this Section 8.5, Manager shall not be entitled to the discounted
purchase price described above, if Manager exercises the Option.
iv. If Manager exercises the Option in accordance with this Section
8.5, the parties shall, except as provided in this Section 8.5, close
under the same terms as are provided in Section 10.1 and Closing must
occur within 180 days from the date Manager exercises the Option as
provided, in Section 10.1.
9. CONSIDERATION
Owner and Manager acknowledge and agree that a material
consideration for this Management Agreement is the parties agreement
under the Lease Agreement. Additionally, if in any Lease Year (as
defined in the Lease Agreement), the total amount wagered by patrons of
the Track while at the Track, either on live racing or on simulcast
racing (whether for horse, greyhound or other form of racing authorized
by the Commission) where Manager is the guest track ("On-track Handle")
is equal to or greater than $40,000,000.00, Manager shall pay to Owner
for that Lease Year only, an amount equal to $200,000.00 within 60 days
after the end of that Lease Year ("Management Fee"), provided that one-
half of any Management Fee paid under this Agreement shall be credited
to the purchase price of the Shares (defined below) if purchased by
Manager under Article X of this Agreement.
10. PURCHASE AND PUT OPTIONS;
SECURITY
a. Manager's Purchase Option. At any time during the Term, Manager
shall have the option ("Option") to purchase 100% of the outstanding
capital stock of LRT (the "LRT Shares") under the terms and provisions
set forth in this Section 10.1 and Exhibit "B" to this Agreement which
is incorporated into and made a part of this Agreement. (All terms in
Exhibit "B" unless otherwise provided therein shall have the same
meaning as provided in this Agreement.) If Manager desires to exercise
this Option, Manager shall notify Owner in writing, and in that notice
shall specify a date for closing of the purchase, which shall not be
sooner than 60 days, nor more than 180 days after the date of the
notice. The consideration to be paid by Manager to Owner for the LRT
Shares shall be a cash payment equal to $2,800,000.00, reduced by (i)
the amount of any condemnation awards paid to Owner as a result of a
taking of any part of the land covered by the Lease Agreement, (ii) any
insurance proceeds paid to Owner for unrepaired damage to the Track, and
(iii) one-half of any Management Fees paid under this Agreement (the
"Option Price"). If Owner's business entity cannot be reorganized as a
corporation in accordance with Section 2.2, and Manager elects not to
terminate this Agreement, the Option shall apply to 100% of the
ownership interest in Owner (the "Venture Interests").
b. Owner's Put Option. Provided this Agreement and the Lease
Agreement are not earlier terminated in accordance with the terms of
this Agreement and the Lease Agreement, Owner shall have the right
during the sixth Lease Year only, upon written notice from Owner not
more than 240 days nor less than 180 days prior to the expiration of the
Term, to require that Manager (and Manager shall) purchase the LRT
Shares (or the Venture Interests, as applicable) effective as of the
expiration of the Term for the same purchase price and on the same terms
and conditions as provided in Section 10.1 above and Exhibit "B" to this
Agreement (the "Put Option").
c. Escrow. Immediately upon the execution of this Agreement, Owner
shall deliver to Winstead Sechrest & Minick P.C. ("Escrow Agent") the
stock certificates representing the LRT Shares and the stock
certificates representing 100% of the capital stock of LRT and LRM
(together the "Venturer's Shares"), endorsed in blank, and accompanied
by stock powers duly endorsed in blank who shall hold the LRT Shares and
the Venturer's Shares in escrow in accordance with the Escrow Agreement
attached to this Agreement as Exhibit "C" for the benefit of Manager and
Owner pending the exercise of either of the Option or the Put Option (if
either is exercised) and the closing of the sale of the LRT Shares (or
the Venturer Interests, as applicable) in accordance with this Agreement
(the "Closing").
d. Grant of Security Interest. To secure the prompt and complete
payment, performance and observance of the obligations of Owner,
including all renewals, extensions, restructurings and refinancings of
any or all of such obligations as set forth in Article 6 of this
Agreement (the "Obligations"), Ladbroke Racing Corporation hereby grants
to the Manager a continuing security interest, lien and mortgage in and
to all right, title and interest of Ladbroke Racing Corporation in all
capital stock held by Ladbroke Racing Corporation in LRT and LRM and
proceeds of all or any of the property described above and Ladbroke
Racing Corporation shall execute and deliver to Manager on the date
hereof the Pledge Agreement attached to this Agreement as Exhibit "D".
e. If the Manager becomes the Owner of LRT or the venture, Manager
shall promptly change the name of that entity so as not to continue the
use of the name Ladbroke.
11. MISCELLANEOUS
a. Entire Agreement; Waivers. This Agreement contains the entire
understanding among the parties hereto concerning the subject matter
hereof and may not be changed, modified, altered or terminated except by
an agreement in writing executed by the party to be charged therewith.
Any waiver by a party of any of its rights under this Agreement or of
any breach of this Agreement must be in writing and signed by the party
to be charged therewith and shall not constitute a waiver of any other
rights or breach or of a future breach.
b. Cross Default. A default by Manager under the Lease Agreement
shall be a default by Manager under this Management Agreement and a
default by Owner under the Lease Agreement shall be a default by Owner
under this Management Agreement.
c. Remedies Cumulative. Except as otherwise provided herein, each and
all of the rights and remedies in this Agreement provided, and each and
all of the rights and remedies allowed at law and in equity in like
case, shall be cumulative, and the exercise of one right or remedy shall
not be exclusive of the right to exercise or resort to any and all other
rights or remedies provided in this Agreement or at law or in equity.
d. Governing Law. This Agreement shall be construed in accordance with
and subject to the laws and decisions of the State of Texas applicable
to contracts made and to be performed entirely therein.
e. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but which shall
together constitute one and the same instrument.
f. Time. Time is of the essence in the performance of the terms,
conditions and covenants herein contained.
g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective
successors and permitted assigns. Neither party may assign any of its
rights or delegate and of its duties, except as provided herein, without
the express prior written consent of the other party and any such
attempted assignment made without such consent shall be void and of no
force or effect.
h. Severability. In the event that any one or more provisions of this
Agreement shall be deemed to be illegal or unenforceable, such
illegality or unenforceability shall not affect any of the remaining
legal and enforceable provisions hereof which shall be construed as if
such illegal or unenforceable provisions) had not been inserted.
i. Notices. All notices, requests (including requests for approvals),
demands and other communications hereunder shall be in writing and shall
be deemed to have been received upon delivery by hand or one business
day after being sent by certified or registered mail, return receipt
requested, with postage prepaid:
i. If to Manager c/o Sam Houston Race Park, Ltd.
7575 N. Sam Houston Parkway West
Houston, Texas 77064
Attn: President
With copy to:
MAXXAM, Inc.
Attn: General Counsel
5847 San Felipe, Suite 2600
Houston, Texas 77057
ii. If to Owner,
LRT, LRM or
Ladbroke Racing
Corporation Ladbroke Racing Corporation
3260 Blume Drive, Suite 500
Richmond, California 94806
Attn: General Counsel
Facsimile: (510) 243-9734
With copy to:
Winstead Sechrest & Minick P.C.
100 Congress Avenue, Suite 800
Austin, Texas 78701
Attn: Timothy E. Young
Facsimile: (512) 370-2850
or to such other person and place as either party shall furnish to the
other party in writing pursuant to the provisions of this Section.
j. Headings. The headings in the sections and paragraphs of this
Agreement are inserted for convenience of reference only and shall not
constitute a part hereof.
k. Fees and Costs. In the event that either party to this Agreement
institutes suit against any other party to enforce any of its rights
hereunder, the prevailing party in such action shall be entitled to
recover from the other party all reasonable costs thereof, including
reasonable attorneys' fees and costs before and at trial and at all
appellate levels.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed as of the 3rd day of March, 1999.
SHRP VALLEY LLC VALLEY RACING ASSOCIATION
By:/S/JAMES D. NOTEWARE By: Ladbroke Racing Texas
Name: James D. Noteware Corporation,
As Its: President Managing Venturer
By:/S/ GEORGE P. HARBISON
Name: George P. Harbison
Title: VP/CFO
Ladbroke Racing Management
Texas Corporation, Venturer
The undersigned has executed this Agreement as the sole shareholder
of LRT and LRM for the sole purpose of acknowledging its agreement to
comply with the covenants and conditions, grant the security interest
required in this Agreement and to make the representations and
warranties which are attributable to it in this Agreement.
Ladbroke Racing Corporation
By :/S/ GEORGE P. HARBISON
Name: George P. Harbison
Title: VP/CFO<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and consolidated statement of operations
and is qualified in its entirety by reference to such consolidated financial
statements together with the related footnotes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 3764
<SECURITIES> 0
<RECEIVABLES> 2177
<ALLOWANCES> 51
<INVENTORY> 0
<CURRENT-ASSETS> 9990
<PP&E> 28495
<DEPRECIATION> 2996
<TOTAL-ASSETS> 35489
<CURRENT-LIABILITIES> 7505
<BONDS> 41081
0
0
<COMMON> 0
<OTHER-SE> (15923)
<TOTAL-LIABILITY-AND-EQUITY> 35489
<SALES> 0
<TOTAL-REVENUES> 24195
<CGS> 0
<TOTAL-COSTS> 23345
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7915
<INCOME-PRETAX> (6858)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6858)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6858)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
