<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________TO___________
Commission file number 000-25306
EQUUS GAMING COMPANY L.P.
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(Exact name of registrant as specified in its charter)
Virginia 52-1846102
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(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
222 Smallwood Village Center
St. Charles, Maryland 20602
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(Address of Principal Executive Offices and Zip Code)
(301) 843-8600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 6,333,617 Class A
Units
<PAGE>2
EQUUS GAMING COMPANY L.P.
FORM 10 Q
INDEX
Page
PART I - FINANCIAL INFORMATION Number
Item 1 - Financial Statements
Equus Gaming Company L.P.
Consolidated Statements of Loss for the Three Months
Ended March 31, 1996 and 1995 (Unaudited) 1
Consolidated Balance Sheets at March 31, 1996 and
December 31, 1995 (Unaudited) 2
Consolidated Statement of Changes in Partners' Deficit
for the Three Months Ended March 31, 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1996 and 1995 (Unaudited) 5
Notes to Consolidated Financial Statements 7
Housing Development Associates S.E.:
Consolidated Statements of Income for the Three Months
Ended March 31, 1996 and 1995. (Unaudited) 26
Consolidated Balance Sheets at March 31, 1996 and
December 31, 1995 (Unaudited) 27
Consolidated Statement of Changes in Partners' Deficit
for the Three Months Ended March 31, 1996 (Unaudited) 29
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1996 and 1995 (Unaudited) 30
Notes to Consolidated Financial Statements 32
El Comandante Operating Company, Inc.:
Statements of Revenues and Expenses for the Three Months
Ended March 31, 1996 and 1995 (Unaudited) 47
Statements of Net Assets (Liabilities) at March 31, 1996
and December 31, 1995 (Unaudited) 48
Statement of Changes in Net Assets (Liabilities) for the
Three Months Ended March 31, 1996 (Unaudited) 50
<PAGE>3 EQUUS GAMING COMPANY L.P.
FORM 10 Q
INDEX
Page
Number
Statements of Cash Flows for the Three Months Ended
March 31, 1996 and 1995 (Unaudited) 51
Notes to Financial Statements 53
Equus Management Company:
Balance Sheet at March 31, 1996 63
Notes to Balance Sheet 64
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 65
Equus Gaming Company L.P.
Results of Operations for the Three Months Ended March 31,
1996 and 1995 66
Liquidity and Capital Resources 68
Proforma Results of Operations for the Three Months Ended
March 31, 1996 and 1995 69
Housing Development Associates S.E.:
Results of Operations for the Three Months Ended March 31,
1996 and 1995 72
Liquidity and Capital Resources 75
PART II - OTHER INFOMATION
Item 1 - Legal Proceedings 78
Item 2 - Material Modifications of Rights of Registrant's
Securities 78
Item 3 - Default upon Senior Securities 78
Item 4 - Submission of Matters to a Vote of Security Holders 78
Item 5 - Other Information 78
Item 6 - Exhibits and Reports on Form 8-K 78
Signatures 79
<PAGE>4 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF LOSS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
1996 1995
---------- ----------
REVENUES:
Rental income from El Comandante Race Track $3,801,669 $ 956,942
Cash distribution from Housing Development
Associates S.E.("HDA") - 134,000
Dominican Republic racing-
Commissions on wagering 1,307,138 66,339
Other revenues 196,214 9,949
Television Stations 500,243 60,501
Interest income 29,379 9,476
---------- ----------
Total revenues 5,834,643 1,237,207
---------- ----------
EXPENSES:
Financial 2,302,299 588,565
Depreciation 624,841 121,594
General and administrative 407,153 162,708
Management fees 117,611 67,583
Operating costs of Dominican Republic racing 1,749,674 123,898
Operating costs of Television Stations 515,224 218,501
---------- ----------
Total expenses 5,716,802 1,282,849
---------- ----------
LOSS BEFORE INCOME TAXES AND MINORITY INTERESTS 117,841 (45,642)
PROVISION FOR INCOME TAXES:
Current 18,209 39,193
Deferred 212,742 21,421
---------- ----------
LOSS BEFORE MINORITY INTERESTS (113,110) (106,256)
MINORITY INTERESTS (99,794) (24,895)
---------- ----------
NET LOSS $ (13,316) $ (81,361)
========== ==========
ALLOCATION OF NET LOSS:
General Partners $ (133) $ (72,148)
Limited Partners (13,183) (9,213)
---------- ----------
$ (13,316) $ (81,361)
========== ==========
NET LOSS PER UNIT $ - $ .02
========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING 6,333,617 3,384,760
========== ==========
The accompanying notes are an integral part
of these consolidated statements.
<PAGE>5 EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
CASH AND CASH EQUIVALENTS $ 3,611,853 $ 814,292
----------- ------------
ASSETS RELATED TO RACE TRACKS:
Property and equipment-
Land 7,128,858 7,128,858
Building and improvements 48,121,090 48,105,723
Equipment 2,433,519 2,389,924
----------- ------------
57,683,467 57,624,505
Less accumulated depreciation (10,304,327) (9,733,479)
----------- ------------
47,379,140 47,891,026
Receivables from El Comandante
Operating Company, Inc. ("ECOC") 1,798,981 1,816,310
Deferred costs-
Financing 4,302,961 4,388,926
Organizational and other 412,708 470,286
Other 636,823 580,288
----------- ------------
54,530,613 55,146,836
----------- ------------
ASSETS RELATED TO TELEVISION STATIONS:
TV Licenses 1,061,290 1,061,290
Property and equipment 2,379,851 2,413,983
----------- ------------
3,441,141 3,475,273
Less accumulated depreciation and
amortization (209,517) (137,620)
----------- ------------
3,231,624 3,337,653
Deferred costs 1,519,613 1,158,668
Other 546,753 365,765
----------- ------------
5,297,990 4,862,086
----------- ------------
$63,440,456 $60,823,214
=========== ============
<PAGE>6 EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND PARTNERS' DEFICIT
March 31, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
LIABILITIES RELATED TO RACE TRACKS:
First Mortgage Notes-
Principal, net of bond discount of
$1,720,552 and $1,760,161, respectively $66,279,448 $66,239,879
Accrued interest 2,330,417 332,918
Payable to minority stockholders, net of
minority interest in Galapagos of
$993,560 and $781,700, respectively 643,208 816,216
Notes payable 494,753 523,562
Accounts payable and accrued liabilities 1,384,334 1,092,765
Minority interest in HDA 175,623 63,559
Accrued income taxes 456,489 231,980
----------- ------------
71,764,272 69,300,879
----------- ------------
LIABILITIES RELATED TO TELEVISION STATIONS:
Note payable 1,343,105 1,365,848
Obligations under TV Purchase Agreements 464,764 474,661
Accounts payable and accrued liabilities 510,230 464,414
----------- ------------
2,318,099 2,304,923
----------- ------------
OTHER LIABILITIES:
Unsecured partner's loans 398,872 211,629
Notes payable and accrued interest 450,000 566,885
Accounts payable and accrued liabilities 306,399 226,710
----------- ------------
1,155,271 1,005,224
----------- ------------
PARTNERS' DEFICIT:
General Partners (758,322) (760,803)
Limited Partners (11,038,864) (11,027,009)
----------- ------------
(11,797,186) (11,787,812)
----------- ------------
$63,440,456 $60,823,214
=========== ============
The accompanying notes are an integral part
of these consolidated balance sheets.
<PAGE>7 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 1996
General Limited
Partners Partners Total
----------- ------------ ------------
BALANCES, December 31, 1995 (audited) $ (760,803) $(11,027,009)$(11,787,812)
Net loss for the period (unaudited) (13,183) (133) (13,316)
Currency translation
adjustments 15,664 158 15,822
Effect of currency
fluctuations on long-
term intercompany
transactions - - -
Cash distributions to
partners - (11,880) (11,880)
----------- ------------ ------------
BALANCES, March 31, 1996 (unaudited) $ (758,322) $(11,038,864)$(11,797,186)
=========== ============ ============
The accompanying notes are an integral part
of this consolidated statement.
<PAGE>8 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13,316) $ (81,361)
----------- -----------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Depreciation 624,841 121,594
Amortization 246,560 47,107
Deferred income tax provision 212,742 21,421
Currency translation adjustments 15,822 -
(Increase) decrease in assets-
Rent receivable from ECOC 31,665 -
Deferred costs 108,525 (81,779)
Other (205,800) 12,059
Increase (decrease) in liabilities-
Accrued interest 2,019,464 538,474
Accounts payable and accrued liabilities 417,074 (606,344)
Accrued income taxes 11,767 39,193
Minority interests (99,794) (24,895)
----------- -----------
Total adjustments 3,382,866 66,830
----------- -----------
Net cash provided by (used in)
operating activities 3,369,550 (14,531)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (20,192) (180,118)
Effect of consolidation of HDA cash accounts - 3,429,221
----------- -----------
Net cash (used in) provided by
investing activities (20,192) 3,249,103
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of obligations under TV
Purchase Agreements (9,897) (4,222)
Loans from minority stockholders - 450,000
Loans from (payments to) general partner, net 187,243 (130,867)
Loans from financial institutions - 600,000
Payments on notes payable (151,553) -
Increase in deferred costs (565,710) -
Cash distributions to partners (11,880)
----------- -----------
Net cash (used in) provided by
financing activities (551,797) 914,911
----------- -----------
<PAGE>9 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(continued)
1996 1995
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,797,561 4,149,483
CASH AND CASH EQUIVALENTS, beginning of year 814,292 -
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,611,853 $ 4,149,483
=========== ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 79,241 $ 5,062
Income taxes paid 6,441 -
NONCASH TRANSACTIONS:
Effect of consolidation of HDA's
non cash accounts - (19,269,865)
Step-up in value of assets related to
race tracks - 5,650,000
The accompanying notes are an integral part
of these consolidated statements.
<PAGE>10 EQUUS GAMING COMPANY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
Equus Gaming Company L.P. (the "Company") was formed initially on
September 17, 1993 as a general partnership between Interstate General Company
L.P. ("IGC") and one of its general partners, Interstate Business Corporation
("IBC"). Through a series of transactions completed on August 2, 1994, the
Company was restructured as a Virginia limited partnership between IGC and its
wholly owned subsidiary, Equus Management Company ("EMC"), for the purpose of
succeeding to substantially all of IGC's ownership interest in real estate
assets employed in thoroughbred racing and related wagering businesses. In
connection with the restructuring, the Company became the owner of a 67%
profits interest in Housing Development Associates S.E. ("HDA"). On February
6, 1995, IGC distributed to its unitholders 5,128,372 Class A Units ("Units")
representing in the aggregate beneficial assignment of a 99% Class A limited
partnership interest in the Company (the "Distribution"). The Units are
listed for trading on the Nasdaq National Market System under the symbol
"EQUUS". On March 8, 1995 an additional 1,205,245 Units were issued by the
Company to HDA Management Corporation ("HDAMC") in exchange for a 15%
interest in HDA. On April 6, 1995, the Company filed a Registration Statement
on Form S-11 with the Securities and Exchange Commission with respect to the
1,204,245 Units and 50,000 Units related to warrants issued to Oppenheimer &
Co., Inc. The Registration Statement has not yet been declared effective. EMC
serves as managing partner of the Company and IGC and EMC together hold a 1%
general partnership interest in the Company.
The Company also owns Virginia Jockey Club, Inc. ("VJC"), a Virginia
corporation, which applied unsuccessfully to the Virginia Racing Commission
for licenses (the "Virginia Licenses") to own and operate Virginia's first
thoroughbred racing and pari-mutuel wagering facility (See Note 12).
The Company's principal income producing asset is an 82% interest in HDA
in which it is a co-managing partner. HDA owns El Comandante Race Track ("El
Comandante"), the only licensed thoroughbred racing facility in Puerto Rico,
which it leases to El Comandante Operating Company, Inc., a Puerto Rico
nonstock corporation ("ECOC"). HDA also owns all of the outstanding capital
stock of S & E Network Inc. ("S&E"), a Puerto Rico corporation that owns and
operates three UHF television stations in Puerto Rico (the "Television
Stations"), and 55% of the capital stock of Galapagos, S.A. ("Galapagos"), a
corporation that leases and operates a race track in the Dominican Republic.
In February 1996, HDA and S&E entered into an agreement to sell to Paxson
Communications of San Juan, Inc. ("Paxson") a 50% interest in S&E, subject to
receiving approval of the Federal Communications Commission ("FCC").
The accompanying consolidated financial statements include the accounts
of the Company and VJC, and the accounts of HDA and its subsidiaries since
March 8, 1995 (see Note 4), after eliminating all inter-company transactions.
<PAGE>11
Accordingly, the consolidated statement of loss for the three months ended
March 31, 1995 only includes results of operations of HDA and its subsidiaries
for the period from March 8 to March 31, 1995.
HDA had an accumulated deficit of $818,750 at December 31, 1994 which
resulted principally from an extraordinary item in 1993 related to financing.
HDA is a limited liability partnership and the partners do not have any legal
obligation to fund any portion of such deficit. Accordingly, generally
accepted accounting principles did not permit the Company to record any
minority partners' interest in HDA's accumulated deficit, nor did they permit
the recognition of the minority partners' 18% share of HDA's net income until
the accumulated deficit was eliminated by earnings. As of March 31, 1995 HDA
had an accumulated deficit of $169,540 and, accordingly, no minority interest
was recorded during the three months period then ended. As of December 31,
1995 HDA's accumulated deficit had been eliminated and a minority interest of
$112,064 was recorded representing the minority partners' 18% interest in
HDA's net income for the three months ended March 31, 1996. A minority
interest of $211,858 and $24,895 was also recorded related to the minority
stockholders' 45% interest in net losses of Galapagos for the three months
ended March 31, 1996 and 1995, respectively.
Net loss per Unit is calculated based on weighted average of Units
outstanding since the Distribution on February 6, 1995. Outstanding options
and warrants to purchase Units do not have a material dilutive effect on the
calculation of earnings per Unit.
Interim Financial Statements
The consolidated financial statements as of March 31, 1996 and for the
three month periods ended March 31, 1996 and 1995 are unaudited but include
all adjustments (consisting of normal recurring adjustments) which management
considers necessary for a fair presentation of the results of operations of
the interim periods. The operating results for the three months ended March
31, 1996 are not necessarily indicative of the results that may be expected
for the year.
Outstanding Warrants and Options
In connection with the Distribution, the Company agreed to make available
to IGC for no consideration up to 100,000 additional Units for distribution by
IGC to a limited number of employees upon the exercise of certain options and
appreciation rights, and to Oppenheimer & Co., Inc. upon the exercise of
certain warrants. The additional Units available to IGC have "piggyback"
registration rights exercisable, at IGC's expense, in the event the Company
undertakes a registered offering of Units within three years following the
Distribution. The 50,000 Units issuable upon exercise of the Oppenheimer
warrants were included in the S-11 Registration Statement filed on April 6,
1995, which has not yet been declared effective.
<PAGE>12
2. BACKGROUND INFORMATION:
Acquisition of El Comandante
On December 14, 1989, HDA acquired El Comandante, consisting of
approximately 257 acres of land and the buildings, structures and ancillary
facilities situated thereon in Canovanas, Puerto Rico. The total purchase
price of El Comandante was approximately $48 million.
El Comandante Lease and the Operating License
HDA leases El Comandante to ECOC under a lease agreement (El "Comandante
Lease") for a term of 15 years ending December 14, 2004 (See Note 9). ECOC
operates El Comandante and pays rent to HDA based upon 25% of ECOC's share of
wagering revenues.
On December 15, 1989, the Puerto Rico Racing Board (the "Racing Board")
granted a license to ECOC to operate El Comandante, which will expire on
December 14, 2004 (the "Operating License"). The Operating License provided
ECOC with: (1) the exclusive right to operate a race track in the area of
Puerto Rico known as the San Juan Region, which approximates the northern half
of Puerto Rico, as delineated in maps produced by the Puerto Rico Planning
Board and Government Development Administration; (2) the exclusive right to
conduct all types of authorized betting, both at El Comandante and off-track,
anywhere in Puerto Rico, based on races held at El Comandante; and (3) the
right to hold a minimum of 180 day or night race days per year. The Operating
License requires payment by ECOC of an annual license fee, currently $250,000.
El Comandante Capital Corp., HDAMC and Private Offering
In 1993 HDA organized El Comandante Capital Corp. ("ECCC") as a wholly-
owned subsidiary to facilitate the issuance and sale of debt securities for
the benefit of HDA, with the primary purpose to repay debt incurred in
connection with the acquisition of El Comandante. On December 15, 1993, ECCC
and HDA, together with HDAMC, completed the sale (the "Private Offering") of
68,000 units, each unit consisting of $1,000 principal amount of ECCC's
11-3/4% First Mortgage Notes due 2003, payment of which is unconditionally
guaranteed by HDA (the "First Mortgage Notes") and a warrant to purchase one
share of Class A Common Stock of HDAMC (the "Warrants"). ECCC loaned the
entire proceeds from the sale of the First Mortgage Notes to HDA and
HDAMC contributed the proceeds from the sale of the Warrants to HDA in
exchange for the right to receive a 15% interest in HDA, subject to the
approval of the Racing Board. The approval was granted on July 21, 1994 and
HDAMC was admitted as a partner in HDA with a 15% partnership interest. On
March 8, 1995 the Company issued 1,205,245 Units to HDAMC in exchange for a
15% profits interest in HDA.
LDA Receivable
On August 2, 1994, HDA distributed a note of $4,128,582 to the Company
<PAGE>13
representing a 31% interest in a receivable of approximately $13.3 million
($11.9 million principal plus $1.4 million in accrued interest) payable by LDA
to HDA (the "LDA Receivable"). This transaction was recorded as a capital
contribution.
On September 30, 1994, the Company transferred $1,250,000 of its share of
the LDA Receivable to IGC in satisfaction of the Company's obligation to repay
a portion of the unsecured partner's loans (see Note 8) and distributed the
remainder, including accrued interest thereon of $54,714, to IGC and EMC as a
partnership distribution.
S & E Network Inc., Television Stations and Agreements with Paxson
On November 17, 1994 S&E acquired the assets and broadcast licenses (the
"TV Licenses") of three dormant Television Stations under certain agreements
(the "TV Purchase Agreements") that required total payments and assumption of
rescheduled debts of approximately $2 million, a portion of which were non-
interest bearing obligations. Based on a 12% discount rate, the present value
of the total purchase price obligations under the TV Purchase Agreements was
$1,736,000. This amount and acquisition costs totalling approximately
$202,000 were assigned to the tangible and intangible assets acquired by S&E
based on their estimated relative fair market values.
S&E commenced broadcasting six hours a day in January 1995 on a test
basis and increased the testing to eighteen hours a day in April 1995. It
officially launched the television network under the trade name of TELENET on
June 26, 1995.
In February 1996, S&E, HDA and Paxson entered into a Stock Purchase
Agreement by which Paxson has agreed to purchase a 50% interest in S&E for $4
million, subject to FCC approval which is expected to be received by June 30,
1996 (the "Closing"). Until FCC approval is received, Paxson is to provide
programming (mainly infomercials) and certain other services to S&E under a
Time Brokerage Agreement and is entitled to 50% of operating cash flow until
the Closing. Following the Closing, Paxson has agreed to assume
responsibility for managing the Television Stations. The agreements with
Paxson require HDA to fund, prior to Closing, approximately $1 million of
costs, which include transaction costs, additional capital expenditures,
employee severance costs and payment of certain S&E liabilities. At Closing,
S&E will distribute to HDA the $4 million from Paxson and HDA will assume
approximately $1.7 million of S&E debt, payable in monthly installments over
six years. If S&E incurs cash operating losses after January 31, 1996, Paxson
has agreed to provide working capital loans to fund those losses.
Galapagos, S.A. and V Centenario Race Track
In September 1994, HDA formed Galapagos, a Dominican Republic
corporation, with an initial 94% ownership interest. Galapagos was selected
by the Dominican Republic Racing Commission to operate and manage the V
Centenario Race Track ("V Centenario"), a new government owned horse race
track in Santo Domingo, Dominican Republic.
<PAGE>14
In February 1995, HDA acquired the 6% ownership interest from the
minority investors in Galapagos and sold a 45% interest to residents of the
Dominican Republic ("Minority Stockholders"). These transfers of ownership
interest were made at cost and, accordingly, no gain or loss was recognized by
HDA.
Galapagos began simulcasting El Comandante races on February 27, 1995
through independently-owned sports betting agencies in the Dominican Republic.
Racing operations at V Centenario commenced on April 29, 1995.
3. SUMMARY OF ACCOUNTING POLICIES:
Principles of Consolidation
The Company consolidates in its financial statements the accounts of
entities in which it has a controlling interest in excess of 50% (see Note 4).
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
New Pronouncements
In 1995, the Company implemented Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial
Instruments", which requires disclosure of the fair value of certain financial
instruments (see Note 16).
In 1996, the Company implemented SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS No. 121 establishes standards for identifying impairment for long-lived
assets and certain identifiable intangibles to be held and used by an entity.
Generaly, if the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an
impairment loss is assumed to have occurred. An adjustment to reflect this
impairment would be recorded to the extent that an asset's market value was
less than its carrying value. As of March 31, 1996, no adjustment has been
recorded under SFAS No. 121.
Rental Income from El Comandante Race Track
Rental income represents rent earned under the El Comandante Lease (see
Note 9). Basic Rent, as defined in Note 9, is recognized when wagering
commissions are earned by ECOC. Fixed Rent, as defined in Note 9, was
recognized in 1995 in equal monthly installments.
<PAGE>15
Revenues from Dominican Republic Racing
Commissions on wagering represent income earned by Galapagos on El
Comandante races simulcasted into the Dominican Republic and on races held at
V Centenario (see Note 10). Other revenues include income earned on the
Jockey Club and food services operations and from foreign currency exchange
transactions.
Revenues from Television Stations
Revenues from Television Stations primarily represent (i) income from
contracts for the production and broadcasting of television program which is
recognized when the program has been completed and delivered, and (ii)
advertising income from sale of air time, recognized at the time of broadcast.
Revenues from Television Stations for the three months ended March 31, 1996
and 1995 include $170,000 and $43,000, respectively, earned from a contract
with ECOC (see Note 11).
VJC Costs
VJC costs represent amounts incurred by the Company in the application
for Virginia Licenses and in appealing the decision of the Virginia Racing
Commission to award the Virginia Licenses to an applicant other than VJC, as
described in Note 12.
Cash Equivalents
The Company considers as cash equivalents certificates of deposit with an
issuance to maturity term of six months or less. Management intends to hold
these certificates until maturity.
Property and Equipment of the Race Tracks
Land, buildings and improvements, and equipment are stated at cost plus a
step-up of $5,650,000 of El Comandante assets on March 8, 1995 resulting from
the issuance of Units of the Company to HDAMC for a 15% profits interest in
HDA. Composite depreciation is calculated for the property related to El
Comandante, using the straight-line method, over the estimated useful lives of
the building and equipment; five to seven years for machinery and
equipment, 35 years for buildings and 10 to 15 years for land
improvements. Under the composite depreciation method, any gain or loss of
property retired or sold is charged against accumulated depreciation, unless
the amount involved is material. Depreciation, using the straight-line
method, commenced May 1, 1995 for the property and equipment related to V
Centenario where racing commenced on April 29, 1995.
TV Licenses and Property and Equipment of the Television Stations
The TV Licenses and land and equipment used in the operation of the
Television Stations are stated at cost. Composite depreciation is calculated
for the property and equipment acquired under the TV Purchase Agreements,
<PAGE>16
using the straight-line method over the estimated useful lives of the
equipment, ranging from 5 to 10 years. The TV Licenses are amortized using
the straight-line method over a period of 20 years. Depreciation and
amortization commenced July 1, 1995.
Deferred Costs
Deferred financing costs are being amortized over the life of the First
Mortgage Notes using the interest method for a period of 10 years ending
December 15, 2003. Organizational and other costs related to El Comandante
are being amortized using the straight-line method over a period of 5 to 15
years that commenced on December 15, 1989. Organizational and other costs
related to V Centenario are being amortized using the straight-line method
over a period of five years ending May 1, 2000.
Deferred costs related to Television Stations include a noncompetition
agreement entered into in connection with the acquisition of the Television
Stations and certain organizational, start-up and other costs which are
amortized, using the straight-line method, over a period of 3 to 10 years that
commenced July 1, 1995.
Deferred costs also include broadcast contract rights which are recorded
when the license period begins and all of the following conditions have been
met: (a) the cost of each program is known or reasonably determinable, (b) the
program material has been accepted by the broadcaster in accordance with the
conditions of the license agreement, and (c) the program is available for its
first showing or telecast. Contractual agreements define the life of the
license, the number of showings available and the cost of each program.
Broadcast contract rights are amortized based on the estimated number of times
the program can be telecasted based on an accelerated amortization schedule at
rates declining over the number of telecasts. Commitments for broadcast
contract rights that have been executed, but which have not been recorded in
the accompanying consolidated financial statements because they do not meet
the criteria prescribed in accounting literature, amounted to approximately
$208,000 as of December 31, 1995. There was no similar amount as of March 31,
1996.
Upon the Closing of the sale to Paxson, S&E will write-off approximately
$830,000 of deferred costs and broadcast contract rights which will not have
any future benefit to S&E under Paxson's management of the Television
Stations.
Currencies
HDA consolidates its accounts with Galapagos whose functional currency is
Dominican Republic pesos ("RD$"), although the United States dollars ("US$")
are also a recording currency. US$ are exchanged into RD$ and vice versa
through commercial banks and/or the Central Bank of the Dominican Republic.
Galapagos remeasures its monetary assets and liabilities recorded in US$ into
RD$ using the exchange rate in effect at balance sheet date (the "current
rate") and all other assets and liabilities and capital accounts, at the
historical rates. Galapagos then translates its financial statements from RD$
<PAGE>17
into US$ using the current rate, for all assets and liabilities, and the
average exchange rate prevailing during the year for results of operations.
Net exchange gains or losses resulting from remeasurement of accounts,
together with gains or losses from foreign currency transactions are included
in other revenues from Dominican Republic racing. For the three months ended
March 31, 1996 and 1995, a net loss of $3,900 and a net gain of $14,900,
respectively, was recognized by Galapagos. Also, the following accumulated
net losses from changes in exchange rates are included in the partners'
deficit:
March 31, December 31,
1996 1995
------------ ------------
Translation of assets and
liabilities $ 77,224 $ 26,680
Unsettled intercompany transactions
of a long term nature 275 66,641
------------ ------------
$ 77,499 $ 93,321
============ ============
The exchange rate as of March 31, 1996 and December 31, 1995 was US$1.00
to RD$13.46 and the average exchange rate prevailing during the three months
ended March 31, 1996 was US$1.00 to RD$13.46.
4. INVESTMENT IN HDA:
In August 1994 IBC and a consolidated subsidiary of IGC together
transferred a 67% interest in the profits and 26.35% interest in the capital
of HDA to the Company as capital contributions, which transfers were
accounted for at book value. On March 8, 1995, HDAMC transferred an
additional 15% interest in the profits and a portion of its capital interest
of HDA to the Company in exchange for 1,205,245 Units which were valued at
$5,650,000, resulting in a step-up of the cost of El Comandante assets by
that amount. In connection with these transactions, (i) HDAMC agreed to
transfer to the Company its remaining capital interest for no additional
consideration, and (ii) the consolidated subsidiary of IGC agreed to transfer
to the Company all but 1% of its profits and capital interest, as capital
contributions. These transfers occurred on February 7, 1996 and the Company
now holds an 82% interest in both the profits and capital of HDA.
Prior to March 8, 1995, the Company accounted for its investment in HDA
under the equity method of accounting. Because HDA is a limited liability
partnership, the original partners of HDA only recorded equity in losses of
HDA until their investments in HDA were reduced to zero. HDA had an
accumulated deficit at the time the partners transferred their interests in
HDA to the Company in August 1994. Since the Company received its interest in
HDA as capital contributions from related parties whose investments in HDA
were zero, the Company did not record any investment in HDA and adopted the
same accounting treatment of not recognizing equity in earnings of HDA until
<PAGE>18
HDA's accumulated deficit was eliminated. The Company did, however, recognize
revenues of $134,000 in the three months ended March 31, 1995 from cash
distributions that were received from HDA prior to consolidation of HDA's
accounts in the Company's financial statements effective March 8, 1995.
Prior to March 8, 1995 generally accepted accounting principles did not
permit the Company to consolidate the accounts of HDA in the Company's
financial statements because HDAMC had the right to approve any sale or
disposition of HDA's assets in excess of $500,000 and the incurrence of any
debt in excess of $1 million. On March 8, 1995, HDA's partnership agreement
was amended to eliminate these approval rights of HDAMC, and commencing as of
March 8, 1995 the accounts of HDA have been consolidated with the Company's
accounts.
5. RECEIVABLES FROM EL COMANDANTE OPERATING COMPANY, INC.:
Receivables from ECOC as of March 31, 1996 and December 31, 1995 consist
of (i) a note receivable of $1 million and accrued interest thereon of $34,500
and $20,164, respectively, and (ii) unpaid rent under the El Comandante Lease
of $764,481 and $796,146, respectively. The note receivable accrues interest
at 5.75%. The accrued interest at March 31, 1996 was collected in April 1996
and thereafter principal and interest is due in monthly installments of
$30,309 over a three year period commencing May 1, 1996.
6. LIABILITIES RELATED TO RACE TRACKS:
First Mortgage Notes
Pursuant to the Private Offering, ECCC issued First Mortgage Notes in the
aggregate principal amount of $68 million under an indenture dated
December 15, 1993 (the "Indenture") between ECCC, HDA and Banco Popular de
Puerto Rico, as trustee (the "Trustee"), and HDAMC issued Warrants to
purchase 68,000 shares of Class A Common Stock of HDAMC. As a result of the
Distribution, in March 1995 the Warrants automatically became exercisable to
purchase Units of the Company from HDAMC. Upon issuance of the Warrants,
HDAMC and HDA recorded additional equity of $1,912,800, equal to the fair
value of the Warrants of $2,040,000, less offering costs of $127,200, and
recorded debt discount of $2,040,000. Such debt discount is being amortized
using the interest method over the term of the First Mortgage Notes. The
First Mortgage Notes mature on December 15, 2003 and bear interest at 11.75%
from December 15, 1993, payable semiannually.
Payment of the First Mortgage Notes is guaranteed by HDA and the First
Mortgage Notes are secured by a first mortgage on El Comandante and by certain
other security which together encompass a lien on (i) the fee interests of HDA
in the land and fixtures comprising El Comandante, (ii) all property rights of
HDA in and to all related equipment, structures, machinery and other property,
including intangible property, ancillary to the operations of El Comandante,
(iii) substantially all of the other assets and property of HDA and ECOC,
including the capital stock of ECCC owned by HDA and (iv) the Rent Escrow as
<PAGE>19
defined in Note 9.
ECCC is required to redeem First Mortgage Notes in the principal amount
of $6,800,000 on December 15, 2000, $10,200,000 on December 15, 2001 and 2002,
and the balance at maturity. ECCC and HDA may redeem First Mortgage Notes on
or after December 15, 1998 at the following redemption prices (expressed as
percentages of principal amount): if redeemed during the 12-month period
beginning December 15 of years 1998 at 104.125%, 1999 at 102.75%, 2000 at
101.5%, and 2001 and thereafter at 100% of principal amount, in each case
together with accrued and unpaid interest. Any such redemptions would offset
the mandatory redemptions due December 15, 2000, 2001 and 2002.
ECCC also may redeem up to one-third of the principal amount of the First
Mortgage Notes from net proceeds of an equity offering by HDA at any time on
or before December 15, 1996 at a redemption price of 110% of the principal
amount. ECCC is required to offer to purchase First Mortgage Notes, at face
value, to the extent that HDA has accumulated excess cash flow, asset sales
with net proceeds in excess of $5 million, or a total taking or casualty, or
in the event of a change of control of HDA.
The Indenture contains certain covenants, one of which restricts the
amount of distributions to HDA's partners, including the Company. Permitted
distributions include amounts intended to be sufficient to provide funds for
HDA's partners to pay income taxes on their allocable share of HDA's taxable
income ("Tax Distributions"). Tax Distributions are equal to the higher of
(i) 8.4% plus the higher of the then applicable federal personal or corporate
income tax rate or (ii) the higher of the then applicable Puerto Rico personal
or corporate income tax rate, multiplied by HDA's consolidated net income.
HDA is permitted to make additional cash distributions to partners and other
Restricted Payments, as defined under the Indenture, equal to 44.25% of the
excess of HDA's cumulative consolidated net income after December 31, 1993
over the cumulative amount of the Tax Distributions, provided that HDA meets
certain minimum debt coverage ratios. HDA does not yet meet the debt coverage
ratios.
Payable to Minority Stockholders
A founders' agreement between HDA and the Minority Stockholders of
Galapagos (the "Founders Agreement") gives HDA the right to make calls for
stockholder loans, up to a maximum of $3,516,000, to be provided in
accordance with ownership interests. As of March 31, 1996 and December 31,
1995, HDA has made loans of $1,842,500, which are eliminated in the
accompanying consolidated financial statements, and the Minority Stockholders
have made loans of $1,507,750. These loans bear interest at a rate equal to
2% over prime rate. At March 31, 1996 and December 31, 1995 the interest rate
was 10.25% and 10.5%, respectively. Principal and accrued interest on the
loans will be paid from available cash flow as determined by the President of
Galapagos in his sole discretion.
As of March 31, 1996 and December 31, 1995, the Minority Stockholders'
share of Galapagos' accumulated losses exceeded their investment in common
stock by $993,560 and $781,700, respectively, which amounts were netted
<PAGE>20
against the payable to Minority Stockholders in the accompanying consolidated
balance sheets.
Notes Payable
Galapagos has obtained a $1.1 million line of credit from a financial
institution for the acquisition of wagering equipment for off-track betting
agencies in the Dominican Republic. During 1995 Galapagos borrowed $549,500
under the line of credit, payable in monthly installments of $11,525 and
$2,612, including interest at 10.75%, for a period of 4 years ending July 1999
and December 1999, respectively. The loans are guaranteed by HDA and
collateralized by wagering equipment.
7. LIABILITIES RELATED TO TELEVISION STATIONS:
Note Payable
On September 22, 1995, S&E obtained a $1.4 million loan, which is payable
in monthly installments of $23,788, including interest at 10.75%, for a period
of 7 years. The loan is guaranteed by HDA and has equipment of the Television
Stations as collateral.
Obligations under TV Purchase Agreements
The unpaid balances of the obligations under TV Purchase Agreements are
as follows:
March 31, December 31,
1996 1995
------------ ------------
Non-interest bearing amount payable in
monthly installments of $9,357
thru October 2001 $ 644,381 $ 673,704
Less accreted interest portion of
monthly installments (179,617) (199,043)
------------ ------------
Present value of monthly installments $ 464,764 $ 474,661
============ ============
HDA has agreed to assume the note payable and the obligations under TV
Purchase Agreements upon the closing of the sale of a 50% interest in S&E to
Paxson.
8. OTHER LIABILITIES:
Notes Payable
The Company borrowed $850,000 in 1995 from a bank and the loan balance
was $450,000 and $550,000 at March 31, 1996 and December 31, 1995,
<PAGE>21
respectively. The bank loan was payable in quarterly installments of $100,000
which commenced May 31, 1995 and the Company assigned to the bank the first
$100,000 of any quarterly cash distributions from HDA. In May 1996 the loan
was increased to $700,000 with the same assignment of $100,000 of quarterly
distributions for principal payments commencing August 31, 1996 and a final
payment of $200,000 in November 1997. The interest is payable monthly based
on the Citibank prime rate plus 2%, which was 10.25% at March 31, 1996 and
10.5% at December 31, 1995.
Unsecured Partner's Loans
During 1994 the Company received advances from IGC (including costs
incurred by IGC on VJC's behalf) to partially finance costs associated with
the unsuccessful application by VJC to obtain the Virginia Licenses. During
1995 the Company also received advances from IGC for principal payments on a
bank loan and other purposes, including VJC appeal costs and investigating
business opportunities. IGC also provided services to the Company pursuant to
the IGC Support Agreement. The outstanding payables to IGC were $398,872 and
$211,629 at March 31, 1996 and December 31, 1995, respectively.
9. LEASE OF EL COMANDANTE:
El Comandante is operated by ECOC pursuant to the Operating License, a
15-year exclusive franchise ending December 2004 covering the San Juan Region
of Puerto Rico, which approximates the northern half of Puerto Rico, as
delineated in maps produced by the Puerto Rico Planning Board and Government
Development Administration (see Note 2).
The El Comandante Lease with ECOC expires December 14, 2004. The El
Comandante Lease provides for payment of rent consisting of 25% ("Basic Rent")
of the annual commissions earned by ECOC ("ECOC Commissions"), but in no event
less than $7,500,000 ("Minimum Basic Rent") adjusted annually with a base year
of 1989 by the percentage increase in the Consumer Price Index ("CPI") for the
calendar year over the CPI for the previous calendar year. ECOC Commissions
consist of all payments received by ECOC on all monies wagered with respect to
horse racing occurring at El Comandante, whether wagered at El Comandante or
at other betting facilities in Puerto Rico or any other country. The El
Comandante Lease also obligated ECOC to pay additional annual fixed rent
("Fixed Rent") of $150,000 in 1994 and $400,000 in 1995. An amendment to El
Comandante Lease eliminated Fixed Rent effective January 1, 1996.
The El Comandante Lease also requires ECOC to establish and fund with
certain excess cash flow a rent escrow (the "Rent Escrow") until the Rent
Escrow equals one half of the Minimum Basic Rent for that year. For purposes
of determining the required deposits to the Rent Escrow, excess cash flow
means, after ECOC has a cash balance of $700,000 for working capital
(excluding restricted cash and payables to winning bettors) all cash flow of
ECOC in excess of $300,000 per year, provided that the $300,000 threshold
shall be increased by $100,000 for each $1 million by which the Rent Escrow
exceeds $3 million. Funds held in the Rent Escrow may be released to make up
any difference between rent payments made by ECOC and the rent due and payable
<PAGE>22
under the El Comandante Lease. After deposits into the Rent Escrow, payments
of Fixed Rent and donations in accordance with ECOC's certificate of
incorporation aggregating $3 million have been made, additional deposits to
the Rent Escrow are subordinated to ECOC's obligations to a former owner of
ECOC and Interstate General Properties Limited Partnership S.E. ("IGP"), a
subsidiary of IGC. As of March 31, 1996, no deposits have been made into the
Rent Escrow.
The El Comandante Lease provides for ECOC to pay all El Comandante
expenses except that, effective January 1, 1996, the amendment to the El
Comandante Lease requires HDA to pay real property taxes on El Comandante.
The El Comandante Lease also contains certain covenants of ECOC including
maintenance obligations; financial reporting requirements; insurance
requirements; compliance with laws; limitations on indebtedness; limitations
on liens; limitations on other activities; limitations on affiliate
transactions; acceptance of IGP consulting services; and acceptance of
amendments necessary to maintain HDA's tax status. ECOC granted a security
interest in substantially all of its assets (excluding cash, but including the
Rent Escrow) to HDA to secure ECOC's obligations under the El Comandante
Lease, which security interest was then assigned to the Trustee as additional
security for HDA's obligations under the First Mortgage Notes. If the El
Comandante Lease is terminated prior to December 2004, ECOC will assign the
Operating License to HDA to the extent permitted by law and sell at book value
its equipment to HDA. Also, HDA will be required to assume up to $1.9 million
of ECOC's obligations under the agreements with a former owner of ECOC.
The El Comandante Lease provides for renegotiation of the Basic Rent,
Fixed Rent and the Rent Escrow provisions with the results of such
renegotiations to be effective on January 1, 1998.
10. DOMINICAN REPUBLIC RACING:
On September 28, 1994, Galapagos entered into an agreement with the
Dominican Republic Government pursuant to which Galapagos leases and operates
V Centenario (the "V Centenario Lease") for an initial term of 10 years which
commenced April 1995. The V Centenario Lease also provides Galapagos with the
right to develop off-track betting in the Dominican Republic and the exclusive
right to simulcast horse races, including El Comandante races, into the
Dominican Republic. The V Centenario Lease may be renewed for additional ten
year periods by mutual agreement of the parties.
The V Centenario Lease provides for payments of rent to the Dominican
Republic Government based on a percentage of the annual wagering on races run
at V Centenario ("V Centenario Wagering"). Galapagos' rent is .25% of the
first RD$240 million (approximately US$18.5 million under current official
exchange rates) of V Centenario Wagering during the year, .5% of the next
RD$240 million, .75% of the next RD$240 million and 1% of V Centenario
Wagering over RD$720 million (approximately US$55 million under current
official exchange rates). Racing operations at V Centenario commenced on
April 29, 1995.
<PAGE>23
Galapagos has an agreement with Dominican Republic horseowners whereby
they receive 50% of Galapagos' commissions on V Centenario Wagering and 50% of
commissions earned by Galapagos on El Comandante's simulcasted races, after
deducting payments to ECOC for its commissions on simulcasted races.
Galapagos receives wagering services, software and equipment under a
service agreement for a ten year period ending March 15, 2005. Service fees
during 1995 are .65% (.0065) of total wagering and thereafter are the greater
of (a) .65% of total wagering or (b) $150,000 in 1996, $175,000 in 1997 and
thereafter $200,000 annually.
As required under the Founders Agreement, ECOC provides executive
management services to Galapagos pursuant to a management agreement for the
term of the V Centenario Lease ("ECOC Management Agreement"). Fees to ECOC
under the ECOC Management Agreement are payable monthly and consist of 1% of
wagering on simulcasted races and on V Centenario Wagering, with a maximum
amount of $250,000 annually, adjusted by CPI commencing January 1996. During
the three months ended March 31, 1996 and 1995, Galapagos incurred in fees of
$66,800 and $2,290, respectively. Galapagos also reimburses ECOC for out-of-
pocket expenses related to Galapagos.
Assets and liabilities related to Dominican Republic racing amounted to
$3,089,000 and $3,357,000, respectively, as of March 31, 1996 and to
$3,125,458 and $2,985,652, respectively, as of December 31, 1995.
11. S&E AND THE TELEVISION STATIONS:
Pursuant to an agreement with ECOC which was effective January 1995, S&E
was producing and broadcasting a four-hour television program for all races
run at El Comandante for a maximum of 208 race days per year (the "Television
Contract"). The Television Contract was originally for ten years to December
2004 but was replaced by a new agreement effective February 1, 1996 (the "New
Contract"). The Television Contract required fixed monthly payments of
$56,000 to S&E. S&E was responsible for producing the broadcasts and was
entitled to revenues from sales of advertising time. ECOC agreed to pay up to
$150,000 for certain improvements to provide facilities at El Comandante for
S&E's television studio, production and administration space at no cost to S&E
as long as S&E broadcasts the television program for ECOC.
The New Contract was negotiated in connection with the proposed sale of
50% interest in S&E to Paxson. Pursuant to the New Contract, ECOC purchases a
minimum of 910 hours of television time annually from S&E at $725 per hour
(minimum annual amount of $659,750), adjusted annually by CPI. If ECOC needs
television time after 7:00 PM, the cost per hour is $900, also subject to CPI
adjustments. ECOC is now responsible for producing and directing the
broadcasts and is entitled to the revenues from its sales of advertising time
during the broadcasts of the racing program. The term of the New Contract
expires January 31, 2000, but is renewable for successive one year terms at
ECOC's option.
<PAGE>24
ECOC provides certain administrative, maintenance, security and utility
services for which S&E pays $2,000 per month, adjusted annually by CPI.
12. VIRGINIA RACING LICENSES:
VJC applied to the Virginia Racing Commission for the Virginia Licenses
to own and operate a thoroughbred horse racing and wagering facility in
Virginia. On October 12, 1994, the Virginia Racing Commission awarded the
Virginia Licenses to an applicant other than VJC. VJC appealed the decision
of the Virginia Racing Commission to the Circuit Court of Richmond which
affirmed the award to the other applicant and then to the Virginia Court of
Appeals which, in April 1996, also affirmed the award. The Company does not
intend to file any further appeals.
13. MANAGEMENT AGREEMENTS:
The Company does not have any employees. The Company's activities are
presently managed by one of its general partners, EMC, pursuant to the
partnership agreement, without compensation. EMC is reimbursed for its
independent directors' fees and expenses and reasonable out-of-pocket third
party costs incurred in connection with the management of the Company, to the
extent that such expenses exceed EMC's share of the Company's cash
distributions. IGC provides administrative support services to EMC and the
Company pursuant to a three-year support agreement effective as of February 6,
1995 ("IGC Support Agreement") and the Company reimburses IGC for expenses
incurred in providing such services.
HDA does not have any employees. HDA's activities are managed by IGP
pursuant to a management agreement with a term of 15 years ending December 31,
2004 (the "IGP Management Agreement"). Under the IGP Management Agreement,
IGP provides management services, including office space, administrative and
accounting support, and property management to HDA. Management fees,
effective December 15, 1993, are $250,000 per annum payable monthly in equal
installments, with annual CPI adjustments after 1993.
14. INCOME TAXES:
Federal Income Taxes
The Company and HDA have been organized as partnerships, which are not
taxable entities for federal income tax purposes and incur no federal income
tax liability. Instead, each partner is required to take into account in
computing its income tax liability such partner's allocable share of the
Company's and HDA's income. VJC and ECCC are corporations subject to federal
income tax on their taxable income and a current provision for ECCC income
taxes of $2,514 and $333 has been provided for the three months ended March
31, 1996 and 1995, respectively.
<PAGE>25
Puerto Rico Income Taxes
HDA, a partnership organized under the laws of the Commonwealth of Puerto
Rico, received a ruling from the Puerto Rico Treasury Department approving its
special partnership status effective January 1, 1993. As a special
partnership, HDA is not a taxable entity in Puerto Rico. Instead, HDA's
partners are taxed on their distributive share of HDA's taxable income. As a
result of its investment in HDA, the Company is subject to Puerto Rico income
tax as a foreign corporation. As such, it pays Puerto Rico income tax on its
Puerto Rico source income, which is its distributable share of HDA's net
taxable income. Residents of the United States who are unitholders in the
Company are generally entitled to a federal tax credit for their prorata share
of Puerto Rico income taxes paid by the Company. Under the Puerto Rico
Internal Revenue Code of 1994, effective for taxable years commencing after
June 30, 1995, (i) the Company is not considered to be engaged in a Puerto
Rico trade or business solely by reason of being a partner in HDA, (ii) the
Company's distributive share of HDA's taxable income is taxed at a 29% tax
rate and, (iii) distributions by the Company to residents of the United States
are not subject to income and withholding taxes. A current provision for
income taxes of $15,695 and $38,860 for the three months ended March 31, 1996
and 1995, respectively, has been provided in the accompanying consolidated
financial statements as a result of the Company's tax liability for its
distributable share of HDA's net taxable income. The deferred income tax
provision for the three months ended March 31, 1996 and 1995 includes $188,099
and $21,421, respectively, related to the difference between the tax basis of
the Company's investment in HDA and the amount reported in the financial
statements.
S&E is a corporation organized under the laws of the Commonwealth of
Puerto Rico and is subject to Puerto Rico income tax. Since S&E has
accumulated net operating losses, no provision for Puerto Rico income tax has
been recorded.
Dominican Republic Income Tax
Galapagos is a Dominican Republic corporation subject to income taxes on
taxable income generated in the Dominican Republic. Since Galapagos has
accumulated net operating losses, no provision for Dominican Republic income
tax has been recorded. However, HDA is subject to withholding taxes in
Dominican Republic upon interest from Galapagos on its stockholder loans,
which loans and interest are eliminated in the accompanying consolidated
financial statements. The deferred income tax provision for the three months
ended March 31, 1996 includes $24,643 in relation to these taxes which will be
payable when interest is collected.
Net Operating Losses
S&E and Galapagos have adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes". This standard required S&E and Galapagos to
recognize deferred income tax benefits for losses carryforwards and the tax
benefits recognized must be reduced by a valuation allowance in certain
circumstances. S&E and Galapagos have established a valuation allowance for
<PAGE>26
the total amount of tax benefits related to the net operating loss
carryforwards available to offset future taxable income.
15. RELATED PARTY TRANSACTIONS:
During the three months ended March 31, 1996 and 1995, the Company
received services from IGC and incurred $50,000 in each period pursuant to the
IGC Support Agreement and incurred costs of $10,800 and $38,000, respectively,
for directors' meeting fees and expenses of EMC. During the period from March
8 to December 31, 1995, HDA paid $5,500 to reimburse HDA's managing partners
for directors' meeting fees and expenses and incurred in fees of $17,583 to
IGP pursuant to the IGP Management Agreement. During the three months ended
March 31, 1996, management fees to IGP were $67,611.
As discussed in Note 1, the Company agreed to make available to IGC for
no consideration up to 50,000 additional Units for distribution by IGC to a
limited number of employees upon the exercise of certain options and
appreciation rights.
16. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107 requires disclosure of the fair value of certain financial
instruments, including cash, evidence of ownership interests in other entities
and contracts that impose either and obligation to deliver a financial
instrument or cash such as loans or notes payable, or a right to receive a
financial instrument or cash such as loans or notes receivable. The estimated
fair values of the Company's financial instruments are as follows:
March 31, 1996 December 31, 1995
------------------------ ------------------------
Carrying Carrying
Fair Value Value Fair Value Value
----------- ----------- ----------- ----------
Cash and cash equivalents $ 3,611,853 $ 3,611,853 $ 814,292 $ 814,292
Receivables from ECOC-
Note and accrued interest 954,500 1,034,500 940,000 1,020,164
First Mortgage Notes 62,900,000 66,279,448 58,000,000 66,239,879
Payable to stockholders 1,636,766 1,636,766 1,597,916 1,597,916
Notes payable 1,837,858 1,837,858 2,439,410 2,439,410
Obligations under TV
Purchase Agreements 464,764 464,764 474,661 474,661
The carrying value of cash and cash equivalents approximates fair value
because of the liquid nature of these assets. The note receivable from ECOC
bears interest at a rate lower than prime rate and accordingly, was discounted
based on the expected collection date assuming a rate of 10.5%. The fair
value of the First Mortgage Notes was based on the quoted market prices for
this investment, as reported by the brokerage firms handling the trading. The
carrying value of the payables to stockholders, notes payable and obligations
under TV Purchase Agreements approximates fair value because these obligations
bear interest at market.
<PAGE>27
17. UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS):
The Company acquired a 67% interest in profits of HDA in August 1994 and
increased its interest in profits to 82% on March 8, 1995. The following
unaudited proforma consolidated statement of income for the three months ended
March 31, 1995 is based upon the historical consolidated statement of the
Company and VJC, and HDA and subsidiaries, and were prepared as if the
acquisition by the Company of its 82% interest in HDA's profits, the
elimination of certain approval rights of HDAMC, the Distribution, and the
issuance of 1,205,245 Units to HDAMC had all occurred on January 1, 1995. The
unaudited proforma consolidated statement is not necessarily indicative of
what the actual results of operations of the Company would have been assuming
such transactions had been completed as of January 1, 1995, and does not
purport to represent the results of operations for future periods. In
Management's opinion, all adjustments necessary to reflect the effects of
these transactions have been made.
<PAGE>28
17. UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS) (continued):
FOR THE THREE MONTHS ENDED MARCH 31,
(In thousands except per unit amounts)
(Unaudited)
1996 1995
---------- ----------
Historical Proforma
REVENUES:
Rental income from El Comandante $ 3,802 $ 3,861
Dominican Republic racing-
Commissions on wagering 1,307 72
Other revenues 196 15
Television Stations 500 227
Interest income 29 32
---------- ----------
Total revenues 5,834 4,207
---------- ----------
EXPENSES:
Financial 2,302 2,193
Depreciation 625 456
General and administrative 407 226
Management fees 118 116
Operating costs of Dominican Republic racing 1,750 196
Operating costs of Television Stations 515 563
Distribution of Units of the Company - 131
---------- ----------
Total expenses 5,717 3,881
---------- ----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 117 326
PROVISION FOR INCOME TAXES 231 255
MINORITY INTERESTS (100) (74)
---------- ----------
NET INCOME (LOSS) $ (14) $ 145
========== ==========
ALLOCATION OF NET INCOME (LOSS):
General Partners $ - $ 1
Limited Partners (14) 144
---------- ----------
$ (14) $ 145
========== ==========
NET INCOME (LOSS) PER UNIT $ - $ 0.02
========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING 6,334 6,334
========== ==========
<PAGE>29
HOUSING DEVELOPMENT ASSOCIATES S.E.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
1996 1995
---------- ----------
REVENUES:
Rental income from El Comandante Race Track $3,801,669 $3,861,073
Dominican Republic racing-
Commissions on wagering 1,307,138 72,247
Other revenues 196,214 14,923
Television Stations 500,243 226,877
Interest income 28,317 32,100
---------- ----------
Total revenues 5,833,581 4,207,220
---------- ----------
EXPENSES:
Financial 2,285,617 2,191,310
Depreciation 573,071 404,217
General and administrative 204,508 79,400
Management fees 67,611 65,937
Operating costs of Dominican Republic racing 1,749,674 195,623
Operating costs of Television Stations 515,224 562,806
Distribution of units of Equus Gaming Company L.P. - 131,189
---------- ----------
Total expenses 5,395,705 3,630,482
---------- ----------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 437,876 576,738
PROVISION FOR INCOME TAXES:
Current 2,514 1,230
Deferred 24,643 -
---------- ----------
INCOME BEFORE MINORITY INTEREST 410,719 575,508
MINORITY INTEREST (211,858) (73,702)
---------- ----------
NET INCOME $ 622,577 $ 649,210
========== ==========
The accompanying notes are an integral part
of these consolidated statements.
<PAGE>30 HOUSING DEVELOPMENT ASSOCIATES S.E.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
CASH AND CASH EQUIVALENTS $ 3,581,021 $ 758,345
----------- ------------
ASSETS RELATED TO RACE TRACKS:
Property and equipment-
Land 6,393,858 6,393,858
Building and improvements 43,206,090 43,190,723
Equipment 2,432,247 2,388,652
----------- ------------
52,032,195 51,973,233
Less accumulated depreciation (10,083,467) (9,564,389)
----------- ------------
41,948,728 42,408,844
Receivables from El Comandante Operating
Company, Inc. ("ECOC") 1,798,981 1,816,310
Deferred costs-
Financing 4,298,077 4,381,118
Organizational and other 412,708 424,227
Other 626,823 580,288
----------- ------------
49,085,317 49,610,787
----------- ------------
ASSETS RELATED TO TELEVISION STATIONS:
TV Licenses 1,061,290 1,061,290
Property and equipment 2,379,851 2,413,983
----------- -----------
3,441,141 3,475,273
Less accumulated depreciation (209,517) (137,620)
----------- -----------
3,231,624 3,337,653
Deferred costs 1,519,613 1,158,668
Other 546,753 365,765
----------- ------------
5,297,990 4,862,086
----------- ------------
$57,964,328 $55,231,218
=========== ============
<PAGE>31 HOUSING DEVELOPMENT ASSOCIATES S.E.
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND PARTNERS' DEFICIT
March 31, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
LIABILITIES RELATED TO RACE TRACKS:
First Mortgage Notes-
Principal, net of bond discount of
$1,720,552 and $1,760,161, respectively $66,279,448 $66,239,879
Accrued interest 2,330,417 332,918
Payable to minority stockholders, net of
minority interest in Galapagos of
$993,560 and $781,700, respectively 643,208 816,216
Notes payable 494,753 523,562
Accounts payable and accrued liabilities 1,429,989 1,117,705
----------- ------------
71,177,815 69,030,280
----------- ------------
LIABILITIES RELATED TO TELEVISION STATIONS:
Note payable 1,343,105 1,365,848
Obligations under TV Purchase Agreements 464,764 474,661
Accounts payable and accrued liabilities 510,230 464,414
----------- ------------
2,318,099 2,304,923
----------- ------------
PARTNERS' DEFICIT:
Capital contributions 1,913,800 1,913,800
Accumulated earnings 975,681 353,104
Cumulative foreign currency translation
adjustments (77,499) (93,321)
Distributions to partners (18,343,568) (18,277,568)
----------- ------------
(15,531,586) (16,103,985)
----------- ------------
$57,964,328 $55,231,218
=========== ============
The accompanying notes are an integral part
of these consolidated balance sheets.
<PAGE>32 HOUSING DEVELOPMENT ASSOCIATES S.E.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(In thousands)
Cummulative
Accumu- Foreign Distri-
Capital lated Currency butions
Contribu- Earnings Translation to
tions (Deficit) Adjustments partners Total
--------- --------- ----------- --------- ---------
BALANCES,
December 31, 1995 $ 1,914 $ 353 $ (93) $ (18,278) $(16,104)
(audited)
Net income
for the
period - 623 - - 623
(unaudited)
Currency
translation
adjustments - - (50) - (50)
Effect of
currency
translation
on long-term
intercompany
transactions - - 66 - 66
Cash
distributions
to partners - - - (66) (66)
--------- --------- ----------- --------- ---------
BALANCES,
March 31, 1996 $ 1,914 $ 976 $ (77) $ (18,344) $(15,531)
(unaudited) ========= ========= =========== ========= =========
The accompanying notes are an integral part
of this consolidated statement.
<PAGE>33
HOUSING DEVELOPMENT ASSOCIATES S.E.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 622,577 $ 649,210
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation 573,071 404,217
Amortization 243,636 176,649
Deferred income tax provision 24,643 -
Currency translation adjustments 15,822 -
(Increase) decrease in assets-
Rent receivable from ECOC 31,665 -
Deferred costs 108,525 (265,900)
Other (241,859) (111,830)
Increase (decrease) in liabilities-
Accrued interest on First Mortgage Notes 1,997,500 1,997,500
Accrued interest on loans to minority
stockholders 38,850 5,967
Accounts payable and accrued liabilities 333,456 500,026
Minority interest (211,858) (73,702)
----------- -----------
Total adjustments 2,913,451 2,632,927
----------- -----------
Net cash provided by operating
activities 3,536,028 3,282,137
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (20,192) (2,321,463)
Sale of interest in subsidiary to minority
stockholders - 46,752
----------- -----------
Net cash used in investing activities (20,192) (2,274,711)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of obligations under TV
Purchase Agreements (9,897) (64,213)
Loans from minority stockholders - 900,000
Payments on loans from financial institutions (51,553) -
Increase in deferred costs (565,710) (154,203)
Cash distributions to partners (66,000) (200,000)
----------- -----------
Net cash (used in) provided by
financing activities (693,160) 481,584
----------- -----------
<PAGE>34 HOUSING DEVELOPMENT ASSOCIATES S.E.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(continued)
1996 1995
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,822,676 1,489,010
CASH AND CASH EQUIVALENTS, beginning of year 758,345 2,455,154
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,581,021 $ 3,944,164
=========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 65,399 $ 15,533
Income taxes paid 6,441 -
The accompanying notes are an integral part
of these consolidated statements.
<PAGE>35 HOUSING DEVELOPMENT ASSOCIATES S.E.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
On February 14, 1989, Housing Development Associates S.E. ("HDA") was
formed as a Puerto Rico partnership to acquire the El Comandante Race Track
("El Comandante"), the only licensed thoroughbred racing facility in Puerto
Rico offering pari-mutuel wagering. In 1993 it organized El Comandante
Capital Corp. ("ECCC") as a wholly-owned subsidiary to facilitate a private
offering of securities. In 1994 it organized Galapagos, S.A. ("Galapagos")
to lease and operate a race track in the Dominican Republic and now holds a
55% interest in Galapagos. HDA also organized S & E Network Inc. ("S&E") in
1994 as a wholly-owned subsidiary to acquire television licenses and assets of
three dormant television stations in Puerto Rico. In February 1996, HDA and
S&E entered into an agreement to sell to Paxson Communications of San Juan,
Inc. ("Paxson") a 50% interest in S&E, subject to receiving approval of the
Federal Communications Commission ("FCC").
The accompanying consolidated financial statements include the accounts
of HDA, ECCC, S&E and Galapagos, after eliminating all intercompany
transactions. The partners' deficit reflected in the accompanying
consolidated financial statements is not segregated by class because all
classes of partners are equal.
Interim Financial Statements
The consolidated financial statements as of March 31, 1996 and for the
three month periods ended March 31, 1996 and 1995 are unaudited but include
all adjustments (consisting of normal recurring adjustments) which management
considers necessary for a fair presentation of the results of operations of
the interim periods. The operating results for the three months ended March
31, 1996 are not necessarily indicative of the results that may be expected
for the year.
2. GENERAL:
Acquisition of El Comandante
On December 14, 1989, HDA and Land Development Associates S.E. ("LDA"),
then an affiliate, purchased substantially all of the Puerto Rico assets of
San Juan Racing Association, Inc. for approximately $68 million, including
acquisition costs of approximately $900,000. The purchase was financed by a
$42 million loan to HDA (the "El Comandante Loan") and an $8 million loan to
LDA (the "Land Loan") from The Chase Manhattan Bank N.A. ("Chase"). The
additional funds required for the acquisition were provided as loans by the
original partners of HDA. The El Comandante Loan and the partners' loans were
paid in December 1993 from proceeds of the Private Offering described below.
<PAGE>36
El Comandante consists of approximately 257 acres of land and the
buildings, structures and ancillary facilities situated thereon in Canovanas,
Puerto Rico. The total purchase price was assigned to the tangible assets
acquired by HDA and LDA based on their relative fair market values. The
purchase price apportioned to the assets acquired by HDA was approximately
$48 million.
El Comandante Lease and the Operating License
HDA leases El Comandante to El Comandante Operating Company ("ECOC")
under a lease agreement (the "El Comandante Lease") for a term of 15 years
ending December 14, 2004 (see Note 7). ECOC was reorganized on August 1, 1994
as a Puerto Rico nonstock corporation named El Comandante Operating Company,
Inc. (also referred to as "ECOC" or "New ECOC"). ECOC operates El Comandante
and pays rent to HDA based upon 25% of ECOC's share of wagering revenues.
On December 15, 1989, the Puerto Rico Racing Board (the "Racing Board")
granted a license to ECOC to operate El Comandante, which will expire on
December 14, 2004 (the "Operating License"). The Operating License provides
ECOC with: (1) the exclusive right to operate a race track in the area of
Puerto Rico known as the San Juan Region, which approximates the northern half
of Puerto Rico, as delineated in maps produced by the Puerto Rico Planning
Board and Government Development Administration; (2) the exclusive right to
conduct all types of authorized betting, both at El Comandante and off-track,
anywhere in Puerto Rico, based on races held at El Comandante; and (3) the
right to hold a minimum of 180 day or night race days per year. The Operating
License requires payment by ECOC of an annual license fee, currently $250,000.
Reorganization of ECOC
Prior to August 1, 1994, HDA owned 60% of the outstanding common stock of
ECOC but only held 48% of the voting rights, with the remaining ownership
interest and voting rights held by Supra & Company S.E. ("Supra"), a partner
in HDA. On December 13, 1993, ECOC entered into a series of agreements
("Reorganization Agreements") with Supra and its majority owner incident to a
planned reorganization of ECOC as a Puerto Rico nonstock corporation (the
"ECOC Reorganization"), providing for the purchase by ECOC of outstanding
common stock of ECOC owned by Supra for $1 million and the payment by ECOC to
Supra and its majority owner of amounts under certain agreements for
noncompetition ($750,000) and past services ($500,000).
Payment of these obligations is to be made quarterly from Excess Cash
Flow of ECOC, as defined in the Reorganization Agreements. No payments have
been made as of March 31, 1996. Pursuant to the Reorganization Agreements,
until these obligations are paid in full HDA and ECOC may not amend the El
Comandante Lease without Supra's consent. In the event of termination of the
El Comandante Lease, HDA will be required to assume up to $1.9 million of
ECOC's obligation under the Reorganization Agreements.
Following the approval of the Racing Board, the ECOC Reorganization was
completed on August 1, 1994, as follows: (i) ECOC assigned the rights under
<PAGE>37
the Reorganization Agreements to New ECOC, which assumed the obligations to
Supra and Supra's majority owner and became a 40% owner of ECOC, (ii) HDA
contributed its 60% interest in ECOC to ECOC's capital and consequently, New
ECOC became the 100% owner of ECOC, and (iii) ECOC merged into New ECOC, which
continues the same business conducted by ECOC and assumed all the
responsibilities under the El Comandante Lease and the Operating License,
subject to the primary obligation of HDA to ensure compliance with all terms
and provisions of the Operating License and applicable regulations and orders
of the Racing Board.
ECCC, HDA Management Corporation and Private Offering
ECCC was organized solely to raise funds through the issuance and sale of
its debt securities for the benefit of HDA. On December 15, 1993, ECCC and
HDA, together with HDA Management Corporation ("HDAMC"), completed the sale
(the "Private Offering") of 68,000 units, each unit consisting of $1,000
principal amount of ECCC's 11-3/4% First Mortgage Notes due 2003, payment of
which is unconditionally guaranteed by HDA (the "First Mortgage Notes") and a
warrant to purchase one share of Class A Common Stock of HDAMC (the
"Warrants"). ECCC loaned the entire proceeds from the sale of the First
Mortgage Notes to HDA and HDAMC contributed the proceeds from the sale of the
Warrants to HDA in exchange for the right to receive a 15% interest in HDA,
subject to the approval of the Racing Board. The approval was granted on July
21, 1994 and HDAMC was admitted as a partner in HDA with a 15% partnership
interest. In March 1995 HDAMC transferred its 15% interest in the profits of
HDA to Equus Gaming Company L.P. (the "Company") in exchange for partnership
units of the Company.
Receivable from LDA
HDA made loans to LDA from 1990 thru 1993, while HDA was an obligor on
the Land Loan, to pay interest and principal on the Land Loan and certain
operating costs of LDA. HDA made additional loans to LDA of $8,388,000 from
proceeds of the Private Offering. On August 2, 1994, HDA distributed notes to
its partners equal to its receivable from LDA (the "LDA Receivable") of
approximately $13.3 million ($11.9 million principal plus $1.4 million in
accrued interest).
S & E Network Inc., the Television Stations and Agreements with Paxson
On November 17, 1994 S&E acquired the assets and broadcast licenses (the
"TV Licenses") of three dormant UHF television stations in Puerto Rico (the
"Television Stations") under certain agreements (the "TV Purchase Agreements")
that required total payments and assumption of certain rescheduled debts of
approximately $2 million, a portion of which were non-interest bearing
obligations. Based on a 12% discount rate, the present value of the total
purchase price obligation under the TV Purchase Agreements was $1,736,000.
This amount and acquisition costs totalling approximately $202,000 were
assigned to the tangible and intangible assets acquired by S&E based on their
estimated relative fair market values.
<PAGE>38
S&E commenced broadcasting six hours a day in January 1995 on a test
basis and increased the testing to eighteen hours a day in April 1995. It
officially launched the television network under the trade name TELENET on
June 26, 1995.
In February 1996, S&E, HDA and Paxson entered into a Stock Purchase
Agreement by which Paxson has agreed to purchase a 50% interest in S&E for $4
million, subject to FCC approval which is expected to be received by June 30,
1996 (the "Closing"). Until FCC approval is received, Paxson is to provide
programming (mainly infomercials) and certain other services to S&E under a
Time Brokerage Agreement and is entitled to 50% of operating cash flow until
the Closing. Following the Closing, Paxson has agreed to assume
responsibility for managing the Television Stations. The agreements with
Paxson require HDA to fund, prior to Closing, approximately $1 million of
costs, which include transaction costs, additional capital expenditures,
employee severance costs and payment of certain S&E liabilities. At Closing,
S&E will distribute to HDA the $4 million from Paxson and HDA will assume
approximately $1.7 million of S&E debt, payable in monthly installments over
six years. If S&E incurs cash operating losses after January 31, 1996, Paxson
has agreed to provide working capital loans to fund those losses.
Galapagos, S.A. and V Centenario Race Track
In September 1994, HDA formed Galapagos, a Dominican Republic
corporation, initially with a 94% ownership interest. Galapagos was selected
by the Dominican Republic Racing Commission to operate and manage the V
Centenario Race Track ("V Centenario"), a new government owned horse race
track in Santo Domingo, Dominican Republic.
In February 1995, HDA acquired from the minority investors their 6%
ownership interest and sold a 45% interest in Galapagos to residents of the
Dominican Republic ("Minority Stockholders"). These transfers of ownership
interest were made at cost and, accordingly, no gain or loss was recognized by
HDA.
Galapagos began simulcasting El Comandante races on February 27, 1995
through independently-owned sports betting agencies in the Dominican Republic.
Racing operations at V Centenario commenced on April 29, 1995.
3. SUMMARY OF ACCOUNTING POLICIES:
Principles of Consolidation
HDA consolidates in its financial statements the accounts of entities in
which it has a controlling interest in excess of 50%.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
<PAGE>39
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
New Pronouncements
In 1995, HDA implemented Statement of Financial Accounting Standards
("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments",
which requires disclosure of the fair value of certain financial instruments
(see Note 13).
In 1996, HDA implemented SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 121
establishes standards for identifying impairment for long-lived assets and
certain identifiable intangibles to be held and used by an entity. Generaly,
if the sum of the expected future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the asset, an impairment
loss is assumed to have occurred. An adjustment to reflect this impairment
would be recorded to the extent that an asset's market value was less than its
carrying value. As of March 31, 1996 no adjustment has been recorded under
SFAS No. 121.
Rental Income from El Comandante Race Track
Rental income represents rent earned under the El Comandante Lease (see
Note 7). Basic Rent, as defined in Note 7, is recognized when wagering
commissions are earned by ECOC. Fixed Rent, as defined in Note 7, was
recognized in 1995 in equal monthly installments.
Revenues from Dominican Republic Racing
Commissions on wagering represent income earned by Galapagos on El
Comandante races simulcasted into the Dominican Republic and on races held at
V Centenario (see Note 8). Other revenues include income earned on the Jockey
Club and food services operations and from foreign currency exchange
transactions.
Revenues from Television Stations
Revenues from Television Stations primarily represent (i) income from
contracts for the production and broadcasting of television programs which is
recognized when the program has been completed and delivered, and (ii)
advertising income from sale of air time, recognized at the time of broadcast.
Revenues from Television Stations for the three months ended March 31, 1996
and 1995, include $170,000 and $168,000, respectively, earned from a contract
with ECOC (see Note 9).
Distribution of the Company's Units
HDA incurred legal, accounting and other costs in connection with the
<PAGE>40
distribution in 1995 of limited partnership units of the Company to
unitholders of the Company's general partner. HDA benefitted directly and
indirectly from this transaction. Specifically, HDA was relieved of its
obligation to fund the costs of registration of the Warrants for resale, and
the associated costs of maintaining HDAMC as a public reporting company.
Also, assuming the Company's market capitalization exceeds $20 million in
December 1998, warrantholders will not be entitled to require HDA to redeem
unexercised Warrants. The Company also serves as a vehicle for trading
indirect equity interests in HDA, while permitting HDA to maintain its status
as a nontaxable special partnership under Puerto Rico law and to avoid
regulatory approvals that would otherwise be required under the Puerto Rico
Horse Racing Act. The increased visibility of a public company directly
promotes El Comandante which, in turn, benefits HDA. Finally, public
financial reporting by the Company should facilitate any future financing that
may be needed by HDA.
Cash Equivalents
HDA considers as cash equivalents certificates of deposit with an
issuance to maturity term of six months or less. Management intends to hold
these certificates until maturity.
Property and Equipment of the Race Tracks
Land, buildings and improvements, and equipment are stated at cost.
Composite depreciation is calculated for the property related to El
Comandante, using the straight-line method, over the estimated useful lives of
the building and equipment; five to seven years for machinery and equipment,
35 years for buildings and 10 to 15 years for land improvements. Under the
composite depreciation method, any gain or loss of property retired or sold is
charged against accumulated depreciation, unless the amount involved is
material. Depreciation, using the straight-line method, commenced May 1, 1995
for the property and equipment related to V Centenario where racing commenced
on April 29, 1995.
TV Licenses and Property and Equipment of the Television Stations
The TV Licenses and land and equipment used in the operation of the
Television Stations are stated at cost. Composite depreciation is calculated
for the property and equipment acquired under the TV Purchase Agreements,
using the straight-line method over the estimated useful lives of the
equipment, ranging from 5 to 10 years. The TV Licenses are amortized using
the straight-line method over a period of 20 years. Depreciation and
amortization commenced July 1, 1995.
Deferred Costs
Deferred financing costs are being amortized over the life of the First
Mortgage Notes using the interest method for a period of 10 years ending
December 15, 2003. Organizational and other costs related to El Comandante
are being amortized using the straight-line method over a period of 5 to 15
years that commenced on December 15, 1989. Organizational and other costs
<PAGE>41
related to V Centenario are being amortized using the straight-line method
over a period of five years ending May 1, 2000.
Deferred costs related to Television Stations include a noncompetition
agreement entered into in connection with the acquisition of the Television
Stations and certain organizational, start-up and other costs which are
amortized,using the straight-line method, over a period of 3 to 10 years that
commenced July 1, 1995.
Deferred costs also includes broadcast contract rights which are recorded
when the license period begins and all of the following conditions have been
met: (a) the cost of each program is known or reasonably determinable, (b) the
program material has been accepted by the broadcaster in accordance with the
conditions of the license agreement, and (c) the program is available for its
first showing or telecast. Contractual agreements define the life of the
license, the number of showings available and the cost of each program.
Broadcast contract rights are amortized based on the estimated number of times
the program can be telecasted based on an accelerated amortization schedule at
rates declining over the number of telecasts. Commitments for broadcast
contract rights that have been executed, but which have not been recorded in
the accompanying consolidated financial statements because they do not meet
the criteria prescribed in accounting literature, amounted to approximately
$208,000 as of December 31, 1995. There was no similar amount as of March 31,
1996.
Upon the Closing of the sale to Paxson, S&E will write-off approximately
$830,000 of deferred costs and broadcast contract rights which will not have
any future benefit to S&E under Paxson's management of the Television
Stations.
Currencies
HDA consolidates its accounts with Galapagos whose functional currency is
Dominican Republic pesos ("RD$"), although the United States dollars ("US$")
are also a recording currency. US$ are exchanged into RD$ and vice versa
through commercial banks and/or the Central Bank of the Dominican Republic.
Galapagos remeasures its monetary assets and liabilities recorded in US$ into
RD$ using the exchange rate in effect at balance sheet date (the "current
rate") and all other assets and liabilities and capital accounts, at the
historical rates. Galapagos then translates its financial statements from RD$
into US$ using the current rate, for all assets and liabilities, and the
average exchange rate prevailing during the year for results of operations.
Net exchange gains or losses resulting from remeasurement of accounts,
together with gains or losses from foreign currency transactions are included
in other revenues from Dominican Republic racing. For the three months ended
March 31, 1996 and 1995, a net loss of $3,900 and a net gain of $14,900,
respectively, was recognized by Galapagos. Also, the following accumulated
net losses from changes in exchange rates are included in partners' deficit:
<PAGE>42
March 31, December 31,
1996 1995
------------ ------------
Translation of assets and
liabilities $ 77,224 $ 26,680
Unsettled intercompany transactions
of a long term nature 275 66,641
------------ ------------
$ 77,499 $ 93,321
============ ============
The exchange rate as of March 31, 1996 and December 31, 1995 was US$1.00
to RD$13.46 and the average exchange rate prevailing during the three months
ended March 31, 1996 was US$1.00 to RD$13.46.
4. RECEIVABLES FROM ECOC:
Receivables from ECOC at March 31, 1996 and December 31, 1995 consist of
(i) a note receivable of $1 million and accrued interest thereon of $34,500
and $20,164, respectively, and (ii) unpaid rent under the El Comandante Lease
of $764,481 and $796,146, respectively. The note receivable accrues interest
at 5.75%. The accrued interest at March 31, 1996 was collected in April 1996
and thereafter principal and interest is due in monthly installments of
$30,309 over a three year period commencing May 1, 1996.
5. LIABILITIES RELATED TO RACE TRACKS:
First Mortgage Notes
Pursuant to the Private Offering, ECCC issued First Mortgage Notes in the
aggregate principal amount of $68 million under an indenture dated
December 15, 1993 (the "Indenture") between ECCC, HDA and Banco Popular de
Puerto Rico, as trustee (the "Trustee"), and HDAMC issued Warrants to purchase
68,000 shares of Class A Common Stock of HDAMC. Upon issuance of the Warrants,
HDAMC and HDA recorded additional equity of $1,912,800, equal to the fair
value of the Warrants of $2,040,000, less offering costs of $127,200, and
recorded debt discount of $2,040,000. Such debt discount is being amortized
using the interest method over the term of the First Mortgage Notes. The
First Mortgage Notes mature on December 15, 2003 and bear interest at 11.75%
from December 15, 1993, payable semiannually, each January 15 and June 15.
Payment of the First Mortgage Notes is guaranteed by HDA and the First
Mortgage Notes are secured by a first mortgage on El Comandante and by certain
other security which together encompass a lien on (i) the fee interests of HDA
in the land and fixtures comprising El Comandante, (ii) all property rights of
HDA in and to all related equipment, structures, machinery and other property,
including intangible property, ancillary to the operations of El Comandante,
(iii) substantially all of the other assets and property of HDA and ECOC,
including the capital stock of ECCC owned by HDA and (iv) the Rent Escrow as
<PAGE>43
defined in Note 7.
ECCC is required to redeem First Mortgage Notes in the principal amount
of $6,800,000 on December 15, 2000, $10,200,000 on December 15, 2001 and 2002,
and the balance at maturity. ECCC and HDA may redeem First Mortgage Notes on
or after December 15, 1998 at the following redemption prices (expressed as
percentages of principal amount), if redeemed during the 12-month period
beginning December 15 of years 1998 at 104.125%, 1999 at 102.75%, 2000 at
101.5%, and 2001 and thereafter at 100% of principal amount, in each case
together with accrued and unpaid interest. Any such redemptions would offset
the mandatory redemptions due December 15, 2000, 2001 and 2002.
ECCC also may redeem up to one-third of the principal amount of the First
Mortgage Notes from net proceeds of an equity offering by HDA at any time on
or before December 15, 1996 at a redemption price of 110% of the principal
amount. ECCC is required to offer to purchase First Mortgage Notes, at face
value, to the extent that HDA has accumulated excess cash flow, asset sales
with net proceeds in excess of $5 million, or a total taking or casualty, or
in the event of a change of control of HDA.
The Indenture contains certain covenants, one of which restricts the
amount of distributions to HDA's partners. Permitted distributions include
amounts intended to be sufficient to provide funds for HDA's partners to pay
income tax on their allocable share of HDA's taxable income ("Tax
Distributions"). Tax Distributions are equal to the higher of (i) 8.4% plus
the higher of the then applicable United States personal or corporate income
tax rate or (ii) the higher of the then applicable Puerto Rico personal or
corporate income tax rate, multiplied by HDA's consolidated net income. HDA
is permitted to make additional cash distributions to partners and other
Restricted Payments, as defined under the Indenture, equal to 44.25% of the
excess of HDA's cumulative consolidated net income after December 31, 1993
over the cumulative amount of the Tax Distributions, provided that HDA meets
certain minimum debt coverage ratios. HDA does not yet meet the debt coverage
ratios.
Payable to Minority Stockholders
A founders' agreement between HDA and the Minority Stockholders of
Galapagos ("Founders' Agreement") gives HDA the right to make calls for
stockholder loans, up to a maximum of $3,516,000, to be provided in
accordance with ownership interests. As of March 31, 1996 and December 31,
1995, HDA has made loans of $1,842,500, which are eliminated in the
accompanying consolidated financial statements, and the Minority Stockholders
have made loans of $1,507,750. These loans bear interest at a rate equal to
2% over prime rate. At March 31, 1996 and December 31, 1995, the interest
rate was 10.25% and 10.5%, respectively. Principal and accrued interest on
the loans will be paid from available cash flow as determined by the President
of Galapagos in his sole discretion.
As of March 31, 1996 and December 31, 1995, the Minority Stockholders'
share of Galapagos' accumulated losses exceeded their investment in common
stock by $993,560 and $781,700, respectively, which amounts were netted
<PAGE>44
against the payable to Minority Stockholders in the accompanying consolidated
balance sheets.
Notes Payable
Galapagos has obtained a $1.1 million line of credit from a financial
institution for the acquisition of wagering equipment for off-track betting
agencies in the Dominican Republic. During 1995 Galapagos borrowed $549,500
under the line of credit, payable in monthly installments of $11,525 and
$2,612, including interest at 10.75%, for a period of 4 years ending July 1999
and December 1999, respectively. The loans are collateralized by wagering
equipment and guaranteed by HDA.
6. LIABILITIES RELATED TO TELEVISION STATIONS:
Note Payable
On September 22, 1995, S&E obtained a $1.4 million loan, which is payable
in monthly installments of $23,788, including interest at 10.75%, for a period
of 7 years. The loan is collaterized by equipment of the Television Stations
and is guaranteed by HDA.
Obligations under TV Purchase Agreements
The unpaid balances of the obligations under TV Purchase Agreements are
as follows:
March 31, December 31,
1996 1995
------------ ------------
Non-interest bearing amount payable in
monthly installments of $9,357
thru October 2001 $ 644,381 $ 673,704
Less accreted interest portion of
monthly installments (179,617) (199,043)
------------ ------------
Present value of monthly installments $ 464,764 $ 474,661
============ ============
HDA has agreed to assume the note payable and the obligations under TV
Purchase Agreements upon the closing of the sale of a 50% interest in S&E to
Paxson.
7. LEASE OF EL COMANDANTE:
El Comandante is operated by ECOC pursuant to the Operating License, a
15-year exclusive franchise ending December 2004 covering the San Juan Region
of Puerto Rico, which approximates the northern half of Puerto Rico, as
delineated in maps produced by the Puerto Rico Planning Board and Government
<PAGE>45
Development Administration (see Note 2).
HDA has leased El Comandante to ECOC for a term ending December 14, 2004.
The El Comandante Lease provides for payment of rent ("Basic Rent")
consisting of 25% of the annual El Comandante commissions earned by ECOC
("ECOC Commissions") but in no event less than $7,500,000 ("Minimum Basic
Rent") adjusted annually with a base year of 1989 by the percentage increase
in the Consumer Price Index ("CPI") for the calendar year over the CPI for the
previous calendar year. ECOC Commissions are ECOC's share of all monies
wagered with respect to horse racing occurring at El Comandante, whether
wagered at El Comandante or at other betting facilities in Puerto Rico or any
other country. The El Comandante Lease also obligated ECOC to pay additional
annual fixed rent ("Fixed Rent") of $150,000 in 1994 and $400,000 in 1995. An
amendment to El Comandante Lease eliminated Fixed Rent effective January 1,
1996.
The El Comandante Lease also requires ECOC to establish and fund with
certain excess cash flow a rent escrow (the "Rent Escrow") until the Rent
Escrow equals one half of the Minimum Basic Rent for that year. For purposes
of determining the required deposits to the Rent Escrow, excess cash flow
means, after ECOC has a cash balance of $700,000 for working capital
(excluding restricted cash and payables to winning bettors), all cash flow of
ECOC in excess of $300,000 per year, provided that the $300,000 threshold
shall be increased by $100,000 for each $1 million by which the Rent Escrow
exceeds $3 million. Funds held in the Rent Escrow may be released to make up
any difference between rent payments made by ECOC and the rent due and payable
under the El Comandante Lease. After deposits into the Rent Escrow, payments
of Fixed Rent and donations in accordance with New ECOC's certificate of
incorporation aggregating $3 million have been made, additional deposits to
the Rent Escrow are subordinated to the obligations to Supra, Supra's majority
owner and Interstate General Properties Limited Partnership S.E. ("IGP"), one
of the managing partners of HDA. As of March 31, 1996, no deposits have been
made into the Rent Escrow.
The El Comandante Lease provides for ECOC to pay all El Comandante
expenses except that, effective January 1, 1996, the amendment to the El
Comandante Lease requires HDA to pay real property taxes on El Comandante.
The El Comandante Lease also contains certain covenants of ECOC including
maintenance obligations; financial reporting requirements; insurance
requirements; compliance with laws; limitations on indebtedness; limitations
on liens; limitations on other activities; limitations on affiliate
transactions; acceptance of IGP consulting services; and acceptance of
amendments necessary to maintain HDA's tax status. ECOC granted a security
interest in substantially all of its assets (excluding cash, but including the
Rent Escrow) to HDA to secure ECOC's obligations under the El Comandante
Lease, which security interest was then assigned to the Trustee as additional
security for HDA's obligations under the First Mortgage Notes. If the El
Comandante Lease is terminated prior to December 2004, ECOC will assign the
Operating License to HDA to the extent permitted by law and sell at book value
its equipment to HDA. Also, HDA will be required to assume up to $1.9 million
of ECOC's obligations under the Reorganization Agreements.
<PAGE>46
The El Comandante Lease provides for renegotiation of the Basic Rent,
Fixed Rent and the Rent Escrow provisions with the results of such
renegotiations to be effective on January 1, 1998.
8. DOMINICAN REPUBLIC RACING:
On September 28, 1994, Galapagos entered into an agreement with the
Dominican Republic Government pursuant to which Galapagos leases and operates
V Centenario (the "V Centenario Lease") for an initial term of 10 years which
commenced April 1995. The V Centenario Lease also provides Galapagos with the
right to develop off-track betting in the Dominican Republic and the exclusive
right to simulcast horse races, including El Comandante races, into the
Dominican Republic. The V Centenario Lease may be renewed for additional ten
year periods by mutual agreement of the parties.
The V Centenario Lease provides for payments of rent to the Dominican
Republic Government based on a percentage of the annual wagering on races run
at V Centenario ("V Centenario Wagering"). Galapagos' rent is .25% of the
first RD$240 million (approximately US$18.5 million based on current official
exchange rates) of V Centenario Wagering during the year, .5% of the next
RD$240 million, .75% of the next RD$240 million and 1% of V Centenario
Wagering over RD$720 million (approximately US$55 million based on current
official exchange rates). Racing operations at V Centenario commenced on
April 29, 1995.
Galapagos has an agreement with Dominican Republic horseowners whereby
they receive 50% of Galapagos' commissions on V Centenario Wagering and 50% of
commissions earned by Galapagos on El Comandante's simulcasted races, after
deducting payments to ECOC for its commissions on simulcasted races.
Galapagos receives wagering services, software and equipment under a
service agreement for a ten year period ending March 15, 2005. Service fees
during 1995 are .65% (.0065) of total wagering and thereafter are the greater
of (a) .65% of total wagering or (b) $150,000 in 1996, $175,000 in 1997 and
thereafter $200,000 annually.
As required under the Founders' Agreement, ECOC provides executive
management services to Galapagos pursuant to a management agreement for the
term of the V Centenario Lease ("ECOC Management Agreement"). Fees to ECOC
under the ECOC Management Agreement are payable monthly and consist of 1% of
wagering on simulcasted races and on V Centenario Wagering, with a maximum
amount of $250,000 annually, adjusted by CPI commencing January 1996. During
the three months ended March 31, 1996 and 1995, Galapagos incurred in fees of
$66,800 and $2,290, respectively. Galapagos also reimburses ECOC for out-of-
pocket expenses related to Galapagos.
Assets and liabilities related to Dominican Republic racing amounted to
$3,089,000 and $3,357,000, respectively, as of March 31, 1996 and to
$3,125,000 and $2,985,000, respectively, as of December 31, 1995.
<PAGE>47
9. S&E AND THE TELEVISION STATIONS:
Pursuant to an agreement with ECOC which was effective January 1995, S&E
was producing and broadcasting a four-hour television program for all races
run at El Comandante for a maximum of 208 race days per year (the "Television
Contract"). The Television Contract was originally for ten years to December
2004, but was replaced by a new agreement effective February 1, 1996 (the "New
Contract"). The Television Contract required fixed monthly payments of
$56,000 to S&E. S&E was responsible for producing the broadcasts and was
entitled to revenues from sales of advertising time. ECOC agreed to construct
and pay up to $150,000 for certain improvements to provide facilities at El
Comandante for S&E's television studio, production and administration space at
no cost to S&E as long as S&E broadcasts the television program for ECOC.
The New Contract was negotiated in connection with the proposed sale of
50% interest in S&E to Paxson. Pursuant to the New Contract, ECOC purchases a
minimum of 910 hours of television time annually from S&E at $725 per hour
(minimum annual amount of $659,750), adjusted annually by CPI. If ECOC needs
television time after 7:00 PM, the cost per hour is $900, also subject to CPI
adjustments. ECOC is now responsible for producing and directing the
broadcasts and is entitled to the revenues from its sales of advertising time
during the broadcasts of the racing program. The term of the New Contract
expires January 31, 2000, but is renewable for successive one year terms at
ECOC's option.
ECOC provides certain administrative, maintenance, security and utility
services for which S&E pays $2,000 per month, adjusted annually by CPI.
10. MANAGEMENT AGREEMENT:
HDA does not have any employees. HDA's activities are managed by
Interstate General Properties Limited Partnership S.E. ("IGP") pursuant to a
management agreement for a term of 15 years ending December 31, 2004 (the "IGP
Management Agreement"). Under the IGP Management Agreement, IGP provides
management services, including office space, administrative and accounting
support, and property management to HDA. Management fees effective
December 15, 1993 are $250,000 per annum payable monthly in equal
installments, with annual CPI adjustment after 1993.
11. INCOME TAXES:
Puerto Rico Income Taxes
HDA, a partnership organized under the laws of the Commonwealth of Puerto
Rico, received a ruling from the Puerto Rico Treasury Department approving its
special partnership status effective January 1, 1993. As a special
partnership, HDA is not a taxable entity in Puerto Rico. Instead, HDA's
partners are taxed on their distributive share of HDA's taxable income.
<PAGE>48
S&E is a corporation organized under the laws of the Commonwealth of
Puerto Rico and is subject to Puerto Rico income tax. Since S&E has
accumulated net operating losses, no current provision for Puerto Rico income
tax has been recorded.
Federal Income Taxes
HDA is not a taxable entity and incurs no federal income tax liability.
Instead, each partner is required to take into account in computing his income
tax liability such partner's allocable share of HDA's taxable income whether
or not HDA makes a distribution of cash corresponding to such income. The
accompanying consolidated financial statements include a current provision for
income tax attributable to ECCC, a Delaware corporation subject to federal
income tax on its taxable income.
Dominican Republic Income Tax
Galapagos is a Dominican Republic corporation subject to income taxes on
taxable income generated in the Dominican Republic. Since Galapagos has
accumulated net operating losses, no current provision for Dominican Republic
income tax has been recorded. However, HDA is subject to withholding taxes in
Dominican Republic upon interest from Galapagos on its stockholder loans,
which loans and interest are eliminated in the accompanying consolidated
financial statements. The deferred income tax provision relates to these
taxes which will be payable when interest is collected.
Net Operating Losses
S&E and Galapagos have adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes". This standard required S&E and Galapagos to
recognize deferred income tax benefits for losses carryforwards and the tax
benefits recognized must be reduced by a valuation allowance in certain
circumstances. S&E and Galapagos have established a valuation allowance for
the total amount of tax benefits related to the net operating loss
carryforwards available to offset future taxable income.
12. RELATED PARTY TRANSACTIONS:
During the three months ended March 31, 1996 and 1995, HDA paid $5,500
(in 1995) to reimburse HDA's managing partners for directors' meeting fees and
incurred $67,611 and $65,937, respectively, in fees to IGP pursuant to the IGP
Management Agreement.
13. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107 requires disclosure of the fair value of certain financial
instruments, including cash, evidence of ownership interests in other entities
and contracts that impose either and obligation to deliver a financial
instrument or cash such as loans or notes payable, or a right to receive a
financial instrument or cash such as loans or notes receivable. The fair
<PAGE>49
values of HDA's financial instruments are as follows:
March 31, 1996 December 31, 1995
------------------------ ------------------------
Carrying Carrying
Fair Value Value Fair Value Value
----------- ----------- ----------- ----------
Cash and cash equivalents $ 3,581,021 $ 3,581,021 $ 758,345 $ 758,345
Receivables from ECOC-
Note and accrued interest 954,500 1,034,500 940,000 1,020,164
First Mortgage Notes 62,900,000 66,279,448 58,000,000 66,239,879
Payable to stockholders 1,636,766 1,636,766 1,597,916 1,597,916
Notes payable 1,837,858 1,837,858 1,889,410 1,889,410
Obligations under TV
Purchase Agreements 464,764 464,764 474,661 474,661
The carrying value of cash and cash equivalents approximates fair value
because of the liquid nature of these assets. The note receivable from ECOC
bears interest at a rate lower than prime rate and accordingly, was discounted
based on the expected collection date assuming a rate of 10.5%. The fair
value of the First Mortgage Notes was based on the quoted market prices for
this investment, as reported by the brokerage firms handling the trading. The
carrying value of the payables to stockholders, notes payable and obligations
under TV Purchase Agreements approximates fair value because these obligations
bear interest at market.
<PAGE>50 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF REVENUES AND EXPENSES
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
1996 1995
----------- -----------
REVENUES:
Commissions on wagering $15,206,667 $15,044,294
Other 681,172 650,168
----------- -----------
Total revenues 15,887,839 15,694,462
----------- -----------
EXPENSES:
Payments to horse owners and horse owners'
association 7,615,006 7,606,816
Track rent 3,801,669 3,861,074
Salaries, wages and employee benefits 1,743,915 1,719,657
Operating expenses 1,295,707 1,326,220
General and administrative 667,847 768,363
Marketing and satellite transmission costs 615,253 609,268
----------- -----------
Total expenses 15,739,397 15,891,398
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 148,442 (196,936)
PROVISION (CREDIT) FOR DEFERRED INCOME TAXES 26,955 (46,880)
----------- -----------
NET INCOME (LOSS) $ 121,487 $ (150,056)
=========== ===========
The accompanying notes are an integral
part of these statements.
<PAGE>51 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF NET ASSETS (LIABILITIES)
March 31, December 31,
1996 1995
----------- -----------
(Unaudited) (Audited)
ASSETS:
CURRENT ASSETS:
Cash, including restricted cash of
$1,761,237 and $903,562, respectively $ 3,032,179 $ 2,883,447
Accounts receivable, net 1,170,478 954,809
Prepayments and supplies inventory 581,890 291,717
Notes receivable 322,562 310,944
----------- -----------
Total current assets 5,107,109 4,440,917
----------- -----------
DEFERRED COSTS, net:
Organizational costs 34,270 36,355
Deferred tax asset 531,182 558,137
Telecommunication installation costs 242,890 257,829
Noncompetition agreement 333,333 395,833
----------- -----------
Total deferred costs 1,141,675 1,248,154
----------- -----------
FURNITURE AND EQUIPMENT, net 3,408,207 3,469,371
----------- -----------
Total assets $ 9,656,991 $ 9,158,442
----------- -----------
<PAGE>52 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF NET ASSETS (LIABILITIES)
(continued)
March 31, December 31,
1996 1995
----------- -----------
(Unaudited) (Audited)
LIABILITIES:
CURRENT LIABILITIES:
Current portion of capital lease
obligations $ 585,620 560,128
Accounts payable and accrued liabilities 3,015,892 2,911,948
Outstanding winning tickets and refunds 2,453,469 2,095,794
----------- -----------
Total current liabilities 6,054,981 5,567,870
----------- -----------
CAPITAL LEASE OBLIGATIONS 1,221,102 1,318,962
----------- -----------
PAYABLE TO HOUSING DEVELOPMENT
ASSOCIATES S.E.:
Rent 764,481 796,146
Note payable and accrued interest 1,034,500 1,020,164
----------- -----------
1,798,981 1,816,310
----------- -----------
OTHER LIABILITIES:
Notes 2,450,000 2,450,000
Accrued interest 130,042 124,902
----------- -----------
2,580,042 2,574,902
----------- -----------
Total liabilities 11,655,106 11,278,044
----------- -----------
NET ASSETS (LIABILITIES) $(1,998,115) $(2,119,602)
=========== ===========
The accompanying notes are an integral part
of these statements.
<PAGE>53 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENT OF CHANGES IN NET ASSETS (LIABILITIES)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
Amount
-------------
BALANCES, December 31, 1995 (audited) $ (2,119,602)
Net income for the period (unaudited) 121,487
-------------
BALANCES, March 31, 1996 (unaudited) $ (1,998,115)
=============
The accompanying notes are an integral part
of this statement.
<PAGE>54 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 148,442 $ (150,056)
----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities-
Depreciation and amortization 229,585 147,085
Deferred tax provision (credit) 26,955 (46,880)
Provision for bad debts 25,002 62,499
(Increase) decrease in current assets-
Accounts receivable (240,671) (32,927)
Prepayments and supplies inventory (290,173) (268,498)
Increase (decrease) in current liabilities-
Accounts payable and accrued liabilities 103,944 (435,430)
Outstanding winning tickets and refunds 357,675 (276,535)
Accrued interest 19,475 5,100
Rent payable (31,664) -
----------- -----------
Total adjustments 200,128 (845,586)
----------- -----------
Net cash provided by (used in)
operating activities 348,570 (995,642)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable (11,618) (71,547)
Capital expenditures (55,723) (151,449)
Payments of telecommunication installation
costs (61) (8,201)
----------- -----------
Net cash used in investing activities (67,402) (231,197)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations (105,481) (93,463)
Payments of organizational costs - (2,359)
----------- -----------
Net cash used in financing activities (105,481) (95,822)
----------- -----------
NET INCREASE (DECREASE) IN CASH 148,732 (1,322,661)
CASH, beginning of year 2,883,447 2,214,801
----------- -----------
CASH, end of period $ 3,032,179 $ 892,140
=========== ===========
<PAGE>55
EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(continued)
1996 1995
----------- ------------
SUPPLEMENTAL INFORMATION:
Interest paid $ 58,179 $ 55,583
NONCASH TRANSACTIONS:
Equipment acquired through capital leases $ 33,113 $ 48,140
The accompanying notes are an integral part
of these statements.
<PAGE>56 EL COMANDANTE OPERATING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
El Comandante Operating Company ("ECOC") was created under Delaware law
as a 60% owned subsidiary of Housing Development Associates S.E. ("HDA"), a
Puerto Rico partnership, to operate El Comandante Race Track ("El
Comandante"), the only thoroughbred race track and off-track betting operation
in Puerto Rico. El Comandante was acquired by HDA on December 14, 1989, and
ECOC leased El Comandante from HDA and started operations on that date.
On August 1, 1994, ECOC was reorganized by means of a merger into a
Puerto Rico nonstock corporation named El Comandante Operating Company, Inc.
(also referred to as "ECOC" or "New ECOC"), which became the surviving entity
(see Note 4). An equity section is not presented in the financial statements
since New ECOC is a non-stock corporation.
Interim Financial Statements
The consolidated financial statements as of March 31, 1996 and for the
three month periods ended March 31, 1996 and 1995 are unaudited but include
all adjustments (consisting of normal recurring adjustments) which management
considers necessary for a fair presentation of the results of operations of
the interim periods. The operating results for the three months ended March
31, 1996 are not necessarily indicative of the results that may be expected
for the year.
2. SUMMARY OF ACCOUNTING POLICIES:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
New Pronouncements
In 1995, ECOC implemented Statement of Financial Accounting Standards
("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments",
which requires disclosure of the fair value of certain financial instruments
(see Note 10).
<PAGE>57
Commissions on Wagering
ECOC earns commissions ("ECOC Commissions") on bets placed on El
Comandante's thoroughbred horse races through wagering facilities at El
Comandante and wagering facilities located at independently owned off-track
betting agencies throughout Puerto Rico, and from wagering on races
simulcasted outside Puerto Rico. ECOC offers bettors win and place, daily
double, exacta, quiniela and pool wagering. Commissions are based on
percentages of wagers established by law and vary for the different types of
wagers in Puerto Rico, as follows: 26% of daily double and pool wagers; 20%
of exacta and quiniela wagers; and 25% of losing wagers on win and place
wagers. ECOC Commissions on wagers in Puerto Rico during the three months
ended March 31, 1996 and 1995 averaged 21.1% and 19.6% , respectively.
Commissions on simulcasted races are negotiated with wagering facilities
outside Puerto Rico. ECOC Commissions on wagers on simulcasted races during
the three months ended March 31, 1996 and 1995 averaged 6.03% and 6.77%,
respectively.
Restricted Cash
Restricted cash represents accumulated cash in the "Pool Pote" that is
paid out when there is a sole pool winner and a bonus amount which is added to
the pool payout on prizes of predetermined race days. An amount is added to
the "Pool Pote" on every race day. The corresponding payables are recorded as
part of the liability for outstanding winning tickets and refunds.
Accounts Receivable
Accounts receivable include balances from pool agents and other
miscellaneous amounts. As of March 31, 1996 and December 31, 1995, reserves
for doubtful accounts amounted to $201,123 and $171,735, respectively.
Notes Receivable
Notes receivable consist of unsecured short term loans to horse owners,
with interest of 2% over prime rate and with various maturity dates. These
loans provide financing to horse owners to purchase horses as a means to
improve the quality of racing. ECOC has advised the Confederacion Hipica de
Puerto Rico (the "Confederacion"), a horse owners' association, that its
credit line to all members of the Confederacion, as a group, will not exceed
$500,000 and it will not extend credit in excess of $50,000 to any single
owner, nor lend more than 80% of the purchase price of any horse.
Organizational Costs
Legal fees and other costs incurred in the reorganization of ECOC into a
nonstock corporation were recorded as deferred costs and are amortized on a
straight-line basis over a period of five years that commenced on August 1,
1994. Amortization expense for the three months ended March 31, 1996 and 1995
was $2,085 in each period.
<PAGE>58
Telecommunication Installation Costs
These costs are related to the installation of telephone lines by Puerto
Rico Telephone Company ("PRTC") and to excise taxes on the off-track
telecommunication equipment. The costs are amortized on a straight-line basis
over the remaining life of an agreement with PRTC expiring on April 1, 1999.
Amortization expense for the three months ended March 31, 1996 and 1995 was
$15,000 in each period.
Noncompetition Agreement
These costs are related to a Noncompetition Agreement entered into with
the majority owner of Supra and former President of ECOC which prohibits him
from investing or participating in horse racing operations anywhere in the
Caribbean for a period of three years from August 1, 1994. The amount of
$750,000 payable under the agreement was recorded as a deferred cost and is
being amortized on a straight-line basis over the noncompete period.
Amortization expense for the three months ended March 31, 1996 and 1995 was
$62,500 in each period.
Furniture and Equipment
Furniture and equipment is stated at cost and depreciated on a
straight-line basis over their estimated useful lives, which range from 5 to
10 years. Major replacements and improvements are capitalized and depreciated
over their estimated useful lives.
Repairs and maintenance are charged to expense when incurred. As of
March 31, 1996 and December 31, 1995, furniture and equipment was as follows:
March 31, December 31,
1996 1995
---------- -----------
Furniture $ 341,823 $ 338,314
Equipment 4,072,549 3,987,222
Motor vehicles 726,138 726,138
---------- -----------
5,140,510 5,051,674
Less - Accumulated depreciation (1,732,303) 1,582,303
---------- -----------
$3,408,207 $ 3,469,371
========== ===========
For information with respect to pledged assets, see Note 4.
3. PENSION PLAN:
ECOC has a non-contributory defined benefit pension plan covering
substantially all of its nonunion employees. Benefits are based on the
employee's years of service and highest average earnings over five consecutive
years during the last 15 years of employment. ECOC's policy is to fund an
<PAGE>59
amount not less than the ERISA minimum funding requirement or more than the
maximum deductible under the Puerto Rico tax law.
Actuarial reports are not prepared on an interim basis, therefore,
pension plan information for the interim periods is not available.
4. THE OPERATING LICENSE, EL COMANDANTE LEASE AND OTHER COMMITMENTS:
Operating License
On December 15, 1989, the Puerto Rico Racing Board (the "Racing Board")
granted a license to ECOC to operate El Comandante, which will expire on
December 14, 2004 (the "Operating License"). The Operating License provides
ECOC with: (1) the exclusive right to operate a race track in the area of
Puerto Rico known as the San Juan Region, which approximates the northern half
of Puerto Rico, as delineated in maps produced by the Puerto Rico Planning
Board and Government Development Administration; (2) the exclusive right to
conduct all types of authorized betting, both at El Comandante and off-track,
anywhere in Puerto Rico, based on races held at El Comandante; and (3) the
right to hold a minimum of 180 day or night race days per year. The Operating
License requires payment by ECOC of an annual license fee, currently $250,000.
Upon its expiration in December 2004, there can be no assurance that a
new Operating License will be issued to ECOC if ECOC's lease of El Comandante
is extended beyond that date. However, ECOC and its predecessor, San Juan
Racing Association, Inc., have continuously operated the only thoroughbred
racing facility in Puerto Rico since 1957.
El Comandante's horse racing and pari-mutuel wagering operations are
subject to substantial government regulation. Pursuant to the Puerto Rico
Horse Racing Industry and Sport Act (the "Racing Act"), the Racing Board and
the Puerto Rico Racing Administrator (the "Racing Administrator") exercise
significant regulatory control over ECOC's racing and wagering operations.
For example, the Racing Administrator determines the monthly racing program
for El Comandante and approves the number of annual race days in excess of the
statutory minimum of 180. The Racing Act also apportions payments of the
wagering handle, and thus, through legislation, the Racing Act could be
amended to reduce the share of monies wagered that would be available as ECOC
Commissions. The Racing Board consists of three persons appointed to four-
year terms by the Governor of Puerto Rico. The Racing Administrator is also
appointed by the Governor for a four-year term.
El Comandante Lease
HDA has leased El Comandante to ECOC under a lease agreement (the "El
Comandante Lease") for a term of 15 years ending December 14, 2004. The El
Comandante Lease provides for payment of rent consisting of 25% of the annual
ECOC Commissions ("Basic Rent"), but in no event less than $7,500,000
("Minimum Basic Rent") adjusted annually with a base year of 1989 by the
percentage increase in the Consumer Price Index ("CPI") for the calendar year
over the CPI for the previous calendar year. The El Comandante Lease also
<PAGE>60
obligated ECOC to pay additional annual fixed rent ("Fixed Rent") of $150,000
in 1994 and $400,000 in 1995. An amendment to the El Comandante Lease
eliminated Fixed Rent effective January 1, 1996.
The El Comandante Lease also requires ECOC to establish and fund with
certain excess cash flow a rent escrow (the "Rent Escrow") until the Rent
Escrow equals one half of the Minimum Basic Rent for that year. For purposes
of determining the required deposits to the Rent Escrow, excess cash flow
means, after ECOC has a cash balance of $700,000 for working capital
(excluding restricted cash and payables to winning bettors), all cash flow of
ECOC in excess of $300,000 per year, provided that the $300,000 threshold
shall be increased by $100,000 for each $1 million by which the Rent Escrow
exceeds $3 million. Funds held in the Rent Escrow may be released to make up
any difference between rent payments made by ECOC and the rent due and payable
under the El Comandante Lease. After deposits into the Rent Escrow, payments
of Fixed Rent and donations in accordance with New ECOC's certificate of
incorporation aggregating $3 million have been made, additional deposits to
the Rent Escrow are subordinated to the obligations to Supra, Supra's majority
owner and Interstate General Properties Limited Partnership S.E. ("IGP"), as
discussed below under "Reorganization of ECOC". As of March 31, 1996, no
deposits have been made into the Rent Escrow.
The El Comandante Lease provides for ECOC to pay all El Comandante
expenses except that, effective January 1, 1996, the new amendment to the El
Comandante Lease requires HDA to pay real property taxes on El Comandante.
The El Comandante Lease also contains certain covenants of ECOC including
obligations to spend not less than $500,000 per calendar year, adjusted from a
base year of 1993 according to the CPI, to repair and maintain El Comandante
and related facilities; financial reporting requirements; insurance
requirements; compliance with laws; limitations on indebtedness; limitations
on liens; limitations on other activities; limitations on affiliate
transactions; acceptance of IGP consulting services; and acceptance of
amendments necessary to maintain HDA's tax status. ECOC granted a security
interest in substantially all of its assets (excluding cash, but including the
Rent Escrow) to HDA to secure ECOC's obligations under the El Comandante
Lease, which security interest was then assigned as additional security for
first mortgage notes of HDA. If the El Comandante Lease is terminated prior
to December 2004, ECOC will assign its Operating License to HDA to the extent
permitted by law and sell at book value its equipment to HDA.
The El Comandante Lease provides for renegotiation of the Basic Rent,
Fixed Rent and the Rent Escrow provisions with the results of such
renegotiation to be effective on January 1, 1998.
Reorganization of ECOC
On December 13, 1993, ECOC entered into a series of agreements with Supra
and its majority owner ("Supra Agreements") incident to the reorganization of
ECOC as a Puerto Rico nonstock corporation (the "ECOC Reorganization"). The
Supra Agreements provide for ECOC to pay accrued interest and principal on an
outstanding note payable to Supra (see Note 7) in the principal amount of
$200,000, to purchase ECOC's stock owned by Supra for $1,000,000 and to pay
<PAGE>61
$500,000 to Supra and Supra's majority owner as compensation for past services
rendered in connection with management of ECOC. On December 15, 1993, IGP
purchased from Supra an 80% interest in the $200,000 note.
In addition, the majority owner of Supra and former President of ECOC
entered into a Noncompetition Agreement that became effective upon the ECOC
Reorganization and prohibits him from investing or participating in horse
racing operations anywhere in the Caribbean for a period of three years. The
Noncompetition Agreement provides for payment of $750,000.
The obligations under the Supra Agreements and Noncompetition Agreement
are subordinated to ECOC's working capital cash balance of $700,000, excluding
restricted cash and payables to winning bettors, and to payments aggregating
$3 million for Fixed Rent payable to HDA, deposits into the Rent Escrow and
donations of $300,000 per year. Thereafter, until the obligations are paid,
Supra and its majority owner will have priority on ECOC's Excess Cash Flow, as
defined in the Supra Agreements, after payment of the Basic Rent, provided
that ECOC has a working capital cash balance of at least $700,000. No
payments of these obligations have been made as of March 31, 1996.
On August 1, 1994, after HDA obtained the necessary approvals from the
Racing Board, the ECOC Reorganization was completed as follows: (i) ECOC
assigned the rights under the Supra Agreements and Noncompetition Agreement to
a Puerto Rico nonstock corporation, El Comandante Operating Company, Inc.
("New ECOC"), which assumed the obligations to Supra and its majority owner
and became a 40% owner of ECOC; (ii) HDA contributed its 60% interest in ECOC
to ECOC's capital and consequently, New ECOC became the 100% owner of ECOC;
and (iii) ECOC was merged into New ECOC, which became the surviving entity and
continues the same business conducted by ECOC and assumed all of ECOC's
responsibilities under the El Comandante Lease and the Operating License. At
the time of the ECOC Reorganization, ECOC recorded additional obligations of
$1,750,000 to Supra and its majority owner for the purchase price of ECOC's
stock owned by Supra and the amount payable under the Noncompetition
Agreement. New ECOC's certificate of incorporation requires New ECOC to
distribute its net cash flow (after payment of rent and operating expenses,
taxes, certain obligations to Supra and funding of working capital) for
charitable, educational and other matters of public interest in Puerto Rico.
Consulting Agreement
Pursuant to a consulting agreement between ECOC and IGP executed on
December 15, 1993 (the "Consulting Agreement") and as required under the El
Comandante Lease, ECOC retained as executive management three racing
consultants employed by IGP. Except for approximately 14% of IGP's salary and
related payroll costs of one consultant, ECOC reimburses all of IGP's payroll,
bonus and fringe benefit costs with respects to IGP's employment of the
consultants. Fees incurred by ECOC pursuant to the Consulting Agreement
during the three months ended March 31, 1996 and 1995 were $80,600 and
$62,500, respectively.
On April 22, 1996, IGP assigned its interest in the Consulting Agreement
to Equus Management Company ("EMC") and the three racing consultants became
<PAGE>62
employees of EMC.
Horse Owners' Agreement and Service Agreement
ECOC has an agreement with the Confederacion whereby 50% of wagering
commissions received by ECOC on races held at El Comandante are to be paid to
the Confederacion through April 1, 1998, plus a fixed amount of $50,000
annually from 1989 to 1992, and $55,000 from 1993 to 1998. The Confederacion
also receives a minimum of $500 per race day for ECOC's wagering commissions
on El Comandante races simulcasted outside Puerto Rico ("Simulcasting
Commissions") and will commence to receive 50% of Simulcasting Commissions
when these commissions exceed simulcasting expenses plus $500.
ECOC receives wagering services, software and equipment under a service
agreement effective through March 15, 2005. The service agreement requires
minimum annual payments which consist of the greater of $800,800 annually or
.65% (.0065) of total wagering. The Confederacion agreed to reimburse ECOC
for one half of the rental fee paid under this service agreement up to a
maximum of $3,461 per race day until April 1998.
Management Services Agreement
ECOC provides executive management services to Galapagos, S.A.
("Galapagos"), a subsidiary of HDA, pursuant to a management agreement
effective September 28, 1994. Fees are the lesser of (i) 1% of amounts
wagered on races run at the government owned V Centenario Race Track in the
Dominican Republic which is operated by Galapagos, and on El Comandante races
simulcasted in the Dominican Republic or (ii) $250,000 annually, adjusted by
CPI commencing January 1996. During the three months ended March 31, 1996 and
1995, ECOC earned fees of $66,800 and $2,290, respectively. Galapagos also
reimburses ECOC for out-of-pocket expenses related to the services.
Television Contracts
Pursuant to an agreement between a subsidiary of HDA, S & E Network Inc.
("S&E"), and ECOC effective January 1995, S&E was producing and broadcasting a
four-hour television program for all races run at El Comandante for a maximum
of 208 race days per year (the "Television Contract"). The Television
Contract was originally for ten years to December 2004, but was replaced by a
new agreement effective February 1, 1996 (the "New Contract"). The Television
Contract required fixed monthly payments by ECOC to S&E of $56,000. S&E was
entitled to revenues from sales of advertising time. ECOC agreed to pay up to
$150,000 for certain improvements to provide facilities at El Comandante for
S&E's television studio, production and administration space at no cost to S&E
as long as S&E broadcasts the television program for ECOC.
Pursuant to the New Contract, ECOC will purchase a minimum of 910 hours
of television time annually from S&E at $725 per hour (minimum annual amount
of $659,750), adjusted annually by CPI. If ECOC needs television time after
7:00 PM, the cost per hour will be $900, also subject to CPI adjustments.
ECOC is now responsible for producing and directing the broadcasts and is
entitled to the revenues from its sales of advertising time during the
<PAGE>63
broadcasts of the racing program. The term of the New Contract expires
January 31, 2000, but is renewable for successive one year terms at ECOC's
option.
ECOC provides certain administrative, maintenance, security and utility
services for which S&E pays $2,000 per month, adjusted annually by CPI.
5. CAPITAL LEASE OBLIGATIONS:
ECOC has entered into certain equipment lease agreements during the
normal course of business which have been classified as capital leases. The
present value of future minimum lease payments under capital leases is as
follows:
Due during year
ending March 31,
1997...........................................$ 585,620
1998........................................... 589,442
1999........................................... 518,973
2000........................................... 91,666
2001........................................... 21,021
----------
Minimum lease payments......................... 1,806,722
Less - Current portion........................ 585,620
----------
$1,221,102
==========
6. PAYABLE TO HOUSING DEVELOPMENT ASSOCIATES S.E.:
Payable to HDA at March 31, 1996 and December 31, 1995 consists of (i) a
note payable of $1 million and accrued interest thereon of $34,500 and
$20,164, respectively, and (ii) unpaid rent under the El Comandante Lease of
$764,481 and $796,146, respectively. The note accrues interest at 5.75%. The
accrued interest at March 31, 1996 was paid in April 1996 and thereafter
principal and interest are payable in monthly installments of $30,309 over a
three year period commencing May 1, 1996.
7. OTHER LIABILITIES:
Other liabilities consist of unsecured notes of $160,000 to IGP and
$40,000 to Supra, including accrued interest, and $500,000 of accrued past
service costs payable to Supra and Supra's majority owner under the Supra
Agreements. They also include $1,750,000 payable to Supra and Supra's
majority owner for the purchase of ECOC's stock and for the amount payable
under the Noncompetition Agreement. The unsecured notes bear interest at 2.5%
over the prime rate, without a stated maturity date. The interest rate at
March 31, 1996 and December 31, 1995 was 10.75% and 11%, respectively.
<PAGE>64
8. INCOME TAXES:
As of January 1, 1993, ECOC adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes", and recorded a deferred tax asset of $345,000,
net of a valuation allowance of $1,055,000. This asset resulted from net
operating loss carryforwards ("NOL") which are available to offset future
taxable income and expire in various dates through 2001.
Deferred tax assets of $531,182 and $558,137, net of valuation allowances
of $1,321,518 and $1,419,433, were recorded as of March 31, 1996 and December
31, 1995, respectively. These assets arise from the difference between the
tax basis of certain liabilities and their reported amounts in the financial
statements (which will result in deductible amounts in future years when such
liabilities are finally settled) and from the benefits of NOL.
The deferred provision for income taxes for the three months ended March
31, 1996 is net of a decrease in the valuation allowance of $97,915 and the
deferred credit for income taxes for the three months ended March 31, 1995 is
net of a decrease in the valuation allowance of $34,000.
9. LEGAL PROCEEDINGS:
ECOC has been named as a defendant in various lawsuits arising out of its
normal business operations, including employment-related claims. Based upon
facts available to date, management and legal counsel believe that none of
such actions will have a material adverse effect on ECOC's financial position
or results of operations.
10. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107 requires disclosure of the fair value of certain financial
instruments, including cash, evidence of ownership interests in other entities
and contracts that impose either and obligation to deliver a financial
instrument or cash such as loans or notes payable, or a right to receive a
financial instrument or cash such as loans or notes receivable. The estimated
fair values of ECOC's financial instruments are as follows:
March 31, 1996 December 31, 1995
------------------------ ------------------------
Carrying Carrying
Fair Value Value Fair Value Value
----------- ----------- ----------- ----------
Cash $3,032,179 $3,032,179 $ 2,883,447 $2,883,447
Note receivable 322,562 322,562 310,944 310,944
Capital lease obligations 1,806,722 1,806,722 1,879,090 1,879,090
Payable to HDA -
Note and accrued interest 954,500 1,034,500 940,000 1,020,164
Other liabilities 2,580,042 2,580,042 2,574,902 2,574,902
<PAGE>65
The carrying value of cash approximates fair value because of the liquid
nature of these assets. The carrying value of the notes receivable
approximates fair value because these notes bear interest at a rate higher
than prime rate. The carrying value of the capital lease obligations
approximates fair value because these obligations bear interest at market.
The note payable to HDA bears interest at a rate lower than prime rate and
accordingly, was discounted based on the expected payment date assuming an
interest rate of 10.5%. For other liabilities the carrying value approximates
fair value.
<PAGE>66 EQUUS MANAGEMENT COMPANY
BALANCE SHEET
MARCH 31, 1996
(unaudited)
ASSETS
Cash $ 35
Receivable from Equus Gaming Company L.P. 10,500
--------
$ 10,535
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $63,014
-------
Stockholder's deficit:
Common stock, $.01 par value, 100 shares authorized,
issued and outstanding 1
Additional paid-in capital 99
Distributions to owner (29,818)
Accumulated deficit (22,761)
--------
(52,479)
--------
$ 10,535
========
The accompanying notes are an integral part of this balance sheet.
<PAGE>67 EQUUS MANAGEMENT COMPANY
NOTES TO BALANCE SHEET
MARCH 31, 1996
1. ORGANIZATION:
Equus Management Company ("EMC") was organized on July 29, 1994 as a
Delaware corporation and a wholly owned subsidiary of Interstate General
Company L.P. ("IGC").
2. INVESTMENT IN EQUUS GAMING COMPANY L.P.:
Shortly after its organization, IGC transferred to EMC a 0.99% general
partnership interest and 0.01% limited partnership interest in Equus Gaming
Company L.P. (the "Company") as a capital contribution and EMC was admitted as
a general partner and a limited partner of the Company. IGC retained a 98.99%
limited partnership interest in the Company.
EMC distributed to IGC its 0.01% limited partnership interest, which
permitted IGC to distribute to its unitholders a 99% limited partnership
interest in the Company.
EMC has full and exclusive responsibility and authority to manage the
business and operations of the Company except as otherwise provided in the
partnership agreement of the Company. EMC is not engaged in any significant
activities other than managing the business of the Company. EMC is reimbursed
for its out-of-pocket costs incurred to third parties in connection with the
management of the Company in excess of its share in the Company's cash
distributions. The amount due to EMC for reimbursement of these costs is
$10,500 as of March 31, 1996.
Because EMC has a general partnership interest, it accounts for its
investment in the Company under the equity method of accounting. Since the
investment in the Company has been written down below zero due to EMC's share
of the Company's losses and distributions received from the Company, the
investment has been reclassified in the accompanying balance sheet as of March
31, 1996 as accrued liabilities.
<PAGE>68
PART I -- ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
Equus Gaming Company L.P. (the "Company") was formed initially on
September 17, 1993 as a general partnership between Interstate General Company
L.P. ("IGC") and one of its general partners, Interstate Business Corporation
("IBC"). Through a series of transactions completed on August 2, 1994, the
Company was restructured as a Virginia limited partnership between IGC and its
wholly owned subsidiary, Equus Management Company ("EMC"), for the purpose of
succeeding to substantially all of IGC's ownership interest in real estate
assets employed in thoroughbred racing and related wagering businesses. In
connection with the restructuring, the Company became the owner of a 67%
profits interest in Housing Development Associates S.E. ("HDA"). On February
6, 1995, IGC distributed to its unitholders 5,128,372 Class A Units ("Units")
representing in the aggregate beneficial assignment of a 99% Class A limited
partnership interest in the Company (the "Distribution"). On March 8, 1995
an additional 1,205,245 Units were issued by the Company to HDA Management
Corporation ("HDAMC") in exchange for a 15% profits interest in HDA.
The Company's principal income producing asset is an 82% interest in HDA
in which it is a co-managing partner. HDA owns El Comandante Race Track ("El
Comandante"), the only licensed thoroughbred racing facility in Puerto Rico,
which it leases to El Comandante Operating Company, Inc., a Puerto Rico
nonstock corporation ("ECOC"). ECOC operates El Comandante at its expense and
pays rent to HDA based primarily upon 25% of ECOC's share of wagering
revenues. The lease agreement between ECOC and HDA (the "El Comandante
Lease") expires on December 14, 2004. HDA also owns all of the outstanding
capital stock of S & E Network Inc. ("S&E"), a Puerto Rico corporation that
owns and operates three UHF television stations in Puerto Rico (the
"Television Stations"), and 55% of the capital stock of Galapagos, S.A.
("Galapagos"), a Dominican Republic corporation that leases and since April
29, 1995 operates V Centenario Race Track, a government-owned racing facility
in the Dominican Republic ("V Centenario"). In February 1996 HDA and S&E
entered into an agreement to sell to Paxson Communications of San Juan, Inc.
("Paxson") a 50% interest in S&E, subject to receiving approval of the Federal
Communications Commission ("FCC").
The Company also owns 100% of the issued and outstanding stock of
Virginia Jockey Club Inc., a Virginia corporation ("VJC"), which applied to
the Virginia Racing Commission for licenses to own and operate a thoroughbred
horse racing and wagering facility in Virginia. On October 12, 1994, the
Virginia Racing Commission awarded the Virginia licenses to an applicant other
than VJC. VJC appealed the decision of the Virginia Racing Commission to the
Circuit Court of Richmond which affirmed the award to the other applicant and
then to the Virginia Court of Appeals which, in April 1996, also affirmed the
award. The Company does not intend to file any further appeals.
<PAGE>69
The Company does not have any employees. IGC provides administrative
support services pursuant to a Master Support and Services Agreement ("Support
Agreement").
Prior to March 8, 1995 generally accepted accounting principles did not
permit the Company to consolidate the accounts of HDA in the Company's
financial statements because HDAMC had the right to approve any sale or
disposition of HDA's assets in excess of $500,000 and the incurrence of any
debt in excess of $1 million. On March 8, 1995, HDA's partnership agreement
was amended to eliminate these approval rights of HDAMC, and commencing as of
that date the accounts of HDA have been consolidated with the Company's
accounts.
This section reflects Management's discussion and analysis of the
financial condition and results of operations of (i) the Company and its
consolidated subsidiaries, VJC and HDA, as of and for the three month periods
ending March 31, 1996 and 1995 (HDA accounts were consolidated with the
Company's accounts for the period after March 8, 1995), (ii) the Company and
its consolidated subsidiaries, VJC and HDA, on a proforma basis based on
proforma statements of income for the three month periods ended March 31, 1996
(historical) and 1995 (proforma) presented in Note 17 to the consolidated
financial statements of the Company, and (iii) HDA and its consolidated
subsidiaries, ECCC, Galapagos and S&E, as of and for the three month periods
ending March 31, 1996 and 1995.
The Company's Results of Operations
Three Months Ended March 31, 1996 Compared to the Three Months Ended
March 31, 1995
The Company did not consolidate the accounts of HDA until March 8, 1995.
Accordingly, the Company's historical results of operations for the quarterly
periods ended March 31, 1996 and 1995 are not readily comparable. More
meaningful comparative information is included elsewhere in this report in
Management's discussions of (1) the Company's Proforma Results of Operations
as if the accounts of HDA had been consolidated as of January 1, 1995 and (2)
HDA's Results of Operations.
Revenues. With the exception of a cash distribution of $134,000
received from HDA in February 1995, the revenues of the Company in its
consolidated statements of loss for the three months ended March 31, 1996 and
1995 are entirely from the consolidation of the accounts of HDA, the Company's
82% owned subsidiary. Because HDA had a zero investment in HDA when the cash
distribution of $134,000 was received in February 1995 and since the
distribution was received prior to the consolidation of HDA's accounts as of
March 8, 1995, the distribution represented revenue to the Company that was
not eliminated in the consolidated financial statements.
Expenses, other than Income Taxes. Substantially all of the expenses,
other than income taxes, in the consolidated statements of loss of the Company
for the quarterly periods ended March 31, 1996 and 1995 are HDA expenses from
<PAGE>70
January 1, 1996 to March 31, 1996 and from March 8, 1995 to March 31, 1995,
respectively.
Expenses of the Company and its subsidiary VJC, excluding HDA's expenses
during these quarterly periods, were as follows:
a. Interest and related financing costs of $17,000 in the 1996 period
and $1,500 in 1995 period related to a bank loan closed March 1995;
b. Depreciation of $52,000 in the 1996 period and $14,000 in the 1995
period related to a step-up of $5,650,000 in El Comandante assets
related to the value assigned to HDAMC's interest in HDA, transferred
to the Company in March 1995 in exchange for limited partnership
Units of the Company;
c. General and administrative expenses of $203,000 in the 1996 period
and $147,000 in the 1995 period, including VJC Appeal costs of
$28,000 in 1996 and $63,000 in 1995. The balance of the expenses are
primarily investor relations costs, costs of investigating new
business opportunities, directors' fees and expenses, legal fees, and
audit and tax expenses of the Company; and
d. Management fees of $50,000 in each of the first three months of 1996
and 1995 pursuant to the Support Agreement.
Provision for Income Taxes. The Company is subject to Puerto Rico income
tax at a 29% rate on its distributable share of HDA's net taxable income. HDA
is subject to Dominican Republic income tax on interest income from Galapagos
and an HDA subsidiary is subject to Federal income taxes. The provisions for
income taxes of $231,000 and $61,000 in the three month periods ended March
31, 1996 and 1995 are as follows:
1996 1995
Period Period
------------ ------------
Puerto Rico income taxes of the Company $ 203,800 $ 60,000
Dominican Republic income taxes of HDA 24,700 -
Federal income taxes of HDA subsidiary 2,500 1,000
------------ ------------
$ 231,000 $ 61,000
============ ============
Minority Interest. Minority partners own 18% of HDA and minority
stockholders hold a 45% interest in Galapagos. The accumulated deficit of HDA
was $169,000 at March 31, 1995 and, as explained in Note 1 to the Company's
consolidated financial statements, the Company did not recognize the 18%
minority partners' share of HDA's net income until such time as the
accumulated deficit of HDA was eliminated by earnings of HDA after March 31,
1995.
The minority interest of $100,000 and $25,000 in the three month periods
ended March 31, 1996 and 1995, respectively, is comprised of the following:
<PAGE>71
1996 1995
Period Period
------------- -------------
Minority stockholders' share of
losses of Galapagos $( 212,000) $( 25,000)
Minority partners' share of
income of HDA after accumulated
deficit was eliminated by
HDA's earnings 112,000 -
------------- -------------
$( 100,000) $( 25,000)
============= =============
Liquidity and Capital Resources of the Company
This discussion relates solely to the liquidity and capital resources of
the Company and VJC. Liquidity and capital resources of HDA and its
subsidiaries is discussed separately below under the caption "Liquidity and
Capital Resources of HDA".
The Company's principal cash needs are income taxes, principal and
interest on a bank loan, fees and expenses of EMC's independent directors,
legal and accounting fees, reimbursements to IGC under the Support Agreement,
and payment of loans from IGC, a general partner of the Company. The
Company's estimated 1996 cash requirements are approximately $1.6 million.
The Company's principal sources of cash to meet its obligations have been
distributions related to its 82% interest in HDA, the bank loan discussed
below and loans from IGC. Indenture restrictions presently limit HDA's
ability to make distributions ("Permitted Distributions") to its partners,
including the Company, to approximately 48% of HDA's cumulative consolidated
net income (see Note 6 to the Company's Consolidated Financial Statements).
The Company borrowed $850,000 in 1995 from a bank in Puerto Rico. The
bank loan was payable in quarterly installments of $100,000 commencing May
1995, and the Company assigned to the bank the first $100,000 of quarterly
distributions it received from HDA. The loan balance was $450,000 at March
31, 1996. In May 1996 the loan was increased to $700,000 with the same
assignment of $100,000 of quarterly distributions for principal payments
commencing August 31, 1996 and a final payment of $200,000 in November 1997.
In March 1996 HDA made a cash distribution of $54,000 to the Company
related to HDA's 1995 fourth quarter consolidated net income. Based on
Management's forecast of HDA's 1996 consolidated net income, the Company's
share of HDA's Permitted Distributions in the second, third and fourth
quarters of 1996 are estimated to be approximately $1.5 million. These
distributions, together with December 31, 1995 cash balances of $56,000 and
net proceeds of approximately $240,000 from the increase in the bank loan, are
expected to exceed the Company's 1996 estimated cash requirements of $1.6
million.
<PAGE>72
The Company's Proforma Results of Operations
Three Months Ended March 31, 1996 Compared to the Three Months Ended
March 31, 1995
As discussed previously, the Company did not consolidate the accounts of
HDA in the Company's historical financial statements until March 8, 1995.
Note 17 to the Company's consolidated financial statements includes proforma
consolidated statements of income (loss) for the three months ended March 31,
1996 (historical) and 1995 (proforma) based upon the consolidated statements
of income of the Company and VJC, and HDA and its subsidiaries, which were
prepared as if the acquisition by the Company of its 82% interest in HDA had
occurred on January 1, 1995.
Revenues. The Company and VJC did not have any revenues in the three
months ended March 31, 1996 and 1995, except for interest income of $1,000 in
1996. Accordingly, all other proforma revenues in that three month period
relate to HDA and its subsidiaries.
Rental income from El Comandante. Rental income from El Comandante
decreased $59,000 (1.5%) to $3,802,000 in the three months ended March 31,
1996 from $3,861,000 in the comparable period of 1995. Rental income in the
1996 period was based on 25% of ECOC's commissions of $15,207,000 from El
Comandante wagering on 61 racing days, whereas 1995 rental income was based on
25% of ECOC's commissions of $15,044,000 from wagering on 52 racing days, plus
fixed rent of $100,000. In February 1996, ECOC commenced racing five days a
week by adding Thursday to its previous four-day race week. Although the
average daily commissions earned by ECOC declined in the 1996 period, the
commissions earned on Thursday race days more than offset the decline in
average daily commissions.
The effect of the additional race day is shown by (1) the comparison of
the January 1996 and 1995 commissions earned by ECOC before introduction of
Thursday racing, and (2) February and March 1995 commissions earned before
Thursday racing commenced compared with commissions earned in February and
March 1996 after Thursday racing commenced. The January 1996 commissions were
$501,000 less than the January 1995 commissions; however the February and
March 1996 commissions exceeded the comparable months in 1995 by $663,000.
Due to a combination of unanticipated regulatory actions and weather
emergencies affecting Puerto Rico racing operations and wagering in 1995, ECOC
requested relief from payment of certain future lease obligations. As a
result, the El Comandante Lease was amended effective January 1, 1996 to
eliminate fixed rent after 1995 and HDA assumed responsibility for paying El
Comandante real property taxes due and payable after December 31, 1995.
Dominican Republic Racing Revenues. Galapagos began simulcasting El
Comandante races on February 27, 1995 to several sports betting agencies in
the Dominican Republic, and earned commissions of $72,000 on wagering on El
Comandante races in the quarter ended March 31, 1995. In the 1996 quarter,
Galapagos had commissions of $823,000 on wagering from racing which had
commenced April, 1995 at V Centenario and $484,000 from wagering on
<PAGE>73
simulcasted El Comandante races. Galapagos also had revenues of $196,000 in
1996 from Jockey Club and restaurant operations and other miscellaneous
sources.
Revenues from Television Stations. In February 1996 S&E, HDA and Paxson
entered into a Stock Purchase Agreement by which Paxson has agreed to purchase
a 50% interest in S&E, subject to FCC approval which is expected to be
received by June 30, 1996. Paxson is a subsidiary of Paxson Communications
Corporation which has created a nationwide network of television stations
dedicated to the airing of infomercial programming (the "Informall TV network"
or "inTV"). Paxson Communications Corporation introduced its Informall TV
Network in January 1995 which, as of March 1996, consisted of 24 owned,
operated pursuant to a time brokerage agreement or affiliated inTV stations in
more than twenty U.S. television markets. Paxson Communications Corporation's
infomercial programming format allows it to eliminate substantially all
programming expenses and achieve reductions in other operating expenses.
Until FCC approval is received, Paxson is providing programming, including
infomercials, and certain other services to S&E under a Time Brokerage
Agreement and is entitled to 50% of S&E's operating cash flow until closing.
Following FCC approval, Paxson has agreed to assume responsibility for
managing the television operations.
S&E commenced television broadcasting in January 1995 and earned
broadcasting fees and advertising revenues of $227,000 in the first quarter of
1995. As a result of the changes in broadcasting and programming formats, S&E
was able to increase its 1996 revenues which were $500,000 in the first
quarter of 1996. The revenues included fees of approximately $170,000 in the
1996 and 1995 quarters from ECOC for broadcasting the El Comandante racing
program.
Interest Income. In the three months ended March 31, 1996, HDA earned
interest income of $28,000 on its note receivable from ECOC and from short
term investments, and the Company earned interest income of $1,000. HDA
earned $32,000 in the comparable 1995 period from short-term investments.
Financial Expenses. Financial expenses in the three months ended March
31, 1996 increased $109,000 (5%) to $2,302,000 from $2,193,000 in the three
months ended March 31, 1995. The increase is primarily attributable to
interest expense of $50,000 in 1996 related to capital leases of the
Television Stations and Galapagos, and increases of $46,000 in interest on
loans from minority stockholders of Galapagos and on a bank loan of the
Company.
Depreciation. Depreciation increased $169,000 (37%) in the three months
ended March 31, 1996 to $625,000 from $456,000 in the comparable three months
of 1995. The increase is attributable to depreciation of $169,000 related to
assets of Television Stations and Galapagos in the 1996 quarter, whereas there
was no depreciation in the 1995 quarter related to these assets.
General and Administrative Expenses. General and administrative expenses
increased to $407,000 in the three months ended March 31, 1996 from $226,000
in the comparable period of 1995. The increase is primarily attributable to
<PAGE>74
increases in costs of investor relations, investigating new business
opportunities and legal fees, and to El Comandante property taxes of $149,000
in the 1996 quarter, offset in part by a decrease of $35,000 in VJC Appeal
costs. As discussed under Rental Income from El Comandante, HDA assumed
responsibility for El Comandante property taxes effective January 1, 1996.
Management Fees. HDA has a management agreement with an affiliate of IGC
which provides for fees of $250,000 annually, adjusted by increases in CPI,
and the Company reimburses IGC for costs of administrative support services
pursuant to the Support Agreement. Management fees were $118,000 in the three
months ended March 31, 1996 and $116,000 in the comparable period of 1995.
Operating Costs of Dominican Republic Racing. Galapagos began
simulcasting El Comandante races on February 27, 1995 and incurred costs in
the first quarter of 1995 in preparation for the opening of V Centenario in
April 1995. Costs incurred in connection with these operations were $196,000
in the three months ended March 31, 1995, and $1,750,000 while under full
operation during the three months ended March 1996.
Operating Costs of Television Stations. S&E commenced television
broadcasting in January 1995 on a test basis and incurred operating expenses
of $563,000 during the three months ended March 31, 1995; the expenses in the
comparable 1996 period were $515,000. As discussed above under Revenues from
Television Stations, a new broadcasting and programming format which commenced
in February 1996 has reduced operating expenses in the 1996 quarter.
Distribution of Units of the Company. The legal, accounting and other
costs of the Distribution were $131,000 in the quarter ended March 31, 1995.
There were no similar costs in the first quarter of 1996.
Provision for Income Taxes. The Company is subject to Puerto Rico income
tax at a 29% rate on its distributable share of HDA's net taxable income. HDA
is subject to Dominican Republic income tax on interest income from Galapagos
and an HDA subsidiary is subject to Federal income taxes. The provisions for
income taxes of $231,000 and $255,000 in the three month periods ended March
31, 1996 and 1995 were as follows:
1996 1995
Period Period
------------ ------------
Puerto Rico income taxes of the Company $ 203,800 $ 254,000
Dominican Republic income taxes of HDA 24,700 -
Federal income taxes of HDA subsidiary 2,500 1,000
------------ ------------
$ 231,000 $ 255,000
============ ============
Minority Interest. Minority partners own 18% of HDA and Dominican
Republic minority stockholders hold a 45% interest in Galapagos. The
accumulated deficit of HDA was $169,000 at March 31, 1995 and, as explained in
Note 1 to the Company's consolidated financial statements, the Company did not
recognize the 18% minority partners' share of HDA's net income until such time
<PAGE>75
as the accumulated deficit of HDA was eliminated by earnings of HDA after
March 31, 1995.
The minority interest of $100,000 and $74,000 in the three month periods
ended March 31, 1996 and 1995, respectively, is comprised of the following:
1996 1995
Period Period
------------- -------------
Minority stockholders' share of
losses of Galapagos $( 212,000) $( 74,000)
Minority partners' share of
income of HDA after accumulated
deficit was eliminated by
HDA's earnings 112,000 -
------------- -------------
$( 100,000) $( 74,000)
============= =============
Results of Operations of HDA
Three Months Ended March 31, 1996 Compared to the Three Months
Ended March 31, 1995
Revenues. Revenues increased $1,627,000 (38.7%) to $5,834,000 in the
three months ended March 31, 1996 from $4,207,000 in the comparable period in
1995. The increase resulted from an increase in revenues of $273,000 from the
Television Stations and $1,416,000 from Dominican Republic racing, offset in
part by a decrease of $59,000 in rental income from El Comandante.
Rental income from El Comandante. Rental income from El Comandante
decreased 1.5% to $3,802,000 in the three months ended March 31, 1996 from
$3,861,000 in the comparable period of 1995. Rental income in the 1996 period
was based on 25% of ECOC's commissions of $15,207,000 from El Comandante
wagering on 61 racing days, whereas 1995 rental income was based on 25% of
ECOC's commissions of $15,044,000 from wagering on 52 racing days, plus fixed
rent of $100,000. In February 1996, ECOC commenced racing five days a week by
adding Thursday to its previous four-day race week. Although the average
daily commissions earned by ECOC declined in the 1996 period, the commissions
earned on Thursday race days more than offset the decline in average daily
commissions.
The effect of the additional race day is shown by (1) the comparison of
the January 1996 and 1995 commissions earned by ECOC before introduction of
Thursday racing, and (2) February and March 1995 commissions earned before
Thursday racing commenced compared with commissions earned in February and
March 1996 after Thursday racing commenced. Whereas the January 1996
commissions were $501,000 less than the January 1995 commissions, the February
and March 1996 commissions exceeded the comparable months in 1995 by $663,000.
<PAGE>76
Due to a combination of unanticipated regulatory actions and weather
emergencies affecting Puerto Rico racing operations and wagering in 1995, ECOC
requested relief from payment of certain future lease obligations. As a
result the El Comandante Lease was amended effective January 1, 1996 to
eliminate fixed rent after 1995 and HDA assumed responsibility for paying El
Comandante real property taxes due and payable after December 31, 1995.
Dominican Republic Racing Revenues. Galapagos began simulcasting El
Comandante races on February 27, 1995 to several sports betting agencies in
the Dominican Republic, and earned commissions of $72,000 on wagering on the
El Comandante races in the quarter ended March 31, 1995. In the 1996 quarter,
Galapagos had commissions of $823,000 on wagering from racing which had
commenced April, 1995 at V Centenario and $484,000 from wagering on
simulcasted El Comandante races. Galapagos also had revenues of $197,000 in
1996 from Jockey Club and restaurant operations and other miscellaneous
sources.
Revenues from Television Stations. In February 1996 S&E, HDA and Paxson
entered into a Stock Purchase Agreement by which Paxson agreed to purchase a
50% interest in S&E, subject to FCC approval which is expected to be received
by June 30, 1996. Paxson is a subsidiary of Paxson Communications Corporation
which has created a nationwide network of television stations dedicated to the
airing of infomercial programming (the "Informall TV network" or "inTV").
Paxson Communications Corporation introduced its Informall TV Network in
January 1995 which, as of March 1996, consisted of 24 owned, operated pursuant
to a time brokerage agreement or affiliated inTV stations in more than twenty
U.S. television markets. Paxson Communications Corporation's infomercial
programming format allows it to eliminate substantially all programming
expenses and achieve reductions in other operating expenses. Until FCC
approval is received, Paxson is providing programming, including infomercials,
and certain other services to S&E under a Time Brokerage Agreement and is
entitled to 50% of S&E's operating cash flow until closing. Following FCC
approval, Paxson has agreed to assume responsibility for managing the
television operations.
S&E commenced television broadcasting in January 1995 and earned
broadcasting fees and advertising revenues of $227,000 in the first quarter of
1995. As a result of the changes in broadcasting and programming formats, S&E
was able to increase its 1996 revenues which were $500,000 in the first
quarter of 1996. The revenues included fees of approximately $170,000 in the
1996 and 1995 quarters from ECOC for broadcasting a four-hour program for
races run at El Comandante.
Interest Income. HDA earned interest income of $28,000 in the three
months ended March 31, 1996 on its note receivable from ECOC and from short
term investments, and earned $32,000 in the comparable 1995 period from short-
term investments.
Financial Expenses. Financial expenses in the three months ended March
31, 1996 increased $94,000 (4.3%) to $2,286,000 from $2,191,000 in the three
months ended March 31, 1995. The increase is primarily attributable to 1996
interest of $50,000 related to capital leases of the Television Stations and
<PAGE>77
Galapagos and increased interest of $34,000 on loans from minority
stockholders of Galapagos.
Depreciation. Depreciation increased $169,000 (41.8%) in the three
months ended March 31, 1996 to $573,000 from $404,000 in the comparable three
months of 1995. The increase is attributable to depreciation of $169,000
related to assets of the Television Stations and Galapagos in the 1996
quarter, whereas there was no depreciation in the 1995 quarter related to
these assets.
General and Administrative Expenses. General and administrative expenses
increased $125,000 to $204,000 in the three months ended March 31, 1996 from
$79,000 in the comparable period of 1995. The increase is attributable to El
Comandante property taxes of $149,000 in the 1996 quarter, less net reductions
of $24,000 in other expenses. As discussed under Rental Income from El
Comandante, HDA assumed responsibility for El Comandante property taxes
effective January 1, 1996.
Management Fees. A management agreement with a subsidiary of IGC
provides for fees of $250,000 annually, adjusted by increases in CPI. Fees
under this agreement were $68,000 in the three months ended March 31, 1996 and
$66,000 in three months ended March 31, 1995.
Operating Costs of Dominican Republic Racing. Galapagos began
simulcasting El Comandante races on February 27, 1995 and incurred costs in
the first quarter of 1995 in preparation for the opening of V Centenario in
April 1995. Costs incurred in connection with these operations were $196,000
in the three months ended March 31, 1995, and $1,750,000 while under full
operation during the three months ended March 1996.
Operating Costs of Television Stations. S&E commenced television
broadcasting in January 1995 on a test basis and incurred operating expenses
of $563,000 during the three months ended March 31, 1995; the expenses in the
comparable 1996 period were $515,000. As discussed above under Revenues from
Television Stations, a new broadcasting and programming format which commenced
in February 1996 has reduced operating expenses in the 1996 quarter.
Distribution of Units of Equus Gaming Company L.P.. The legal,
accounting and other costs incurred in connection with the Distribution were
$131,000 in the three months ended March 31, 1995. There were no similar
costs in the first three months of 1996.
Provision for Income Taxes. HDA qualifies as a special partnership
under the Puerto Rico Income Tax Act and therefore is not subject to taxation
in Puerto Rico at HDA level. Instead HDA's partners are taxed on their
allocable share of HDA's taxable income. HDA is subject to Dominican Republic
income tax on interest income from Galapagos and an HDA subsidiary is subject
to Federal income taxes.
The provisions for income taxes in the three months ended March 31, 1996
are deferred Dominican Republic taxes of $24,600 and current Federal income
taxes of $2,500. The provision for income taxes in the three months ended
<PAGE>78
March 31, 1995 is Federal income taxes of $1,200.
Minority Interest. HDA and the other incorporators of Galapagos
together sold a 45% interest in Galapagos in February 1995 to Dominican
Republic resident investors (the "Minority Stockholders"). HDA retained a 55%
interest. The minority interest of $212,000 for the three months ended March
31, 1996 represents the Minority Stockholders' share of the losses of
Galapagos during the 1996 quarter, and the minority interest of $74,000 for
the three months ended March 31, 1995 represents their share of accumulated
losses of Galapagos from inception through March 31, 1996.
Liquidity and Capital Resources of HDA
HDA's principal source of cash is rental income from the lease of El
Comandante to ECOC. El Comandante commissions on wagering in 1995 were
approximately $2,800,000 less than commissions in 1994. Also, ECOC incurred
higher costs in 1995 related to (i) costs of televising El Comandante races
resulting from a new contract which was effective January 1, 1995, (ii) early
retirement of approximately 25 employees under an incentive plan designed to
reduce payroll costs prospectively, and (iii) satellite costs for the
simulcasting of El Comandante races to the Dominican Republic. As a result of
reduced El Comandante commissions and higher operating costs in 1995, ECOC had
rent payable to HDA of approximately $1,800,000 at December 31, 1995,
including $1,000,000 which was converted into a promissory note. ECOC's
business plan is to increase revenue through growth in the core Puerto Rico
market, primarily by the increase in number of race days from four to five
days a week commencing February 1, 1996, bring additional OTB agencies on line
for simulcasting in the Dominican Republic and expand simulcasting to other
Caribbean islands and Latin American countries.
HDA's liquidity was adversely affected in 1995 by (i) collections of El
Comandante rent in 1995 of approximately $2.5 million less than in 1994, due
to a $700,000 reduction in amount of 1995 rent and to ECOC's inability to pay
$1.8 million of accrued rent (ii) cash requirements of approximately $6
million for the Television Stations and Dominican Republic racing and (iii)
HDA's costs of the Distribution and registration of the Company's Units.
Notwithstanding the effect of these matters, HDA was able to meet its cash
requirements from accumulated cash at the beginning of 1995, cash flow from
ECOC rent collections and equipment financing proceeds of approximately $1.8
million for the Television Stations and Dominican Republic racing. The cash
of $6 million used in the operations of the Television Stations and Dominican
Republic racing was primarily for equipment purchases, start-up costs,
acquisition debt of Television Stations and operating losses of both
operations.
ECOC's management is forecasting a 1996 increase in excess of $6 million
in El Comandante commissions which includes commissions on wagering on its
races simulcasted to the Dominican Republic. As a result ECOC is forecasting
a positive cash flow in 1996 and expects its payments to HDA in 1996 to exceed
1995 payments by approximately $3 million, including $800,000 of the 1995
unpaid debt of $1.8 million. The principal reasons for the forecast of
<PAGE>79
increased El Comandante commissions are (i) increases in ECOC's race days from
four to five days effective February 1, 1996 and (ii) increased simulcasting
commissions from OTB agencies in Dominican Republic, with an expected increase
in agencies from 163 at the end of 1995 to approximately 360 by the end of
1996. ECOC expects to achieve these results without any significant increase
in costs in excess of 1995 costs, except for costs such as purses to
horseowners, rent to HDA and Autotote rent which are calculated, pursuant to
agreements, based on wagering handle or El Comandante commissions. The
forecast assume no adverse regulatory changes, continued availability of
adequate horses and jockeys, and no significant loss of revenues due to new
forms of competing gambling, any unusual number of pick-six jackpot winners or
general economic decline.
HDA's management is forecasting significantly improved cash flow and
liquidity in 1996 due primarily to forecasts of 1996 rent payments by ECOC of
approximately $3 million in excess of 1995 payments; no significant, if any,
1996 cash requirements for Dominican Republic racing; and positive cash flow
to HDA of approximately $2.3 million from the Television Stations, resulting
from sale of 50% interest in S&E to Paxson which is subject to approval of
FCC.
The 1996 operations for Dominican Republic racing are forecasted to be
approximately break-even cash flow. The forecasted improved operating results
are based primarily on (1) increased commissions from the OTB agencies on
wagering on V Centenario and El Comandante races due to the planned expansion
of the OTB network to 360 agencies in Dominican Republic by December 31, 1996,
and (2) reductions in cash requirements for marketing costs in 1996. A
portion of wagering in the Dominican Republic is set aside and reserved for
covering losses from currency fluctuations and for other purposes approved
by the Dominican Republic Racing Commission. The Racing Commission has
authorized Galapagos to use reserved funds commencing April 1996 to promote
racing in the Dominican Republic, including payments of certain existing
marketing costs that would otherwise be payable from operating cash flow of
Galapagos.
S&E's agreements with Paxson will have a significant positive effect on
HDA's cash flow to an estimated $2.3 million of cash flow in 1996, in contrast
to a cash requirement of $3.9 million in 1995 which was funded by HDA cash
investments of $2.5 million and equipment financing proceeds of $1.4 million.
HDA's estimated net cash flow of $2.3 million in 1996 is comprised of $4
million to be received from Paxson after the FCC approves the S&E stock sale,
net of estimated HDA investments in S&E of $1.7 million. The Paxson
agreements require HDA to fund 100% of certain capital improvements of
$280,000, and 50% of any additional improvements if such funds are not
available from S&E's operations, and require Paxson to make loans to S&E for
any operating cash requirements after February 1, 1996 and for 50% of capital
improvements in excess of $280,000. HDA's estimated investment of $1.7
million will be used by S&E primarily for (i) estimated Paxson transaction
costs of $1,000,000 (100% of the first $280,000 of capital improvements,
employee severance costs, costs to cancel certain S&E contracts and other
transaction costs, including legal, accounting and costs of approvals required
<PAGE>80
from holders of the First Mortgage Notes), (ii) other 1996 capital
improvements proposed by Paxson, of which HDA's 50% share is $350,000, (iii)
operating losses in January 1996 and (iv) debt service on approximately $1.7
million of S&E debt that HDA will assume when the stock sale closes. The
assumed debt is payable in monthly installments over approximately six years.
HDA had cash balances of $560,000 at December 31, 1995, and is
forecasting a net cash flow of approximately $8 million in 1996, before
distributions to partners, as follows:
1996 Actual
Forecast 3-31-96
------------ ------------
Cash receipts to HDA:
El Comandante rent & collections of
receivables from ECOC $ 16,285,000 $ 3,633,000
Sale of 50% interest in S&E 4,000,000 -
------------ ------------
20,285,000 3,633,000
Cash Disbursements by HDA:
Debt service on First Mortgage Notes ( 8,200,000) -
Television Station costs and
capital improvements ( 1,700,000) ( 690,000)
Administration costs, management fees and
registration of Equus Units ( 700,000) ( 256,000)
El Comandante property taxes and capital
improvements ( 1,250,000) ( 335,000)
Contingency reserve ( 435,000) -
------------ ------------
$ 8,000,000 $ 2,352,000
============ ============
HDA made distributions of $66,000 to its partners in the first quarter of
1996 related to 1995 fourth quarter results of operations. Based on HDA's
1996 forecast of income, HDA would be permitted by the terms of the Indenture
to make cash distributions to its partners of approximately $2,500,000 during
the second, third and fourth quarters of 1996 and first quarter of 1997. The
Company receives 82% of HDA's distributions.
ECOC requested and HDA approved a 1996 capital improvement budget of
$650,000 for El Comandante. HDA has commenced the preparation of a "master
plan" for capital improvements to El Comandante for the next 3 to 4 years,
which will include, among other things, additional horse stalls, a jockey club
within the existing Clubhouse and remodeling of the Turf Room and restaurant.
ECOC's management has asked HDA for additional barns with 100 horse stalls, at
an estimated cost of $850,000, which HDA's management expects will be approved
in 1996. However, any costs for barns will principally be incurred in 1997,
and are not included in the 1996 forecast of cash flow.
<PAGE>81
PARTI II -- OTHER INFORMATION
ITEM 1 - 5
Not applicable.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit -- None
(b) Reports on Form 8-K -- On April 29, 1996, the Company filed a report
on Form 8-K with respect to its Registration Statement on Form S-3 (No. 33-
90982) under the Securities Act of 1933, as amended, to incorporate by
reference therein the audited financial statements of Interstate General
Company L.P..
<PAGE>82 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.
Equus Gaming Company L.P.
-----------------------------------
(Registrant)
By: Equus Management Company
Managing General Partner
May 15, 1996 /s/ Donald G. Blakeman
- -------------- ------------------------------
Date Donald G. Blakeman
President
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 Title Signature
- -------------- ---------------------- -----------------------
May 15, 1996 President and Director /s/ Donald G. Blakeman
- -------------- ---------------------- -----------------------
Donald G. Blakeman
Senior Vice President,
Chief Financial Officer,
May 15, 1996 Secretary and Director /s/ John E. Hans
- -------------- ---------------------- ----------------------
John E. Hans
May 15, 1996 Director /s/ Alberto Paracchini
- -------------- ---------------------- -----------------------
Alberto Paracchini
May 15, 1996 Director /s/ Donald J. Kevane
- -------------- ---------------------- -----------------------
Donald J. Kevane
May 15, 1996 Director /s/ Barbara A. Wilson
- -------------- ---------------------- -----------------------
Barbara A. Wilson
May 15, 1996 Director /s/ James M. Wilson
- -------------- ---------------------- -----------------------
James M. Wilson
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,612
<SECURITIES> 0
<RECEIVABLES> 1,799<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 60,063
<DEPRECIATION> 10,474
<TOTAL-ASSETS> 63,440
<CURRENT-LIABILITIES> 0
<BONDS> 66,279<F2>
0
0
<COMMON> 0
<OTHER-SE> (11,797)
<TOTAL-LIABILITY-AND-EQUITY> 63,440
<SALES> 0
<TOTAL-REVENUES> 5,835
<CGS> 0
<TOTAL-COSTS> 3,415
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,302
<INCOME-PRETAX> 118
<INCOME-TAX> 231
<INCOME-CONTINUING> (13)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes note receivable of $1 million.
<F2>Net of bond discount of $1.720 million.
</FN>
</TABLE>
