(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 JUNE 30, 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.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 52-1846102
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Smallwood Village Center
St. Charles, Maryland 20602
----------------------------------------
(Address of Principal Executive Offices and Zip Code)
(301) 843-8600
-----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------
(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. (the "Company")
Consolidated Statements of Income for the Six
Months Ended June 30, 1996 and 1995 (Unaudited) 1
Consolidated Statements of Income for the Three
Months Ended June 30, 1996 and 1995 (Unaudited) 2
Consolidated Balance Sheets at June 30, 1996 (Unaudited)
and December 31, 1995 (Audited) 3
Consolidated Statement of Changes in Partners' Deficit
for the Six and the Three Months Ended June 30, 1996
(Unaudited) 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995 (Unaudited) 6
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 1996 and 1995 (Unaudited) 8
Notes to Consolidated Financial Statements 10
El Comandante Operating Company, Inc.:
Statements of Revenues and Expenses for the Six Months
Ended June 30, 1996 and 1995 (Unaudited) 27
Statements of Revenues and Expenses for the Three Months
Ended June 30, 1996 and 1995 (Unaudited) 28
Statements of Net Assets (Liabilities) at June 30, 1996
(Unaudited) and December 31, 1995 (Audited) 29
Statement of Changes in Net Assets (Liabilities) for the
Six and the Three Months Ended June 30, 1996 (Unaudited) 31
Statements of Cash Flows for the Six Months Ended
June 30, 1996 and 1995 (Unaudited) 32
Statements of Cash Flows for the Three Months Ended
June 30, 1996 and 1995 (Unaudited) 34
(PAGE)3 EQUUS GAMING COMPANY L.P.
FORM 10 Q
INDEX
Page
Number
Notes to Financial Statements 36
Equus Management Company:
Balance Sheet at June 30, 1996 (Unaudited) 46
Notes to Balance Sheet 47
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 48
The Company's Results of Operations for the Six Months
Ended June 30, 1996 and 1995 49
The Company's Results of Operations for the Three Months
Ended June 30, 1996 and 1995 51
Liquidity and Capital Resources of the Company 54
Liquidity and Capital Resources of Housing Development
Associates S.E. 55
The Company's Proforma Results of Operations for the Six
Months Ended June 30, 1996 and 1995 58
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 62
Item 2 - Material Modifications of Rights of Registrant's
Securities 62
Item 3 - Default upon Senior Securities 62
Item 4 - Submission of Matters to a Vote of Security Holders 62
Item 5 - Other Information 62
Item 6 - Exhibits and Reports on Form 8-K 62
Signatures 63
(PAGE)4 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
1996 1995
---------- ----------
REVENUES:
Rental income from El Comandante Race Track $7,418,514 $4,457,134
Cash distribution from Housing Development
Associates S.E.("HDA") - 134,000
Dominican Republic racing-
Commissions on wagering 2,261,204 715,173
Other revenues 290,389 84,875
Television Stations 1,165,109 363,386
Interest income 80,150 43,027
---------- ----------
Total revenues 11,215,366 5,797,595
---------- ----------
EXPENSES:
Financial 4,438,067 2,818,445
Depreciation 1,240,907 607,447
General and administrative 777,523 380,171
Management fees 235,220 183,521
Operating costs of Dominican Republic racing 3,109,834 1,052,536
Operating costs of Television Stations 1,083,248 559,523
---------- ----------
Total expenses 10,884,799 5,601,643
---------- ----------
INCOME BEFORE INCOME TAXES
AND MINORITY INTERESTS 330,567 195,952
PROVISION FOR INCOME TAXES:
Current 75,177 170,737
Deferred 267,326 51,721
---------- ----------
LOSS BEFORE MINORITY INTERESTS (11,936) (26,506)
MINORITY INTERESTS (58,897) (71,630)
---------- ----------
NET INCOME $ 46,961 $ 45,124
========== ==========
ALLOCATION OF NET INCOME:
General Partners $ 470 $ (70,883)
Limited Partners 46,491 116,007
---------- ----------
$ 46,961 $ 45,124
========== ==========
NET INCOME PER UNIT $ .01 $ .02
========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING 6,333,617 6,084,256
========== ==========
The accompanying notes are an integral part
of these consolidated statements.
(PAGE)5 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30,
(Unaudited)
1996 1995
---------- ----------
REVENUES:
Rental income from El Comandante Race Track $3,616,845 $3,500,192
Dominican Republic racing-
Commissions on wagering 954,066 648,834
Other revenues 90,226 74,926
Television Stations 664,866 302,885
Interest income 50,771 33,551
---------- ----------
Total revenues 5,376,774 4,560,388
---------- ----------
EXPENSES:
Financial 2,135,768 2,229,880
Depreciation 616,066 485,853
General and administrative 370,370 217,463
Management fees 117,609 115,938
Operating costs of Dominican Republic racing 1,356,211 928,638
Operating costs of Television Stations 568,024 341,022
---------- ----------
Total expenses 5,164,048 4,318,794
---------- ----------
INCOME BEFORE INCOME TAXES
AND MINORITY INTERESTS 212,726 241,594
PROVISION FOR INCOME TAXES:
Current 56,968 131,544
Deferred 54,584 30,300
---------- ----------
INCOME BEFORE MINORITY INTERESTS 101,174 79,750
MINORITY INTERESTS 40,897 (46,735)
---------- ----------
NET INCOME $ 60,277 $ 126,485
========== ==========
ALLOCATION OF NET INCOME:
General Partners $ 603 $ 1,265
Limited Partners 59,674 125,220
---------- ----------
$ 60,277 $ 126,485
========== ==========
NET INCOME PER UNIT $ .01 $ .02
========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING 6,333,617 6,333,617
========== ==========
The accompanying notes are an integral part
of these consolidated statements.
(PAGE)6 EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
CASH AND CASH EQUIVALENTS $ 2,424,647 $ 814,292
----------- ------------
ASSETS RELATED TO RACE TRACKS:
Property and equipment-
Land 7,128,858 7,128,858
Building and improvements 48,104,210 48,105,723
Equipment 2,478,220 2,389,924
----------- ------------
57,711,288 57,624,505
Less accumulated depreciation (10,851,168) (9,733,479)
----------- ------------
46,860,120 47,891,026
Receivables from El Comandante
Operating Company, Inc. ("ECOC") 1,634,716 1,816,310
Deferred costs-
Financing 4,231,837 4,388,926
Organizational and other 391,286 470,286
Other 496,345 580,288
----------- ------------
53,614,304 55,146,836
----------- ------------
ASSETS RELATED TO TELEVISION STATIONS:
TV Licenses 1,061,290 1,061,290
Property and equipment 2,470,908 2,413,983
----------- ------------
3,532,198 3,475,273
Less accumulated depreciation and
amortization (282,262) (137,620)
----------- ------------
3,249,936 3,337,653
Deferred costs 1,947,255 1,158,668
Other 366,660 365,765
----------- ------------
5,563,851 4,862,086
----------- ------------
$61,602,802 $60,823,214
=========== ============
(PAGE)7 EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND PARTNERS' DEFICIT
June 30, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
LIABILITIES RELATED TO RACE TRACKS:
First Mortgage Notes-
Principal, net of bond discount of
$1,680,637 and $1,760,161, respectively $66,319,363 $66,239,879
Accrued interest 332,918 332,918
Minority interest in Galapagos 452,918 816,216
Notes payable 569,005 523,562
Accounts payable and accrued liabilities 1,493,491 1,092,765
Accrued income taxes 380,172 231,980
----------- ------------
69,547,867 69,237,320
----------- ------------
LIABILITIES RELATED TO TELEVISION STATIONS:
Note payable 1,295,156 1,365,848
Obligations under TV Purchase Agreements 441,992 474,661
Accounts payable and accrued liabilities 432,676 464,414
----------- ------------
2,169,824 2,304,923
----------- ------------
OTHER LIABILITIES:
Unsecured partner's loans 460,224 211,629
Notes payable and accrued interest 702,439 566,885
Accounts payable and accrued liabilities 285,719 226,710
Minority interest in HDA 277,794 63,559
----------- ------------
1,726,176 1,068,783
----------- ------------
PARTNERS' DEFICIT:
General Partners (748,302) (760,803)
Limited Partners (11,092,763) (11,027,009)
----------- ------------
(11,841,065) (11,787,812)
----------- ------------
$61,602,802 $60,823,214
=========== ============
The accompanying notes are an integral part
of these consolidated balance sheets.
(PAGE)8 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
FOR THE SIX AND THE THREE MONTHS ENDED JUNE 30, 1996
(Unaudited)
General Limited
Partners Partners Total
----------- ------------ ------------
BALANCES, December 31, 1995(audited) $ (760,803) $(11,027,009) $(11,787,812)
Net loss for the period (13,183) (133) (13,316)
Currency translation
adjustments (50,039) (505) (50,544)
Effect of currency
fluctuations on long-
term intercompany
transactions 65,703 663 66,366
Cash distributions to
partners - (11,880) (11,880)
----------- ------------ ------------
BALANCES, March 31, 1996 (758,322) (11,038,864) (11,797,186)
Net income for the period 59,674 603 60,277
Currency translation
adjustments (49,654) (502) (50,156)
Cash distributions to
partners - (54,000) (54,000)
----------- ------------ ------------
BALANCES, June 30, 1996 $ (748,302) $(11,092,763) $(11,841,065)
=========== ============ ============
The accompanying notes are an integral part
of this consolidated statement.
(PAGE)9 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,961 $ 45,124
----------- -----------
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities-
Depreciation 1,240,907 607,447
Amortization 469,246 215,914
Deferred income tax provision 267,326 51,721
Currency translation adjustments (34,334) -
Forgiveness of interest (173,754) -
(Increase) decrease in assets-
Rent receivable from ECOC 114,820 -
Deferred costs 108,525 (947,745)
Other 144,724 (258,468)
Increase (decrease) in liabilities-
Accrued interest 69,142 (1,416,233)
Accounts payable and accrued liabilities 427,997 143,233
Accrued income taxes (119,134) 83,736
Minority interests (58,897) (71,630)
----------- -----------
Total adjustments 2,456,568 (1,592,025)
----------- -----------
Net cash provided by (used in)
operating activities 2,503,529 (1,546,901)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (148,816) (988,322)
Collection of note from ECOC 51,157 -
Effect of consolidation of HDA cash accounts - 3,429,221
----------- -----------
Net cash (used in) provided by
investing activities (97,659) 2,440,899
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of obligations under TV
Purchase Agreements (32,669) (35,541)
Loans from minority stockholders - 450,000
Loans from (payments to) general partner, net 248,595 (130,867)
Loans from financial institutions 356,168 850,000
Payments on notes payable (231,418) (100,000)
Increase in deferred costs (1,070,311) (133,793)
Cash distributions to partners (65,880) (352,345)
----------- -----------
Net cash (used in) provided by
financing activities (795,515) 547,454
----------- -----------
(PAGE)10 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
(continued)
1996 1995
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,610,355 1,441,452
CASH AND CASH EQUIVALENTS, beginning of year 814,292 -
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,424,647 $ 1,441,452
=========== ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,163,753 $ 4,015,053
Income taxes paid 194,310 87,000
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)11 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30,
(Unaudited)
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 60,277 $ 126,485
----------- -----------
Adjustments to reconcile net income to net
cash used in operating activities-
Depreciation 616,066 485,853
Amortization 222,686 168,807
Deferred income tax provision 54,584 30,300
Currency translation adjustments (50,156) -
Forgiveness of interest (173,754) -
(Increase) decrease in assets-
Rent receivable from ECOC 83,155 -
Deferred costs - (865,966)
Other 350,524 (270,527)
Increase (decrease) in liabilities-
Accrued interest (1,950,322) (1,954,707)
Accounts payable and accrued liabilities 10,923 749,577
Accrued income taxes (130,901) 44,543
Minority interests 40,897 (46,735)
----------- -----------
Total adjustments (926,298) (1,658,855)
----------- -----------
Net cash used in operating activities (866,021) (1,532,370)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (128,624) (808,204)
Collection of note from ECOC 51,157 -
----------- -----------
Net cash used in investing activities (77,467) (808,204)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of obligations under TV
Purchase Agreements (22,772) (31,319)
Loans from general partner, net 61,352 -
Loans from financial institutions 356,168 250,000
Payments on notes payable (79,865) (100,000)
Increase in deferred costs (504,601) (133,793)
Cash distributions to partners (54,000) (352,345)
----------- -----------
Net cash used in financing activities (243,718) (367,457)
----------- -----------
(PAGE)12 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30,
(Unaudited)
(continued)
1996 1995
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,187,206) (2,708,031)
CASH AND CASH EQUIVALENTS, beginning of period 3,611,853 4,149,483
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,424,647 $ 1,441,452
=========== ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,084,512 $ 4,009,991
Income taxes paid 187,869 87,000
The accompanying notes are an integral part
of these consolidated statements.
(PAGE)13 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'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,
located in a 257 acres of land, 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") which is expected to be received in August 1996.
The Company also owns Virginia Jockey Club, Inc. ("VJC"), an unsuccessful
applicant for licenses to own and operate Virginia's first thoroughbred racing
and pari-mutuel wagering facility, which is now inactive.
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.
Accordingly, the consolidated statement of loss for the six months ended June
(PAGE)14
30, 1995 only includes results of operations of HDA and its subsidiaries for
the period from March 8 to June 30, 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 June 30, 1995 the
accumulated deficit had been eliminated and a minority interest of $92,000 was
recorded for the six months ended June 30, 1995 representing the minority
partners' 18% interest in HDA's net income in excess of the December 31, 1994
accumulated deficit of $818,750. For the six months ended June 30, 1996 a
minority interest of $214,000 was recorded representing the minority partners'
18% interest in HDA's net income for the period. A minority interest of
$273,000 and $164,000 was also recorded related to the minority stockholders'
interest in the net losses of Galapagos for the six months ended June 30, 1996
and 1995, respectively.
Net income 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 June 30, 1996 and for the six
and the three month periods ended June 30, 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 six months
ended June 30, 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)15
2. BACKGROUND INFORMATION:
El Comandante Lease and the Operating License
HDA leases El Comandante to ECOC under a lease agreement (El "Comandante
Lease") that expires on 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.
HDA has the primary obligation to ensure that ECOC complies with all
terms and provisions of the Operating License and applicable regulations and
orders of the Racing Board.
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.
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-
(PAGE)16
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 in August
1996. Paxson and S&E also entered into a Time Brokerage Agreement which will
terminate when the sale is closed. Pursuant to the terms of this agreement,
Paxson pays fees of $23,333 monthly to S&E, provides programming (mainly
infomercials) and certain other services to S&E and is entitled to 50% of
S&E's operating cash flow from February 1, 1996 until closing of the sale.
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 $1.5 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
HDA has a 55% ownership interest in Galapagos, a Dominican Republic
corporation selected by the Dominican Republic Racing Commission to operate
and manage the V Centenario Race Track ("V Centenario"), a government owned
horse race track in Santo Domingo, Dominican Republic. The remaining 45%
interest in Galapagos is owned by residents of the Dominican Republic
("Minority Stockholders").
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).
(PAGE)17
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 15).
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.
Generally, 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 June 30, 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.
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.
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 six months ended June 30, 1996 and
1995 include $334,000 and $211,000, respectively, earned from a contract with
ECOC (see Note 11).
(PAGE)18
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. All
property and equipment is depreciated using the straight-line method over
their estimated useful lives, 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. As of December 31, 1995, deferred costs also included
broadcast contract rights for agreements that had been executed by S&E, except
for contracts amounting to approximately $208,000 which did not meet certain
conditions prescribed in accounting literature for their recognition.
Broadcast contract rights were amortized based, in general terms, on the
estimated number of times the program could be telecasted. Since February 1,
(PAGE)19
1996 under the Time Brokerage Agreement with Paxson, S&E has not entered into
new commitments for broadcast contract rights. Upon the closing of the sale
to Paxson, S&E will write-off approximately $1 million of deferred costs and
broadcast contract rights which will not have any future benefit to S&E under
Paxson's management of the Television Stations.
Currencies
HDA consolidates its accounts with Galapagos whose functional currency is
Dominican Republic pesos ("RD$"), 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 operating costs of Dominican Republic racing. For the six months ended
June 30, 1996 and 1995, a net loss of $28,600 and a net gain of $10,000,
respectively, was recognized by Galapagos. Also, the following accumulated
net losses from changes in exchange rates are included in the partners'
deficit:
June 30, December 31,
1996 1995
------------ ------------
Translation of assets and
liabilities $ 127,600 $ 26,700
Unsettled intercompany transactions
of a long term nature - 66,600
------------ ------------
$ 127,600 $ 93,300
============ ============
The exchange rate as of June 30, 1996 and December 31, 1995 was US$1.00
to RD$14.01 and US$1.00 to RD$13.46, respectively and the average exchange
rate prevailing during the six months ended June 30, 1996 was US$1.00 to
RD$13.74.
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
(PAGE)20
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
HDA's accumulated deficit was eliminated. The Company did, however, recognize
revenues of $134,000 in the six months ended June 30, 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 June 30, 1996 and December 31, 1995 consist
of (i) a note receivable and accrued interest of $953,390 and $1,020,164,
respectively, and (ii) unpaid rent under the El Comandante Lease of $681,326
and $796,146, respectively. The note accrues interest at 5.75% and is due in
monthly installments of $30,309, including interest, over a three year period
that commenced 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
(PAGE)21
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
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
(PAGE)22
ratios.
Minority Interest in Galapagos
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 December 31, 1995, HDA had made
loans of $1,842,500, which were eliminated in the accompanying consolidated
financial statements, and the Minority Stockholders had made loans of
$1,507,750. These loans bore interest at a rate equal to 2% over prime rate,
which at December 31, 1995 was 10.5%. Effective June 30, 1996, HDA and the
Minority Stockholders contributed these loans to the capital of Galapagos and
forgave accrued interest thereon.
The minority interest in Galapagos represents the Minority Stockholders'
investment (loans and capital), net of their share of Galapagos' accumulated
losses.
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. As of December 31, 1995, Galapagos has
borrowed $549,500 under the line of credit and in May 1996 borrowed an
additional $106,100. The notes are payable in monthly installments, including
interest at 10.75%, of $4,759, $11,525 and $2,612, for a period ending July
1998, July 1999 and December 1999, respectively. The loans are guaranteed by
HDA and collateralized by wagering equipment.
7. LIABILITIES RELATED TO TELEVISION STATIONS:
The note payable consists of a $1.4 million loan obtained by S&E on
September 22, 1995, 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.
The obligation under TV Purchase Agreements consists of a non-interest
bearing debt, assumed by S&E in connection with the acquisition of the
Television Stations, payable in monthly installments of $9,357, including
imputed interest at 12%, thru October 2001.
HDA has agreed to assume the note payable and the obligation under TV
Purchase Agreements upon closing of the sale of a 50% interest in S&E to
Paxson.
8. OTHER LIABILITIES:
Notes Payable
(PAGE)23
During 1995 the Company borrowed $850,000 from a bank. The loan was
payable in quarterly installments of $100,000 commencing May 31, 1995 and the
Company assigned to the bank the first $100,000 of quarterly distributions
from HDA. As of December 31, 1995 the loan balance was $550,000 an in May
1996 it was increased to $700,000, also payable in quarterly installments of
$100,000 commencing August 31, 1996 and a final payment of $200,000 in
November 1997. As of June 30, 1996 the loan balance was $700,000. The
interest is payable monthly based on the Citibank prime rate plus 2%, which
was 10.25% at June 30, 1996 and 10.5% at December 31, 1995.
Unsecured Partner's Loans
During 1995 the Company 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 $460,224 and $211,629 at June 30, 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
(PAGE)24
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 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 June 30, 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. 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 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
(PAGE)25
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.
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 six months ended June 30, 1996 and 1995, Galapagos incurred in fees of
$121,219 and $35,758, respectively. Galapagos also reimburses ECOC for out-
of-pocket expenses related to Galapagos.
Assets and liabilities related to Dominican Republic racing amounted to
$2,684,000 and $1,806,000, respectively, as of June 30, 1996 and to $3,125,000
and $2,985,000, 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
(PAGE)26
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.
12. 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.
13. 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 $3,809 and $1,087 has been provided for the six months ended June 30,
1996 and 1995, respectively.
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
(PAGE)27
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 $71,368 and $169,650 for the six months ended June 30, 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 six months ended June 30, 1996 and 1995 includes $286,487
and $51,721, 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 was subject to withholding taxes in
Dominican Republic upon interest collected from Galapagos on its stockholder
loans, which loans and interest were eliminated in the accompanying
consolidated financial statements. These loans were contributed to the
capital of Galapagos and accrued interest forgiven in 1996 before any interest
had been collected. The deferred income tax provision for the six months
ended June 30, 1996 includes a credit of $19,161 for the reversal of prior
year's taxes on interest that was forgiven.
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.
(PAGE)28
14. RELATED PARTY TRANSACTIONS:
During the six months ended June 30, 1996 and 1995, the Company received
services from IGC and incurred $100,000 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 fees of $83,521 to IGP
pursuant to the IGP Management Agreement. During the six months ended June
30, 1996, management fees to IGP were $135,220.
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.
15. 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:
June 30, 1996 December 31, 1995
------------------------ ------------------------
Carrying Carrying
Fair Value Value Fair Value Value
----------- ----------- ----------- ----------
Cash and cash equivalents $ 2,424,647 $ 2,424,647 $ 814,292 $ 814,292
Receivables from ECOC-
Note and accrued interest 920,000 953,390 940,000 1,020,164
First Mortgage Notes 65,280,000 66,319,363 58,000,000 66,239,879
Payable to stockholders - - 1,597,916 1,597,916
Notes payable 2,564,161 2,564,161 2,439,410 2,439,410
Obligations under TV
Purchase Agreements 441,992 441,992 474,661 474,661
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 notes payable and obligations under TV Purchase Agreements
approximates fair value because these obligations bear interest at market.
(PAGE)29
16. UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF INCOME:
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 six months ended
June 30, 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)30
16. UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF INCOME (continued):
FOR THE SIX MONTHS ENDED JUNE 30,
(In thousands except per unit amounts)
(Unaudited)
1996 1995
---------- ----------
Historical Proforma
REVENUES:
Rental income from El Comandante $ 7,419 $ 7,361
Dominican Republic racing-
Commissions on wagering 2,261 721
Other revenues 290 90
Television Stations 1,165 530
Interest income 80 66
---------- ----------
Total revenues 11,215 8,768
---------- ----------
EXPENSES:
Financial 4,438 4,423
Depreciation 1,241 942
General and administrative 778 444
Management fees 235 232
Operating costs of Dominican Republic racing 3,110 1,124
Operating costs of Television Stations 1,083 904
Other Costs - 131
---------- ----------
Total expenses 10,885 8,200
---------- ----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 330 568
PROVISION FOR INCOME TAXES 342 368
MINORITY INTERESTS (59) (120)
---------- ----------
NET INCOME $ 47 $ 320
========== ==========
ALLOCATION OF NET INCOME:
General Partners $ 1 $ 3
Limited Partners 46 317
---------- ----------
$ 47 $ 320
========== ==========
NET INCOME PER UNIT $ .01 $ 0.05
========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING 6,334 6,334
========== ==========
(PAGE)31 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF REVENUES AND EXPENSES
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
1996 1995
----------- -----------
REVENUES:
Commissions on wagering $29,674,056 $28,645,061
Other 1,350,234 1,199,465
----------- -----------
Total revenues 31,024,290 29,844,526
----------- -----------
EXPENSES:
Payments to horse owners and horse owners'
association 14,785,549 14,335,395
Track rent 7,418,514 7,361,265
Salaries, wages and employee benefits 3,514,357 3,367,268
Operating expenses 2,627,693 2,888,520
General and administrative 1,350,835 1,518,236
Marketing and satellite transmission costs 1,191,980 1,120,225
----------- -----------
Total expenses 30,888,928 30,590,909
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 135,362 (746,383)
PROVISION (CREDIT) FOR DEFERRED INCOME TAXES (14,870) 87,572
----------- -----------
NET INCOME (LOSS) $ 150,232 $ (833,955)
=========== ===========
The accompanying notes are an integral
part of these statements.
(PAGE)32 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF REVENUES AND EXPENSES
FOR THE THREE MONTHS ENDED JUNE 30,
(Unaudited)
1996 1995
----------- -----------
REVENUES:
Commissions on wagering $14,467,389 $13,600,767
Other 669,062 549,297
----------- -----------
Total revenues 15,136,451 14,150,064
----------- -----------
EXPENSES:
Payments to horse owners and horse owners'
association 7,215,752 6,797,750
Track rent 3,616,845 3,500,191
Salaries, wages and employee benefits 1,770,442 1,647,611
Operating expenses 1,286,777 1,473,631
General and administrative 682,988 769,371
Marketing and satellite transmission costs 576,727 510,957
----------- -----------
Total expenses 15,149,531 14,699,511
----------- -----------
LOSS BEFORE INCOME TAXES (13,080) (549,447)
PROVISION (CREDIT) FOR DEFERRED INCOME TAXES (41,825) 134,452
----------- -----------
NET INCOME (LOSS) $ 28,745 $ (683,899)
=========== ===========
The accompanying notes are an integral
part of these statements.
(PAGE)33 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF NET ASSETS (LIABILITIES)
June 30, December 31,
1996 1995
----------- -----------
(Unaudited) (Audited)
ASSETS:
CURRENT ASSETS:
Cash, including restricted cash of
$220,249 and $903,562, respectively $ 608,269 $ 2,883,447
Accounts receivable, net 1,366,643 954,809
Prepayments and supplies inventory 370,415 291,717
Notes receivable 426,946 310,944
----------- -----------
Total current assets 2,772,273 4,440,917
----------- -----------
DEFERRED COSTS, net:
Organizational costs 32,185 36,355
Deferred tax asset 573,007 558,137
Telecommunication installation costs 223,681 257,829
Noncompetition agreement 270,833 395,833
----------- -----------
Total deferred costs 1,099,706 1,248,154
----------- -----------
FURNITURE AND EQUIPMENT, net 3,789,139 3,469,371
----------- -----------
Total assets $ 7,661,118 $ 9,158,442
----------- -----------
(PAGE)34 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF NET ASSETS (LIABILITIES)
(continued)
June 30, December 31,
1996 1995
----------- -----------
(Unaudited) (Audited)
LIABILITIES:
CURRENT LIABILITIES:
Current portion of capital lease
obligations $ 577,892 $ 560,128
Accounts payable and accrued liabilities 2,465,070 2,911,948
Outstanding winning tickets and refunds 886,030 2,095,794
----------- -----------
Total current liabilities 3,928,992 5,567,870
----------- -----------
CAPITAL LEASE OBLIGATIONS 1,486,101 1,318,962
----------- -----------
PAYABLE TO HOUSING DEVELOPMENT
ASSOCIATES S.E.:
Rent 681,326 796,145
Note payable and accrued interest 953,390 1,020,164
----------- -----------
1,634,716 1,816,310
----------- -----------
OTHER LIABILITIES:
Notes 2,450,000 2,450,000
Accrued interest 130,679 124,902
----------- -----------
2,580,679 2,574,902
----------- -----------
Total liabilities 9,630,488 11,278,044
----------- -----------
NET ASSETS (LIABILITIES) $(1,969,370) $(2,119,602)
=========== ===========
The accompanying notes are an integral part
of these statements.
(PAGE)35 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENT OF CHANGES IN NET ASSETS (LIABILITIES)
FOR THE SIX AND THE THREE MONTHS ENDED JUNE 30, 1996
(Unaudited)
Amount
-------------
BALANCES, December 31, 1995 (audited) $ (2,119,602)
Net income for the period 121,487
-------------
BALANCES, March 31, 1996 (1,998,115)
Net income for the period 28,745
-------------
BALANCES, June 30, 1996 $ (1,969,370)
=============
The accompanying notes are an integral part
of this statement.
(PAGE)36 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 150,232 $ (833,955)
----------- -----------
Adjustments to reconcile net income (loss)
to net cash used in operating activities-
Depreciation and amortization 455,396 407,001
Deferred tax provision (credit) (14,870) 87,572
Provision for bad debts 50,004 124,998
(Increase) in current assets-
Accounts receivable (461,838) (176,718)
Prepayments and supplies inventory (78,698) (56,775)
Increase (decrease) in current liabilities-
Accounts payable and accrued liabilities (446,878) 256,293
Outstanding winning tickets and refunds (1,209,763) (646,795)
Accrued interest (9,840) 10,746
Rent payable (114,820) -
----------- -----------
Total adjustments (1,831,307) 6,322
----------- -----------
Net cash used in operating activities (1,681,075) (827,633)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable (116,002) (52,877)
Capital expenditures (213,021) (274,328)
Payments of telecommunication installation
costs (61) (12,835)
----------- -----------
Net cash used in investing activities (329,084) (340,040)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations (213,862) (209,701)
Payments on notes payable (51,157) -
----------- -----------
Net cash used in financing activities (265,019) (209,701)
----------- -----------
NET DECREASE IN CASH (2,275,178) (1,377,374)
CASH, beginning of year 2,883,447 2,214,801
----------- -----------
CASH, end of period $ 608,269 $ 837,427
=========== ===========
(PAGE)37 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
(continued)
1996 1995
----------- ------------
SUPPLEMENTAL INFORMATION:
Interest paid $ 113,786 $ 116,231
NONCASH TRANSACTIONS:
Equipment acquired through capital leases $ 398,765 $ 91,863
The accompanying notes are an integral part
of these statements.
(PAGE)38 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30,
(Unaudited)
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 28,745 $ (683,899)
----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities-
Depreciation and amortization 225,811 259,916
Deferred tax provision (credit) (41,825) 134,452
Provision for bad debts 25,002 62,499
(Increase) decrease in current assets-
Accounts receivable (221,167) (143,791)
Prepayments and supplies inventory 211,475 211,723
Increase (decrease) in current liabilities-
Accounts payable and accrued liabilities (550,822) 691,723
Outstanding winning tickets and refunds (1,567,438) (370,260)
Accrued interest (29,316) 5,646
Rent payable (83,155) -
----------- -----------
Total adjustments (2,031,435) 851,908
----------- -----------
Net cash provided by (used in)
operating activities (2,002,690) 168,009
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in notes receivable (104,384) 18,670
Capital expenditures (157,298) (122,879)
Payments of telecommunication installation
costs - (4,634)
----------- -----------
Net cash used in investing activities (261,682) (108,843)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations (108,381) (116,238)
Payments on notes payable (51,157)
Decrease in organizational costs - 2,359
----------- -----------
Net cash used in financing activities (159,538) (113,879)
----------- -----------
NET DECREASE IN CASH (2,423,910) (54,713)
CASH, beginning of period 3,032,179 892,140
----------- -----------
CASH, end of period $ 608,269 $ 837,427
=========== ===========
(PAGE)39 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30,
(Unaudited)
(continued)
1996 1995
----------- ------------
SUPPLEMENTAL INFORMATION:
Interest paid $ 55,607 $ 60,648
NONCASH TRANSACTIONS:
Equipment acquired through capital leases $ 365,652 $ 43,723
The accompanying notes are an integral part
of these statements.
(PAGE)40 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 June 30, 1996 and for the six
and the three month periods ended June 30, 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 six months
ended June 30, 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)41
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 six months ended
June 30, 1996 and 1995 averaged 21.3% and 20.2% , respectively. Commissions
on simulcasted races are negotiated with wagering facilities outside Puerto
Rico. ECOC Commissions on wagers on simulcasted races during the six months
ended June 30, 1996 and 1995 averaged 6.06% and 6.52%, 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, simulcasting
commissions, fees earned under a management agreement described in Note 4 and
other miscellaneous amounts. As of June 30, 1996 and December 31, 1995,
reserves for doubtful accounts amounted to $235,127 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 six months ended June 30, 1996 and 1995
was $4,170 in each period.
(PAGE)39
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 six months ended June 30, 1996 and 1995 was
$30,000 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 six months ended June 30, 1996 and 1995 was
$125,000 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 June
30, 1996 and December 31, 1995, furniture and equipment was as follows:
June 30, December 31,
1996 1995
---------- -----------
Furniture $ 363,785 $ 338,314
Equipment 4,513,892 3,987,222
Motor vehicles 756,982 726,138
---------- -----------
5,634,659 5,051,674
Less - Accumulated depreciation (1,845,520) 1,582,303
---------- -----------
$3,789,139 $ 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
(PAGE)43
years during the last 15 years of employment. ECOC's policy is to fund an
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
(PAGE)44
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
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 June 30, 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
(PAGE)45
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
$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 June 30, 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 then employed by IGP. Except for approximately 14% of the salary
and related payroll costs of one consultant, ECOC reimburses all of payroll,
bonus and fringe benefit costs with respects to the employment of the
consultants. On April 22, 1996, IGP assigned its interest in the Consulting
Agreement to Equus Management Company ("EMC") and the three racing consultants
(PAGE)46
became employees of EMC. Fees incurred by ECOC pursuant to the Consulting
Agreement during the six months ended June 30, 1996 and 1995 were $458,700 and
$448,400, respectively.
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 an
amount equal to .325% (.00325) of wagering for each race day up to a maximum
of $3,461 per race day until April 1998 and subject to a maximum contribution
per annum.
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 six months ended June 30, 1996 and
1995, ECOC earned fees of $121,219 and $35,758, 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.
(PAGE)47
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
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 $2,000 per month, adjusted annually by CPI.
5. CAPITAL LEASE OBLIGATIONS:
ECOC has entered into certain equipment lease agreements during the
normal course of business which have been classified as capital leases. The
present value of future minimum lease payments under capital leases is as
follows:
Due during year
ending June 30,
1997...........................................$ 577,892
1998........................................... 632,118
1999........................................... 643,274
2000........................................... 210,709
2001...........................................
----------
Minimum lease payments......................... 2,063,993
Less - Current portion........................ 577,892
----------
$1,486,101
==========
6. PAYABLE TO HOUSING DEVELOPMENT ASSOCIATES S.E.:
Payable to HDA as of June 30, 1996 and December 31, 1995 consists of (i)
a
note payable and accrued interest of $953,390 and $1,020,164, respectively,
and (ii) unpaid rent under the El Comandante Lease. The note accrues interest
at 5.75% and is payable in monthly installments of $30,309, including
interest, over a three year period that commenced 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
(PAGE)48
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
June 30, 1996 and December 31, 1995 was 10.75% and 11%, respectively.
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 $573,007 and $558,137, net of valuation allowances
of $1,284,793 and $1,419,433, were recorded as of June 30, 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 (credit) for income taxes for the six months ended
June 30, 1996 is net of a decrease in the valuation allowance of $134,640 and
the deferred credit for income taxes for the six months ended June 30, 1995 is
net of an increase in the valuation allowance of $315,420.
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:
(PAGE)49
June 30, 1996 December 31, 1995
------------------------ ------------------------
Carrying Carrying
Fair Value Value Fair Value Value
----------- ----------- ----------- ----------
Cash $ 608,269 $ 608,269 $ 2,883,447 $2,883,447
Note receivable 426,946 426,946 310,944 310,944
Capital lease obligations 2,063,993 2,063,993 1,879,090 1,879,090
Payable to HDA -
Note and accrued interest 920,000 953,390 940,000 1,020,164
Other liabilities 2,580,679 2,580,679 2,574,902 2,574,902
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)50 EQUUS MANAGEMENT COMPANY
BALANCE SHEET
JUNE 30, 1996
(unaudited)
ASSETS
Cash $ 35
Receivable from Equus Gaming Company L.P. 17,000
--------
$17,035
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $69,658
--------
Stockholder's deficit:
Common stock, $.01 par value, 100 shares authorized,
issued and outstanding 1
Additional paid-in capital 99
Distributions to stockholder (29,818)
Accumulated deficit (22,905)
--------
(52,623)
--------
$17,035
========
The accompanying notes are an integral part of this balance sheet.
(PAGE)51 EQUUS MANAGEMENT COMPANY
NOTES TO BALANCE SHEET
JUNE 30, 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
$17,000 as of June 30, 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 June
30, 1996 as accrued liabilities.
(PAGE)52
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 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 final approval of the Federal Communications Commission
("FCC") which is expected to be received in August 1996.
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 and VJC is now
(PAGE)53
an inactive company.
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 six and three month
periods ending June 30, 1996 and 1995 (HDA accounts were consolidated with the
Company's accounts for the period after March 8, 1995) and (ii) the Company
and its consolidated subsidiaries, VJC and HDA, based on proforma statements
of income for the six month periods ended June 30, 1996 (historical) and 1995
(proforma) presented in Note 16 to the consolidated financial statements of
the Company.
The Company's Results of Operations
Six Months Ended June 30, 1996 Compared to the Six Months Ended
June 30, 1995
The Company did not consolidate the accounts of HDA until March 8, 1995.
Accordingly, the Company's historical results of operations for the six month
periods ended June 30, 1996 and 1995 are not readily comparable. More
meaningful comparative information is included elsewhere in this report in
Management's discussion of the Company's Proforma Results of Operations for
the six months ended June 30, 1996 compared to the six months ended June 30,
1995.
Revenues. With the exception of a cash distribution of $134,000
received from HDA in February 1995 and $1,000 of interest income in 1996, the
revenues of the Company in its consolidated statements of income for the six
months ended June 30, 1996 and 1995 are entirely from the consolidation of the
accounts of HDA. Because the Company 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 income of the
(PAGE)54
Company for the six month periods ended June 30, 1996 and 1995 are HDA
expenses from January 1, 1996 to June 30, 1996 and from March 8, 1995 to June
30, 1995. Since the proforma income statements of the Company include HDA's
expenses for the entire six month periods ended June 30, 1996 and 1995, better
comparative expense information is available in management's discussion of the
Company's Proforma Results of Operations included later in this report.
Expenses of the Company and its subsidiary VJC during the six month
periods ended June 30, 1996 and 1995, and excluding the expenses of HDA and
its subsidiaries, were as follows:
a. Interest and amortization of financing costs of $40,000 in the 1996
period and $22,000 in the 1995 period related to a bank loan closed
March 1995 and renegotiated in May 1996;
b. Depreciation of $104,000 in the 1996 period and $66,000 in the 1995
period related to a step-up of $5,650,000 in El Comandante assets.
The step-up is the value assigned to HDAMC's interest in HDA which
was transferred to the Company in March 1995 in exchange for limited
partnership Units of the Company;
c. General and administrative expenses of $329,000 in each of the six
month periods ended June 30, 1996 and 1995, including VJC appeal
costs of $30,000 in 1996 and $56,000 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 accounting costs of the Company; and
d. Management fees of $100,000 pursuant to the Support Agreement in each
of the six month periods ended June 30, 1996 and 1995.
Provision for Income Taxes. The Company is subject to Puerto Rico income
tax at a 29% rate on its allocable share of HDA's net taxable income and an
HDA subsidiary is subject to Federal income taxes. HDA had previously
provided for deferred Dominican Republic income taxes on interest accrued on
loans to Galapagos. The accrued interest was forgiven in 1996 and a tax
credit was recorded for reversal of the deferred tax provision applicable to
the forgiven interest. The net provisions for income taxes of $343,000 and
$222,000 in the six month periods ended June 30, 1996 and 1995 were as
follows:
1996 1995
Period Period
------------ ------------
Puerto Rico income taxes of the Company $ 358,000 $ 221,000
Dominican Republic income tax credit of HDA (19,000) -
Federal income taxes of HDA subsidiary 4,000 1,000
------------ ------------
$ 343,000 $ 222,000
============ ============
(PAGE)55
Minority Interest. Minority partners own 18% of HDA and minority
stockholders hold a 45% interest in Galapagos. 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 at December 31, 1994 was eliminated by earnings of
HDA in the six months ended June 30, 1995. The minority interest in the six
month periods ended June 30, 1996 and 1995 is comprised of the following:
1996 1995
Period Period
------------- -------------
Minority stockholders' share of
losses of Galapagos $( 273,000) $( 164,000)
Minority partners' share of
income of HDA after accumulated
deficit was eliminated by
HDA's earnings in the 1995 period 214,000 92,000
------------- -------------
$( 59,000) $( 72,000)
============= =============
Three Months Ended June 30, 1996 Compared to the Three Months Ended
June 30, 1995
Revenues. The revenues of the Company in its consolidated statements of
income for the three months ended June 30, 1996 and 1995 are entirely from the
consolidation of the accounts of HDA. Revenues increased $816,000 (17.9%) to
$5,377,000 in the three months ended June 30, 1996 from $4,561,000 in the
comparable period in 1995. The increase resulted primarily from increases in
revenues of $362,000 from the Television Stations, $321,000 from Dominican
Republic racing and $117,000 from El Comandante rental income.
Rental income from El Comandante. Rental income from El Comandante
increased $117,000 to $3,617,000 in the three months ended June 30, 1996 from
$3,500,000 in the comparable period of 1995. Rental income in the 1996
quarter was based on 25% of ECOC's commissions of $14,467,000 from El
Comandante wagering on 62 racing days, whereas 1995 rental income was based on
25% of ECOC's commissions of $13,601,000 from wagering on 50 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 quarter, the
commissions earned on Thursday race days more than offset the decline in
average daily commissions.
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
(PAGE)56
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 on wagering on El Comandante
races of $320,000 in the three months ended June 30, 1996 and $266,000 in the
comparable three months of 1995. Galapagos commenced racing operations at V
Centenario in late April 1995 and earned commissions on V Centenario races of
$634,000 in the three months ended June 30, 1996 and $382,000 in the
comparable three months of 1995. Galapagos also had revenues of $90,000 in
each of the 1996 and 1995 three month periods from Jockey Club and restaurant
operations and other miscellaneous sources.
A portion of the wagering in the Dominican Republic is set aside and
reserved to cover losses from currency fluctuations and for other purposes
approved by the Dominican Republic Racing Commission ("Required Reserve").
Revenues from Television Stations. In February 1996 S&E, HDA and Paxson
entered into a Stock Purchase Agreement pursuant to which Paxson agreed to
purchase a 50% interest in S&E, subject to final FCC approval which is
expected to be received in August, 1996. Paxson and S&E also entered into a
Time Brokerage Agreement which will terminate when the sale of 50% interest in
S&E closes. Pursuant to the terms of this agreement, Paxson is paying fees of
$23,333 monthly to S&E, is providing programming, including infomercials, and
certain other services to S&E and is entitled to 50% of S&E's operating cash
flow from February 1, 1996 until closing of the sale. Following the closing,
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 $303,000 in the three months
ended June 30, 1995. As a result of the changes in broadcasting and
programming formats which commenced February 1996 pursuant to the Paxson Time
Brokerage Agreement, S&E increased its revenues to $665,000 in the three
months ended June 30, 1996. The revenues included fees of approximately
$164,000 and $168,000 in the three months ended June 30, 1996 and 1995,
respectively, from ECOC for broadcasting a four-hour program for races run at
El Comandante and fees of $70,000 in the 1996 period from Paxson pursuant to
the Time Brokerage Agreement.
Interest Income. HDA earned interest income of $37,000 on its note
receivable from ECOC and $14,000 from short term investments in the three
months ended June 30, 1996, and earned $34,000 in the comparable 1995 period
from short-term investments.
Financial Expenses. Financial expenses in the three months ended June
30, 1996 decreased $94,000 to $2,136,000 from $2,230,000 in the three months
ended June 30, 1995. The stockholders of Galapagos converted their loans to
capital in 1996 and forgave accrued interest on their loans. As a result,
interest expense in the 1996 three-month period includes a credit of $129,000
for the reversal of interest accrued on minority stockholder loans, whereas
(PAGE)57
the 1995 three-month period included interest expense of $25,000 on the loans,
for a net decrease in interest of $154,000 between periods. The decrease was
offset in part by interest expense in 1996 of $48,000 on capital leases of
Galapagos and the Television Stations; there was no similar interest in the
1995 period.
Depreciation. Depreciation increased $130,000 (26.7%) in the three
months ended June 30, 1996 to $616,000 from $486,000 in the comparable three
months of 1995. The increase is attributable to depreciation of $166,000
related to assets of the Television Stations and Galapagos in the 1996
quarter, compared to depreciation of $30,000 for Galapagos and no depreciation
for the Television Stations in the 1995 quarter.
General and Administrative Expenses. General and administrative expenses
increased $153,000 to $370,000 in the three months ended June 30, 1996 from
$217,000 in the comparable three months of 1995. The increase is primarily
attributable to El Comandante property taxes of $149,000 in 1996. As
discussed above under "Rental Income from El Comandante", HDA assumed
responsibility for paying El Comandante property taxes effective January 1,
1996.
Management Fees. An HDA management agreement with a subsidiary of IGC
provides for fees of $250,000 annually, adjusted by increases in the Consumer
Price Index ("CPI"), and IGC provides services to the Company pursuant to the
Support Agreement. Fees under these agreements were $118,000 in the three
months ended June 30, 1996 and $116,000 in three months ended June 30, 1995.
Operating Costs of Dominican Republic Racing. Galapagos began
simulcasting El Comandante races on February 27, 1995 and opened V Centenario
in April 1995. Costs incurred in connection with these operations were
$929,000 in the three months ended June 30, 1995, and $1,356,000 while under
full operation during the three months ended June 30, 1996.
Operating Costs of Television Stations. S&E commenced television
broadcasting in January 1995 on a test basis until June 1995 and incurred
operating expenses of $341,000 during the three months ended June 30, 1995;
the expenses in the comparable 1996 quarter were $568,000, which includes fees
of $158,000 to Paxson in the 1996 quarter pursuant to the Time Brokerage
Agreement.
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 the HDA level. Instead, HDA's partners are taxed on their
allocable share of HDA's taxable income. An HDA subsidiary is subject to
federal income taxes. HDA had previously provided for deferred Dominican
Republic income taxes on interest accrued on loans to Galapagos. The accrued
interest was forgiven in 1996 and a tax credit was recorded for reversal of
the deferred tax provision applicable to the forgiven interest. The net
provisions for income taxes in the three month periods ended June 30, 1996 and
1995 were as follows:
(PAGE)58
1996 1995
Period Period
------------ ------------
Puerto Rico income taxes of the Company $ 154,000 $ 161,000
Dominican Republic income tax credit of HDA ( 44,000) -
Federal income taxes of HDA subsidiary 1,000 1,000
------------ ------------
$ 111,000 $ 162,000
============ ============
Minority Interest. Minority partners own 18% of HDA and minority
stockholders hold a 45% interest in Galapagos. The minority interest in the
three months ended June 30, 1996 was $41,000, comprised of minority partners'
share of income of HDA of $102,000 less minority stockholders' share of losses
of Galapagos of $61,000. The minority interest in the three months ended June
30, 1995 was $47,000, comprised of minority partners' share of income of HDA
of $139,000 less minority stockholders' share of losses of Galapagos of
$92,000.
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 below. HDA is forecasting $7.5 million of cash flow
in 1996 before distributions to its partners.
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, investor relations costs, and reimbursements to IGC
under the Support Agreement. The Company's 1996 cash requirement is estimated
to be approximately $1.3 million without considering any payments of 1995
loans from IGC, a general partner of the Company, which amounted to $212,000
at December 31, 1995.
The Company's principal sources of cash to meet its obligations have been
distributions related to its 82% interest in HDA, a 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
since January 1, 1994 (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. In May 1996 the Company borrowed an
additional $250,000, thereby increasing the loan balance from $450,000 to
$700,000 with the bank taking 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.
(PAGE)59
During the six months ended June 30, 1996 HDA made cash distributions of
$300,000 to the Company related to HDA's 1995 fourth quarter and 1996 first
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 third and fourth quarters of 1996 are estimated to be approximately
$780,000. 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 cover the Company's 1996 estimated cash
requirements of $1.3 million.
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 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
which commenced 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, primarily
for equipment purchases, start-up costs, acquisition debt of Television
Stations and operating losses of both operations, and (iii) costs of the
Distribution and registration of the Company's Units. Notwithstanding the
effect of these matters, HDA was able to meet its 1995 cash requirements from
accumulated cash at December 31, 1994, cash flow from ECOC rent collections
and equipment financing proceeds of approximately $1.8 million for the
Television Stations and Dominican Republic racing.
At the beginning of the year ECOC's management forecasted that 1996 El
Comandante commissions would exceed 1995 commissions by $6 million, which
commissions include wagering on races simulcasted to the Dominican Republic.
Based on this forecast ECOC estimated its payments to HDA in 1996 would exceed
1995 payments by approximately $3 million, including payment of $800,000 of
the 1995 debt of $1.8 million (as discussed below, the estimated 1996 rent and
debt payments by ECOC to HDA have now been reduced by approximately $900,000).
The principal reasons for the forecast of increased El Comandante commissions
(PAGE)60
of $6 million were (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 expected
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 fixed
percentages of wagering handle or El Comandante commissions. The forecast
assumed 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.
ECOC's revenues and expenses for the six months ended June 30, 1996 did
not vary significantly from ECOC's forecast. However, June and July 1996
commissions on El Comandante wagering were below forecasts by 11% and 16%,
respectively, which ECOC management attributes in part to the effect of the
pick-six jackpot being won in late May and again in early June 1996. Also,
the preparations by the people of Puerto Rico for hurricane Bertha in July
1996 (which did not directly hit Puerto Rico or result in any significant
damage) affected wagering before and after the storm. ECOC management
believes there were no other identifiable reasons for the decline in June-July
wagering and ECOC management expects Puerto Rico wagering to rebound over the
course of the remainder of the year. The wagering in the Dominican Republic
on simulcasted El Comandante races has also been less than forecast, due in
part to the growth of OTB agencies being slower than forecasted. Management
now expects that ECOC's commissions from wagering in Puerto Rico and the
Dominican Republic will be approximately $2,000,000 less than originally
forecasted. As a result the original HDA forecasts of 1996 rental income have
been reduced by approximately $500,000 (25% of ECOC's reductions in estimated
commissions) and collections of receivables have been reduced by $400,000.
HDA's management is still forecasting significantly improved cash flow
and liquidity in 1996 due primarily to (1) 1996 rent payments by ECOC in
excess of 1995 payments, (2) no significant 1996 cash requirements for
Dominican Republic racing, and (3) net cash flow to HDA of approximately $2.5
million from the Television Stations, resulting from pending sale of 50%
interest in S&E to Paxson.
At the beginning of the year management forecasted Dominican Republic
racing operations to generate approximately break-even cash flow in 1996 and
result in a significant improvement over 1995 results. The forecasted
improved operating results were based primarily on (1) cash which the
Dominican Republic government would permit to be made available from Required
Reserves 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 and (2) 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. However, the planned expansion of the OTB network is
behind schedule and wagering for the six months ended June 30, 1996 was less
(PAGE)61
than forecast. Management believes that any operating cash losses of
Galapagos caused by the wagering being less than forecast can be financed in
1996 by increasing payables under the V Centenario lease, and accordingly the
stockholders of Galapagos, including HDA, are not expected to make additional
investments in Galapagos in 1996.
S&E's agreements with Paxson will have a significant positive effect on
HDA's cash flow, resulting in an estimated $2.5 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 $2.5 million in 1996 is comprised
of $4 million to be received from Paxson upon closing of the S&E stock sale,
less estimated net investments in S&E of $1.5 million in 1996. The FCC has
approved the transaction which in scheduled to close in late August after the
FCC approval becomes a final order. The Paxson agreements require HDA to fund
100% of certain capital improvements of $330,000, and 50% of any additional
improvements if such funds are not available from S&E's operations. HDA's
estimated net investment of $1.5 million will be used primarily for capital
improvements, employee severance costs, costs to cancel certain S&E contracts
and other transaction costs (including legal, accounting and costs of
approvals required from holders of the First Mortgage Notes), and 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; however, HDA management may choose to prepay all or a
portion of this debt from 1996 cash flow.
HDA had cash balances of $560,000 at December 31, 1995, and is now
forecasting a net cash flow of approximately $7.5 million in 1996, before
distributions to partners, as follows:
1996 Actual
Forecast 6-30-96
------------ ------------
Cash receipts to HDA:
El Comandante rent & collections of
receivables from ECOC $ 15,400,000 $ 7,628,000
Sale of 50% interest in S&E 4,000,000 -
Interest on investments 140,000 48,000
------------ ------------
19,540,000 7,676,000
Cash Disbursements by HDA:
Debt service on First Mortgage Notes ( 8,000,000) ( 3,995,000)
Net investment in S&E ( 1,500,000) ( 877,000)
Administration costs, management fees and
costs of registration of the
Company's Units ( 750,000) ( 414,000)
El Comandante property taxes and capital
improvements ( 1,250,000) ( 409,000)
Contingency reserve ( 540,000) -
------------ ------------
$ 7,500,000 $ 1,981,000
============ ============
(PAGE)62
HDA made distributions of $366,000 to its partners in the first two
quarters of 1996 related its results of operations for 1995 fourth quarter and
1996 first quarter. Based on HDA's up-dated forecast of 1996 income, HDA
would be permitted by the terms of the Indenture to make cash distributions to
its partners of approximately $1,450,000 during the third and fourth quarters
of 1996 and first quarter of 1997. The Company receives 82% of HDA's
distributions.
In January 1996 ECOC requested and HDA approved a 1996 capital
improvement budget of $650,000 for El Comandante. ECOC's management also
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 but costs
will principally be incurred in 1997. Another $230,000 was added to the
budget in the second quarter of 1996 for an additional closed circuit
television tower at the race track. Based on the present status of the
capital improvement program, ECOC management estimates that cash requirements
for the approved capital improvements of $880,000 will not exceed $650,000 in
1996 and the balance will be needed in 1997.
The Company's Proforma Results of Operations
Six Months Ended June 30, 1996 Compared to the Six Months Ended
June 30, 1995
As previously disclosed, the Company did not consolidate the accounts of
HDA in the Company's historical financial statements until March 8, 1995.
Note 16 to the Company's consolidated financial statements includes proforma
consolidated statements of income for the six months ended June 30, 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 proforma revenues in the
six months ended June 30, 1996 and 1995, except for interest income of $1,000
in 1996. Accordingly, all other proforma revenues in these six month periods
relate to HDA and its subsidiaries. Revenues increased $2,447,000 (27.9%) to
$11,215,000 in the six months ended June 30, 1996 from $8,768,000 in the
comparable period in 1995. The increase resulted primarily from increases in
revenues of $635,000 from the Television Stations and $1,740,000 from
Dominican Republic racing.
Rental income from El Comandante. Rental income from El Comandante
increased to $7,419,000 in the six months ended June 30, 1996 from $7,361,000
in the comparable period of 1995. Rental income in the 1996 period was based
on 25% of ECOC's commissions of $29,674,000 from El Comandante wagering on 123
racing days, whereas 1995 rental income was based on 25% of ECOC's commissions
of $28,645,000 from wagering on 102 racing days, plus fixed rent of $200,000
(as disclosed previously, fixed rent payments were eliminated January 1,
1996). In February 1996, ECOC commenced racing five days a week by adding
(PAGE)63
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 the comparison of (1)
January 1996 and 1995 commissions earned by ECOC before introduction of
Thursday racing, and (2) February to June 1995 commissions earned before
Thursday racing commenced with commissions earned in February to June 1996
after Thursday racing commenced. Whereas the January 1996 commissions were
$501,000 less than the January 1995 commissions, the average monthly
commissions in February through June 1996 exceeded by $306,000 the average
monthly commissions in the comparable months of 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 on wagering on El Comandante
races of $803,000 in the first six months of 1996 and $339,000 in the 1995
period. Galapagos commenced racing operations at V Centenario in April 1995
and earned commissions on V Centenario races of $1,458,000 in the six months
ended June 30, 1996 and $382,000 in the 1995 period. Galapagos also had
revenues of $290,000 in the 1996 period and $90,000 in the 1995 period from
Jockey Club and restaurant operations and other miscellaneous sources.
Revenues from Television Stations. S&E commenced television
broadcasting in January 1995 on a test basis until June 26, 1995, and earned
broadcasting fees and advertising revenues of $530,000 in the six months ended
June 30, 1995. As a result of the changes in broadcasting and programming
formats commencing February 1996 pursuant to Paxson's Time Brokerage
Agreement, S&E increased its revenues to $1,165,000 in the first six months of
1996. The revenues included fees of $334,000 and $336,000 in the six months
ended June 30, 1996 and 1995, respectively, from ECOC for broadcasting a four-
hour program for races run at El Comandante and fees of $117,000 in 1996 from
Paxson pursuant to the Time Brokerage Agreement.
Interest Income. Interest income was $51,000 on a note receivable from
ECOC and $29,000 from short term investments in the six months ended June 30,
1996 and $66,000 in the comparable 1995 period from short-term investments.
Financial Expenses. Financial expenses in the six months ended June 30,
1996 increased $15,000 to $4,438,000 from $4,423,000 in the six months ended
June 30, 1995, summarized as follows:
(PAGE)64
1996 1995
----------- -----------
Interest on First Mortgage Notes and
amortization of related financing
costs $ 4,342,000 $ 4,329,000
Interest on capital leases of
Galapagos and S&E 98,000 -
Interest and financing costs on the
Company's bank loan 40,000 22,000
Interest (interest credit) on Galapagos'
minority stockholder loans (89,000) 31,000
Other costs 47,000 41,000
----------- -----------
$ 4,438,000 $ 4,423,000
=========== ===========
As previously disclosed, the stockholders of Galapagos forgave accrued
interest in 1996 on their loans to Galapagos and accordingly the 1996 six-
month period includes a credit of $89,000 for the reversal of interest accrued
in 1995 on minority stockholder loans.
Depreciation. Depreciation increased $299,000 (31.7%) in the six months
ended June 30, 1996 to $1,241,000 from $942,000 in the comparable six months
of 1995. The increase is attributable to depreciation of $336,000 related to
assets of the Television Stations and Galapagos in the 1996 period, compared
to no depreciation in the 1995 period for the Television Stations since they
were operating on a test basis until June 26, 1995 and only $30,000 for
Galapagos which commenced operations on April 29, 1995.
General and Administrative Expenses. General and administrative expenses
increased $334,000 to $778,000 in the six months ended June 30, 1996 from
$444,000 in the comparable period of 1995. The increase is primarily
attributable to El Comandante property taxes of $299,000 in the 1996 period;
HDA assumed the responsibility for these 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 $235,000 in the six
months ended June 30, 1996 and $232,000 in the comparable period of 1995.
Operating Costs of Dominican Republic Racing. Galapagos began simulcasting
El Comandante races on February 27, 1995 and opened V Centenario in April
1995. Costs incurred in connection with these operations were $1,124,000 in
the six months ended June 30, 1995, and $3,110,000 while under full operation
during the six months ended June 1996.
(PAGE)65
Operating Costs of Television Stations. S&E commenced television
broadcasting in January 1995 on a test basis and incurred operating expenses
of $904,000 during the six months ended June 30, 1995. Expenses in the
comparable 1996 period were $1,083,000, which includes fees of $187,000 in
1996 period payable to Paxson pursuant to the Time Brokerage Agreement.
Distribution of Units of the Company. The legal, accounting and other
costs of the Distribution were $131,000 in the six months ended June 30, 1995.
There were no similar costs in the comparable period of 1996.
Provision for Income Taxes. The Company is subject to Puerto Rico income
tax at a 29% rate on its allocable share of HDA's net taxable income and an
HDA subsidiary is subject to Federal income taxes. HDA had previously
provided for deferred Dominican Republic income taxes on accrued interest on
loans to Galapagos. The accrued interest was forgiven in 1996 and a tax
credit of $19,000 was recorded for reversal of the deferred tax provision
applicable to the forgiven interest. The net provision for income taxes of
$343,000 and $368,000 in the six month periods ended June 30, 1996 and 1995
were as follows:
1996 1995
Period Period
------------ ------------
Puerto Rico income taxes of the Company $ 358,000 $ 366,000
Dominican Republic income tax credit
of HDA (19,000) -
Federal income taxes of HDA subsidiary 4,000 2,000
------------ ------------
$ 343,000 $ 368,000
============ ============
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 $818,750 at December 31, 1994 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
December 31, 1994.
The minority interest of $59,000 and $120,000 in the six month periods
ended June 30, 1996 and 1995, respectively, is comprised of the following:
(PAGE)66
1996 1995
Period Period
------------- -------------
Minority stockholders' share of
losses of Galapagos $( 273,000) $( 213,000)
Minority partners' share of
income of HDA after accumulated
deficit was eliminated by HDA's
earnings in the 1995 period 214,000 93,000
------------- -------------
$( 59,000) $( 120,000)
============= =============
PART II -- OTHER INFORMATION
ITEM 1 - 5
Not applicable.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Securities and Exchange Commission Section 601
of Resolution S-K
Exhibit
No. Descrption of Exhibit Reference
--------- --------------------------- ---------------
10.1 Assignment and Assumption of
Employment Agreements dated
April 22, 1996 File herewith
(b) Reports on Form 8-K -- On May 17, 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)67 SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Equus Gaming Company L.P.
-----------------------------------
(Registrant)
By: Equus Management Company
Managing General Partner
August 14, 1996 By: /s/ Donald G. Blakeman
- -------------- ------------------------------
Date Donald G. Blakeman
President
August 14, 1996 By: /s/ Gretchen Gronau
- -------------- ----------------------
Date Gretchen Gronau
Vice President and
Chief Financial Officer
(PAGE)68
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.1 Assignment and Assumption of Employment Agreements dated
April 22, 1996
(PAGE)1 ASSIGNMENT AND ASSUMPTION OF EMPLOYMENT AGREEMENTS
THIS ASSIGNMENT AND ASSUMPTION OF EMPLOYMENT AGREEMENTS is made as
of the 22nd day of April, 1996, between Interstate General Properties Limited
Partnership S.E., a Maryland limited partnership ("Assignor"), and Equus
Management Company, a Delaware corporation ("Assignee").
W I T N E S S E T H:
WHEREAS, Assignor is a party to that certain employment agreement,
dated as of December 14, 1993, by and between Assignor and Donald Drew
("Drew"), a copy of which is attached hereto as Exhibit A (the "Drew
Agreement"); and
WHEREAS, Assignor is a party to that certain employment agreement,
dated as of June 1, 1995, by and between Assignor and Juan Manuel Rivera
("Rivera"), a copy of which is attached hereto as Exhibit B (the "Rivera
Agreement", and, together with the Drew Agreement, the "Employment
Agreements"); and
WHEREAS, Assignor desires to assign to Assignee, and Assignee
desires to assume, all of Assignor's rights and obligations under the
Employment Agreements;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree
as follows:
1. Assignee hereby sells, assigns, transfers, and conveys to
Assignee all of Assignor's right, title and interest in and to the Employment
Agreements, and Assignee hereby assumes, and agrees timely to pay or perform,
all of Assignor's obligations under the Employment Agreements.
(PAGE)2
2. All amounts owned, as of the date hereof, to Drew and Rivera
for services performed prior to the date hereof under the Drew Agreement and
the Rivera Agreement, respectively, shall be paid by Assignor.
This Assignment and Assumption of Employment Agreements shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
This Assignment and Assumption of Employment Agreements may be
executed in one or more counterparts, but all such counterparts shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
duly executed as of the year and date first above written.
INTERSTATE GENERAL PROPERTIES LIMITED
PARTNERSHIP S.E.
By: Interstate General Company L.P.,
its general partner
By: Interstate General Management
Corporation, its general partner
By: s/s Francisco Arrivi Cros
-----------------------------
Name: Francisco Arrivi Cros
Title: Senior Vice President
EQUUS MANAGEMENT COMPANY
BY: s/s Donald G. Blakeman
-----------------------------
Name: Donald G.Blakeman
Title: President
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,425
<SECURITIES> 0
<RECEIVABLES> 1,635<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 60,181
<DEPRECIATION> 11,133
<TOTAL-ASSETS> 61,603
<CURRENT-LIABILITIES> 2,212
<BONDS> 66,319<F2>
0
0
<COMMON> 0
<OTHER-SE> (11,841)
<TOTAL-LIABILITY-AND-EQUITY> 61,603
<SALES> 0
<TOTAL-REVENUES> 11,215
<CGS> 0
<TOTAL-COSTS> 6,447
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,438
<INCOME-PRETAX> 331
<INCOME-TAX> 342
<INCOME-CONTINUING> 47
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes note receivable of $.953 million.
<F2>Net of bond discount of $1.68 million.
</FN>
</TABLE>
