(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 SEPTEMBER 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 (Loss) for the Nine
Months Ended September 30, 1996 and 1995 (Unaudited) 1
Consolidated Statements of Income (Loss) for the Three
Months Ended September 30, 1996 and 1995 (Unaudited) 2
Consolidated Balance Sheets at September 30, 1996 (Unaudited)
and December 31, 1995 (Audited) 3
Consolidated Statement of Changes in Partners' Deficit
for the Nine and the Three Months Ended September 30, 1996
(Unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1995 (Unaudited) 6
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1996 and 1995 (Unaudited) 8
Notes to Consolidated Financial Statements 10
El Comandante Operating Company, Inc.:
Statements of Revenues and Expenses for the Nine Months
Ended September 30, 1996 and 1995 (Unaudited) 28
Statements of Revenues and Expenses for the Three Months
Ended September 30, 1996 and 1995 (Unaudited) 29
Statements of Net Assets (Liabilities) at September 30,
1996 (Unaudited) and December 31, 1995 (Audited) 30
Statement of Changes in Net Assets (Liabilities) for the
Nine and the Three Months Ended September 30, 1996
(Unaudited) 32
Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and 1995 (Unaudited) 33
Statements of Cash Flows for the Three Months Ended
September 30, 1996 and 1995 (Unaudited) 35
(PAGE)3 EQUUS GAMING COMPANY L.P.
FORM 10 Q
INDEX
Page
Number
Notes to Financial Statements 37
Equus Management Company:
Balance Sheet at September 30, 1996 (Unaudited) 47
Notes to Balance Sheet 48
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 50
The Company's Results of Operations for the Nine Months
Ended September 30, 1996 and 1995 51
The Company's Results of Operations for the Three Months
Ended September 30, 1996 and 1995 53
Liquidity and Capital Resources of the Company 56
Liquidity and Capital Resources of Housing Development
Associates S.E. 57
The Company's Proforma Results of Operations for the Nine
Months Ended September 30, 1996 and 1995 61
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 66
Item 2 - Material Modifications of Rights of Registrant's
Securities 66
Item 3 - Default upon Senior Securities 66
Item 4 - Submission of Matters to a Vote of Security Holders 66
Item 5 - Other Information 66
Item 6 - Exhibits and Reports on Form 8-K 66
Signatures 67
(PAGE)4 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1996 1995
----------- ----------
REVENUES:
Rental income from El Comandante Race Track $10,746,502 $7,658,961
Cash distribution from Housing Development
Associates S.E.("HDA") - 134,000
Dominican Republic racing-
Commissions on wagering 3,299,481 1,632,204
Other revenues 337,601 256,749
Television Stations 1,676,046 733,380
Gain from sale of 50% interest in
Television Stations 581,120 -
Interest income 141,109 53,545
----------- ----------
Total revenues 16,781,859 10,468,839
----------- ----------
EXPENSES:
Financial 6,695,587 5,070,137
Depreciation 1,846,792 1,209,755
General and administrative 1,399,427 928,977
Operating costs of Dominican Republic racing 4,490,492 2,556,676
Operating costs of Television Stations 1,461,312 1,407,398
----------- ----------
Total expenses 15,893,610 11,172,943
----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTERESTS 888,249 (704,104)
PROVISION (CREDIT) FOR INCOME TAXES:
Current 157,628 221,207
Deferred 461,128 (12,642)
----------- ----------
LOSS BEFORE MINORITY INTERESTS 269,493 (912,669)
MINORITY INTERESTS (91,682) (411,401)
----------- ----------
NET INCOME (LOSS) $ 361,175 $ (501,268)
=========== ==========
ALLOCATION OF NET INCOME (LOSS):
General Partners $ 3,612 $ (76,347)
Limited Partners 357,563 (424,921)
----------- ----------
$ 361,175 $ (501,268)
=========== ==========
NET INCOME (LOSS) PER UNIT $ .06 $ (0.07)
=========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING 6,333,617 6,180,408
=========== ==========
The accompanying notes are an integral part
of these consolidated statements.
(PAGE)5 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1996 1995
---------- ----------
REVENUES:
Rental income from El Comandante Race Track $3,327,988 $3,201,827
Dominican Republic racing-
Commissions on wagering 1,038,277 917,031
Other revenues 47,212 171,874
Television Stations 510,937 369,994
Gain from sale of 50% interest in
Television Stations 581,120 -
Interest income 60,959 10,518
---------- ----------
Total revenues 5,566,493 4,671,244
---------- ----------
EXPENSES:
Financial 2,257,520 2,251,692
Depreciation 605,885 602,308
General and administrative 386,684 365,285
Operating costs of Dominican Republic racing 1,380,658 1,504,140
Operating costs of Television Stations 378,064 847,875
---------- ----------
Total expenses 5,008,811 5,571,300
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTERESTS 557,682 (900,056)
PROVISION (CREDIT) FOR INCOME TAXES:
Current 82,451 50,470
Deferred 193,802 (64,363)
---------- ----------
INCOME (LOSS) BEFORE MINORITY INTERESTS 281,429 (886,163)
MINORITY INTERESTS (32,785) (339,771)
---------- ----------
NET INCOME (LOSS) $ 314,214 $ (546,392)
========== ==========
ALLOCATION OF NET INCOME (LOSS):
General Partners $ 3,142 $ (5,464)
Limited Partners 311,072 (540,928)
---------- ----------
$ 314,214 $ (546,392)
========== ==========
NET INCOME (LOSS) PER UNIT $ .05 $ (0.09)
========== ==========
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
September 30, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
CASH AND CASH EQUIVALENTS $ 7,183,103 $ 814,292
----------- ------------
ASSETS RELATED TO RACE TRACKS:
Property and equipment-
Land 7,128,858 7,128,858
Building and improvements 48,095,964 48,105,723
Equipment 2,623,652 2,389,924
----------- ------------
57,848,474 57,624,505
Less accumulated depreciation (11,424,005) (9,733,479)
----------- ------------
46,424,469 47,891,026
Receivables from El Comandante
Operating Company, Inc. ("ECOC") 1,682,772 1,816,310
Deferred costs-
Financing 4,183,794 4,388,926
Organizational and other 383,457 470,286
Other 917,504 580,288
----------- ------------
53,591,996 55,146,836
----------- ------------
ASSETS RELATED TO TELEVISION STATIONS:
TV Licenses - 1,061,290
Property and equipment - 2,413,983
----------- ------------
- 3,475,273
Less accumulated depreciation and
amortization - (137,620)
----------- ------------
- 3,337,653
Investment in S & E Network Inc. 1,887,891 -
Deferred costs - 1,158,668
Other 253,863 365,765
----------- ------------
2,141,754 4,862,086
----------- ------------
$62,916,853 $60,823,214
=========== ============
(PAGE)7 EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND PARTNERS' DEFICIT
September 30, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
LIABILITIES RELATED TO RACE TRACKS:
First Mortgage Notes-
Principal, net of bond discount of
$1,680,634 and $1,760,161, respectively $66,361,366 $66,239,879
Accrued interest 2,330,417 332,918
Minority interest in Galapagos 255,361 816,216
Notes payable 543,560 523,562
Accounts payable and accrued liabilities 2,148,226 1,092,765
Accrued income taxes 656,425 231,980
----------- ------------
72,295,355 69,237,320
----------- ------------
LIABILITIES RELATED TO TELEVISION STATIONS:
Note payable - 1,365,848
Obligations under TV Purchase Agreements 420,695 474,661
Accounts payable and accrued liabilities - 464,414
----------- ------------
420,695 2,304,923
----------- ------------
OTHER LIABILITIES:
Unsecured partner's loans 463,831 211,629
Notes payable and accrued interest 600,000 566,885
Accounts payable and accrued liabilities 272,093 226,710
Minority interest in HDA 442,566 63,559
----------- ------------
1,778,490 1,068,783
----------- ------------
PARTNERS' DEFICIT:
General Partners (438,374) (760,803)
Limited Partners (11,139,313) (11,027,009)
----------- ------------
(11,577,687) (11,787,812)
----------- ------------
$62,916,853 $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 NINE AND THE THREE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
General Limited
Partners Partners Total
----------- ------------ ------------
BALANCES, December 31, 1995(audited) $ (760,803) $(11,027,009) $(11,787,812)
Net income for the period 46,491 470 46,961
Currency translation
adjustments (99,693) (1,007) (100,700)
Effect of currency
fluctuations on long-
term intercompany
transactions 65,703 663 66,366
Cash distributions to
partners - (65,880) (65,880)
----------- ------------ ------------
BALANCES, June 30, 1996 (748,302) (11,092,763) (11,841,065)
Net income for the period 311,072 3,142 314,214
Currency translation
adjustments 64,558 652 65,210
Effect of currency
fluctuations on long-
term intercompany
transactions (65,702) (664) (66,366)
Cash distributions to
partners - (49,680) (49,680)
----------- ------------ ------------
BALANCES, September 30, 1996 (438,374) (11,139,313) (11,577,687)
=========== ============ ============
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 NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 361,175 $ (501,268)
----------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by operating
activities-
Gain from sale of 50% interest in
Television Stations (581,120) -
Equity in earnings (6,588) -
Depreciation 1,846,792 1,209,755
Amortization 663,703 466,930
Deferred income tax provision 461,128 (12,642)
Currency translation adjustments (35,490) -
Forgiveness of interest (173,754) -
(Increase) decrease in assets-
Rent receivable from ECOC (13,169) (499,730)
Deferred costs (97,596) 104,097
Other (518,391) (513,261)
Increase (decrease) in liabilities-
Accrued interest 2,064,202 609,846
Accounts payable and accrued liabilities 1,014,822 (220,940)
Accrued income taxes (36,683) 134,207
Minority interests (91,682) (411,401)
----------- -----------
Total adjustments 4,496,174 866,861
----------- -----------
Net cash provided by operating
activities 4,857,349 365,593
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (361,468) (1,731,114)
Collection of note from ECOC 128,814 1,000,000
Effect of deconsolidation of S&E (129,948) -
Sale of 50% interest in Television Stations
Proceeds 4,000,000 -
Costs (418,950) -
Effect of consolidation of HDA cash accounts - 3,429,221
----------- -----------
Net cash provided by investing
activities 3,218,448 698,107
----------- -----------
(PAGE)10 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(continued)
1996 1995
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of obligations under TV
Purchase Agreements (53,966) (106,980)
Loans from minority stockholders - 675,000
Loans from (payments to) general partner, net 252,202 (130,867)
Loans from financial institutions 356,168 2,698,000
Payments on notes payable (1,652,019) (215,091)
Increase in deferred costs (493,811) (968,784)
Cash distributions to partners (115,560) (388,345)
----------- -----------
Net cash (used in) provided by
financing activities (1,706,986) 1,562,933
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,368,811 2,626,633
CASH AND CASH EQUIVALENTS, beginning of year 814,292 -
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 7,183,103 $ 2,626,633
=========== ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,237,627 $ 4,024,250
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 SEPTEMBER 30,
(Unaudited)
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 314,214 $ (546,392)
----------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities-
Gain from sale of 50% interest in
Television Stations (581,120) -
Equity in earnings (6,588) -
Depreciation 605,885 602,308
Amortization 194,457 251,016
Deferred income tax provision 193,802 (64,363)
Currency translation adjustments (1,156) -
Forgiveness of interest - -
(Increase) decrease in assets-
Rent receivable from ECOC (127,989) (499,730)
Deferred costs (206,121) 1,051,842
Other (663,115) (254,793)
Increase (decrease) in liabilities-
Accrued interest 1,955,060 2,026,079
Accounts payable and accrued liabilities 586,825 (364,173)
Accrued income taxes 82,451 50,471
Minority interests (32,785) (339,771)
----------- -----------
Total adjustments 2,039,606 2,458,886
----------- -----------
Net cash provided by operating
activities 2,353,820 1,912,494
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (212,652) (742,792)
Collection of note from ECOC 77,657 (1,000,000)
Effect of deconsolidation of S&E (129,948) -
Sale of 50% interest in Television Stations
Proceeds 4,000,000 -
Costs (418,950) -
----------- -----------
Net cash provided by (used in)
investing activities 3,316,107 (1,742,792)
----------- -----------
(PAGE)12 EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(continued)
1996 1995
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of obligations under TV
Purchase Agreements (21,297) (71,439)
Loans from minority stockholders - 225,000
Loans from general partner, net 3,607 -
Loans from financial institutions - 1,848,000
Payments on notes payable (1,420,601) (115,091)
Increase in deferred costs 576,500 (834,991)
Cash distributions to partners (49,680) (36,000)
----------- -----------
Net cash (used in) provided by
financing activities (911,471) 1,015,479
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,758,456 1,185,181
CASH AND CASH EQUIVALENTS, beginning of period 2,424,647 1,441,452
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 7,183,103 $ 2,626,633
=========== ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 73,874 $ 9,197
Income taxes paid - -
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 55%
of the capital stock of Galapagos, S.A. ("Galapagos"), a corporation that
leases and operates a race track in the Dominican Republic. On August 30,
1996, HDA closed the sale to Paxson Communications of San Juan, Inc.
("Paxson") of a 50% interest in its wholly owned subsidiary, S & E Network
Inc. ("S&E"), a Puerto Rico corporation that owns and operates since 1995
three UHF television stations in Puerto Rico (the "Television Stations").
Paxson assumed responsibility for managing the Television Stations after the
closing of the sale. On November 12, 1996, HDA entered into an agreement to
sell to Paxson its remaining 50% interest in S&E, subject to receiving
approval of the Federal Communications Commission ("FCC").
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 its consolidated subsidiaries, HDA and VJC, after
(PAGE)14
eliminating all inter-company transactions. The accounts of HDA and its
subsidiaries have been consolidated since March 8, 1995 (see Note 4),
Accordingly, the consolidated statement of loss for the nine months ended
September 30, 1995 only includes results of operations of HDA and its
subsidiaries for the period from March 8 to September 30, 1995. Since HDA's
ownership interest in S&E was reduced to 50% on August 30, 1996 and Paxson now
manages the Television Stations, commencing September 1, 1996 the accounts of
S&E are not consolidated into the financial statements of HDA or the Company.
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 September 30, 1995
the accumulated deficit had been eliminated and a minority interest of $22,600
was recorded for the nine months ended September 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 nine months ended September
30, 1996 a minority interest of $379,000 was recorded representing the
minority partners' 18% interest in HDA's net income for the period. A
minority interest of $471,000 and $434,000 was also recorded related to the
minority stockholders' interest in the net losses of Galapagos for the nine
months ended September 30, 1996 and 1995, respectively.
Net income (loss) per Unit is calculated based on weighted average of
Units outstanding since the Distribution on February 6, 1995. Outstanding
options and warrants to purchase Units do not have a material dilutive effect
on the calculation of earnings per Unit.
Interim Financial Statements
The consolidated financial statements as of September 30, 1996 and for
the nine and the three month periods ended September 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 nine months ended September 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
(PAGE)15
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.
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% interest in HDA.
(PAGE)16
S & E Network Inc., Television Stations and Agreements with Paxson
On November 17, 1994 S&E acquired the assets and broadcast licenses (the
"TV Licenses") of three dormant Television Stations under certain agreements
(the "TV Purchase Agreements") that required total payments and assumption of
rescheduled debts of approximately $2 million, a portion of which were non-
interest bearing obligations. Based on a 12% discount rate, the present value
of the total purchase price obligations under the TV Purchase Agreements was
$1,736,000. This amount and acquisition costs totalling approximately
$202,000 were assigned to the tangible and intangible assets acquired by S&E
based on their estimated relative fair market values.
S&E commenced broadcasting six hours a day in January 1995 on a test
basis and increased the testing to eighteen hours a day in April 1995. It
officially launched the television network under the trade name of TELENET on
June 26, 1995.
On August 30, 1996 HDA closed the sale to Paxson of a 50% interest in
S&E, at which time HDA received $4 million and assumed approximately $1.7
million of S&E debt, payable in monthly installments over six years (see Note
7). Upon closing, Paxson assumed responsibility for managing the Television
Stations. HDA funded approximately $1 million in transaction costs in
connection with the sale including capital expenditures, employee severance
costs and payment of certain liabilities of S&E. The sale was made pursuant
to certain agreements effective February 1996 one of which required Paxson to
pay fees of $23,333 monthly to S&E and to provide programming (mainly
infomercials) and certain other services to S&E until closing. Paxson was
also entitled to 50% of S&E's operating cash flow generated during that
period. Paxson has also been responsible since February 1996 to make loans to
S&E for any cash operating losses; no loans were outstanding at September 30,
1996. Commencing September 1996, HDA is accounting for its investment in S&E
under the equity method of accounting.
On November 12, 1996, HDA entered into an agreement to sell to Paxson its
remaining 50% interest in S&E, subject to receiving FCC approval.
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.
(PAGE)17
3. SUMMARY OF ACCOUNTING POLICIES:
Principles of Consolidation
The Company consolidates in its financial statements the accounts of
entities in which it has a controlling interest in excess of 50% (see Note 4).
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
New Pronouncements
In 1995, the Company implemented Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial
Instruments", which requires disclosure of the fair value of certain financial
instruments (see Note 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 September 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 income earned by
(PAGE)18
S&E until August 1996 while HDA consolidated the accounts of S&E into its
financial statements from (i) contracts for the production and broadcasting of
television programs which is recognized when the programs have been completed
and delivered, and (ii) advertising income from sale of air time, recognized
at the time of broadcast. Revenues from Television Stations included income
earned from a contract with ECOC (see Note 11) of $452,000 for the eight
months ended August 31, 1996 and of $379,000 for the nine months ended
September 30, 1995. During the 1996 period, revenues from Television Stations
also included HDA's $7,000 share of S&E's net income for September, recognized
under the equity method of accounting for investments.
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 at December 31, 1995 are stated at cost. Depreciation and
amortization of S&E was included in the accompanying consolidated financial
statements through August 1996 when HDA sold a 50% interest in S&E and no
longer consolidates the accounts of S&E in its financial statements.
Composite depreciation was calculated for the property and equipment acquired
under the TV Purchase Agreements. All property and equipment was depreciated
using the straight-line method over their estimated useful lives, ranging from
5 to 10 years. The TV Licenses were 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
(PAGE)19
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 at December 31, 1995
included a noncompetition agreement entered into in connection with the
acquisition of the Television Stations and certain organizational, start-up
and other costs which were amortized, using the straight-line method, over a
period of 3 to 10 years that commenced July 1, 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. Upon
the closing of the sale to Paxson on August 30, 1996, S&E wrote-off
approximately $1 million of deferred costs and broadcast contract rights which
do not have any future benefit to S&E under Paxson's management of the
Television Stations. The write-off has been included in the accompanying
consolidated financial statements as a reduction of the gain fron the sale of
the 50% interest in the Television Stations.
Currencies
HDA consolidates its accounts with Galapagos whose functional currency is
Dominican Republic pesos ("RD$"), although 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 the 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 nine months ended
September 30, 1996 and 1995, a net loss of $36,400 and a net gain of $20,280,
respectively, was recognized by Galapagos. Also, the following accumulated
net losses from changes in exchange rates are included in the partners'
deficit:
September 30, December 31,
1996 1995
------------ ------------
Translation of assets and
liabilities $ 128,800 $ 26,700
Unsettled intercompany transactions
of a long term nature - 66,600
------------ ------------
$ 128,800 $ 93,300
============ ============
(PAGE)20
The exchange rate as of September 30, 1996 and December 31, 1995 was
US$1.00 to RD$13.81 and US$1.00 to RD$13.46, respectively and the average
exchange rate prevailing during the nine months ended September 30, 1996 was
US$1.00 to RD$13.77.
4. INVESTMENT IN HDA:
In August 1994 IBC and a consolidated subsidiary of IGC together
transferred a 67% interest in the profits and 26.35% interest in the capital
of HDA to the Company as capital contributions, which transfers were
accounted for at book value. On March 8, 1995, HDAMC transferred an
additional 15% interest in the profits and a portion of its capital interest
of HDA to the Company in exchange for 1,205,245 Units which were valued at
$5,650,000, resulting in a step-up of the cost of El Comandante assets by
that amount. In connection with these transactions, (i) HDAMC agreed to
transfer to the Company its remaining capital interest for no additional
consideration, and (ii) the consolidated subsidiary of IGC agreed to transfer
to the Company all but 1% of its profits and capital interest, as capital
contributions. These transfers occurred on February 7, 1996 and the Company
now holds an 82% interest in both the profits and capital of HDA.
Prior to March 8, 1995, the Company accounted for its investment in HDA
under the equity method of accounting. Because HDA is a limited liability
partnership, the original partners of HDA only recorded equity in losses of
HDA until their investments in HDA were reduced to zero. HDA had an
accumulated deficit at the time the partners transferred their interests in
HDA to the Company in August 1994. Since the Company received its interest in
HDA as capital contributions from related parties whose investments in HDA
were zero, the Company did not record any investment in HDA and adopted the
same accounting treatment of not recognizing equity in earnings of HDA until
HDA's accumulated deficit was eliminated. The Company did, however, recognize
revenues of $134,000 in the nine months ended September 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 September 30, 1996 and December 31, 1995
consist of (i) a note receivable and accrued interest of $873,457 and
(PAGE)21
$1,020,164, respectively, and (ii) unpaid rent under the El Comandante Lease
of $809,315 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
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
(PAGE)22
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. If the sale of the remaining 50%
interest in S&E is closed, HDA will be required to make an offer within 360
days of the closing to purchase First Mortgage Notes, at par, with net
proceeds of the sale to the extent the net proceeds are not invested in a
gaming related business within the 360 day period.
The Indenture contains certain covenants, one of which restricts the
amount of distributions to HDA's partners, including the Company. Permitted
distributions include amounts intended to be sufficient to provide funds for
HDA's partners to pay income taxes on their allocable share of HDA's taxable
income ("Tax Distributions"). Tax Distributions are equal to the higher of
(i) 8.4% plus the higher of the then applicable federal personal or corporate
income tax rate or (ii) the higher of the then applicable Puerto Rico personal
or corporate income tax rate, multiplied by HDA's consolidated net income.
HDA is permitted to make additional cash distributions to partners and other
Restricted Payments, as defined under the Indenture, equal to 44.25% of the
excess of HDA's cumulative consolidated net income after December 31, 1993
over the cumulative amount of the Tax Distributions, provided that HDA meets
certain minimum debt coverage ratios. HDA does not yet meet the debt coverage
ratios.
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.
(PAGE)23
7. LIABILITIES RELATED TO TELEVISION STATIONS:
In connection with the sale to Paxson of a 50% interest in S&E, HDA
assumed on August 30, 1996 a note payable and the obligations under TV
Purchase Agreements.
The note payable consisted of a $1.4 million loan that was obtained in
September 22, 1995 for the financing of equipment of the Television Stations.
The note was payable in monthly installments of $23,788, including interest at
10.75%, for a period of 7 years. In September 1996, HDA prepaid the
$1,270,700 balance of the note.
The obligation under TV Purchase Agreements consists of a non-interest
bearing debt assumed in connection with the acquisition of the Television
Stations, payable in monthly installments of $9,357, including imputed
interest at 12%, through October 2001.
8. OTHER LIABILITIES:
Notes Payable
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 and 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 September 30, 1996 the loan balance was $600,000. The
interest is payable monthly based on the Citibank prime rate plus 2%, which
was 10.25% at September 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 provides services to the
Company pursuant to the IGC Support Agreement. The outstanding payables to
IGC were $442,566 and $211,629 at September 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).
(PAGE)24
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 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 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 September 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.
(PAGE)25
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
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 nine months ended September 30, 1996 and 1995, Galapagos incurred fees of
$175,219 and $80,395, respectively. Galapagos also reimburses ECOC for out-
of-pocket expenses related to Galapagos.
Assets and liabilities related to Dominican Republic racing amounted to
$2,224,000 and $2,286,000, respectively, as of September 30, 1996 and to
$3,125,000 and $2,985,000, respectively, as of December 31, 1995.
(PAGE)26
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 sale of 50%
interest in S&E to Paxson. Pursuant to the New Contract, ECOC purchases a
minimum of 910 hours of television time annually from S&E at $725 per hour
(minimum annual amount of $659,750), adjusted annually by CPI. If ECOC needs
television time after 7:00 PM, the cost per hour is $900, also subject to CPI
adjustments. ECOC is now responsible for producing and directing the
broadcasts and is entitled to the revenues from its sales of advertising time
during the broadcasts of the racing program. The term of the New Contract
expires January 31, 2000, but is renewable for successive one year terms at
ECOC's option.
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 certain 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. Commencing August 1996 two employees of IGC were
transferred to EMC and the scope of the services rendered by IGC were reduced;
EMC is now providing the administrative services to the Company.
HDA does not have any employees. HDA's activities were managed by IGP
pursuant to a management agreement (the "Management Agreement") until August
1996 when IGP assigned the agreement to EMC. The Management Agreement has a
term of 15 years ending December 31, 2004. Management fees, effective
December 15, 1993, are $250,000 per annum payable monthly in equal
installments, with annual CPI adjustments after 1993.
(PAGE)27
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 $4,960 and $4,000 has been provided for the nine months ended
September 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
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 $152,700 and $217,200 for the nine months ended September 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 nine months ended September 30, 1996 and 1995 includes a
provision of $480,300 and a credit of $12,642, 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 was
accumulated net operating losses, no provision for Puerto Rico income tax was
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
(PAGE)28
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 nine months
ended September 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.
14. RELATED PARTY TRANSACTIONS:
During the nine months ended September 30, 1996 and 1995, the Company
received services from IGC and incurred $110,000 and $150,000, respectively,
pursuant to the IGC Support Agreement and incurred costs of $67,700 and
$26,600, respectively, for directors' meeting fees and expenses of EMC.
During the period from March 8 to September 30, 1995, HDA paid $5,500 to
reimburse HDA's managing partners for directors' meeting fees and expenses and
incurred fees of $149,457 pursuant to the Management Agreement with IGP.
During the nine months ended September 30, 1996, management fees were $202,830
of which $33,800 were paid to EMC and $169,030 to IGP.
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:
(PAGE)29 September 30, 1996 December 31, 1995
------------------------ ------------------------
Carrying Carrying
Fair Value Value Fair Value Value
----------- ----------- ----------- ----------
Cash and cash equivalents $ 7,183,103 $ 7,183,103 $ 814,292 $ 814,292
Receivables from ECOC-
Note and accrued interest 920,000 873,457 940,000 1,020,164
First Mortgage Notes 64,600,000 66,361,366 58,000,000 66,239,879
Payable to stockholders - - 1,597,916 1,597,916
Notes payable 1,143,560 1,143,560 2,439,410 2,439,410
Obligations under TV
Purchase Agreements 420,695 420,695 474,661 474,661
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.
16. UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS):
The Company acquired a 67% interest in profits of HDA in August 1994 and
increased its interest in profits to 82% on March 8, 1995. The following
unaudited proforma consolidated statement of income(loss) for the nine months
ended September 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 (LOSS) (continued):
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(In thousands except per unit amounts)
(Unaudited)
1996 1995
---------- ----------
Historical Proforma
REVENUES:
Rental income from El Comandante $ 10,747 $ 10,563
Dominican Republic racing-
Commissions on wagering 3,299 1,638
Other revenues 338 262
Television Stations 1,676 900
Gain from sale of 50% interest in
Television Stations 581 -
Interest income 141 76
---------- ----------
Total revenues 16,782 13,439
---------- ----------
EXPENSES:
Financial 6,696 6,674
Depreciation 1,847 1,544
General and administrative 1,400 1,041
Operating costs of Dominican Republic racing 4,490 2,628
Operating costs of Television Stations 1,461 1,752
Other Costs - 131
---------- ----------
Total expenses 15,894 13,770
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTERESTS 888 (331)
PROVISION FOR INCOME TAXES 619 354
MINORITY INTERESTS (92) (460)
---------- ----------
NET INCOME (LOSS) $ 361 $ (225)
========== ==========
ALLOCATION OF NET INCOME (LOSS):
General Partners $ 4 $ (2)
Limited Partners 357 (223)
---------- ----------
$ 361 $ (225)
========== ==========
NET INCOME (LOSS) PER UNIT $ .06 $ (0.04)
========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING 6,334 6,334
========== ==========
(PAGE)31 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF REVENUES AND EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1996 1995
----------- -----------
REVENUES:
Commissions on wagering $42,989,361 $41,052,371
Other 2,060,785 1,728,251
----------- -----------
Total revenues 45,050,146 42,780,622
----------- -----------
EXPENSES:
Payments to horse owners and horse owners'
association 21,431,724 20,537,085
Track rent 10,746,502 10,563,092
Salaries, wages and employee benefits 5,291,011 5,135,620
Operating expenses 3,942,872 4,301,120
General and administrative 1,978,845 2,209,503
Marketing and satellite transmission costs 1,806,368 1,582,516
----------- -----------
Total expenses 45,197,322 44,328,936
----------- -----------
LOSS BEFORE INCOME TAXES (147,176) (1,548,314)
CREDIT FOR DEFERRED INCOME TAXES (53,182) (45,450)
----------- -----------
NET LOSS $ (93,994) $(1,502,864)
=========== ===========
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 SEPTEMBER 30,
(Unaudited)
1996 1995
----------- -----------
REVENUES:
Commissions on wagering $13,315,305 $12,407,310
Other 710,551 528,786
----------- -----------
Total revenues 14,025,856 12,936,096
----------- -----------
EXPENSES:
Payments to horse owners and horse owners'
association 6,646,175 6,201,690
Track rent 3,327,988 3,201,827
Salaries, wages and employee benefits 1,776,654 1,768,352
Operating expenses 1,315,179 1,412,600
General and administrative 628,010 691,267
Marketing and satellite transmission costs 614,388 462,291
----------- -----------
Total expenses 14,308,394 13,738,027
----------- -----------
LOSS BEFORE INCOME TAXES (282,538) (801,931)
CREDIT FOR DEFERRED INCOME TAXES (38,312) (133,022)
----------- -----------
NET LOSS $ (244,226) $ (668,909)
=========== ===========
The accompanying notes are an integral
part of these statements.
(PAGE)33 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF NET ASSETS (LIABILITIES)
September 30,December 31,
1996 1995
----------- -----------
(Unaudited) (Audited)
ASSETS:
CURRENT ASSETS:
Cash, including restricted cash of
$984,024 and $903,562, respectively $ 1,112,883 $ 2,883,447
Accounts receivable, net 1,269,742 954,809
Prepayments and supplies inventory 423,850 291,717
Notes receivable 418,112 310,944
----------- -----------
Total current assets 3,224,587 4,440,917
----------- -----------
DEFERRED COSTS, net:
Organizational costs 30,100 36,355
Deferred tax asset 611,319 558,137
Telecommunication installation costs 205,249 257,829
Noncompetition agreement 208,333 395,833
----------- -----------
Total deferred costs 1,055,001 1,248,154
----------- -----------
FURNITURE AND EQUIPMENT, net 3,800,197 3,469,371
----------- -----------
Total assets $ 8,079,785 $ 9,158,442
----------- -----------
(PAGE)34 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF NET ASSETS (LIABILITIES)
(continued)
September 30,December 31,
1996 1995
----------- -----------
(Unaudited) (Audited)
LIABILITIES:
CURRENT LIABILITIES:
Current portion of capital lease
obligations $ 680,156 $ 560,128
Accounts payable and accrued liabilities 2,441,589 2,911,948
Outstanding winning tickets and refunds 1,661,069 2,095,794
----------- -----------
Total current liabilities 4,782,814 5,567,870
----------- -----------
CAPITAL LEASE OBLIGATIONS 1,237,797 1,318,962
----------- -----------
PAYABLE TO HOUSING DEVELOPMENT
ASSOCIATES S.E.:
Rent 809,315 796,145
Note payable and accrued interest 873,457 1,020,164
----------- -----------
1,682,772 1,816,310
----------- -----------
OTHER LIABILITIES:
Notes 2,450,000 2,450,000
Accrued interest 139,998 124,902
----------- -----------
2,589,998 2,574,902
----------- -----------
Total liabilities 10,293,381 11,278,044
----------- -----------
NET ASSETS (LIABILITIES) $(2,213,596) $(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 NINE AND THE THREE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
Amount
-------------
BALANCES, December 31, 1995 (audited) $ (2,119,602)
Net income for the period 150,232
-------------
BALANCES, June 30, 1996 (1,969,370)
Net loss for the period (244,226)
-------------
BALANCES, September 30, 1996 $ (2,213,596)
=============
The accompanying notes are an integral part
of this statement.
(PAGE)36 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (93,994) $(1,502,864)
----------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 690,777 621,586
Deferred tax credit (53,182) (45,450)
Provision for bad debts 75,006 174,998
(Increase) in current assets-
Accounts receivable (389,939) (183,712)
Prepayments and supplies inventory (132,133) (239,411)
Increase (decrease) in current liabilities-
Accounts payable and accrued liabilities (470,359) (417,070)
Outstanding winning tickets and refunds (434,725) (445,041)
Accrued interest (2,798) 20,638
Rent payable 13,170 499,730
----------- -----------
Total adjustments (704,183) (13,732)
----------- -----------
Net cash used in operating activities (798,177) (1,516,596)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable (107,168) (19,222)
Capital expenditures (227,939) (334,920)
Payments of telecommunication installation
costs (61) (17,374)
----------- -----------
Net cash used in investing activities (335,168) (371,516)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations (508,405) (301,140)
Payments on notes payable (128,814) -
Cash contributions - 1,000,000
----------- -----------
Net cash (used in) provided by in
financing activities (637,219) 698,860
----------- -----------
NET DECREASE IN CASH (1,770,564) (1,189,252)
CASH, beginning of year 2,883,447 2,214,801
----------- -----------
CASH, end of period $ 1,112,883 $ 1,025,549
=========== ===========
(PAGE)37 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(continued)
1996 1995
----------- ------------
SUPPLEMENTAL INFORMATION:
Interest paid $ 278,039 $ 197,862
NONCASH TRANSACTIONS:
Equipment acquired through capital leases $ 547,269 $ 275,976
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 SEPTEMBER 30,
(Unaudited)
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (244,226) $ (668,909)
----------- -----------
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities-
Depreciation and amortization 235,381 214,585
Deferred tax provision (credit) (38,312) (133,022)
Provision for bad debts 25,002 50,000
(Increase) decrease in current assets-
Accounts receivable 71,899 (6,994)
Prepayments and supplies inventory (53,435) (182,636)
Increase (decrease) in current liabilities-
Accounts payable and accrued liabilities (23,481) (673,363)
Outstanding winning tickets and refunds 775,038 201,754
Accrued interest 7,042 9,892
Rent payable 127,990 499,730
----------- -----------
Total adjustments 1,127,124 (20,054)
----------- -----------
Net cash provided by (used in)
operating activities 882,898 (688,963)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in notes receivable 8,834 33,655
Capital expenditures (14,918) (60,592)
Payments of telecommunication installation
costs - (4,539)
----------- -----------
Net cash used in investing activities (6,084) (31,476)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations (294,543) (91,439)
Payments on notes payable (77,657)
Decrease in organizational costs - 1,000,000
----------- -----------
Net cash (used in) provided by financing
activities (372,200) 908,561
----------- -----------
NET INCREASE IN CASH 504,614 188,122
CASH, beginning of period 608,269 837,427
----------- -----------
CASH, end of period $ 1,112,883 $ 1,025,549
=========== ===========
(PAGE)39 EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(continued)
1996 1995
----------- ------------
SUPPLEMENTAL INFORMATION:
Interest paid $ 164,253 $ 81,631
NONCASH TRANSACTIONS:
Equipment acquired through capital leases $ 148,504 $ 184,113
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 September 30, 1996 and for
the nine and the three month periods ended September 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 nine months ended September 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 nine months
ended September 30, 1996 and 1995 averaged 21.23% and 20.42% , respectively.
Commissions on simulcasted races are negotiated with wagering facilities
outside Puerto Rico. ECOC Commissions on wagers on simulcasted races during
the nine months ended September 30, 1996 and 1995 averaged 6.16% and 6.42%,
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 September 30, 1996 and December 31, 1995,
reserves for doubtful accounts amounted to $260,129 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 nine months ended September 30, 1996 and
(PAGE)42
1995 was $6,255 in each period.
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 nine months ended September 30, 1996 and 1995 was
$45,000 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 nine months ended September 30, 1996 and 1995 was
$187,500 in each period.
Furniture and Equipment
Furniture and equipment is stated at cost and depreciated on a
straight-line basis over their estimated useful lives, which range from 5 to
10 years. Major replacements and improvements are capitalized and depreciated
over their estimated useful lives.
Repairs and maintenance are charged to expense when incurred. As of
September 30, 1996 and December 31, 1995, furniture and equipment was as
follows:
September 30, December 31,
1996 1995
---------- -----------
Furniture $ 379,938 $ 338,314
Equipment 4,613,236 3,987,222
Motor vehicles 804,907 726,138
---------- -----------
5,798,081 5,051,674
Less - Accumulated depreciation 1,997,884 1,582,303
---------- -----------
$3,800,197 $ 3,469,371
========== ===========
For information with respect to pledged assets, see Note 4.
(PAGE)43
3. PENSION PLAN:
ECOC has a non-contributory defined benefit pension plan covering
substantially all of its nonunion employees. Benefits are based on the
employee's years of service and highest average earnings over five consecutive
years during the last 15 years of employment. ECOC's policy is to fund an
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.
(PAGE)44
El Comandante Lease
HDA has leased El Comandante to ECOC under a lease agreement (the "El
Comandante Lease") for a term of 15 years ending December 14, 2004. The El
Comandante Lease provides for payment of rent consisting of 25% of the annual
ECOC Commissions ("Basic Rent"), but in no event less than $7,500,000
("Minimum Basic Rent") adjusted annually with a base year of 1989 by the
percentage increase in the Consumer Price Index ("CPI") for the calendar year
over the CPI for the previous calendar year. The El Comandante Lease also
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 September 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
(PAGE)45
renegotiation to be effective on January 1, 1998.
Reorganization of ECOC
On December 13, 1993, ECOC entered into a series of agreements with Supra
and its majority owner ("Supra Agreements") incident to the reorganization of
ECOC as a Puerto Rico nonstock corporation (the "ECOC Reorganization"). The
Supra Agreements provide for ECOC to pay accrued interest and principal on an
outstanding note payable to Supra (see Note 7) in the principal amount of
$200,000, to purchase ECOC's stock owned by Supra for $1,000,000 and to pay
$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 September 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
(PAGE)46
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
became employees of EMC. Fees incurred by ECOC pursuant to the Consulting
Agreement during the nine months ended September 30, 1996 and 1995 were
$539,043 and $530,449, 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 nine months ended September 30, 1996
and 1995, ECOC earned fees of $175,219 and $80,395, 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
(PAGE)47
entitled to revenues from sales of advertising time. ECOC agreed to pay up to
$150,000 for certain improvements to provide facilities at El Comandante for
S&E's television studio, production and administration space at no cost to S&E
as long as S&E broadcasts the television program for ECOC.
Pursuant to the New Contract, ECOC 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 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 $2,000 per month, adjusted annually by CPI.
5. CAPITAL LEASE OBLIGATIONS:
ECOC has entered into certain equipment lease agreements during the
normal course of business which have been classified as capital leases. The
present value of future minimum lease payments under capital leases is as
follows:
Due during year
ending September 30,
1997...........................................$ 680,156
1998........................................... 635,172
1999........................................... 447,820
2000........................................... 154,805
----------
Minimum lease payments......................... 1,917,953
Less - Current portion........................ 680,156
----------
$1,237,797
==========
6. PAYABLE TO HOUSING DEVELOPMENT ASSOCIATES S.E.:
Payable to HDA as of September 30, 1996 and December 31, 1995 consists of
(i) a note payable and accrued interest of $873,457 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.
(PAGE)48
7. OTHER LIABILITIES:
Other liabilities consist of unsecured notes of $160,000 to IGP and
$40,000 to Supra, including accrued interest, and $500,000 of accrued past
service costs payable to Supra and Supra's majority owner under the Supra
Agreements. They also include $1,750,000 payable to Supra and Supra's
majority owner for the purchase of ECOC's stock and for the amount payable
under the Noncompetition Agreement. The unsecured notes bear interest at 2.5%
over the prime rate, without a stated maturity date. The interest rate at
September 30, 1996 and December 31, 1995 was 10.50% 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 $611,319 and $558,137, net of valuation allowances
of $1,342,047 and $1,419,433, were recorded as of September 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 credit for income taxes for the nine months ended September
30, 1996 is net of a decrease in the valuation allowance of $77,386 and the
deferred credit for income taxes for the nine months ended September 30, 1995
is net of an increase in the valuation allowance of $175,440.
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 September 30, 1996 December 31, 1995
------------------------ ------------------------
Carrying Carrying
Fair Value Value Fair Value Value
----------- ----------- ----------- ----------
Cash $ 1,112,883 $ 1,112,883 $ 2,883,447 $2,883,447
Note receivable 418,112 418,112 310,944 310,944
Capital lease obligations 1,917,953 1,917,953 1,879,090 1,879,090
Payable to HDA -
Note and accrued interest 920,000 873,457 940,000 1,020,164
Other liabilities 2,589,998 2,589,998 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
SEPTEMBER 30, 1996
(unaudited)
ASSETS
Cash $111,319
Receivables 278,893
Other 2,164
----------
$394,376
==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Accounts payable and accrued liabilities $443,148
----------
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 (19,054)
----------
(48,772)
----------
$394,376
==========
The accompanying notes are an integral part of this balance sheet.
(PAGE)51 EQUUS MANAGEMENT COMPANY
NOTES TO BALANCE SHEET
SEPTEMBER 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.
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
negative investment account balance is classified as accrued liabilities in
the accompanying balance sheet.
3. OPERATIONS
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 reimbursed for its independent
director's fees and expenses and reasonable out-of-pocket costs incurred to
third parties in connection with the management of the Company and for
administrative services that EMC renders to the Company to the extent that
such expenses exceed EMC's share in the Company's cash distributions.
IGC provides certain support services to EMC and the Company pursuant to
a three-year support agreement effective as of February 6, 1996 and the
Company reimburses IGC for expenses incurred in providing such services.
Commencing August 1996 the scope of the service rendered by IGC were reduced
when EMC employed two former executives of IGC and EMC is now providing
administrative services to the Company. These executives also provide
services to a subsidiary of IGC and EMC is reimbursed for these costs.
(PAGE)52
A subsidiary of IGC provided management services to Housing Development
Associates S.E. ("HDA"), an 82% owned subsidiary of the Company, pursuant to a
management agreement which was assigned to EMC effective August 1996. The
management agreement ends on December 31, 2004 and provides for fees of
$250,000 per annum payable monthly in equal installements, with annual CPI
adjustments after 1993.
Until April 1996, a subsidiary of IGC provided three racing consultants
as executive management to El Comandante Operating Company, Inc. ("ECOC")
which leases El Comandante Race Track from HDA. The consulting services were
provided pursuant to a consulting agreement which the IGC subsidiary assigned
to EMC in April 1996, at which time the racing consultants became employees of
EMC. The consulting agreement requires ECOC to reimburse to EMC all of EMC's
payroll costs, fringe benefits and out-of-pocket costs with respect to the
racing consultants, except for approximately 14% of the compensation of one of
the consultants which is paid by the Company. The ECOC-HDA lease agreement
requires ECOC to retain the services of the racing consultants as set forth in
the consulting agreement.
(PAGE)53
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 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"). On August 30, 1996 HDA closed the
sale to Paxson Communications of San Juan, Inc. ("Paxson") of a 50% interest
in its wholly owned subsidiary, S & E Network Inc. ("S&E"), a Puerto Rico
corporation that owns and operates since 1995 three 3 UHF television stations
in Puerto Rico (the "Television Stations"). On November 12, 1996, HDA entered
into an agreement to sell to Paxson its remaining 50% interest in S&E, subject
to receiving approval of the Federal Communications Commission ("FCC"). If
approved, the transaction is expected to close in late 1996 or early 1997.
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
(PAGE)54
award. The Company does not intend to file any further appeals and VJC is now
an inactive company.
The Company does not have any employees. IGC provides support services
pursuant to a Master Support and Services Agreement ("Support Agreement").
Commencing August 1996 the scope of services rendered by IGC was reduced and
EMC now provides administrative support services and is reimbursed by the
Company for its costs in excess EMC's share of cash distributions that it
receives from the Company.
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 and its consolidated subsidiaries 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 nine and three month
periods ending September 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 nine month periods ended September 30, 1996
(historical) and 1995 (proforma) presented in Note 16 to the consolidated
financial statements of the Company.
The Company's Results of Operations
Nine Months Ended September 30, 1996 Compared to the Nine Months Ended
September 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 nine month
periods ended September 30, 1996 and 1995 are not readily comparable and the
discussion below is limited to a comparison of revenues and expenses of the
Company and VJC for these nine month periods. More meaningful comparative
information for these nine month periods is included elsewhere in this report
in Management's Discussion of the Company's Proforma Results of Operations
since that discussion also includes results of operations of HDA for the nine
month periods ended September 30, 1996 and 1995.
Revenues. With the exception of a cash distribution of $134,000
received from HDA in February 1995 and $2,500 of interest income in 1996, the
revenues of the Company in its consolidated statements of income for the nine
months ended September 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
(PAGE)55
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
Company for the nine month periods ended September 30, 1996 and 1995 are HDA
expenses from January 1, 1996 to September 30, 1996 and from March 8, 1995 to
September 30, 1995.
Expenses of the Company and its subsidiary VJC during the nine month
periods ended September 30, 1996 and 1995, and excluding the expenses of HDA
and its subsidiaries, were as follows:
a. Interest and amortization of financing costs were $56,000 in the 1996
period and $45,000 in the 1995 period related to a bank loan closed
March 1995 and renegotiated in May 1996;
b. Depreciation of $155,000 in the 1996 period and $117,000 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 were $523,000 in the nine months
ended September 30, 1996 and $599,000 in the comparable period of
1995. The decrease of $76,000 resulted primarily from reductions in
VJC appeal costs of $69,000, costs of IGC and EMC support services of
$21,000 and $31,000 in costs of investigating new business
opportunities, partially offset by increases in legal, accounting and
consulting fees of $45,000 and Directors' fees and expenses of
$22,000.
Provision for Income Taxes. The Company is subject to Puerto Rico income
tax at a 29% rate on its allocable share of HDA's 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
(PAGE)56
recorded for reversal of the deferred tax provision applicable to the forgiven
interest. The net provisions for income taxes of $619,000 and $209,000 in the
nine month periods ended September 30, 1996 and 1995 were as follows:
1996 1995
Period Period
------------ ------------
Puerto Rico income taxes of the Company
Current $ 153,000 $ 216,000
Deferred 480,000 (12,000)
Dominican Republic income tax credit of HDA (19,000) -
Federal income taxes of HDA subsidiary 5,000 5,000
------------ ------------
$ 619,000 $ 209,000
============ ============
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 nine months ended September 30, 1995. The minority interest in the
nine month periods ended September 30, 1996 and 1995 is comprised of the
following:
1996 1995
Period Period
------------- -------------
Minority stockholders' share of
losses of Galapagos $( 471,000) $( 483,000)
Minority partners' share of
income of HDA after accumulated
deficit was eliminated by
HDA's earnings in the 1995 period 379,000 72,000
------------- -------------
$( 92,000) $( 411,000)
============= =============
Three Months Ended September 30, 1996 Compared to the Three Months Ended
September 30, 1995
Revenues. The revenues of the Company for the three months ended
September 30, 1996 and 1995, except for interest income of $1,500 and $1,000,
respectively, are entirely from the consolidation of the accounts of HDA in
the Company's financial statements. Revenues increased $895,000 to $5,566,000
in the three months ended September 30, 1996 from $4,671,000 in the comparable
period in 1995. The increase resulted primarily from a gain of $581,000 in
the 1996 period from the sale of 50% interest in S&E and increases in revenues
of $140,000 from the Television Stations and $126,000 from El Comandante
(PAGE)57
rental income.
Rental income from El Comandante. Rental income from El Comandante
increased $126,000 to $3,328,000 in the three months ended September 30, 1996
from $3,202,000 in the comparable period of 1995. Rental income in the 1996
quarter was based on 25% of ECOC's commissions of $13,315,000 from El
Comandante wagering on 65 racing days, whereas 1995 rental income was based on
25% of ECOC's commissions of $12,407,000 from wagering on 49 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, and HDA granted, relief from payment of certain future lease
obligations. As a result the El Comandante Lease was amended effective
January 1, 1996 to eliminate fixed rent after 1995 and HDA assumed
responsibility for paying El Comandante real property taxes due and payable
after December 31, 1995.
Dominican Republic Racing Revenues. Galapagos began simulcasting El
Comandante races on February 27, 1995 to several sports betting agencies in
the Dominican Republic, and earned commissions on wagering on El Comandante
races of $310,000 in the three months ended September 30, 1996 and $284,000 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 $727,000 in the three months ended September 30, 1996 and $633,000 in the
comparable three months of 1995.
Revenues from Television Stations. In August 1996 HDA closed a sale to
Paxson of a 50% interest in S&E (see "Introduction") and Paxson is now
responsible for managing the Television Stations. Paxson and S&E previously
entered into a Time Brokerage Agreement which commenced February 1996 and
terminated upon the closing of the sale. Pursuant to the terms of this
agreement, Paxson paid fees of $23,333 monthly to S&E from February through
August 1996, provided programming, including infomercials, and certain other
services to S&E and was entitled to 50% of S&E's operating cash flow from
February through August 1996.
Commencing September 1996, the accounts of S&E are not included in HDA's
consolidated financial statements since its ownership interest in S&E is now
50% and Paxson manages the operations of S&E and is responsible for making
operating loans to S&E, if required. Consequently, commencing September 1996
HDA accounts for its investment in S&E under the equity method and therefore
recognizes in its financial statements a 50% share in net income or loss of
S&E.
S&E earned broadcasting fees and advertising revenues of $370,000 in the
three months ended September 30, 1995. As a result of the changes in
(PAGE)58
broadcasting and programming formats pursuant to the Time Brokerage Agreement
with Paxson which commenced February 1996 and terminated August 1996, S&E
increased its revenues to $504,000 for the two months ended August 1996. HDA
recognized revenues of $7,000 for its share of September 1996 earnings of S&E.
The revenues included fees of $118,000 in the two months ended August 1996 and
$168,000 in the three months ended September 1995 from ECOC for broadcasting a
four-hour program for races run at El Comandante and fees from Paxson of
$47,000 for July and August 1996 pursuant to the Time Brokerage Agreement.
Interest Income. Interest income was $61,000 in the three months ended
September 30, 1996, including interest income of $13,000 on its note
receivable from ECOC and $46,000 from short term investments; in the
comparable 1995 period interest income was $11,000, including interest of
$6,000 on the ECOC note receivable and $4,000 from short-term investments.
Gain on Sale of 50% Interest in Television Stations. On August 30, 1996
HDA closed the sale of 50% interest in S&E. The sales price was $4 million,
and a gain of $581,000 was recorded for this sale in the three months ended
September 1996. The costs of this sale included approximately $1.5 million
for employee severance payments, costs to cancel certain contracts, write-off
of deferred costs not recoverable under the revised broadcasting and
programming format, legal, accounting and investment bankers' fees, and
consent fees to holders of First Mortgage Notes for approving the transaction.
Financial Expenses. Financial expenses in the three months ended
September 30, 1996 increased to $2,258,000 from $2,252,000 in the three months
ended September 30, 1995. The principal changes between periods were interest
expense in 1996 of $50,000 on capital leases of Galapagos and the Television
Stations versus interest expense of $11,000 in the 1995 period for the leases
which commenced in September 1995, and a decrease in interest expense of
$28,000 on loans from minority stockholders of Galapagos. The stockholders of
Galapagos converted their loans to capital in 1996 and forgave accrued
interest on their loans. The 1995 three-month period included interest
expense of $28,000 on the loans and no interest expense was recorded in the
1996 period.
Depreciation. There was no significant change in depreciation which was
$606,000 in the three months ended September 30, 1996 and $602,000 in the
comparable three months of 1995.
General and Administrative Expenses. General and administrative expenses
increased to $387,000 in the three months ended September 30, 1996 from
$365,000 in the comparable three months of 1995. The increase was caused by
El Comandante property taxes of $158,000 in the 1996 period and none in the
1995 period, partially offset by decreases in investor relations expenses of
$28,000, VJC appeal costs of $43,000, IGC and EMC support services of $21,000
and costs of $32,000 of investigating new business opportunities.
Operating Costs of Dominican Republic Racing. A portion of the wagering
in the Dominican Republic is set aside and reserved to cover losses from
(PAGE)59
currency fluctuations and for other purposes approved by the Dominican
Republic Racing Commission ("Required Reserves"). Commencing April 1996, the
Dominican Republic approved the use of Required Reserves for certain marketing
costs and $183,000 of such reserves were used in the three months ended
September 30, 1996. Operating costs of Dominican Republic racing were
$1,381,000 in the three months ended September 30, 1996, net of the $183,000
credit for marketing costs, and $1,504,000 in the three months ended September
30, 1995.
Operating Costs of Television Stations. Operating costs of the
Television Stations were $378,000 in the two months ended August 1996 (S&E's
accounts were not consolidated after August 1996) and $848,000 in the three
months ended September 30, 1995. The change in the broadcasting and
programming format which commenced in February 1996 resulted in significant
reductions in operating costs. As a result, there was only $6,000 of
production and programming costs in the 1996 two-month period, whereas the
1995 three-month period included $450,000 of such costs.
Provision for Income Taxes. HDA qualifies as a special partnership
under the Puerto Rico Internal Revenue Code 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. The Company is subject to
Puerto Rico taxes at a 29% rate on its share of HDA's taxable income. An HDA
subsidiary is subject to federal income taxes. The net provisions (credit)
for income taxes in the three month periods ended September 30, 1996 and 1995
were as follows:
1996 1995
Period Period
------------ ------------
Puerto Rico income taxes of the Company -
Current $ 81,000 $ 47,000
Deferred 194,000 (64,000)
Federal income taxes of HDA subsidiary 1,000 3,000
------------ ------------
$ 276,000 $ (14,000)
============ ============
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 September 30, 1996 was $33,000, comprised of minority
stockholders' $198,000 share of losses of Galapagos, less minority partners'
$165,000 share of income of HDA. The minority interest in the three months
ended September 30, 1995 was $340,000, comprised of minority partners' $70,000
share of losses of HDA and minority stockholders' $270,000 share of losses of
Galapagos.
Liquidity and Capital Resources of the Company
This discussion relates solely to the liquidity and capital resources of
(PAGE)60
the Company and VJC. Liquidity and capital resources of HDA and its
subsidiaries is discussed below under "Liquidity and Capital Resources of
HDA". HDA is forecasting $5.4 million of cash flow in 1996 after
distributions to its partners.
The Company's principal cash needs are income taxes, principal and
interest on a bank loan, and general and administrative expenses. The
Company's 1996 cash requirement is estimated to be approximately $1.3 million
without considering any payments of loans from IGC, a general partner of the
Company, which amounted to $212,000 at December 31, 1995 and $464,000 at
September 30, 1996.
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.
During the nine months ended September 30, 1996 HDA made cash
distributions of $526,000 to the Company related to consolidated net income of
HDA for the fourth quarter of 1995 and first six months of 1996. Based on
HDA's consolidated net income for the quarter ended September 30, 1996, the
Company's share of HDA's Permitted Distributions to be made in the fourth
quarter of 1996 is approximately $361,000. These distributions, together with
December 31, 1995 cash balances of $56,000, net proceeds of approximately
$240,000 from the increase in the bank loan and 1996 loans of $252,000 from
IGC are expected to cover the Company's 1996 estimated cash requirements of
$1.3 million.
Management does not anticipate any significant changes in expenses and
cash requirements of the Company in 1997, except for income taxes related to
the sale of S&E to Paxson and the payment of its debt to IGC which amounted to
$464,000 at September 30, 1996 and is not expected to change materially by
year-end. As discussed previously, HDA anticipates that it will close the
sale to Paxson of its remaining 50% interest in S&E in late 1996 or early
1997. Management expects that the net income of HDA in 1997, including a gain
on the sale to Paxson, will be sufficient to permit HDA to distribute
approximately $2.5 million to the Company as its 82% share of HDA's cash
distributions. Consequently, management expects an improvement in the
(PAGE)61
Company's liquidity in 1997.
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. As discussed previously, ECOC
achieved an increase of $1,937,000 in commission income for the nine months
ended September 30, 1996 as compared to the nine months ended September 30,
1995.
At the beginning of the year ECOC's management forecasted that the 1996
El Comandante commissions would exceed 1995 commissions by $6 million, which
commissions include wagering on races simulcasted to the Dominican Republic,
but now forecasts the increase will be approximately $2.3 million. The
principal reasons for the forecast of increased El Comandante commissions 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. Based on the revised
forecast ECOC expects to pay 1996 rent in full and reduce its 1995 debt to HDA
by approximately $200,000. 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 total revenues for the nine months ended September 30, 1996 were
$2,872,000 lower (6%) than forecasted. While 1996 year-to-date wagering
commissions increased $1,937,000 over the comparable period of 1995, the 1996
commissions on El Comandante wagers were $2,394,000 below (5.3%) the forecast.
The Puerto Rico racing law was changed whereby OTB agents received 5% of win-
place wagers as commissions commencing August 1994 which reduced the pay-out
to bettors by the amount paid to agents. The commissions were increased to
5.5% in January 1995 and 6% in July 1995, further reducing the pay-out to
bettors. ECOC's management believes that the majority of the variance from
budget is caused by the effect on wagering caused by the reduced pay-outs to
(PAGE)62
bettors on win-place wagers and by over estimating the increase in weekly
wagering when ECOC increased the number of racing days from four to five days
a week in February 1996. ECOC believes that other contributing factors for
the variance from the forecast were (1) the effect on wagering on the Pick-Six
Jackpot of more frequent Jackpot winners in 1996 which caused the Jackpot pay-
outs to bettors to be smaller and (2) an unusually active hurricane season in
1996 which typically affects wagering for a few days before and after
threatened or actual storms.
Wagering in the Dominican Republic on simulcasted El Comandante races has
also been less than forecasted which ECOC management attributes to (1) growth
of OTB agencies being slower than forecasted and (2) average wagering per OTB
agency being less that forecasted as a result of the Presidential elections in
the Dominican Republic which impacted economic activity (including wagering)
and, as discussed below, declines in wagering on horse races during the U.S.
major league baseball season.
HDA's management continues to forecast significantly improved cash flow
and liquidity in 1996 due primarily to 1996 rent payments by ECOC in excess of
1995 payments, net cash flow to HDA of approximately $1.6 million from the
Television Stations, as discussed below.
At the beginning of the year management forecasted Dominican Republic
racing operations would generate approximately break-even cash flow in 1996
and consequently 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 nine months ended September 30, 1996 was
less than forecasted. Most OTB agencies in the Dominican Republic accept
wagers on a number of sports. Average daily betting in OTB agencies has
declined significantly from January through September 1996. Management
believes the decline in average daily betting coincided with (1) the
uncertainty during the 1996 Presidential election process which had a negative
effect on the economy, and (2) a large shift in OTB wagering from horse racing
to baseball during the major league baseball season in the U.S. Wagering is
expected to improve during the winter and spring months, and to offset the
effect on wagering when the U.S. baseball season begins in April 1997
management expects to have more OTB agencies on line through intensified
efforts to open new agencies and have other sources of revenue which are being
developed by Galapagos.
The sale of a 50% interest in S&E and the operations of the Television
Stations under Paxson's management have had a significant positive effect on
HDA's cash flow, resulting in an estimated $1.6 million of cash flow in 1996,
in contrast to a cash requirement of $3.9 million in 1995. HDA's estimated
(PAGE)63
net cash flow of $1.6 million in 1996 is comprised of $4 million received from
Paxson upon closing of the S&E stock sale, less estimated net investments in
S&E of $2.4 million in 1996. HDA's estimated investment of $2.4 million,
which is net of HDA's estimated $340,000 share of 1996 operating cash flow of
S&E, is 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 payments of $1,325,000 of the $1.7 million of S&E debt that HDA
assumed when the S&E stock sale closed. The balance of the assumed debt is
payable in monthly installments over approximately five years; however, HDA
management may choose to prepay this debt from 1996 or 1997 cash flow.
HDA had cash balances of $560,000 at December 31, 1995, and is
forecasting a cash balance of $5,960,000 at December 31, 1996, as follows,
under the assumption that the pending sale to Paxson of the remaining 50%
interest in S&E does not close until 1997:
1996 Actual
Forecast 9-30-96
------------ ------------
Cash receipts to HDA:
El Comandante 1996 rent & collections
of receivables from ECOC $ 14,750,000 $ 10,862,000
Sale of 50% interest in S&E 4,000,000 4,000,000
Interest on investments 175,000 110,000
------------ ------------
18,925,000 14,972,000
Cash disbursements by HDA:
Debt service on First Mortgage
Notes ( 7,990,000) ( 3,995,000)
Television Stations
Net investment in S&E ( 1,060,000) ( 1,197,000)
Payment of S&E debt assumed by HDA ( 1,325,000) ( 1,306,000)
Administrative costs and costs of
registration of the units of Equus ( 800,000) ( 685,000)
El Comandante property taxes and
capital improvements ( 1,035,000) ( 784,000)
Cash distributions to partners ( 1,084,000) ( 642,000)
Contingency reserve ( 231,000) -
------------- -------------
Net cash flow 5,400,000 6,363,000
Cash balance, December 31, 1995 560,000 560,000
------------ ------------
Cash balance, end of period $ 5,960,000 $ 6,923,000
============ ============
In January 1996 ECOC requested and HDA approved a 1996 capital
improvement budget of $650,000 for El Comandante, which budget was increased
to $880,000 in the second quarter of 1996 for the estimated cost of an
additional closed circuit television tower. ECOC's management also asked HDA
for additional barns with 100 horse stalls, at an estimated cost of $850,000,
(PAGE)64
which HDA's management expects will be approved in the 1997 budget. Based on
the present status of the capital improvement program, ECOC management
estimates that cash requirements for the approved capital budget of $880,000
will not exceed $450,000 in 1996 and the balance will be needed in 1997.
HDA is forecasting a cash balance of approximately $6 million at the end
of 1996 and HDA should have excellent liquidity in 1997. The proceeds of the
sale to Paxson of the remaining 50% interest in S&E plus cash flow from 1997
operations of HDA are expected to provide an additional $10-11 million to HDA,
before distributions to partners. If the sale to Paxson closes, as expected,
HDA will be required by the terms of the Indenture for the First Mortgage
Notes to use approximately $8 million in 1997 to purchase First Mortgage Notes
from noteholders to the extent such funds are not invested in assets to be
used in a gaming-related business. Accordingly, HDA believes it will have $8-
9 million available in 1997 for cash distributions and other purposes. As
previously disclosed the Indenture for the First Mortgage Notes presently
limits cash distributions to 48% of the consolidated net income of HDA.
The Company's Proforma Results of Operations
Nine Months Ended September 30, 1996 Compared to the Nine Months Ended
September 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 nine months ended September 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 revenues in the nine
months ended September 30, 1996 and 1995, except for minor amounts of interest
income. Accordingly, all other revenues in these nine month periods relate to
HDA and its subsidiaries. Revenues increased $3,343,000 to $16,782,000 in the
nine months ended September 30, 1996 from $13,439,000 in the comparable period
in 1995.
Rental income from El Comandante. Rental income from El Comandante
increased to $10,747,000 in the nine months ended September 30, 1996 from
$10,563,000 in the comparable period of 1995. Rental income in the 1996
period was based on 25% of ECOC's commissions of $42,989,000 from El
Comandante wagering on 188 racing days, whereas 1995 rental income was based
on 25% of ECOC's commissions of $41,052,000 from wagering on 151 racing days,
plus fixed rent of $300,000 (as disclosed previously, fixed rent payments were
eliminated effective January 1, 1996). In February 1996, ECOC commenced
racing five days a week by adding Thursday to its previous four-day race week.
Although the average daily commissions earned by ECOC declined in the 1996
period, the commissions earned on Thursday race days more than offset the
(PAGE)65
decline in average daily commissions.
The effect of the additional race day is shown by (1) the comparison of
January 1996 and 1995 commissions earned by ECOC before introduction of
Thursday racing, and (2) the comparison of February to September 1995
commissions earned before Thursday racing commenced with commissions earned in
February to September 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 September 1996 exceeded by
$305,000 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 $1,114,000 in the first nine months of 1996 and $623,000 in the
comparable 1995 period. Galapagos commenced racing operations at V Centenario
in April 1995 and earned commissions on V Centenario races of $2,185,000 in
the nine months ended September 30, 1996 and $1,015,000 in the 1995 period.
Galapagos also had revenues of $338,000 in the 1996 period and $262,000 in the
1995 period from Jockey Club and restaurant operations and other miscellaneous
sources.
Revenues from Television Stations. In August 1996 HDA closed a sale to
Paxson of a 50% interest in S&E (see "Introduction") and commencing September
1996 Paxson is responsible for managing the Television Stations. Paxson and
S&E previously entered into a Time Brokerage Agreement which commenced
February 1996 and terminated upon the closing of the sale. Pursuant to the
terms of this agreement, Paxson paid fees of $23,333 monthly to S&E, provided
programming, including infomercials, and certain other services to S&E and was
entitled to 50% of S&E's operating cash flow from February through August
1996.
As discussed previously, the accounts of S&E were included in HDA's
consolidated financial statements through August 1996, and commencing
September 1996 HDA recognizes its 50% share of income or losses of S&E. S&E
commenced television broadcasting in January 1995 on a test basis until June
26, 1995 and earned broadcasting fees and advertising revenues of $900,000 in
the nine months ended September 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 $1,669,000 in
the eight months ended August 1996. The revenues included fees of $452,000
and $504,000 in the nine months ended September 30, 1996 and 1995,
respectively, from ECOC for broadcasting a four-hour program for races run at
El Comandante, fees of $163,000 from Paxson in the 1996 period pursuant to the
Time Brokerage Agreement and $7,000 recognized by HDA for its share of
earnings of S&E for September 1996.
Gain on Sale of 50% Interest in Television Stations. On August 30, 1996,
HDA closed the sale of a 50% interest in S&E. The sales price was $4 million,
and a gain of $581,000 was recorded for this sale in the nine months ended
September 1996. The costs of this sale included approximately $1.5 million
(PAGE)66
for employee severance payments, costs to cancel certain contracts, write-off
of deferred costs not recoverable under the revised broadcasting and
programming format, legal, accounting and investment bankers' fees, and
consent fees to holders of First Mortgage Notes for approving the transaction.
Interest Income. Interest income increased $65,000 to $141,000 in the
nine months ended September 30, 1996 from $76,000 in the comparable 1995
period, caused primarily by increases in interest income of $35,000 on a note
receivable from ECOC and $28,000 from short-term investments.
Financial Expenses. Financial expenses in the nine months ended
September 30, 1996 increased to $6,696,000 from $6,674,000 in the nine months
ended September 30, 1995, summarized as follows:
1996 1995
----------- -----------
Interest on First Mortgage Notes and
amortization of related financing
costs $ 6,516,000 $ 6,498,000
Interest on capital leases of
Galapagos and S&E (leases commenced
in third quarter of 1995) 148,000 11,000
Interest and financing costs on the
Company's bank loan 46,000 39,000
Interest (interest credit) on Galapagos'
minority stockholder loans (89,000) 59,000
Other costs 75,000 67,000
----------- -----------
$ 6,696,000 $ 6,674,000
=========== ===========
As previously disclosed, the stockholders of Galapagos forgave accrued
interest in 1996 on their loans to Galapagos and accordingly the 1996 nine-
month period includes a credit of $89,000 for the reversal of interest accrued
in 1995 on minority stockholder loans.
Depreciation. Depreciation increased $303,000 in the nine months ended
September 30, 1996 to $1,847,000 from $1,544,000 in the comparable nine months
of 1995. The increase is attributable to depreciation of $491,000 related to
assets of the Television Stations and Galapagos in the 1996 period, compared
to 1995 depreciation of $122,000 for Galapagos which commenced operations on
April 29, 1995 and $53,000 for the Television Stations. The Television
Stations were operated on a test basis from January to June 26, 1995 and
depreciation was recognized commencing July 1995.
General and Administrative Expenses. General and administrative expenses
increased $358,000 to $1,399,000 in the nine months ended September 30, 1996
(PAGE)67
from $1,041,000 in the comparable period of 1995. The major changes in
expenses are summarized as follows:
Increase
(Decrease)
____________
El Comandante property taxes of $456,000
in 1996, and none in 1995 $ 456,000
Legal, accounting and consulting fees 50,000
Management fees and admistrative support
services (35,000)
VJC appeal costs (70,000)
Costs of investigating new business
opportunities (31,000)
Other, net (12,000)
_____________
$ 358,000
=============
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 $2,628,000 in
the nine months ended September 30, 1995, net of certain costs which were
deferred as start-up costs prior to the opening of V Centenario in April 1995,
and $4,490,000 while under full operation during the nine months ended
September 1996. Certain costs, such as horseowners' 50% share of commissions,
ECOC's management fee and fees paid to Autotote for providing the wagering
system, are directly related to the amount of wagering or to commissions
earned by Galapagos. Such costs accounted for $958,000 of the 1996 increase
in costs. The other increases in 1996 costs are largely attributable to the
additional months that V Centenario operated in 1996, offset in part by
credits of $343,000 for funds released for marketing costs from the Required
Reserves.
Operating Costs of Television Stations. S&E commenced television
broadcasting in January 1995 on a test basis which ended June 1995 and
incurred operating costs of $1,752,000 during the nine months ended September
30, 1995, net of certain costs which were deferred as start-up costs during
the test period. Operating costs in the 1996 period were $1,461,000 for the
January to August period when S&E's accounts were consolidated in the
Company's financial statements. The 1996 costs include fees of $272,000 to
Paxson pursuant to the Time Brokerage Agreement for the seven months from
February through August 1996. Costs between periods are not readily
comparable because (1) certain costs were deferred during the 1995 test
period, (2) the change in the broadcasting and programming format which
(PAGE)68
commenced February 1996 resulted in significant reductions in production and
programming costs in 1996 and (3) fees to Paxson of $272,000 are included in
the 1996 period.
Distribution of Units of the Company. The legal, accounting and other
costs of the Distribution were $131,000 in the nine months ended September 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 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 $619,000 and
$354,000 in the nine month periods ended September 30, 1996 and 1995 were as
follows:
1996 1995
Period Period
------------ ------------
Puerto Rico income taxes of the Company -
Current $ 153,000 $ 217,000
Deferred 480,000 132,000
Dominican Republic income tax credit
of HDA (19,000) -
Federal income taxes of HDA subsidiary 5,000 5,000
------------ ------------
$ 619,000 $ 354,000
============ ============
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 $92,000 and $460,000 in the nine month periods
ended September 30, 1996 and 1995, respectively, is comprised of the
following:
(PAGE)69 1996 1995
Period Period
------------- -------------
Minority stockholders' share of
losses of Galapagos $( 471,000) $( 483,000)
Minority partners' share of
income of HDA after accumulated
deficit was eliminated by HDA's
earnings in the 1995 period 379,000 23,000
------------- -------------
$( 92,000) $( 460,000)
============= =============
(PAGE)70
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 Stock Purchase Agreement by
and between Housing Development
Associates S.E. and Paxson
Communications of San Juan, Inc.
dated November 12, 1996 File herewith
(PAGE)71
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
November 14, 1996 By: /s/ Donald G. Blakeman
- ----------------- ------------------------------
Date Donald G. Blakeman
President
November 14, 1996 By: /s/ Gretchen Gronau
- ----------------- ----------------------
Date Gretchen Gronau
Vice President and
Chief Financial Officer
(PAGE)72 INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.1 Stock Purchase Agreement by and between Housing Development
Associates S.E. and Paxson Communication of San Juan, Inc.
dated November 12, 1996
(PAGE)1
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
HOUSING DEVELOPMENT ASSOCIATES S.E.
AND
PAXSON COMMUNICATIONS OF SAN JUAN, INC.
NOVEMBER 12, 1996
(PAGE)2 TABLE OF CONTENTS
Page
SECTION 1. CERTAIN DEFINITIONS. . . . . . . . . . . . . . . . . . . . 1
1.1 Terms Defined in this Section . . . . . . . . . . . . . . . . . 1
1.2 Terms Defined Elsewhere in this Agreement . . . . . . . . . . . 3
1.3 Clarifications. . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 2. AT CLOSING; PURCHASE PRICE . . . . . . . . . . . . . . . . 4
2.1 Agreement to Sell and Buy . . . . . . . . . . . . . . . . . . . 4
2.2 Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 Preclosing Distribution . . . . . . . . . . . . . . . . . . . . 4
SECTION 3. REPRESENTATIONS AND WARRANTIES OF HDA. . . . . . . . . . . 4
3.1 Organization of HDA . . . . . . . . . . . . . . . . . . . . . . 4
3.2 Authorization and Binding Obligation. . . . . . . . . . . . . . 4
3.3 Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.4 Absence of Conflicting Agreements; Consents . . . . . . . . . . 5
3.5 Claims and Legal Actions. . . . . . . . . . . . . . . . . . . . 5
3.6 Broker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.7 Real Property.. . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 4. REPRESENTATIONS AND WARRANTIES OF BUYER. . . . . . . . . . 6
4.1 Organization, Standing, Authority, Ownership. . . . . . . . . . 6
4.2 Authorization and Binding Obligation. . . . . . . . . . . . . . 6
4.3 Absence of Conflicting Agreements . . . . . . . . . . . . . . . 6
4.4 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.5 Investment Purpose. . . . . . . . . . . . . . . . . . . . . . . 7
4.6 Qualifications. . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 5. CERTAIN PRECLOSING COVENANTS . . . . . . . . . . . . . . . 7
5.1 Encumbrances. . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.2 Dispositions. . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.3 Access to Information . . . . . . . . . . . . . . . . . . . . . 7
5.4 Indebtedness and Obligations. . . . . . . . . . . . . . . . . . 7
5.5 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . 7
5.6 Licenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.7 No Inconsistent Action. . . . . . . . . . . . . . . . . . . . . 8
5.8 HDA Consents. . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.9 Notification. . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.10 Capital Improvements . . . . . . . . . . . . . . . . . . . . . 8
5.11 Shareholder and Management Agreement.. . . . . . . . . . . . . 8
SECTION 6. SPECIAL COVENANTS AND AGREEMENTS . . . . . . . . . . . . . 8
6.1 FCC Consent . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.2 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . 9
6.3 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.4 Control of the Stations . . . . . . . . . . . . . . . . . . . .10
6.5 No Inconsistent Action. . . . . . . . . . . . . . . . . . . . .10
6.6 Buyer Consents. . . . . . . . . . . . . . . . . . . . . . . . .10
6.7 Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . .10
6.8 Agreement with ECOC . . . . . . . . . . . . . . . . . . . . . .12
6.9 Studio Lease Agreement. . . . . . . . . . . . . . . . . . . . .12
(PAGE)3
6.10 Cancellation of Note. . . . . . . . . . . . . . . . . . . . . .12
6.11 Shareholder and Management Agreements . . . . . . . . . . . . .12
6.12 Ponce Transmitter Site. . . . . . . . . . . . . . . . . . . . .12
6.13 Mortgage. . . . . . . . . . . . . . . . . . . . . . . . . . . .13
SECTION 7. CONDITIONS TO OBLIGATIONS OF BUYER AND HDA . . . . . . . .13
7.1 Conditions to Obligations of Buyer. . . . . . . . . . . . . . .13
7.2 Conditions to Obligations of HDA. . . . . . . . . . . . . . . .15
SECTION 8. CLOSING AND CLOSING DELIVERIES . . . . . . . . . . . . . .16
8.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.2 Deliveries by HDA . . . . . . . . . . . . . . . . . . . . . . .16
8.3 Deliveries by Buyer . . . . . . . . . . . . . . . . . . . . . .17
SECTION 9. TERMINATION. . . . . . . . . . . . . . . . . . . . . . . .18
9.1 Termination by HDA . . . . . . . . . . . . . . . . . . . . . .18
9.2 Termination by Buyer. . . . . . . . . . . . . . . . . . . . . .18
9.3 Rights on Termination . . . . . . . . . . . . . . . . . . . . .19
9.4 Specific Performance. . . . . . . . . . . . . . . . . . . . . .19
9.5 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . .19
SECTION 10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION;
CERTAIN REMEDIES . . . . . . . . . . . . . . . . . . . . .19
10.1 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . .19
10.2 Indemnification by HDA . . . . . . . . . . . . . . . . . . . .19
10.3 Indemnification by Buyer . . . . . . . . . . . . . . . . . . .20
10.4 Procedure for Indemnification. . . . . . . . . . . . . . . . .21
10.5 Certain Limitations. . . . . . . . . . . . . . . . . . . . . .22
10.6 Exclusivity of Remedy. . . . . . . . . . . . . . . . . . . . .22
SECTION 11. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . .22
11.1 Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . .22
11.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . .23
11.3 Benefit and Binding Effect . . . . . . . . . . . . . . . . . .23
11.4 Further Assurances . . . . . . . . . . . . . . . . . . . . . .24
11.5 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . .24
11.6 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . .24
11.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . .24
11.8 Waiver of Compliance; Consents . . . . . . . . . . . . . . . .24
11.9 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . .24
11.10 Guaranty of PCC. . . . . . . . . . . . . . . . . . . . . . . .24
(PAGE)4
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT is made as of November 12, 1996, by and
between PAXSON COMMUNICATIONS OF SAN JUAN, INC., a Florida corporation
("Buyer"), and HOUSING DEVELOPMENT ASSOCIATES S.E., a Puerto Rico special
partnership ("HDA").
R E C I T A L S:
A. S & E Network Inc., a Puerto Rico corporation (the "Company"),
owns television stations WSJN-TV, San Juan, Puerto Rico, WKPV(TV), Ponce,
Puerto Rico and WJWN-TV, San Sebastian, Puerto Rico (the "Stations")
pursuant to licenses issued by the Federal Communications Commission (the
"FCC").
B. HDA owns fifty percent (50%) of the issued and outstanding shares
of the common stock of the Company and Buyer owns the remaining fifty
percent (50%) of the issued and outstanding shares of the common stock of
the Company.
C. Buyer desires to buy from HDA and HDA desires to sell to Buyer
all of HDA's shares of the common stock of the Company on the terms and
conditions hereinafter set forth.
A G R E E M E N T S:
In consideration of the above recitals and of the mutual agreements
and covenants contained in this Agreement, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement, intending to
be bound legally, agree as follows:
SECTION 1. CERTAIN DEFINITIONS
1.1 Terms Defined in this Section. The following terms, as used in
this Agreement, have the meanings set forth in this Section:
"Affiliate" means (a) any Person that directly or indirectly, through
one or more intermediaries, controls, is controlled by or is under common
control with another Person, or (b) an officer or director of an affiliate
within the meaning of (a) above.
"Buyer Consents" means the Consents required to be obtained by Buyer
to permit Buyer to buy the Stock pursuant to this Agreement.
"Closing" means the consummation of the purchase and sale of the Stock
pursuant to this Agreement in accordance with the provisions of Section 8.
"Closing Date" means the date on which the Closing occurs, as
determined pursuant to Section 8.
"Communications Act" means the Communications Act of 1934, as amended.
(PAGE)5
"Consents" means the consents, permits, or approvals of government
authorities and other third parties necessary to transfer the Stock to
Buyer or otherwise to consummate the transactions contemplated by this
Agreement.
"Effective Time" means 12:01 a.m., local San Juan time, on the Closing
Date.
"FCC" means the Federal Communications Commission.
"FCC Consent" means action by the FCC granting its consent to the
transfer of the Stock to Buyer as contemplated by this Agreement.
"FCC Licenses" means those licenses, permits, and authorizations
issued by the FCC to the Company in connection with the business and
operations of the Stations.
"First Purchase Agreement" means the Stock Purchase Agreement, dated
as of January 31, 1996, by and among the Company, Buyer and HDA.
"HDA Consents" means the Consents required to be obtained by HDA to
permit HDA to sell the Stock pursuant to this Agreement as listed in
Schedule 3.4.
"Licenses" means all licenses, permits, construction permits, and
other authorizations issued by the FCC, the Federal Aviation
Administration, or any other federal, state, or local governmental
authorities to the Company, currently in effect and used or useful in the
business or operations of the Stations, together with any additions thereto
between the date of this Agreement and the Closing Date.
"Management Agreement" means the Management Agreement, dated as of
August 30, 1996, by and among Buyer, the Company and HDA.
"Material Contract" means any contract, lease, non-governmental
license, agreement, or commitment to which HDA is a party, except for any
contract, lease, non-governmental license, agreement, or commitment, (i)
the obligations under which will be fully performed prior to Closing; or
(ii) except for film or programming, entered into in the ordinary course of
business and not involving a commitment in excess of $5,000.
"Person" means an individual, corporation, association, partnership,
joint venture, trust, estate, limited liability company, limited liability
partnership, or other entity or organization.
"Shareholder Agreement" means the Shareholder Agreement dated as of
August 30, 1996, by and among Buyer, the Company and HDA.
"Stations" means television stations WSJN-TV, San Juan, Puerto Rico,
WKPV(TV), Ponce, Puerto Rico and WJWN-TV, San Sebastian, Puerto Rico.
"Stock" means 500 shares of voting common stock, par value $.01 per
share which, as of the Effective Time, shall represent fifty percent (50%)
(PAGE)6
of the issued and outstanding shares of capital stock of the Company.
1.2 Terms Defined Elsewhere in this Agreement. For purposes of this
Agreement, the following terms have the meanings set forth in the sections
indicated:
Term Section
Buyer Preamble
Claimant Section 10.4 (a)
Company Recitals
ECOC Section 6.8
ECOC Agreement Section 6.8
ECOC Amendment Section 6.8
GE Loan Section 5.4
HDA Preamble
Indemnifying Party Section 10.4 (a)
IRS Debt Section 5.4
Purchase Price Section 2.2
Studio Lease Agreement Section 6.9
1.3 Clarifications. Words used herein, regardless of the gender and
number specifically used, shall be deemed and construed to include any
other gender and any other number as the context requires. Use of the word
"including" herein shall be deemed and construed to mean "including but not
limited to." Except as specifically otherwise provided in this Agreement
in a particular instance, a reference to a Section, Exhibit or Schedule is
a reference to a Section of this Agreement or an Exhibit or Schedule
hereto, and the terms "hereof," "herein" and other like terms refer to this
Agreement as a whole, including the Schedules hereto, and not solely to any
particular part hereof.
SECTION 2. AT CLOSING; PURCHASE PRICE
2.1 Agreement to Sell and Buy. Subject to the terms and conditions
set forth in this Agreement, HDA hereby agrees to sell, transfer and
deliver to Buyer on the Closing Date, and Buyer agrees to purchase, the
Stock, free and clear of any claims, liabilities, security interests,
mortgages, liens, pledges, conditions, charges, or encumbrances of any
nature whatsoever.
2.2 Purchase Price. The purchase price for the Stock (the "Purchase
Price") shall be Seven Million Dollars ($7,000,000), adjusted as provided
in Section 6.12 and payable by federal wire transfer of same-day funds
pursuant to wire instructions which shall be delivered by HDA to Buyer at
least two business days prior to the Closing Date.
2.3 Preclosing Distribution. At least ten days prior to the Closing,
HDA and Buyer shall use good faith efforts to agree on the amount of a
dividend (the "Dividend") to be declared by the Company in the aggregate
amount of the excess of the Stations' cash receipts for the period January
31, 1996 through the Closing Date over the Stations' operating expenses
(excluding noncash charges) for the same period. Immediately preceding the
(PAGE)7
Closing, HDA and Buyer shall cause the Company to declare the Dividend
which shall be payable within 30 days after the Closing Date, one-half to
HDA and one-half to Buyer, as shareholders of record immediately preceding
the Closing.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF HDA
HDA represents and warrants to Buyer as follows:
3.1 Organization of HDA. HDA is a partnership duly organized and
validly existing under the laws of the Commonwealth of Puerto Rico. HDA has
the requisite partnership power and authority to execute, deliver and
perform this Agreement and the documents contemplated hereby according to
their respective terms.
3.2 Authorization and Binding Obligation. The execution, delivery
and performance of this Agreement by HDA have been duly authorized by all
necessary partnership action on the part of HDA. This Agreement has been
duly executed and delivered by HDA and constitutes the legal, valid, and
binding obligation of HDA, enforceable in accordance with its terms except
as the enforceability of this Agreement may be affected by bankruptcy,
insolvency, or similar laws affecting creditors' rights generally and by
judicial discretion in the enforcement of equitable remedies.
3.3 Stock. HDA owns beneficially and of record the Stock free and
clear of any mortgages, liens, claims, charges, encumbrances, assessments
or other adverse interests of any kind or nature whatsoever except for
encumbrances created by the Shareholder Agreement. The Stock constitutes
fifty percent (50%) of the issued and outstanding shares of the capital
stock of the Company. The Stock and the five hundred (500) shares of
common stock of the Company owned by Buyer constitute the only issued and
outstanding equity interest in the Company. The Stock has been duly and
validly issued, is fully paid and nonassessable and was issued in
accordance with all applicable laws. There are no outstanding options or
other rights to acquire the Stock. Except for the Shareholder Agreement,
there are no voting trust agreements or other contracts, agreements or
arrangements restricting voting or dividend rights or the issuance or
transferability of the Stock.
3.4 Absence of Conflicting Agreements; Consents. Subject to obtaining
the FCC Consent provided for in Section 6.1, the Buyer Consents and the HDA
Consents described on Schedule 3.4, the execution, delivery and
performance by HDA of this Agreement and the documents contemplated hereby
(with or without the giving of notice, the lapse of time, or both): (a) do
not require the consent of any third party; (b) will not conflict with any
provision of the Certificate of Incorporation or Bylaws of the Company or
the Partnership Agreement of HDA; (c) will not conflict with, result in a
breach of, or constitute a default under any applicable law, judgment,
order, ordinance, injunction, decree, rule, regulation, or ruling of any
court or governmental instrumentality; and (d) will not conflict with,
constitute grounds for termination of, result in a breach of, constitute a
default under, or accelerate or permit the acceleration of any performance
required by the terms of any Material Contract. Except for the FCC Consent
(PAGE)8
provided for in Section 6.1, the Buyer Consents and the HDA Consents
described in Schedule 3.4, no consent, approval, permit, or authorization
of, or declaration to, or filing with any governmental or regulatory
authority or any other third party is required to permit HDA to consummate
this Agreement and the transactions contemplated hereby.
3.5 Claims and Legal Actions. There is no claim, legal action,
counterclaim, suit, arbitration, or other legal, administrative, or tax
proceeding, nor any order, decree, or judgment, in progress or pending, or
to the knowledge of HDA threatened, against HDA or relating to alleged
actions or omissions of HDA which could impair HDA's ability to consummate
the transactions contemplated hereby or affect the business or operations
of any Station, nor does HDA know of any basis for the same.
3.6 Broker. Neither HDA nor any Person acting on its behalf has
incurred any liability for any finders' or brokers' fees or commissions in
connection with the transactions contemplated by this Agreement.
3.7 Real Property. All indebtedness and other payments secured by the
mortgage described in Schedule 3.7 hereto (the "Mortgage") have been paid
in full by the Company.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to HDA as follows:
4.1 Organization, Standing, Authority, Ownership. Buyer is a
corporation duly organized, validly existing, and in good standing under
the laws of the State of Florida and has the requisite corporate power and
authority to execute, deliver, and perform this Agreement and the documents
contemplated hereby according to their respective terms and to own the
Stock.
4.2 Authorization and Binding Obligation. The execution, delivery
and performance of this Agreement by Buyer have been duly authorized by all
necessary corporate action on the part of Buyer. This Agreement has been
duly executed and delivered by Buyer and constitutes a legal, valid, and
binding obligation of Buyer, enforceable against Buyer in accordance with
its terms except as the enforceability of this Agreement may be affected by
bankruptcy, insolvency, or similar laws affecting creditors' rights
generally and by judicial discretion in the enforcement of equitable
remedies.
4.3 Absence of Conflicting Agreements. Subject to the receipt of the
Consents, the execution, delivery and performance by Buyer of this
Agreement and the documents contemplated hereby (with or without the giving
of notice, the lapse of time, or both): (a) do not require the consent of
any third party; (b) will not conflict with the Articles of Incorporation
or By-laws of Buyer; (c) will not conflict with, result in a breach of, or
constitute a default under, any applicable law, judgment, order, ordinance,
injunction, decree, rule, regulation, or ruling of any court or
governmental instrumentality; and (d) will not conflict with, constitute
grounds for termination of, result in a breach of, constitute a default
(PAGE)9
under, or accelerate or permit the acceleration of any performance required
by the terms of, any agreement, instrument, license or permit to which
Buyer is a party or by which Buyer may be bound. Except for the FCC
Consent, the HDA Consents and the Buyer Consents, no consent, approval,
permit or authorization of, or declaration to, or filing with any
governmental or regulatory authority or any other third party is required
to permit Buyer to consummate this Agreement and the transactions
contemplated hereby.
4.4 Brokers. Neither Buyer nor any Person acting on its behalf has
incurred any liability for any finders' or brokers' fees or commissions in
connection with the transactions contemplated by this Agreement.
4.5 Investment Purpose. Buyer is acquiring the Stock for investment
for its own account and not with a view to the sale or distribution of any
part thereof, and not including collateral assignments or pledges of the
Stock for financing purposes, Buyer has no present intention of selling,
granting participations in, or otherwise distributing the Stock.
4.6 Qualifications. Assuming the Company's existing FCC
authorization to operate WKPV(TV) and WJWN-TV as satellites of WSJN-TV
pursuant to Section 73.3555, Note 5, of the FCC's rules and regulations is
not terminated, Buyer is legally qualified under the Communications Act and
FCC rules, regulations and policies to acquire the Stock and to operate the
Stations.
SECTION 5. CERTAIN PRECLOSING COVENANTS
HDA covenants and agrees that between the date hereof and the Closing
Date, HDA shall comply with the following covenants:
5.1 Encumbrances. HDA will not create, assume, or permit to exist
any mortgage, pledge, lien, or other charge or encumbrance affecting the
Stock.
5.2 Dispositions. HDA will not sell, assign, lease, or otherwise
transfer or dispose of the Stock.
5.3 Access to Information. HDA will give to Buyer and its counsel,
accountants, engineers, and other authorized representatives reasonable
access to all information that they reasonably request relating to the
Stock.
5.4 Indebtedness and Obligations. HDA shall either prepay, or pay
promptly when due, all payment obligations (including principal, interest,
penalties and other amounts) payable under the Promissory Notes of the
Company to General Electric Capital Corporation of Puerto Rico
(collectively, the "GE Loan") and all indebtedness of the Company to the
Internal Revenue Service (the "IRS Debt"), which payment obligations have
been assumed by HDA pursuant to an Assumption Agreement, dated August 30,
1996, by and among HDA, Buyer and the Company.
5.5 Compliance with Laws. HDA shall comply in all material respects
(PAGE)10
with all laws, rules, and regulations except to the extent that
noncompliance would not have a material adverse effect on the Company or
the Stock or that noncompliance is caused by an agent of Buyer.
5.6 Licenses. HDA shall not cause any of the Licenses issued by the
FCC with respect to the Stations to expire or to be revoked, suspended, or
modified, or take any action that could reasonably be expected to cause the
FCC or any other governmental authority to institute proceedings for the
suspension, revocation, or material adverse modification of any of such
Licenses.
5.7 No Inconsistent Action. HDA shall not take any action that is
inconsistent in any material respect with its obligations under this
Agreement or that could reasonably be expected to hinder or delay the
consummation of the transactions contemplated by this Agreement. Neither
HDA nor any of its representatives or agents shall, directly or indirectly,
solicit, initiate, or participate in any way in discussions or negotiations
with, or provide any confidential information to, any Person (other than
Buyer or any Affiliate or associate of Buyer and their respective
representatives and agents) concerning any possible disposition of the
Stock or any similar transaction.
5.8 HDA Consents. HDA shall use its best efforts to obtain all HDA
Consents without any change in the terms or conditions of any contract or
license to which such Consent relates. HDA shall promptly advise Buyer of
any difficulties experienced in obtaining any of the HDA Consents and of
any conditions proposed, considered, or requested for any of the HDA
Consents.
5.9 Notification. HDA shall promptly notify Buyer in writing of any
material change in any of the information contained in the representations
and warranties contained in Section 3 of this Agreement.
5.10 Capital Improvements. Prior to the Closing Date, HDA shall have
paid to the Company $50,000 for the repair of the retaining wall at the
Cubuy tower site. HDA shall also have paid to the Company the necessary
funds in excess of insurance proceeds to repair the other damage from
Hurricane Bertha at the Cubuy tower site.
5.11 Shareholder and Management Agreement. HDA shall comply with all
of the terms and conditions of the Shareholder Agreement and the Management
Agreement.
SECTION 6. SPECIAL COVENANTS AND AGREEMENTS
6.1 FCC Consent.
(a) The sale of the Stock as contemplated by this Agreement is
subject to the prior consent and approval of the FCC.
(b) HDA and Buyer shall, and shall cause the Company to, prepare
and, within five (5) business days after the date hereof, file with the FCC
an appropriate application for the FCC Consent. HDA and Buyer shall, and
(PAGE)11
shall cause the Company to, thereafter prosecute the application for the
FCC Consent with all reasonable diligence and otherwise use their
respective best efforts to obtain a grant of the application for the FCC
Consent as expeditiously as practicable. Each party agrees to comply, and
cause the Company to comply, with any condition imposed on it by the FCC
Consent, except that no party shall be required to comply with a condition
if (i) the condition was imposed on it as the result of a circumstance the
existence of which does not constitute a breach by that party of any of its
representations, warranties, or covenants hereunder, and (ii) compliance
with the condition would have a material adverse effect upon it. HDA and
Buyer shall, and shall cause the Company to, oppose any petitions to deny
or other objections filed with respect to the application for the FCC
Consent and any requests for reconsideration or judicial review of the FCC
Consent. The cost of such opposition shall be borne by the party whose
qualifications are being challenged in such petition to deny, objection,
request for reconsideration or judicial review.
(c) If the Closing shall not have occurred for any reason within
the original effective period of the FCC Consent, and neither party shall
have terminated this Agreement under Section 9, the parties shall jointly
request an extension of the effective period of the FCC Consent. No
extension of the effective periods of the FCC Consent shall limit the
exercise by either party of its right to terminate the Agreement under
Section 9.
6.2 Confidentiality. Except as necessary for the consummation of the
transaction contemplated by this Agreement, including the requirements of
HDA's and Buyer's lenders, and the operation of the Stations pursuant to
the Management Agreement and except as and to the extent required by law,
each party will keep confidential any information obtained from the other
party in connection with the transactions contemplated by this Agreement.
If this Agreement is terminated, each party will return to the other party
all information obtained by such party from the other party in connection
with the transactions contemplated by this Agreement.
6.3 Cooperation. Buyer and HDA shall cooperate fully with each other
and their respective counsel and accountants in connection with any actions
required to be taken as part of their respective obligations under this
Agreement, and Buyer and HDA shall execute such other documents as may be
necessary and desirable to the implementation and consummation of this
Agreement, and otherwise use their best efforts to consummate the
transaction contemplated hereby and to fulfill their obligations under this
Agreement. Notwithstanding the foregoing, and except as otherwise
expressly provided in this Agreement, Buyer shall have no obligation to
agree to any adverse change in any License or contract in order to obtain a
Consent required with respect thereto.
6.4 Control of the Stations. Prior to Closing, the operations of the
Stations, including complete control and supervision of all of the
Stations' programs, employees, and policies, shall be the sole
responsibility of the Company as managed by Buyer pursuant to the
Management Agreement.
(PAGE)12
6.5 No Inconsistent Action. Buyer shall not take any action that is
inconsistent in any material respect with its obligations under this
Agreement or that could reasonably be expected to hinder or delay the
consummation of the transactions contemplated hereby. Without limiting the
generality of the foregoing, Buyer shall not take any action that could
result in its disqualification under the Communications Act or FCC rules
and regulations to purchase the Stock or operate the Stations. If Buyer
becomes aware of any fact that could result in such disqualification, it
will so inform HDA and use its best efforts to eliminate any such
disqualifying fact.
6.6 Buyer Consents. Buyer shall use its best efforts to obtain all
of the Buyer Consents. Buyer shall promptly advise HDA of any difficulties
experienced in obtaining any of the Buyer Consents and of any conditions
proposed, considered or requested for any of the Buyer Consents.
6.7 Exclusivity.
(a) During the Exclusivity Period (defined below) Buyer shall
cause the Stations not to broadcast any Interactive Gaming Programming
(defined below) except for (i) Interactive Gaming Programming provided
under the ECOC Agreement as amended pursuant to Section 6.8, (ii)
Interactive Gaming Programming produced by or broadcast during time
purchased by HDA or an Affiliate of HDA or (iii) RFR Waiver Programming
(defined below).
(b) The "Exclusivity Period" shall mean the period commencing on
the date hereof and ending on the second anniversary of the Closing Date;
provided, however, that the Exclusivity Period shall be extended following
the second anniversary of the Closing Date for so long as HDA or an HDA
Affiliate shall offer to purchase at least 2 hours per week of broadcast
time on the Stations for broadcast of Interactive Gaming Programming which
2 hours requirement shall not be satisfied by the broadcast of Interactive
Gaming Programming under the ECOC Agreement.
(c) During the Exclusivity Period, Buyer shall cause the Company
to sell to HDA or an HDA Affiliate, upon request, broadcast time on the
Stations for Interactive Gaming Programming in a minimum and maximum amount
of 2 hours per week and 10 hours per week, respectively. Buyer shall cause
the Stations to make such broadcast time available at such times as shall
be requested by HDA at least 30 days prior to the broadcast, but shall not
be required to provide more than 2 hours per day. The hourly rate charged
for such broadcast time shall equal the average of the rate charged for
each hour immediately preceding and immediately following such broadcast
time (not including advertising revenues for individual spots of one minute
or less broadcast during such hour).
(d) During the Exclusivity Period Buyer shall cause the Company
to notify HDA of any bona fide offer from any person to purchase broadcast
time on the Stations for the broadcast of Interactive Gaming Programming
which the Company desires to accept ("Proposed Programming"). Such notice
shall be in writing and shall set forth all material terms of the Proposed
Programming including the schedule and number of hours per week of proposed
(PAGE)13
broadcast time, a detailed description of the content of the Proposed
Programming, the consideration to be received by the Company in respect of
the Proposed Programming and the duration of the commitment to purchase
broadcast time. Following receipt of such notice, HDA shall have 60 days
to notify the Company whether it wishes to purchase broadcast time for
Interactive Gaming Programming on the same terms as the Proposed
Programming. If HDA notifies the Company within such period of its desire
to purchase broadcast time on such terms, the Company shall sell to HDA or
an Affiliate of HDA such broadcast time on such terms provided that HDA or
an Affiliate of HDA makes available to the Stations such programming within
120 days of HDA's receipt of notice of the Proposed Programming from Buyer
pursuant to the first sentence of this paragraph (d). If HDA notifies the
Company that it declines to purchase such broadcast time or fails to notify
the Company within the 60-day period or fails to provide such programming
within the 120-day period, the Company may broadcast the Proposed
Programming in accordance with the terms thereof (hereafter "RFR Waiver
Programming").
(e) "Interactive Gaming Programming" shall mean programming
permitted under applicable law the content of which determines or announces
the outcome of a Sponsored Gaming Activity (defined below). "Sponsored
Gaming Activity" shall mean any parimutuel wagering, sports betting or
other game, lottery or contest where winners are determined predominantly
by chance with respect to which (i) participants in the Sponsored Gaming
Activity provide consideration for an opportunity to win a cash and/or non
cash prize, and (ii) the purchaser of broadcast time for determining or
announcing the outcome of such Sponsored Gaming Activity (or an Affiliate
thereof) receives directly or indirectly some portion of such consideration
or a fee paid by some other person who receives some portion of such
consideration.
Interactive Gaming Programming shall not include (i)
advertisements for casinos, government lotteries, sports books or other
gambling venues or gambling opportunities, or (ii) "no purchase necessary"
sweepstakes or other games of chance where participants have an opportunity
to win a prize but provide no consideration for such opportunity.
(f) Notwithstanding the foregoing, the Company shall retain the
right to interrupt or preempt the programming of HDA or an Affiliate
thereof to be broadcast hereunder in case of an emergency or for
noncommercial public service programming which, in the good faith judgment
of the Company, is of greater local or national public importance and the
Company shall not be required to broadcast any programming of HDA or an
Affiliate thereof that violates any applicable laws, rules, regulations or
policies of any governmental entity, including the FCC.
6.8 Agreement with ECOC. Simultaneously with the Closing, Buyer and
HDA shall cause the Company and HDA shall cause ECOC to amend the Agreement
(the "ECOC Agreement"), dated as of February 1, 1996, between the Company
and El Comandante Operating Co., Inc. ("ECOC"), pursuant to the Amendment
to the ECOC Agreement attached hereto as Exhibit A (the "ECOC Amendment").
6.9 Studio Lease Agreement. Simultaneously with the Closing, Buyer
(PAGE)14
and HDA shall cause the Company and HDA shall cause ECOC to enter into the
studio lease agreement attached hereto as Exhibit B (the "Studio Lease
Agreement").
6.10 Cancellation of Note. Simultaneously with the Closing, the
Company shall repay to HDA all capital funding notes issued by the Company
pursuant to the Shareholder Agreement.
6.11 Shareholder and Management Agreements. Simultaneously with the
Closing, Buyer and HDA shall, and shall cause the Company to, terminate the
Shareholder Agreement and the Management Agreement except that with respect
to HDA, Section 7.4 of the Shareholder Agreement shall survive such
termination for the term set forth in such Section.
6.12 Ponce Transmitter Site. The parties hereto acknowledge that they
have agreed to cause the Company to relocate the tower site for television
station WKPV(TV), Ponce, Puerto Rico. HDA shall pay and reimburse Buyer
and/or the Company, as applicable, for 25% of the costs and expenses
relating to such relocation regardless of whether such costs and expenses
are incurred prior to or after the Closing Date, provided that HDA's
reimbursement obligation hereunder shall not exceed $100,000. At Closing,
the Purchase Price shall be reduced by the amount of the relocation costs
and expenses incurred by Buyer and/or the Company as of such date for which
HDA is responsible hereunder and Buyer's reasonable estimate of the amount
of the relocation costs and expenses to be incurred by Buyer and/or the
Company following the Closing for which HDA is responsible hereunder
provided that such reduction in the Purchase Price shall not exceed
$100,000. Upon completion of the relocation, Buyer shall promptly pay to
HDA the amount, if any, by which such reduction in the Purchase Price
exceeded the aggregate amount of relocation costs and expenses actually
incurred by Buyer and/or the Company for which HDA is responsible hereunder
and HDA shall promptly pay to Buyer the amount, if any, by which such
reduction in the Purchase Price is less than the aggregate amount of
relocation costs and expenses actually incurred by Buyer and/or the Company
for which HDA is responsible hereunder. Relocation costs and expenses
payable hereunder by HDA shall include all out-of-pocket costs and expenses
incurred by Buyer and/or the Company relating to such relocation; provided
that relocation costs and expenses payable by HDA hereunder shall not
include any lease payments to be made by the Company if the Company elects
to lease the site to which it will relocate the WKPV(TV) transmitter site.
6.13 Mortgage. Prior to and after the Closing, HDA shall use
commercially reasonable efforts to assist the Company and Buyer in
obtaining the release of record of the Mortgage.
SECTION 7. CONDITIONS TO OBLIGATIONS OF BUYER AND HDA
7.1 Conditions to Obligations of Buyer. All obligations of Buyer at
the Closing hereunder are subject at Buyer's option to the fulfillment
prior to or at the Closing Date of each of the following conditions:
(a) Representations and Warranties. All representations and
warranties of HDA contained in this Agreement shall be true and complete in
(PAGE)15
all material respects at and as of the Closing Date as though made at and
as of that time.
(b) Covenants and Conditions. HDA shall have performed and
complied in all material respects with all covenants, agreements, and
conditions required by this Agreement to be performed or complied with by
it prior to or on the Closing Date.
(c) Consents. All Consents shall have been obtained without any
adverse change in the terms or conditions of any Material Contract or any
License.
(d) FCC Consent. The FCC Consent shall have been granted without
the imposition on Buyer or the Company of any conditions that need not be
complied with by Buyer or the Company under Section 6.1 hereof and HDA
shall have complied with any conditions imposed on it by the FCC Consent.
(e) Governmental Authorizations. The Company shall be the holder
of all FCC Licenses and there shall not have been any modification,
revocation, or non-renewal of any License that could have an adverse effect
on the Stations or the conduct of their business and operations. No
proceeding shall be pending the effect of which could be to revoke, cancel,
fail to renew, suspend, or modify adversely any FCC License.
(f) Deliveries. HDA shall have made or stand willing to make all
the deliveries to Buyer described in Section 8.2.
(g) Station Authorizations. The Company shall continue to have
all waivers and authorizations from the FCC to operate Station WKPV(TV) and
Station WJWN-TV as satellites of Station WSJN-TV pursuant to Section
73.3555, Note 5, of the FCC's rules and regulations, 47 C.F.R. Section
73.3555 and there shall be no proceedings pending or threatened to revoke or
suspend such waivers or authorizations.
(h) No Proceeding. No administrative or judicial proceeding by
any governmental authority or any other person shall have been instituted
or threatened that questions the validity or legality of the transactions
contemplated by this Agreement.
(i) Stations' Operation. Buyer shall have received evidence that
HDA shall have made the payments to the Company required by Section 5.10
hereof.
(j) Carmen Jovet Programming Agreement. The termination
agreement relating to the Carmen Jovet Programming Agreement shall be in
full force and effect and HDA shall have made all payments required by the
Company thereunder.
(k) ECOC Amendment. ECOC shall have executed and delivered to
Company the ECOC Amendment and the ECOC Agreement as amended by the ECOC
Amendment shall be in full force and effect and ECOC shall be in compliance
in all material respects therewith.
(PAGE)16
(l) Studio Lease Agreement. ECOC shall have executed and
delivered to Company the Studio Lease Agreement and such Studio Lease
Agreement shall be in full force and effect.
(m) GE Loan and IRS Debt. Buyer shall have received evidence
that the GE Loan and the IRS Debt shall have been repaid in full by HDA or
HDA shall have delivered to Buyer a release from General Electric Capital
Corporation of Puerto Rico and the Internal Revenue Service releasing the
Company from any and all liabilities or obligations thereunder. General
Electric Capital Corporation of Puerto Rico and the Internal Revenue
Service shall have released any and all liens that they may have in the
assets of the Company and shall have delivered termination statements and
releases reasonably satisfactory to Buyer with respect thereto.
(n) Equipment Lease. The lease of equipment between the Company
and ECOC shall be in full force and effect.
7.2 Conditions to Obligations of HDA. All obligations of HDA at the
Closing hereunder are subject at HDA's option to the fulfillment prior to
or at the Closing Date of each of the following conditions:
(a) Representations and Warranties. All representations and
warranties of Buyer contained in this Agreement shall be true and complete
in all material respects at and as of the Closing Date as though made at
and as of that time.
(b) Covenants and Conditions. Buyer shall have performed and
complied in all material respects with all covenants, agreements, and
conditions required by this Agreement to be performed or complied with by
it prior to or on the Closing Date.
(c) Deliveries. Buyer shall have made or stand willing to make
all the deliveries described in Section 8.3.
(d) FCC Consent. The FCC Consent shall have been granted without
the imposition on HDA of any conditions that need not be complied with by
HDA under Section 6.1 hereof, and Buyer and the Company shall have complied
with any conditions imposed on them by the FCC Consent.
(e) No Proceeding. No administrative or judicial proceeding by
any governmental authority or any other person shall have been instituted
or threatened that questions the validity or legality of the transactions
contemplated by this Agreement.
(f) ECOC Amendment. The Company shall have executed and
delivered to ECOC the ECOC Amendment and the ECOC Agreement as amended by
the ECOC Amendment shall be in full force and effect and the Company shall
be in compliance in all material respects therewith.
(g) Studio Lease Agreement. The Company shall have executed and
delivered to ECOC the Studio Lease Agreement and such Studio Lease
Agreement shall be in full force and effect.
(PAGE)17
(h) Carmen Jovet Programming Agreement. Buyer shall have paid
$64,486 to HDA, $30,000 of which represents one-half of the amount
previously paid by HDA to Carmen Jovet and $34,486 of which represents the
estimated book value as of December 31, 1996 of production equipment for
the Carmen Jovet show owned by HDA and to be conveyed "as is" to the
Company on or before the Closing pursuant to documentation reasonably
satisfactory to Buyer.
SECTION 8. CLOSING AND CLOSING DELIVERIES
8.1 Closing.
(a) Closing Date.
(1) Except as provided below in this Section 8.1 (a) or as
otherwise agreed to by Buyer and HDA, the Closing shall take place at 10:00
a.m. on a date, to be set by Buyer on at least five days' written notice to
HDA, which shall be not earlier than the first business day after the FCC
Consent is granted and not later than ten business days after the FCC
Consent is granted.
(2) Except as provided below in this Section 8.1 (a), if
Buyer fails to specify the date for Closing pursuant to the preceding
sentence prior to the fifth business day after the date upon which the FCC
Consent has been granted, the Closing shall take place on the tenth
business day after the date upon which the FCC Consent has been granted.
(3) If there is in effect on the date on which the Closing
would otherwise occur pursuant to this Section 8.1 (a) any judgment,
decree, or order that would prevent or make unlawful the Closing on that
date, the Closing shall be postponed until a date within the effective
period of the FCC Consent (as it may be extended pursuant to Section 6.1),
to be agreed upon by Buyer and HDA when such judgment, decree, or order no
longer prevents or makes unlawful the Closing. If the Closing is postponed
pursuant to this paragraph, the date of the Closing shall be mutually
agreed to by HDA and Buyer.
(b) Closing Place. The Closing shall be held at the offices of
Dow, Lohnes & Albertson, 1200 New Hampshire Avenue, N.W., Suite 800,
Washington, D.C. 20036, or any other place that is agreed upon by Buyer
and HDA.
8.2 Deliveries by HDA. Prior to or on the Closing Date, HDA shall
deliver to Buyer the following, in form and substance reasonably
satisfactory to Buyer and its counsel:
(a) Stock. Certificates representing all of the Stock, which
shall be either duly endorsed or accompanied by stock powers duly executed
in favor of Buyer.
(b) Resolutions. Copies of resolutions adopted by the managing
(PAGE)18
general partner of the managing partner of HDA authorizing and approving
the execution of this Agreement and the consummation of the transactions
contemplated hereby, certified by the Secretary or Assistant Secretary of
such managing general partner as being true and complete on the Closing
Date.
(c) Officer's Certificate. A certificate, dated as of the
Closing Date, executed on behalf of HDA by the President of the managing
partner of HDA, certifying: (1) that the representations and warranties of
HDA contained in this Agreement are true and complete in all material
respects as of the Closing Date as though made on and as of that date; and
(2) that HDA has in all material respects performed and complied with all
of its obligations, covenants, and agreements in this Agreement to be
performed and complied with on or prior to the Closing Date.
(d) Opinions of Counsel. Opinions of HDA's counsel and
communications counsel dated as of the Closing Date, in form and substance
satisfactory to Buyer's counsel.
(e) Resignations. Written resignations effective as of the
Closing Date of the officers and directors of the Company set forth on
Schedule 8.2(e) hereto or any successor to any such officers or directors.
(f) GE and IRS Debt. Evidence reasonably satisfactory to Buyer
that the GE Debt and the IRS Loan shall have been paid in full or the
Company shall have been discharged from all liabilities and obligations
thereunder and that General Electric Capital Corporation of Puerto Rico and
the Internal Revenue Service shall have released all liens, security
interests, claims and other encumbrances that they may have in the
Company's assets.
(g) Other Agreements. The documents required by Sections 7.1(k),
(l) and (m).
8.3 Deliveries by Buyer. Prior to or on the Closing Date, Buyer
shall deliver to HDA the following, in form and substance reasonably
satisfactory to HDA and its counsel:
(a) Purchase Price. The payment described in Section 2.2.
(b) Resolutions. Copies of resolutions adopted by the Board of
Directors of Buyer, authorizing and approving the execution of this
Agreement and the consummation of the transactions contemplated hereby,
certified by its Secretary as being true and correct on the Closing Date.
(c) Officer's Certificate. A certificate, dated as of the
Closing Date, executed on behalf of Buyer by the Chairman or President of
Buyer, certifying (1) that the representations and warranties of Buyer
contained in this Agreement are true and complete in all material respects
as of the Closing Date as though made on and as of that date, and (2) that
Buyer has in all material respects performed and complied with all of its
obligations, covenants, and agreements in this Agreement to be performed
and complied with on or prior to the Closing Date.
(PAGE)19
(d) Opinion of Counsel. An opinion of Buyer's counsel dated as
of the Closing Date, in form and substance satisfactory to HDA's counsel.
(e) Other Agreements. The agreements duly executed by the
Company required by Sections 7.2(f) and (g).
SECTION 9. TERMINATION
9.1 Termination by HDA This Agreement may be terminated by HDA, if
HDA is not then in material default, upon written notice to Buyer, upon the
occurrence of any of the following:
(a) Conditions. If on the date that would otherwise be the
Closing Date any of the conditions precedent to the obligations of HDA set
forth in this Agreement has not been satisfied or waived in writing by HDA.
(b) Judgments. If there shall be in effect on the date that
would otherwise be the Closing Date any judgment, decree, or order that
would prevent or make unlawful the Closing.
(c) Upset Date. If the Closing shall not have occurred on or
prior to July 1, 1997.
9.2 Termination by Buyer. This Agreement may be terminated by Buyer,
if Buyer is not then in material default, upon written notice to HDA, upon
the occurrence of any of the following:
(a) Conditions. If on the date that would otherwise be the
Closing Date any of the conditions precedent to the obligations of Buyer
set forth in this Agreement has not been satisfied or waived in writing by
Buyer.
(b) Judgments. If there shall be in effect on the date that
would otherwise be the Closing Date any judgment, decree, or order that
would prevent or make unlawful the Closing.
(c) Upset Date. If the Closing shall not have occurred on or
prior to July 1, 1997.
9.3 Rights on Termination. If this Agreement is terminated by
either party due to the other party's breach of any provision of this
Agreement, such party shall have all rights and remedies available at law
or equity.
9.4 Specific Performance. The parties recognize that if HDA breaches
this Agreement and refuses to perform under the provisions of this
Agreement, monetary damages alone would not be adequate to compensate Buyer
for its injury. Buyer shall therefore be entitled, in addition to any
other remedies that may be available, to obtain specific performance of the
terms of this Agreement. If any action is brought by Buyer to enforce this
Agreement, HDA shall waive the defense that there is an adequate remedy at
law.
9.5 Attorneys' Fees. In the event of a default by either party that
(PAGE)20
results in a lawsuit or other proceeding for any remedy available under
this Agreement, the prevailing party shall be entitled to reimbursement
from the other party of its reasonable legal fees and expenses (whether
incurred in arbitration, at trial, or on appeal).
SECTION 10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION; CERTAIN REMEDIES
10.1 Survival. Without prejudice to representations and warranties
in other agreements delivered hereunder, all representations and warranties
of Buyer and HDA herein and all covenants of Buyer and HDA herein with
respect to periods prior to Closing shall be deemed continuing
representations, warranties and covenants, and shall survive the Closing
for a period of eighteen (18) months. Any investigations by or on behalf
of any party hereto shall not constitute a waiver as to enforcement of any
representation, warranty, or covenant contained in this Agreement. No
notice or information delivered by either party shall affect the other
party's right to rely on any representation, warranty, or covenant made by
such party or relieve such party of any obligations under this Agreement as
the result of a breach of any of its representations and warranties.
10.2 Indemnification by HDA. Notwithstanding the Closing but subject
to Section 10.5, HDA hereby agrees to indemnify and hold Buyer harmless
against and with respect to, and shall reimburse Buyer for:
(a) any and all losses, liabilities, or damages resulting from
any untrue representation, breach of warranty, or nonfulfillment of any
covenant by HDA contained herein or in any certificate, document, or
instrument delivered to Buyer hereunder;
(b) any and all losses, liabilities or damages resulting from the
threatened claims and legal actions described in Section 8 of Schedule 1 to
the Officer's Certificate of the Company and HDA dated as of August 30,
1996 delivered at the closing under the First Purchase Agreement;
(c) any and all losses, liabilities, or damages resulting from
any claim by Angulo Capital Corporation relating to the matters alleged in
its letter dated October 29, 1996 to Mr. Dean Goodman;
(d) any and all losses, liabilities, or damages resulting from
any claim that any current use of the property described on Schedule 3.7 to
the First Purchase Agreement in which the Company has a 17.96% ownership
interest does not comply with applicable deed restrictions or zoning
requirements; provided that Buyer uses commercially reasonable efforts to
mitigate any such losses, liabilities or damages;
(e) any and all out-of-pocket costs and expenses, including
reasonable legal fees and expenses, incident to any action, suit,
proceeding, claim, demand, assessment, or judgment incident to the
foregoing or incurred in investigating or attempting to avoid the same or
to oppose the imposition thereof, or in enforcing this indemnity; and
(f) in the event of an early termination of the Company's
(PAGE)21
leasehold interest under the Studio Lease Agreement resulting from any
order by the Puerto Rico Racing Board, (i) any out-of-pocket costs not to
exceed $150,000 of relocating the Company's studio to another facility,
plus (ii) the rent differential between (A) rent payable under the Studio
Lease Agreement for the remainder of the five-year term then in effect at
the time of termination, and (B) rent payable by the Company for a
replacement studio not to exceed 8,000 square feet for the same period;
provided, however, that if the Company enters into a lease for a
replacement studio in excess of 8,000 square feet, then HDA's reimbursement
obligation shall apply only to that portion of the space equal to 8,000
square feet.
10.3 Indemnification by Buyer. Notwithstanding the Closing but
subject to Section 10.5, Buyer hereby agrees to indemnify and hold HDA
harmless against and with respect to, and shall reimburse HDA for:
(a) any and all losses, liabilities, or damages resulting from
any untrue representation, breach of warranty, or nonfulfillment of any
covenant by Buyer contained herein or in any certificate, document, or
instrument delivered to HDA hereunder; and
(b) any and all out-of-pocket costs and expenses, including
reasonable legal fees and expenses, incident to any action, suit,
proceeding, claim, demand, assessment, or judgment incident to the
foregoing or incurred in investigating or attempting to avoid the same or
to oppose the imposition thereof, or in enforcing this indemnity.
10.4 Procedure for Indemnification. The procedure for
indemnification shall be as follows:
(a) The party claiming indemnification (the "Claimant") shall
promptly give notice to the party from which indemnification is claimed
(the "Indemnifying Party") of any claim, whether between the parties or
brought by a third party, specifying in reasonable detail the factual basis
for the claim. If the claim relates to an action, suit, or proceeding
filed by a third party against Claimant, such notice shall be given by
Claimant within five business days after written notice of such action,
suit, or proceeding was given to Claimant.
(b) With respect to claims solely between the parties, following
receipt of notice from the Claimant of a claim, the Indemnifying Party
shall have thirty days to make such investigation of the claim as the
Indemnifying Party deems necessary or desirable. For the purposes of such
investigation, the Claimant agrees to make available to the Indemnifying
Party and its authorized representatives the information relied upon by the
Claimant to substantiate the claim. If the Claimant and the Indemnifying
Party agree at or prior to the expiration of the thirty-day period (or any
mutually agreed upon extension thereof) to the validity and amount of such
claim, the Indemnifying Party shall immediately pay to the Claimant the
full amount of the claim. If the Claimant and the Indemnifying Party do
not agree within the thirty-day period (or any mutually agreed upon
extension thereof), the Claimant may seek appropriate remedy at law or
equity or under the arbitration provisions of this Agreement, as
(PAGE)22
applicable.
(c) With respect to any claim by a third party as to which the
Claimant is entitled to indemnification under this Agreement, the
Indemnifying Party shall have the right at its own expense, to participate
in or assume control of the defense of such claim, and the Claimant shall
cooperate fully with the Indemnifying Party, subject to reimbursement for
actual out-of-pocket expenses incurred by the Claimant as the result of a
request by the Indemnifying Party. If the Indemnifying Party elects to
assume control of the defense of any third-party claim, the Claimant shall
have the right to participate in the defense of such claim at its own
expense. If the Indemnifying Party does not elect to assume control or
otherwise participate in the defense of any third-party claim, it shall be
bound by the results obtained in good faith by the Claimant with respect to
such claim.
(d) If a claim, whether between the parties or by a third party,
requires immediate action, the parties will make every effort to reach a
decision with respect thereto as expeditiously as possible.
(e) The indemnifications rights provided in Section 10.2 and
Section 10.3 shall extend to the partners, officers, employees, and
representatives of any Claimant although for the purpose of the procedures
set forth in this Section 10.4, any indemnification claims by such parties
shall be made by and through the Claimant.
10.5 Certain Limitations.
(a) Except as provided in paragraph (c) of this Section 10.5,
notwithstanding anything in this Agreement to the contrary, neither party
shall indemnify or otherwise be liable to the other party with respect to
any claim for any breach of a representation or warranty, or for the breach
of any covenant contained in Section 5 of this Agreement, (i) unless notice
of the claim is given within eighteen months after the Closing Date and
(ii) except to the extent the losses, obligations, liabilities, costs and
expenses of such party arising therefrom exceed in the aggregate Ten
Thousand Dollars ($10,000).
(b) Notwithstanding anything in this Agreement to the contrary,
no indemnification shall be payable by HDA or by Buyer to any Claimant in
excess of Two Hundred Thousand Dollars ($200,000) in the aggregate, except
with respect to Sections 3.5, 3.3, 5.10, 6.12, 10.2(c), 10.2(d) and
10.2(f) or with respect to the failure of Buyer to pay the Purchase Price.
(c) The limitations on indemnification set forth in paragraph (a)
of this Section 10.5 shall not apply to indemnification obligations of HDA
under Sections 10.2(c), 10.2(d) or 10.2(f).
10.6 Exclusivity of Remedy. Except as otherwise specifically
provided for in this Agreement, the provisions of this Section 10 shall be
the sole recourse of Buyer and HDA for any matters relating to or arising
in connection with this Agreement, and such recourse is explicitly limited
to the amounts and time limits set forth in Section 10.5.
(PAGE)23
SECTION 11. MISCELLANEOUS
11.1 Fees and Expenses. HDA shall pay any filing fees, transfer
taxes, document stamps, or other charges levied by any governmental entity
on account of the transfer of the Stock from HDA to Buyer. Except as
provided in Section 6.1 (b) of this Agreement, Buyer and HDA shall each pay
one-half of any fees charged by the FCC in connection with obtaining the
FCC Consent. Except as otherwise specifically provided in this Agreement,
each party shall pay its own expenses incurred in connection with the
authorization, preparation, execution, and performance of this Agreement,
including all fees and expenses of counsel, accountants, agents, and
representatives.
11.2 Notices. All notices, demands, and requests required or
permitted to be given under the provisions of this Agreement shall be in
writing and shall be addressed as follows:
If to Buyer: Paxson Communications of San Juan, Inc.
601 Clearwater Park Road
West Palm Beach, FL 33401
Attn: Mr. Lowell W. Paxson
with copies (which shall not
constitute notice) to: John R. Feore, Jr., Esq.
Dow, Lohnes & Albertson
1200 New Hampshire Ave., N.W.
Suite 800
Washington, D.C. 20036
If to HDA: Housing Development Associates S.E.
650 Munoz Rivera Avenue, 7th Floor
Hato Rey
Puerto Rico 00918
Attention: President
with a copy (which shall not
constitute notice) to: W. Andrew Jack, Esq.
Covington & Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20044-7566
or to any other or additional persons and addresses as the parties may from
time to time designate in a writing delivered in accordance with this
Section 11.2. A notice mailed by registered or certified mail, postage
prepaid and return receipt requested, shall be deemed to have been duly
delivered and received on the date of receipt shown on the return receipt.
11.3 Benefit and Binding Effect. No party hereto may assign this
Agreement without the prior written consent of the other parties hereto;
provided, however, that Buyer may assign its rights and obligations under
this Agreement to another entity without seeking or obtaining HDA's prior
approval provided, further, that Buyer shall guarantee such assignee's
(PAGE)24
performance hereunder. Upon any assignment by Buyer or permitted
assignment by HDA in accordance with this Section 11.3, all references to
"Buyer" herein shall be deemed to be references to Buyer's assignee and all
references to "HDA" herein shall be deemed to be references to HDA's
assignee. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
11.4 Further Assurances. The parties shall take any actions and
execute any other documents that may be necessary or desirable to the
implementation and consummation of this Agreement.
11.5 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED, CONSTRUED, AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA (WITHOUT
REGARD TO THE CHOICE OF LAW PROVISIONS THEREOF).
11.6 Headings. The headings herein are included for ease of
reference only and shall not control or affect the meaning or construction
of the provisions of this Agreement.
11.7 Entire Agreement. This Agreement, the schedules hereto, the
First Purchase Agreement, the Shareholder Agreement, the Management
Agreement, and all documents, certificates, and other documents to be
delivered or previously delivered by the parties pursuant hereto or thereto
(including the Assumption Agreement and the Closing Agreement executed at
the closing of the First Purchase Agreement), collectively represent the
entire understanding and agreement between Buyer and HDA with respect to
the subject matter of this Agreement. This Agreement supersedes all prior
negotiations between the parties and cannot be amended, supplemented, or
changed except by an agreement in writing that makes specific reference to
this Agreement and that is signed by the party against which enforcement of
any such amendment, supplement, or modification is sought.
11.8 Waiver of Compliance; Consents. Except as otherwise provided in
this Agreement, any failure of any of the parties to comply with any
obligation, representation, warranty, covenant, agreement, or condition
herein may be waived by the party entitled to the benefits thereof only by
a written instrument signed by the party granting such waiver, but such
waiver or failure to insist upon strict compliance with such obligation,
representation, warranty, covenant, agreement, or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or
other failure. Whenever this Agreement requires or permits consent by or
on behalf of any party hereto, such consent shall be given in writing in a
manner consistent with the requirements for a waiver of compliance as set
forth in this Section 11.8.
11.9 Counterparts. This Agreement may be signed in counterparts with
the same effect as if the signature on each counterpart were upon the same
instrument.
11.10 Guaranty of PCC. In consideration of the execution and
delivery of this Agreement by HDA, Paxson Communications Corporation
("PCC") agrees as follows:
(a) PCC hereby guarantees the full, complete and timely
(PAGE)25
performance by Buyer of each and every obligation of Buyer under this
Agreement. If any default shall be made by Buyer in the performance of any
of such obligations, then PCC will itself perform or cause to be performed
such obligation upon receipt of notice from HDA specifying in summary form
the default;
(b) PCC waives presentment, protest, demand or action in respect
of any of the obligations of Buyer under this Agreement. PCC waives all
notices of nonperformance, notices of protest, notices of dishonor and
notices of acceptance of this guaranty; and
(c) this guaranty shall be deemed a continuing guaranty, and the
above consents and waivers of PCC shall remain in full force and effect
until the satisfaction in full of all obligations of Buyer under this
Agreement.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
(PAGE)26
IN WITNESS WHEREOF, this Agreement has been executed by the duly
authorized officers of Buyer and HDA as of the date first written above.
PAXSON COMMUNICATIONS OF SAN JUAN, INC.
By: /s/ William L. Watson
-------------------------------
Name: William L. Watson
Title: Secretary
HOUSING DEVELOPMENT ASSOCIATES S.E.
By: Equus Gaming Company L.P.,
its managing partner
By: Equus Management Company,
its managing general partner
By: /s/ Donald G. Blakeman
---------------------------
Name: Donald G. Blakeman
Title: President
With respect to Section 11.10 only:
PAXSON COMMUNICATIONS CORPORATION
By: /s/ William L. Watson
-------------------------------
Name: William L. Watson
Title: Assistant Secretary
(PAGE)27
EXHIBITS AND SCHEDULES TO
STOCK PURCHASE AGREEMENT
EXHIBITS
EXHIBIT A - ECOC Amendment
EXHIBIT B - Studio Lease Agreement
SCHEDULES
Schedule 3.4 - HDA Consents
Schedule 3.7 - Mortgage
Schedule 8.2(e) - Officers and Directors to Resign
(PAGE)28
SCHEDULE 3.4
HDA CONSENTS
None.
(PAGE)29
SCHEDULE 3.7
MORTGAGE
The mortgage set forth below on land in Cubuy, Canovanas, Puerto
Rico which land is described in Schedule 3.7 to the First Purchase
Agreement and in which the Company has a 17.96% ownership interest:
Mortgage in the principal sum of $170,000 in favor of bearer,
created as per Deed No. 43 executed on March 2, 1987 before Notary
Public William A. Power, duly recorded at page 248(r) of Canovanas,
14th inscription.
Mortgage in favor of bearer in the principal sum of $150,000
created as per Deed No. 56 executed on May 31, 1989 before notary
Public Sergio A. Ramirez de Arellano, duly recorded at page 250 of
book 98 of Canovanas, 17th and last inscription.
(PAGE)30
SCHEDULE 8.2(e)
OFFICERS AND DIRECTORS TO RESIGN
Directors
Donald G. Blakeman
Gretchen Gronau
Officers
Donald G. Blakeman Vice President
Gretchen Gronau Assistant Secretary
(PAGE)31
EXHIBIT A
FORM OF ECOC AMENDMENT
(PAGE)32
EXHIBIT B
FORM OF STUDIO LEASE AGREEMENT
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 7,183
<SECURITIES> 0
<RECEIVABLES> 1,683<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 57,848
<DEPRECIATION> 11,424
<TOTAL-ASSETS> 62,917
<CURRENT-LIABILITIES> 2,420
<BONDS> 66,361<F2>
0
0
<COMMON> 0
<OTHER-SE> (11,578)
<TOTAL-LIABILITY-AND-EQUITY> 62,917
<SALES> 0
<TOTAL-REVENUES> 16,782
<CGS> 0
<TOTAL-COSTS> 9,198
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,696
<INCOME-PRETAX> 888
<INCOME-TAX> 619
<INCOME-CONTINUING> 361
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 361
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes note receivable of $.873 million.
<F2>Net of bond discount of $1.68 million.
</FN>
</TABLE>
