(PAGE)
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, 1997, 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) EQUUS GAMING COMPANY L.P.
FORM 10 Q
INDEX
Page
PART I - FINANCIAL INFORMATION Number
Item 1 - Financial Statements
Equus Gaming Company L.P. (the "Company"):
Consolidated Statements of Income for the Nine
Months Ended September 30, 1997 and 1996 (Unaudited) 1
Consolidated Statements of Income (Loss) for the Three
Months Ended September 30, 1997 and 1996 (Unaudited) 3
Consolidated Balance Sheets at September 30, 1997 (Unaudited)
and December 31, 1996 (Audited) 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 (Unaudited) 7
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1997 and 1996 (Unaudited) 9
Notes to Consolidated Financial Statements 11
El Comandante Operating Company, Inc.:
Statements of Revenues and Expenses for the Nine Months
Ended September 30, 1997 and 1996 (Unaudited) 18
Statements of Revenues and Expenses for the Three Months
Ended September 30, 1997 and 1996 (Unaudited) 19
Statements of Net Assets (Liabilities) at September 30, 1997
(Unaudited) and December 31, 1996 (Audited) 20
Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996 (Unaudited) 21
Statements of Cash Flows for the Three Months Ended
September 30, 1997 and 1996 (Unaudited) 22
Notes to Financial Statements 23
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
The Company's Results of Operations for the Nine and
Three Months Ended September 30, 1997 and 1996 26
Liquidity and Capital Resources of HDA and the Company 32
(PAGE)
EQUUS GAMING COMPANY L.P.
FORM 10 Q
INDEX
Page
PART II - OTHER INFORMATION Number
Item 1 - Legal Proceedings 36
Item 2 - Material Modifications of Rights of Registrant's
Securities 36
Item 3 - Default upon Senior Securities 36
Item 4 - Submission of Matters to a Vote of Security Holders 36
Item 5 - Other Information 36
Item 6 - Exhibits and Reports on Form 8-K 37
Signatures 38
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1997 1996
----------- -----------
REVENUES:
Rental income from El Comandante Race Track $10,348,140 $10,746,502
Dominican Republic racing-
Commissions on wagering 3,447,470 3,299,481
Other revenues 553,017 337,601
Television Stations - 1,676,046
Gain from sale of Television Stations 4,615,000 581,120
Interest income 376,607 141,109
----------- -----------
Total revenues 19,340,234 16,781,859
----------- -----------
EXPENSES:
Financial 6,481,586 6,695,587
Depreciation 1,737,049 1,846,792
General and administrative 1,547,188 1,399,427
Costs of Supra transaction 319,550 -
Operating costs of Dominican Republic racing 4,299,645 4,490,492
Operating costs of Television Stations - 1,461,312
----------- -----------
Total expenses 14,385,018 15,893,610
----------- -----------
INCOME BEFORE INCOME TAXES, MINORITY INTERESTS
AND EXTRAORDINARY ITEM 4,955,216 888,249
PROVISION FOR INCOME TAXES:
Current 2,548 157,628
Deferred 781,692 461,128
----------- -----------
INCOME BEFORE MINORITY INTERESTS AND
EXTRAORDINARY ITEM 4,170,976 269,493
MINORITY INTERESTS 734,190 (91,682)
----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 3,436,786 361,175
EXTRAORDINARY ITEM - Premium on early redemption
of First Mortgage Notes and write-off of related
deferred financing costs and bond discount 459,173 -
----------- -----------
NET INCOME $ 2,977,613 $ 361,175
=========== ===========
(continues)
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(continued)
1997 1996
----------- -----------
ALLOCATION OF NET INCOME:
General Partners $ 29,776 $ 3,612
Limited Partners 2,947,837 357,563
----------- -----------
$ 2,977,613 $ 361,175
=========== ===========
PER UNIT AMOUNTS:
Net income before extraordinary item $ .54 $ .06
Extraordinary item .07 -
----------- -----------
Net income $ .47 $ .06
=========== ===========
WEIGHTED AVERAGE UNITS OUTSTANDING 6,333,617 6,333,617
=========== ===========
The accompanying notes are an integral part
of these consolidated statements.
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1997 1996
----------- -----------
REVENUES:
Rental income from El Comandante Race Track $ 3,235,297 $ 3,327,988
Dominican Republic racing-
Commissions on wagering 1,124,153 1,038,277
Other revenues 286,151 47,212
Television Stations - 510,937
Gain from sale of Television Stations - 581,120
Interest income 105,349 60,959
----------- -----------
Total revenues 4,750,950 5,566,493
----------- -----------
EXPENSES:
Financial 2,075,419 2,257,520
Depreciation 576,913 605,885
Costs of Supra transaction 319,550 -
General and administrative 570,442 386,684
Operating costs of Dominican Republic racing 1,539,656 1,380,658
Operating costs of Television Stations - 378,064
----------- -----------
Total expenses 5,081,980 5,008,811
----------- -----------
(LOSS)INCOME BEFORE INCOME TAXES, MINORITY
INTERESTS AND EXTRAORDINARY ITEM (331,030) 557,682
PROVISION (CREDIT) FOR INCOME TAXES:
Current 526 82,451
Deferred (59,034) 193,802
----------- -----------
(LOSS) INCOME BEFORE MINORITY INTERESTS AND
EXTRAORDINARY ITEM (272,522) 281,429
MINORITY INTERESTS (80,890) (32,785)
----------- -----------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM (191,632) 314,214
EXTRAORDINARY ITEM - Premium on early redemption
of First Mortgage Notes and write-off of related
deferred financing costs and bond discount 459,173 -
----------- -----------
NET (LOSS) INCOME $ (650,805) $ 314,214
=========== ===========
(continues)
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(continued)
1997 1996
----------- -----------
ALLOCATION OF NET (LOSS) INCOME:
General Partners $ (6,508) $ 3,142
Limited Partners (644,297) 311,072
----------- -----------
$ (650,805) $ 314,214
=========== ===========
PER UNIT AMOUNTS:
Net (loss) income before extraordinary item $ (.03) $ .05
Extraordinary item .07 -
----------- -----------
Net (loss) income $ (.10) $ .05
=========== ===========
WEIGHTED AVERAGE UNITS OUTSTANDING 6,333,617 6,333,617
=========== ===========
The accompanying notes are an integral part
of these consolidated statements.
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1997 1996
----------- ------------
(Unaudited) (Audited)
CASH AND CASH EQUIVALENTS $ 2,329,097 $ 4,268,029
----------- -----------
ASSETS RELATED TO RACE TRACKS:
Property and equipment-
Land 7,128,858 7,128,858
Buildings and improvements 48,585,267 48,138,946
Equipment 2,630,078 2,669,639
----------- -----------
58,344,203 57,937,443
Less accumulated depreciation (13,703,056) (11,981,552)
----------- -----------
44,641,147 45,955,891
Receivables from El Comandante
Operating Company, Inc. ("ECOC") 2,915,159 2,780,416
Deferred costs-
Financing 3,848,721 4,055,866
Organizational and other 331,431 370,120
Panama 2,260,000 -
Other 1,405,998 932,566
----------- -----------
55,402,456 54,094,859
----------- -----------
ASSETS RELATED TO TELEVISION STATIONS:
Investment in S & E Network Inc. ("S&E") - 1,825,243
Other - 398,199
----------- -----------
- 2,223,442
----------- -----------
$57,731,553 $60,586,330
=========== ===========
(continues)
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND PARTNERS' DEFICIT
September 30, December 31,
1997 1996
----------- ------------
(Unaudited) (Audited)
LIABILITIES RELATED TO RACE TRACKS:
First Mortgage Notes-
Principal, net of bond discount of
$1,404,248 and $1,596,261, respectively $63,358,752 $66,403,739
Accrued interest 2,219,831 332,918
Minority interest in Galapagos - 111,427
Notes payable to Supra and Velez 260,000 -
Notes payable 421,442 577,388
Accounts payable and accrued liabilities 1,688,761 2,157,681
Accrued income taxes 959,431 437,692
----------- -----------
68,908,217 70,020,845
----------- -----------
OTHER LIABILITIES:
Unsecured partner's loans - 415,883
Notes payable 200,000 500,000
Accounts payable and accrued liabilities 96,047 287,976
Minority interest in HDA 83,270 550,605
----------- -----------
379,317 1,754,464
----------- -----------
PARTNERS' DEFICIT:
General Partners (723,272) (752,867)
Limited Partners (10,832,709) (10,436,112)
----------- -----------
(11,555,981) (11,188,979)
----------- -----------
$57,731,553 $60,586,330
=========== ===========
The accompanying notes are an integral part
of these consolidated balance sheets.
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,977,613 $ 361,175
----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities-
Gain from sale of Television Stations (4,615,000) (581,120)
Extraordinary item 459,173 -
Equity in earnings - (6,588)
Depreciation 1,737,049 1,846,792
Amortization 458,192 663,703
Deferred income tax provision 781,692 461,128
Currency translation adjustments (18,126) (35,490)
Forgiveness of interest - (173,754)
Decrease (increase) in assets-
Rent receivable from ECOC (379,140) (13,169)
Deferred costs (2,260,000) (97,596)
Other 144,915 (518,391)
Increase (decrease) in liabilities-
Accrued interest 1,886,913 2,064,202
Accounts payable and accrued liabilities (660,847) 1,014,822
Accrued income taxes (259,952) (36,683)
Minority interests 734,190 (91,682)
----------- -----------
Total adjustments (1,990,941) 4,496,174
----------- -----------
Net cash provided by operating activities 986,672 4,857,349
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (422,306) (361,468)
Collection of note from ECOC 243,231 128,814
Effect of deconsolidation of S&E - (129,948)
Sale of Television Stations -
Proceeds 7,000,000 4,000,000
Costs (559,757) (418,950)
----------- -----------
Net cash provided by investing activities 6,261,168 3,218,448
----------- -----------
(continues)
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(continued)
1997 1996
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of First Mortgage Notes $(3,237,000) $ -
Premium on redemption of First Mortgage Notes (250,000) -
(Payments to) loans from general partner, net (415,883) 252,202
Issuance of notes payable to Supra 260,000 -
Loans from financial institutions - 356,168
Payments on notes payable (455,946) (1,705,985)
Increase in deferred costs (229,519) (493,811)
Redemption of 17% minority interest in HDA (4,314,284) -
Cash distributions to minority partners of HDA (544,140) (115,560)
----------- -----------
Net cash used in financing activities (9,186,772) (1,706,986)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,938,932 6,368,811
CASH AND CASH EQUIVALENTS, beginning of year 4,268,029 814,292
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,329,097 $ 7,183,103
=========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,148,187 $ 4,237,250
Income taxes paid 262,500 194,310
NONCASH TRANSACTIONS:
The accompanying notes are an integral part
of these consolidated statements.
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (650,805) $ 314,214
----------- -----------
Adjustments to reconcile net (loss)income to
net cash provided by operating activities-
Gain from sale of Television Stations - (581,120)
Equity in earnings - (6,588)
Extraordinary Item 459,173 -
Depreciation 576,913 605,885
Amortization 84,726 194,457
Deferred income tax provision (59,034) 193,802
Currency translation adjustments 3 (1,156)
Forgiveness of interest - -
Decrease in assets-
Rent receivable from ECOC (135,297) (127,989)
Deferred costs (2,260,000) (206,121)
Other (249,550) (663,115)
Increase (decrease) in liabilities-
Accrued interest 1,890,990 1,995,060
Accounts payable and accrued liabilities 90,741 586,825
Accrued income taxes 526 82,451
Minority interests (80,890) (32,785)
----------- -----------
Total adjustments 318,301 2,039,606
----------- -----------
Net cash (used in) provided by operating
activities (332,504) 2,353,820
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (57,846) (212,652)
Collections of note from ECOC 82,243 77,657
Effect of deconsolidation of S&E - (129,948)
Sale of Television Stations
Proceeds - 4,000,000
Costs - (418,950)
----------- -----------
Net cash provided by investing activities 24,397 3,316,107
----------- -----------
(continues)
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(continued)
1997 1996
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of First Mortgage Notes $(2,500,000) $ -
Premium on redemption of First Mortgage Notes (250,000) -
(Payments to) loans from general partner, net (415,883) 3,607
Issuance of notes payable to Supra 260,000 -
Payments on notes payable (146,310) (1,441,898)
Increase in deferred costs (110,133) 576,500
Redemption of 17% minority interest in HDA (3,898,401) -
Cash distributions to minority partners of HDA (55,080) (49,680)
----------- -----------
Net cash used in financing activities (7,115,807) (911,471)
----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (7,423,914) 4,758,456
CASH AND CASH EQUIVALENTS, beginning of period (9,753,011) 2,424,647
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,329,097 $ 7,183,103
=========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 96,506 $ 73,874
Income taxes paid - -
The accompanying notes are an integral part
of these consolidated statements.
(PAGE) EQUUS GAMING COMPANY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND PRINCIPLES OF ACCOUNTING:
Equus Gaming Company L.P. (the "Company") is engaged in thoroughbred
racing and related wagering businesses through its 99% owned subsidiary,
Housing Development Associates S.E. ("HDA"). HDA owns El Comandante Race
Track ("El Comandante"), the only licensed thoroughbred racing facility in
Puerto Rico, located in 257 acres of land, which is leased to El Comandante
Operating Company, Inc., a Puerto Rico non-stock corporation ("ECOC") under a
lease agreement that expires on December 14, 2004 (the "El Comandante Lease")
but is expected to be terminated effective January 1, 1998 (see Note 5). HDA
also owns (i) 55% of the capital stock of Galapagos, S.A. ("Galapagos"), a
corporation that leases and operates a race track in the Dominican Republic
and (ii) 100% of the capital stock of Equus Gaming de Panama, S.A. ("EGP"), a
corporation that will operate and manage a race track in Panama under a 20
year contract commencing January 1, 1998. HDA was also the owner of S & E
Network Inc. ("S&E"), the owner and operator of three UHF television stations
in Puerto Rico (the "Television Stations"), until it was sold to Paxson
Communications of San Juan, Inc. ("Paxson") in transactions closed in August
1996 (50% interest) and January 1997 (50% interest).
The consolidated financial statements as of September 30, 1997 and for
the nine and three month periods ended September 30, 1997 and 1996 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 and three month periods ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year. Net income per
Unit is calculated based on weighted average of Units outstanding.
Outstanding options and warrants to purchase Units do not have a material
dilutive effect on the calculation of earnings per Unit.
These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
financial statements prepared in accordance with Generally Accepted
Accounting Principles ("GAAP") have been condensed or omitted. While
Management believes that the disclosures presented are adequate to make the
information not misleading, it is suggested that these financial statements
be read in conjunction with the financial statements and the notes included
in the Company's Annual Report filed on Form 10-K for the year ended December
31, 1996.
The preparation of financial statements in conformity with GAAP 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.
(PAGE)
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries after eliminating all inter-company
transactions. The Company recorded minority interests, as follows:
For the For the
Nine Months Three Months
Ended September 30, Ended September 30,
------------------------ ----------------------
1997 1996 1997 1996
----------- ----------- ---------- ----------
Minority interest in -
Income of HDA $1,064,000 $ 379,000 $ 42,000 $ 165,000
Losses of Galapagos (330,000) (471,000) (123,000) (198,000)
----------- ----------- ---------- ----------
$ 734,000 $ (92,000) $ (81,000) $ (33,000)
=========== =========== ========== ==========
Currencies
The Company 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 results of Dominican
Republic racing. At September 30, 1997 and December 31, 1996 accumulated net
losses of $145,080 and $126,950, respectively, from changes in exchange rates
due to the translation of assets and liabilities of Galapagos are included in
partners' deficit. The exchange rates as of September 30, 1997 and December
31, 1996 were US$1.00 to RD$14.24 and US$1.00 to RD$13.97, respectively, and
the average exchange rates prevailing during the nine months ended September
30, 1997 and 1996 were US$1.00 to RD$14.24 and US$1.00 to RD$13.77,
respectively.
The Company also consolidates its accounts with EGP whose functional
currencies are the Panama colones and the U.S. dollars. Because these
currencies are of equivalent value there is no effect attributed to foreign
currency transactions of EGP.
2. TRANSACTIONS WITH SUPRA:
On August 19, 1997, HDA redeemed for $4,075,000 the 17% interest held by
Supra & Company S.E.("Supra"), thereby increasing the Company's interest in
HDA to 99%. The redemption price plus transaction costs of $238,724 were
(PAGE)
recorded in partners' deficit, net of the book value of Supra's minority
interest in HDA of $1,544,586. The transaction required the approval from
the majority of holders of outstanding First Mortgage Notes (the "Noteholders
Approval").
In connection with the redemption, HDA agreed to pay $260,000 to Supra
and Ruben Velez Lebron and his wife ("Velez"), the principal owners of Supra,
in exchange for Supra's and Velez's cancellation of certain promissory notes
and other obligations of ECOC aggregating $2,290,000 (the "ECOC Debt"). The
cancellation relieved HDA of its guarantee of approximately $1.6 million of
the ECOC Debt which would become due if the El Comandante Lease was
terminated prior to December 2004. The $260,000, plus 8.5 % interest, is
payable to Supra and Velez as follows: $150,000 on January 2, 1998, $55,000
on March 31, 1998 and $55,000 on June 30, 1998. The $260,000 and transaction
costs of $59,550 are included in the consolidated statement of income as
costs of Supra transaction.
Upon closing of these transactions, there were certain mutual releases
granted among the parties, including the filing by Supra of a motion to
dismiss the Supra complaint described in Part II - "Legal Proceedings".
3. RECEIVABLES FROM EL COMANDANTE OPERATING COMPANY, INC.:
Receivables from ECOC as of September 30, 1997 and December 31, 1996
consist of (i) a note receivable and accrued interest of $551,806 and
$796,203, respectively, and (ii) rent receivable under the El Comandante
Lease of $2,363,353 and $1,984,213, 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. The rent receivable
reflects an accural of Basic Rent (described below) payable for all completed
racing days even though rent for any racing day is not payable until the 29th
day following such racing day.
Under the El Comandante Lease, ECOC is required to pay HDA its Basic
Rent for each race day on the 29th day following such racing day. Unless
paid by the 29th day the Basic Rent becomes due and payable and constitutes
an extension of credit and an event of default under the El Comandante Lease.
ECOC is in default of this lease provision. Under the Indenture (as defined
in Note 4), the maximum outstanding amount of credit that HDA can extend ECOC
is $2 million, including the note and the Basic Rent that has become due and
payable. ECOC's payable to HDA has increased during 1997 to an amount that
approaches the limit established in the Indenture. The Indenture also
requires HDA to commence appropriate proceedings to enforce ECOC's obligation
to pay rent if unpaid rent exceeds the monthly average for 30 days.
As a result of the event of default related to payment of Basic Rent and
for certain other reasons permitted under the El Comandante Lease, on October
31, 1997, HDA issued to ECOC a 60-day notice for the termination of the El
Comandante Lease (see Note 5).
(PAGE)
4. LIABILITIES RELATED TO RACE TRACKS:
First Mortgage Notes
Pursuant to a private offering, El Comandante Capital Corp. ("ECCC"), a
single-purpose wholly owned subsidiary of HDA, issued first mortgage notes in
the aggregate principal amount of $68 million (the "First Mortgage Notes")
under an indenture dated December 15, 1993 (the "Indenture") between ECCC,
HDA and Banco Popular de Puerto Rico, as trustee (the "Trustee"), and HDA
Management Corporation ("HDAMC") issued Warrants to purchase 68,000 shares of
Class A Common Stock of HDAMC. Upon issuance of the Warrants, HDAMC and
HDA recorded additional equity of $1,912,800, equal to the fair value of the
Warrants of $2,040,000, less offering costs of $127,200, and recorded debt
discount of $2,040,000. Such debt discount is being amortized using the
interest method over the term of the First Mortgage Notes. The First
Mortgage Notes mature on December 15, 2003 and bear interest at 11.75% from
December 15, 1993, payable semiannually. In March 1995 the Warrants became
exercisable to purchase Units of the Company from HDAMC.
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 collateral 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.
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,
$10,200,000 on December 15, 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 is required to offer to purchase First Mortgage Notes, at face
value, to the extent that HDA has accumulated excess cash flow, asset sales
with net proceeds in excess of $5 million ("Excess Proceeds Offer"), or a
total taking or casualty, or in the event of a change of control of HDA. As
a result of the sales of its interest in S&E, HDA is required to use
approximately $7.5 million of these proceeds to redeem First Mortgage Notes,
at par, to the extent these proceeds are not invested in HDA's racing
business by January 1998. HDA made an Excess Proceeds Offer to redeem up to
$5 million of which $737,000 in principal amount of First Mortgage Notes were
tendered and redeemed on March 28, 1997. HDA expects to use the remaining
$2.5 million as investments in Galapagos and EGP or for capital improvements
to El Comandante.
(PAGE)
In connection with the Noteholders Approval, HDA redeemed on September
29, 1997 First Mortgage Notes in the principal amount of $2.5 million at 110%
of par. The $250,000 premium paid and corresponding write-off of bond
discount and deferred financing costs are included in the accompanying
consolidated statement of (loss) income as an extraordinary item. HDA is
also required to make an offer not later than December 1, 1998 to redeem
First Mortgage Notes in the principal amount of $3 million at 110% of par or
it will have to pay a penalty equal to 1.5% of principal amount of
outstanding First Mortgage Notes.
The redemptions of $737,000 and $2.5 million are reductions of the
mandatory redemption of $6.8 million due December 15, 2000.
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"). In connection with the Noteholders Approval,
HDA has been temporarily required to reduce its Tax Distributions by 17%.
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 a certain
minimum debt coverage ratio. HDA does not yet meet the debt coverage ratio.
5. EL COMANDANTE LEASE:
Due to the existing default under the El Comandante Lease for unpaid
Basic Rent (see Note 3) and for certain other reasons permitted under the El
Comandante Lease, HDA has notified ECOC of the termination of the El
Comandante Lease effective January 1, 1998. The Company expects to operate
El Comandante through a wholly owned subsidiary. The termination of the El
Comandante Lease and the assignment of the ECOC's racing license to the
Company are subject to the approval of the Puerto Rico Racing Board. Upon
termination of the El Comandante Lease, ECOC is required to transfer to HDA,
at book value, all assets employed in the racing business and HDA's wholly
owned subsidiary will assume all liabilities and agreements of ECOC. At
September 30, 1997, ECOC's liabilities, including approximately $2.9 million
due to HDA, exceed its assets by approximately $2 million. As part of the
transaction, the Company will contribute its interest in HDA to a wholly-
owned susidiary, Equus Entertainment Corporation.
6. PANAMA
EGP has signed a 20-year contract effective January 1, 1998 with the
Panamanian Government for the operation of the Presidente Remon Race Track in
(PAGE)
Panama City and for the development of off-track betting in Panama. The
contract grants EGP exclusive rights to simulcast horse races from and to the
country and the right to operate up to 500 slot machines at the race track.
Upon execution of the contract, $2.2 million was paid to the Panama
Government, which amount has been deferred in the consolidated balance sheet
and will be amortized on a straight-line basis over a 20 year period
commencing January 1, 1998, when EGP will assume management control of the
race track. EGP has entered into other contracts and commitments in
connection with this operation, which should be in effect during 1998.
It is expected that approximately 50% of the capital stock of EGP will
be sold to Panamanian investors.
7. MANAGEMENT AGREEMENTS:
The Company and HDA do not have any employees. Their activities are
presently managed by Equus Management Company ("EMC"), one of the Company's
general partners. Pursuant to a management agreement (the "HDA Management
Agreement") with a term of 15 years ending December 31, 2004, HDA pays EMC
fees of $250,000 per annum with annual CPI adjustments after 1993. Pursuant
to its partnership agreement, the Company reimburses EMC for its costs and
expenses, including compensation of officers and directors, in excess of
amounts EMC receives from other sources, which sources are primarily
collections for services pursuant to a racing consulting agreement with ECOC,
cash distributions from its 1% interest in the Company, fees pursuant to the
HDA Management Agreement, and reimbursements for services rendered to
Interstate General Company L.P. ("IGC"), the other general partner of the
Company, and its subsidiary, Interstate General Properties Limited
Partnership, S.E. ("IGP").
Pursuant to a three-year support agreement effective as of February 6,
1995 ("IGC Support Agreement"), IGC and IGP provide administrative support
services to the Company and the Company reimburses them for expenses incurred
in providing such services. Also, effective August 1996 Interstate Business
Corporation ("IBC") has been providing certain accounting services to the
Company for a monthly fee of $1,000.
On August 16, 1996, two former employees of IGP were transferred to EMC.
The employees continue to render limited services to IGC and IGP and a
portion of their employment costs, based on the amount of time spent on IGP
and IGC matters, are reimbursed to EMC. Prior to August 16, 1996; (i) HDA's
activities were managed by IGP pursuant to the HDA Management Agreement and
(ii) all administrative support services to the Company were rendered by IGC
and IGP.
8. RELATED PARTY TRANSACTIONS:
Amounts incurred with respect to services rendered by certain related
parties during the nine and three months ended September 30, 1997 and 1996
are summarized as follows:
(PAGE)
For the For the
Nine Months Three Months
Services Rendered Ended Sept. 30, Ended Sept. 30,
- --------------------- ----------------- ---------------
To By Concept 1997 1996 1997 1996
- ----------- --------- --------------------- -------- -------- -------- ------
HDA IGP Management agreement $ - $169,000 $ - $67,610
HDA EMC Management agreement 208,818 33,800 69,900 -
The Company IBC Accounting services 9,000 5,000 3,000 5,000
The Company IGC/IGP Support agreement 18,700 110,000 8,700 10,000
The Company EMC Expenses in excess of
receipts 185,800 - 86,200 -
The Company EMC Directors fees and
expenses 71,400 18,700 23,500 -
9. INCOME TAXES:
The provision for income taxes included in the accompanying consolidated
financial statements are attributed to (i) Puerto Rico income taxes, at a 29%
tax rate, on the Company's distributive share of HDA's income from Puerto
Rico sources and (ii) ECCC's federal income taxes on its taxable income, as
follows:
For the For the
Nine Months Three Months
Ended September 30, Ended September 30,
------------------------ ----------------------
1997 1996 1997 1996
----------- ----------- ---------- ----------
Puerto Rico income taxes -
Deferred $ 781,692 $ 480,289 $ (59,034) $ 193,802
Current - 152,668 - 81,300
Federal income tax 2,548 4,960 526 1,151
Dominican Republic - (19,161) - -
----------- ----------- ---------- ----------
$ 784,240 $ 618,756 $ (58,508) $ 276,253
=========== =========== ========== ==========
The deferred income taxes are related to the difference between the tax
basis of the Company's investment in HDA and the amount reported in the
financial statements. The credit for Dominican Republic income tax is due to
the reversal of a provision previously recorded on interest earned by HDA on
certain loans to Galapagos, which interest was forgiven in September 1996
before any interest had been collected.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF REVENUES AND EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1997 1996
----------- -----------
REVENUES:
Commissions on wagering $41,392,554 $42,989,361
Other 1,882,309 2,060,785
----------- -----------
Total revenues 43,274,863 45,050,146
----------- -----------
EXPENSES:
Payments to horse owners and horse owners'
association 20,617,808 21,431,724
Track rent 10,348,140 10,746,502
Salaries, wages and employee benefits 5,612,347 5,291,011
Operating expenses 3,979,400 3,942,872
General and administrative 1,659,160 1,978,845
Marketing and satellite transmission costs 1,552,628 1,806,368
----------- -----------
Total expenses 43,769,483 45,197,322
----------- -----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM (494,620) (147,176)
CREDIT FOR DEFERRED INCOME TAXES (49,699) (53,182)
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (444,921) (93,994)
EXTRAORDINARY ITEM:
Forgiveness of indebtedness, net of
deferred income taxes of $487,500 1,802,500 -
----------- -----------
NET INCOME (LOSS) $ 1,357,579 $ (93,994)
=========== ===========
The accompanying notes are an integral
part of these statements.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF REVENUES AND EXPENSES
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1997 1996
----------- -----------
REVENUES:
Commissions on wagering $12,941,188 $13,315,305
Other 537,972 710,551
----------- -----------
Total revenues 13,479,160 14,025,856
----------- -----------
EXPENSES:
Payments to horse owners and horse owners'
association 6,440,414 6,646,175
Track rent 3,235,297 3,327,988
Salaries, wages and employee benefits 1,923,701 1,776,654
Operating expenses 1,263,506 1,315,179
General and administrative 353,268 628,010
Marketing and satellite transmission costs 456,655 614,388
----------- -----------
Total expenses 13,672,841 14,308,394
----------- -----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM (193,681) (282,538)
CREDIT FOR DEFERRED INCOME TAXES (73,044) ( 38,312)
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (120,637) (244,226)
EXTRAORDINARY ITEM:
Forgiveness of indebtedness, net of
deferred income taxes of $487,500 1,802,500 -
----------- -----------
NET INCOME (LOSS) $ 1,681,863 $ (244,226)
=========== ===========
The accompanying notes are an integral
part of these statements.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF NET ASSETS (LIABILITIES)
September 30, December 31,
1997 1996
------------ ------------
(Unaudited) (Audited)
ASSETS:
CURRENT ASSETS:
Cash, including restricted cash of
$152,992 and $187,391, respectively $ 695,839 $ 1,116,330
Accounts receivable, net 1,590,285 1,379,932
Prepayments and supplies inventory 435,097 242,468
Notes receivable 478,508 335,248
------------ ------------
Total current assets 3,199,729 3,073,978
------------ ------------
DEFERRED COSTS, net:
Organizational costs 21,760 28,015
Deferred tax asset 214,536 652,337
Telecommunication installation costs 136,675 185,905
Noncompetition agreement - 145,833
------------ ------------
Total deferred costs 372,971 1,012,090
------------ ------------
FURNITURE AND EQUIPMENT, net 3,814,970 3,964,066
------------ ------------
Total assets 7,387,670 8,050,134
------------ ------------
LIABILITIES:
CURRENT LIABILITIES:
Current portion of capital lease
obligations 717,663 707,917
Rent payable to Housing Development
Associates S.E. ("HDA") 2,363,353 1,984,213
Accounts payable and accrued liabilities 3,944,459 3,299,930
Outstanding winning tickets, refunds and
Pool Pote 704,616 784,897
------------ -----------
Total current liabilities 7,730,091 6,776,957
------------ -----------
CAPITAL LEASE OBLIGATIONS 803,757 1,223,557
------------ -----------
NOTE PAYABLE TO HDA, and accrued interest 551,806 796,203
------------ -----------
OTHER LIABILITIES:
Notes 160,000 2,450,000
Accrued interest 126,323 145,303
------------ -----------
286,323 2,595,303
------------ -----------
Total liabilities 9,371,977 11,392,020
------------ -----------
NET ASSETS (LIABILITIES) $ (1,984,307) $(3,341,886)
============ ===========
The accompanying notes are an integral part
of these statements.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,357,579 $ (93,994)
----------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities-
Forgiveness of indebtedness (2,290,000) -
Depreciation and amortization 725,395 690,777
Deferred tax provision (credit) 437,801 (53,182)
Provision for bad debts 75,006 75,006
Increase in current assets-
Accounts receivable (285,359) (389,939)
Prepayments and supplies inventory (188,400) (132,133)
Increase (decrease) in current liabilities-
Accounts payable and accrued liabilities 644,529 (470,359)
Outstanding winning tickets, refunds and
Pool Pote (80,281) (434,725)
Accrued interest (16,349) (2,798)
Rent payable 379,140 13,170
----------- -----------
Total adjustments (598,518) (704,183)
----------- -----------
Net cash provided by (used in)
operating activities 759,061 (798,177)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable (143,260) (107,168)
Capital expenditures (247,308) (227,939)
Payments of telecommunication installation costs - (61)
----------- -----------
Net cash used in investing activities (390,568) (335,168)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable (247,028) (128,814)
Payments of capital lease obligations (541,956) (508,405)
----------- -----------
Net cash used in financing activities (788,984) (637,219)
----------- -----------
NET DECREASE IN CASH (420,491) (1,770,564)
CASH, beginning of year 1,116,330 2,883,447
----------- -----------
CASH, end of period $ 695,839 $ 1,112,883
=========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 184,421 $ 278,039
NON CASH TRANSACTIONS:
Equipment acquired through capital leases 131,901 547,269
Forgiveness of indebtedness 2,290,000 -
The accompanying notes are an integral part
of these statements.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,681,863 $ (244,226)
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities-
Forgiveness of indebtedness (2,290,000) -
Depreciation and amortization 217,511 235,381
Deferred tax provision (credit) 414,456 (38,312)
Provision for bad debts 25,002 25,002
Increase (decrease) in current assets-
Accounts receivable (408,526) 71,899
Prepayments and supplies inventory (31,487) (53,435)
Increase (decrease) in current liabilities-
Accounts payable and accrued liabilities 593,746 (23,481)
Outstanding winning tickets, refunds and
Pool Pote (1,669,327) 775,038
Accrued interest (30,175) 7,042
Rent payable 135,297 127,990
----------- -----------
Total adjustments (3,043,503) 1,127,124
----------- -----------
Net cash (used in) provided by
operating activities (1,361,640) 882,898
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable (25,526) 8,834
Capital expenditures (145,792) (14,918)
----------- -----------
Net cash used in investing activities (171,318) (6,084)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable (82,243) (77,657)
Payments of capital lease obligations (200,211) (294,543)
----------- -----------
Net cash used in financing activities (282,454) (372,200)
----------- -----------
NET DECREASE IN CASH (1,815,412) 504,614
CASH, beginning of period 2,511,252 608,269
----------- -----------
CASH, end of period $ 695,840 $ 1,112,883
=========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 56,472 $ 164,253
NON CASH TRANSACTIONS:
Equipment acquired through capital leases 131,901 148,504
Forgiveness of indebtedness 2,290,000 -
The accompanying notes are an integral part
of these statements.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND PRINCIPLES OF ACCOUNTING:
El Comandante Operating Company, Inc. ("ECOC") is a Puerto Rico non-
stock corporation which leases from Housing Development Associates S.E.
("HDA") El Comandante Race Track ("El Comandante"), the only thoroughbred
race track and off-track betting operation in Puerto Rico. ECOC is required
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. An equity section is not presented in the financial statements since
ECOC is a non-stock corporation.
The financial statements as of September 30 1997 and for the nine and
three month periods ended September 30, 1997 and 1996 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 and
three month periods ended September 30, 1997 are not necessarily indicative
of the results that may be expected for the year.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with Generally Accepted Accounting Principles ("GAAP")
have been condensed or omitted. While Management believes that the
disclosures presented are adequate to make the information not misleading, it
is suggested that these financial statements be read in conjunction with the
financial statements and the notes of ECOC included in the Annual Report of
Equus Gaming Company L.P. ("Equus") filed on Form 10-K for the year ended
December 31, 1996.
The preparation of financial statements in conformity with GAAP 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.
2. CAPITAL LEASE OBLIGATIONS:
ECOC has entered into certain equipment lease agreements which have been
classified as capital leases. The present value of future minimum lease
payments under capital leases is as follows:
(PAGE)
Due during year
ending September 30,
1998...........................................$ 717,663
1999........................................... 521,210
2000........................................... 142,910
2001........................................... 84,899
2002........................................... 54,738
----------
Minimum lease payments......................... 1,521,420
Less - Current portion........................ (717,663)
----------
$ 803,757
==========
3. PAYABLES TO HOUSING DEVELOPMENT ASSOCIATES S.E.:
The payables to HDA as of September 30, 1997 and December 31, 1996
consists of (i) a note payable and accrued interest of $551,806 and $796,203,
respectively, and (ii) unpaid rent under the El Comandante Lease of
$2,363,353 and $1,984,213, respectively. 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.
4. OTHER LIABILITIES:
Other liabilities at December 31, 1996 consisted of (i) unsecured notes
of $160,000 to Interstate General Properties Limited Partnership, S.E.
("IGP") and $40,000 to Supra & Company S.E. ("Supra"), including accrued
interest, (ii) $500,000 of accrued past service costs payable to Supra and
Supra's majority owner, Ruben Velez Lebron and his wife ("Velez"), under a
series of agreements executed on December 13, 1993 incident to the
reorganization of ECOC as a nonstock corporation (the "Supra Agreements") and
(iii) $1,750,000 payable to Supra and Velez for the purchase of ECOC's stock
and for the amount payable under the Noncompetition Agreement. The unsecured
notes of $200,000 bear interest at 2.5% over the prime rate, without a stated
maturity date. The interest rate at September 30, 1997 and December 31, 1996
was 11.00% and 10.75%, respectively.
The obligations to Supra and Velez (the "ECOC Debt") were canceled on
August 19, 1997 in exchange for a payment by HDA to Supra and Velez of
$260,000 in connection with the purchase by HDA of Supra's 17% interest in
HDA. The cancellation of ECOC Debt have been recorded in the accompanying
statement of revenues and expenses as an extraordinary item.
5. EL COMANDANTE LEASE:
Under the El Comandante Lease, ECOC is required to pay HDA its Basic Rent
for each race day on the 29th day following such racing day. Unless paid by
the 29th day the Basic Rent becomes due and payable and constitutes an
extension of credit and an event of default under the El Comandante Lease.
ECOC is in default of this lease provision.
(PAGE)
Due to the default under the El Comandante Lease for unpaid rent and for
certain other reasons permitted under the El Comandante Lease, HDA has
notified ECOC of the termination of the El Comandante Lease effective January
1, 1998. The termination of the El Comandante Lease and the assignment of
the racing license to HDA are subject to the approval of the Puerto Rico
Racing Board. Under the terms of the El Comandante Lease, ECOC is required
to transfer to HDA, at book value, all assets employed in the racing business
and HDA will assume all liabilities and agreements of ECOC.
6. INCOME TAXES:
Deferred tax assets of $214,536 and $652,337, net of valuation allowances
of $1,400,049 and $1,729,926, were recorded as of September 30, 1997 and
December 31, 1996, 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 net
operating loss carryforwards ("NOL") which are available to offset future
taxable income and expire in various dates through 2003.
The deferred credit for income taxes for the nine months ended September
30, 1997 and 1996 is net of decreases in the valuation allowance of $329,877
and $77,386, respectively.
(PAGE)
PART I -- ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company owns a 99% interest in Housing Development Associates S.E.
("HDA"), the owner of El Comandante Race Track ("El Comandante"), the only
licensed thoroughbred racing facility in Puerto Rico, located in 257 acres of
land. El Comandante is leased to El Comandante Operating Company, Inc., a
Puerto Rico non-stock corporation ("ECOC") under a lease agreement that
expires on December 14, 2004 (the "El Comandante Lease") but is expected to
be terminated effective January 1, 1998 (see Note 5 to the Company's
financial statements). HDA also owns (i) 55% of the capital stock of
Galapagos, S.A. ("Galapagos"), a corporation that leases and operates a race
track in the Dominican Republic and (ii) 100% of the capital stock of Equus
Gaming de Panama, S.A. ("EGP"), a corporation that will operate and manage a
race track in Panama under a 20 year contract commencing January 1, 1998.
HDA was also the owner of S & E Network Inc. ("S&E"), the owner and operator
of three UHF television stations in Puerto Rico (the "Television Stations"),
until it was sold to Paxson Communications of San Juan, Inc. ("Paxson") in
transactions closed in August 1996 (50% interest) and January 1997 (50%
interest).
THE COMPANY'S RESULTS OF OPERATIONS
The following discussion and analysis covers changes in the results of
operations for the nine and three month periods ended September 30, 1997 as
compared to the results for the nine and three month periods ended September
30, 1996. The operating results of the Company are summarized as follows:
Nine Months Three Months
-------------- -------------
1997 1996 1997 1996
----- ----- ----- -----
(In thousands)
El Comandante $1,875 $2,322 $ 479 $ 506
Galapagos - Dominican Republic
racing (735) (1,174) (272) (440)
Television Stations -
Sale 4,615 581 - 581
Operations - (97) - 54
Interest income 377 141 105 61
Other expenses (856) (885) (324) (205)
Redemption of Notes & Supra
Transaction (779) - (779) -
------ ------ ------ -------
4,497 888 (791) 557
Minority stockholders 45% interest
in losses of Galapagos 330 471 123 198
Minority partners interest in
income of HDA (1,065) (379) (42) (165)
Provision for income taxes (784) (619) 59 (276)
------ ------ ------ -------
Net income (loss) $2,978 $ 361 $ (651) $ 314
====== ====== ====== =======
(PAGE)
El Comandante
The operating results of El Comandante are as follows:
Nine Months Three Months
----------------- ---------------
1997 1996 1997 1996
-------- ------- ------ -------
(In thousands)
Rental income $10,348 $10,747 $ 3,235 $ 3,328
Financial expenses (6,393) (6,545) (2,054) (2,193)
Depreciation (1,367) (1,355) (454) (450)
Property and municipal taxes and
racing license (713) (525) (248) (179)
------- ------- ------- -------
$ 1,875 $ 2,322 $ 479 $ 506
======= ======= ======= =======
Rental income from the lease of El Comandante to ECOC is based on 25% of
ECOC's commissions on wagering. Rental income decreased by $93,000 (2.8%) in
the third quarter of 1997, compared to the third quarter of 1996. There were
65 race days in the third quarter of both years. For the nine months ended
September 30, 1997, rental income decreased by $399,000 (3.7%), when there
were 192 race days, compared to the nine months ended September 30, 1996,
when there were 188 race days. The decrease in each of the three and nine
month periods is attributable, at least in part, to additional gaming
opportunities that are available to the public, particularly slot machines in
new casino hotels and up-graded slot machines in existing casino hotels. In
August 1997 ECOC implemented two new wagers, a Pick 3 and Trifecta, which
helped to slow the decline in wagering.
Financial expenses decreased by $139,000 (6.3%) in the third quarter of
1997 compared to the third quarter of 1996. For the nine months ended
September 30, 1997, financial expenses decreased by $152,000 (2.3%) compared
to the nine months ended September 30, 1996. The decrease in each of the
three and nine month periods was primarily due to a reduction in amortization
of deferred financing costs.
There were no significant changes in depreciation in the three and nine
month periods ended September 30, 1997 compared to the same periods of 1996.
The costs of property and municipal taxes and the racing license
increased by $69,000 (38.5%) in the third quarter of 1997 compared to the
third quarter of 1996. For the nine months ended September 30, 1997, these
costs increased by $188,000 (35.8%) compared to the nine months ended
September 30, 1996. The increase in the three and nine month periods was
caused primarily by HDA's assumption, effective January 1997, of the
obligation to pay the annual fee of $250,000 for the El Comandante racing
license which was paid by ECOC through 1996.
(PAGE)
Galapagos - Dominican Republic Racing
The accounting records of Galapagos are maintained in Dominican Republic
pesos and converted to U.S. dollars based on the average exchange rate during
the reporting period. Consequently, fluctuations in exchange rates have an
effect in the results of operations of Galapagos, when reported in U.S.
dollars. The currency exchange rates were 14.24 pesos to one U.S. dollar in
the nine months ended September 30, 1997 and 13.77 pesos to one U.S. dollar
in the comparable period of 1996. The operating results for Galapagos were
as follows:
Nine Months Three Months
--------------- ----------------
1997 1996 1997 1996
------ ----- ------ -------
(In thousands)
Commissions on wagering $ 3,447 $ 3,299 $ 1,124 $ 1,038
Other income 553 338 286 47
------- ------- ------- -------
4,000 3,637 1,410 1,085
Operating costs (4,318) (4,521) (1,546) (1,395)
Depreciation (370) (334) (123) (116)
Interest expense (47) 44 (13) (14)
------- ------- ------- -------
Losses before minority $ (735) $(1,174) $ (272) $ (440)
interests ======= ======= ======= =======
Commissions on wagering of Galapagos increased by $86,000 in the third
quarter of 1997 compared to the third quarter of 1996, which is net of the
$31,000 negative effect of fluctuations in exchange rates. During the nine
months ended September 30, 1997, the commissions on wagering increased by
$148,000 compared to the nine months ended September 30, 1996, which is net
of the $113,000 negative effect of fluctuations in exchange rates. The
increase in each of the three and nine month periods was attributable
primarily in part to the introduction in August 1997 of new wagers with local
pool bets on simulcasted races from El Comandante and to more agencies on
line during 1997.
Other income increased by $239,000 in the third quarter of 1997 compared
to the third quarter of 1996. During the nine months ended September 30,
1997, other income increased by $215,000 compared to the nine months ended
September 30, 1996. The increase in each of the three and nine month
periods was primarily due to increased advertising revenues from the racing
broadcast and to economic assistance to Galapagos from the Dominican Republic
Government from taxes that it receives on wagering on simulcasted races from
El Comandante ("Tax Relief"). The Government agreed to invest these tax
receipts from July 1997 through January 1998 to improve racing, and
management is discussing with the Government an extension beyond January,
1998. Galapagos receives 75% of the tax receipts as partial reimbursement
for repairs and maintenance at V Centenario, marketing costs (including
television costs of V Centenario races) and certain other items benefiting
racing in the Dominican Republic. Horseowners receive the balance of the tax
receipts as purses.
(PAGE)
The operating costs of Galapagos are summarized as follows:
Nine Months Three Months
--------------- --------------
1997 1996 1997 1996
------ ----- ------ -----
(In thousands)
Non-controllable costs which are
based on the amount of wagering
and/or commissions on wagering $2,041 $1,984 $ 675 $ 619
Controllable operating costs 2,658 2,880 963 959
Receipt of funds from Required
Escrow account (381) (343) (92) (183)
------ ------ ------ ------
$4,318 $4,521 $1,546 $1,395
====== ====== ====== =======
The controllable operating costs of Galapagos during the third quarter of
1997 did not change significantly compared to the third quarter of 1996. For
the nine months ended September 30, 1997, these costs decreased by $222,000
compared to the nine months ended September 30, 1996, which decrease included
a $99,000 favorable fluctuation in exchange rates. An intensified effort by
the management of Galapagos has reduced controllable costs in a broad range
of expenses categories. These expense reductions were offset in part by
increased expenditures for advertising and television coverage.
An account is funded from a portion of wagers on pool bets for the
purpose of reimbursing Galapagos for foreign exchange losses and/or for other
purposes approved by the Government (the "Required Escrow"). During the nine
months ended September 30, 1997 the receipt of funds from the Required Escrow
increased by $38,000 compared to the nine months ended September 30, 1996,
whereas these receipts decreased by $91,000 in the third quarter of 1997
compared to the third quarter of 1996. The decrease during the third quarter
was caused by changes of the uses to the Required Escrow as determined by the
Dominican Republic Government. Effective July 1997, 25% of this account is
allocated to horseowners as purses whereas Galapagos previously received the
entire amount for operating expenses.
Depreciation for the nine months ended September 30, 1997 increased by
$36,000 compared to the nine months ended September 30, 1996 while
depreciation in the third quarter of 1997 did not change significantly
compared to the third quarter of 1996. The increase in the nine month period
is attributed to additional depreciation on equipment purchases.
Interest expense in the third quarter of 1997 did not change compared to
the third quarter of 1996. During the nine months ended September 30, 1997,
interest expense was $47,000, whereas the nine months ended September 30,
1996 had a credit balance of $44,000, for a net change of $91,000. The
stockholders of Galapagos contributed loans to capital on June 30, 1996 and
forgave accrued interest on the loans. The interest expense account in the
1996 nine-month period included a credit of $89,000 for the reversal of
interest accrued on minority stockholders' loans.
(PAGE)
Television Stations
The Television Stations were sold in transactions closed in August 1996
(50%) and January 1997 (50%), resulting in gains of $581,000 and $4,615,000,
respectively. During the three and nine month periods ended September 1996
the Company had operating profits of $54,000 and a loss of $97,000,
respectively, from television operations. The Company did not have
television operations during 1997.
Interest Income
Interest income in the third quarter of 1997 increased by $44,000
compared to the third quarter of 1996. During the nine months ended
September 30, 1997, interest income increased by $236,000 compared to the
nine months ended September 30, 1996. Interest income is earned from short-
term investments and a note receivable from ECOC. HDA had more cash
available for investment in 1997 from proceeds of the January 1997 sale of
the Television Stations, resulting in an increase in interest income in the
1997 periods as compared to the 1996 periods.
Other Expenses
Other expenses of the Company represent (i) financial expenses of $8,000
and $16,000 in the third quarter of 1997 and 1996, respectively, and of
$40,000 and $57,000 in the nine months ended September 30, 1997 and 1996,
respectively, and (ii) general and administrative expenses of $316,000 and
$189,000 in the third quarter of 1997 and 1996, respectively, and of $816,000
and $828,000 in the nine months ended September 30, 1997 and 1996,
respectively.
The decrease of financial expenses in each of the three and nine month
periods is the result of quarterly principal payments on the bank loan,
offset in part during the nine months ended September 30, 1997 by interest of
$8,000 on general partner loans which were paid in the second quarter of
1997.
General and administrative expenses in the third quarter of 1997
increased by $127,000 compared to the third quarter of 1996 whereas there
were no significant changes during the nine months ended September 30, 1997,
compared to the nine months ended September 30, 1996. The increase in the
three month period was primarily related to an increase in consulting fees
and costs reimbursed to the managing partner of the Company, Equus Management
Company, in connection with services rendered by its executives to the
Company.
Redemption of Notes and Supra Transaction
In connection with the redemption in August 1997 of the 17% minority
interest in HDA held by Supra & Company, S.E. ("Supra"), which required
approval from the holders of majority of First Mortgage Notes (the
"Noteholders Approval"), HDA agreed to pay $260,000 to Supra and its majority
owners for the cancellation of certain promissory notes and other obligations
(PAGE)
of ECOC aggregating $2,290,000 (the "ECOC Debt"). The cancellation relieved
HDA of its guarantee of approximately $1.6 million of the ECOC Debt which
would have become due if the El Comandante Lease was terminated prior to
December 2004. The $260,000 and related transaction costs were charged to
expense in the third quarter of 1997 with no similar charges in the
comparable period of 1996.
In connection with the Noteholders Approval, on September 29, 1997 HDA
redeemed First Mortgage Notes in the principal amount of $2.5 million at 110%
of par. The $250,000 premium paid and related bond discount and deferred
financing costs were written-off in the third quarter of 1997, and disclosed
in the Company's financial statements as an extraordinary item. There were
no similar charges in the comparable period of 1996.
Provision for Income Taxes
The provision for income tax is primarily related to Puerto Rico income
taxes on the Company's distributive share of HDA's income from Puerto Rico
sources, without taking into account Galapagos losses or expenses of the
Company. The deferred income taxes are related to the difference between the
tax basis of the Company's investment in HDA and the amount reported in the
financial statements. During the nine months ended September 30, 1997,
approximately $463,000 of the deferred income tax provision is related to the
reversal of the tax benefit recorded by the Company in prior years for the
accumulated operating losses of the Television Stations as a result of the
sale of S&E in January 1997.
See Note 9 to the Company's consolidated financial statements for
composition of the provision for income taxes.
Liquidity and Capital Resources of HDA and the Company
The Company's only source of cash is distributions from its interest in
HDA. Therefore, its capital resources are tied to HDA's liquidity and ability
to make cash distributions to its partners, which, under the Indenture, are
restricted to approximately 48% of HDA's cumulative consolidated net income
since January 1, 1994 (see Note 4 to the Company's consolidated financial
statements). In connection with the Noteholders Approval, HDA has been
temporarily required to reduce its distributions by 17%.
Liquidity of HDA HDA had cash and cash equivalents of $4,038,000 at
December 31, 1996 and management is forecasting 1997 sources and uses of cash
as follows:
Forecast Actual
1997 9-30-97
----------- -----------
SOURCES OF CASH:
Receipts from ECOC
Rental income for 1997 $13,923,000 $ 9,969,000
Collection of note receivable 327,000 243,000
Sale of remaining 50% interest in S&E 7,000,000 7,000,000
Interest income 407,000 360,000
----------- -----------
21,657,000 17,572,000
----------- -----------
(PAGE)
USES OF CASH:
Debt service on First Mortgage Notes 7,855,000 4,061,000
El Comandante-
Property taxes and racing license 864,000 864,000
Capital improvements 700,000 603,000
General and administrative expenses and
costs of approvals of Noteholders 1,180,000 926,000
Costs related to sale of S&E 169,000 169,000
Redemption of First Mortgage Notes -
Redeemed at par 737,000 737,000
Redeemed at 10% premium 2,750,000 2,750,000
Investment in Galapagos 1,500,000 91,000
Investment in Panama 1,500,000 2,260,000
Cash distributions to partners (Company's
share is $2,480,000 for 1997) 3,024,000 3,024,000
Transaction with Supra and Velez 4,080,000 4,080,000
----------- -----------
24,355,000 19,561,000
----------- -----------
NET CASH FLOW (Deficit) (2,698,000) (1,989,000)
CASH, beginning of year 4,038,000 4,038,000
----------- -----------
CASH, end of period $ 1,340,000 $ 2,049,000
=========== ===========
HDA's principal source of cash is rental income from the lease of El
Comandante, augmented in 1997 by proceeds of the sale of HDA's remaining 50%
interest in S&E to Paxson. The rental income is based on 25% of ECOC's
commissions on wagering. Rental income was forecasted based on actual
commissions through September 30, 1997 and assuming that commissions for the
fourth quarter will be equal to the commissions for the comparable quarter of
1996. The decline in wagering that ECOC has experienced during 1997 has been
offset in part by wagering in the two new forms of bets that were introduced
in August 1997.
In connection with the sales of S&E to Paxson in August 1996 (50%) and
January 1997 (50%), HDA made an Excess Proceeds Offer under its Indenture to
redeem up to $5 million of First Mortgage Notes, of which $737,000 in
principal amount were tendered and redeemed on March 28, 1997.
In August 1997, HDA obtained approval of holders of its First Mortgage
Notes for the following transactions ("Noteholders Approval") which are
included in HDA's 1997 forecast of uses of cash:
1. Redemption of the 17% minority interest in HDA held by Supra for
approximately $4 million.
2. Investment of up to $1.5 million in Galapagos. HDA's expected
cumulative investments in Galapagos by the end of 1997 is $3.5
million.
3. When it ceases to be a wholly-owned subsidiary, investment of up to
$1.5 million in EGP and permission for EGP to borrow up to $3.5
(PAGE)
million. At September 30, 1997, HDA had paid $2.2 million to the
Panama Government for the right to operate the Presidente Remon
Race Track during the 20 year period commencing January 1, 1998.
It is expected that 50% of the capital stock of EGP will be issued
to Panamanian investors before year end and that HDA will be able
to recover amounts invested in excess of $1.5 million.
4. Amendment to the El Comandante Lease to permit ECOC to incur third
party debt not to exceed $1 million to finance ECOC's loans to
horseowners.
Galapagos had a cash flow deficit from operations of approximately $1.1
million in 1996 and has a forecasted 1997 cash flow deficit of $500,000.
Management expects Galapagos to generate positive cash flow in 1998 as a
result of the following:
1. An intensified effort in 1997 to expand the OTB network which grew
from 163 to 252 OTB agencies in 1996, with a goal of 375 agencies
by the end of 1997 and further growth in 1998 to a maximum of 450
agencies.
2. Galapagos has a contract to manage the lottery distribution system
for LEIDSA, the company that was granted a license to operate the
lottery in the Dominican Republic. The lottery operations
commenced on November 1, 1997 with approximately 470 agencies
selling lottery games (including OTB agencies). Lottery agencies
are forecasted to grow to 900 by December 31, 1998. Galapagos
permits OTB agencies to sell lottery tickets and in connection
therewith LEIDSA pays Galapagos $100 per month per OTB agency as
partial reimbursement for telephone line costs for OTB agencies.
Each lottery location that is not an OTB agency will also sell the
Pick-6 pool wagers for Galapagos' live racing and El Comandante's
simulcasted races. The Dominican bettors favor the pool bet and
in 1996 approximately 67% of Galapagos' commissions were earned
from this wager. Forecasted cash flows from the lottery operations
for 1997 and 1998 are $122,000 and $1 million, respectively.
3. Galapagos has reduced its 1997 controllable operating costs by
approximately 8%, as compared with 1996.
4. The Dominican Republic Government is providing Tax Relief by
investing tax receipts from July 1997 through January 1998 to
improve racing. Galapagos is entitled to 75% of the tax receipts
as reimbursement for repairs and maintenance at V Centenario,
marketing costs (including television costs of V Centenario races)
and certain other items benefiting racing in the Dominican
Republic. Horseowners are entitled to the balance of the tax
receipts as purses. It is expected that the period will be
extended beyond January 1998. Forecasted cash flow from the Tax
Relief is $420,000 for 1997 and $1 million for 1998 if the Tax
Relief is extended.
In October 1997 HDA invested $1.5 million in Galapagos. Galapagos used
these funds to (i) redeem the $750,000 preferred stock of the Company, (ii)
(PAGE)
pay simulcasting debt to ECOC, and (iii) improve Galapagos' working capital
position while these additional sources of revenues from operations
materialize.
ECOC had rent and loans payable to HDA of $2.78 million at December 31,
1996 and $2.9 million at September 30, 1997. As a result of the existing
event of default related to delinquent payment of Basic Rent and for certain
other reasons permitted under the El Comandante Lease, HDA notified ECOC of
the termination of the El Comandante Lease effective January 1, 1998. The
Company expects to operate El Comandante through a wholly owned subsidiary.
The termination of the El Comandante Lease and the assignment of the ECOC's
operating license to the Company are subject to the approval of the Puerto
Rico Racing Board. Upon termination of the El Comandante Lease, ECOC is
required to transfer to HDA, at book value, all assets employed in the racing
business and HDA's wholly owned subsidiary will assume all liabilities and
agreements of ECOC. At September 30, 1997, ECOC's liabilities, including
approximately $2.9 million due to HDA, exceed its assets by approximately $2
million. It is expected that the consolidation of operations and management
will save costs to the Company and make the operations more efficient.
Liquidity and Capital Resources of the Company
The forecasted sources of cash for 1997 of the Company are (i)
$2,480,000 in cash distributions from HDA and (ii) $265,000 from commissions
and guarantee fees related to the sale of S&E. As discussed in Liquidity of
HDA, the Company made a preferred stock investment of $750,000 in Galapagos
in early 1997 which was recovered in October 1997. The Company's forecasted
cash requirements for 1997 are approximately $2.3 million for (i) payment of
$481,000 for loans from a general partner, (ii) payment of bank debt and
interest of $531,000, (iii) administrative expenses and costs of
investigating new business opportunities of $710,000, (iv) income taxes for
1996 of $257,000 and (v) costs related to the cancellation effective July 1,
1997 of the consulting agreement between ECOC and EMC, estimated to be
approximately $300,000.
The Company's bank debt was paid in full in November 1997 and Management
believes the line of credit can be renewed if needed. The forecast of 1997
net cash flow of approximately $470,000, coupled with cash of $160,000 at
December 31, 1996 will provide an estimated year-end cash balance of
$630,000.
(PAGE)
PART II -- OTHER INFORMATION
Item 1 - Legal Proceedings
Prompted by HDA's then pending sale of S&E, on December 30, 1996 the
Racing Board issued an order (the "Order") seeking to impose certain
obligations on HDA, ECOC and Paxson in conjunction with the second sale,
including that (i) in addition to live racing broadcasts, ECOC must
rebroadcast races at times of lesser audience, (ii) any broadcast agreement
for races must be approved by the Racing Board, and (iii) HDA, ECOC and
Paxson must indemnify third parties for any losses suffered from any
discontinuance of racing telecasts and, to secure this indemnity, HDA and
ECOC must post a $4 million bond. On January 21, 1997 HDA filed with the
Racing Board a motion for reconsideration of the order arguing that the
Racing Board failed to comply with applicable administrative procedures in
issuing the order and that the Racing Board lacked jurisdiction to impose
conditions on the S&E sale. The Racing Board held a hearing on the motion
for reconsideration on March 4, 1997 but did not issue a ruling on the motion
within the 90 day period provided under applicable law. That term having
elapsed, the Racing Board lost jurisdiction on the motion of reconsideration
and HDA filed an appeal on May 18, 1997 to contest the Order before the
Circuit Court of Appeals of Puerto Rico. On May 30, 1997, the Racing Board
filed a motion for dismissal for lack of jurisdiction. HDA opposed said
motion and same is pending resolution. 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, HDA's or the Company's financial position
or results of operations.
On February 28, 1997, Supra filed a complaint in the Superior Court of
the Commonwealth of Puerto Rico, San Juan Part, naming as defendants HDA,
Land Development Associates S.E. ("LDA"), Interstate General Properties
Limited Partnership S.E. ("IGP"), Covington & Burling ("Covington"), and the
Company, Civil Case #KAC-970210 (902). Supra, on its own behalf, and as a
partner in HDA and LDA, alleged that due to the negligence of IGP and
Covington, HDA and LDA paid $6,386,000 to The Chase Manhattan Bank N.A. as a
penalty for prepayment of mortgage debt. The Company was included as a
defendant in the case because as a managing partner of HDA and LDA it
refused, as requested by Supra, to sue Covington. In connection with the
closing of the redemption of Supra's 17% minority interest in HDA, Supra
filed a motion to dismiss this complaint.
Item 2 - 5
Not applicable.
(PAGE)
Item 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Securities and Exchange Commission Section 601
of Regulation S-K
Exhibit
No. Description of Exhibit Reference
--------- --------------------------- ---------------
10.1 Eight Amended and Restated
Partnership Agreement of
Housing Development Associates
S.E. dated as of August 19, 1997 Filed Herewith
10.2 Fifth Supplemental Indenture
dated as of November 14, 1997 Filed Herewith
(b) Form 8-K - None
(PAGE)
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, 1997 By: /s/ Donald G. Blakeman
- ----------------- ------------------------------
Date Donald G. Blakeman
President
November 14, 1997 By: /s/ Gretchen Gronau
- ----------------- ----------------------
Date Gretchen Gronau
Vice President and
Chief Financial Officer
(PAGE)
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.1 Eight Amended and Restated Partnership Agreement of Housing
Development Associates S.E. dated as of August 19, 1997
10.2 Fifth Supplemental Indenture dated November 14, 1997
(PAGE)
EIGHTH AMENDED AND RESTATED PARTNERSHIP AGREEMENT
HOUSING DEVELOPMENT ASSOCIATES S.E.
Dated: August 19, 1997
(PAGE)
This amended and restated partnership agreement (hereinafter
referred to as the "Agreement") is made effective as of the 19th
day of August, 1997 (hereinafter referred to as the "Eighth
Amendment Date"), by and between INTERSTATE GENERAL PROPERTIES
LIMITED PARTNERSHIP S.E., a limited partnership duly organized
and existing under the laws of the State of Maryland (hereinafter
referred to as "IGP"), and EQUUS GAMING COMPANY L.P., a limited
partnership organized and existing under the laws of the
Commonwealth of Virginia (hereinafter referred to as "Equus") and
constitutes a restatement of the Deed of Constitution of Special
Partnership executed by certain of said parties as of the 14th
day of February, 1989, including any amendments thereof
(hereinafter referred to as the "Deed").
WHEREAS
As of February 14, 1989, IGP and SUPRA AND COMPANY S.E., a
special partnership organized and existing under the laws of the
Commonwealth of Puerto Rico (hereinafter referred to as
"SUPRA"), executed a Deed of Constitution of Special Partnership
whereby they formed a special partnership (hereinafter the
"Partnership") for the purpose of conducting the business of
land development in general, building and sale of residential
and/or commercial properties, the ownership of a race track, and
the leasing of buildings and structures.
As of April 15, 1992, IGP, SUPRA and Interstate Business
Corporation, a corporation organized and existing under the laws
of the State of Delaware (hereinafter referred to as "IBC")
subscribed a "Second Amended and Restated Partnership Agreement"
whereby IBC was admitted to the Partnership with a thirty-one
percent (31%) ownership interest as of September 30, 1991.
As of December 15, 1993, IGP, SUPRA, IBC and HDA MANAGEMENT
CORPORATION, a corporation organized and existing under the laws
of the State of Delaware (hereinafter referred to as "HDAMC")
subscribed a "Third Amended and Restated Partnership Agreement"
whereby HDAMC was admitted to the Partnership with a one-percent
(1%) interest.
On July 21, 1994, the Puerto Rico Racing Board approved
HDAMC's acquisition of a fifteen percent (15%) interest. As of
that date, IGP, SUPRA, IBC, and HDAMC subscribed a "Fourth
Amended and Restated Partnership Agreement" whereby HDAMC's
interest became fifteen percent (15%).
As of August 1, 1994, IGP, SUPRA, HDAMC and Equus
subscribed a "Fifth Amended and Restated Partnership Agreement"
whereby IBC transferred its entire ownership interest in the
Partnership to Equus, IGP transferred a forty and sixty-five one
hundredths percent (40.65%) interest in the profits (but not its
interest in the capital) of the Partnership to Equus, IBC
withdrew from the Partnership, Equus was admitted to the
Partnership, and Equus was designated a Managing Partner.
(PAGE)
As of March 8, 1995, IGP, Supra, HDAMC and Equus subscribed
a "Sixth Amended and Restated Partnership Agreement" whereby
HDAMC transferred to Equus its entire Fifteen percent (15%)
Profits Interest (as that term is defined in the Sixth Amended
and Restated Partnership Agreement) and a portion of its Capital
Interest (as that term is defined in the Sixth Amended and
Restated Partnership Agreement) and IGP was designated a
Managing Partner.
On February 7, 1996, HDAMC transferred its entire ownership
interest in the Partnership to Equus, IGP transferred all of its
interest except for one percent of the total profits and capital
of the Partnership to Equus, and HDAMC resigned as a Managing
Partner (as that term is defined in Section 6) and withdrew from
the Partnership.
On the Eighth Amendment Date, the Partnership redeemed
SUPRA's Partnership interest and SUPRA withdrew from the
Partnership.
Now Equus and IGP (collectively the "Partners" and
individually a "Partner") desire to amend the Seventh Amended
and Restated Partnership Agreement and to set forth the rights
and obligations of the Partners in connection with the
Partnership, their participation in any profits or liabilities
derived therefrom, and their participation in any loss that may
arise from such venture. Accordingly, the Partners agree herein
as follows:
One: Constitution of Partnership. The Partners hereby
associate themselves as a partnership under the laws of the
Commonwealth of Puerto Rico and have elected to be treated as a
Special Partnership in accordance with the provisions of the
Puerto Rico Income Tax Act of 1954, as amended (the "ITA") and
Act Number 3 of September 27, 1985, amending Article 1589 of the
Civil Code of Puerto Rico, for the purpose of engaging in the
business of land development in general, the building and sale
of residential and/or commercial properties, owning of a race
track, leasing of buildings and structures, and performing any
and all acts and services necessary or desirable in connection
with the foregoing, including but not limited to the purchase,
lease or otherwise the acquisition and use of real or personal
property, entering into, making, performing and carrying out of
contracts, borrowing money for the purposes of the Partnership
and securing any such borrowing through the issuance of required
loan documents, collateral agreements, securities and other
guarantees proper or necessary to secure repayment thereof, and
in general to do and perform any and all acts authorized to be
done by partnerships under the laws of the Commonwealth of
Puerto Rico.
(PAGE)
Two: Name and Principal Office of Partnership. The name
of the Partnership shall be HOUSING DEVELOPMENT ASSOCIATES S.E.,
and the principal offices of the Partnership shall be located at
650 Munoz Rivera Avenue, Doral Building, Seventh Floor, Hato
Rey, Puerto Rico 00918; postal address shall be G.P.O. Box
363908, San Juan, Puerto Rico 00936-3908, which location may be
changed by the Managing Partners of the Partnership from time to
time.
Three: Term of Partnership. The term of the Partnership
shall commence as of the date of execution of the Deed and shall
continue for a period of 50 years from the date thereof, unless
sooner terminated as provided in Section 22 hereof (except as
otherwise provided, references to "Section" shall refer to
Sections of this Agreement), and may be extended and continued
for such additional periods as the Partners may agree.
Four: [Reserved]
Five: Limited Purpose. The relationship between the
Partners shall be limited to the performance of the specific
purposes and objectives of the Partnership as set forth in this
Agreement. Nothing herein shall be construed to create a
general purpose partnership between the Partners; nor to
authorize any Partner to act as general agent for any other; nor
to confirm or grant to any Partner any proprietary interest in,
or to subject any Partner to any liabilities for or in respect
of, the business, assets, profits or obligations of any other
Partner, except only to the extent and for the business
contemplated by this Agreement.
Six: Management of the Partnership. The business and
affairs of the Partnership shall be supervised and controlled
exclusively by the managing partners, Equus and IGP
(collectively the "Managing Partners" and individually a
"Managing Partner"). Notwithstanding the foregoing, Equus has
exclusive authority to manage the Partnership, including to
retain other persons to perform services for the Partnership,
provided that approval of IGP shall be required (i) to admit
any transferee of an interest in the Partnership as a Partner
pursuant to Section 20(a) hereof or (ii) for any amendment to
this Agreement for which the Managing Partners' approval is
required under Section 24 hereof. In furtherance of and subject
to the foregoing, Equus shall have the power and authority to
act on behalf of the Partnership in all acts and contracts, and,
among others, to apply for and obtain loans, to approve the
execution of contracts, execution of deeds, granting of
mortgages over its real and personal properties and acquisition
of assets and real property deemed by it necessary or convenient
for its business, either by lease or outright purchase, to apply
for and obtain any required license, permit or governmental
authorization, and to perform any other act which the
Partnership is authorized to do pursuant to the terms hereof as
(PAGE)
well as under the laws of the Commonwealth of Puerto Rico.
Without the approval or authorization of Equus, no party
(including no Partner) may act on behalf of the Partnership and
no Partner shall be considered to be the agent of another.
Notwithstanding the foregoing, Equus may appoint officers of the
Partnership and delegate to such officers such powers, duties
and authority as it shall deem appropriate. The actions of the
Managing Partners require no ratification by any other Partners.
The Managing Partners shall be the agents of the Partnership for
the conduct of the Partnership's business. The Partnership
shall reimburse Equus and IGP for all reasonable out-of-pocket
expenses incurred by Equus and IGP, respectively, in connection
with management of the Partnership, including reasonable
directors' fees for directors who are not then existing officers
or employees of the Partnership or any Managing Partner, and the
reasonable cost of directors' and officers' liability insurance.
Seven: Percentage Partnership Interests. The Percentage
Partnership Interest of Equus and IGP shall be, respectively,
Ninety Eight and Eight-tenths percent (98.8%) and One and Two-
tenths percent (1.2%).
Eight: [Reserved]
Nine: Appointment of Manager. The Managing Partners shall
have authority to appoint and employ such managers, employees,
consultants and agents for the Partnership, as they shall deem
appropriate, and may delegate to such managers, employees,
consultants and agents any and all offices, powers and authority
hereunder.
Ten: Limited Responsibility. The Partners shall not be
personally liable for the debts, liabilities or obligations of
the Partnership. Each Partner's liability and obligations with
regards to the Partnership, shall be limited to the capital
contribution actually made by such Partner to the Partnership.
Eleven: Books and records. The Partnership shall maintain
at its principal office full and proper records and books of
account based upon generally accepted accounting principles,
consistently applied. The fiscal year of the Partnership shall
be the calendar year, or such other fiscal year as shall be
determined by the Managing Partners and permitted by law.
Twelve: Inspection of Books, Appointment of Accountants.
Each of the Partners shall have the right at all reasonable
times to have any and all of the Partnership's records and books
of account inspected at its own expense by its own employees,
attorneys or accountants.
The Managing Partners shall at all times name and appoint
such independent nationally recognized accounting and auditing
firm (the "Partnership Accountants") as in their sole discretion
shall be determined.
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Thirteen: Bank Account. The Partnership shall maintain
such bank accounts as shall be approved by the Managing
Partners.
The Managing Partners shall determine the individuals
authorized to draw checks against the Partnership bank accounts.
Such drawings shall require not less than two (2) signatures.
Fourteen: Profits, Losses, and Tax Allocations.
(a) The net income or net loss, respectively, for federal
and Puerto Rico tax purposes shall be determined annually by the
Partnership Accountants. The Partnership Accountants shall
prepare the income tax returns for the Partnership as soon as
possible after the end of each of the Partnership's fiscal
years.
(b) For purposes of this Agreement the terms "Profits" and
"Losses" mean the income or loss of the Partnership for "book"
purposes under Treas. Reg. Section 1.704-1(b)(2)(iv). In
particular, and without limitation, the terms "Profits" and
"Losses" mean, for any fiscal year, the net income or net loss,
respectively, of the Partnership as reported by the Partnership
for federal income tax purposes, except that (i) items of income,
gain, loss, and deduction relating to property contributed to the
Partnership shall be computed as if the basis of the property to
the Partnership at the time of contribution were equal to its
fair market value on that date (for purposes of this clause (i),
(A) the amount of any depreciation, amortization, or other cost
recovery deduction allowable for any period with respect to
property contributed to the Partnership shall be an amount that
bears the same ratio to the fair market value of the property on
the date of contribution as the federal income tax depreciation,
amortization, or other cost recovery deduction bears to the
adjusted tax basis of the property on the date of contribution;
provided, however, that if the adjusted tax basis of the
property on the date of contribution is zero, depreciation,
amortization, or other cost recovery deduction shall be
determined with reference to the fair market value of the
property on the date of contribution using any reasonable method
selected by the Managing Partners and (B) gain or loss resulting
from any disposition of such property with respect to which gain
or loss is recognized for federal income tax purposes shall be
computed under this sentence as if such property had an adjusted
basis on the date of contribution equal to its fair market value
on such date and all subsequent adjustments were made in
accordance with subclause (A) of this clause (i)), (ii) any
income of the Partnership that is exempt from federal income tax
and not otherwise taken into account in computing Profits or
Losses shall be added to such taxable income or loss, and any
related expenses not allowed as a deduction pursuant to Section
265 of the Internal Revenue Code of 1986 (hereinafter referred
(PAGE)
to as "Code") shall be subtracted from such taxable income or
loss, (iii) any expenditures of the Partnership described in
Code Section 705(a)(2)(B) or treated as Code Section
705(a)(2)(B) expenditures pursuant to Treas. Reg. Section
1.704-1(b) and not otherwise taken into account under this
Section 14(b) shall be subtracted from such income or loss, and
(iv) if there has been an adjustment to the Partners' capital
accounts pursuant to Section 17(d) to reflect the unrealized
income, gain, loss, or deduction inherent in Partnership
property: (A) depreciation, amortization, or other cost recovery
deductions with respect to such property for each fiscal year or
other period shall equal an amount which bears the same ratio to
the fair market value of such property on the date of such
adjustment as the federal income tax depreciation, amortization,
or other cost recovery deductions for such year or other period
bears to the adjusted tax basis of such property on such date
(provided, however, that if the adjusted tax basis of the
property on the date of such adjustment is zero, depreciation,
amortization, or other cost recovery deduction shall be
determined with reference to the fair market value of the
property on the date of adjustment using any reasonable method
selected by the Managing Partners); and (B) gain or loss
resulting from any disposition of such property with respect to
which gain or loss is recognized for federal income tax purposes
shall be computed under this sentence as if such property had an
adjusted basis on the date of such adjustment equal to its fair
market value on such date and all subsequent adjustments for
depreciation, amortization, or other cost recovery deductions
were made in accordance with subclause (A) of this clause (iv).
The term "Profits" means a net positive amount and the term
"Losses" means a net negative amount for the Partnership fiscal
year determined after making the adjustments described in this
Section 14(b) and after removing any amounts of income or gain
allocated under Sections 16(a), 16(b), or 16(c) of this
Agreement.
(c) In the event of any changes in any Partner's
Percentage Partnership Interest during the fiscal year, then for
purposes of this Agreement, the Managing Partners shall take
into account the requirements of Code Section 706(d) and shall
have the right to select any reasonable method of determining
the varying interests of the Partners during the year which is
consistent with the terms of this Agreement and which satisfies
Code Section 706(d).
(d) All items of income, gain, loss, and deduction, and
all tax preferences, depreciation, accelerated cost recovery
system deduction and investment interest and other tax items of
the Partnership for each fiscal year (collectively referred to
as "Partnership Tax Items") shall be allocated for federal tax
purposes to the Partners in accordance with this Section 14(d).
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(i) Except as provided in Sections 14(d)(ii) and
(iii), Partnership Tax Items shall be allocated for tax purposes
in accordance with the allocations of Profits, Losses, or other
items under Sections 15 and 16 hereof. For purposes of the
preceding sentence, an allocation to a Partner of a share of
Profits or Losses shall be treated as an allocation to such
Partner of the same share of each Partnership Tax Item that is
taken into account in computing such Profits or Losses.
(ii) Gain or loss upon sale or other disposition of
any property contributed to the Partnership or any depreciation,
amortization, or other cost recovery deduction allowable with
respect to the basis of property contributed to the Partnership
shall be allocated for tax purposes among the contributing and
non-contributing Partners so as to take into account the
difference between the adjusted tax basis and the fair market
value of the property on the date of its contribution to the
extent permitted by Treas. Reg. Section 1.704-3 or such
superseding regulations as may be promulgated in accordance with
Code Section 704(c).
(iii) If there has been an adjustment to the
Partners' capital accounts pursuant to Section 17(d) to reflect
the unrealized income, gain, loss or deduction inherent in
Partnership property, then Partnership Tax Items with respect to
such property and, if necessary, other property, shall be allo-
cated to the Partners for federal income tax purposes so as to
take into account the difference between the adjusted tax basis
of such property and the value at which it is reflected in the
Partners' capital accounts. In making allocations pursuant to
the preceding sentence, the Managing Partners are authorized to
apply any method or convention required or permitted by Code
Section 704(c). Further, Equus and its partners shall cause the
tax items of Equus to be allocated among such partners in a
manner that preserves the effect of the application of Code
Section 704(c) described in this Section 14(d)(iii). The
allocations under this Section 14(d)(iii) are intended to comply
with paragraphs (b)(2)(iv)(f)(4) and (b)(4)(i) of Treas. Reg.
Section 1.704-1 and shall be interpreted consistently with such
regulation to effectuate such intent.
Fifteen: Allocation of Losses. Losses of the Partner-
ship shall be allocated among the Partners in proportion to
their Percentage Partnership Interests.
Sixteen: Special Allocations and Allocation of Profits.
Certain items of income or gain required to be allocated to a
Partner under federal income tax regulations and the Profits of
the Partnership shall be allocated to the Partners in accordance
with the provisions of this Section 16.
(e) If there is a net decrease during a Partnership fiscal
year in Partnership Minimum Gain then, to the extent required by
Treas. Reg. Section 1.704-2(f), each Partner shall be allocated
items of Partnership income and gain for that year (and, if
(PAGE)
necessary, for succeeding years) equal to that Partner's share of
the net decrease in Partnership Minimum Gain (within the meaning
of Treas. Reg. Section 1.704-2(g)(2)). It is the intent of the
Partners that this Section 16(a) constitute a Partnership Minimum
Gain Chargeback provision under Treas. Reg. Section 1.704-2(f)
and be interpreted consistently with such regulation to
effectuate such intent.
(f) If there is a net decrease during a Partnership fiscal
year in Partner Nonrecourse Debt Minimum Gain then, to the
extent required by Treas. Reg. Section 1.704-2(i)(4), any Partner
with a share of that Partner Nonrecourse Debt Minimum Gain (as
determined under Treas. Reg. Section 1.704-2(i)(5)) at the
beginning of such fiscal year shall be allocated items of
Partnership income and gain for such fiscal year (and, if
necessary, for succeeding years) equal to that Partner's share of
the net decrease in the Partner Nonrecourse Debt Minimum Gain
(within the meaning of Treas. Reg. Section 1.704-2(i)(4)). It is
the intent of the Partners that this Section 16(b) constitute a
Partner Nonrecourse Debt Minimum Gain chargeback provision under
Treas. Reg. Section 1.704-2(i)(4) and be interpreted consistently
with such regulation to effectuate such intent.
(g) If any Partner unexpectedly receives an adjustment,
allocation, or distribution of the type contemplated by Treas.
Reg. Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6) that causes or
increases a deficit in such Partner's Adjusted Capital Account
Balance items of Partnership income and gain shall be allocated
to all such Partners in proportion to such deficits being offset
to eliminate such deficits as quickly as possible. It is the
intent of the Partners that this Section 16(c) constitute a
qualified income offset provision under Treas. Reg. Section
1.704-1(b)(2)(ii)(d) and be interpreted consistently with such
regulation to effectuate such intent.
(h) Profits of the Partnership shall be allocated among
the Partners in proportion to their Percentage Partnership
Interests.
(i) For purposes of this Section 16:
(i) The term "Adjusted Capital Account Balance" means
a Partner's capital account balance (a) increased by any amount
that such Partner is obligated to restore under Treas. Reg.
Section 1.704-1(b)(2)(ii)(c) (including any addition thereto
pursuant to the next to last sentences of Treas. Reg. Section
1.704-2(g)(1) and (i)(5) after taking into account thereunder any
changes during such fiscal year in Partnership Minimum Gain and
in Partner Nonrecourse Debt Minimum Gain) and (b) decreased by
any adjustments, allocations, and distributions specified in
Treas. Reg. Section 1.704-1(b)(2)(ii)(d)(4), (5), and (6) as are
reasonably expected to be made to such Partner. A distribution
or allocation will result in a Partner having a deficit Adjusted
(PAGE)
Capital Account Balance to the extent such distribution or
allocation either will create or increase a deficit balance in
such Partner's capital account after making the adjustments
described in the preceding sentence.
(ii) The terms "Partnership Minimum Gain" and
"Partner Nonrecourse Debt Minimum Gain" shall have the meaning
set forth in Treas. Reg. Section 1.704-2(d) and (i)(3),
respectively.
Seventeen: Capital Accounts. Separate capital accounts
shall be maintained for each Partner. All allocations of
Partnership income, gain, Profit and Loss and all capital
contributions by and all distributions to the Partners shall be
credited or charged, as the case may be, to the separate capital
accounts of the Partners in accordance with this Section 17.
(a) The capital accounts of each Partner shall be
increased by:
(i) The amount of any cash contributed to the
Partnership by or on behalf of such Partner;
(ii) The fair market value of any property other than
cash contributed to the Partnership by or on behalf of such
Partner; and
(iii) The amount of any Profits or items of income or
gain allocated to such Partner under Section 16 of this
Agreement or to such Partner under a similar provision in a
predecessor Partnership agreement of the Partners.
(b) The capital accounts of each Partner shall be reduced
by:
(i) The amount of any cash distributed to such
Partner,
(ii) The fair market value of any property other than
cash distributed to such Partner; and
(iii) The amount of any Losses or items of deduction
or loss allocated to such Partner under Section 15 of this
Agreement or to such Partner under a similar provision in a
predecessor Partnership agreement of the Partners.
(c) If any property other than cash is distributed to a
Partner, the capital accounts of the Partners shall be adjusted
to reflect the manner in which gain or loss that has not
previously been reflected in the capital accounts would be
allocated among the Partners under Sections 15 and 16 of this
Agreement if the distributed property had been sold by the
Partnership for a price equal to its fair market value on the
date of distribution.
(PAGE)
(d) The Managing Partners may, upon the occurrence of one
of the events described in Section 17(d)(ii), increase or
decrease the capital accounts of the Partners in accordance with
Section 17(d)(i) to reflect a revaluation of Partnership
property.
(i) Any adjustments made under this Section 17(d)
shall reflect the manner in which the unrealized income, gain,
loss, or deduction inherent in Partnership property (to the
extent that it has not been reflected in the capital accounts
previously) would be allocated among the Partners under Sections
15 and 16 if the Partnership had sold all of its property for
its fair market value on the date of adjustment. The
adjustments described in this Section 17(d)(i) shall be based on
the fair market value of Partnership property on the date of
adjustment.
(ii) The Managing Partners may make the capital
account adjustments described in this Section 17(d) upon the
occurrence of the following events: (A) a contribution of money
or other property (other than a de minimis amount) to the
Partnership by a new or existing Partner as consideration for an
interest in the Partnership; (B) a distribution of money or
other property (other than a de minimis amount) by the
Partnership to a retiring or continuing Partner as consideration
for an interest in the Partnership; or (C) the liquidation of
the Partnership.
(iii) The adjustments described in this Section 17(d)
are intended to comply with Treas. Reg. Section
1.704-1(b)(2)(iv)(f) and shall be interpreted consistently with
such regulation to effectuate such intent. See Section 14(b)(iv)
for special rules for the computation of Profits and Losses in
the case of an Adjustment under this Section 17(d).
(e) The Managing Partners shall have the authority to make
such changes in the allocations of Profits or Losses to the
Partners under Sections 15 and 16 of this Agreement, and to make
such adjustments to the capital accounts of IGP and Equus as is
necessary in order that the allocations of Profits or Losses to
IGP and Equus have substantial economic effect (or are otherwise
recognized for United States federal tax purposes) and are
consistent with the economic arrangement of the Partners. The
allocations set forth in Sections 16(a), 16(b), and 16(c), and
such part of the allocations under Section 15 that constitute
Nonrecourse Deductions and Partner Nonrecourse Deductions
(within the meaning of Treas. Reg. Section 1.704-2(c) and (i)(2),
respectively), together with allocations made under similar
provisions in a predecessor Partnership agreement of the
Partners (collectively referred to as the "Regulatory
Allocations") are intended to comply with certain requirements
of the Treasury Regulations promulgated under Code Section
704(b). It is the intent of the Partners that, to the greatest
(PAGE)
extent possible, all Regulatory Allocations shall be offset
either with other Regulatory Allocations or with special
allocations of other items of Partnership income, gain, loss, or
deduction pursuant to this Section 17(e). Therefore,
notwithstanding any other provisions of Sections 15 and 16
(other than the Regulatory Allocations), the Managing Partners
shall make such offsetting special allocations of income, gain,
loss, or deductions in whatever manner they determine
appropriate so that, after the Regulatory Allocations and such
offsetting allocations are made, each Partner's capital account
balance is, to the greatest extent possible, equal to the
capital account balance such Partner would have had if the
Regulatory Allocations were not part of the Partnership
Agreement and all Partnership items were allocated pursuant to
Sections 15 and 16 (without regard to the Regulatory
Allocations). In exercising their discretion under this Section
17(e) the Managing Partners shall take into account future
Regulatory Allocations that, although not yet made, are likely
to offset other Regulatory Allocations previously made to the
extent that taking into account such future Regulatory
Allocations would not affect the economic arrangement of the
Partners. The preceding two sentences are intended to
eliminate, to the greatest extent possible, any economic
distortions which may result from application of the Regulatory
Allocations and shall be interpreted in a manner consistent
therewith.
(f) The transferee of an interest in the Partnership shall
succeed to the capital account of the transferor of such
interest to the extent it relates to the transferred interest.
Eighteen: Cash Distributions.
(a) To the extent permitted by the Annual Tax Payment
Agreement as defined in that certain indenture by and among the
Partnership, the Partnership's subsidiary, El Comandante Capital
Corp., and Banco Popular de Puerto Rico, as Trustee, dated as of
December 15, 1993, (the "Indenture", and the closing of which is
referred to herein as the "Closing"), the Partnership shall
distribute to the Partners for each fiscal year an amount equal
to the product of (i) the Partnership's net income for such
fiscal year determined in accordance with generally accepted
accounting principles, consistently applied, and (ii) the
highest of the then applicable highest United States federal or
Puerto Rico personal or corporate income tax rate (the "Highest
Tax Rate"). Such distributions shall be made at such times as
shall be determined by Equus, provided that within 75 days of
the close of each fiscal year Equus shall determine the maximum
amount permitted to be distributed under this Section 18(a) for
such fiscal year ("Maximum Annual Amount") and shall distribute
within 90 days of the close of such fiscal year the excess of
the Maximum Annual Amount for such fiscal year over the
aggregate distributions previously made in respect of such
(PAGE)
fiscal year. Distributions under this Section 18(a) shall be
made in proportion to the Partners' Percentage Partnership
Interests.
(b) To the extent permitted by the Indenture, the
Partnership shall make cash distributions of funds (to the
extent that such funds have not been distributed under Section
18(a)) to the Partners in such amounts and at such times as
shall be determined by the Managing Partners; provided, however,
that (i) no distribution shall be made under this Section 18(b)
until all advances made by the Partners pursuant to Section 8 of
this Agreement, together with any interest accrued thereon,
shall have been paid, and (ii) all distributions under this
Section 18(b) shall be made to the Partners in proportion to
their Percentage Partnership Interests. In any year in which
there has been a change in the Percentage Partnership Interests
of the Partners, distributions shall be made under this Section
18(b) to reflect properly such change.
(c) In determining the amount available under Section
18(b) for distribution to the Partners, the Managing Partners
shall take into consideration the anticipated needs of the
Partnership for working capital and future expansion, amounts
needed to pay or reserve against existing and anticipated
operating expenses and obligations, and such other factors as
the Managing Partners deem relevant, including the reserve for
contingencies.
Nineteen: [Reserved]
Twenty: Transfer of Interests.
(a) Except as provided in this Section, the Partners may
transfer their interest in the Partnership subject to a right of
first refusal exercisable by the Partnership; provided, however,
that such right of first refusal shall not apply to the
transfers described in Section 4(a) or Section 4(c). The
transferring Partner is required to advise the Partnership by
written notice of the price, terms and conditions of a third-
party bona fide written offer to purchase any interest in the
Partnership at least sixty (60) days prior to the proposed
transfer. Said right of first refusal shall be exercisable by
the Partnership at the price and on the terms and conditions set
forth in such written offer and the Partnership must notify the
transferring Partner of its intention to purchase its interest
in the Partnership at least thirty (30) days prior to the
proposed date of transfer. In the case of a gratuitous transfer
of an interest in the Partnership, said right of first refusal
shall be at fair market value as determined by an independent
appraisal. Until admitted to the Partnership as a Partner, a
transferee of an interest in the Partnership pursuant to this
Section 20 shall be entitled to receive the distributions from
this Partnership to which the transferor would otherwise be
(PAGE)
entitled but shall not become entitled to exercise any rights of
a Partner. However, in the case of any purported transfer not
permitted under any other subsection of this Section 20, the
purported transfer shall be void and the purported transferee
shall not receive any distribution. Notwithstanding any other
provision of this Section 20, a transferee of an interest in
this Partnership shall be admitted as a Partner only with the
consent of all Managing Partners, which consent may be given or
withheld in the sole and absolute discretion of the Managing
Partners. A Partner shall cease to be a Partner upon the
transfer of all of its interest in the Partnership.
(b) Unless all Managing Partners consent to the transfer,
no Partner shall transfer any interest in the Partnership to any
other person to the extent that such transfer, if effected,
would cause a termination of the Partnership for federal income
tax purposes under Code Section 708(b). Unless all Managing
Partners consent to the transfer, any attempt to transfer an
interest in the Partnership that, if effected, would cause a
termination of the Partnership is not effective to transfer the
interest in the Partnership to the purported transferee thereof
and the purported transferee shall not be entitled to any rights
as a Partner of the Partnership.
Twenty-One: Indemnification.
The Partnership shall indemnify, to fullest extent of
Puerto Rico law, the Managing Partners and their shareholders,
partners, directors, officers, employees, and agents against
expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred by
any of those persons in connection with any threatened, pending,
or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, if such person's
actions did not constitute gross negligence, willful misconduct
or fraud.
Twenty-Two: Termination of the Partnership.
(a) The Partnership may be terminated at any time by the
mutual agreement of all the Partners.
(b) The Partnership shall be terminated if a Managing
Partner is adjudicated bankrupt or insolvent, or if an
assignment of its assets is made for the benefit of its
creditors, or if a trustee is appointed to take care of its
assets, or if a voluntary petition for relief in bankruptcy is
filed by such Managing Partner.
(c) Upon the termination of the Partnership on account of
an event described in subsection (b) above, a majority in
interest of the Partners other than such Managing Partner shall
have a right of first refusal to purchase the assets of the
(PAGE)
Partnership at their then fair market value as determined by
independent appraisal.
Twenty-Three: Liquidation of Partnership. Upon
termination of the Partnership for any reason, the Partnership
shall continue its business solely for the purpose of winding up
its affairs and shall be liquidated as rapidly as business
judgment permits. All decisions with respect to the disposition
of the Partnership's assets, collections, or compromise of any
amounts receivable and payment or compromise of any amounts
payable by the Partnership, shall be made by the Managing
Partners. The assets of the Partnership shall be applied for
the following in the following manner:
(a) First, to the payment or provision for payment of all
debts and obligations of the Partnership to creditors, other
than the Partners, and for the expenses of winding up the
affairs of the Partnership.
(b) Second, to the payment of all amounts payable by the
Partnership to the Partners, other than in respect to Partners'
capital accounts.
(c) Third, all remaining assets of the Partnership shall
be distributed to the Partners in accordance with the positive
balance in each Partner's capital account as adjusted under
Section 17 to reflect all Partnership operations up to and
including the liquidation.
Twenty-Four: Amendments.
(a) Except as provided in subsection (b) below, amendments
to this Agreement require the prior approval of all Partners.
(b) Acting jointly, the Managing Partners, after thirty
(30) days notice to the Partners and subject to subsection
(c) below, may amend this Agreement, without the approval of the
other Partners: (i) to change the name of the Partnership or
its registered agent or registered office or the location of its
principal registered office; (ii) to make any change necessary
or advisable in the good faith opinion of the Managing Partners
to ensure that the Partnership will not be treated as an
association taxable as a corporation for federal income tax
purposes and will remain qualified as a special partnership
under the ITA; (iii) to make any change that is necessary or
desirable to satisfy any requirements contained in any opinion,
directive, order, ruling or regulation of any federal or state
agency (including the Puerto Rico Racing Board), compliance with
which the Managing Partners in their good faith judgment deem to
be in the best interests of the Partnership and the Partners;
(iv) to make any change that is required to bring the Partner-
ship into compliance with the Puerto Rico Racing Industry and
Sport Act; (v) to make any change necessary or desirable in the
good faith opinion of the Managing Partners to facilitate the
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public trading of Partnership interests including changes that
may be necessary to ensure that the Partnership interests may
qualify as Listed Securities (as that term is defined in the
offering memorandum issued in connection with the Closing); (vi)
to make any change that is of an inconsequential nature and does
not affect the Partners in any material respect; and (vii) to
make any other changes similar to the foregoing.
(c) Notwithstanding the foregoing, the Managing Partners
may not amend the Partnership Agreement in any manner that would
disproportionately and inequitably affect the interests of the
Partners without the consent of Partners holding seventy percent
(70%) of the Percentage Interests of the Partnership.
Twenty-Five: Entire Agreement. This Agreement constitutes
the entire agreement of the parties with respect to the subject
matters hereof.
Twenty-Six: Notices. Any and all notices or other
communication or deliveries required or permitted to be given
pursuant to any of the provisions of this Agreement, shall be
deemed to have been duly given for all purposes to be sent by
certified or registered mail, return receipt requested, and
postage pre-paid, hand delivered or sent by telegraph or telex
to the parties hereto at the following addresses: (a) IGP:
P.O. Box 363908, San Juan, Puerto Rico 00936-3908; (b) Equus:
222 Smallwood Village Center, St. Charles, Maryland 20602; or at
such other address as any Partner may have specified by notice
given to the other Partners in accordance with this section.
The date of giving any such notice shall be the date the same is
deposited in the mail, as such date appears in the postage
cancellation affixed by the United States Postal Service.
Twenty-Seven: Waiver of Provisions. Except as provided in
Section 4, no waiver of the provisions hereof shall be effective
unless in writing and signed by the party to be charged with
such waiver and no waiver shall be deemed a continuing waiver or
waivers in respect of any subsequent breach or default, of
either a similar or different nature, unless expressly so stated
in writing.
Twenty-Eight: Separability. Should any clause, section or
part of this Agreement be held or declared to be void or illegal
for any reason, all other clauses, sections or parts of this
Agreement which can be affected without the illegal clause,
section or part, shall nevertheless continue in full force and
effect.
Twenty-Nine: Governing Law. This Agreement shall be
governed, interpreted and construed in accordance with the laws
of the Commonwealth of Puerto Rico. It is the intention of the
parties that the Partnership be governed by the provisions of
Special Partnerships of the Civil Code of Puerto Rico. The
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Partnership shall file with the Secretary of the Treasury of
the Commonwealth of Puerto Rico its option to have the Part-
nership operate as a Special Partnership under the provisions of
Act Number 8 of July 1985, as may be amended from time to time.
Thirty: Jurisdiction of Courts. Each of the parties
hereto consents to the jurisdiction of the Courts of the Common-
wealth of Puerto Rico, with respect to any matter arising under
this Agreement, and shall subject itself to the jurisdiction of
such Courts and agrees that service of process upon it, may be
made in any matter permitted by the laws of the Commonwealth of
Puerto Rico.
Thirty-One: Successors. This Agreement and the various
rights and obligations arising hereunder shall inure to the
benefit of and be binding upon the parties hereto and their
respective successors and assigns.
Thirty-Two: Headings. The headings or captions under
sections of this Agreement are for convenience and reference
only and do not in any way modify or interpret or construe the
intent of the parties to affect any of the provisions of this
Agreement.
Thirty-Three: Certain Terms. The use of the term Partner
in this document shall be understood to include and mean the
singular and/or plural as the identity of the parties or the
situation so requires.
IN WITNESS WHEREOF, the undersigned have hereunto set their
hands as of the date and year first above written.
INTERSTATE GENERAL PROPERTIES LIMITED PARTNERSHIP S.E.
By: INTERSTATE GENERAL COMPANY L.P.
Its Managing General Partner
By: INTERSTATE GENERAL MANAGEMENT CORPORATION
Its Managing General Partner
By: ______________________________
Francisco Arrivi Cros
Executive Vice President
EQUUS GAMING COMPANY L.P.
By: EQUUS MANAGEMENT COMPANY
Its Managing General Partner
By: ______________________________
Donald G. Blakeman
President
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Affidavit No. 4138
Subscribed before me by Donald G. Blakeman, of legal age,
married and resident of San Juan, Puerto Rico, in his capacity as
President of Equus Management Company, the Managing General
Partner of Equus Gaming Company L.P., to me personally known.
Subscribed before me by Francisco Arrivi Cros, of legal age,
married and resident of San Juan, Puerto Rico, in his capacity as
Executive Vice President of Interstate General Management
Corporation, the Managing General Partner of Interstate General
Company L.P., the Managing General Partner of Interstate General
Properties Limited Partnership S.E., to me personally known.
In San Juan, Puerto Rico, this 14th day of November, 1997.
/s/ Alvaro Calderon Mongil
----------------------------------
Alvaro Calderon Mongil
Notary Public
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,329
<SECURITIES> 0
<RECEIVABLES> 2,915<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 58,344
<DEPRECIATION> 13,703
<TOTAL-ASSETS> 57,731
<CURRENT-LIABILITIES> 0
<BONDS> 63,359<F2>
0
0
<COMMON> 0
<OTHER-SE> 11,556
<TOTAL-LIABILITY-AND-EQUITY> 57,731
<SALES> 0
<TOTAL-REVENUES> 19,340
<CGS> 0
<TOTAL-COSTS> 6,166
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,481
<INCOME-PRETAX> 4,955
<INCOME-TAX> 784
<INCOME-CONTINUING> 4,171
<DISCONTINUED> 0
<EXTRAORDINARY> 459
<CHANGES> 0
<NET-INCOME> 2,978
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
<FN>
<F1>Includes note receivable of $.5 million.
<F2>Net of bond discount of $1.404 million.
</FN>
</TABLE>
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FIFTH SUPPLEMENTAL INDENTURE
THIS FIFTH SUPPLEMENTAL INDENTURE, is executed as of
this __th day of November 1997, by and among EL COMANDANTE
CAPITAL CORP., a Delaware corporation (the "Company"), BANCO
POPULAR DE PUERTO RICO, a Puerto Rico banking corporation (the
"Trustee"), and HOUSING DEVELOPMENT ASSOCIATES S.E., a Puerto
Rico partnership (the "Partnership").
WITNESSETH:
WHEREAS, the Company, the Trustee and the Partnership
are parties to that certain indenture, dated as of December 15,
1993 and amended by a First Supplemental Indenture and Second
Supplemental Indenture each dated as of December 22, 1994, and
a Third Supplemental Indenture and Fourth Supplemental Indenture
each dated as of February 27, 1996 (the "Indenture"); and
WHEREAS, the Company and the Partnership desire to
amend the Indenture to permit the Partnership to purchase the
interest of Supra (as defined in the Indenture) in the
Partnership, to permit the Partnership to increase by $1.5
million the amount of its Investments (as defined in the
Indenture) in Galapagos (as defined in the Indenture), to permit
the Partnership to make Investments up to an aggregate amount of
$1.5 million in Equus Gaming de Panama, S.A., a corporation
organized under the laws of the Republic of Panama ("Equus
Panama"); and
WHEREAS, the Trustee has been requested to join the
Company and the Partnership in the execution of this Fifth
Supplemental Indenture; and
WHEREAS, pursuant to Section 902 of the Indenture the
holders of a majority of the outstanding principal amount of
11.75% First Mortgage Notes of the Company have consented to such
amendment to the Indenture and to permit certain amendments to
the Lease Agreement (as defined in the Indenture) to permit ECOC
(as defined in the Indenture) to borrow up to $1 million from
third parties for limited purposes;
NOW, THEREFORE, in consideration of the foregoing
premises of the mutual covenants herein contained and for other
good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows:
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1. Section 101 of the Indenture is hereby amended to add
the following immediately after the definition of "Equus
Distribution":
"Equus Panama" shall mean Equus Gaming de Panama,
S.A., a corporation organized under the laws of the
Republic of Panama and any successor thereto.
2. The term "Permitted Indebtedness", as defined in
Section 101 of the Indenture, shall be amended so as
(a) to amend and restate clause (f) as follows:
(f) Indebtedness of Galapagos to the Partnership
in an aggregate principal amount not in excess of
$3,500,000 and to its stockholders other than the
Partnership in an aggregate principal amount not in
excess of $2,863,636;
(b) to add thereto following the end of clause (f) a
new clause (g) as follows:
(g) If it should become a Subsidiary (other than
a Wholly-owned Subsidiary), Indebtedness of Equus
Panama to the Partnership in an aggregate principal
amount not in excess of $1,500,000 and to its
investors other than the Partnership ratably in
proportion to their respective percentage Equity
Interest in Equus Panama and Indebtedness to third
parties without recourse to the Partnership not to
exceed $3.5 million;
(c) to redesignate current clause (g) as clause (h),
and to amend and restate the first subclause thereof as follows:
(h) any renewals, extensions, substitutions,
refundings, refinancings, or replacements of any
Indebtedness described in clauses (a), (b), (c), (d),
(e), (f), and (g) of this definition of "Permitted
Indebtedness,"
3. The term "Permitted Investment," as defined in Section
101 of the Indenture, shall be amended so as
(a) to amend and restate clause (h) as follows:
(h) the ownership of at least a majority of the
outstanding capital stock of Galapagos, S.A., a
Dominican Republic corporation, or any successor
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thereto ("Galapagos"), and any Investment (in the form
of loans, capital contributions or otherwise) in
Galapagos from time to time not to exceed the
aggregate amount of $3,500,000;
(b) to add thereto following the end of clause (h) a
new clause (i) as follows:
(i) the ownership of at least half of the
outstanding capital stock of Equus Panama, or any
successor thereto, and any Investment (in the form of
loans, capital contributions or otherwise) in Equus
Panama from time to time not to exceed the aggregate
amount of $1,500,000.
4. The term "Consent Fees," as defined in Section 101 of
the Indenture, shall be amended to read as follows:
"Consent Fees" means (a) the aggregate amount of
payments made by the Partnership to Holders, in
respect of that certain first supplemental indenture,
dated December 22, 1994, that certain third
supplemental indenture, dated February 27, 1996, and
that certain fifth supplemental indenture, dated
November 13, 1997, by and among the Company, the
Partnership and the Trustee; and (b) the aggregate
amount of payments made by the Partnership to holders
of Warrants, in respect of that certain amendment,
dated as of December 12, 1994, to the registration
rights agreement with respect to the Warrants, dated
as of December 15, 1993, by and among the Partnership,
HDAMC, Oppenheimer & Co., and the Argosy Securities
Group L.P.; and (c) the aggregate amount of any
redemption premium paid by the Partnership in
connection with the redemption of up to $5.5 million
in aggregate principal amount of Notes in accordance
with the terms of the 1997 Waiver Redemption and the
1998 Waiver Redemption Offer; and (d) the aggregate
amount of any 1998 Waiver Redemption Default Fees paid
to the Holders.
5. Section 101 of the Indenture is hereby amended to add
the following immediately after the definition of "New Notes":
"1997 Waiver Redemption" shall mean the
redemption of Notes in the aggregate principal amount
of $2.5 million at a redemption price of 110% of par
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completed on September 29, 1997.
"1998 Waiver Redemption Offer" shall mean an
offer to be commenced by the Company on or before
December 1, 1998 to redeem Notes in the aggregate
principal amount of up to $3 million at a redemption
price of 110% of par which offer shall remain open for
twenty (20) Business Days following the commencement
date.
"1998 Waiver Redemption Default Fees" shall mean
waiver fees paid to Holders pursuant to Section 518.
6. A new Section 518 is hereby added to the Indenture as
follows:
Section 518. 1998 Waiver Redemption Default
Remedies.
On or before December 1, 1998 the Company shall
commence the 1998 Waiver Redemption Offer and at the
expiration thereof shall redeem all Notes validly
tendered pursuant thereto in the aggregate principal
amount not exceeding $3 million plus accrued and
unpaid interest through the redemption date. If the
Company fails to make the 1998 Waiver Redemption Offer
or fails to redeem Notes validly tendered pursuant
thereto, as the sole and exclusive remedy for such
failure, on January 15, 1999 the Company shall pay a
fee pro rata to each Holder of record on January 1,
1999 equal to 1.5% of the aggregate principal amount
of Notes outstanding on January 1, 1999; provided that
the fee shall be reduced to an amount equal to 1.5% of
the aggregate principal amount of the Notes
outstanding on January 1, 1999 multiplied by a
fraction, the numerator of which shall be the
aggregate principal amount of Notes redeemed pursuant
to the 1998 Waiver Redemption Offer and the
denominator of which shall be the aggregate principal
amount of Notes (not exceeding $3 million) validly
tendered pursuant thereto.
7. Subsection (a)(ii) of Section 1009 of the Indenture
shall be amended to read as follows:
(ii) purchase, redeem or otherwise acquire or retire
for value (A) any such Capital Stock or Equity
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Interests, other than (I) the Warrants in accordance
with the terms thereof, (II) any such Equity Interests
owned by Supra, or any assignee, transferee, or
successor thereto, provided that such purchase,
redemption or acquisition occurs at a fair market
price after arm's length negotiation, or (B) any
options, warrants or other rights to acquire such
Capital Stock or Equity Interests.
8. Subsection (c)(iv) of Section 1009 of the Indenture
shall be amended to read as follows:
(iv) the amounts payable pursuant to the Annual Tax
Payment Agreement; provided that such amounts shall be
reduced by 17% (each such reduction being referred to
as a "Withheld 17% Distribution") with respect to the
Partnership's net income determined in accordance with
GAAP, on a cumulative basis during the period
commencing on July 1, 1997 until such time as the sum
of the following exceeds $3 million (or $1.5 million
if the Partnership abandons plans to invest in Equus
Panama): (i) cumulative Withheld 17% Distribution,
plus (ii) cumulative distributions received by the
Partnership after July 1, 1997 from Galapagos and
Equus Panama and not reinvested within twelve (12)
months into Galapagos or Equus Panama, plus (iii) the
principal amount of Notes in excess of $2.5 million
redeemed or repurchased by the Partnership other than
pursuant to Mandatory Redemption or an Excess Proceeds
Offer or Excess Cash Flow Offer.
9. Except as amended by this Fifth Supplemental
Indenture, all other terms and provisions of the Indenture shall
remain in full force and effect.
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IN WITNESS WHEREOF, the parties hereto have caused
this Fifth Supplemental Indenture to be duly executed as of the
year and date first above written.
EL COMANDANTE CAPITAL CORP.
By: ___________________________________
Donald G. Blakeman
President
HOUSING DEVELOPMENT ASSOCIATES S.E.
By: Equus Gaming Company L.P., its
managing partner
By: Equus Management Company, its
managing general partner
By: ___________________________________
Donald G. Blakeman
President
BANCO POPULAR DE PUERTO RICO
By: ___________________________________
Title:
