(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 MARCH 31, 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 (Loss) for the three
Months Ended March 31, 1997 and 1996 (Unaudited) 1
Consolidated Balance Sheets at March 31, 1997 (Unaudited)
and December 31, 1996 (Audited) 2
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1996 (Unaudited) 4
Notes to Consolidated Financial Statements 6
El Comandante Operating Company, Inc.:
Statements of Revenues and Expenses for the Three Months
Ended March 31, 1997 and 1996 (Unaudited) 12
Statements of Net Assets (Liabilities) at March 31, 1997
(Unaudited) and December 31, 1996 (Audited) 13
Statements of Cash Flows for the Three Months Ended
March 31, 1997 and 1996 (Unaudited) 15
Notes to Financial Statements 17
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
The Company's Results of Operations for the Three Months
Ended March 31, 1997 and 1996 20
Liquidity and Capital Resources of HDA and the Company 25
(PAGE) EQUUS GAMING COMPANY L.P.
FORM 10 Q
INDEX
Page
Number
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 30
Item 2 - Material Modifications of Rights of Registrant's
Securities 31
Item 3 - Default upon Senior Securities 31
Item 4 - Submission of Matters to a Vote of Security Holders 31
Item 5 - Other Information 31
Item 6 - Exhibits and Reports on Form 8-K 31
Signatures 32
<PAGE>
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
1997 1996
----------- -----------
REVENUES:
Rental income from El Comandante Race Track $ 3,489,927 $ 3,801,669
Dominican Republic racing-
Commissions on wagering 1,213,299 1,307,138
Other revenues 118,296 196,214
Television Stations - 500,243
Gain from sale of 50% interest in Television
Stations 4,615,000 -
Interest income 132,636 29,379
----------- -----------
Total revenues 9,569,158 5,834,643
----------- -----------
EXPENSES:
Financial 2,162,857 2,302,299
Depreciation 578,192 624,841
General and administrative 460,129 524,764
Operating costs of Dominican Republic racing 1,309,678 1,749,674
Operating costs of Television Stations - 515,224
----------- -----------
Total expenses 4,510,856 5,716,802
----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY
INTERESTS 5,058,302 117,841
PROVISION FOR INCOME TAXES:
Current 70,468 18,209
Deferred 577,646 212,742
----------- -----------
INCOME (LOSS) BEFORE MINORITY INTERESTS 4,410,188 (113,110)
MINORITY INTERESTS 853,701 (99,794)
----------- -----------
NET INCOME (LOSS) $ 3,556,487 $ (13,316)
=========== ===========
ALLOCATION OF NET INCOME (LOSS):
General Partners $ 35,565 $ (133)
Limited Partners 3,520,922 (13,183)
----------- -----------
$ 3,556,487 $ (13,316)
=========== ===========
NET INCOME PER UNIT $ 0.56 $ -
=========== ===========
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
March 31, December 31,
1997 1996
----------- ------------
(Unaudited) (Audited)
CASH AND CASH EQUIVALENTS $12,613,357 $ 4,268,029
----------- -----------
ASSETS RELATED TO RACE TRACKS:
Property and equipment-
Land 7,128,858 7,128,858
Buildings and improvements 48,229,678 48,138,946
Equipment 2,629,739 2,669,639
----------- -----------
57,988,275 57,937,443
Less accumulated depreciation (12,540,759) (11,981,552)
----------- -----------
45,447,516 45,955,891
Receivables from El Comandante
Operating Company, Inc. ("ECOC") 2,971,043 2,780,416
Deferred costs-
Financing 4,077,707 4,055,866
Organizational and other 359,477 370,120
Other 1,035,329 932,566
----------- -----------
53,891,072 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
----------- -----------
$66,504,429 $60,586,330
=========== ===========
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND PARTNERS' DEFICIT
March 31, December 31,
1997 1996
----------- ------------
(Unaudited) (Audited)
LIABILITIES RELATED TO RACE TRACKS:
First Mortgage Notes-
Principal, net of bond discount of
$1,541,108 and $1,596,261, respectively $65,721,892 $66,403,739
Accrued interest 2,304,691 332,918
Minority interest in Galapagos 55,363 111,427
Notes payable 514,797 577,388
Accounts payable and accrued liabilities 2,225,622 2,157,681
Accrued income taxes 1,080,606 437,692
----------- -----------
71,902,971 70,020,845
----------- -----------
OTHER LIABILITIES:
Unsecured partner's loans 223,278 415,883
Notes payable 400,000 500,000
Accounts payable and accrued liabilities 207,485 287,976
Minority interest in HDA 1,460,370 550,605
----------- -----------
2,291,133 1,754,464
----------- -----------
PARTNERS' DEFICIT:
General Partners 7,813 24,854
Limited Partners (7,697,488) (11,213,833)
----------- -----------
(7,689,675) (11,188,979)
----------- -----------
$66,504,429 $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 THREE MONTHS ENDED MARCH 31,
(Unaudited)
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,556,487 $ (13,316)
----------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities-
Gain from sale of 50% interest in
Television Stations (4,615,000) -
Depreciation 578,192 624,841
Amortization 125,674 246,560
Deferred income tax provision 577,646 212,742
Currency translation adjustments (4,623) 15,822
Decrease (increase) in assets-
Rent receivable from ECOC (270,927) 31,665
Deferred costs - 108,525
Other 295,820 (205,800)
Increase (decrease) in liabilities-
Accrued interest 1,971,773 2,019,464
Accounts payable and accrued liabilities (12,550) 417,074
Accrued income taxes 65,268 11,767
Minority interests 853,701 (99,794)
----------- -----------
Total adjustments (435,026) 3,382,866
----------- -----------
Net cash provided by operating activities 3,121,461 3,369,550
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (69,817) (20,192)
Collections of note from ECOC 79,917 -
Sale of 50% interest in Television Stations -
Proceeds 7,000,000 -
Costs (559,757) -
----------- -----------
Net cash provided by (used in) investing
activities 6,450,343 (20,192)
----------- -----------
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(continued)
1997 1996
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of First Mortgage Notes (737,000) -
Loans from general partner, net (192,605) 187,243
Payments on notes payable (162,591) (161,450)
Increase in deferred costs (81,720) (565,710)
Cash distributions to minority partners of HDA (52,560) (11,880)
----------- -----------
Net cash used in financing activities (1,226,476) (551,797)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,345,328 2,797,561
CASH AND CASH EQUIVALENTS, beginning of year 4,268,029 814,292
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $12,613,357 $ 3,611,853
=========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 52,990 $ 79,241
Income taxes paid 5,200 6,441
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") was formed for the purpose of
succeeding to substantially all ownership interest of Interstate General
Company L.P. ("IGC") in real estate assets employed in thoroughbred racing and
related wagering businesses. The Company's principal income producing asset
is an 82% interest in Housing Development Associates S.E. ("HDA") in which it
is a co-managing partner. HDA owns El Comandante Race Track ("El
Comandante"), the only licensed thoroughbred racing facility in Puerto Rico,
located in 257 acres of land, which it leases 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"). HDA
also owns 55% of the capital stock of Galapagos, S.A. ("Galapagos"), a
corporation that leases and operates a race track in the Dominican Republic.
In 1994 HDA formed S & E Network Inc. ("S&E"), a Puerto Rico corporation that
owns and operates since 1995 three UHF television stations in Puerto Rico (the
"Television Stations"). HDA sold its interest in S&E to Paxson Communications
of San Juan, Inc. ("Paxson") in sales closed in August 1996 (50% interest) and
January 1997 (50% interest). The Company also owns Virginia Jockey Club, Inc.
("VJC"), an unsuccessful applicant for licenses to own and operate Virginia's
first thoroughbred racing and pari-mutuel wagering facility. VJC is now
inactive.
The consolidated financial statements as of March 31, 1997 and for the
three month periods ended March 31, 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 three months ended March
31, 1997 are not necessarily indicative of the results that may be expected
for the year. Net income (loss) 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
(PAGE)
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The accompanying consolidated financial statements include the accounts
of the Company and its consolidated subsidiaries, HDA and VJC, after
eliminating all inter-company transactions. For the three months ended March
31, 1997 and 1996 the Company recorded a minority interest in HDA's net income
of $909,700 and $112,000, respectively, which is partially offset by minority
interest in the net losses of Galapagos of $56,000 and $211,800, respectively.
Currencies
HDA consolidates its accounts with Galapagos whose functional currency is
Dominican Republic pesos ("RD$"), although United States dollars ("US$") are
also a recording currency. US$ are exchanged into RD$ and vice versa through
commercial banks and/or the Central Bank of the Dominican Republic. Galapagos
remeasures its monetary assets and liabilities recorded in US$ into RD$ using
the exchange rate in effect at the balance sheet date (the "current rate") and
all other assets and liabilities and capital accounts, at the historical
rates. Galapagos then translates its financial statements from RD$ into US$
using the current rate, for all assets and liabilities, and the average
exchange rate prevailing during the year for results of operations. Net
exchange gains or losses resulting from remeasurement of accounts, together
with gains or losses from foreign currency transactions are included in
operating results of Dominican Republic racing. At March 31, 1997 and
December 31, 1996 accumulated net losses of $131,570 and $126,950,
respectively, from changes in exchange rates due to the translation of assets
and liabilities of Galapagos are included in the partners' deficit.
The exchange rates as of March 31, 1997 and December 31, 1996 were
US$1.00 to RD$14.32 and US$1.00 to RD$13.97, respectively, and the average
exchange rates prevailing during the three months ended March 31, 1997 and
1996 were US$1.00 to RD$14.24 and US$1.00 to RD$13.46, respectively.
2. RECEIVABLES FROM EL COMANDANTE OPERATING COMPANY, INC.:
Receivables from ECOC as of March 31, 1997 and December 31, 1996 consist
of (i) a note receivable and accrued interest of $715,903 and $796,203,
respectively, and (ii) unpaid rent under the El Comandante Lease of $2,225,140
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.
3. 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
(PAGE)
and Banco Popular de Puerto Rico, as trustee (the "Trustee"), and HDAMC
issued Warrants to purchase 68,000 shares of Class A Common Stock of HDAMC. As
a result of the Distribution, in March 1995 the Warrants automatically became
exercisable to purchase Units of the Company from HDAMC. Upon issuance of
the Warrants, HDAMC and HDA recorded additional equity of $1,912,800, equal to
the fair value of the Warrants of $2,040,000, less offering costs of $127,200,
and recorded debt discount of $2,040,000. Such debt discount is being
amortized using the interest method over the term of the First Mortgage Notes.
The First Mortgage Notes mature on December 15, 2003 and bear interest at
11.75% from December 15, 1993, payable semiannually.
Payment of the First Mortgage Notes is guaranteed by HDA and the First
Mortgage Notes are secured by a first mortgage on El Comandante and by certain
other 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 and 2002,
and the balance at maturity. ECCC and HDA may redeem First Mortgage Notes on
or after December 15, 1998 at the following redemption prices (expressed as
percentages of principal amount): if redeemed during the 12-month period
beginning December 15 of years 1998 at 104.125%, 1999 at 102.75%, 2000 at
101.5%, and 2001 and thereafter at 100% of principal amount, in each case
together with accrued and unpaid interest. Any such redemptions would offset
the mandatory redemptions due December 15, 2000, 2001 and 2002.
ECCC also may redeem up to one-third of the principal amount of the First
Mortgage Notes from net proceeds of an equity offering by HDA at any time on
or before December 15, 1996 at a redemption price of 110% of the principal
amount. ECCC is required to offer to purchase First Mortgage Notes, at face
value, to the extent that HDA has accumulated excess cash flow, asset sales
with net proceeds in excess of $5 million ("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 First Mortgage Notes and expects to use the remaining $2.5 million (i) as
investment in Galapagos, (ii) for capital improvements for El Comandante,
and/or (iii) as an offer to redeem additional First Mortgage Notes. In
response to the Excess Proceeds Offer, First Mortgage Notes in the principal
amount of $737,000 were tendered and redeemed on March 28, 1997, which would
partially offset the mandatory redemption due December 15, 2000. The
remaining $4,263,000 will be retained by HDA for business purposes permitted
by the Indenture.
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
(PAGE)
HDA's partners to pay income taxes on their allocable share of HDA's taxable
income ("Tax Distributions"). Tax Distributions are equal to the higher of
(i) 8.4% plus the higher of the then applicable federal personal or corporate
income tax rate or (ii) the higher of the then applicable Puerto Rico personal
or corporate income tax rate, multiplied by HDA's consolidated net income.
HDA is permitted to make additional cash distributions to partners and other
Restricted Payments, as defined under the Indenture, equal to 44.25% of the
excess of HDA's cumulative consolidated net income after December 31, 1993
over the cumulative amount of the Tax Distributions, provided that HDA meets a
certain minimum debt coverage ratio. HDA does not yet meet the debt coverage
ratio.
At March 31, 1997 and December 31, 1996 the fair value of the First
Mortgage Notes, based on the market prices quoted by a brokerage firm that
trades the Notes, were $67,263,000 and $64,600,000, respectively, as compared
with its carrying value of $65,721,892 and $66,403,739, respectively.
Letter of Credit
In connection with a proposal submitted by the Company and a Mexican
partner for the operation of the Las Americas race track in Mexico City, a
letter of credit was issued in April 1997 in favor of the Government of Mexico
for $10,000,000 mexican pesos (equivalent to approximately US$1.3 million) to
guarantee performance in the event a contract to operate Las Americas is
awarded to the Company and its partner. The letter was issued for a term of
one year and is secured by a $1.3 million certificate of deposit.
4. OTHER LIABILITIES:
Notes Payable
In 1995 the Company obtained from a bank a $850,000 loan, which was
payable in quarterly installments of $100,000 commencing May 31, 1995. In May
1996 the loan was refinanced and increased to $700,000, also payable in
quarterly installments of $100,000 commencing August 31, 1996 and a final
payment of $200,000 in November 1997. The Company has assigned to the bank
the first $100,000 of quarterly distributions from HDA. As of March 31, 1997
and December 31, 1996 the loan balance was $400,000 and $500,000,
respectively. The interest is payable monthly based on the Citibank prime
rate plus 2%, which at March 31, 1997 and December 31, 1996 was 10.50% and
10.25%, respectively.
Unsecured Partner's Loans
The Company has received in prior years advances from IGC, one of its
general partners. The outstanding payables to IGC, including accrued
interest, were $223,278 and $415,883 at March 31, 1997 and December 31, 1996,
respectively. The loans accrue interest based on the Citibank prime rate plus
1%, which at March 31, 1997 and December 31, 1996 was 9.50% and 9.25%,
respectively. The loans were paid in full in April 1997.
(PAGE)
5. 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 in
equal monthly installments 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 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 in exchange 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.
6. RELATED PARTY TRANSACTIONS:
Amounts accrued with respect to services rendered by certain related
parties during the three months ended March 31, 1997 and 1996 are summarized
as follows:
For the three months
Services Rendered ended March 31,
- ----------------------- --------------------
To By Concept 1997 1996
- ----------- --------- --------------------- ---------- ----------
HDA IGP Management Agreement - 67,611
HDA EMC Management Agreement 69,860 -
The Company IBC Accounting Services 3,000 -
The Company IGC/IGP Support Agreement 4,930 50,000
The Company EMC Expenses in excess of
receipts 42,030 -
The Company EMC Directors fees and
expenses 21,470 10,800
(PAGE)
7. INCOME TAXES:
The provisions 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, (ii) ECCC's federal income taxes on its taxable income and (iii)
Dominican Republic income taxes on interest earned by HDA on certain loans to
Galapagos, which interest was forgiven in 1996 before any interest had been
collected, as follows:
For the three months ended
March 31,
---------------------------
1997 1996
----------- -----------
Puerto Rico income taxes -
Deferred $ 577,646 $ 188,099
Current 69,438 15,695
Federal income taxes 1,030 2,514
Dominican Republic - 24,643
----------- -----------
$ 648,114 $ 230,951
=========== ===========
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.
8. AGREEMENT WITH SUPRA
The Company and HDA entered into an agreement on May 13, 1997 (the
"Agreement") with Supra and Company, S.E. ("Supra") and Ruben Velez Lebron and
his wife ("Velez"), the principal owners of Supra, for HDA to purchase Supra's
17% interest in HDA for $4.2 million and for HDA to pay $600,000 over a three
year period to Supra and Velez 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 closing of the entire
transaction is subject to certain conditions, including the approval of
holders of First Mortgage Notes to pay $4.2 million for Supra's 17% interest
in HDA. The Agreement provides for certain releases upon closing, including
the filing by Supra of a motion to dismiss the Supra complaint described in
Part II - "Legal Proceedings" and a release of HDA's guarantee of
approximately $1.6 million of the ECOC Debt if the El Comandante Lease is
terminated prior to December 2004.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF REVENUES AND EXPENSES
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
1997 1996
----------- -----------
REVENUES:
Commissions on wagering $13,959,706 $15,206,667
Other 681,867 681,172
----------- -----------
Total revenues 14,641,573 15,887,839
----------- -----------
EXPENSES:
Payments to horse owners and horse owners'
association 6,957,468 7,615,006
Track rent 3,489,927 3,801,669
Salaries, wages and employee benefits 1,776,073 1,743,915
Operating expenses 1,368,096 1,295,707
General and administrative 648,838 667,847
Marketing and satellite transmission costs 545,244 615,253
----------- -----------
Total expenses 14,785,646 15,739,397
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (144,073) 148,442
PROVISION FOR DEFERRED INCOME TAXES 26,930 26,955
----------- -----------
NET INCOME (LOSS) $ (171,003) $ 121,487
=========== ===========
The accompanying notes are an integral
part of these statements.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF NET ASSETS (LIABILITIES)
March 31, December 31,
1997 1996
------------ ------------
(Unaudited) (Audited)
ASSETS:
CURRENT ASSETS:
Cash, including restricted cash of
$935,715 and $187,391, respectively $ 1,761,940 $ 1,116,330
Accounts receivable, net 1,678,685 1,379,932
Prepayments and supplies inventory 402,770 242,468
Notes receivable 354,390 335,248
------------ ------------
Total current assets 4,197,785 3,073,978
------------ ------------
DEFERRED COSTS, net:
Organizational costs 25,930 28,015
Deferred tax asset 625,407 652,337
Telecommunication installation costs 168,218 185,905
Noncompetition agreement 83,333 145,833
------------ ------------
Total deferred costs 902,888 1,012,090
------------ ------------
FURNITURE AND EQUIPMENT, net 3,841,319 3,964,066
------------ ------------
Total assets $ 8,941,992 $ 8,050,134
------------ ------------
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF NET ASSETS (LIABILITIES)
(Continued)
March 31, December 31,
1997 1996
------------ ------------
(Unaudited) (Audited)
LIABILITIES:
CURRENT LIABILITIES:
Current portion of capital lease
obligations $ 711,859 $ 707,917
Rent payable to Housing Development
Associates S.E. ("HDA") 2,255,141 1,984,213
Accounts payable and accrued liabilities 3,579,930 3,299,930
Outstanding winning tickets and refunds 1,549,175 784,897
------------ -----------
Total current liabilities 8,096,105 6,776,957
------------ -----------
CAPITAL LEASE OBLIGATIONS 1,045,583 1,223,557
------------ -----------
NOTE PAYABLE TO HDA, and accrued interest 715,903 796,203
------------ -----------
OTHER LIABILITIES:
Notes 2,450,000 2,450,000
Accrued interest 147,290 145,303
------------ -----------
2,597,290 2,595,303
------------ -----------
Total liabilities 12,454,881 11,392,020
------------ -----------
NET ASSETS (LIABILITIES) $ (3,512,889) $(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 THREE MONTHS ENDED MARCH 31,
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (171,003) $ 121,447
----------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities-
Depreciation and amortization 183,085 167,085
Deferred tax credit 26,930 26,995
Provision for bad debts 25,002 25,002
Amortization of noncompetition agreement 62,500 62,500
Increase in current assets-
Accounts receivable (323,755) (240,671)
Prepayments and supplies inventory (160,303) (290,173)
Increase (decrease) in current liabilities-
Accounts payable and accrued liabilities 280,000 103,944
Outstanding winning tickets and refunds 764,278 357,675
Accrued interest 5,401 19,475
Rent payable 270,928 (31,664)
----------- -----------
Total adjustments 1,134,066 200,168
----------- -----------
Net cash provided by operating
activities 963,063 348,570
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable (19,142) (11,618)
Capital expenditures (43,253) (55,723)
Decrease (increase) in telecommunication
installation costs 2,688 (61)
----------- -----------
Net cash used in investing activities (59,707) (67,402)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable (83,714) -
Payments of capital lease obligations (174,032) (105,481)
----------- -----------
Net cash used in financing activities (257,746) (105,481)
----------- -----------
NET INCREASE IN CASH 645,610 148,732
CASH, beginning of year 1,116,330 2,883,447
----------- -----------
CASH, end of period $ 1,761,940 $ 3,032,179
=========== ===========
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(continued)
1997 1996
----------- -----------
SUPPLEMENTAL INFORMATION:
Interest paid $ 68,939 $ 58,179
NONCASH TRANSACTIONS:
Equipment acquired through capital leases - 33,113
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 nonstock
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 March 31, 1997 and for the three month
periods ended March 31, 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 three months ended March
31, 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. FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost and depreciated on a
straight-line basis over their estimated useful lives, which range from 5 to
10 years. Major replacements and improvements are capitalized and depreciated
over their estimated useful lives.
Repairs and maintenance are charged to expense when incurred. As of
March 31, 1997 and December 31, 1996, furniture and equipment was as follows:
(PAGE)
March 31, December 31,
1997 1996
----------- ------------
Furniture $ 424,928 $ 399,088
Equipment 4,964,930 4,948,516
Motor vehicles 799,145 799,145
----------- ------------
6,189,003 6,146,749
Less - Accumulated depreciation (2,347,684) (2,182,683)
----------- ------------
$ 3,841,319 $ 3,964,066
=========== ============
For information with respect to pledged assets, see Note 4.
3. 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:
Due during year
ending March 31,
1998...........................................$ 711,859
1999........................................... 702,595
2000........................................... 199,092
2001........................................... 83,425
2002........................................... 40,156
Thereafter..................................... 20,315
----------
Minimum lease payments......................... 1,757,442
Less - Current portion........................ (711,859)
----------
$1,045,583
==========
4. PAYABLES TO HOUSING DEVELOPMENT ASSOCIATES S.E.:
The payables to HDA as of March 31, 1997 and December 31, 1996 consists
of
(i) a note payable and accrued interest of $715,903 and $796,203,
respectively, and (ii) unpaid rent under the El Comandante Lease of $2,255,141
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.
5. OTHER LIABILITIES:
Other liabilities consist of (i) unsecured notes of $160,000 to
Interstate
General Properties Limited Partnerhsip, 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 March 31, 1997 and December 31, 1996 was 11.00% and 10.75%, respectively.
The obligations to Supra and Velez (the "ECOC Debt") are subordinated to
ECOC's working capital cash balance of $700,000, excluding restricted cash and
payables to winning bettors, and donations of $300,000 per year. Thereafter,
until the obligations are paid, Supra and Velez will have priority on ECOC's
Excess Cash Flow, as defined in the Supra Agreements, after payment of the
Basic Rent, provided that ECOC has a working capital cash balance of at least
$700,000. No payments of these obligations have been made as of March 31,
1997.
Equus and HDA entered into an agreement on May 13, 1997 (the "Agreement")
with Supra and Velez for HDA to purchase Supra's 17% interest in HDA for $4.2
million and for HDA to pay $600,000 over a three year period to Supra and
Velez in exchange for Supra's and Velez's cancellation of the ECOC Debt. The
closing of the entire transaction is subject to certain conditions, including
the approval of holders of HDA's first mortgage notes to pay $4.2 million for
Supra's 17% interest in HDA. The Agreement provides for certain releases upon
closing, including a release of HDA's guarantee of approximately $1.6 million
of the ECOC Debt if the El Comandante Lease is terminated prior to December
2004.
6. INCOME TAXES:
Deferred tax assets of $625,407 and $652,337, net of valuation allowances
of $1,755,286 and $1,729,926, were recorded as of March 31, 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 provision for income taxes for the three months ended March
31, 1997 and 1996 is net of an increase in the valuation allowance of $25,360
and of a decrease in the valuation allowance of $97,915, respectively.
(PAGE)
PART I -- ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
The Company's principal income producing asset is its 82% interest in
Housing Development Associates S.E. ("HDA"). HDA owns El Comandante Race
Track ("El Comandante"), the only licensed thoroughbred racing facility in
Puerto Rico, which it leases to El Comandante Operating Company, Inc., a
Puerto Rico nonstock corporation ("ECOC"). HDA also owns 55% of the capital
stock of Galapagos, S.A. ("Galapagos"), a Dominican Republic corporation that
leases and since April 29, 1995 operates V Centenario Race Track, a
government-owned racing facility in the Dominican Republic ("V Centenario").
In 1994 HDA formed S&E Network Inc. ("S&E"), a Puerto Rico corporation that
owns and operates three UHF television stations in Puerto Rico (the
"Television Stations"). HDA sold its interest in S&E to Paxson Communications
of San Juan, Inc. in sales closed in August 1996 (50% interest) and January
1997 (50% interest). The Company also owns Virginia Jockey Club, Inc.
("VJC"), an unsuccessful applicant for licenses to own and operate Virginia's
first thoroughbred racing and pari-mutuel wagering facility. VJC is now
inactive.
The Company's Results of Operations
The following discussion and analysis covers changes in the results of
operations for the three month period ended March 31, 1997 as compared to the
results for the three month period ended March 31, 1996. The operating
results are summarized as follows:
Three months ended
March 31,
-------------------
1997 1996
-------- --------
(In thousands)
El Comandante Race Track $ 674 $ 997
Galapagos - Dominican Republic racing (125) (423)
Television Stations --
Operations - (130)
Sale 4,615 -
Interest Income 133 29
Other expenses (239) (355)
-------- --------
5,058 118
Minority stockholders interest
in losses of Galapagos 56 212
Minority partners 18% interest in
income of HDA (910) (112)
-------- --------
Income before taxes 4,204 218
Provisions for income taxes (648) (231)
-------- --------
Net income (loss) $ 3,556 $ (13)
======== ========
(PAGE)
Results of Operations of El Comandante Race Track
Three Months Ended
March 31
-------------------
1997 1996
-------- --------
(in thousands)
Rental income $3,490 $3,802
Financial expenses (2,123) (2,176)
Depreciation (455) (456)
Property and municipal taxes and
racing license (238) (173)
--------- ---------
$ 674 $ 997
========= =========
Rental income from the lease of El Comandante to ECOC is based on 25% of
ECOC's commissions on wagering. Rental income decreased $312,000 (8.2%) to
$3,490,000 for 62 race days in the 1997 first quarter from $3,802,000 for 61
race days in the 1996 quarter. ECOC management believes the decline is
attributable, at least in part, to an unusually heavy rain during the first
quarter of 1997 and 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. ECOC management expects to implement two
new wagers, a Pick 3 and Trifecta, in June 1997 which it believes will attract
additional El Comandante wagering for the balance of the year.
There were no significant changes between the 1997 and 1996 first
quarters
for financial expenses and depreciation. The property and municipal taxes and
racing license fee increased $64,000 in the 1997 quarter, caused by HDA's
assumption, effective January 1997, of the obligation to pay the annual fee
for the El Comandante racing license that was previously paid by ECOC.
Galapagos -- Results of Operations of 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. The currency exchange rates were 13.47 pesos to one
U.S. dollar in the three months ended March 31, 1996 and 14.24 pesos to one
U.S. dollar in the three months ended March 31, 1997. The operating results
for Galapagos during these periods were as follows:
(PAGE) Amount of Change
Three months ended March 31 attributable to
------------------------------- --------------------
Favorable Effect of
(Unfavorable) Exchange
1997 1996 Change Operations Rates
------- ------- ------------- ---------- ---------
(In thousands)
Commissions on wagering $1,213 $1,307 $ (94) $ 20 $ (114)
Other income 118 197 (79) (62) (17)
------- ------- ------------ --------- ---------
1,331 1,504 (173) (42) (131)
Operating costs (1,315) (1,759) 444 290 154
Depreciation (123) (111) (12) (22) 10
Interest expense (18) (57) 39 35 4
------- ------- ------------ --------- ---------
Losses before minority
interests (125) (423) 298 $ 261 $ 37
Minority stockholders' ========= =========
interest in losses of
Galapagos 56 212 (156)
------- ------- ------------
$ (69) $ (211) $ 142
======= ======= ============
Commissions on Wagering -- Galapagos. There was a small increase in
commissions on wagering in Dominican Republic pesos in the 1997 first quarter
as compared to the 1996 first quarter, but the Company reported a $94,000
decrease after converting the wagering in pesos to dollars.
Other Income -- Galapagos. Other income in the 1996 quarter included
approximately $70,000 related to simulcasting of El Comandante races that was
reversed in the third quarter of 1996. This amount accounts for substantially
all of the $79,000 difference between other income reported in the 1997 and
1996 first quarters.
Operating Costs of Dominican Republic Racing. As shown in the above
table, the change in exchange rates significantly affects the amount of the
changes in operating costs between the first quarters of 1997 and 1996. The
improved operating results in Dominican Republic racing in the 1997 first
quarter is primarily attributable to reductions in operating costs, as
follows:
(PAGE)
Favorable (Unfavorable) Change
attributable to
---------------------------------
Effect of
Exchange Total
Operations Rates Change
---------- --------- --------
(In thousands)
Non-controllable costs which are
based on the amount of wagering
and/or commissions on wagering $ (6) $ 68 $ 62
Controllable operating costs 109 86 195
Receipt of funds from Required
Escrow account 187 - 187
---------- --------- --------
$ 290 $ 154 $ 444
========== ========= ========
The management of Galapagos made an intensified effort to reduce
controllable costs in late 1996 and the effect was shown in the 1997 first
quarter in a broad range of expenses categories, which reductions were offset
in part by costs of increased 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"). In the three
months ended March 31, 1997, funds of $187,000 were released for Galapagos'
marketing costs from the Required Escrow account upon authorization of the
Government. There were no similar funds released from the Required Escrow
account in the three months ended March 31, 1996.
Depreciation -- Galapagos. Depreciation costs in the 1997 first quarter
increased $12,000 over the 1996 comparable quarter due to the 1997
depreciation of capital additions made after the first quarter of 1996.
Interest expense -- Galapagos. Interest expense in the first quarter of
1996 included interest of $40,000 on minority stockholders' loans. The
interest was forgiven on June 30, 1996 and consequently there was no similar
interest in the 1997 quarter.
Results of Operations of Television Stations
The Television Stations were sold in sales closed in August 1996 (50%)
and January 1997 (50%). In the three months ended March 1996 the Company had
a loss of $130,000 from television operations. In the 1997 first quarter the
Company had a gain of $4,615,000 from the sale closed in January 1997, and did
not have any television operations.
(PAGE)
Interest Income
The Company earned interest income of $133,000 in the three months ended
March 31, 1997 and $29,000 in the comparable period of 1996 from investments
in short term securities and from a note receivable from ECOC. HDA had more
cash available for investment at the beginning of 1997 than at the beginning
of 1996, and HDA's cash balances grew from $4 million to $12 million in the
first quarter of 1997 (See "Liquidity of HDA"). The investment of the excess
cash resulted in the $104,000 increase in interest income in the 1997 quarter
as compared to the 1996 first quarter.
Other Expenses of the Company
Three months ended
March 31
------------------
1997 1996
-------- --------
(in thousands)
Interest expense $ 22 $ 17
General & administrative expenses 217 338
-------- --------
$ 239 $ 355
======== ========
The interest expense in both three month periods is interest and
financing costs on the Company's bank loan.
General and administrative expenses were reduced $121,000 to $217,000 in
the 1997 first quarter from $338,000 in the 1996 first quarter. The decrease
was primarily related to (i) reductions of $65,000 in legal and consulting
fees in the 1997 quarter as compared to the 1996 quarter and (ii) VJC costs of
$28,000 and new business costs of $33,000 in the 1996 quarter, with no similar
costs changed to expense in the 1997 quarter. The Company incurred costs in
the 1997 first quarter in investigating new business opportunities, but such
costs are deferred until a determination is made to enter into or abandon the
new business.
Provision for Income Taxes
Three Months Ended March 31,
------------------------------
Increase
1997 1996 (Decrease)
-------- -------- ----------
(in thousands)
Puerto Rico income taxes of the Company $ 647 $ 204 $ 443
Dominican Republic income tax
provision of HDA - 25 (25)
Federal income taxes of HDA subsidiary 1 2 (1)
-------- -------- ---------
$ 648 $ 231 $ 417
======== ======== =========
(PAGE)
The Company recorded a deferred tax asset of $463,000 in prior years for
the anticipated Puerto Rico income tax benefit of the accumulated operating
losses of the Television Stations. As a result of the second sale of S&E
closed January 1997, the tax benefit will not be realized and the $463,000 was
reversed; the reversal was the primary reason for the increase in 1997 in the
Puerto Rico income tax provision of the Company.
In the first quarter of 1996 HDA provided for deferred Dominican Republic
income taxes of $25,000 on interest income accrued on its stockholder loans to
Galapagos. The accrued interest on stockholder loans was forgiven on June 30,
1996 and consequently there was no provision for Dominican Republic taxes in
the 1997 first quarter.
Liquidity and Capital Resources of HDA and the Company
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 3-31-97
----------- -----------
SOURCES OF CASH:
Receipts from ECOC
Rental income for 1997 $14,260,000 $ 3,490,000
Collection of note and rent receivable 1,000,000 (191,000)
Sale of 50% interest in S&E 7,000,000 7,000,000
Interest income 435,000 84,000
----------- -----------
22,695,000 10,383,000
----------- -----------
USES OF CASH:
Debt service on First Mortgage Notes 7,925,000 25,000
Property and municipal taxes and racing
license of El Comandante 860,000 549,000
General and administrative expenses and
costs of approvals of Noteholders 1,020,000 192,000
Costs related to sale of S&E 400,000 59,000
Uses of proceeds from sale of S&E
for redemption of First Mortgage Notes,
investment in Galapagos and/or El
Comandante capital improvements 3,237,000 944,000
Cash distributions to partners (Company's
82% share is $2,747,000 for 1997) 3,350,000 292,000
Transaction with Supra and Velez
discussed below 4,800,000 -
Unforeseen uses 400,000 -
----------- -----------
21,992,000 2,061,000
(PAGE) ----------- -----------
NET CASH FLOW 703,000 8,322,000
CASH, beginning of year 4,038,000 4,038,000
----------- -----------
CASH, end of period $ 4,741,000 $12,360,000
=========== ===========
HDA's principal source of cash is rental income from the lease of El
Comandante to ECOC, augmented in 1997 by proceeds of the sale of HDA's
remaining 50% interest in S&E. The rental income is based on ECOC's
commissions on wagering commissions. Based on actual commission through April
30, 1997 and the anticipated effect of the two new wagers to be placed into
effect in June 1997, ECOC management has forecasted that commissions in 1997
will approximate the 1996 commissions.
HDA sold a 50% interest in S&E in August 1996 for $4 million and the
remaining 50% for $7 million in January 1997. The indenture for HDA's First
Mortgage Notes requires HDA to use approximately $7.5 million of these
proceeds by January 1998 to offer to redeem First Mortgage Notes to the extent
these proceeds are not used in HDA's racing business. HDA made an offer to
redeem up to $5 million of the First Mortgage Notes at par plus accrued
interest and plans to use the other $2.5 million prior to January 1998 as
investment in Galapagos, for capital improvements for El Comandante and/or for
redemption of First Mortgage Notes. In response to the $5 million repurchase
offer, First Mortgage Notes in the principal amount of $737,000 were redeemed
on March 28, 1997, and accordingly HDA has retained $4,263,000 of the $5
million for other business purposes permitted by the indenture.
The Company and HDA entered into an agreement on May 13, 1997 (the
"Agreement") with Supra and Company, S.E. ("Supra") and Ruben Velez Lebron and
his wife ("Velez"), the principal owners of Supra, for HDA to purchase Supra's
17% interest in HDA for $4.2 million and for HDA to pay $600,000 over a three
year period to Supra and Velez 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" -- see Note 5 to ECOC's financial
statements for description of ECOC Debt). The closing of the entire
transaction is subject to certain conditions, including the approval of
holders of HDA's First Mortgage Notes to pay $4.2 million for Supra's 17%
interest in HDA. The Agreement provides for certain releases upon closing,
including the filing by Supra of a motion to dismiss the Supra complaint
described in Part II "Legal Proceedings" and a release of HDA's guarantee of
approximately $1.6 million of the ECOC Debt if the El Comandante lease with
ECOC is terminated prior to December 2004.
Galapagos had a cash flow deficit from operations of approximately $1.1
million in 1996. Management expects Galapagos to have a positive cash flow in
1997 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.
(PAGE)
2. The Lottery Operator, a company controlled by one of Galapagos'
Minority Stockholders, has a contract with the Government to operate
an electronic lottery in the Dominican Republic. Galapagos will
permit OTB agencies to sell lottery tickets and the Lottery Operator
will pay Galapagos $100 per month per OTB agency as partial
reimbursement for telephone line costs for OTB agencies. The
reimbursement is forecasted to be $230,000 from June to December
1997. 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. Galapagos will manage the distribution
system for the Lottery Operator. The lottery is scheduled to open
in June 1997 with approximately 485 agencies selling lottery games,
with agencies forecasted to grow to 725 locations by year-end and to
900 in 1998. Forecasted cash flow for the management contract is
$275,000 for 1997.
3. Galapagos has reduced its controllable operating costs in 1997 by
approximately 5%.
4. The Dominican Republic Government receives taxes on wagering on
simulcasted races from El Comandante. Galapagos, the Horseowners'
Association and the Breeders' Association have proposed that the
Government invest these tax receipts to improve racing in the
Dominican Republic. Pursuant to the proposal, Galapagos would
receive 75% of the taxes in the first year, 65% in the second year
and 50% thereafter as reimbursement for repairs and maintenance at V
Centenario, marketing costs (including television costs of V
Centenario races) and certain other items benefitting racing in the
Dominican Republic. If approved effective June 1997, as expected,
these Government expenditures are forecasted to reduce Galapagos'
operating costs by approximately $600,000 in 1997. The balance of
the tax revenues would be used to increase the purses paid to
horseowners.
The President of the Dominican Republic appoints the members of the
Racing Commission and of the Patronato Hipodromo V Centenario
("Patronato"), a seven member commission that oversees the
contractual relationship between the Government and Galapagos. Both
commissions support the proposal. The President of the Patronato,
the President of the Breeders' Association, a representative of the
Horseowners' Association and the general manager of Galapagos met
with a Presidential aide to discuss the proposal and this matter is
expected to be concluded in May 1997.
The Company invested $750,000 in preferred stock of Galapagos in 1997.
Subject to approval by holders of a majority in principal amount of the First
Mortgage Notes, HDA plans to make capital contributions, together with the
Minority Stockholders, to Galapagos to enable Galapagos to redeem the
preferred stock held by the Company and to improve Galapagos' working capital
position until these additional sources of revenues from operations
materialize.
(PAGE)
ECOC had rent and loans payable to HDA of approximately $2.8 million at
December 31, 1996 and the indebtedness has increased in the first quarter of
1997 to $2.97 million. ECOC's 1997 forecasts show cash flow from (i) El
Comandante operations, (ii) collection of its 1996 receivable of approximately
$900,000 from Galapagos and (iii) financing of its horseowners' loans which
will provide approximately $335,000 to ECOC. ECOC's forecast also includes a
$1 million reduction in 1997 in its debt to HDA. As discussed above,
Galapagos is expected to have funds from operations and capital contributions
to pay its debt to ECOC, which in turn can use a significant portion of the
amount collected to reduce its debt to HDA. The Company's management has
reviewed ECOC's forecasts and believes that ECOC's cash position will be
significantly improved in 1997 and that, assuming the planned capital
contributions are made to Galapagos, ECOC will be able to reduce its debt to
HDA in 1997.
Liquidity and Capital Resources of the Company
The Company's principal sources of cash have been distributions related
to its 82% interest in HDA, proceeds from bank loans and loans from IGC.
Indenture restrictions presently limit HDA's ability to make distributions to
its partners, including the Company, to approximately 48% of HDA's cumulative
consolidated net income since January 1, 1994 (see Note 5 to the Company's
Consolidated Financial Statements).
Management has forecasted approximately $2.7 million in cash
distributions from HDA to the Company in 1997 and the only other forecasted
source of cash of the Company is $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 1997 which is
expected to be redeemed this year. The Company's forecasted cash needs,
assuming the Galapagos preferred stock is redeemed, are approximately $2.1
million, including payment of bank debt and interest ($531,000),
administrative expenses and costs of investigating new business opportunities
($675,000), income taxes ($257,000) and reduction of payables ($690,000).
The Company's bank debt will be paid in full in 1997 and Management
believes the line of credit can be renewed if needed. The forecast of 1997
net cash flow of approximately $800,000, coupled with cash of $175,000 at
December 31, 1996 and bank loans, if needed, should provide the Company with
funds to expand its business (see discussions below regarding Panama and
Mexico) or make modest cash distributions to partners. EMC's directors
consider cash distributions on a quarterly basis.
The Company is negotiating with the Government of Panama to operate the
Presidente Remon race track in Panama City which is owned and presently
managed by the Government. If an agreement to operate Presidente Remon is
concluded, a 50% owned subsidiary that would operate the race track will
require capital investment that management expects to fund from its cash flow
from operations and/or bank financing.
(PAGE)
The Company responded to a request for proposals from the Government of
Mexico to operate the Las Americas race track in Mexico City in a 49% owned
subsidiary. Based on the initial submissions of 17 applicants, the Government
invited six of the applicants, including the Company, to submit economic
proposals which were filed on May 6, 1997. The final selection is scheduled
to be completed in May 1997. In the event the Company's subsidiary is
selected, bank financing for the subsidiary will be required and the Company
will be required to make a capital investment in the subsidiary of an amount
not yet determined. As in the case of Panama, the Company would most likely
need bank financing for its capital investment.
(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 (1) in addition to live racing broadcasts, ECOC must
rebroadcast races at times of lesser audience, (2) any broadcast agreement for
races must be approved by the Racing Board, and (3) 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 intends to file an
appeal to contest the Order before the Circuit Court of Appeals of Puerto
Rico. 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 to
HDA and LDA, alleges that due to the negligence of IGP and Covington, HDA and
LDA paid $6,386,000 to The Chase Manhattan Bank N.A. ("Chase") as a penalty
for prepayment of mortgage debt. The Company is 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. The complaint petitions that a judgment be
entered against Covington for the amount paid to Chase plus 6% interest
thereon, and damages in the amount of $10 million, or in the alternative
against the Company and/or IGP for the same amount if the court determines
that due to the failure of the Company and/or IGP to sue Covington as
aforesaid, HDA, LDA, and its partners (except the Company and/or IGP) have
been deprived of their claim to be compensated for the amounts paid to Chase.
For additional information related to this matter, see the Agreement with
Supra discussed in "Liquidity of HDA".
(PAGE)
Item 2 - 5
Not applicable.
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. Descrption of Exhibit Reference
--------- --------------------------- ---------------
10.1 Letter Agreement dated May 13,
1997 by and between Equus
Gaming Company L.P., Housing
Development Associates S.E,
Supra & Company S.E. and Ruben
Velez Lebron and his wife Filed herewith
(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
May 15, 1997 By: /s/ Donald G. Blakeman
- ----------------- ------------------------------
Date Donald G. Blakeman
President
May 15, 1997 By: /s/ Gretchen Gronau
- ----------------- ----------------------
Date Gretchen Gronau
Vice President and
Chief Financial Officer
(PAGE)
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.1 Letter Agreement dated May 13, 1997 by and between Equus
Gaming Company L.P., Housing Development Associates S.E,
Supra & Company S.E. and Ruben Velez Lebron and his wife
(PAGE)
May 13, 1997
Supra & Company, S.E.
A Street #23
Julia Industrial Park
Puerto Nuevo, Puerto Rico 00922
Attn: Ruben Velez Lebron, President
Re: Purchase of Supra's Interest in HDA and Related Matters
Dear Ruben:
Upon your acceptance, this letter will set forth the
agreement among Equus Gaming Company, L.P., a Virginia limited
partnership ("Equus"), its affiliate Housing Development
Associates S.E., a Puerto Rico special partnership ("HDA"), Supra
and Company, S.E., a Puerto Rico special partnership ("Supra"),
and its President, Ruben Velez Lebron and his wife Stella
Vizcarrondo Wolff (Collectively, "Velez") regarding the purchase
by HDA of Supra's partnership interest in HDA and certain related
transactions.
1. Closing
a. At the Closing (defined in Section 4 below), HDA
shall pay Supra $4.2 million minus the sum of any distributions
by HDA to Supra subsequent to April 30, 1997 (the "Payment") by
manager or cashier check or wire transfer, and deliver to Supra
and Velez original duly executed by HDA, Equus, Interstate
General Company, L. P. ("IGC"), Interstate General Properties
Limited Partnership, S.E. ("IGP"), El Comandante Operating
Company, Inc. ("ECOC"), and Covington and Burling, as applicable,
of the forms of General Waiver and Release of Claims attached as
Exhibits 1A1, 1A2, 1A3 and 3B hereto (the "Supra Releases"); and
(ii) HDA or Equus shall execute and deliver to Supra and Velez a
Promissory Note in the form attached as Exhibit 1A4 hereto (the
"Supra Note") in the principal amount of $600,000. The
determination of as to which of HDA or Equus shall execute and
deliver the Supra Note shall be solely at the discretion of
Equus.
(PAGE)
b. At the Closing, each of Supra, Velez, IGP, ECOC
and HDA shall execute and deliver to each other a Termination
Agreement in the form attached as Exhibit 1B hereto (the
"Termination Agreement").
c. At the Closing, Supra shall (i) deliver to ECOC,
each of the following notes (as defined in the Termination
Agreement), the Stock Note, the Supra Services Note and the Pre-
reorganization Note; and (ii) execute and deliver to ECOC the
form of General Waiver and Release attached as Exhibit 1C hereto
(the "ECOC Release").
d. At the Closing, Velez shall (i) deliver to ECOC
the Velez Services Note (as defined in the Termination
Agreement), and (ii) execute and deliver to ECOC the ECOC
Release.
e. At the Closing, Supra and Velez shall execute and
deliver to HDA, IGC, IGP, and Equus the form of General Waiver
and Release attached as Exhibit 1D hereto (the "HDA/IGC/IGP/Equus
Release").
f. At the Closing, Supra shall execute and deliver to
HDA an Assignment of Partnership Interest in the form attached as
Exhibit 1E hereto granting, assigning and transferring to HDA all
of its rights, title and interest as a partner in HDA (the "HDA
Partnership Interest"). Such assignment shall be made free and
clear of any lien or pledge of its interest in favor of any third
party, including, but not limited to, Royal Bank of Canada
("Royal Bank") and General Electric Capital Corporation of Puerto
Rico ("GE Capital").
g. At the Closing, Supra and Velez shall agree to and
deliver to Covington and Burling the Supra Release in the form of
Exhibit 3B attached hereto.
2. Representations and Warranties
a. Equus and HDA represent and warrant to Supra and
Velez that (i) each has all necessary partnership power and
authority to execute, deliver and perform its obligations under
this Agreement and the agreements and instruments contemplated
hereby to which each is a party, (ii) such execution, delivery
and performance will not violate or conflict with any applicable
statute, law, regulation or governmental order, or, assuming the
consents referred to herein are obtained, any agreement to which
either of Equus or HDA is a party; and (iii) this Agreement
(PAGE)
evidences, and, upon execution and delivery, the Supra Note, the
Supra Releases to which either of Equus or HDA is a party, and
the Termination Agreement will evidence, the legal valid and
binding agreements of Equus and HDA, as applicable, enforceable
against Equus or HDA, as applicable, in accordance with their
terms except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws
affecting creditors rights and by general equitable principles.
b. Supra and Velez represent and warrant to Equus and
HDA that (i) each has all necessary power and authority to
execute, deliver and perform its obligations under this Agreement
and the agreements and instruments contemplated hereby to which
each is a party, (ii) such execution, delivery and performance
will not violate or conflict with any applicable statute, law,
regulation or governmental order, or, assuming the consents and
pledge releases referred to herein are obtained, any agreement to
which either of Supra or Velez is a party; and (iii) this
Agreement evidences, and, upon execution and delivery, the
Termination Agreement, the ECOC Release, and the
HDA/IGC/IGP/Equus Release will evidence, the legal valid and
binding agreements of Supra and Velez, as applicable, enforceable
against Supra or Velez, as applicable, in accordance with their
terms except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws
affecting creditors rights and by general equitable principles.
c. The foregoing representations and warranties shall
survive the scheduled Closing Date.
3. Closing Conditions:
a. The obligations of HDA and Equus hereunder to be
completed in connection with the Closing are subject to (i) the
representations and warranties of Supra and Velez set forth
herein being true in all material respects as of the Closing
Date, (ii) execution and delivery by Supra and Velez of the
agreements and instruments described in Section 1 of this
Agreement to which each is a party including delivery to ECOC of
all of the notes referred to therein, (iii) filing of a motion by
Supra with the Puerto Rico Superior Court - San Juan Part
requesting dismissal with prejudice of Supra's complaint dated
February 28, 1997 captioned Supra & Company, S.E. v. Housing
Development Associates, S.E., et al. (the "Pending Action"), (iv)
execution and delivery by Supra, Velez, ECOC and IGP of the
Termination Agreement, (v) delivery to HDA and Equus of an
(PAGE)
opinion of counsel to Supra and Velez in form and substance
satisfactory to HDA and Equus as to the due authorization,
execution and delivery and enforceability of this Agreement and
the other agreements and instruments contemplated hereby, (vi)
execution and delivery by Supra of the Assignment of Partnership
Interest in the form of Exhibit 1E, (vii) HDA obtaining the prior
written consent of the holders of a majority in principal amount
of the First Mortgage Notes due 2003, issued by El Comandante
Capital Corp. and unconditionally guaranteed by HDA (the
"Noteholder Consent"), (viii) receipt by HDA of evidence
satisfactory to HDA of the release by Royal Bank and GE Capital
of their security interests in the HDA Partnership Interest, and
(ix) the absence of any injunction, governmental order, or
proceeding prohibiting the consummation, or questioning the
validity or legality, of the transactions contemplated hereby.
b. The obligations of Supra and Velez hereunder to be
completed in connection with the Closing are subject to (i) the
representations and warranties of Equus and HDA set forth herein
being true in all material respects as of the Closing Date; (ii)
delivery by HDA of the Payment and the Supra Releases; (iii)
execution and delivery by HDA, IGP and ECOC of the Termination
Agreement, (iv) delivery to Supra and Velez of opinions of
counsel to HDA, Equus, IGC, IGP, and ECOC as to the due
authorization, execution, and delivery and enforceability of this
Agreement and the Supra Releases, as applicable; (v) delivery by
HDA or Equus of the Supra Note; (vi) delivery by HDA of the
release attached as Exhibit 3B hereto duly executed by Covington
and Burling; (vii) obtaining the lien releases referred to under
Sectin 2f; and (viii) the absence of any injunction, governmental
order, or proceeding prohibiting the consummation, or questioning
the validity or legality, of the transactions contemplated
hereby.
4. Closing/Termination.
a. The closing of the transactions contemplated by
Section 1 hereof (the Closing") shall be held at the offices of
Fiddler Gonzalez & Rodriguez on the Closing Date, which shall be
at 10:00 a.m. San Juan time on the fifth (5th) business day
following notice delivered by HDA to Supra and Velez of receipt
by HDA of the Noteholder Consent, or such other date as shall be
mutually agreed by the parties hereto.
b. Prior to the Closing, this Agreement may be
terminated and the transactions contemplated hereby abandoned:
(PAGE)
(i) upon mutual agreement in writing by the parties
hereto;
(ii) by Equus or HDA, in the event that as of the
scheduled Closing Date the conditions under
Section 3a to either of their obligations to close
have not been satisfied, or
(iii) by Supra or Velez, in the event that as of
the scheduled Closing Date, the conditions
under Section 3b to either of their
obligations to close have not been satisfied.
5. Miscellaneous.
a. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors
and assigns.
b. This Agreement may be executed in counterparts.
c. This Agreement and the agreements and instruments
to be delivered pursuant hereto set forth the entire agreement
among the parties regarding the subject matter hereof and
supersede all prior agreements relating to the subject matter
hereof. This Agreement and the agreements and instruments to be
delivered pursuant hereto may not be amended or modified except
by a written instrument executed by the party against whom
enforceability is sought.
d. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Puerto Rico,
without regard to the conflict-of-laws rules thereof.
e. The parties agree that the fair market value of
the notes referred to in Sections 1c and 1d is less than the
aggregate principal thereof; however, the parties have not agreed
upon any allocation of value to any of such notes.
f. The execution of this letter agreement shall not
be deemed to curtail or abrogate any rights or obligations each
of the parties now have under existing agreement among them;
provided that, until Closing or termination of this Agreement
Supra and Velez shall not continue to prosecute the Pending
Action except to serve process and/or amend the complaint for
purposes other than to add parties thereto.
(PAGE)
If you agree to the terms outlined above, please countersign
in the spaces provided below.
Very truly yours,
HOUSING DEVELOPMENT ASSOCIATES S.E.
By: Equus Gaming Company, L.P.
its managing partner
By: Equus Management Company,
its managing general partner
By: /s/ Donald G. Blakeman
------------------------
Donald G. Blakeman
President
EQUUS GAMING COMPANY, L.P.
By: Equus Management Company,
its managing general partner
By: /s/ Donald G. Blakeman
------------------------
Donald G. Blakeman
President
Agreed to:
SUPRA & COMPANY, S.E. /s/ Ruben Velez Lebron
------------------------
Ruben Velez Lebron
By: Supra Development Corp.
its managing general partner
By: /s/ Ruben Velez Lebron /s/ Stella Vizcarrondo Wolff
---------------------- ----------------------------
Ruben Velez Lebron, Stella Vizcarrondo Wolff
its President
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,613
<SECURITIES> 0
<RECEIVABLES> 2,971<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 57,988
<DEPRECIATION> 12,541
<TOTAL-ASSETS> 66,504
<CURRENT-LIABILITIES> 0
<BONDS> 65,722<F2>
0
0
<COMMON> 0
<OTHER-SE> (7,690)
<TOTAL-LIABILITY-AND-EQUITY> 66,504
<SALES> 0
<TOTAL-REVENUES> 9,569
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,348
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,163
<INCOME-PRETAX> 5,058
<INCOME-TAX> 648
<INCOME-CONTINUING> 3,556<F3>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,556
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
<FN>
<F1>Includes note receivable of $.716 million.
<F2>Net of bond discount of $1.541 million.
<F3>Net of minority interests of $.854 million.
</FN>
</TABLE>
