(PAGE) SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 000-25306
EQUUS GAMING COMPANY L.P.
(Exact name of registrant as specified in its charter)
Virginia 54-1719877
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 Munoz Rivera Avenue
Doral Building, 7th Floor
Hato Rey, Puerto Rico 00918
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (787) 753-0676
Securities registered pursuant to Section 12(b) of the Act: Not applicable
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
Class A Units representing assignment Nasdaq National Market System
beneficial ownership of Class A limited ("Nasdaq/NMS")
partnership interest and evidenced by
beneficial assignment certificates ("Units")
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. [ ]
As of March 25, 1998, the aggregate market value of 2,499,167 Units held by
non-affiliates of the registrant based on the closing price reported on the
NASDAQ was $3,123,959.
Documents Incorporated By Reference: Not Applicable
(PAGE) EQUUS GAMING COMPANY L.P.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Class A Units and Related
Unitholder Matters 9
Item 6. Selected Financial and Operating Data 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 65
PART III
Item 10. Directors and Executive Officers of the Company and EMC 65
Item 11. Executive Compensation 68
Item 12. Security Ownership of Certain Unitholders and Management 72
Item 13. Certain Relationships and Related Transactions 73
PART IV
Item 14. Exhibits, Financial Schedules and Reports 74
(PAGE) PART I
ITEM 1. BUSINESS
GENERAL
Equus Gaming Company L.P. (the "Company") is a Virginia limited
partnership. The Company is managed by its managing general partner, Equus
Management Company ("EMC"), which until December 31, 1996 was a wholly owned
subsidiary of the Company's other general partner, Interstate General Company
L.P. ("IGC"). Effective December 31, 1996, IGC transferred all of the
outstanding shares of EMC to IGC's general partner, Interstate Business
Corporation ("IBC"). IGC is a publicly traded limited partnership with its
units traded on the American Stock Exchange. The Company is the successor
owner of the horse racing and wagering business acquired in 1989 by an IGC
subsidiary. On February 6, 1995, IGC distributed to its unitholders Class A
Units ("Units") representing assignment of a 99% Class A limited partnership
interest in the Company (the "Distribution").
The Company is engaged in thoroughbred racing, wagering and other gaming
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. El Comandante was
leased to El Comandante Operating Company, Inc., a Puerto Rico non-stock
Corporation ("ECOC") until December 31, 1997 when the lease was terminated
due to certain events of default of the terms of the lease. HDA also has
interests of (i) 55% in Galapagos, S.A. ("Galapagos"), which operates since
April 1995 the V Centenario Race Track in the Dominican Republic ("V
Centenario"), (ii) 100% in Equus Gaming de Panama, S.A. ("EGP"), which
operates since January 1, 1998 the Presidente Remon Race Track in the
Republic of Panama ("Presidente Remon"), and (iii) 100% in El Comandante
Management Company, LLC ("ECMC"), which operates El Comandante since January
1, 1998. In 1997 the Company formed Equus Entertainment Corporation ("EEC"),
as a wholly-owned Puerto Rico corporate subsidiary, for the purpose of
replacing the Company once certain approvals are obtained.
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.
HDA was the previous owner of S & E Network Inc. ("S&E"), which owned and
operated three UHF television stations in Puerto Rico (the "Television
Stations"), until sold to Paxson Communications of San Juan, Inc. ("Paxson")
in transactions closed in August 1996 (50% interest) and January 1997 (50%
interest).
A. Puerto Rico Operations
Live thoroughbred horse racing has been conducted continuously at El
Comandante since 1976 and at a predecessor facility since 1957. ECOC
generates commissions from bets placed on El Comandante's thoroughbred horse
races through computerized wagering facilities located at El Comandante and
V Centenario, and as of December 31, 1997 at 672 independently-owned
(PAGE)
off-track betting ("OTB") agencies throughout Puerto Rico, and from bets
placed on races simulcasted outside Puerto Rico. ECOC offers bettors win and
place wagers and exotic wagers that include daily double, exacta, quiniela,
trifecta, and Pick 3 and Pick 6 pool wagers. Races are run 52 weeks per
year, generally five days per week (Monday, Wednesday, Thursday, Friday and
Sunday). From 1993 through February 1996 races were generally run four days
per week and prior to 1993 three days per week.
The total amounts wagered are distributed principally as commissions to
the operating company and the OTB agents, winning bettors and the Puerto Rico
Government.
Operating License. On December 15, 1989, the Puerto Rico Racing Board
(the"PR Racing Board"), at the request of HDA, granted an operating license
(the "Operating License") to ECOC, which has been assigned to ECMC. The
Operating License provides ECMC with the exclusive right through December 14,
2004, to operate a race track in the San Juan Region (the largest of three
regions in Puerto Rico) which includes the San Juan metropolitan area and
over three-fourths of the northern half of the Island; the exclusive right to
conduct all types of authorized betting, both at El Comandante and off-track,
anywhere in Puerto Rico, based on races held at El Comandante; and the right
to hold a minimum of 180 day- or night-race days per year. The racing program
for El Comandante is approved annually by the PR Racing Board.
The continued validity of the Operating License during its term requires
payment of an annual license fee, currently $250,000. Pursuant to the
Operating License, HDA has an obligation to ensure that the operator complies
with all terms and provisions of the Operating License and applicable laws
and regulations. Upon its expiration in December 2004, there can be no
assurance that a new operating license will be issued to ECMC, HDA, or any
other entity operating El Comandante or that a new operating license will be
exclusive. However, since 1957 ECOC and its predecessor have operated the
only thoroughbred racing facility in Puerto Rico.
El Comandante Lease. Until December 31, 1997 HDA leased El Comandante
to ECOC under a lease agreement, as amended, (the "El Comandante Lease") that
required payments of rent by ECOC to HDA consisting principally of 25%
("Basic Rent") of the annual commissions earned by ECOC. These commissions
consist of all payments received by ECOC on all monies wagered with respect
to horse racing occurring at El Comandante, whether wagered at El Comandante
or at other betting facilities in Puerto Rico or any other country. The El
Comandante Lease provided for ECOC to pay all El Comandante expenses except
that, pursuant to (i) an amendment effective January 1, 1996, HDA assumed the
obligation to pay real property taxes on El Comandante and (ii) an amendment
effective January 1, 1997, HDA assumed the obligation to pay the annual
racing license fee.
Due to ECOC's default for unpaid Basic Rent and for certain other reasons
permitted under the El Comandante Lease, HDA terminated the El Comandante
Lease on December 31, 1997. In connection therewith, on January 1, 1998 at
HDA's direction (i) ECOC transferred to ECMC, at book value, all assets
employed in the racing business, (ii) ECMC assumed all agreements and
(PAGE)
liabilities of ECOC and (iii) ECOC assigned to ECMC the Operating License.
Among the agreements assumed by ECMC are the horseowners' agreement and
wagering service agreement.
The termination of the El Comandante Lease and the assignment of the
Operating License to ECMC are subject to the approval of the PR Racing Board,
which has not make a final determination on this matter but is permitting
ECMC to operate El Comandante until the review process is concluded.
Racing Operations. Commencing in January 1998, HDA's revenues, through
its wholly owned subsidiary ECMC, will be derived principally from
commissions on wagering. ECMC will also generate revenues from fees paid by
bettors on all OTB wagers except win-place, clubhouse admissions,
concessions, the sale of programs, and other non-wagering activities.
The largest single item of expense in operating El Comandante consists
of payments to individual horse owners and to a horse owners association (the
"Owners Association") pursuant to a contract that expired April 1, 1998. The
contract requires the Owners' Association to field sufficient horses to
conduct racing operations at El Comandante in accordance with the racing
program approved by the PR Racing Board. Management is in the process of
renegotiating the contract but does not expect significant economic changes.
The prior owner of El Comandante maintained similar agreements with the
Owners' Association since 1957. The contract obligates ECMC to provide horse
stables and related facilities, to make annual lump sum payments to the
Owners' Association of $55,000 and to pay 50% of El Comandante's commissions
as purse monies.
As a means to improve the quality and quantity of horses of racing, ECMC
provides limited financing to horse owners to purchase horses. Total credit
available to all members of the Owners' Association as a group is not to
exceed $500,000 and not more than $50,000 to any single owner, nor more than
80% of the purchase price for any horse.
ECOC had an equipment lease and services agreement with Autotote Systems
Inc. ("Autotote") for the computerized tote system installed at El Comandante
and related computerized wagering equipment provided to the OTB agencies.
Autotote personnel operate and maintain the tote system at El Comandante and
maintain the wagering equipment provided to the OTB agencies. Pursuant to
the lease and services agreement which expires March 2004, ECOC was required
to reimburse Autotote's personal property taxes and to pay a fee equal to the
greater of $800,800 annually or .65% (.0065) of the pari-mutuel handle. When
the on-line wagering system was implemented, the Owners' Association agreed
to reimburse ECOC for one-half of the rental fee paid to Autotote by ECOC up
to a maximum of $3,461 per race day. This agreement was also assumed by
ECMC.
Since commencing the on-line wagering system, all of El Comandante's
races have been broadcasted via commercial television in Puerto Rico. The
telecast permits OTB patrons to monitor odds and handicapping information
while placing bets until post time and then to view the live racing action.
The races are currently broadcasted through an agreement with S&E.
Competition. El Comandante is the only licensed thoroughbred race track
(PAGE)
operating in Puerto Rico. Until the expiration of the Operating License, no
other thoroughbred race track license for the San Juan Region may be issued
to any person. Neither the Racing Act nor ECMC's Operating License precludes
the Puerto Rico Government from granting a license to a competitor to
construct or operate a race track outside of the San Juan Region (either in
the Ponce Region or the Mayaguez Region). Management is not aware of any
pending applications for such a license, even though it has been published in
the press that the legislature is conducting an investigation on the
viability of establishing another race track in the southern part of the
island. Management believes there are significant practical obstacles to
establishing a competing race track in Puerto Rico including the availability
of financing, the need to establish an OTB network and insufficiency of
horses in Puerto Rico to conduct racing operations at two tracks. In
addition, pursuant to the Interstate Racing Act of 1978, no entity may
simulcast its racing program to Puerto Rico without consent of ECMC.
ECMC faces competition from other forms of legalized gambling in Puerto
Rico. There are 19 licensed casinos in Puerto Rico offering card and dice
games, slot machines and other games of chance. The Puerto Rico Government
has operated a ticket lottery for more than 50 years and in 1991 commenced an
electronic jackpot lottery. In addition, there are numerous cock fighting
venues on the Island. ECMC also faces competition from illegal gambling.
The Puerto Rico Government may, through legislation, legalize other forms of
gambling or grant additional gaming licenses for those forms of gambling
already authorized by law.
Employees. ECOC had approximately 316 employees as of December 31, 1997.
There were 90 employees working in the mutuel, admissions, and closed circuit
television departments covered by a collective bargaining agreement between
ECOC and the El Comandante Race Track Employees Union which expires August
23, 1998, 106 employees performing building and premises maintenance services
covered by a collective bargaining agreement between ECOC and the General
Workers Union which expires May 31, 1999, and 43 employees performing
security guard services covered by a collective bargaining agreement between
ECOC and the Security Guards Union which expires January 23, 1999. ECOC has
not experienced any work stoppage or material labor difficulty since it began
operating El Comandante in December 1989. Effective January 1, 1998, all of
ECOC's employees were transferred to ECMC and the three collective
bargaining agreements have been assumed by ECMC.
B. Dominican Republic Operations
Galapagos was selected by the Dominican Republic Racing Commission to
operate the government-owned V Centenario race track pursuant to a ten year
lease which commenced April 1995 (the "V Centenario Lease"). The V
Centenario Lease also provides Galapagos with the right to develop OTB in the
Dominican Republic and the exclusive right to simulcast all horse races,
including El Comandante races, into the Dominican Republic. Simulcasting of
El Comandante races to the Dominican Republic commenced February 27, 1995 and
V Centenario racing operations commenced April 29, 1995.
At December 31, 1997 there were 302 agencies in the Dominican Republic
(PAGE)
taking wagers on El Comandante and V Centenario races. Galapagos' business
plan anticipates that approximately 400 agencies will be installed by the end
of 1998 with continuing growth to approximately 450 agencies in 1999.
Galapagos has a five year contract with a private operator to provide the
wagering distribution system for a government-sponsored electronic lottery,
which commenced in November 1, 1997. Galapagos has an agreement with
Autotote which provides wagering equipment, software and related services.
Lottery games are sold at OTB agencies of Galapagos and at lottery agencies
selected by the operator. Galapagos' commissions (net of fees to Autotote)
are 1% of gross lottery sales at lottery agencies and 2% of gross lottery
sales at OTB agencies. In addition, the lottery operator pays Galapagos a
monthly fee for each OTB agency that sells lottery games as reimbursement for
a 50% share of telephone line costs. Galapagos is also permitted to identify
the lottery agencies to take Pick 6 pool wagers on Galapagos' live and
simulcasted races.
Competition. Galapagos faces competition from other forms of gambling
in the Dominican Republic. The Dominican Republic Government operates a
ticket lottery and instant lottery throughout the country, and an electronic
lottery commenced operations in November 1997. There are approximately 600
independent sports betting agencies and wagering on baseball is particularly
popular. Approximately 200 of the sports betting agencies were being
utilized by Galapagos as OTB agencies at December 31, 1997. Wagering on cock
fighting is both legal and popular in the Dominican Republic. Casino gaming
is permitted at hotels with a minimum of 100 rooms and there are 25 licensed
casinos in operation. Galapagos also faces competition from illegal
gambling.
Employees. Galapagos had 167 employees at December 31, 1997. Galapagos
has no agreements with unions and has not experienced any work stoppage or
material labor difficulties.
C. Panama Operations
EGP has a contract with the Panama Government for the operation of
Presidente Remon in Panama City and for the development of off-track betting
in Panama for a period of 20 years that commenced on January 1, 1998. 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.
EGP began simulcasting races from United States race tracks on January 2,
1998 and live racing commenced on February 14, 1998, after major improvements
to the racing strip were made. Simulcasting of El Comandante races is
expected to commence in April 1998.
EGP has entered into certain contracts and commitments in connection with
the Panama operation. An agreement with horseowners provides for minimum
guaranteed payments to horseowners as purses in 1998 and 1999 of $3.6 million
and $3.9 million, respectively. An agreement with Autotote for wagering
services, software and equipment requires minimum monthly payments of $25,000
in 1998. Service fees will be based on 1% (.01) of total wagering.
(PAGE)
Management expects that 49% of the capital stock of EGP will be sold in
1998 to Panamanian investors.
Competition. EGP faces competition from other forms of legalized
gambling in Panama. There are 8 licensed casinos in Panama offering card and
dice games and slot machines. Also, there are 15 slot machines parlors
currently operating and EGP is authorized to install up to 500 slot machines
at Presidente Remon. In addition, the Panama Government has operated a
lottery for more than 50 years.
Employees. EGP currently has 280 employees, including the general
manager who is also an employee of EMC.
D. Television Stations
To ensure the availability of television time for El Comandante racing,
HDA formed S&E as a wholly-owned subsidiary and on November 17, 1994 S&E
acquired the assets and broadcast licenses of the Television Stations for
approximately $2 million. S&E commenced broadcasting on a test basis six
hours a day and had the official inauguration of its network, TELENET, in
June 1995.
Paxson provided programming and certain other services to S&E under a
Time Brokerage Agreement from February to August 1996 when Paxson purchased
a 50% interest in S&E for $4 million. Paxson then assumed responsibility for
managing the television operations. In January 1997 Paxson purchased the
other 50% interest in S&E for $7 million.
E. HDA Financing
On December 15, 1993, HDA and El Comandante Capital Corp. ("ECCC"), a
special purpose finance wholly-owned subsidiary of HDA, together with HDA
Management Corporation ("HDAMC"), completed the sale of 68,000 units each
consisting of $1,000 principal amount of ECCC's 11.75% First Mortgage Notes
due 2003 (the "First Mortgage Notes") and a warrant to purchase one share of
Class A Common Stock of HDAMC (the "Warrants"). ECCC loaned the proceeds of
the sale of the First Mortgage Notes to HDA and HDAMC contributed the
proceeds from the sale of the Warrants to HDA in exchange for a 15% interest
in HDA. Following the 1995 Distribution of Units by IGC, HDAMC transferred
its 15% interest in HDA to the Company in exchange for 1,205,245 Units. As
a result, the Warrants became exercisable to purchase a ratable portion of
the Units held by HDAMC, net of Units to be sold by HDAMC to fund payment of
HDAMC's income taxes associated with the disposition of Units upon exercise
of Warrants.
ITEM 2. PROPERTIES
El Comandante. HDA is the owner of El Comandante, the only licensed
thoroughbred racing facility in Puerto Rico. El Comandante and related
assets consist of the following:
(PAGE)
a. A 257-acre improved parcel of land located approximately 12 miles
east of downtown San Juan in Canovanas, Puerto Rico;
b. A six-level grandstand and clubhouse with seating for over 10,000,
including private boxes for the PR Racing Board, Racing
Administrator, and other officials and horse owners, and a total
capacity in excess of 25,000;
c. Racing facilities, including a one-mile oval racing strip with a
seven-furlong chute and a 65-foot wide exercise track;
d. Food concession services and two glass-enclosed air conditioned
dining rooms with a total seating capacity of over 1,400;
e. Barn area and related facilities, including 1,595 horse stalls;
f. Paved parking area which can accommodate 7,250 vehicles;
g. Landscaped infield containing three lakes and a waterfall.
El Comandante is encumbered by a mortgage securing the First Mortgage Notes.
V Centenario. Galapagos leases V Centenario from the Dominican Republic
Government. V Centenario and related assets consist of the following:
a. An improved parcel of land located approximately 12 kilometers east
of Santo Domingo, Dominican Republic;
b. Grandstand and clubhouse with seating for over 4,200 and a total
capacity in excess of 10,000;
c. Racing facilities, including a one-mile oval strip with a
seven-furlong chute and a 1400 meter exercise track and all
necessary racing and groundskeeping equipment;
d. Food concession services and an air conditioned dining room with a
total seating capacity of 400;
e. Barn area and related facilities and equipment, including 950 horse
stalls;
d. Paved parking area which can accommodate 1,100 vehicles.
Galapagos also owns certain race track and telecommunication equipment
used in the operation of V Centenario and the off-track betting system.
Presidente Remon. EGP operates Presidente Remon under an exclusive
contract granted by the Panama Government. Presidente Remon and related
assets consist of the following:
a. A 175-acres improved parcel of land located approximately 5 miles
east of downtown Panama in Juan Diaz, Panama;
(PAGE)
b. Grandstand and clubhouse with seating for over 2,000 and a total
capacity in excess of 10,000;
c. Racing facilities, including a one-mile oval strip with a seven-
furlong chute, a ten-furlong chute and a 1,400 meter exercise
track and all necessary racing and groundskeeping equipment;
d. Food concession services and an air conditioned dining room with a
total seating capacity of 200;
e. Barn area and related facilities and equipment, including 1,200
horse stalls;
f. Paved parking area which can accommodate 600 vehicles.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
(PAGE) PART II
ITEM 5. MARKET FOR REGISTRANT'S CLASS A UNITS AND RELATED UNITHOLDER
MATTERS
The Units, which represent the assignment of beneficial ownership of the
Company's Class A limited partnership interests, have been listed and traded
on Nasdaq/NMS since February 7, 1995. The following table sets forth, for
the periods indicated, the high and low sales prices per Unit as reported by
the Nasdaq Stock Market and cash distributions paid to Unitholders during
these periods.
Cash Distributions Price Range of Units
Total Per Unit High Low
1997 Quarter:
First - - $3.375 $1.75
Second - - 3.00 1.75
Third - - 2.75 1.75
Fourth - - 2.25 0.75
1996 Quarter:
First - - 4.00 3.00
Second - - 4.125 3.125
Third - - 3.50 2.50
Fourth - - 3.00 2.25
On March 25, 1998, the closing sale price of Units was $1.25 as
reported on Nasdaq/NMS.
As of March 26, 1998, there were 6,333,617 Units outstanding and
approximately 279 Unitholders of record.
The Company intends to distribute quarterly to its Unitholders the
maximum possible amount of cash from operations, consistent with the
operational needs of the Company, including debt service. The Company's
principal source of cash has been distributions related to its interest in
HDA. The trust indenture related to the First Mortgage Notes (the
"Indenture") limits distributions by HDA to its partners, including the
Company, to approximately 48% of HDA's consolidated net income. It allows
additional cash distributions, if a certain debt coverage ratio is met.
Nasdaq has notified the Company that it does not qualify for continued
listing under the new maintenance criteria that became effective on February
23, 1998 which requires a minimum of $4 million in net tangible assets and
market public float of at least $5 million . The Company submitted on March
27, 1998 a written hearing to support its arguments in favor of an exception.
The Units of the Company will continue listed pending final determination of
the Nasdaq Listing Review Committee.
(PAGE)
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The Company was organized in 1993 and effective March 8, 1995 it
consolidates the accounts of HDA and its subsidiaries in its financial
statements. Since the Company's historical results of operations for years
1997, 1996, and 1995 are not readily comparable, Management has presented
herein certain data on a proforma basis as if the consolidation of HDA's
account into the Company's financial statements and the issuance of 1,205,245
Units to HDAMC had all occurred on January 1, 1995. The historical financial
information was derived from the consolidated financial statements of the
Company which for the years ended December 31, 1993 through 1997 have been
audited by Arthur Andersen LLP, independent public accountants. The proforma
financial information is unaudited. This information should be read in
conjunction with, and is qualified in its entirety by, the consolidated
financial statements of the Company and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
(PAGE) For the years ended December 31,
Historical (1)
Proforma(1)
1997 1996 1995 1994 1993 1995
(In thousands, except per Unit amounts)
Income Statement Data:
Revenues:
Rental income (2) $13,720 $14,322 $11,429 $ - $ - $14,333
Commissions on wagering 4,619 4,513 2,719 - - 2,724
Other revenues:
Cash distributions - - 134 300 - -
Net lotto revenues 88 - - - - -
Other racing revenues 782 523 368 - - 374
Television Stations - 1,725 1,344 - - 1,511
Gain from sale of
Television Stations 4,669 581 - - - -
Interest income 420 232 92 55 - 114
------- ------- ------- ------- ------- -------
24,298 21,896 16,086 355 - 19,056
Financial expenses 8,735 9,048 7,398 - - 9,002
Depreciation 2,323 2,508 1,829 - - 2,163
Other expenses 8,529 9,240 7,940 1,762 - 8,600
------- ------- ------- ------- ------- -------
4,711 1,100 (1,081) (1,407) - (709)
Provision for income taxes 895 400 231 87 - 511
Minority interest (3) 878 (127) (721) - - (770)
Extraordinary item (4) 459 - - - - -
------- ------- ------- ------- ------- -------
Net income (loss) $ 2,479 $ 827 $ (591) $(1,494)$ - $ (450)
======= ======= ======= ======= ======= =======
Net income (loss) per
Unit (5) $ 0.39 $ .13 $ (.08) - - $ (.07)
December 31,
1997 1996 1995 1994 1993
Balance Sheet Data:
Cash and cash equivalents $ 508 $ 4,268 $ 814 $ - $ -
Race Tracks property and
equipment (6) 45,056 45,956 47,891 - -
Receivables from ECOC 3,106 2,780 1,816 - -
Investment in S&E (7) - 2,223 4,862 - -
Total assets 56,187 60,586 60,823 - 800
First Mortgage Notes and
accrued interest 63,681 66,737 66,573 - -
Unsecured partner's loans - 415 212 131 654
Notes payable 1,876 1,073 2,457 - -
Total liabilities 68,280 71,775 72,611 524 800
Partner's deficit (12,093) (11,189) (11,788) (524) -
- ---------------------------------------------------------------------------
(PAGE)
(1) The accounts of HDA and its subsidiaries have been consolidated in the
historical statements of income (loss) as of and for the periods after March
8, 1995. The proforma statement of loss was prepared as if the accounts of
HDA and its subsidiaries had been included commencing on January 1, 1995.
(2) Represents rent paid by ECOC pursuant to the El Comandante Lease, which
was terminated by HDA effective December 31, 1997. Commencing in 1998 a
wholly owned subsidiary of HDA is operating El Comandante.
(3) Includes HDA's minority interest in losses of Galapagos and the
Company's minority interest in HDA's net income, except that generally
accepted accounting principles limited the amount recognized in 1995, as the
Company's minority interest in HDA and in 1997, as HDA's minority interest in
Galapagos (see Note 1 to the Company's consolidated financial statements).
(4) Represents premium on early redemption of First Mortgage Notes and
write-off of related deferred financing costs and note discount.
(5) Net income (loss) allocable to the units is based on approximately 99%
interest. The per Unit amount in the historical statements of income (loss)
is calculated based on weighted average of Units outstanding since the
Distribution on February 6, 1995 amounting to 6,333,617 in 1997 and 1996 and
6,223,381 in 1995. The per Unit amount in the proforma statement of income
(loss) is calculated as if all the outstanding Units of the Company had been
issued as of January 1, 1995 amounting to 6,333,617. Outstanding options and
Warrants to purchase Units do not have a material dilutive effect on the
calculation of per Unit amounts.
(6) Includes a step-up of $5,650,000, resulting from the issuance of Units
by the Company for a 15% interest in HDA on March 8, 1995, net of related
accumulated depreciation in 1997, 1996 and 1995 of $583,190, $376,140 and
$169,000, respectively.
(7) In 1995 this amount consisted of licenses, property and equipment and
other assets of the Television Stations owned by S&E. The accounts of S&E
were not consolidated at December 31, 1996.
(PAGE)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The table below summarizes the results of operations of the Company and
its consolidated subsidiaries for each of the three years in the period ended
December 31, 1997. Because the Company did not consolidate the accounts of
HDA until March 8, 1995 (see Note 1 to the Company's financial statements)
the Company's historical results of operations for 1997 and 1996 are not
readily comparable with results of operations for 1995. Accordingly, the
unaudited proforma results for 1995 have been presented as if the accounts of
HDA had been included in the Company's financial statements since January 1,
1995.
The Company's results of operations are principally attributed to its
indirect interests in two race tracks: El Comandante in Puerto Rico and V
Centenario in Dominican Republic. The Company also had an interest in
certain Television Stations in Puerto Rico which were sold in transactions
closed in August 1996 and January 1997.
For the years ended December 31,
1997 1996 1995 1995
Proforma
Revenues:
Puerto Rico $14,137 $14,551 $11,519 $14,446
Dominican Republic 5,488 5,036 3,087 3,098
Television Stations 4,669 2,306 1,344 1,511
Other 4 3 136 1
-------- -------- -------- --------
24,298 21,896 16,086 19,056
Expenses:
Financial 8,735 9,048 7,398 9,002
Depreciation 2,323 2,508 1,829 2,163
Operations
Puerto Rico 1,356 1,091 381 472
Dominican Republic 6,010 6,011 4,357 4,438
Television Stations - 1,477 2,399 2,756
Other 1,163 661 803 934
-------- -------- -------- --------
4,711 1,100 (1,081) (709)
Provision for income taxes 895 400 231 511
Minority interest 878 (127) (721) (770)
Extraordinary item 459 - - -
-------- -------- -------- --------
Net income (loss) $ 2,479 $ 827 $ (591) $ (450)
======== ======== ======== ========
THE COMPANY'S RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Puerto Rico Operations
(PAGE)
Overview. El Comandante had significant growth in revenues from 1991
through 1994 which resulted largely from (i) the conversion (commencing in
November 1991 and completed in 1993) of over 570 OTB agencies to an on-line
computerized wagering system, (ii) the increase in OTB agencies to 636 at
December 31, 1994, (ii) the expansion of betting program to offer additional
wagers, (iv) the broadcasting of all of its races throughout Puerto Rico via
commercial television (until November 1991, ECOC televised only Sunday races)
and, (v) the introduction in August 1990 of a jackpot pool ("Pool Pote"),
which is paid out only in the event a single bettor wins the regular pick-six
pool.
These actions resulted in substantial increases in wagering from $128
million in 1992 to $288 million in 1994 as betting opportunities became more
attractive and more convenient to wagering patrons. However, due to
regulatory changes in OTB agents' commissions and other uncontrollable
factors, wagering decreased to $274 million in 1995, remained at the same
level in 1996 and decreased to $266 million in 1997.
In February 1996 the number of race days at El Comandante was increased
from four to five days a week and, at the same time, the number of races per
day was reduced, resulting in an increase to approximately 36 races per week
from approximately 32 races per week. The average daily wagering handle
decreased, as expected, but the extra day has compensated for the decrease.
The extra race day per week provides an extra Pick-6 pool wager each week;
this wager is favored by bettors and provides a higher commission to ECOC
than other wagers. The mix of wagers usually affects ECOC's percentage of
the total wagers it received as commissions.
Revenues. Decreased in 1997 by $414,000 (2.8%) from 1996. Revenues
from the Puerto Rico operations include (i) rental income earned from the
lease of El Comandante to ECOC and (ii) interest income from short term
investments and a note receivable from ECOC.
The El Comandante Lease, which was terminated effective December 31,
1997, required payment of rent consisting of 25% of ECOC's commissions on
wagering. In 1997, rental income decreased by $601,000 (4.2%), when there
was commissions on wagering of $54,882,000 (20.6% average take) on 258 race
days, compared to 1996, when there was commissions on wagering of $57,286,000
(20.8% average take) on 256 race days. The decrease 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.
Due to ECOC's default for unpaid rent and for certain other defaults under
the El Comandante Lease, HDA terminated the El Comandante Lease. Effective
January 1, 1998 El Comandante is operated by ECMC, a wholly owned subsidiary
of HDA (see Note 2 to the Company's consolidated financial statements).
Expenses. Increased in 1997 by $265,000 from 1996. The increase 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)
Dominican Republic Operations
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 average exchange rate for 1997 was 14.44 pesos to one U.S.
dollar, compared to 13.75 pesos to one U.S. dollar in 1996.
Revenues. Increased in 1997 by $452,000 (9%) from 1996. Revenues from
the Dominican Republic operations include commissions on wagering of
Galapagos of $4,619,000 in 1997, when there were 363 race days and an average
of 233 agencies on line, and $4,513,000 in 1996, when there were 361 race
days and an average of 198 agencies on line. The $106,000 (2.3%) increase in
commissions on wagering was attributable primarily 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.
The increase in revenues from other sources was attributed to $88,000 in
net fees earned under a contract for providing the distribution system of an
electronic lottery that commenced in November 1997, and $438,000 of economic
assistance in 1997 received from the Dominican Republic Government to improve
racing, offset in part by a reduction in restaurant revenues at V Centenario
when Galapagos discontinued operating the restaurant in August 1997 and sub-
leased it to a third party. The Government provided economic assistance from
July 1997 thru January 1998 from taxes it received on wagering on simulcasted
races from El Comandante. Management requested an extension beyond January
31, 1998 but no response has been received from the Government. However, a
portion of the Government's taxes are being set aside in a restricted account
pending the Government's final decision. If the economic assistance is not
extended, it could have an adverse effect in Galapagos' financial conditions
and its future results of operations.
Expenses. Expenses from the Dominican Republic operations in 1997
remained at the same level as in 1996. An intensified effort by the
management of Galapagos reduced controllable costs in 1997 in a broad range
of expense categories. These reductions were offset by (i) increased
expenditures for advertising and television, primarily related to the
expansion of OTB agencies outside the Santo Domingo metropolitan area where
television coverage of the races commenced July 1997 and (ii) reduced funds
available for reimbursement of expenses arising from an account funded from
a portion of wagers on pool bets. The decrease in these funds resulted from
an agreement with horseowners effective July 1997 whereby they are entitled
to 25% of these funds as purses, whereas Galapagos previously received the
entire amount. Galapagos' share will further be reduced to 65% in July 1998
and to 50% in July 1999.
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 $4,669,000,
respectively. During 1996 the revenues and expenses of the Television
Stations were $1,725,000 and $1,477,000, respectively, while in 1997 there
were no operations.
(PAGE)
Financial Expenses
Financial expenses decreased in 1997 by $313,000 (3.5%) as compared with
1996. Excluding financial expenses in 1996 related to the Television
Stations, the decrease was $175,000 and was primarily caused by interest
savings attributable to (i) final payments of the Company's loan during 1997
(outstanding balance at December 31, 1996 was $500,000) and (ii) redemption
of $3,237,000 of First Mortgage Notes in 1997.
Depreciation
Depreciation decreased in 1997 by $185,000 (7.3%) as compared with 1996.
Excluding depreciation in 1996 related to the Television Stations, the change
was not significant.
Other expenses
Other expenses increased in 1997 by $502,000 as compared with 1996,
principally due to $320,000 in non recurring costs incurred by HDA for the
cancellation of certain ECOC obligations to Supra aggregating $2,290,000; the
cancellation was done in connection with HDA's redemption in August 1997 of
Supra's 17% interest in HDA. The cancellation relieved HDA of its guarantee
of approximately $1.6 million of the $2,290,000 obligation which would have
become due upon termination of the El Comandante Lease. There was also an
increase in costs and expenses reimbursed by the Company to EMC, its managing
general partner, for services rendered by EMC's executives to the Company.
Effective January 1, 1998, the only significant services rendered by EMC to
the Company will be services of Directors since employees of EMC were
transferred to a new wholly-owned subsidiary of the Company.
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. In 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.
Minority Interest
The minority interest in 1996 was based on 18% of HDA's net income
reduced by 45% of Galapagos' net losses. For 1997, the bases for
recognition of minority interest changed as follows: (i) following
redemption of Supra's 17% interest in HDA in August 1997, minority interest
in HDA was based on 1% of HDA's net income and (ii) because accumulated
losses of Galapagos allocable to minority stockholders exceeded their
(PAGE)
investment, minority interest in Galapagos' net losses was reduced by
$308,971. Commencing in 1998, (i) if and while Galapagos continues
generating losses, no minority interest in Galapagos' net losses will be
recognized by the Company, and (ii) if Galapagos generates profits, no
minority interest in Galapagos' net income will be recognized by the Company,
up to $308,971.
Extraordinary Item
On September 29, 1997 HDA redeemed First Mortgage Notes in the principal
amount of $2.5 million at 110% of par. This redemption was made in
connection with the approval obtained from the holders of First Mortgage
Notes to redeem the 17% interest in HDA owned by Supra. The $250,000 premium
and related bond discount and deferred financing costs were written-off in
1997 as an extraordinary item. There were no similar charges in the
comparable period of 1996. However, the Company is required to make an offer
by December 1, 1998 to redeem $3 million in First Mortgage Notes, at 110% of
par. If redeemed, the Company will also recognize an extraordinary item in
1998 for the premium and related write-offs.
1996 (HISTORICAL) COMPARED TO 1995 (PROFORMA)
The following discussion of results of operations for 1996 as compared to
1995 is made based on unaudited proforma balances for 1995 as if the accounts
of HDA had been included in the Company's financial statements at December
31, 1995.
Puerto Rico Operations
Revenues. Increased in 1996 by $105,000 (1%) from 1995, principally due
to an increase in interest income on short term investments. Rental income
from El Comandante did not change significantly: $14,322,000 in 1996 and
$14,333,000 in 1995. Rental income in 1996 was based on 25% of ECOC's
commissions of $57,286,000 from El Comandante wagering on 256 racing days,
whereas 1995 rental income was based on 25% of ECOC's commissions of
$55,731,000 from wagering on 207 racing days, plus fixed rent of $400,000
(eliminated effective January 1, 1996). In February 1996, ECOC commenced
racing five days a week by adding Thursday to its previous four-day race
week. Although the average daily commissions earned by ECOC declined in the
1996 period, the commissions earned on Thursday race days more than offset
the decline in average daily commissions.
The effect of the additional race day is shown by (1) the comparison of
January 1996 and 1995 commissions earned by ECOC before introduction of
Thursday racing, and (2) the comparison of February - December, 1995
commissions earned before Thursday racing commenced with commissions earned
February - December 1996 after Thursday racing commenced. Whereas the
January 1996 commissions were $501,000 less than the January 1995
commissions, the average monthly commissions for the balance of 1996 exceeded
by $187,000 the average monthly commissions in the comparable months of 1995.
(PAGE)
Expenses. Increased in 1996 by $619,000 from 1995. The increase was
caused primarily by HDA's assumption, effective January 1996, of the
obligation to pay real property taxes on El Comandante, which were paid by
ECOC through 1995.
Dominican Republic Operations
Revenues. Revenues in 1996 increased by $1,938,000 from 1995 due to
increased commissions on wagering. Galapagos began simulcasting El
Comandante races on February 27, 1995 to several sports betting agencies in
the Dominican Republic and commenced live racing operations at V Centenario
in April 1995. The increase in commissions is attributable to (i) full
year of racing in 1996 versus partial year in 1995 and (ii) growth in the
number OTB agencies -- 53 agencies when V Centenario opened in April 1995,
163 at December 31, 1995 and 230 at December 31, 1996.
Galapagos also had revenues of $523,000 in 1996 and $373,000 in 1995
from Jockey Club and restaurant operations and other miscellaneous sources.
Expenses. Increased in 1996 by $1,573,000 from 1995. Costs incurred in
connection with the Dominican Republic operations prior to the opening of V
Centenario in April 1995, where deferred as start up costs, whereas under
full operation during 1996 all operating costs were expensed. Certain costs,
such as horseowners' 50% share of commissions, ECOC's management fee and fees
paid to Autotote for providing the wagering system, are directly related to
the amount of wagering or to commissions earned by Galapagos and,
accordingly, accounted for a portion of the increase. The other increases in
1996 costs are largely attributable to the additional months that V
Centenario operated in 1996, offset in part by credits of $545,000 for funds
released for Galapagos' marketing costs from a restricted account upon
authorization of the Government.
Television Stations
Overview. On August 30, 1996, HDA closed the sale of a 50% interest in
Television Stations to Paxson, and consequently, the accounts of S&E were
included in the Company's consolidated financial statements only through
August 1996. The sales price was $4 million, and a gain of $581,000 was
recorded in 1996 for this sale. The costs of this sale included
approximately $1.5 million for employee severance payments, costs to cancel
certain contracts, write-off of deferred costs not recoverable under the
revised broadcasting and programming format, legal, accounting and investment
bankers' fees, and fees to holders of First Mortgage Notes for consenting to
the transaction. Commencing September 1996 Paxson assumed responsibility for
managing the Television Stations.
Revenues. S&E commenced television broadcasting in January 1995 on a
test basis until June 26, 1995, and therefore, did not have a full year of
operations in 1995. Also pursuant to the terms of a brokerage agreement
effective February 1996, Paxson provided S&E programming, including
infomercials, and changed the programming format. For the period from
September to December 1996 the revenues only included the Company's 50% share
(PAGE)
of S&E's net income. Consequently, the revenues between years are not
readily comparable.
Expenses. Decreased in 1996 by $1,279,000 from 1995. Operating costs
incurred during the 1995 test period were deferred as start-up costs while
operating costs in the period from January to August, 1996 were expensed.
The 1996 costs include fees of $272,000 to Paxson pursuant to the time
brokerage agreement for the seven months from February through August 1996.
Costs between periods are not readily comparable because (i) certain costs
were deferred during the 1995 test period, (ii) the change in the
broadcasting and programming format which commenced February 1996 resulted in
significant reductions in production and programming costs in 1996 and (iii)
fees to Paxson of $272,000 in 1996.
Financial Expenses
Financial expenses in 1996 increased by $46,000 from 1995. The increase
was primarily caused by interest in 1996 on a debt to the Dominican Republic
Government and on advances to the Company by its general partner, net of a
$86,000 reversal of interest on loans to minority stockholders.
Galapagos pays taxes to the Government of the Dominican Republic based
on a percentage of wagering. The Government agreed to a deferred payment
plan for taxes of approximately $519,000 and interest of $91,000 was accrued
in 1996 on this deferred liability. The balance of the indebtedness was
$473,000 at December 31, 1996.
Depreciation
Depreciation increased in 1996 by $345,000 from 1995. The increase is
primarily caused by capital additions to El Comandante during the year.
Property and equipment of V Centenario was not depreciated until the
commencement of its live racing operations on April 29, 1995, while there was
a full year of depreciation in 1996. Depreciation of $207,000 in 1996 and
$169,000 in 1995 was related to a step-up of $5,650,000 in El Comandante
assets. The step-up is the value assigned HDAMC's interest in HDA which was
transferred to the Company in March 1995 in exchange for Units of the
Company.
Other Expenses
Other expenses decreased in 1996 by $273,000 from 1995. The decrease
results from 1995 costs of (i) $134,000 in 1995, related to the application
by VJC, a subsidiary of the Company (currently inactive), for a license to
operate a race track in Virginia and VJC's appeal of the grant of the license
to another applicant and (ii) $131,000 for legal, accounting and other costs
incurred in connection with the distribution in February 1995 by IGC to its
unitholders of a 99% interest in the Company. No similar costs were incurred
in 1996.
There were also reductions in 1996 in IGC and EMC support services of
$82,000 and costs of $37,000 related to investigating new business
opportunities, and increases in 1996 in legal, accounting and consulting fees
(PAGE)
of $86,000 and Directors' fees and expenses of $30,000.
Provision for Income Taxes
The Company is subject to Puerto Rico income tax at a 29% rate on its
allocable share of HDA's taxable income and ECCC, an HDA subsidiary, is
subject to Federal income taxes. HDA had previously provided for deferred
Dominican Republic income taxes on interest accrued on Stockholders' loans to
Galapagos. The accrued interest was forgiven in 1996 and a tax credit was
recorded for reversal of the deferred tax provision applicable to the
forgiven interest.
1996 COMPARED TO 1995 (HISTORICAL)
The Company did not consolidate the accounts of HDA until March 8, 1995.
Accordingly, the Company's historical results of operations for 1996 and 1995
are not readily comparable and the discussion below is limited to a
comparison of revenues and expenses of the Company and VJC for these years.
Other Revenues. The Company received a cash distribution of $134,000
from HDA in February 1995 and insignificant amounts of interest income in
both years. Because the Company had a zero investment in HDA when the cash
distribution of $134,000 was received in February 1995 and since the
distribution was received prior to the consolidation of HDA's accounts as of
March 8, 1995, the distribution represented revenue to the Company that was
not eliminated in the consolidated financial statements.
Other Expenses. The changes in expenses were primarily reductions in
1996 in IGC and EMC support services of $82,000 and costs of $37,000 related
to investigating new business opportunities, and increases in 1996 in legal,
accounting and consulting fees and Directors' fees and expenses. In 1995
there were also costs of $134,000 related to VJC's application for licenses
to own and operate Virginia's first thoroughbred racing and pari-mutuel
wagering facility and to VJC's appeal of the grant of the license to another
applicant. No similar costs were incurred in 1996.
Financial Expenses. Related to interest and amortization of financing
costs on a bank loan and interest on loans from IGC.
Provision for Income Taxes. The Company is subject to Puerto Rico
income tax at a 29% rate on its allocable share of HDA's taxable income and
ECCC, an HDA subsidiary, is subject to federal income taxes. HDA had
previously provided for deferred Dominican Republic income taxes on interest
accrued on Stockholders' loans to Galapagos. The accrued interest was
forgiven in 1996 and a tax credit was recorded for reversal of the deferred
tax provision applicable to the forgiven interest.
(PAGE)
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash during the year was distributions
from HDA, which are eliminated in the Company's consolidated financial
statements. Pursuant to the Indenture for the issuance of its First Mortgage
Notes, HDA's ability to make distributions to its partners is restricted to
approximately 48% of HDA's consolidated book income. In connection with the
redemption in August 1997 of a 17% interest owned by a minority partner (a
transaction that required the approval of holders of First Mortgage Notes), HDA
agreed to reduce its distributions by 17%. Because cash held by HDA and its
subsidiaries is not readily available to the Company, capital resources and
liquidity of the Company and HDA are discussed separately.
Liquidity and Capital Resources of the Company. Cash of the Company at
December 31, 1997 was approximately at the same level as December 31, 1996.
The Company's sources of cash for 1997 were $2,480,000 in cash
distributions from HDA and $320,000 in commissions related to the sale of the
Television Stations. These sources were sufficient to cover the operating
activities of the Company and its financial obligations with respect to a bank
loan and advances received in prior years from a general partner. At December
31, 1997, the Company had paid all of its loans.
Effective January 1, 1998, EMC transferred to the Company (i) its
agreements to provide certain management services to HDA and each of its
subsidiaries and (ii) the executives rendering these services. Management
estimates 1998 cash requirements in approximately $1.9 million and cash
receipts
of approximately $2.3 million from the following sources (arising from
transactions that will be eliminated in the Company's consolidated financial
statements): (i) cash distributions from HDA, estimated at $500,000 (see
"Liquidity and Capital Resources of HDA") (ii) estimated fees of $1.4 million
earned by the Company under these management agreements and (iii) collection of
approximately $400,000 of its receivables from subsidiaries. The Company's
liquidity greatly depends on the ability of its subsidiaries to pay the 1998
fees for services and their 1997 payables to the Company and HDA's ability to
make cash distributions to the Company. Because Galapagos has generated
losses
in prior years and EGP is a start-up operation, there is no assurance that the
entire amount of these fees will be collected.
Liquidity and Capital Resources of HDA. Cash and cash equivalents of HDA,
excluding its consolidated subsidiaries, decreased by $3,674,000 during 1997 to
$363,000 at December 31, 1997. HDA's 1997 uses of cash for financing and
investing activities were (i) redemption of $3,487,000 in First Mortgage Notes,
(ii) redemption of a minority 17% interest in HDA for $4 million, (iii) cash
distributions to partners of $3,024,000, (iv) capital improvements to El
Comandante of $619,000, (v) investment in Galapagos of $1,491,500, and (vi)
investment in EGP of $2,875,000 (of which $2.2 million was paid to the Panama
Government for the right to operate Presidente Remon). The $7 million proceeds
of sale in January 1997 of a 50% interest in the Television Stations and
proceeds of a $1 million loan in December 1997, together with HDA's beginning
(PAGE)
cash balance and cash flows from operations (primarily from its rental
activities related to El Comandante) were sufficient to cover HDA's 1997
capital
requirements and financial obligations. The $1 million loan from a financial
institution is payable in four quarterly installments of $250,000, commencing
April 1, 1998.
Due to an ECOC default for unpaid rent and certain other reasons permitted
under the El Comandante Lease, HDA terminated the El Comandante Lease on
December 31, 1997. On January 1, 1998, ECOC transferred to ECMC, a wholly
owned subsidiary of HDA, all assets employed in the racing business and the
Operating License, and ECMC assumed all agreements of ECOC and its liabilities,
including certain capital leases. At December 31, 1997 ECOC's liabilities
exceeded assets by $3 million including certain payables to HDA amounting to
$3.1 million.
The termination of the El Comandante Lease and the assignment of the
Operating License to ECMC are subject to the approval of the PR Racing Board.
The Racing Board has not given final approval but has permitted ECMC to operate
El Comandante until the review process is concluded. Management expects that
approval of these transactions to be subject to making the Company and HDA (i)
primarily responsible to ensure that ECMC complies with all terms and
provisions
of the Operating License and applicable regulations and orders of the Racing
Board, and (ii) jointly liable with ECMC with respect to all financial
commitments with horseowners.
As a result of the termination of the El Comandante Lease, commencing in
1998 HDA's principal source of revenues will be commissions on wagering on El
Comandante's races and on simulcasted races, principally to the Dominican
Republic and Panama. Management has projected commissions on wagering for
1998
at the same level as in 1997, approximately $55 million. During 1997 wagering
in Puerto Rico on El Comandante races declined, in part due to additional
gaming
opportunities, particularly additional and up-graded slot machines. However,
Management expects to partially offset this negative effect by expanding
simulcasting of El Comandante races in the Caribbean and Central America
countries and installing local telephone betting in the Dominican Republic,
Panama and, subject to the approval of the PR Racing Board, in Puerto Rico.
Capital requirements and financial obligations of HDA in 1998 and
anticipated cash distributions to partners are expected to be covered by cash
flows from operations and net cash flows from its investment in EGP (see
discussion below). HDA has budgeted $1.4 million in capital improvements to El
Comandante. The 1998 financial requirements of HDA and ECMC consist of (i)
principal payments on capital leases, (ii) principal payments on the December
1997 loan of $1 million discussed above and (iii) $3.3 million for redemption
of First Mortgage Notes. HDA is 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 of $971,000, equal to
1.5% of the principal amount of outstanding First Mortgage Notes. HDA's
ability to redeem the $3.3 million of First Mortgage Notes and make
(PAGE)
distributions to partners will partly depend on recovering from EGP $1,375,000
of the funds invested in Panama in 1997 and any additional funds invested in
1998. The recovery requires the closing of an underwriting of EGP's equity and
debt securities.
In January 1998, EGP received a $1.5 million bridge loan from an
investment banker in Panama and an underwriting proposal to raise, in a private
placement of registered securities, approximately $1.5 million from the sale of
49% of EGP's capital stock and $3.5 million of EGP's unsecured debt. The
unsecured debt is proposed to contain the following terms: (i) 11% interest
rate, (ii) interest payments during the first two years, monthly payments of
principal and interest for next four years, and a balloon principal payment at
maturity in six years and (iii) requirement for HDA to maintain a capital
investment in EGP of $1.5 million, the maximum amount permitted under HDA's
Indenture once EGP ceases to be a wholly owned subsidiary of HDA. Upon closing
of the underwriting, the bridge loan and accrued interest will be repaid, HDA
will recover all funds invested in EGP in excess of the $1.5 million permitted
amount, and the balance of the proceeds after offering costs will be available
for EGP's capital improvements to Presidente Remon, acquisition of equipment
and working capital. Under the contract for the operation of Presidente Remon,
EGP is required to invest $4 million during the first four years in capital
improvements and acquisition of wagering and race track equipment.
Management expects the EGP underwriting to close in June 1998 but there
can be no assurance that this deadline will be met. If the Offering is not
closed before June 15, 1998 and as a consequence HDA does not recover
$1,375,000 of its investment at December 31, 1997 and any additional funds
invested in 1998 by that date, HDA may temporarily need another source of
funds to make the $3.8 million interest payment on its First Mortgage Notes due
on June 15, 1998.
In addition to capital leases assumed from ECOC, HDA's long-term cash
commitments are charitable contributions of $550,000 and repayment commencing
in 2000 of First Mortgage Notes.
In connection with the termination of the El Comandante Lease, ECMC
assumed commitments to make contributions of $550,000 to certain charitable and
educational institutions as follows: $100,000 in 1998, $100,000 in 1999,
$150,000 in 2000 and $200,000 in 2001. Management expects to satisfy these
obligations.
HDA's First Mortgage Notes bear interest at 11.75%, payable semiannually
on June 15 and December 15, and are secured by El Comandante assets. The First
Mortgage Notes are redeemable, at the option of HDA, at redemption prices
decreasing from 104.125% to 101.5% of par, depending upon the redemption date
(see Note 6 to the Company's consolidated financial statements). The stated
maturity dates are as follows: $3,563,000 in 2000 (decreased by any amount of
First Mortgage Notes redeemed in 1998), $10,200,000 in 2001, $10,200,000 in
2002 and $40,800,000 in 2003 at maturity. Management expects to refinance this
obligation in 2001.
Year 2000 Computer Issue. Many computer systems in use today were
designed and developed using two digits, rather than four, to specify the year.
(PAGE)
As a result, such systems will recognize the year 2000 as "00". This could
cause many computer applications to fail completely or to create erroneous
results unless corrective measures are taken. The Company and its subsidiaries
utilize software and related computer technologies essential to its operations
that will be affected by the year 2000 issue. The Company is studying what
actions will be necessary to make its computer systems Year 2000 compliant.
The expense associated with these actions cannot presently be determined, but
could be significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(PAGE)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the partners of
Equus Gaming Company L.P.:
We have audited the accompanying consolidated balance sheets of Equus Gaming
Company L.P. (a Virginia limited partnership) (the Company) and subsidiaries as
of December 31, 1997 and 1996, and the related consolidated statements of
income (loss), changes in partners' deficit and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did
not audit the 1997 and 1996 balance sheets of Galapagos S.A. which reflect
total assets of 4% each year nor the statement of net income (loss) for the
years ended December 31, 1997, 1996 and 1995 which reflect total revenues of
23%, 23% and 19%, respectively, of the consolidated totals. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for this entity, is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors, provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Equus Gaming Company L.P. and subsidiaries
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
March 31, 1998
San Juan, Puerto Rico
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
----------- ----------- -----------
REVENUES:
Rental income from El Comandante
Race Track $13,720,424 $14,321,401 $11,428,711
Cash distribution from Housing
Development Associates S.E.("HDA") - - 134,000
Dominican Republic operations-
Commissions on wagering from racing 4,618,720 4,513,252 2,718,646
Net revenues on lotto sales 87,659 - -
Other revenues 781,641 523,348 368,186
Television Stations - 1,724,991 1,344,338
Gain from sale of
Television Stations 4,669,400 581,120 -
Interest income 419,823 232,048 91,775
----------- ----------- -----------
24,297,667 21,896,160 16,085,656
----------- ----------- -----------
EXPENSES:
Financial 8,734,827 9,048,141 7,397,759
Depreciation 2,322,732 2,508,116 1,828,841
General and administrative 2,233,488 1,807,104 1,114,807
Operating costs of Dominican
Republic racing 5,976,140 5,971,818 4,341,046
Operating costs of Television Stations - 1,461,312 2,350,412
Other costs 319,550 - 133,713
----------- ----------- -----------
19,586,737 20,796,491 17,166,578
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES,
MINORITY INTEREST AND EXTRAORDINARY
ITEM 4,710,930 1,099,669 (1,080,922)
PROVISION FOR INCOME TAXES:
Current 1,582 263,163 222,164
Deferred 893,403 136,860 8,991
----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND EXTRAORDINARY ITEM 3,815,945 699,646 (1,312,077)
MINORITY INTEREST IN INCOME (LOSS) 878,033 (127,577) (720,792)
----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 2,937,912 827,223 (591,285)
EXTRAORDINARY ITEM - Premium on early
redemption of First Mortgage Notes
and write-off of related deferred
financing costs and note discount 459,173 - -
------------ ----------- -----------
NET INCOME (LOSS) $ 2,478,739 $ 827,223 $ (591,285)
=========== =========== ===========
(continues)
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31,
(continued)
1997 1996 1995
----------- ----------- ----------
ALLOCATION OF NET INCOME (LOSS):
General Partners $ 24,787 $ 8,272 $ (77,247)
Limited Partners 2,453,952 818,951 (514,038)
----------- ----------- -----------
$ 2,478,739 $ 827,223 $ (591,285)
=========== =========== ===========
BASIC AND DILUTED PER UNIT AMOUNTS:
Net income (loss) before
extraordinary item $ 0.46 $ 0.13 $ (0.08)
Extraordinary item (0.07) - -
----------- ----------- -----------
Net income (loss) per unit $ 0.39 $ 0.13 $ (0.08)
=========== =========== ===========
WEIGHTED AVERAGE UNITS OUTSTANDING 6,333,617 6,333,617 6,223,381
=========== =========== ===========
The accompanying notes are an integral part
of these consolidated statements.
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
---------------------------
1997 1996
----------- ------------
CASH AND CASH EQUIVALENTS $ 507,656 $ 4,268,029
----------- ------------
ASSETS RELATED TO RACE TRACKS:
Property and equipment-
Land 7,128,858 7,128,858
Buildings and improvements 48,855,905 48,138,946
Equipment 3,346,834 2,669,639
----------- ------------
59,331,597 57,937,443
Less accumulated depreciation (14,275,812) (11,981,552)
----------- ------------
45,055,785 45,955,891
Receivables from El Comandante
Operating Company, Inc. ("ECOC") 3,106,497 2,780,416
Deferred costs-
Financing 3,565,586 4,055,866
Costs of Panama contract 2,356,292 -
Organizational and other 393,704 370,120
Other 1,201,839 932,566
----------- ------------
55,679,703 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
----------- ------------
$56,187,359 $60,586,330
=========== ============
(continues)
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND PARTNERS' DEFICIT
December 31,
---------------------------
1997 1996
----------- ------------
LIABILITIES RELATED TO RACE TRACKS:
First Mortgage Notes-
Principal, net of note discount of
$1,398,887 and $1,596,261, respectively $63,364,113 $66,403,739
Accrued interest 317,069 332,918
Minority interest in Galapagos - 111,427
Notes payable 615,697 572,550
Accounts payable and accrued liabilities 1,355,592 2,162,519
Accrued income taxes 1,069,902 437,692
----------- ------------
66,722,373 70,020,845
----------- ------------
OTHER LIABILITIES:
Unsecured partner's loans - 415,883
Notes payable 1,260,000 500,000
Accounts payable and accrued liabilities 215,531 287,976
Minority interest in HDA 82,631 550,605
----------- ------------
1,558,162 1,754,464
----------- ------------
PARTNERS' DEFICIT:
General Partners (728,644) (752,867)
Limited Partners - 6,383,617 units
authorized; 6,333,617 units issued
and outstanding in 1997 and 1996 (11,364,532) (10,436,112)
----------- ------------
(12,093,176) (11,188,979)
----------- ------------
$56,187,359 $60,586,330
=========== ============
The accompanying notes are an integral part
of these consolidated balance sheets.
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1997
General Limited
Partners Partners Total
----------- ------------ ------------
BALANCES, December 31, 1994 $ (524,217) $ - $ (524,217)
Net loss for the year (77,247) (514,038) (591,285)
Issuance of partnership's units - 5,650,000 5,650,000
Effect of consolidation of HDA (158,406) (15,682,238) (15,840,644)
Currency translation adjustments (933) (92,388) (93,321)
Cash distributions to minority
partners of HDA - (388,345) (388,345)
----------- ------------- ------------
BALANCES, December 31, 1995 (760,803) (11,027,009) (11,787,812)
Net income for the year 8,272 818,951 827,223
Currency translation adjustments (336) (33,294) (33,630)
Cash distributions to minority
partners of HDA - (194,760) (194,760)
----------- ------------ ------------
BALANCES, December 31, 1996 (752,867) (10,436,112) (11,188,979)
Net income for the year 24,787 2,453,952 2,478,739
Currency translation adjustments (564) (55,883) (56,447)
Cash distributions to minority
partners of HDA - (544,139) (544,139)
Redemption of 17% minority
interest in HDA - (2,782,350) (2,782,350)
----------- ------------ ------------
BALANCES, December 31, 1997 $ (728,644) $(11,364,532) $(12,093,176)
=========== ============ ============
The accompanying notes are an integral part
of this consolidated statement.
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,478,739 $ 827,223 $(591,285)
----------- ----------- -----------
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities-
Extraordinary item 459,173 - -
Gain from sale of Television
Stations (4,669,400) (581,120) -
Equity in earnings - (55,533) -
Depreciation 2,322,732 2,508,116 1,828,841
Amortization 762,423 853,035 798,773
Deferred income tax provision 893,403 136,860 8,991
Currency translation adjustments (56,447) (33,630) (93,321)
Forgiveness of interest - (173,754) -
(Increase) decrease in assets-
Rent receivable from ECOC (654,307) (1,188,067) (796,146)
Deferred costs (2,356,292) (97,598) (36,971)
Other 263,128 (435,306) (756,985)
Increase (decrease) in liabilities-
Accrued interest (2,805) 66,703 (1,359,409)
Accounts payable and accrued
liabilities (984,030) 1,040,160 (60,293)
Accrued income taxes (261,192) 68,852 134,315
Minority interest 878,033 (127,577) (720,792)
----------- ----------- -----------
Total adjustments (3,405,581) 1,981,141 (1,052,997)
----------- ----------- -----------
Net cash (used in) provided by
operating activities (926,842) 2,808,364 (1,644,282)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,422,626) (554,214) (1,790,109)
Loan to ECOC - - (1,000,000)
Collections of note from ECOC 326,661 207,594 -
Effect of the consolidation of S&E - (129,948) -
Sales of Television Stations -
Proceeds 7,000,000 4,000,000 -
Costs (505,357) (418,950) -
Effect of consolidation of HDA
cash accounts - - 3,429,221
----------- ----------- -----------
Net cash provided by investing
activities 5,398,678 3,104,482 639,112
----------- ----------- -----------
(continues)
(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(continued)
1997 1996 1995
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of First Mortgage Notes (3,237,000) - -
Premium on redemption of First
Mortgage Notes (250,000) - -
Loans and contributions from minority
stockholders 32,758 - 1,057,750
(Payments to) loans from general
partner, net (415,883) 204,254 80,762
Loans from financial institutions 1,258,079 448,418 2,799,525
Issuance of notes payable to Supra 260,000 - -
Payments on notes payable (714,213) (2,417,517) (747,191)
Increase in deferred costs (307,527) (499,504) (983,039)
Redemption of 17% minority interest
in HDA (4,314,284) - -
Cash distributions to minority
partners of HDA (544,139) (194,760) (388,345)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (8,232,209) (2,459,109) 1,819,462
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (3,760,373) 3,453,737 814,292
CASH AND CASH EQUIVALENTS,
beginning of year 4,268,029 814,292 -
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ 507,656 $ 4,268,029 $ 814,292
=========== =========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 7,992,439 $ 8,269,562 $ 8,165,847
Income taxes paid 262,500 194,310 94,844
NONCASH TRANSACTIONS:
Effect of consolidation of HDA's
non cash accounts - - (19,269,865)
Step-up in value of assets related to
race tracks - - 5,650,000
Units appreciation rights 106,534 - -
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 SIGNIFICANT ACCOUNTING POLICIES:
Equus Gaming Company L.P. (the "Company"), a Virginia limited
partnership, is engaged in thoroughbred racing, wagering and other gaming
businesses through its 99% indirectly 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. El Comandante was leased to El Comandante
Operating Company, Inc., a Puerto Rico non-stock corporation ("ECOC") until
December 31, 1997 (see Note 2). HDA also has interests of: (i) 55% in
Galapagos, S.A. ("Galapagos"),a company that operates since April 1995 the V
Centenario Race Track in the Dominican Republic ("V Centenario"), (ii) 100%
in Equus Gaming de Panama, S.A. ("EGP"), a company that operates since
January 1, 1998 the Presidente Remon Race Track in the Republic of Panama
("Presidente Remon"), and (iii) 100% in El Comandante Management Company, LLC
("ECMC"), the company that operates El Comandante since January 1, 1998,
following termination by HDA of its lease agreement with ECOC. HDA was also
the owner of S & E Network Inc. ("S&E"), which owned and operated three UHF
television stations in Puerto Rico (the "Television Stations"), until sold to
Paxson Communications of San Juan, Inc. ("Paxson") in transactions closed in
August 1996 (50% interest) and January 1997 (50% interest). In 1997 the
Company formed Equus Entertainment Corporation ("EEC"), as a wholly-owned
Puerto Rico corporate subsidiary, for the purpose of replacing the Company
once certain approvals are obtained.
Consolidation and Presentation
The Company consolidates in its financial statements the accounts of
entities in which it has a controlling interest in excess of 50%. The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries after eliminating all significant inter-company
transactions. All of the entities included in the consolidated financial
statements are hereinafter referred to collectively, when practicable, as the
"Company". The accounts of HDA and its subsidiaries have been consolidated
since March 8, 1995 and the accounts of S&E have been excluded from the
consolidation since September 1, 1996 due to the reductions in ownership
interests.
Prior to March 8, 1995 the Company had an interest in HDA in excess of
50%. However, generally accepted accounting principles ("GAAP") did not
permit the Company to consolidate the accounts of HDA in its financial
statements because HDA Management Corporation ("HDAMC"), a partner in HDA
(see Note 6), had the right to approve any sale or disposition of HDA's
assets in excess of $500,000 and the incurrence of any debt in excess of $1
million. On March 8, 1995, HDA's partnership agreement was amended to
eliminate these approval rights of HDAMC, and effective such date the
accounts of HDA have been consolidated with the Company's accounts. The
Company recognized in 1995 revenues of $134,000 from cash distributions that
were received from HDA prior to consolidation of HDA's accounts in the
Company's financial statements.
(PAGE)
During the years ended December 31, 1997, 1996 and 1995 the Company
recorded minority interest in the income and (losses) of consolidated
subsidiaries, as follows:
For the Year Ended December 31,
--------------------------------------------
Subsidiary 1997 1996 1995
- ----------------- ------------ ------------ -------------
HDA $1,063,960 $ 487,046 $ 63,559
Galapagos (185,927) (614,623) (784,351)
------------ ------------ -------------
$ 878,033 $ (127,577) $ (720,792)
============ ============ =============
Minority interest in HDA represents the minority partners' share in
HDA's net income based on approximately 1% since August 20, 1997, when HDA
redeemed a 17% interest owned by Supra & Company S.E. ("Supra") (see Note
10), and 18% from January 1, 1996 until the date of redemption. For 1995 the
recorded minority interest represents an 18% interest in HDA's net income in
excess of the December 31, 1994 accumulated deficit of $818,750. Because HDA
is a limited liability partnership and the partners do not have any legal
obligation to fund any portion of such deficit, GAAP did not permit the
Company to record the minority partners' share of HDA's net income until the
accumulated deficit of HDA was eliminated by earnings. Minority interest in
Galapagos represents the minority stockholders' 45% share in Galapagos net
losses. In 1997 the Company recognized $308,971 of losses attributable to
the minority interest because they have no legal obligation to fund such
losses in excess of their investment.
Outstanding Units, Warrants and Options
On February 6, 1995, Interstate General Company L.P. ("IGC"), a publicly
traded limited partnership, distributed to its unitholders 5,128,372 Class A
Units ("Units") representing in the aggregate beneficial assignment of a 99%
Class A limited partnership interest in the Company (the "Distribution"). On
March 8, 1995 an additional 1,205,245 Units were issued by the Company to
HDAMC. The Units are listed for trading on the Nasdaq National Market System
("Nasdaq") under the symbol "EQUUS".
In connection with the Distribution and pursuant to the Control Transfer
Agreement (see Note 10) the Company agreed to make available to IGC for no
consideration 50,000 Units of the Company for Oppenheimer & Co., Inc. upon
the exercise of certain warrants. IGC was a general partner of the Company
until December 31, 1997.
Net income (loss) per Unit is calculated based on the weighted average
of Units outstanding since the Distribution on February 6, 1995. Outstanding
options and warrants to purchase Units do not have a material dilutive effect
on the calculation of earnings per Unit.
Pervasiveness of Estimates
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
(PAGE)
liabilities, if any, at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
New Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130 "Reporting Comprehensive Income", which is effective for fiscal years
beginning after December 15, 1997. The statement establishes standards for
reporting of comprehensive income and its components. The Company plans to
adopt SFAS No. 130 in 1998 and the impact on the Company's financial
statements is not expected to be significant.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information",
which is effective for fiscal years beginning after December 15, 1997. The
Company plans to adopt SFAS No. 131 in 1998.
Rental Income from El Comandante Race Track
Rental income represents rent earned under the El Comandante Lease,
recognized when wagering commissions are earned by ECOC. In 1995 a portion
of rental income, the fixed rent, was recognized in equal monthly
installments.
Revenues from Dominican Republic Operations
Commissions on wagering represent income earned by Galapagos on bets
placed on El Comandante's races simulcasted into the Dominican Republic and
on live races held at V Centenario Race Track principally through wagering
facilities located at independently owned off track betting ("OTB") agencies
throughout the Republic. Revenues on lotto sales are fees earned under a
contract for the distribution system of an electronic lottery, net of fees
paid to the company providing the equipment, software and related services
for the distribution system. In 1997, other revenues include $438,169
arising from Government tax receipts on El Comandante's simulcasted races, a
portion of which have been released to Galapagos as reimbursement of certain
costs (see Note 3).
Revenues from Television Stations
Revenues from Television Stations were primarily: (i) from contracts for
the production and broadcasting of television programs, recognized when the
programs had been completed and delivered and (ii) advertising income from
sale of air time, recognized at the time of broadcast. In 1996 it also
included HDA's $55,533 share of S&E's net income from August 31, 1996 to
December 31, 1996, recognized under the equity method of accounting for
investments.
Cash Equivalents
The Company considers as cash equivalents certificates of deposit with
an issuance to maturity term of three months or less. Management intends to
hold these certificates until maturity.
(PAGE)
Property and Equipment and Depreciation
Land, buildings and improvements, and equipment are stated at cost plus
a step-up of $5,650,000 of El Comandante assets on March 8, 1995 resulting
from the issuance of Units of the Company to HDAMC for a 15% profits interest
in HDA. Depreciation is calculated using the straight-line method over the
estimated useful lives of the property: five to ten years for equipment, 35
years for buildings, and 10 to 15 years for land improvements. For the
property related to El Comandante and the Television Stations, the composite
depreciation method was used, where any gain or loss of property retired or
sold is charged against accumulated depreciation, unless the amount involved
is material. Costs paid by S&E for the licenses to operate the Television
Stations were amortized, until sold, using the straight-line method over a
period of 20 years.
Deferred Costs
Deferred financing costs are being amortized since December 15, 1993
over the 10 year life of the first mortgage notes using the interest method.
Costs of Panama contract (see Note 4) will be amortized commencing January 1,
1998 over the 20-year period of the Panama license, using the straight line
method. Organizational and other costs are being amortized using the
straight-line method over the period of estimated benefit, ranging from 5 to
15 years.
Upon the closing of the sale to Paxson on August 30, 1996, S&E wrote-off
approximately $1 million of deferred costs and broadcast contract rights
which did not have any future benefit to S&E under Paxson's management of the
Television Stations. The write-off has been included in the accompanying
consolidated financial statements as a reduction of the gain from the sale of
Television Stations.
Currencies
The Company consolidates its accounts with Galapagos whose functional
currency is the Dominican Republic peso ("RD$"), 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
the revenues and expenses.
For the years ended December 31, 1997, 1996 and 1995, net exchange gains
and (losses) resulting from remeasurement of accounts, together with gains
and (losses) from foreign currency transactions, amounted to $(36,000) and
$(82,000) (included in operating costs) and $37,000 (included in other
revenues). Accumulated net losses from changes in exchange rates due to the
translation of assets and liabilities of Galapagos are included in partners'
deficit and at December 31, 1997 and 1996 amounted to $183,400, including
$52,200 from unsettled intercompany transactions, and $126,950, respectively.
The exchange rates as of December 31, 1997 and 1996 were US$1.00 to RD$14.50
(PAGE)
and US$1.00 to RD$13.97, respectively, and the average exchange rates
prevailing during the years ended December 31, 1997, 1996, and 1995, were
US$1.00 to RD$14.44, US$1.00 to RD$13.75, and US$1.00 to RD$13.00,
respectively.
The Company also consolidates its accounts with EGP whose functional
currencies are the Panama colones and the US$. Because these currencies are
of equivalent value, there is no effect attributed to foreign currency
transactions of EGP.
Reclassifications
Certain amounts presented for 1996 and 1995 in the accompanying
consolidated financial statements have been reclassified to conform with the
1997 presentation.
2. EL COMANDANTE LEASE AND PUERTO RICO RACING OPERATIONS:
Operating License
On December 15, 1989, the Puerto Rico Racing Board (the "PR Racing
Board") granted ECOC a license to operate El Comandante, which expires on
December 14, 2004 (the "Operating License"). The Operating License, which
requires payment of an annual license fee (currently $250,000), provides ECOC
with: (i) the exclusive right to operate a race track in the area of Puerto
Rico known as the San Juan Region, which approximates the northern half of
Puerto Rico, as delineated in maps produced by the Puerto Rico Planning Board
and Government Development Administration; (ii) the exclusive right to
conduct all types of authorized betting, both at El Comandante and off-track,
anywhere in Puerto Rico, based on races held at El Comandante; and (iii) the
right to hold a minimum 180 day or night race days per year.
Upon its expiration in December 2004, there can be no assurance that a
new Operating License will be issued. However, ECOC and the prior owner of
El Comandante have continuously operated the only thoroughbred racing
facility in Puerto Rico since 1957.
El Comandante's horse racing and pari-mutuel wagering operations are
subject to substantial government regulation. Pursuant to the Puerto Rico
Horse Racing Industry and Sport Act (the "Racing Act"), the PR Racing Board
and the Puerto Rico Racing Administrator (the "Racing Administrator")
exercise significant regulatory control over El Comandante's racing and
wagering operations. For example, the Racing Administrator determines the
monthly racing program and approves the number of annual race days in excess
of the statutory minimum of 180. The Racing Act also apportions payments of
the wagering handle and thus the Racing Act could be amended through
legislation to reduce the share of monies wagered that would be available as
commissions. The PR Racing Board consists of three persons appointed to
four-year terms by the Governor of Puerto Rico. The Racing Administrator is
also appointed by the Governor for a four-year term.
(PAGE)
El Comandante Lease
Until December 31, 1997 HDA leased El Comandante to ECOC under a lease
agreement, as amended, (the "El Comandante Lease") that required payments by
ECOC to HDA of rent consisting of 25% ("Basic Rent") of the annual
commissions earned by ECOC. These commissions consist of all payments
received by ECOC on all monies wagered with respect to horse racing occurring
at El Comandante, whether wagered at El Comandante or at other betting
facilities in Puerto Rico or any other country. In 1995, the El Comandante
Lease also provided for payment of certain fixed rent of $400,000. The El
Comandante Lease provided for ECOC to pay all El Comandante expenses except
that, pursuant to (i) an amendment effective January 1, 1996, HDA assumed the
obligation to pay real property taxes on El Comandante and (ii) an amendment
effective January 1, 1997, HDA assumed the obligation to pay the annual
racing license fee.
Termination of El Comandante Lease and Agreements Assumed
On October 31, 1997, HDA notified ECOC the termination of the El
Comandante Lease effective December 31, 1997 due to the existing default for
unpaid Basic Rent (see Note 5) and for certain other reasons permitted under
the El Comandante Lease. On January 1, 1998 at HDA's direction, ECOC
transferred to ECMC, at book value, all assets employed in the racing
business and ECMC assumed all agreements of ECOC and its liabilities,
including the $3.1 million due to HDA and $550,000 in commitments made by
ECOC's Board of Directors to make contributions to several charitable and
educational institutions during a four year period commencing in 1998. At
December 31, 1997, ECOC's liabilities exceeded its assets by approximately $3
million (see unaudited proforma financial statements in Note 13). Effective
January 1, 1998, ECMC commenced operating El Comandante pursuant to the
Operating License.
Among the agreements assumed by ECMC upon termination by HDA of El
Comandante Lease are the horse owners' agreement and wagering service
agreement. The agreement with the Confederacion Hipica de Puerto Rico (the
"Confederacion"), which expires on April 1, 1998, provides for payment to
horseowners of (i) 50% of wagering commissions received by the operating
company on races held at El Comandante, (ii) an annual fixed amount of
$55,000 from 1993 to 1998, and (iii) a minimum of $500 per race day for
wagering commissions on El Comandante races simulcasted outside Puerto Rico
("Simulcasting Commissions"). When Simulcasting Commissions exceed
simulcasting expenses plus $500, the Confederacion receives $500 plus 50% of
Simulcasting Commissions.
The agreement with Autotote Systems, Inc. ("Autotote") for wagering
services, software and equipment, which expires on March 15, 2005, requires
minimum annual payments which consist of the greater of $800,800 annually or
.65% (.0065) of total wagering. The Confederacion agreed to reimburse the
operating company an amount equal to .325% (.00325) of wagering for each race
day up to a maximum of $3,461 per race day until April 1998.
Management is in the process of renegotiating the agreement with the
Confederacion and does not expect any significant changes in the economic
terms of the contract that might materially affect the financial position of
ECMC or the Company.
(PAGE)
ECMC also assumed an agreement with S&E for the broadcast of El
Comandante's races effective February 1, 1997 (the "S&E Broadcast Agreement")
which requires the purchase of television time for a minimum of 910 hours at
the rate of $725 per hour (minimum annual amount of $659,750), adjusted
annually by CPI, or at the rate of $900 per hour, also subject to CPI
adjustments, if television time after 7:00 PM is needed. The S&E Broadcast
Agreement is non-cancelable by either party for ten years and thereafter can
be cancelled by HDA, at five year intervals, or by S&E, upon payment of
liquidated damages of $2 million plus CPI after January 1997. ECOC was, and
ECMC will be, responsible for producing the racing show and directing the
broadcast and is entitled to the revenues from the sales of advertising time
during the broadcasts of the racing program.
The termination of the El Comandante Lease and the assignment of the
Operating License to ECMC are subject to the approval of the PR Racing Board.
The Puerto Rico Racing Board has not made a final determination on this
matter but has temporarily permitted ECMC to operate El Comandante until
their review process is concluded. Management expects that approval of these
transactions will be subject to making the Company and HDA (i) primarily
responsible to ensure that ECMC complies with all terms and provisions of the
Operating License and applicable regulations and orders of the PR Racing
Board, and (ii) jointly liable with ECMC with respect to all financial
commitments with the Confederacion.
3. DOMINICAN REPUBLIC OPERATIONS:
V Centenario Lease
The V Centenario is leased from the Dominican Republic Government and
operated by Galapagos pursuant to a 10 year agreement ending in April 2005
(the "V Centenario Lease"). The V Centenario Lease may be renewed for
additional ten year periods by mutual agreement of the parties. The V
Centenario Lease also provides Galapagos with the right to develop off-track
betting in the Dominican Republic and the exclusive right to simulcast horse
races, into the Dominican Republic. The V Centenario Lease provides for
payments of rent based on a percentage of the annual wagering on races run at
V Centenario ("V Centenario Wagering"), as follows: .25% of the first RD$240
million (approximately US$16.5 million), .5% of the next RD$240 million, .75%
of the next RD$240 million and 1% over RD$720 million (approximately US$49.6
million).
The Dominican Republic Government agreed to invest tax receipts on
simulcasted races from July 1997 through January 1998 to improve horse
racing. Galapagos was entitled to 75% of the tax receipts, as reimbursement
for repairs and maintenance at V Centenario, marketing and television costs
and certain other items. Horseowners are entitled to the balance of the tax
receipts as additional purses. Galapagos requested an extension beyond
January 1998, which is expected to be approved, but no formal response has
been received from the Government. If extended, pursuant to an agreement
with horse owners, Galapagos's share in these tax receipts will be reduced to
65% in July 1998 and to 50% in July 1999 and years thereafter.
(PAGE)
Horse Owners' Agreement and Wagering Services Agreement
Galapagos has an agreement with Dominican Republic horseowners whereby
they receive 50% of Galapagos' commissions on V Centenario Wagering and 50%
of commissions earned by Galapagos on El Comandante's simulcasted races,
after deducting payments to ECOC for its commissions.
Galapagos receives wagering services, software and equipment under a
service agreement with Autotote for a ten year period ending March 15, 2005.
Service fees during 1995 were .65% (.0065) of total wagering and thereafter
are the greater of (a) .65% of total wagering or (b) $150,000 in 1996,
$175,000 in 1997 and thereafter $200,000 annually.
Consulting Agreement
Galapagos receives executive management services pursuant to an
agreement for the term of the V Centenario Lease. Services under this
agreement were rendered by ECOC until June 30, 1997 when it was assigned to
Equus Management Company ("EMC"), the managing general partner of the
Company. Fees consist of 1% of wagering on simulcasted races and on V
Centenario Wagering, with a maximum amount of $250,000 annually, adjusted by
CPI commencing in January 1996. Galapagos also reimburses the out-of-pocket
expenses in connection with these services. During the years ended December
31, 1997, 1996 and 1995, Galapagos incurred fees of $224,000, $236,000 and
$141,000, respectively.
Lottery
Galapagos has a five year contract with a private operator to provide
the wagering distribution system for a government-sponsored electronic
lottery, which commenced in November 1, 1997. Galapagos has an agreement
with Autotote to obtain wagering equipment, software and related services.
Lottery games are sold at OTB agencies of Galapagos and at lottery agencies
selected by the operator. Galapagos' commissions (net of fees to Autotote)
are 1% of gross lottery sales at lottery agencies and 2% of gross lottery
sales at OTB agencies. In addition, the lottery operator pays Galapagos a
monthly fee for each OTB agency that sells lottery games as reimbursement for
a 50% share of telephone line costs. Galapagos is also permitted to identify
the lottery agencies to take Pick 6 pool wagers on Galapagos' live and
simulcasted races.
Assets and liabilities related to Dominican Republic operations amounted
to $2,288,000 and $1,692,000, respectively, as of December 31, 1997 and to
$2,649,000 and $2,529,000, respectively, as of December 31, 1996.
4. REPUBLIC OF PANAMA OPERATIONS:
EGP has a contract with the Panama Government for the operation of
Presidente Remon in Panama City and for the development of off-track betting
in Panama for a period of 20 years that commenced on January 1, 1998. 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. EGP is required to invest up to $4 million in improvements to
(PAGE)
Presidente Remon and for the acquisition of wagering and related equipment in
a period of four years. EGP began simulcasting races from United States race
tracks on January 2, 1998 and live racing commenced on February 14, 1998,
after major improvements to the racing strip were made.
EGP has entered into certain contracts and commitments in connection
with this operation, which should be in effect during 1998. An agreement
with horseowners provides for minimum guaranteed payments to horseowners as
purses in 1998 and 1999 of $3.6 million and $3.9 million, respectively. An
agreement with Autotote for wagering services, software and equipment
requires minimum monthly payments of $25,000 in 1998. Service fees will be
based on 1% (.01) of total wagering.
Management expects that 49% of the capital stock of EGP will be sold to
Panamanian investors for approximately $1.5 million and that EGP will raise
an additional $3.5 million in unsecured debt by June 30, 1998. The Company
has received an underwriting proposal from an investment banker in Panama
with the following terms: (i) 11% interest rate, (ii) maturity in six years,
(iii) no principal amortization during first two years, a balloon payment on
maturity and (iv) requirement for HDA to maintain an investment in the
capital of EGP of $1.5 million. In connection with this proposal, in January
1998 EGP received a $1.5 million bridge loan, which will be repaid together
with accrued interest at 11%, from proceeds of the issuance of debt
securities described above.
As of December 31, 1997, assets related to Panama operations amounted to
$3,033,000.
5. RECEIVABLES FROM EL COMANDANTE OPERATING COMPANY, INC.:
Receivables from ECOC as of December 31, 1997 and 1996 consisted of (i)
a note receivable and accrued interest of $467,977 and $796,203,
respectively, and (ii) unpaid rent under the El Comandante Lease of
$2,638,520 and $1,984,213, respectively. The note accrued interest at 5.75%
and is due in monthly installments of $30,309, including interest, over a
three year period that commenced on May 1, 1996. HDA assumed ECOC's
liabilities in connection with the termination of El Comandante Lease
effective January 1, 1998 and, consequently, these receivables will be
eliminated from the Company's consolidated financial statements.
Under the El Comandante Lease, ECOC was required to pay HDA its Basic
Rent for each race day on the 29th day following such racing day when it
became due and payable. Thereafter, unpaid Basic Rent constituted an
extension of credit and an event of default under the El Comandante Lease.
During 1997 ECOC was in default with respect to this provision.
Under the Indenture (as defined in Note 6), the maximum outstanding
amount of credit that HDA could extend to ECOC was $2 million, excluding the
portion of the rent that has not become due and payable (but which has been
accrued and included in rent receivable). During 1997 ECOC's payable to HDA
increased to an amount that approached the limit established in the El
Comandante Lease and the Indenture. The Indenture also required HDA to
commence appropriate proceedings to enforce ECOC's obligation to pay rent if
unpaid rent exceeded the monthly average for 30 days.
(PAGE)
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 2).
6. 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
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% payable semiannually. In March 1995 the
Warrants automatically 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, including the capital stock of ECCC owned by HDA.
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 (to the extent these proceeds are
not invested in HDA's racing business within a year), or a total taking or
casualty, or in the event of a change of control of HDA.
As a result of the sale of the Television Stations, HDA redeemed on
March 28, 1997, $737,000 in First Mortgage Notes, at par. In connection with
the Noteholders Approval (as described in Note 10), 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 note
discount and deferred financing costs are included in the accompanying
consolidated statement of income (loss) for the year ended December 31, 1997
as an extraordinary item. HDA has 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 the
principal amount of outstanding First Mortgage Notes.
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. However, the 1997 redemptions have
reduced the amount due on December 15, 2000. The stated maturities of the
First Mortgage Notes at December 31, 1997, reduced by early redemptions are
(PAGE)
as follows (in thousands):
Year Amount
---- -------
1998 $ -
1999 -
2000 3,563
2001 10,200
2002 10,200
2003 40,800
--------
64,763
Less note discount (1,399)
--------
$63,364
========
The amount due in 2000 will be reduced by any redemptions of First
Mortgage Notes in 1998 pursuant to the $3 million offer.
As discussed in Note 4, Management expects the EGP underwriting to close
in June 1998 but there can be no assurance that this deadline will be met.
If the Offering is not closed before June 15, 1998 and as a consequence HDA
does not recover $1,375,000 of its investment at December 31, 1997 and any
additional funds invested in 1998 by that date, HDA may temporarily need
another source of funds to make the $3.8 million interest payment on its
First Mortgage Notes due on June 15, 1998.
ECCC and HDA may also 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.
The Indenture contains certain covenants, one of which restricts the
amount of distributions to HDA's partners, including the Company. These
distributions are equal to approximately 48% of HDA's consolidated net
income. In connection with the Noteholders Approval (see Note 10), HDA
agreed to temporarily reduce these distributions by 17%. 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 48% Distributions, provided that HDA meets a certain
minimum debt coverage ratio. HDA has not meet this debt coverage ratio.
7. NOTES PAYABLE:
The Company's outstanding notes payable consist of the following:
(i) Capital leases of Galapagos for the acquisition of wagering
equipment for OTB agencies in the Dominican Republic. The loans are
guaranteed by HDA and collateralized by wagering equipment. The notes are
payable in monthly installments, including interest at 10.75%. As of December
31, 1997 and 1996, loan balance was $615,697 and $572,550, respectively.
(PAGE)
(ii) A loan of the Company paid in November 1997. As of December 31,
1996 the loan balance was $500,000 and interest rate was based on the
Citibank prime rate plus 2%, equivalent to 10.25%.
(iii) A $1 million loan borrowed by HDA in December 1997 for working
capital purposes and temporary investments in Panama. The loan is payable in
four quarterly installments of $250,000 commencing April 1, 1998. The
Company has assigned up to $250,000 of quarterly distributions from HDA to
the bank and has also guaranteed the loan. The note bears interest, payable
monthly, based on Citibank prime rate plus 1/2%. At December 31, 1997 the
interest rate was 9%.
(iv) Notes payable to Supra related to a transaction described in Note
10. The $260,000, plus accrued interest at 8.5%, is payable in three
installments during 1998.
In connection with the termination of the El Comandante Lease, effective
January 1, 1998 ECMC assumed certain obligations under capital leases,
originated mainly for the acquisition of wagering related equipment. These
obligations were not reflected in the Company's consolidated financial
statements until the transfer.
The following table summarizes future minimum principal payments on notes
payable and capital leases of the Company and its subsidiaries:
Galapagos HDA ECMC
---------- ---------- ----------
Due during year
ending December 31,
1998 $ 260,706 $1,010,000 $ 513,417
1999 190,232 250,000 510,131
2000 92,137 - 445,225
2001 72,622 - 35,936
2002 - - 10,443
---------- ---------- ----------
$ 615,697 $1,260,000 $1,515,152
========== ========== ==========
8. UNIT INCENTIVE AWARDS
Various employees of the Company's managing general partner, EMC, who
were previously employed by a subsidiary of IGC, participated in IGC's Unit
Incentive Plan and Unit Option Plan ("IGC's Employee Plans"). Effective
December 31, 1996 the Company agreed to the terms of a Control Transfer
Agreement (see Note 10) to provide these employees with unit incentive awards
("Replacement Awards") that provide benefits substantially equivalent to the
awards in IGC's Employee Plans.
When the Company assumed the obligations for the Replacement Awards, IGC
transferred to the Company 75,000 of its unregistered Class A limited
Partnership Units ("IGC Units"), which are included as part of other assets.
Also, there are 20,000 IGC Units that are allocated to unit options held by
one ex-employee. These unit options are fully vested and exercisable at
December 31, 1997 and will expire on March 31, 1998. The Company is required
(PAGE)
to return to IGC the portion of the 20,000 IGC Units that is not exercised.
The Company will use the IGC Units to partially satisfy its obligations under
these plans, which at December 31, 1997 amounted to $91,709 (included in
accrued liabilities).
Under the Replacement Awards, the Unit Appreciation Rights entitle the
holders to receive upon exercise, an amount payable in cash, Units of the
Company, IGC Units or some combination thereof, as determined by EMC's
Directors. The amount received upon exercise is based on the excess of the
fair market value of the IGC's Units, plus 50% of the fair market value of
the Company's Units, over the $4 base price of the Unit Appreciation Rights
("UAR"). The fair market values of the units are determined based on the
average for a 20 day period commencing 10 days before the exercise date.
These plans are summarized on the following tables:
UAR Options
------------ -----------
Outstanding at December 31, 1996 76,500 20,000
Cancelled (18,600) -
------------ -----------
Outstanding at December 31, 1997 57,900 20,000
============ ===========
At December 31, 1997, the dates that the outstanding UAR become
exercisable and their expiration dates are as follows:
UAR Expiring
------------------------------------------------
March 31, 1998 May 15, 2004 October 18, 2004
-------------- ------------ ----------------
UAR exercisable at
December 31, 1997 27,900 6,000 16,000
May 15, 1998 - 2,000 -
October 18, 1998 - - 4,000
May 15, 1999 - 2,000 -
------------ ------------ ------------
27,900 10,000 20,000
============ ============ ============
9. INCOME TAXES:
The Company is organized as a partnership, which is not a taxable entity
for United States tax purposes and incurs no federal income tax liability.
Instead, each partner is required to take into account in computing its
income tax liability such partner's allocable share of the Company's net
taxable income.
The reconciliation between the Company's consolidated net income (loss)
per books and its net taxable income (loss), per United States partnership
return, allocable to holders of Units is as follows:
(PAGE) December 31,
-----------------------------------------------------
1997 1996 1995
--------------- ----------------- -----------------
(In thousands except per Unit amounts)
Total Per unit Total Per Unit Total Per Unit
------- ------- ------- -------- -------- --------
Net income (loss) per
books $2,478 $ 0.39 $ 827 $ 0.13 $ (591) $ (0.10)
Taxable (income) loss
not allocable to
Unitholders (1,216) (0.19) (1,226) (0.20) (1,168) (0.19)
Book income from HDA
before consolidation
and unrecorded
minority interest - - - - 345 0.06
Difference in gain from
sale of Television
Stations (1,083) (0.17) (1,286) (0.21) - -
Additional tax
depreciation (257) (0.04) (169) (0.03) (576) (0.09)
Losses from corporate
subsidiaries not
deductible by the
Company 806 0.13 1,617 0.26 2,315 0.37
Write-off of receivables - - (30) - (387) (0.06)
Disallowed costs related
to partnership interest
redemption 260 0.04 - - - -
Deferred taxes 893 0.14 172 0.03 (10) -
Other, none of which is
individually
significant 167 0.02 (75) (0.01) (143) (0.02)
------- ------- -------- -------- -------- --------
Net taxable income
(loss) $2,048 $ 0.32 $ (172) $ (0.03) $ (216) $ (0.03)
======= ======= ======== ======== ======== ========
The Company is subject to Puerto Rico income taxes at a 29% tax rate on
its Puerto Rico source income. The provision for income taxes included in the
accompanying consolidated financial statements is attributed to (i) Puerto Rico
income taxes on the Company's distributive share of HDA's income from Puerto
Rico sources and (ii) ECCC's United States income taxes on its taxable income,
as follows:
(PAGE) For the years ended December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
Puerto Rico income taxes -
Deferred $ 893,403 $ 156,021 $ (10,170)
Current - 257,300 217,200
Federal income tax- current 1,582 5,863 4,964
Dominican Republic-deferred - (19,161) 19,161
----------- ----------- -----------
$ 894,985 $ 400,023 $ 231,155
=========== =========== ===========
The deferred income taxes are related to the difference between the Puerto
Rico tax basis of the Company's investment in HDA and the amount reported in
the financial statements. The 1996 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.
Galapagos has deferred income tax benefits for losses carryforwards, which
have been fully reserved by a valuation allowance.
10. RELATED PARTY TRANSACTIONS:
Unsecured Partner's Loans
During 1996 and 1995 the Company received advances from IGC, which until
December 31, 1997 was a general partner. The advances accrued interest based
on the Citibank prime rate plus 1%, which at December 31, 1996 was 9.25%. The
loans and accrued interest were paid in 1997.
Transactions With Supra
On August 19, 1997, HDA redeemed for $4,075,000 the 17% interest held by
Supra, thereby increasing the Company's interest in HDA to approximately 99%.
The redemption price plus transaction costs of $238,724 were recorded in
partners' deficit, net of the book value of Supra's minority interest in HDA of
$1,531,934. 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 cancellation relieved
HDA of its guarantee of approximately $1.6 million of these obligations which
would become due upon termination of the El Comandante Lease. The $260,000 and
transaction costs of $59,550 are included in the 1997 consolidated statement of
income (loss) as other costs. 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 against the Company and other
related parties.
(PAGE)
Management Agreements
IGC and IGP provided substantially all of the administrative support
services to EMC and the Company through June, 1996 pursuant to a three year
support service agreement effective as of February 6, 1995, and continue to
provide limited administrative support and office space. The Company
reimburses IGC and IGP for expenses incurred in providing such services. In
December 1997, EMC prepaid IGP $80,000, in these type of expenses to be applied
against actual charges made by IGP.
Since August 1996 Interstate Business Corporation ("IBC"), the sole
stockholder of EMC and a general partner in IGC, has been providing certain
accounting services to the Company for a monthly fee of $1,000.
IGP provided management services to HDA pursuant to a management agreement
until August 16, 1996 when the agreement was assigned to EMC. The Agreement
has a term of 15 years ending in December 2004. Pursuant to this agreement,
HDA pays an annual management fee of $250,000, adjusted annually after 1993 by
the percentage increase in CPI over the prior year.
Pursuant to terms of its partnership agreement, the Company reimburses EMC
for its costs and expenses, including compensation of EMC's officers and
directors, in excess of amounts of EMC's cash receipts. Effective January 1,
1998, all officers of EMC were transferred to EEC, a wholly owned subsidiary of
the Company and, consequently, substantially all services rendered by EMC will
primarily be services of its Directors. EEC will also assume EMC's rights to
all management agreements with the Company's consolidated subsidiaries.
The following represents a summary of amounts accrued with respect to
services rendered by certain related parties during the years ended December
31, 1997, 1996 and 1995 (in the case of HDA, for the periods after March 8,
1995):
Services Rendered For the years ended December 31,
- ----------------------- --------------------------------
To By Concept 1997 1996 1995
- ----------- -------- --------------------- --------- --------- ----------
HDA IGP Management agreement $ - $ 169,278 $ 215,400
HDA EMC Management agreement 278,673 101,414 -
The Company IBC Accounting services 12,000 8,000 -
The Company IGC/IGP Support agreement 28,607 117,198 254,364
The Company EMC Expenses in excess of
receipts 420,958 54,783 -
The Company EMC Directors fees and
expenses 88,200 71,500 36,069
Control Transfer Agreement
Pursuant to the terms of a Control Transfer Agreement effective as of
December 31, 1996, as amended, the following agreements were made:
1. IGC sold its interest in EMC to IBC.
2. IGC guaranteed EMC up to $20 million (the "IGC Guarantee") for payment
of EMC's liabilities in excess of assets, arising from EMC status as general
(PAGE)
partner of the Company, should EMC or the Company become insolvent. IGC
withdrew as general partner of the Company following execution of the IGC
Guarantee, which is effective until December 31, 2001.
3. IBC irrevocably assigned to IGC all rights to any distributions
received by EMC from the Company in respect of EMC's general partnership
interest in the Company to the extent that such distributions and other cash
receipts of EMC exceed EMC's expenses incurred in the ordinary course of
business in its capacity as managing general partner of the Company.
4. IBC contributed to the capital of EMC 50,000 units of IGC and agreed to
maintain in EMC at all times prior to termination of the IGC Guaranty
sufficient capital to provide EMC with tangible net worth of at least $200,000.
5. EMC shall use its best efforts to obtain the approval of Nasdaq to
continue listing the Units of the Company without relying on the IGC Guarantee.
6. The Company granted Replacement Awards to various executives of EMC,
previously employed by IGP. The number of Units that the Company had agreed to
make available to IGC in connection with the Distribution was reduced from
100,000 to 50,000 Units. IGC transferred 75,000 IGC Units to the Company to
fund the Company's obligations under the Replacement Awards and the Company is
required to return to IGC the portion of 20,000 IGC Units that are not
exercised under option units, expiring on March 31, 1998, held by one
ex-employee of EMC (see Note 8).
Transaction with IGP
On December 16, 1997, the Company purchased from IGP a .19790099% interest
in HDA for a purchase price of $30,000, thereby increasing the Company's
ownership in HDA to exactly 99%.
11. LEGAL PROCEEDINGS:
Certain of the Company's subsidiaries are presently named as defendants in
various lawsuits and might be subject to certain other claims arising out of
its normal business operations. Management, based in part upon advice from
legal counsel, believes that the results of such actions will not have an
adverse impact on the Company's financial position or results of operations.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The balance sheet carrying amounts of cash and cash equivalents,
receivables and other current assets approximate fair value due to the liquid
and short term nature of these items. As of December 31, 1997 and 1996 the
fair value of the First Mortgage Notes were $64,763,000 and $64,600,000,
respectively, based on the market price as quoted by a brokerage firm that
trades the First Mortgage Notes. The carrying value of notes payable
approximates fair value because these obligations bear interest at variable
rates.
(PAGE)
13. UNAUDITED PROFORMA FINANCIAL STATEMENTS:
In August 1997, HDA redeemed a 17% interest owned by a minority partner,
thereby increasing the Company's interest in HDA to approximately 99% and
effective January 1, 1998, it terminated the El Comandante Lease and commenced
operating El Comandante through its wholly owned subsidiary, ECMC (the
"Proforma Transactions"). The following unaudited proforma consolidated
statement of loss for the year ended December 31, 1997 is based upon the
historical consolidated statement of the Company and its subsidiaries, and were
prepared as if the above described transactions had all occurred on January 1,
1997 and excluding the following non recurring transactions: (i) extraordinary
items, (ii) gain from sale of Television Stations and (iii) provision for
$550,000 in charitable and educational contributions committed by ECOC's Board
of Directors in connection with the termination of the El Comandante Lease.
Proforma adjustments also includes results of operations of ECOC for the year
ended December 31, 1997. The unaudited proforma consolidated statement is not
necessarily indicative of what the actual results of operations of the Company
would have been assuming such transactions had been completed as of January 1,
1997, and does not purport to represent the results of operations for future
periods. In Management's opinion, all adjustments necessary to reflect the
effects of these transactions have been made.
PROFORMA CONSOLIDATED STATEMENT OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands except per unit amounts)
(Unaudited)
REVENUES:
Commissions on wagering $ 59,512
Lottery services 88
Other revenues 3,244
Interest income 420
----------
63,264
EXPENSES:
Financial 8,735
Depreciation 2,323
General and administrative 2,333
Operating costs of racing 50,997
-----------
(1,124)
PROVISION FOR INCOME TAXES 372
MINORITY INTEREST (129)
-----------
NET LOSS $ (1,367)
===========
ALLOCATION OF NET LOSS:
General partners $ (14)
Limited partners (1,353)
-----------
$ (1,367)
===========
NET LOSS PER UNIT $ (0.21)
===========
WEIGHTED AVERAGE UNITS OUTSTANDING 6,334
===========
(PAGE)
The following unaudited proforma consolidated balance sheet was presented
as if the Proforma Transactions had taken place on December 31, 1997 (amounts
in thousands):
AT DECEMBER 31, 1997
(Unaudited)
ASSETS:
Cash and cash equivalents $ 1,569
Property and equipment, net 48,829
Deferred costs, net 6,316
Other 2,572
-----------
$ 59,286
===========
LIABILITIES:
First mortgage notes and accrued interest $ 63,681
Notes payable 3,391
Accounts payable and accrued liabilities 7,783
Minority interest in HDA 82
-----------
74,937
PARTNERS' DEFICIT: (15,651)
-----------
$ 59,286
===========
(PAGE) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
El Comandante Operating Company, Inc.:
We have audited the accompanying statements of net liabilities El Comandante
Operating Company, Inc. (a Puerto Rico nonstock corporation in process of
liquidation) (ECOC) as of December 31, 1996, and the related statements of
operations for each of the two years in the period ended December 31, 1996 and
cash flows for each of the three years in the period ended December 31, 1997.
In addition, we have audited the statements of net liabilities in liquidation
as of December 31, 1997 and the related statements of operations and
transactions in liquidation for the year ended December 31, 1997. These
financial statements are the responsibility of ECOC's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable bases
for our opinion.
As discussed in Note 1, effective January 1, 1998, ECOC discontinued its
operations upon termination of its lease of El Comandante Race Track. As a
result, ECOC has changed its basis of accounting as of December 31, 1997 from
the going concern basis to a liquidation basis. Accordingly, the carrying
values of assets are presented at estimated realizable values and liabilities
are presented at estimated settlement amounts.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net liabilities of El Comandante Operating Company,
Inc. as of December 31, 1996, and the results of its operations for each of the
two years in the period ended December 31, 1996 and its cash flows for each of
the three years in the period ended December 31, 1997, its net assets in
liquidation as of December 31, 1997 and results of operations and transactions
in liquidation for the year ended December 31, 1997 in conformity with
generally accepted accounting principles on the bases described in the
preceding paragraph.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule II - Allowance for
Doubtful Accounts Receivable is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
March 17, 1998
San Juan, Puerto Rico
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
(In Process of Liquidation)
STATEMENTS OF OPERATIONS AND TRANSACTIONS IN LIQUIDATION FOR THE YEAR
ENDED DECEMBER 31, 1997 AND OPERATIONS FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996
1997 1996 1995
----------- ----------- -----------
REVENUES:
Commissions on wagering $54,881,688 $57,285,607 $55,731,364
Other 2,474,084 2,728,516 2,329,179
----------- ----------- -----------
Total revenues 57,355,772 60,014,123 58,060,543
----------- ----------- -----------
EXPENSES:
Payments to horse owners and
horse owners' association 27,359,694 28,561,893 27,851,823
Track rent 13,720,424 14,321,401 14,332,841
Salaries, wages and employee
benefits 7,565,816 7,314,034 6,866,856
Operating expenses 5,294,508 5,721,396 5,853,875
General and administrative 2,982,159 2,804,546 2,783,343
Marketing and satellite
transmission costs 2,469,002 2,607,337 2,178,155
----------- ----------- -----------
Total expenses 59,391,603 61,330,607 59,866,893
----------- ----------- -----------
LOSS BEFORE DEFERRED TAX BENEFIT
AND EXTRAORDINARY ITEMS (2,035,831) (1,316,484) (1,806,350)
DEFERRED TAX BENEFIT (522,819) (94,200) (53,007)
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEMS (1,513,012) (1,222,284) (1,753,343)
EXTRAORDINARY ITEMS:
Forgiveness of indebtedness, net of
deferred income taxes of $487,500 1,884,222 - -
---------- ----------- -----------
NET INCOME (LOSS) $ 371,210 $(1,222,284) $(1,753,343)
========== =========== ===========
The accompanying notes are an integral
part of these statements.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
(In Process of Liquidation)
STATEMENTS OF NET LIABILITIES IN LIQUIDATION AS OF DECEMBER 31, 1997
AND NET LIABILITIES AS OF DECEMBER 31, 1996
1997 1996
----------- -----------
ASSETS:
CURRENT ASSETS:
Cash, including restricted cash of
$424,994 and $494,653, respectively $1,061,239 $ 1,116,330
Accounts receivable, net 538,009 1,379,932
Prepayments and supplies inventory 277,658 242,468
Notes receivable 436,245 335,248
----------- -----------
Total current assets 2,313,151 3,073,978
----------- -----------
DEFERRED COSTS, net:
Organizational costs - 28,015
Deferred tax asset 687,656 652,337
Telecommunication installation costs 118,724 185,905
Noncompetition agreement - 145,833
----------- -----------
Total deferred costs 806,380 1,012,090
----------- -----------
FURNITURE AND EQUIPMENT, net 3,773,324 3,964,066
----------- -----------
Total assets 6,892,855 8,050,134
----------- -----------
(continues)
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
(In Process of Liquidation)
STATEMENTS OF NET LIABILITIES IN LIQUIDATION AS OF DECEMBER 31, 1997
AND NET LIABILITIES AS OF DECEMBER 31, 1996
(continued)
1997 1996
----------- -----------
LIABILITIES:
CURRENT LIABILITIES:
Current portion of capital lease
obligations 513,417 707,917
Rent payable to Housing Development
Associates S.E. ("HDA") 2,638,520 1,984,213
Accounts payable and accrued liabilities 4,245,126 3,299,930
Outstanding winning tickets and refunds 996,756 784,897
----------- -----------
Total current liabilities 8,393,819 6,776,957
----------- -----------
CAPITAL LEASE OBLIGATIONS 1,001,735 1,223,557
----------- -----------
NOTE PAYABLE TO HDA, and accrued interest 467,977 796,203
----------- -----------
OTHER LIABILITIES:
Notes - 2,450,000
Accrued interest - 145,303
----------- -----------
- 2,595,303
----------- -----------
Total liabilities 9,863,531 11,392,020
----------- -----------
NET LIABILITIES IN LIQUIDATION (1997) AND
NET LIABILITIES (1996) $(2,970,676) $(3,341,886)
=========== ===========
The accompanying notes are an integral part
of these statements.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
(In Process of Liquidation)
STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 371,210 $(1,222,284)$(1,753,343)
----------- ----------- -----------
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities-
Forgiveness of indebtedness (2,371,722) - -
Depreciation and amortization 809,165 698,102 590,244
Deferred tax benefit (35,319) (94,200) (53,007)
Provision for bad debts 50,008 100,008 100,000
Amortization of noncompetition
agreement 145,833 250,000 250,000
(Increase) decrease in assets-
Accounts receivable 791,915 (503,621) (361,232)
Prepayments supplies inventory
and organization costs (26,850) 49,249 306,905
Increase (decrease) in liabilities-
Accounts payable and accrued
liabilities 945,196 387,982 100,302
Outstanding winning tickets
and refunds 211,859 (1,310,897) 501,042
Accrued interest (143,071) 20,401 42,244
Rent payable 654,307 1,188,069 796,146
----------- ----------- -----------
Total adjustments 931,321 785,093 2,272,644
----------- ----------- -----------
Net cash provided by (used
in) operating activities 1,402,531 (437,191) 519,301
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in notes
receivable (100,997) (24,304) 72,995
Capital expenditures (292,788) (484,196) (411,167)
Payments of telecommunication
installation costs - (9,586) (17,738)
----------- ----------- -----------
Net cash used in investing
activities (393,785) (518,086) (355,910)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable - - 1,000,000
Payments on note payable (408,736) (207,594) -
Payments of capital lease
obligations (655,101) (604,246) (488,275)
Payments of organizational costs - - (6,470)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (1,063,837) (811,840) 505,255
----------- ----------- -----------
(continues)
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
(In Process of Liquidation)
STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
(continued)
1997 1996 1995
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (55,091) (1,767,117) 668,646
CASH, beginning of year 1,116,330 2,883,447 2,214,801
----------- ----------- -----------
CASH, end of year $1,061,239 $ 1,116,330 $ 2,883,447
=========== =========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 235,466 $ 168,849 $ 246,495
=========== =========== ===========
NONCASH TRANSACTIONS:
Equipment acquired through
capital leases $ 238,779 $ 656,630 $ 429,211
=========== =========== ===========
Forgiveness of indebtedness $2,371,722 $ - $ -
=========== =========== ===========
The accompanying notes are an integral part
of these statements.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
(In Process of Liquidation)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
El Comandante Operating Company, Inc. ("ECOC") is a Puerto Rico non-
stock corporation which leased from Housing Development Associates S.E.
("HDA") the El Comandante Race Track ("El Comandante"), the only thoroughbred
race track and off-track betting operation in Puerto Rico. Due to an
existing default for unpaid rent (see Note 4) and for certain other reasons
permitted under the lease agreement (the "El Comandante Lease"), HDA
terminated the El Comandante Lease effective December 31, 1997. On January
1, 1998, ECOC transferred to HDA, at book value, all assets employed in the
racing business and HDA assumed all agreements and liabilities of ECOC.
As a result of the termination of El Comandante Lease and the cease of
its racing operations, ECOC changed its basis of accounting for 1997 from a
going concern basis to a liquidation basis. Accordingly, the carrying values
of assets as of December 31, 1997 are presented at estimated realizable
values and liabilities are presented at estimated amounts. The carrying
amount assigned to all assets and liabilities did not change from historical
cost amounts, as they represent a fair estimate of liquidating values. No
significant transactions in liquidation were recorded as part of changing
ECOC's basis of accounting from a liquidation to a going concern basis.
On December 31, 1997, the Board of Directors of ECOC made commitments
with several educational and charitable institutions to make contributions
totalling $550,000 in a period of four years commencing in 1998, which was
recorded in the accompanying financial statements. In connection with the
termination of the El Comandante Lease, HDA assumed this contingent
liability.
2. SUMMARY OF ACCOUNTING POLICIES:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Commissions on Wagering
ECOC earned commissions ("ECOC Commissions") on bets placed on El
Comandante's thoroughbred horse races through wagering facilities at El
Comandante and at wagering facilities located at independently owned off-
track betting ("OTB") agencies throughout Puerto Rico, and from wagering on
races simulcasted outside Puerto Rico, principally to Dominican Republic. El
Comandante offers bettors win and place, daily double, exacta, trifecta,
quiniela and pool wagering. Commissions are based on percentages of wagers
(PAGE)
established by law and vary for the different types of wagers in Puerto Rico,
as follows: 26% of daily double and pool wagers; 20% of exacta, trifecta and
quiniela wagers; and 25% of losing wagers on win and place wagers. ECOC
Commissions on wagers in Puerto Rico during the years ended December 31,
1997, 1996 and 1995 averaged 21.08%, 21.27% and 20.56%, respectively.
Commissions on simulcasted races are negotiated with wagering facilities
outside Puerto Rico. ECOC Commissions on wagers on simulcasted races during
the years ended December 31, 1997 and 1996 and 1995 averaged 6.34%, 6.20% and
6.36%, respectively.
Restricted Cash
Restricted cash represents (i) accumulated cash in the "Pool Pote" which
is funded by 4% of the amounts payable to winners of the daily Pick 6 pool
and (ii) a bonus amount which is added to the Pick 6 pool payout of
predetermined race days. The Pool Pote is paid out when there is a sole pool
winner or when it reaches $2 million, $1 million is paid out as part of the
regular Pick-6 pool on the following Sunday or Holiday. The corresponding
payables are recorded as part of the liability for outstanding winning
tickets and refunds.
Accounts Receivable
Accounts receivable include balances from pool agents, simulcasting
commissions, fees earned under a management agreement described in Note 4 and
other miscellaneous amounts. As of December 31, 1997 and 1996, reserves for
doubtful accounts amounted to $290,067 and $292,087, respectively.
Notes Receivable
Notes receivable consist of unsecured short term loans to horse owners,
with interest at 2% over prime rate and with various maturity dates. These
loans provide financing to horse owners to purchase horses as a means to
improve the quality of racing. ECOC has advised the Confederacion Hipica de
Puerto Rico (the "Confederacion"), a horse owners' association, that its
credit line to all members of the Confederacion, as a group, will not exceed
$500,000 and it will not extend credit in excess of $50,000 to any single
owner, nor lend more than 80% of the purchase price of any horse.
Telecommunication Installation Costs
These costs are related to the installation of telephone lines by the
Puerto Rico Telephone Company ("PRTC") and to excise taxes on the off-track
telecommunication equipment. The costs are amortized on a straight-line
basis over the remaining life of an agreement with PRTC expiring on April 1,
1999. Amortization expense for the years ended December 31, 1997, 1996 and
1995 was approximately $60,000 in each year.
Noncompetition Agreement
These costs are related to a Noncompetition Agreement entered into with
the majority owner of Supra & Company S.E. ("Supra") and former President of
ECOC which prohibited him from investing or participating in horse racing
operations anywhere in the Caribbean for a period of three years from August
1, 1994. The amount of $750,000 payable under the agreement was recorded as
(PAGE)
a deferred cost and was amortized on a straight-line basis over the
noncompete period. Amortization expense for the years ended December 31,
1997, 1996 and 1995 was $145,833, $250,000 and $250,000, respectively.
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 December 31, 1997 and 1996,
furniture and equipment was as follows:
December 31,
Useful --------------------------
Lives 1997 1996
-------- ---------- -----------
Furniture 10 $ 429,467 $ 399,088
Equipment 4-14 5,299,105 4,948,516
Motor vehicles 6 937,537 799,145
---------- -----------
6,666,109 6,146,749
Less - Accumulated depreciation (2,892,785) (2,182,683)
---------- -----------
$3,773,324 $3,964,066
========== ===========
For information with respect to pledged assets, see Note 4.
3. PENSION PLAN:
ECOC has a non-contributory defined benefit pension plan covering
substantially all of its nonunion employees. As a result of the transfer of
the company's assets, liabilities and commitments, HDA is now the sponsor of
the nonunion employees pension plan. Benefits are based on the employee's
years of service and highest average earnings over five consecutive years
during the last 15 years of employment. ECOC's policy is to fund an amount
not less than the ERISA minimum funding requirement or more than the maximum
deductible under the Puerto Rico tax law.
The net periodic pension expense for the years ended December 31, 1997,
1996 and 1995, respectively, included the following components:
1997 1996 1995
---------- ---------- ----------
Service cost $ 81,851 $ 80,475 $ 88,613
Interest cost 62,012 54,471 44,982
Actual return on plan assets (31,478) (29,061) (13,768)
Amortization of transitional asset 22,964 16,690 (1,701)
---------- ---------- ----------
Net pension expense $ 135,349 $122,575 $ 118,126
========== ========== ==========
(PAGE)
Reconciliation of the funded status and the amounts recognized in the
accompanying statements of net liabilities follows:
1997 1996 1995
---------- ---------- ----------
Accumulated benefit obligations -
Vested $ 564,891 $ 383,675 $ 350,061
Non-vested 35,211 23,828 15,400
---------- ---------- ----------
$ 600,102 $ 407,503 $ 365,461
========== ========== ==========
Actuarial present value of projected
benefit obligations $(926,531) $(723,857) $(661,354)
Plan assets at fair value 465,855 352,889 333,167
---------- ---------- ----------
Under funded status (460,676) (370,968) (328,187)
Item not yet recognized in earnings -
Unrecognized transitional obligation 286,893 234,975 198,008
---------- ---------- ----------
Accrued pension expense $(173,783) $(135,993) $(130,179)
========== ========== ==========
Assumptions used for the above computations included:
1997 1996 1995
---------- ---------- ----------
Discount rate 7.5% 8% 8%
Expected rate of increase in future
compensation levels 4.5% 5% 5%
Expected long-term rate of return on
assets 7.5% 8% 8%
4. THE OPERATING LICENSE AND EL COMANDANTE LEASE:
Operating License
On December 15, 1989, the Puerto Rico Racing Board (the "Racing Board")
granted ECOC a license to operate El Comandante, which expires on
December 14, 2004 (the "Operating License"). The Operating License, which
requires payment of an annual license fee (currently $250,000), provides ECOC
with: (i) the exclusive right to operate a race track in the area of Puerto
Rico known as the San Juan Region, which approximates the northern half of
Puerto Rico, as delineated in maps produced by the Puerto Rico Planning Board
and Government Development Administration; (ii) the exclusive right to
conduct all types of authorized betting, both at El Comandante and off-track,
anywhere in Puerto Rico, based on races held at El Comandante; and (iii) the
right to hold a minimum 180 day or night race days per year.
El Comandante's horse racing and pari-mutuel wagering operations are
subject to substantial government regulation. Pursuant to the Puerto Rico
Horse Racing Industry and Sport Act (the "Racing Act"), the Racing Board and
the Puerto Rico Racing Administrator (the "Racing Administrator") exercises
significant regulatory control over ECOC's racing and wagering operations.
(PAGE)
For example, the Racing Administrator determined the monthly racing program
for El Comandante and approved the number of annual race days in excess of
the statutory minimum of 180. The Racing Act also apportions payments of
monies wagered that would be available as ECOC Commissions. The Racing Board
consists of three persons appointed to four-year terms by the Governor of
Puerto Rico. The Racing Administrator is also appointed by the Governor for
a four-year term.
El Comandante Lease
Until December 31, 1997 HDA leased El Comandante to ECOC under a lease
agreement, as amended, (the "El Comandante Lease") that required payments by
ECOC to HDA of rent consisting of 25% ("Basic Rent") of the annual
commissions earned by ECOC. These commissions consist of all payments
received by ECOC on all monies wagered with respect to horse racing occurring
at El Comandante, whether wagered at El Comandante or at other betting
facilities in Puerto Rico or any other country. In 1995 the El Comandante
Lease also provided for payment of certain fixed rent of $400,000. The El
Comandante Lease provided for ECOC to pay all El Comandante expenses except
that, pursuant to (i) an amendment effective January 1, 1996, HDA assumed the
obligation to pay real property taxes on El Comandante and (ii) an amendment
effective January 1, 1997, HDA assumed the obligation to pay the annual
racing license fee.
Termination of El Comandante Lease and Assignment of Operating License
Due to the existing default for unpaid Basic Rent and for certain other
reasons permitted under the El Comandante Lease, HDA terminated the El
Comandante Lease. In connection therewith on January 1, 1998 at HDA's
direction (i) ECOC transferred, at book value, to El Comandante Management
Company, LLC ("ECMC"), a wholly owned subsidiary of HDA, all assets employed
in the racing business, (ii) ECMC assumed all agreements and liabilities of
ECOC, including the $3.1 million payable to HDA, and (iii) ECOC assigned to
ECMC the Operating License.
The termination of the El Comandante Lease and the assignment of the
Operating License to ECMC are subject to the approval of the Racing Board,
which has not make a final determination on this matter but has temporarily
permitted ECMC to operate El Comandante until their review process is
concluded.
Consulting Agreement
Pursuant to a consulting agreement between ECOC and Interstate General
Properties Limited Partnership S.E. ("IGP") (the "Consulting Agreement"), and
as required under the El Comandante Lease, ECOC retained as executive
management three racing consultants then employed by IGP. In April 1996, IGP
assigned its interest in the Consulting Agreement to Equus Management Company
("EMC") and the three racing consultants became employees of EMC. Except for
$25,000 of the annual salary and related payroll costs of one consultant,
ECOC reimbursed all of payroll and fringe benefit costs with respect to the
employment of the consultants. The Consulting Agreement was cancelled
effective July 1, 1997. Fees incurred by ECOC pursuant to the Consulting
Agreement during the years ended December 31, 1997, 1996 and 1995 were
$560,700, $894,000 and $871,000, respectively.
(PAGE)
Horse Owners' Agreement and Wagering Service Agreement
ECOC had an agreement with the Confederacion whereby 50% of wagering
commissions received by ECOC on races held at El Comandante are to be paid to
the Confederacion through April 1, 1998, plus an annual fixed amount of
$55,000 from 1993 to 1998. The Confederacion also receives a minimum of $500
per race day for ECOC's wagering commissions on El Comandante races
simulcasted outside Puerto Rico ("Simulcasting Commissions") and when
Simulcasting Commissions exceed simulcasting expenses plus $500, the
Confederacion receives $500 plus 50% of Simulcasting Commissions.
ECOC received wagering services, software and equipment under a service
agreement with Autotote Systems, Inc, effective through March 15, 2005. The
service agreement required minimum annual payments which consist of the
greater of $800,800 annually or .65% (.0065) of total wagering. The
Confederacion had agreed to reimburse ECOC an amount equal to .325% (.00325)
of wagering for each race day up to a maximum of $3,461 per race day until
April 1998.
5. PAYABLES TO HOUSING DEVELOPMENT ASSOCIATES S.E.:
Under the El Comandante Lease, ECOC was required to pay HDA its Basic
Rent for each race day on the 29th day following such racing day. ECOC's
failure to pay Basic Rent, in the aggregate, in an amount equal to one
month's average Basic Rent (based on the preceding 12 months) for a period of
30 days was an event of default under the El Comandante Lease. During 1997
ECOC was in default of this provision.
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 notified ECOC of the termination of the El Comandante Lease
effective December 31, 1997. Effective January 1, 1998 ECMC assumed all
ECOC's liabilities, including this payable to HDA.
6. OTHER LIABILITIES AND EXTRAORDINARY ITEM:
Other liabilities at December 31, 1996 consisted of (i) unsecured notes
of $160,000 to IGP and $40,000 to 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 bore interest at 2.5% over the prime rate, without a stated maturity
date, which at December 31, 1996 was 10.75%.
In connection with the purchase by HDA of Supra's 17% interest in HDA
the obligations to Supra and Velez were canceled on August 19, 1997 in
exchange for a payment by HDA of $260,000 to Supra and Velez. In December
1997 ECOC paid IGP $210,000 in cancellation of the note and accrued interest
which totalled $291,722. The cancellation of the obligations to Supra and
Velez and the amount of discount in cancellation of the IGP note have been
(PAGE)
recorded in the accompanying statement of operations and transactions in
liquidation for the year ended December 31, 1997 as extraordinary items.
7. INCOME TAXES:
Deferred tax assets of $687,656 and $652,337, net of valuation
allowances of $1,272,848 and $1,729,926, were recorded as of December 31,
1997 and 1996, respectively. These assets arose 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 in 1998, mainly from the gain on the transfer of assets and
liabilities on January 1, 1998 to HDA upon termination of the El Comandante
Lease. Any tax deficiency of ECOC will be assumed by ECMC.
The deferred credit for income taxes for the years ended December 31,
1997, 1996 and 1995 is net of an increase (decrease) in the valuation
allowance of ($457,078), $310,493 and $572,943, respectively.
8. LEGAL PROCEEDINGS:
ECOC has been named as a defendant in various lawsuits and might be
subject to certain other claims arising from its normal business operations,
including employment-related claims. Based upon facts available to date,
management and legal counsel believe that none of such actions will have a
material adverse effect on ECOC's financial position or results of
operations.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The balance sheet carrying value of cash and receivables approximates
fair value because of the liquid nature of these assets. The carrying value
of the notes receivable approximates fair value because these notes bear
interest at a rate higher than prime rate. The carrying value of the capital
lease obligations approximates fair value because these obligations bear
interest at market.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
SCHEDULE -II- ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
For Year Balance Provision Balance
ended Beginning Charged to End of
December 31, of Year Expense Write-Offs Recoveries Year
------------ ---------- ----------- ---------- ---------- ---------
1995 248,887 100,000 (192,025) 14,873 171,735
1996 171,735 100,008 0 20,344 292,087
1997 292,087 50,008 ( 91,416) 39,388 290,067
Under the on-line off-track betting system, ECOC has daily receivables
from agents for the difference between amounts wagered at the agencies, less
(1) payouts made by agents to winnings bettors and (2) agents' commissions.
The uncollectible receivables are the result of significant volume in
wagering resulting from the on-line system, which increases the amount of
daily receivables.
(PAGE)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND EMC
Managing Partner of the Company
Equus Management Company ("EMC") is the managing general partner of the
Company and, as such, has full and exclusive responsibility and authority to
manage the Company, including declaring and authorizing cash distributions,
making employment decisions, determining executive compensation and making
investment decisions and other decisions normally made by executive officers
and directors of a corporation.
EMC does not engage in any significant activities other than managing the
business of the Company. EMC is governed by its Board of Directors, which
currently consists of seven persons. Directors will be elected in the future
either by Interstate Business Corporation ("IBC"), as the parent company of
EMC, or by the directors then holding office subject to certain limitations,
including that at least two of the directors be independent of the Company,
IBC and Interstate General Company L.P. ("IGC"). Thus, Unitholders do not
have the power to elect EMC's directors. The officers of EMC are elected by
its Board of Directors. At present, two of EMC's directors are directors of
IGC's managing general partner and two are officers and directors of IBC.
Approximately 99.4% of IBC is owned by the adult children of James J. and
Barbara A. Wilson. IGC is managed by its managing general partner,
Interstate General Management Corporation ("IGMC"). The Wilson family and
companies controlled by them, including IBC and Wilson Family Limited
Partnership ("WFLP"), hold approximately a 54.1% interest in IGC and a 42.6%
interest in the Company.
Directors and Executive Officers of the Company and EMC
The table below sets forth the name, age and positions with the Company and
EMC of each director and executive officer of EMC and each executive officer
of the Company.
(PAGE)
Name Age Positions with the Company and EMC
- ------------------------ ------- -----------------------------------
Thomas B. Wilson 35 President and Chief Executive
Officer of EMC and the Company;
Director of EMC
Juan M. Rivera-Gonzalez 50 Executive Vice President and
Chief Operating Officer of EMC
and the Company; Director of EMC
Gretchen Gronau 33 Vice President, Chief Financial
Officer and Treasurer of EMC
and the Company
Rafael Otero 42 Senior Vice President of EMC
and the Company
Carlos R. Rodriguez 52 Senior Vice President of EMC
and the Company
Angel Blanco-Bottey 58 Senior Vice President of EMC
and the Company
Donald G. Blakeman 65 Director of EMC
Donald J. Kevane 66 Director of EMC
Alberto M. Paracchini 65 Director of EMC
Barbara A. Wilson 61 Director and Secretary of EMC
Kevin Wilson 39 Director of EMC
Relationships Barbara A. Wilson is the mother of Thomas B. Wilson and Kevin
Wilson.
Certain additional information concerning the above persons is set forth
below.
Thomas B. Wilson has been President and Chief Executive Officer of EMC and
the Company since January 1998 and Director of EMC since February 1998. He
has been a Director of IGMC since December 1995 a Director of IBC since 1994
and a Vice President of IBC since September 1994. From 1994 to December 1997
he was President of El Comandante Operating Company, Inc.("ECOC").
Juan M. Rivera-Gonzalez has been Executive Vice President and Chief
Operating Officer of EMC and the Company since January 1998 and Director of
EMC since February 1998. From January 1996 to December 1997 he was
Executive Vice President of the Company. From September 1995 to December
1995 he served as Vice President of the Company and was also Vice President
of IGC from 1994 to April 1996. From April 1991 to December 1993 he was
President and General Manager of ECOC.
(PAGE)
Gretchen Gronau is a Certified Public Accountant and has been Vice President
and Chief Financial Officer of the Company and EMC since August 1996. From
May 1990 to August 1996 she served in various tax and financial management
positions with IGC, including Vice President from August 1994 to August 1996.
She has served as Assistant Treasurer of IBC since October 1996.
Rafael Otero has been Senior Vice President of EMC and the Company since
January 1998 and Vice President of EMC since April 1996. From 1987 to April
1996 he was an employee of IGC or ECOC and served in the following positions:
Vice President of IGC from February 1992 to April 1993; Treasurer and Senior
Vice President of ECOC from April 1993 to December 1993; Vice President of
IGC from December 1993 to April 1996. He is currently serving as General
Manager of EGP.
Carlos R. Rodriguez has been Senior Vice President of EMC and the Company
since January 1998. Prior to January 1998 he was Vice President of IGC since
1989.
Angel Blanco-Bottey has been Senior Vice President of EMC and the Company
since January 1998. He joined ECOC in 1997 as Executive Vice President and
Chief Financial Officer. From 1993 to 1997 he engaged in selective
consulting work and served in several boards of directors. Prior to 1993 he
served as Executive Vice President of Banco-Central Hispano- P.R., a
commercial bank, from which he retired. He is currently serving as Executive
Vice President of ECMC.
Donald G. Blakeman, until retired effective December 31, 1997, served as the
President of EMC and the Company since January 1996 and a Director of EMC
since its formation in 1994. Since 1994, he was Executive Vice President of
EMC until January, 1996 and Chief Financial Officer of EMC until August 1996.
He has been a Director of IGMC since its formation in 1986. He was Executive
Vice President of IGC and IGMC from 1986 until August 1996 and Secretary
from December 1990 to 1995. He was a Director of IGC's predecessor companies
from 1970 to 1986 and served in various executive positions in those
companies.
Donald J. Kevane has been a Director of EMC since its formation in 1994. He
is a certified public accountant and senior partner in the Puerto Rico
accounting firm of Kevane Peterson Soto & Pasarell, which he founded in 1975.
He is also a director since 1990 of Venture Capital Fund, Inc., a Puerto
Rico-based venture capital firm and a director since 1985 of Universal
Insurance Co., a subsidiary of Kirby Industries.
Alberto M. Paracchini has been a Director of EMC since its formation in
1994. He has been a director of BanPonce Corporation since January 1991, and
was Chairman of the Board from January 1991 to April 1993. He is Vice
Chairman of the Board of Puerto Rican Cement Company, Inc. and a director of
Venture Capital Fund, Inc., a Puerto Rico-based venture capital firm.
Barbara A. Wilson has been a Director of EMC since January 1996 and
Secretary of EMC since August 1996. She served as Director of IGMC from
December 1995 to 1996. She has been a Director of IBC since 1987, Chairman
of the Board since March 1996, Secretary since 1990 and Treasurer since
1993.
(PAGE)
Kevin Wilson has been a Director of EMC since September 1996. He has been
the President, Director and majority owner since 1989 of Community Homes,
Inc., a homebuilding company of which he was a co-founder.
Section 16(a) Beneficial Ownership Reporting Requirements
WFLP filed late on March 31, 1998 a Form 5 to report changes in its
beneficial ownership of Units during 1997 and a Form 4 with respect to its
acquisition of Units in January 1998.
ITEM 11. EXECUTIVE COMPENSATION
Until December 31, 1997 the Company did not have any employees. EMC had
five employees who were officers of EMC and/or the Company, and were
previously employees of Interstate General Properties Limited Partnership
S.E. ("IGP"), a subsidiary of IGC. Three of these employees rendered
services to ECOC pursuant to a consulting agreement that was cancelled
effective June 30, 1997. ECOC reimbursed to EMC all of their compensation
and related costs, except for $25,000 of one employee's annual salary which
was paid by the Company.
The Company reimbursed EMC for its costs and expenses, including
compensation of officers and directors, in excess of amounts EMC received
from other sources, which sources were primarily cash distributions from the
Company and reimbursements and fees for (i) services pursuant to the
consulting agreement with ECOC, (ii) services pursuant to the management
agreement with HDA, and (iii) limited services rendered to IGP and IGC by Mr.
Blakeman and Ms. Gronau.
All employees and management contracts of EMC were transferred to a wholly-
owned subsidiary of the Company on January 1, 1998. Consequently, EMC's only
significant costs will be Directors' fees and expenses. The Company will
reimburse all costs of EMC in excess of any cash it receives, which will
primarily be distributions from the Company.
Summary Compensation Table. The following table sets forth the aggregate
compensation with respect to the Chief Executive Officer and each of the
other four most highly compensated executive officers of EMC.
(PAGE) Long-Term
Compensation
Annual Compensation(1) Awards
--------------------------- ------------
Securities
Underlying
Other Annual Options/ All Other
Name & Principal Salary Bonus Compensation SAR's Compensation
Position Year ($) ($) ($) # (2) ($)(1)(3)
- ------------------ ----- ------- ----- ------------ ---------- ----------
Donald G. Blakeman(4) 27,900
President 1997 315,200 - - SAR 9,420
1996 315,200 - - 9,492
Donald Drew(5) 20,000 9,420
Senior Vice Options
President 1997 385,800 161,620 - -
1996 - - -
Juan M. Rivera 10,000 9,420
Executive Vice SAR
President 1997 180,200 50,000 -
1996 - - -
Rafael Otero 10,000 8,200
Vice President 1997 135,200 47,500 - SAR -
1996 - - -
Gretchen Gronau 10,000
Vice President SAR
and CFO 1997 100,200 - - 5,400
1996 90,200 - - 4,692
(1) The annual and other compensation paid to Messrs. Drew, Rivera and
Otero for 1996 was omitted since all but $25,000 of such annual compensation
was reimbursed to EMC by ECOC. For 1997 the entire amount of compensation has
been included. However, the consulting agreement with ECOC was cancelled
effective June 30, 1997.
(2) Represents Replacement Awards granted by the Company for unit
Appreciation Rights and Unit Options.
(3) Reflects EMC's contributions to Retirement Plan discussed below.
(4) Retired effective December 31, 1997.
(5) His employment terminated on September 30, 1997 but continued
receiving compensation until end of year while on vacations. His salary for
1997 includes a payment of $45,600 for accrued vacations and unpaid at
December 31, 1997. His bonus include $71,620 payable on April 1998 pursuant
to his employment agreement.
(PAGE)
Employment Agreements. Messrs. Drew and Rivera entered into employment
agreements with IGP which were assigned to EMC as of April 22, 1996. Mr.
Drew's agreement, which expired December 31, 1997, provided for a base salary
of $340,000 annually, plus an annual bonus payable no later than April 30 of
each year, equal to (a) 3% of Basic Rent (as defined in the El Comandante
Lease) payable by ECOC for the prior calendar year, (b) less $340,000.
Effective January 1, 1998 Mr. Drew is no longer an employee of EMC but will be
entitled to a bonus of $71,620 in 1998 based on Basic Rent of El Comandante
for 1997.
Mr. Rivera's agreement, which was cancelled effective December 31, 1997,
provided for a base salary of $180,000 annually, plus an annual bonus payable
by April 30 of each year equal to .33% of the Basic Rent payable by ECOC to
HDA for the previous year. Mr. Rivera remains as an employee without any
formal bonus arrangement.
Retirement Plan. The EMC employees were all members of IGC's retirement
plan (the "Retirement Plan") as employees of IGP and continue under the same
plan as employees of EMC. Contributions to the Retirement Plan in 1996 and
1997 were in amounts equal to 4% of base salaries and wages not in excess of
the U.S. Social Security taxable wage base, and 8% of salaries (limited to
$150,000) that exceeded that wage base.
Directors. Directors of EMC who are not employees of the Company, EMC
or any of their affiliates, receive directors' fees established by the Board
of Directors of EMC. These Directors are compensated at a rate of $3,750 per
quarter, $1,000 per meeting and out-of-pocket expenses for meetings. In 1997,
the directors' fees totaled $88,200.
Unit Options and Unit Appreciation Rights. The five employees of EMC who
were previously employed by IGP (the "Transferred Employees") participated in
IGC's Unit Incentive Plan and Unit Option Plan ("Employee Plans"). Effective
December 31, 1996 the Company agreed, pursuant to the terms of a Control
Transfer Agreement, to grant the Transferred Employees unit incentive awards
("Replacement Awards") that provide benefits substantially equivalent to the
awards in the Employee Plans of IGC.
When the Company assumed the obligations for the Replacement Awards, IGC
transferred to the Company 75,000 of its unregistered Class A limited
Partnership Units ("IGC Units"), which are to be used to satisfy the Company's
obligations under the Replacement Awards. The Replacement Awards include (i)
Unit Appreciation Rights to four EMC employees and (ii) an option granted to
Donald Drew to purchase 20,000 IGC Units and 10,000 Units of the Company
("Drew Options"). The Drew Options were fully vested and exercisable at
December 31, 1997 but expired on March 31, 1998 without being exercised.
The Company is required to return to IGC the 20,000 IGC Units.
The Unit Appreciation Rights entitle the holders to receive upon
exercise, an amount payable in cash, Units of the Company, IGC Units or some
combination thereof, as determined by EMC's Directors. The amount received
upon exercise is based on the excess of the fair market value of the IGC's
Units, plus 50% of the fair market value of the Company's Units, over the $4
base price of the Unit Appreciation Rights ("UAR"). The fair market values of
the units are determined based on the average for a 20 day period commencing
10 days before the exercise date.
(PAGE)
The 1996 activity under these plans is summarized on the following
tables:
AGGREGATED OPTION / UAR EXERCISES IN 1997 AND
DECEMBER 31, 1997 OPTION / UAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-money
Options Options
and UAR at and UAR at
December 31, December 31,
1997 1997
Units ------------ ------------
Acquired Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisble
(#) ($) (#) ($)
-------- -------- ------------- ------------
Unit Appreciation Rights-
Donald G. Blakeman - - 27,900/ - 36,300/ -
Juan M. Rivera - - 8,000/ 2,000 10,495/2,625
Rafael Otero - - 6,000/ 4,000 7,870/5,250
Gretchen Gronau - - 8,000/ 2,000 10,495/2,625
Options-
Donald Drew - - 20,000/ - 26,240/ -
(PAGE)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN UNITHOLDERS AND MANAGEMENT
The following table sets forth certain information regarding the Units
that are beneficially owned as of March 25, 1998 (i) by each director of EMC
or executive officer of EMC or the Company, (ii) by all directors of EMC and
executive officers of EMC or the Company, as a group, and (iii) by each
person who is known by EMC or the Company to beneficially own more than 5% of
the outstanding Units of the Company. Except where noted, the address for
the beneficial owner is Doral Building, 7th Floor, 650 Munoz Rivera Avenue,
Hato Rey, PR 00918.
Beneficial Ownership (1)
Name of Beneficial Owner Number
- -------------------------- of Units Percent
----------- --------
Management and Directors
Barbara A. Wilson (2) 50 -
Kevin Wilson (2) 86,397 1.36%
Thomas B. Wilson (2) 86,397 1.36%
Donald J. Kevane 1,000 .02%
Donald G. Blakeman 186,894 2.95%
Gretchen Gronau 900 0.01%
All executive officers of EMC and
the Company and directors of EMC,
as a group (6 persons) 361,438 5.71%
Other Unitholders
HDA Management Corporation 1,205,245 19.03%
Wilson Family Limited Partnership(2)
222 Smallwood Village Center
St. Charles, Maryland 20602 2,267,721 35.80%
- --------------------------------------------------------------------------
(1) The beneficial ownership of Units is determined on the basis of
Units directly and indirectly owned by executive officers and
directors of EMC and units to be issued under options which are
exercisable within the next 60 days.
(2) WFLP is owned by the adult children of Barbara Wilson, including
Kevin Wilson and Thomas Wilson. However, because none of them is
a general partner in WFLP, the units of the Company owned by WFLP
are not considered beneficially owned by them.
(PAGE)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for the matter discussed below concerning Thomas B. Wilson, the
information responding to this item appears in Note 10 to the Company's
consolidated financial statements included in Item 8 of this report.
Thomas B. Wilson has been serving as Vice President of Caribe Waste
Technologies, Inc. ("CWT") a subsidiary of IGC engaged in the development of
municipal solid waste treatment facilities and has been, and will continue to
be, devoting time to this operation. CWT will reimburse the Company for
actual payroll costs attributed to time spent by Mr. Wilson on waste
technology matters.
(PAGE)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
Index to Financial Statements.
(i) Financial Statements (included in Item 8)
Equus Gaming Company L.P.
Report of Independent Public Accountants
Consolidated Statements of Income (Loss) for the years
ended December 31, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Changes in Partners' Deficit for
each of the three years in the period ended December 31, 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
El Comandante Operating Company, Inc.
Report of Independent Public Accountants
Statements of operations and Transactions in Liquidation for the
year ended December 31, 1997 and Operations for each of the
two years in the period ended December 31, 1996
Statements of Net Liabilities in Liquidation as of December 31,
1997 and Net Liabilities as of December 31, 1996
Statements of Cash Flows for the three years in the period ended
December 31, 1997
Notes to Financial Statements
(ii) Financial Statements Schedules (included in Item 8)
El Comandante Operating Company, Inc.
Schedule II - Allowance for Doubtful Accounts Receivable
(PAGE)
Exhibits.
Exhibit
Number Exhibit Description Reference
- ---------------------------------------------------------------------------
3.1 First Amended and Restated Limited Exhibit 3.1 to Registration
Partnership Agreement of Equus Statement on Form S-11
Gaming Company L.P. (the "Company") No. 33-90982 of the Company
("Second Form S-11")
3.2 Certificate of Limited Partnership Exhibit 3.1 to Registration
of the Company Statement on Form S-11
No. 33-82750 of the Company
("Form S-11")
3.3 First Amendment to Certificate of Exhibit 3.2 to Form S-11
Limited Partnership of the Company
3.4 Second Amendment to Certificate of Exhibit 3.3 to Form S-11
Limited Partnership of the Company
3.5 Third Amendment to Certificate of Exhibit 3.5 to Form S-11
Limited Partnership of the Company
3.6 Fourth Amendment to Certificate of Filed herewith
Limited Partnership of the Company
5.1 Form of Unit Certificate Exhibit 5.1 to Form S-11
10.1 Sixth Amended and Restated Exhibit 2.2. to Current
Partnership Agreement of Housing Report on Form 8-K of
Development Associates S.E. ("HDA") March 23, 1995
("Form 8-K")
10.2 Indenture dated December 15, 1993, Exhibit 5.1 to Registration
among El Comandante Capital Corp. Statement on Form S-5
("ECCC"), as Issuer, Banco Popular No. 33-75285 of HDA,
de Puerto Rico as Trustee ("Banco ECCC and El Comandante
Popular") and HDA as Guarantor Operating Company, Inc.
(the "Indenture") ("ECOC") ("Form S-5")
10.3 First Supplemental Indenture dated Exhibit 10.27 to Form S-11
December 22, 1994 to the Indenture
10.4 Second Supplemental Indenture dated Exhibit 10.28 to Form S-11
December 22, 1994 to the Indenture
10.5 Warrant Agreement dated December 15, Exhibit 10.3 to Form S-4
1993, among HDA Management
Corporation ("HDAMC"), HDA and
Banco Popular as Warrant Agent
(PAGE)
10.6 HDA Guaranty of certain obligations Exhibit 10.5 to Form S-4
Ruben Velez Lebron and Supra &
Company, S.E. ("Supra")dated
December 14, 1993
10.7 Amended and Restated Management Exhibit 10.6 to Form S-4
Agreement dated December 15, 1993,
between Interstate General Properties
Limited Partnership S.E. ("IGP")
and HDA
10.8 Amended and Restated Lease Agreement Exhibit 10.8 to Form S-4
dated December 15, 1993, between
HDA and ECOC
10.9 Rent Escrow Agreement dated December Exhibit 10.10 to Form S-4
15, 1993, between HDA as Landlord,
ECOC as Tenant and Banco Popular as
Escrow Agent
10.10 Collateral Assignment of HDA's Exhibit 10.11 to Form S-4
Interests under the Lease dated
December 15, 1993, between HDA and
Banco Popular
10.11 Stock Pledge Agreement dated Exhibit 10.12 to Form S-4
December 15, 1993, between HDA and
Banco Popular
10.12 Pledge Agreement (Mortgage Notes) Exhibit 10.13 to Form S-4
dated December 15, 1993 between HDA
and Banco Popular
10.13 Chattel Mortgage dated December Exhibit 10.15 to Form S-4
15, 1993, between ECOC and HDA
10.14 Assignment Agreement (General Exhibit 10.15 to Form S-4
Intangibles) dated December 15,
1993, between ECOC and HDA
10.15 Assignment Agreement (General Exhibit 10.16 to Form S-4
Intangibles) dated December 15, 1993,
between HDA and Banco Popular
10.16 Pledge Agreement between ECCC and Exhibit 10.17 to Form S-4
Banco Popular
10.17 Mortgage Note of $52,000,000 of HDA Exhibit 10.18 to Form S-4
10.18 Mortgage Note of $26,000,000 of HDA Exhibit 10.19 to Form S-4
10.19 Deed of Modification and Extension Exhibit 10.20 to Form S-4
of First Mortgage to Secure
Additional Mortgage Note, No. 43,
dated December 15, 1993
(PAGE)
10.20 HDA Note in the amount of Exhibit 10.21 to Form S-4
$68,000,000 to ECCC dated December
15, 1993
10.21 Master Support and Services Exhibit 10.20 to Form S-11
Agreement dated December 9, 1994,
between Interstate General Company
L.P. ("IGC") and the Company
10.22 Consulting Agreement dated December Exhibit 10.21 to Form S-11
15, 1993 between ECOC and IGP
10.23 Closing Agreement dated November 16, Exhibit 10.26 to Form S-11
1994, among Multi-Media Television,
Inc., JEM Communications, Inc. Tele
38, Inc., S & E Network, Inc. and HDA
10.25 Conversion Agreement dated February Exhibit 2.3 to Form 8-K
3, 1995, between the Company and
IGP (the "Conversion Agreement")
10.25 First Amendment to the Conversion Exhibit 2.3 to Form 8-K
Agreement dated March 6, 1995
10.26 Lease Agreement dated September 28, Exhibit 10.21 of the Annual
1994 between the Dominican Republic Report on Form 10-K of
and Galapagos, S.A.("Galapagos") HDA for the year ended
December 31, 1994 ("1994
HDA 10-K")
10.27 Founders' Agreement among Exhibit 10.22 to 1994
Galapagos, HDA and Minority HDA 10-K
Stockholders
10.28 Management Agreement dated September Exhibit 10.23 to 1994
28, 1994, between Galapagos and HDA 10-K
ECOC
10.29 Broadcasting, Marketing and Exhibit 10.25 to 1994
Production Agreement dated March 30, HDA 10-K
1995 between ECOC and S&E
10.30 Amended and Restated Distribution Exhibit 2.1 to Form S-11
Agreement dated November 22, 1994
between the Company and IGC (the
"Distribution Agreement")
10.31 First Amendment to the Distribution Exhibit 10.31 to Second
Agreement dated February 3, 1995 Form S-11
10.32 Registration Rights Agreement dated Exhibit 10.32 to Second
February 6, 1995 between the Company Form S-11
and IGC
(PAGE)
10.33 Amended and Restated Registration Exhibit 10.29 to Form S-11
Rights Agreement with respect to the
Warrants dated December 12, 1994 by
and among HDA, HDAMC, the Company
and Oppenheimer & Co., Inc. and The
Argosy Securities Group L.P.
10.34 Third Supplemental Indenture dated Exhibit 10.34 to Annual
February 27, 1996 to the Indenture Report on Form 10-K of the
Company for the year ended
December 31, 1995 ("1995
10-K")
10.35 Fourth Supplemental Indenture dated Exhibit 10.35 to 1995 10-K
February 27, 1996 to the Indenture
10.36 First Amendment to Amended and Exhibit 10.36 to 1995 10-K
Restated Lease Agreement dated
March 28, 1996
10.37 Seventh Amended and Restated Exhibit 10.37 to 1995 10-K
Partnership Agreement of HDA dated
February 7, 1996
10.38 Stock Purchase Agreement by and Exhibit 10.38 to 1995 10-K
among S&E Network Inc. ("S&E"), HDA
and Paxson Communications of San
Juan, Inc. ("Paxson") dated January
31, 1996
10.39 Time Brokerage Agreement by and Exhibit 10.39 to 1995 10-K
between Paxson and S&E dated January
31, 1996
10.40 Escrow Agreement dated January 31, Exhibit 10.40 to 1995 10-K
1996 by and among Paxson, S&E and
First Union National Bank of Florida
10.41 Guaranty by Paxson in favor of S&E Exhibit 10.41 to 1995 10-K
and HDA dated January 31, 1996
10.42 Broadcast Agreement between ECOC and Exhibit 10.42 to 1995 10-K
S&E dated February 1, 1996
10.43 First Amendment to the Amended and Exhibit 10.43 to Annual
Restated Registration Rights Report on Form 10-K/A of
Agreement dated August 15, 1995 the Company for the year
ended December 31, 1995
("1995 10-K/A")
10.44 Assignment and Assumption of Exhibit 10.44 to 1995
Consulting Agreement dated April 10-K/A
22, 1996
(PAGE)
10.45 Assignment and Assumption of Exhibit 10.1 to Quarterly
Employment Agreements dated Report on Form 10-Q of the
April 22, 1996 Company for the quarter
ended June 30, 1996
10.46 Stock Purchase Agreement by and Exhibit 10.1 to Quarterly
between HDA and Paxson dated Report on Form 10-Q of the
November 12, 1996 Company for the quarter
ended September 30, 1996
10.47 Employment Agreement between IGP Exhibit 10.47 to Annual
and Donald Drew dated Report on Form 10-K of the
December 14, 1993 Company for the year ended
December 31, 1996
("1996 10-K")
10.48 Employment Agreement between IGP Exhibit 10.48 to 1996 10-K
and Juan Manuel Rivera dated
June 1, 1995
10.49 Closing Agreement by and among S&E, Exhibit 10.49 to 1996 10-K
Paxson, Equus and HDA dated January
21, 1997
10.50 Control Transfer Agreement by and Exhibit 10.50 to 1996 10-K
among IBC, IGC, IGP, HDA, EMC and
the Company dated December 31, 1996
10.51 Amendment to Control Transfer Exhibit 10.51 to 1996 10-K
Agreement by and among IBC, IGC,
IGP, HDA, EMC and the Company
dated March 25, 1997
10.52 Broadcast Agreement among S&E, Exhibit 10.52 to 1996 10-K
HDA and Paxson dated January
21, 1997
10.53 Second Amendment to Amended and Exhibit 10.53 to 1996 10-K
Restated Lease Agreement dated
March 31, 1997
10.54 Letter Agreement dated May 13, Exhibit 10.1 on Quarterly
1997 by and between Equus Gaming Report on Form 10-Q of the
Company L.P., HDA, Supra & Company for the Quarter
Company S.E. and Ruben Velez and ended March 31, 1997
his wife
10.55 Letter Agreement dated July 18, Exhibit 10.1 on Quarterly
1997 by and between Equus Gaming Report on Form 10-Q of the
Company L.P., HDA, Supra & Company for the Quarter
Company S.E. and Ruben Velez and ended June 30, 1997
his wife
(PAGE)
10.56 Eight Amended and Restated Exhibit 10.1 on Quarterly
Partnership Agreement of HDA dated Report on Form 10-Q of the
August 19, 1997 Company for the Quarter
ended September 30, 1997
10.57 Fifth Supplemental Indenture dated Exhibit 10.2 on Quarterly
November 14, 1997 to the Indenture Report on Form 10-Q of the
Company for the Quarter
ended September 30, 1997
10.58 Asset Purchase and Sale Agreement Filed herewith
by and between El Comandante
Management Company LLC ("ECMC") and
ECOC dated December 19, 1997
10.59 Second Amendment to Control Filed herewith
Transfer Agreement by and among
IBC, IGC, IGP, HDA, EMC and the
Company dated December 19, 1997
10.60 Guaranty Agreement by and between Filed herewith
EMC and IGC dated December 30, 1997
10.61 Agreement to Retire Partnership Filed herewith
Interest of Interstate General
Company, L.P. in Equus Gaming
Company, L.P. by and among the
Company, IGC, EMC, EMTC and HDA
dated December 30, 1997
10.62 Ninth Amended and Restated Filed herewith
Partnership Agreement of HDA
dated December 31, 1997
21 Subsidiaries of the Company Filed herewith
Reports on Form 8-K. None
(PAGE) SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
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
April 8, 1998 /s/ Thomas B. Wilson
- ----------------- ------------------------------
Date Thomas B. Wilson
President & Chief Executive Officer
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.
Date Title Signature
- ----------------- ----------------------- ------------------------
April 8, 1998 President, Chief /s/ Thomas B. Wilson
- ----------------- Executive Officer and ------------------------
Director Thomas B. Wilson
April 8, 1998 /s/ Juan M. Rivera
- ----------------- Executive Vice President, ------------------------
Chief Operating Officer Juan M. Rivera
and Director
April 8, 1998 Vice President and /s/ Gretchen Gronau
- ----------------- Chief Financial Officer ------------------------
Gretchen Gronau
April 8, 1998 Director /s/ Donald J. Kevane
- ----------------- ------------------------
Donald J. Kevane
April 8, 1998 Director /s/ Alberto M. Paracchini
- ----------------- -------------------------
Alberto M. Paracchini
April 8, 1998 Director /s/ Barbara A. Wilson
- ----------------- -------------------------
Barbara A. Wilson
April 8, 1998 Director /s/ Kevin Wilson
- ----------------- -------------------------
Kevin Wilson
April 8, 1998 Director /s/ Donald G. Blakeman
- ----------------- -------------------------
Donald G. Blakeman
(PAGE)
ASSET PURCHASE AND SALE AGREEMENT
BETWEEN
EL COMANDANTE MANAGEMENT COMPANY LLC
(the "Buyer")
and
EL COMANDANTE OPERATING COMPANY LLP
(the "Seller")
(PAGE) ASSET PURCHASE AND SALE AGREEMENT
This Asset Purchase and Sale Agreement dated as of December
19, 1997 made between the Persons appearing on the cover page
hereto.
RECITALS
(a) Seller is lessee and operator of the El Comandante Race
Track located in Canovanas, Puerto Rico (the "Race Track") pursuant
to that certain Amended and Restated Lease Agreement dated as of
December 15, 1993, as amended, by and between Housing Development
Associates S.E. ("HDA") and Seller (the "Lease").
(b) The Lease proved that (i) upon an event of default, all
of Seller's contracts and agreements for the operation of the Race
Track shall be assigned to HDA, and (ii) upon termination of the
Lease, Seller shall sell and HDA shall purchase all of Seller's
personal property used in the operation of the Race Track.
(c) On October 31, 1997 HDA delivered to Seller a Notice of
Termination citing uncured events of default and other grounds for
terminating the Lease effective December 31, 1997.
(d) As a result of the foregoing HDA has formed Buyer as a
wholly owned subsidiary for the purpose of acquiring the Assets
(defined below ) and assuming the Contracts (defined below).
(e) Effective on the Closing Date, Buyer and HDA shall enter
into a lease agreement (the "New Lease") providing for Buyer to
operate the Race Track on substantially the same terms as the
Lease.
AGREEMENT
In consideration of the foregoing recitals, which are
incorporated herein and made a part hereof, the mutual covenants
herein contained and other good and valuable consideration (the
receipt, adequacy and sufficiency of which are hereby acknowledged
by the parties by their execution hereof), the parties hereto,
intending to be legally bound, hereby agree as follows:
(PAGE) ARTICLE 1
DEFINITIONS; CONSTRUCTION
Section 1.1 Definitions. For purposes of this Agreement,
unless the context clearly indicates otherwise, the following
capitalized terms have the following meanings:
"Agreement" this Asset Purchase and Sale Agreement and Bill Of
Sale, including all Exhibits and Schedules hereto.
"Applicable Law" any applicable law, rule, regulation, or
ordinance of any Governmental Authority to which Seller, the
Business or the Assets is subject.
"As Is" the condition and state of repair of the Assets
existing on the Closing Date.
"Assets" Tenant's Personal Property, the Contracts, the
Franchises, the Intellectual Property, the Receivables, and the
Permits owned or held by Seller as of the Closing Date.
"Auditors" Arthur Andersen LLP or such other independent
public accounting and auditing firm as may be selected by Buyer and
acceptable to Seller to prepare an audit of the Business as of the
Closing Date.
"Business" the operation in the Demised Premises of the
business known as El Comandante racetrack and related off-track
betting operations.
"Buyer" has the meaning set forth in the cover page of this
Agreement.
"Closing Date" as of 12:01 a.m. San Juan Time on January 1,
1998.
"Closing Date Balance Sheet" an audited, statement of assets
and liabilities of Seller as of the Closing Date to be prepared and
examined by and accompanied by the report of the Auditors.
"Commonwealth" the Commonwealth of Puerto Rico.
"Contracts" all of the rights and obligations by or against
Seller in and under contracts, leases of personal property,
licenses, purchase and sales orders, non-competition agreements,
permits, employee contracts, insurance contracts, agents contracts,
(PAGE)
horse owners contracts, television contracts, off -track betting
transmission contracts, and supplier contracts, marketing programs,
promotional programs and advertising programs, and all claims,
rights and obligations by or against Seller whether contingent or
otherwise, including those listed on Exhibit "A".
"Demised Premises" shall have the meaning assigned thereto in
the Lease.
"Dollar" or "$" United States of America dollars.
"Encumbrance" any mortgage, deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lease, lien
(statutory or otherwise), security interest or preferential
arrangement of any kind or nature whatsoever, including any
conditional sale or other title retention agreement.
"Environmental Laws" all Applicable Laws existing on the
Closing Date relating to the protection of the environment,
including all applicable requirements pertaining to reporting,
licensing, permitting, investigation and remediation of emissions,
discharges, releases or threatened releases of Hazardous Materials,
whether solid, liquid or gaseous in nature, into the air, surface
water, ground water or land, or relating to the manufacture,
processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, whether solid, liquid
or gaseous in nature.
"Financial Statements" the unaudited interim statement of
assets and liabilities of Seller and the related statements of
sales, costs and expenses for the period ended November 30, 1997,
prepared by Seller.
"Franchises" all franchises of the Seller.
"Governmental Authority" any government of any nation, state,
the Commonwealth or other political subdivision thereof and any
entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"HDA" has the meaning set forth in the Recitals of this
Agreement.
"Intellectual Property" Trade Names and any other inventions,
know how, patents, trade names, trademarks, designs, service names,
(PAGE)
service marks, copyrights and logos, if any, owned by Seller or as
to which Seller has rights.
"Lease" has the meaning set forth in the Recitals of this
Agreement.
"Liabilities" the liabilities of the Business on the Closing
Date, as shown in the Closing Date Balance Sheet, including but not
limited to those shown in Exhibit "B".
"License" the license to operate the Business issued by the
Commonwealth's Racing Board..
"Material Adverse Change" a material adverse change in the
Business (financially or otherwise), taken as a whole; provided,
however, that neither (i) the effects of any events, circumstances
or conditions resulting from changes, developments or circumstances
in worldwide national or local conditions (political, economic,
regulatory or otherwise) that adversely affect industries related
to any products of the Business generally, or adversely affect a
broad group of industries generally, in each case where such
events, circumstances or conditions do not adversely affect the
Business disproportionately, nor (ii) any effects of competition or
changes in price of products, raw materials or component products,
shall be deemed to give rise to a Material Adverse Change.
"Material Adverse Effect" an effect that would result in a
Material Adverse Change; provided, however, that neither (i) the
effects of any events, circumstances or conditions resulting from
changes, developments or circumstances in worldwide, national or
local conditions (political, economic, regulatory or otherwise)
that adversely affect industries related to any products of the
Business generally, or adversely affect a broad group of industries
generally, in each case where such events, circumstances or
conditions do not adversely affect the Business disproportionately,
nor (ii) any effects of competition or changes in prices of
products, raw materials or component products, shall constitute a
Material Adverse Effect.
"Motor Vehicles" all automobiles, trucks, forklifts, and other
motor driven vehicles (whether on wheels or tracks) owned by Seller
and used exclusively by the Business.
"New Lease" has the meaning set forth in the Recitals of this
Agreement.
(PAGE)
"Notice of Termination" the letter of HDA to Seller dated
October 31, 1997, whereby the Lease was terminated effective
December 31, 1997 (Exhibit "C" ).
"Party" a Person named as entering into this Agreement.
"Permit" all approvals, authorizations, consents, licenses,
franchises, orders and other permits of any Governmental Authority.
"Person" any natural person, corporation, limited partnership,
general partnership, joint venture, association, company, trust,
joint stock company, bank, trust company, land trust, vehicle
trust, business trust, real estate investment trust, estate,
limited liability company or other organization irrespective of
whether it is a legal entity, and any Governmental Authority.
"Receivables" all amounts payable by any person to Seller as
of the Closing Date whether contingent or otherwise arising from
the operations of the Business.
"Seller" has the meaning set forth in the cover page of this
Agreement.
"Settlement Date" 15 calendar days after the date in which the
Closing Date Balance Sheet is notified by the Auditors to Buyer.
"Tax" any tax, charge, fee, levy, duty, impost, withholding or
other assessment, together with any interest and penalties,
additions to tax and additional amounts imposed by any Governmental
Authority.
"Tenant's Personal Property" shall have the meaning assigned
thereto in the Lease.
Section 1.2 Rules of Construction.
1.2.1 Unless otherwise specified herein, all
accounting terms used herein shall be interpreted, all accounting
determinations hereunder shall be made, and all financial
statements required to be delivered hereunder shall be prepared, in
accordance with generally accepted accounting principles, as in
effect from time to time, applied on a consistent basis.
1.2.2 All the agreements or instruments herein
defined shall mean such agreements or instruments as the same may
(PAGE)
from time to time be supplemented or amended or the terms thereof
waived or modified to the extent permitted by, and in accordance
with, the terms thereof and of this Agreement.
1.2.3 Unless this Agreement clearly requires
otherwise, words of masculine gender shall be construed to include
the correlative words of feminine and neuter genders and vice
versa, and words of singular number shall be construed to include
correlative words of plural number and vice versa.
1.2.4 The words "herein", "hereof", and "hereunder"
and words of similar import refer to this Agreement as a whole.
1.2.5 This Agreement and all the provisions hereof
shall be liberally construed to effectuate the purposes set forth
herein and to sustain the validity hereof.
1.2.6 All references herein to particular articles,
sections, or exhibits, are references to articles, sections, or
exhibits of this Agreement unless some other reference is
established.
ARTICLE 2
PURCHASE AND SALE OF ASSETS
Section 2.1 Purchase and Sale - As Is. Subject to the
terms and conditions hereof, Seller hereby sells, assigns,
transfers, grants, bargains, delivers and conveys to Buyer, and
Buyer purchases from Seller, on an As Is basis, all of the right,
title and interest of Seller in and to the Assets.
Section 2.2 Assignability and Consents. Anything in this
Agreement to the contrary notwithstanding, this Agreement shall not
constitute an agreement to assign any order, Contract, agreement,
lease, commitment, license, Franchise, permits, authorization or
concession if an attempted assignment thereof, without the consent
of another party thereto or any Governmental Authority, would
constitute a breach thereof. Seller shall use all reasonable
efforts and Buyer shall cooperate in all reasonable respects with
Seller to obtain all consents and waivers and to resolve all
impracticalities of assignments or transfers necessary to convey
the Assets to Buyer.
Section 2.3 Assumption of Liabilities. Buyer hereby
assumes, and shall hereinafter pay, perform and discharge as and
(PAGE)
when due, the Liabilities.
Section 2.4 Transfer Taxes. Buyer shall be responsible for
all transfer, registration, excise and similar taxes and fees
assessed or payable in connection with the transfer of the Assets.
Section 2.5 Purchase Price. Buyer, in consideration for
the sale, transfer, conveyance and assignment of the Assets, shall
pay to Seller, on the Settlement Date, an amount equal to the
difference, if any, between the depreciated book value of the
Assets and the aggregate amount owed by Seller on the Liabilities,
all pursuant to the Closing Date Balance Sheet.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Except as set forth on the Disclosure Schedule, Seller hereby
represents and warrants to Buyer as follows:
Section 3.1 Corporate Organization of the Company. Seller
is a duly organized and validly existing corporation under the laws
of the Commonwealth, and in good standing under the laws of the
Commonwealth. Seller has the power and authority to own, lease and
operate the Assets, to own and to conduct its business as presently
being conducted. Seller is duly qualified and in good standing to
do business as a foreign corporation in each jurisdiction in which
the properties owned or leased by it or the nature of the business
conducted by it makes such qualification necessary.
Section 3.2 Power and Authority to Sell. Seller has full
right, power and authority to enter into this Agreement and the
other agreements, documents and instruments to be executed and
delivered by Seller pursuant hereto and to consummate the
transactions contemplated of it hereunder and thereunder; and the
consummation by Seller of all transactions contemplated of it
hereunder and thereunder has been duly authorized by all necessary
corporate action. This Agreement constitutes, and when executed
and delivered each of the other agreements, documents and
instruments to be executed by Seller pursuant hereto will
constitute a legal, valid and binding obligation of the Seller
enforceable against the Seller in accordance with its terms except
as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or moratorium laws or other similar laws
affecting enforcement of creditor's rights generally or by general
principles of equity (regardless of whether such enforcement is
(PAGE)
considered in a proceeding in equity or at law).
Section 3.3 Financial Statements. Correct and complete
copies of the Financial Statements are attached hereto as Schedule
3.3. The Financial Statements fairly present, in all material
respects, the assets, liabilities, gross income, cost and expenses
of Seller as of the date thereof.
Section 3.4 Taxes. Seller has timely filed, all federal,
Commonwealth, local and foreign Tax reports and returns required to
be filed by it for the Business prior to the date hereof, and the
full amount of Taxes, if any, together with interest and penalties
thereon, shown to be due on such Tax returns have been timely paid.
To the knowledge of Seller, the foregoing Tax returns reflected
accurately the facts regarding the income, business, assets,
operations and activities of the Business and any other information
required to be shown thereon. To the knowledge of Seller, there
are no claims pending against Seller for deficient or past due
taxes, nor is any unassessed tax deficiency proposed against
Seller.
Section 3.5 No Conflict or Violation. Neither the
execution and delivery by Seller of this Agreement nor the
consummation of the transactions contemplated to be consummated by
Seller hereby nor compliance by Seller with any of the provisions
hereof will: (i) violate or conflict with any provision of the
certificate of incorporation, bylaws, or comparable organizational
documents of Seller; (ii) violate or conflict with, in any material
respect any Applicable Law, or any order, judgment, writ,
injunction, decree or award applicable to Seller, or constitute an
event which, with the giving of notice, lapse of time, or both,
would result in any such violation or conflict; (iii) except as set
forth on Schedule 3.5, result in a violation or breach of, or
constitute a default (or an event which, with the giving or notice
or the lapse of time or both, would become a default) under any
material agreement, note, bond, mortgage, indenture, license,
permit or instrument to which Seller is a party or by which any of
the Assets are bound, or (iv) result in the imposition of any
Encumbrance on any Asset , or an event which, with the giving of
notice, lapse of time, or both, would result in any such
imposition.
Section 3.6 Litigation and Proceedings. There is no
action, suit, proceeding or investigation pending or, to the
knowledge of Seller, threatened against or directly affecting the
Assets or the Business before any Governmental Authority which
(PAGE)
challenges the validity of this Agreement or otherwise seeks to
prevent the consummation of the transactions contemplated hereunder
or which, if adversely determined, would have a Material Adverse
Effect. No judgment, order, writ, injunction, decree or assessment
of any Governmental Authority is presently in effect which would
have a Material Adverse Effect.
Section 3.7 Consents and Approvals. Except as set forth on
Schedule 3.7, no consent, approval or authorization of any Person,
nor any declaration, filing or registration with any Governmental
Authority or other Person, is required to be made or obtained by
Seller or the Business in connection with the execution and
delivery by Seller of this Agreement and the consummation by Seller
of the transactions contemplated to be consummated by Seller
hereunder.
Section 3.8 Assets; Title. Since November 30, 1997,
there have been no acquisitions or dispositions of Assets except in
the ordinary course of business and consistent with the past
practices of the Business. The Seller possesses good and
marketable title to the Assets (other than property leased to
Seller, in which the case Seller possesses a valid right to use
such property), and none of the Assets are subject to any
Encumbrances.
<PAGE>
(PAGE)
Section 3.9 Contracts.
3.9.1 Schedule 3.9 lists
(i) all employment Contracts to which Seller is a party
with employees of the Business; and
(ii) each written Contract to which Seller is a party
which (a) is not terminable by Seller on one hundred twenty or
fewer days' notice at any time without penalty, or (b) has a
remaining term, as of the date of this Agreement, of over one year
in length, or involves the receipt or payment after the Closing
Date of more than $200,000.
3.9.2 To Seller's knowledge, the Seller is not in breach
or violation of, or in default under any of the Contracts, and no
event has occurred which, with the giving of notice, lapse of time,
or both, would constitute such a breach, violation or default by
the Seller, excluding in any case such breaches, violations and
defaults which, individually or in the aggregate, would not have a
Material Adverse Effect. All of the Contracts (a) constitute the
valid and binding obligation of Seller, enforceable against Seller
in accordance with their terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization or
moratorium laws or other similar laws affecting enforcement of
creditor's rights generally or by general principles of equity
(regardless of whether such enforcement is considered in a
proceeding in equity or at law) and (b) to Seller's knowledge,
constitute the valid and binding obligation of the other parties
thereto, enforceable against such parties in accordance with their
terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization or moratorium laws or other
similar laws affecting enforcement of creditor's rights generally
or by general principles of equity (regardless of whether such
enforcement is considered in a proceeding in equity or at law).
Section 3.10 Environmental Matters. To the knowledge of
Seller, except as set forth on Schedule 3.10, neither the ownership
or use of the Assets, violates Environmental Laws and no condition
or event has occurred with respect to the Business or Assets which,
with the giving of notice, lapse of time, or both, would constitute
a violation of Environmental Laws, excluding in any event such
violations, conditions and events which, individually or in the
aggregate, would not have a Material Adverse Effect.
(PAGE)
Section 3.11 Material Adverse Change; Absence of Undisclosed
Liabilities. Except (a) for liabilities and obligations incurred
in the ordinary course of business since November 30, 1997 , since
said date, Seller has not incurred any liabilities or obligations
(whether direct, indirect, accrued, contingent or otherwise)
material to the Business that would be required to be reflected or
reserved against in a balance sheet of the Business, or in the
notes thereto.
Section 3.12 Permits. Seller has all Permits necessary for
the conduct of the Business except for any Permits the absence of
which would not have a Material Adverse Effect. Seller has not
received notice that it is operating the Business in default or
violation of any of the Permits, except for any such defaults or
violations which would not have a Material Adverse Effect. A
complete and correct list of all material Permits is set forth on
Schedule 3.12.
Section 3.13 Compliance with Laws. Seller, in operating the
Business, is in compliance with all Applicable Laws, except such
non-compliance which would not have a Material Adverse Effect.
Section 3.14 Employees; Labor Matters; Benefit Plans.
3.14.1 Except as set forth in Schedule 3.14 and for such
violations, claims, changes, disputes, actions, grievances and
arbitrations which, individually or in the aggregate, would not
have a Material Adverse Effect, to Seller's knowledge, Seller, in
operating the Business, is in material compliance with all
Applicable Laws respecting employment practices, terms and
conditions of employment, wages and hours, there is no unfair labor
practice complaint against Seller arising from the operation of the
Business pending before the National Labor Relations Board or other
agency, there is no claim or charge before the Equal Employment
Opportunity Commission or other similar state agency arising from
the operation of the Business, and there is no labor strike,
material dispute, slowdown or stoppage pending against the
Business.
3.14.2 Seller maintains a pension plan with respect to
employees of the Business, which Buyer assumes pursuant to the
terms of this Agreement. A copy of said plan has been delivered to
Buyer prior to the date hereof. Seller maintains no other employee
benefit plan, including, without limitation, deferred compensation
or severance plan.
(PAGE)
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer makes the following representations and warranties to
Seller:
Section 4.1 Organization. Buyer is a duly organized and
validly existing limited liability company, in good standing under
the laws of the State of Delaware, and has the power and authority
to own, lease and operate its assets and properties and to conduct
its business as now being conducted.
Section 4.2 Authorization. Buyer has full right, power and
authority to enter into this Agreement and the other agreements,
documents and instruments to be executed and delivered by Buyer
pursuant hereto and to consummate the transactions contemplated of
it hereunder and thereunder and the consummation by Buyer of all
transactions contemplated of it hereunder and thereunder has been
duly authorized by all necessary corporate action. This Agreement
constitutes, and when executed and delivered each of the other
agreements, documents and instruments to be executed and delivered
by Buyer pursuant hereto will constitute a legal, valid and binding
obligation of Buyer enforceable against the Buyer in accordance
with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization or moratorium
laws or other similar laws affecting enforcement of creditor's
rights generally or by general principles of equity (regardless of
whether such enforcement is considered in a proceeding in equity or
at law).
Section 4.3 No Conflict or Violation. Neither the
execution and delivery of this Agreement, nor the consummation of
the transactions contemplated to be consummated by Buyer hereby nor
compliance by Buyer with any of the provisions hereof will: (i)
violate or conflict with any provision of the certificate of
formation, operating agreement, or comparable organizational
documents of Buyer; (ii) violate or conflict with, in material
respect, any Applicable Law or any order, judgment, writ,
injunction, decree or award applicable to Buyer, or constitute an
event which, with the giving of notice, lapse of time, or both,
would result in any such violation or conflict; or (iii) result in
a violation or breach of, or constitute a default (or an event
which, with the giving of notice or the lapse of time or both,
would become a default) under any material agreement, note, bond,
mortgage, indenture, license, permit or instrument to which Buyer
(PAGE)
is a party or by which any of its assets are bound.
Section 4.4 Litigation and Proceedings. There is no
action, suit, proceeding or investigation pending or, to the
knowledge of Buyer, threatened before any Governmental Authority
which challenges the validity of this Agreement or otherwise seeks
to prevent the consummation of the transactions contemplated
hereunder or which, if adversely determined, would adversely affect
the ability of Buyer to perform its obligations hereunder.
Section 4.5 Consents and Approvals. No consent, approval
or authorization of any Person, nor any declaration, filing or
registration with any Governmental Authority or other Person, is
required to be made or obtained by Buyer in connection with the
execution and delivery by Buyer of this Agreement and the
consummation by Buyer of the transactions contemplated to be
consummated by Buyer hereunder.
Section 4.6 Brokers. No agent, broker or other Person
acting pursuant to express or implied authority of Buyer is
entitled to a commission or finder's fee in connection with the
transactions contemplated by this Agreement or, pursuant to express
or implied authority of Buyer, will be entitled to make any claim
against Seller for a commission or finder's fee.
Section 4.7 Financial Ability to Close. Buyer specifically
represents and warrants to Seller that Buyer presently has and at
Closing will have the financial ability to perform Buyer's
obligations under this Agreement.
Section 4.8 Employment of Business Employees. Buyer will
offer employment to all the employees of the Business. Said offer
of employment will be under terms and conditions substantially
equivalent to those prevailing immediately prior to the Closing
Date, except for pension plan, long and short term disability
insurance coverage, life insurance coverage and medical insurance
coverage now being provided by Seller. Buyer shall recognize the
vacation leave accumulated (and accrued on the books) as of the
Closing Date.
ARTICLE 5
FURTHER AGREEMENTS
Section 5.1 Assignment of Contracts. Seller assigns,
(PAGE)
transfers and delivers to Buyer, and Buyer accepts and assumes all
of Seller's obligations in the Contracts.
Section 5.2 Assignment of Permits. Seller assigns,
transfers and delivers to Buyer, and Buyer accept and assumes all
of Seller's obligations in the Permits.
Section 5.3 Racing License. Upon termination of the
Lease, Seller hereby surrenders all right in the License. Seller
shall use its best efforts to cause the Racing Board to grant a new
license to Buyer to operate the Race Track and the Business
commencing on the Closing Date.
Section 5.4 Survival of Covenants, Representations and
Warranties. All representations, warranties and covenants made by
the Parties in this Agreement shall survive the Closing Date and
continue in full force and effect thereafter.
Section 5.5 Power of Attorney. Seller hereby irrevocably
constitutes and appoints Buyer its true and lawful attorney-in-fact
with full power of substitution and in name and stead of Seller,
but on behalf of and for the benefit of Buyer, to (i) demand and
receive the Assets, including to execute any document or instrument
necessary or appropriate to confirm unto Buyer clear title to the
Assets, (ii) collect for the account of Buyer all receivables
payable to Seller on the Closing Date, and (iii) institute,
prosecute, defend or settle, in the name of Seller or otherwise,
but for the benefit of Buyer, any and all proceedings at law or
equity which Buyer may deem proper relating to the Assets or the
Business.
ARTICLE 6
GENERAL PROVISIONS
Section 6.1 Amendment and Modification. No amendment,
modification, supplement, termination, consent or waiver of any
provision of this Agreement, nor consent to any departure
therefrom, will in any event be effective unless the same is signed
by the Party against whom enforcement of the same is sought. Any
waiver of any provision of this Agreement and any consent to any
departure from the terms of any provision of this Agreement shall
be effective only in the specific instance and for the specific
purpose for which given.
Section 6.2 Approvals and Consents. If any provision
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hereof requires the approval or consent of any Party to any act or
omission, such approval or consent is not to be unreasonably
withheld or delayed except as set forth herein.
Section 6.3 Assignments. No Party may assign or transfer
any of its rights or obligations under this Agreement to any other
Person without the prior consent of the other Party.
Section 6.4 Captions. Captions contained in this Agreement
have been inserted herein only as a matter of convenience and in no
way define, limit, extend or describe the scope of this Agreement
or the intent of any provision hereof.
Section 6.5 Compliance with Law. None of the terms or
provisions of this Agreement require any of the Parties to take any
action prohibited by, or contrary to, Applicable Law.
Section 6.6 Facsimile Execution. For purposes of
executing this Agreement, a document (or signature page thereto)
signed and transmitted by facsimile machine or telecopier shall be
treated as an original document. The signature of any Party
thereon, for purposes hereof, shall be considered as an original
signature, and the document transmitted shall be considered to have
the same binding effect as an original signature on an original
document. At the request of any Party, any facsimile or telecopy
document shall be re-executed in original form by the Parties who
executed the facsimile or telecopy document. No Party may raise
the use of a facsimile machine or telecopier machine as a defense
to the enforcement of this Agreement or any amendment or other
document executed in compliance with this Section.
Section 6.7 Counterparts. This Agreement may be executed
by the Parties on any number of separate counterparts, and all such
counterparts so executed constitute one agreement binding on all
the Parties notwithstanding that all the Parties are not
signatories on the same counterpart.
Section 6.8 Entire Agreement. This Agreement constitutes
the entire agreement among the Parties pertaining to the subject
matter hereof and supersedes all prior agreements, letters of
intent, understandings, negotiations and discussions of the
Parties, whether oral or written.
Section 6.9 Exhibits and Schedules. All of the Exhibits
and Schedules attached to this Agreement are deemed incorporated
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herein by reference.
Section 6.10 Failure or Delay. No failure on the part of
any Party to exercise, and no delay in exercising, any right, power
or privilege hereunder operates as a waiver thereof; nor does any
single or partial exercise of any right, power or privilege
hereunder preclude any other or further exercise thereof, or the
exercise of any other right, power or privilege. No notice to or
demand on any Party in any case entitles such Party to any other or
further notice or demand in similar or other circumstances.
Section 6.11 Further Assurances. The Parties will execute
and deliver such further instruments and do such further acts and
things as may be required to carry out the intent and purpose of
this Agreement.
Section 6.12 Governing Law. This Agreement and the rights
and obligations of the Parties hereunder are to be governed by and
construed and interpreted in accordance with the laws of the
Commonwealth applicable to contracts made and to be performed
wholly within the Commonwealth, without regard to choice or
conflict of laws rules.
Section 6.13 Legal Fees, Costs. All legal and other costs
and expenses incurred in connection with this Agreement and the
transactions contemplated hereby are to be paid by the Party
incurring such costs and expenses; provided, however, that the
provision of this Section 6.13 shall not in any way limit the
rights of any Party hereto against the other Party with respect to
a breach by such other Party of its obligations hereunder.
Section 6.14 Notices. All notices, consents, requests,
demands and other communications hereunder are to be in writing,
and are deemed to have been duly given or made: (a) when delivered
in person; (b) on the date noted on the return receipt of the
delivery date or attempted delivery date, when mailed by United
States mail, first class, return receipt requested first class
postage prepaid; (c) in the case of overnight courier services, on
the day of delivery by the overnight courier service with payment
provided for; or (d) in the case of telex or telecopy or fax, when
sent, verification received, in each case addressed as follows:
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(i) if to Buyer:
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Fax #: ( )
with a copy to:
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Fax #: ( )
(ii) if to Seller:
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Attention:
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Fax #: ( ) ]
with a copy to:
Fiddler, Gonzalez & Rodriguez
Chase Manhattan Bank Building
Fifth Floor
Hato Rey, Puerto Rico
Post Office Box 363507
San Juan, Puerto Rico 00936-3507
Attention: Julio L. Aguirre, Esquire
Fax # (787) 759-3108
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and to:
Covington & Burling
1201 Pennsylvania Avenue, NW
Washington, D.C. 20004
Attention: Andrew Jack, Esquire
Fax #: (202) 778-5232
or to such other address as any Party may designate by notice to
the other Parties in accordance with the terms of this Section.
Section 6.15 Publicity. Any publicity release,
advertisement, filing, public statement or announcement made by or
at the request of any Party regarding this Agreement hall be first
reviewed by and must be satisfactory and consented to the other
Parties, which consent will not be unreasonably withheld.
Section 6.16 Severability. Any provision of this Agreement
which is prohibited, unenforceable or not authorized in any
jurisdiction is, as to such jurisdiction, ineffective to the extent
of any such prohibition, unenforceability or non-authorization
without invalidating the remaining provisions hereof, or affecting
the validity, enforceability or legality of such provision in any
other jurisdiction, unless the ineffectiveness of such provision
would result in such a material change as to cause completion of
the transactions contemplated hereby to be unreasonable.
Section 6.17 Successors and Assigns. All provisions of this
Agreement are binding upon, inure to the benefit of, and are
enforceable by or against, the Parties and their respective
administrators or other legal representatives and permitted
successors and assigns.
Section 6.18 Third-Party Beneficiary. This Agreement is
solely for the benefit of the Parties and their respective
successors and permitted assigns, and no other Person has any
right, benefit, priority or interest under, or because of the
existence of, this Agreement.
Section 6.19 Bulk Sales Law. Buyer hereby waives compliance
by Seller with the laws or any jurisdiction, including without
limitation the laws of the Commonwealth, relating to bulk transfers
which may be applicable in connection with the transfer of the
Assets to Buyer.
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Section 6.20 Signature Warranty. Each Person executing this
Agreement warrants that he is authorized to do so on behalf of the
Party for whom he signs this Agreement.
Section 6.21 Effectiveness. This Agreement shall be
effective as of the date hereof upon the approval by the
Commonwealth's Racing Board of the New Lease.
IN WITNESS WHEREOF, Buyer and Seller have caused this
Agreement to be executed by their respective officers, as of the
date first set forth above.
(PAGE) AMENDMENT TO CONTROL TRANSFER AGREEMENT
This Second Amendment to Control Transfer Agreement
(this "Amendment"), dated as of December 19, 1997, is entered
into by and among Interstate Business Corporation, a Delaware
corporation ("IBC"), Interstate General Company L.P., a Delaware
limited partnership ("IGC"), Interstate General Properties
Limited Partnership S.E., a Maryland limited partnership
("IGP"), Housing Development Associates S.E., a Puerto Rico
partnership ("HDA"), Equus Management Company, a Delaware
corporation ("EMC"), and Equus Gaming Company L.P., a Virginia
limited partnership ("Equus").
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to that
certain Control Transfer Agreement dated as of December 31, 1996
as amended by the amendment thereto dated as of March 31, 1997
(the "Agreement"); and
WHEREAS, the parties hereto now wish to amend Sections
2, and 3 of the Agreement;
NOW, THEREFORE, in consideration of the foregoing
premises and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as
follows:
1. Amendments. Sections 2, and 3 of the Agreement are
hereby amended and restated in their entirety as follows:
2. Execution of Net Worth Guaranty IGC shall
execute and deliver to EMC a Guaranty Agreement in the form
attached hereto as Exhibit A. Following execution and
delivery by IGC of the Guaranty Agreement, IGC may withdraw
as a general partner of Equus.
3. IGC Undertakings. For and in full consideration
of the transfer of the EMC Stock and execution and delivery
by IGC of the Guaranty Agreement, IBC hereby agrees to:
(a) forever indemnify and hold harmless IGC, and
its successors and assigns from and against any and all
liability and expense (including, without limitation, any
liability for debts or obligations incurred by Equus) which
IGC may incur as a result of its serving as a general
partner of Equus;
(b) contribute to the capital of EMC 50,000 IGC
Class A Units and maintain in EMC at all times prior to
termination of the Guaranty Agreement sufficient capital to
(PAGE)provide EMC with tangible net worth of at least $200,000.
(c) irrevocably assign to IGC all rights to any
distributions received by EMC from Equus in respect of its
.99% general partnership interest in Equus to the extent
that such distributions exceed the expenses and liabilities
of EMC incurred in the ordinary course of business in its
capacity as managing general partner of Equus; and
(d) not transfer or otherwise dispose of any EMC
stock other than (i) to an affiliate or IBC who agrees to
remain bound by the terms of this Agreement, or (ii) to any
party in an arm's length transaction for fair value which
such value is hereby irrevocably assigned to IGC.
2. Effectiveness of Amendment. This Agreement shall be
effective as of the date hereof. Except as expressly amended
hereby, all other provisions of the Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused
this Amendment to be executed as o9f the date first above
written.
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INTERSTATE GENERAL COMPANY L.P.
By: Interstate General Management
Corporation, its managing general
partner
By: /s/ Francisco Arrivi
----------------------------------
Name: Francisco Arrivi
Title: Executive Vice President
EQUUS GAMING COMPANY L.P.
By: Equus Management Company,
its managing general partner
By: /s/ Gretchen Gronau
-----------------------------
Name: Gretchen Gronau
Title: Vice President
INTERSTATE BUSINESS CORPORATION
By: /s/ Gretchen Gronau
------------------------------
Name: Gretchen Gronau
Title: Assistant Secretary
EQUUS MANAGEMENT COMPANY
By: /s/ Gretchen Gronau
--------------------------------
Name: Gretchen Gronau
Title: Vice President
(PAGE) HOUSING DEVELOPMENT ASSOCIATES S.E.
By: Equus Gaming Company, L.P.
its managing general partner
By: Equus Management Company,
its managing general partner
By: /s/ Gretchen Gronau
-------------------------------
Name: Gretchen Gronau
Title: Vice President
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: /s/ Francisco Arrivi
-------------------------------
Name: Francisco Arrivi
Title: Executive Vice President
(PAGE) GUARANTY
THIS GUARANTY AGREEMENT (this "Agreement") is made as of
December 30, 1997, by and between EQUUS MANAGEMENT COMPANY, a
Delaware corporation ("EMC"), and INTERSTATE GENERAL COMPANY,
L.P., a Delaware limited partnership (the "Guarantor" of
"IGC").
WHEREAS, EMC is the managing general partner of Equus
Gaming Company L.P. (the "Partnership") and the Guarantor is a
general partner of the Partnership;
WHEREAS, the Partnership is a publicly traded partnership
which is listed on the Nasdaq Market ("Nasdaq");
WHEREAS, Nasdaq approved the listing of the Partnership's
Class A Limited Partnership Stock Units ("Units") on Nasdaq on
the condition that the Guarantor retain certain liability with
respect to the debts of the Partnership;
WHEREAS, pursuant to a Stock Purchase Agreement dated as
of December 31, 1996, (the "EMC Purchase Agreement") IGC sold
all of the outstanding capital stock of EMC to Interstate
Business Corporation, a Delaware Corporation ("IBC");
WHEREAS, pursuant to the EMC Purchase Agreement, IBC
agreed to use its best efforts to permit IGC to withdraw as a
general partner of the Partnership without affecting the
continued listing of Units on Nasdaq;
WHEREAS, in connection with the foregoing obligation, IBC
has contributed certain assets to EMC to increase its net
tangible assets and EMC has caused the Partnership to redeem
IGC's general partnership interest pursuant to a Redemption
Agreement between the Partnership and IGC of even date;
WHEREAS, as partial inducement to EMC to cause the
Partnership to enter into the Redemption Agreement, the
Guarantor has agreed to provide the guaranty provided
hereunder; and
WHEREAS, the Guarantor has determined that the Redemption
Agreement will result in direct and/or indirect financial
benefits to the Guarantor and is otherwise in Guarantor's
interest;
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NOW THEREFORE, in consideration of the premises and for
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
1. Guaranty. The Guarantor for itself, its successors
and assigns, guarantees to EMC (the "Guaranty"):
(a) in the case of the insolvency of the
Partnership and the insolvency of EMC, the payment of any and
all liabilities of EMC which exceed the assets of EMC, arising
from EMC's status as a general partner of the Partnership (the
"Liabilities"), provided, however, that
(i) the Guarantor shall pay only that portion
of the Liabilities which exceed Two Hundred Thousand Dollars
(US $200,000.00); and
(ii) Notwithstanding any other provision of
this Agreement, the Guarantor shall not be required to pay
more than Twenty Million Dollars (U.S. $20,000,000.00)
pursuant to this Guaranty.
2. Nasdaq Listing. Upon the execution of this
Agreement, EMC shall use its best efforts to obtain, as soon
as reasonably practical, the approval of Nasdaq to continue
listing the Units without relying on this Guaranty.
3. Termination.
(a) Guarantor may elect to terminate the Guaranty
by written notice to EMC upon the occurrence of any one of the
following events:
(i) Nasdaq confirms the Partnership that
Nasdaq will continue the listing of the Units of this
Guaranty;
(ii) The consolidated partners' equity of the
Partnership, as determined in accordance with generally
accepted accounting principles falls below negative Twenty
Million Dollars (US $20,000,000.00); or
(iii) Ten (10) days following delivery of
written notice to EMC of non payment when due of the fee set
forth in Section 4 hereof, unless such payment is made before
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the expiration of the ten (10) days.
(b) EMC May elect to terminate the Guaranty at any
time upon written notice to Guarantor.
4. Guaranty Fee. If this Guaranty has not terminated
by the fourth anniversary of its inception, then beginning on
the fourth anniversary of this Guaranty and on each
anniversary thereafter until this Guaranty is terminated, EMC
shall cause the Partnership to pay to the Guarantor, a fee
equal to 2% of the amount by which the Consolidated partners'
equity is less than Four Million Dollars ($4,000,000.00).
5. Representations and Warranties. The Guarantor
represents and warrants to EMC, effective as of the date of
the execution by the Guarantor of this Agreement, that:
(a) Good Standing. The Guarantor is a limited
partnership duly organized, validly existing and in good
standing, under the laws of the State of Delaware and has the
power and authority to own its property and to carry on its
business and is duly qualified or registered in each
jurisdiction in which the character of the properties owned by
it therein or in which the transaction of its business makes
such qualification necessary.
(b) Authority. The Guarantor has full power and
authority to execute and deliver this Agreement and to incur
the obligations provided for herein, all of which have been
duly authorized by all proper and necessary action of its
managing general partner. No consent or approval of any
public authority is required as a condition to the validity of
this Agreement.
(c) Binding Agreement. This Agreement constitutes
the valid and legally binding obligation of the Guarantor in
accordance with its terms.
(d) No Conflicts. None of the execution, delivery
or performance of this Agreement will violate (i) any
provision of law or of the partnership agreement of the
Guarantor, or any order of any court or other agency of
government to which the Guarantor or any affiliate thereof is
subject, or (ii) any indenture, agreement or other instrument
to which the Guarantor is a party or by which any of the
(PAGE)
property or assets of the Guarantor is bound, or be in
conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any such
indenture, agreement or other instrument or result in the
creation or imposition of any lien, charge or encumbrance of
any nature whatsoever upon any of the property or assets of
the Guarantor.
6. Waivers. Except as expressly set forth below, the
Guarantor hereby waives notice of the following acts, events
and/or conditions and hereby agrees that the creation or
existence of any such act, event or condition or the
performance thereof by the Partnership (in any number of
instances) shall in no way release or discharge the Guarantor
from liability hereunder, in whole or in part:
(a) the addition of or partial or entire release of
any other guarantor, maker, surety, endorser, indemnitor or
other party or parties primarily or secondarily liable for the
payment of the Liabilities;
(b) the institution of any suit or the obtaining of
any judgment against any other guarantor, maker, surety,
endorser, indemnitor or other party primarily or secondarily
liable for the payment of the Liabilities;
(c) acceptance of this Guaranty;
(d) all rights to require the marshalling of assets
of the Partnership or any party or parties and all rights
accorded by law to the Guarantor which might impair the right
of action against the Guarantor;
(e) the taking or retaining of the primary or
secondary obligation of any party or parties, in addition to
the Guarantor, with respect to the Liabilities;
(f) the taking or retaining of a lien and security
interest in any property to secure the Liabilities or any of
the liabilities of the Guarantor hereunder or the impairment
of any collateral therefor, including, without limitation, the
substitution, exchange, surrender or release thereof,
(g) the failure of the Partnership at any time or
times to assert any claim or demand or to enforce any right or
remedy against EMC, or any other person or entity; or
(PAGE)
(h) any lack of validity of the Redemption
Agreement.
7. Conditional Guaranty. The Guaranty is a conditional
guaranty on the terms and conditions set forth herein. It
guarantees the performance of EMC as a general partner and it
is conditioned upon the requirement that the Partnership first
attempt to collect any of its liabilities from the assets of
EMC. Payments by the Guarantor hereunder are immediately due
and payable upon the insolvency of EMC. Any such payments may
be required by EMC in any number of installments, and shall
remain in full force and effect until satisfaction in full of
the Liabilities, notwithstanding any intermediate or temporary
payment or settlement of the whole or any part of the
Liabilities.
8. Notices. All notices and other communications
provided for hereunder shall be in writing (including
telegraphic communication) and mailed by certified mail,
return receipt requested, or delivered by overnight delivery,
or telegraphed or deliver if to the Guarantor or to EMC, at
their address at 222 Smallwood Village Center, Waldorf,
Maryland 20602, or sent by telecopier (telecopier number (301)
870-8481), as to each party, at such other address as shall be
designated by such party in a written notice to the other
party. All such notices and communications shall, when
mailed, be effective on the date received as indicated in the
receipt and, when sent by overnight delivery or telecopier or
telegraphed, be effective when delivered to the overnight
delivery service company or when sent by telecopier or
telegraph, respectively, addressed as aforesaid.
9. Successors and Assigns. All obligations, covenants
and agreements of the Guarantor shall be binding on it and its
successors and assigns.
10. No Delay or Waiver Severability. No delay on the
part of EMC in the exercise of any right or remedy shall
operate as a waiver thereof, and no single exercise by EMC of
any right or remedy shall preclude other or further exercise
thereof or the exercise of any right or remedy; no waiver by
EMC of any right or remedy shall be effective unless in
writing nor, in any event, operate as a waiver of any other or
future right or remedy that may accrue to EMC. If any part of
this Guaranty shall be adjudged invalid, then such partial
(PAGE)
invalidity shall not cause the remainder of the Guaranty to be
or to become invalid, and if a provision hereof is held
invalid in one or more of its applications, it is agreed that
said provision shall remain in effect in valid applications
that are severable from the invalid application or
applications.
11. Governing Law. This Agreement shall be construed
under the laws of the Commonwealth of Virginia (excluding the
conflicts of laws principles thereof).
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the day and year first above written.
INTERSTATE GENERAL COMPANY, L.P.
By: Interstate General Management
Corporation
Its: Managing General Partner
By: /s/ Francisco Arrivi
---------------------------------
Name: Francisco Arrivi
-------------------------------
Title: Executive Vice President
-------------------------------
EQUUS GAMING COMPANY, L.P.
By: Equus Management Company
Its: Managing General Partner
By: /s/ Gretchen Gronau
---------------------------------
Name: Gretchen Gronau
-------------------------------
Title: Vice President
-------------------------------
(PAGE) AGREEMENT TO RETIRE PARTNERSHIP INTEREST OF
INTERSTATE GENERAL COMPANY, L.P. IN
EQUUS GAMING COMPANY, L.P.
This AGREEMENT TO RETIRE PARTNERSHIP INTEREST OF
INTERSTATE GENERAL COMPANY, L.P. IN EQUUS GAMING COMPANY, L.P. (the
"Agreement") is entered into and shall be effective as of December
30, 1997 by and among Equus Gaming Company, L.P., a Virginia
limited partnership (the "Partnership"), Interstate General
Company, L.P., a Delaware limited partnership and general partner
of the Partnership (the "Retiring Partner"), Equus Management
Company, a Delaware Corporation and managing general partner of the
Partnership ("EMC"), Equus Management Title Company, a Delaware
Corporation and limited partner of the Partnership ("EMTC" and
together with EMC, the "Continuing Partners"), and Housing
Development Associates S.E., a Puerto Rico Partnership ("HDA")
(HDA, the Retiring Partner, the Continuing Partners, and the
Partnership are sometimes referred to individually as a "Party" and
collectively as the "Parties"), based on the following facts:
A. The Retiring Partner and the Continuing Partners formed the
Partnership pursuant to that certain agreement dated February 6,
1995, which agreement has been amended from time to time (as
amended, the "Partnership Agreement").
B. The Parties have agreed that the Retiring Partner's entire
right, title, and interest in the Partnership (the "Redemption
Interest") shall be retired and redeemed by the Partnership and the
Retiring Partner shall withdraw from the Partnership, all as set
forth herein.
Based on the foregoing, and in consideration of the mutual
agreements, covenants, and conditions contained herein, and for
other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the Parties hereby agree as follows:
1. Retirement, Redemption, and Withdrawal. The
Redemption Interest shall be retired and redeemed by the
Partnership effective as of 9:00 a.m. Eastern Time on December 31,
1997, (the "Effective Date"), all in accordance with the provisions
set forth in this Agreement. The Retiring Partner shall sell,
assign, and transfer the entire Redemption Interest to the
Partnership and withdraw from the Partnership as of the close of
business on the Effective Date.
(PAGE) 2. Consideration for Redemption Interest;
Indemnification Provisions. In consideration for the retirement
and redemption of the Redemption Interest, the Partnership agrees
to distribute to the Retiring Partner consideration (the
"Redemption Consideration") composed of the following:
(a) On the Effective Date, the Partnership shall
distribute to the Retiring Partner a portion of its partnership
interest in HDA, such portion being equal to the product of (a) the
Partnership's interest in HDA immediately prior to the Effective
Date and (b) the Retiring Partner's Partnership interest in the
Partnership immediately prior to the Effective Date.
(b) As among the Parties and subject to the
Guaranty Agreement (of even date herewith by and between Retiring
Partner and EMC (the "Guaranty Agreement")) and Section 7.7 of the
Partnership Agreement, the Retiring Partner shall be relieved of
all responsibility for liabilities of the Partnership whether known
or unknown the Partnership and EMC shall indemnify, defend,
protect, and hold harmless the Retiring Partner from such
liabilities, subject to the Guaranty Agreement and Section 7.7 of
the Partnership Agreement. Liabilities to which the Retiring
Partner remains subject pursuant to Section 7.7 of the Partnership
Agreement are referred to herein as "Contingent Liabilities".
(c) The Redemption Consideration provided for in
this Section 2 is the total consideration payable by the
Partnership to the Retiring Partner for the Redemption Interest,
and the Retiring Partner shall not retain an interest in, or be
entitled to receive distributions of, any other Partnership assets.
3. Continuation of Partnership; Adjustment of EMC
Percentage Interest. The Parties hereby agree that the Partnership
shall continue and shall not be dissolved because of the retirement
and redemption of the Redemption Interest or the withdrawal of the
Retiring Partner. Pursuant to Section 7.3 of the Partnership
Agreement, the partnership interest of EMC shall be increased from
.99% to 1%.
4. Tax Matters. The Parties agree that:
(a) To the extent possible, the tax and other
attributes that the Retiring Partner held indirectly in HDA through
its interest in the Partnership (including its share of Section
704(c) property under Treas. Reg. Sec. 1.704-3 and its share of HDA's
(PAGE)
nonrecourse liabilities under Section 752 of the Internal Revenue
Code of 1986 (the "Code")) immediately before the Effective Date
shall continue to be held by the Retiring Partner through its
direct interest in HDA on and after the Effective Date.
(b) The Parties shall each file all required
Federal, state, and local income tax returns and related returns
and reports in a manner consistent with the provisions of this
Section 4.
5. Representations, Warranties, and Covenants.
(a) Of Each Party. The Partnership, the Retiring
Partner, and the Continuing Partners each hereby represents and
warrants to and covenants to each other Party that:
(i) Neither the execution nor the delivery of
this Agreement, the incurrence of the obligations herein set forth,
the consummation of the transactions herein contemplated, nor the
compliance with the terms of this Agreement will conflict with, or
result in a breach of, any of the terms, conditions, or provisions
of, or constitute a default under, any bond, note, or other
evidence or indebtedness or any contract, indenture, mortgage, deed
of trust, loan agreement, lease, or other agreement or instrument
to which such Party is a party or by which such Party may be bound.
(ii) Such Party has the right, power, legal
capacity, and authority to execute and enter into this Agreement
and to execute all other documents and perform all other acts as
may be necessary in connection with the performance of this
Agreement.
(iii) No approval or consent not heretofore
obtained by any person or entity is necessary in connection with
the execution of this Agreement by such Party or the performance of
such Party's obligations under this Agreement.
(iv) Such Party has received independent tax
and legal advice from attorneys of his choice with respect to the
advisability of executing this Agreement.
(v) Such Party has made such investigation of
the facts pertaining to this Agreement, and all of the matters
pertaining thereto, as he deems necessary.
(PAGE) (vi) Except as expressly provided herein, no
person has made any statement or representation to such Party
regarding any fact relied upon by such Party in entering into this
Agreement and each Party specifically does not rely upon any
statement, representation, or promise of any other person in
executing this Agreement.
(vii) Such Party relies on the finality of
this Agreement as a material factor inducing his execution of this
Agreement, and the obligations under this Agreement.
(viii) Such Party will not take any action
which would interfere with the performance of this Agreement by any
other Party or which would adversely affect any of the rights
provided for herein.
(b) Additional Representation, Warranty, and Covenant of
the Retiring Partner. The Retiring Partner hereby represents and
warrants to and covenants to each other Party that the Retiring
Partner owns the Redemption Interest free and clear of any and all
liens, claims, encumbrances, and adverse equities.
6. Releases and Indemnification.
(a) By Each Party. For value received, each Party for
himself and for each and all of his past, present, and future
predecessors, successors, assigns, affiliates, licensees,
transferees, principals, servants, agents, partners, associates,
officers, directors, employees, representatives, shareholders,
attorneys, insurers, legal representatives, descendants,
dependents, heirs, executors, administrators, and all other persons
(collectively, the "Successors in Interest") hereby and forever
releases and discharges and agrees to indemnify and hold harmless
each other Party and each and all of each other Party's Successors
in Interest, from any and all claims, demands, liens, causes of
action, suits, obligations, controversies, debts, costs, expenses,
damages, judgments, and orders of whatever kind or nature, in law,
equity, or otherwise, whether known or unknown, suspected or
unsuspected, and whether or not concealed or hidden, which have
existed, do presently exist, or may exist, relating to the
Partnership or its activities, assets, liabilities, or partners,
other than the obligations to the Retiring Partner set forth in
this Agreement.
(PAGE)
(b) After-Discovered Facts. It is understood by each
Party that there is a risk that subsequent to the execution of this
Agreement, a Party may discover facts different from or in addition
to the facts which he now knows or believes to be true with
respect to the subject matter of this Agreement, or that certain
debts, claims, expenses, or liabilities presently known may be or
become greater than a Party now expects or anticipates. Each Party
intends this Agreement to apply to all unknown or unanticipated
results, as well as those known and anticipated, and it is the
intention of each Party to hereby fully, finally, absolutely, and
forever resolve any and all claims and disputes which have existed,
do exist, or may exist relating to the Partnership or its
activities, assets, liabilities, or partners, other than the
obligations to the Retiring Partner set forth in this Agreement.
7. Miscellaneous.
(a) Statement of Partnership; Other Filings. The
Partnership may prepare and file fictitious business name
statements and such other statements or documents as the Continuing
Partners deem appropriate to reflect the withdrawal of the Retiring
Partner from the Partnership and the continuation of the
Partnership.
(b) Name of Partnership. The Partnership may, in the
sole discretion of the Continuing Partners, continue to use Equus
Gaming Company, L.P. as the name of the Partnership after the
Effective Date.
(c) Attorneys' Fees to Enforce This Agreement or in
Subsequent Litigation. In the event any Party shall maintain or
commence any action, proceeding, or motion against any other Party
to enforce this Agreement or any provision thereof, the prevailing
Party therein shall be entitled to recover his actual attorneys'
fees and costs therein incurred. Each Party agrees that if such
Party hereafter commences, joins in, or in any manner asserts
against any other Party any of the claims released hereunder, then
it will pay to the other Party, in addition to any other damages
caused to the other Party thereby, all actual attorneys' fees and
costs incurred in defending or otherwise responding to such suit or
claim.
(d) Severability. Each provision of this Agreement is
intended to be severable. If any term or provision hereof is
illegal or invalid for any reason whatsoever, such illegality or
(PAGE)
invalidity shall not affect the legality or validity of the
remainder of the Agreement.
(e) Survival. All of the terms, representations,
warranties, and other provisions of this Agreement shall survive
and remain in effect after the Effective Date.
(f) Costs. Each Party shall pay its own legal fees and
expenses incidental to the execution of this Agreement and the
consummation of the transactions contemplated hereby.
(g) Execution of Documents. Each Party agrees to
execute all documents necessary to carry out the purpose of this
Agreement and to cooperate with each other for the expeditious
filing of any and all documents and the fulfillment of the terms
of this Agreement.
(h) Successors and Assigns. This Agreement shall inure
to the benefit of the transferees, successors, assigns, heirs,
beneficiaries, executors, administrators, partners, agents,
employees, and representatives of each Party.
(i) Controlling Law. This Agreement has been entered
into in the Commonwealth of Virginia and the Agreement, including
any rights, remedies, or obligations provided for thereunder, shall
be construed and enforced in accordance with the laws of the State
of Delaware.
(j) Counterpart Execution. This Agreement may be
executed in multiple counterparts each of which may be deemed an
original and shall become effective when the separate counterparts
have been exchanged among the Parties.
(k) Construction. Every covenant, term, and provision
of this Agreement shall be construed simply according to its fair
meaning and not strictly for or against any Party.
(l) Headings. Section and other headings contained in
this Agreement are for reference purposes only and are not intended
to describe, interpret, define, or limit the scope, extent, or
intent of this Agreement or any provision hereof.
(m) Incorporation by Reference. Every exhibit,
schedule, and other appendix attached to this Agreement and
referred to herein is hereby incorporated in this Agreement by
reference.
(PAGE) (n) Variation of Provisions. All pronouns and any
variations thereof shall be deemed to refer to the masculine,
feminine, or neuter, singular or plural, as the identity of the
person or persons may require.
(o) Notices. Any notice, payment, demand, or
communication required or permitted to be given by any provision of
this Agreement shall be in writing and shall be delivered
personally to the Party or to an officer of the Party to whom the
same is directed, or sent by regular, registered, or certified
mail, addressed to the person to whom directed at the following
address, or to such other address as such Party may from time to
time specify by notice to the Parties:
(i) If to the Partnership or the Continuing
Partners:
Equus Gaming Co., L.P.
222 Smallwood Village Center
St. Charles, MD 20602
(ii) If to the Retiring Partner:
Interstate General Company
222 Smallwood Village Center
St. Charles, MD 20602
Any such notice shall be deemed to be delivered, given, and
received for all purposes as of the date so delivered, if delivered
personally or if sent by regular mail, or as of the date on which
the same was deposited in a regularly maintained receptacle for
the deposit of United States mail, if sent by registered or
certified mail, postage and charges prepaid. Any Party may from
time to time specify a different address by choice to the other
Parties.
(p) Amendments. Any amendment to this Agreement shall
be in writing and executed by each Party hereto.
(q) Entire Agreement. This Agreement contains the
entire understanding among the Parties and supersedes any prior
written or oral agreements between them respecting the subject
matter of this Agreement. There are no representations,
agreements, arrangements, or understandings, oral or written,
between the Parties relating to the subject matter of this
Agreement that are not fully set forth herein. This Agreement
(PAGE)
amends and restates the Partnership Agreement with respect to the
subject matter of this Agreement. This Agreement shall be
considered part of the Partnership Agreement for all purposes under
the Code.
IN WITNESS WHEREOF, the Parties hereto have approved and
executed this Agreement as of the date first set forth above.
PARTNERSHIP
EQUUS GAMING COMPANY, L.P.
a Virginia partnership
By: EQUUS MANAGEMENT COMPANY
its Managing General Partner
By: /s/ Gretchen Gronau
------------------------------
CONTINUING PARTNERS:
EQUUS MANAGEMENT COMPANY, a
Delaware corporation
By: /s/ Gretchen Gronau
------------------------------
Its: Vice President
------------------------------
EQUUS MANAGEMENT TITLE COMPANY, a
Delaware corporation.
By: /s/ Gretchen Gronau
------------------------------
Its: Vice President
------------------------------
RETIRING PARTNER:
INTERSTATE GENERAL COMPANY, L.P.
By: Interstate General Management
Company, its managing general
partner
By: /s/ Francisco Arrivi
------------------------------
HOUSING DEVELOPMENT ASSOCIATES S.E.
By: EQUUS GAMING COMPANY, L.P.
a Virginia partnership
By: EQUUS MANAGEMENT COMPANY
its Managing General Partner
By: /s/ Gretchen Gronau
------------------------------
(PAGE)
NINTH AMENDED AND RESTATED PARTNERSHIP AGREEMENT
HOUSING DEVELOPMENT ASSOCIATES S.E.
Dated: December 31, 1997
(PAGE)
This amended and restated partnership agreement
(hereinafter referred to as the "Agreement") is made effective
as of the 31st day of December, 1997 (hereinafter referred to as
the "Ninth Amendment Date"), by and between INTERSTATE GENERAL
COMPANY, L.P., a limited partnership duly organized and existing
under the laws of the State of Delaware (hereinafter referred to
as "IGC"), 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, 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 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
(PAGE)
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.
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, IGP, SUPRA, and Equus subscribed a
"Seventh Amended and Restated Partnership Agreement" whereby
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
and withdrew from the Partnership.
On August 19, 1997, Equus and IGP subscribed an "Eighth
Amended and Restated Partnership Agreement" whereby the
Partnership redeemed SUPRA's Partnership interest and SUPRA
withdrew from the Partnership.
On December 16, 1997, Equus purchased from IGP a
0.20990099% interest in HDA. On December 30, 1997: (i) IGP
transferred its remaining 0.99009901% interest in HDA to IGC;
(ii) IGP resigned as Managing Partner; (iii) IGP withdrew from
the Partnership and (iv) IGC was admitted to the Partnership
with a 0.99009901% interest. On the Ninth Amendment Date: (1)
Equus distributed an interest in HDA to IGC in complete
redemption of IGC's general partner interest in Equus, pursuant
to an Agreement to Retire Partnership Interest of Interstate
General Company, L.P. in Equus Gaming Company, L.P. (hereinafter
the "Redemption Agreement"); (2) Equus contributed its entire
(PAGE)
remaining interest in HDA to Equus Entertainment Corporation
("EEC"); (3) EEC was admitted to the Partnership with a 99%
interest and was designated a Managing Partner (as that term is
defined in Section 6); (4) Equus resigned as a Managing Partner
and withdrew from the Partnership; (5) IGC was admitted to the
Partnership with a 1% interest; and (6) Equus and the Managing
Partner consented to the above-described transfers.
Now EEC and IGC (collectively the "Partners" and
individually a "Partner") desire to amend the Eighth 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.
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
(PAGE)
changed by the Managing Partner 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 partner, EEC (the "Managing
Partner"). The Managing Partner has exclusive authority to
manage the Partnership, including to retain other persons to
perform services for the Partnership. In furtherance of and
subject to the foregoing, the Managing Partner 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 well as under the laws of the Commonwealth of
Puerto Rico. Without the approval or authorization of the
Managing Partner, no party (including no Partner) may act on
behalf of the Partnership and no Partner shall be considered to
(PAGE)
be the agent of another. Notwithstanding the foregoing, the
Managing Partner 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 Partner
require no ratification by any other Partners. The Managing
Partner shall be the agent of the Partnership for the conduct of
the Partnership's business. The Partnership shall reimburse the
Managing Partner for all reasonable out-of-pocket expenses
incurred by the Managing Partner 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 EEC and IGC shall be, respectively,
Ninety Nine percent (99%) and One (1%).
Eight: [Reserved]
Nine: Appointment of Manager. The Managing Partner shall
have authority to appoint and employ such managers, employees,
consultants and agents for the Partnership, as it 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 Partner 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.
(PAGE)
The Managing Partner shall at all times name and appoint
such independent nationally recognized accounting and auditing
firm (the "Partnership Accountants") as in its sole discretion
shall be determined.
Thirteen: Bank Account. The Partnership shall maintain
such bank accounts as shall be approved by the Managing Partner.
The Managing Partner 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. Sec. 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, amorti-
zation, 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 Partner and (B) gain or loss
resulting from any disposition of such property with respect to
(PAGE)
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
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. Sec. 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 Partner); 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.
(PAGE)
(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 Partner 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).
(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. Sec. 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
(PAGE)
Partners' capital accounts. In making allocations pursuant to
this Section 14(d), the Managing Partner is authorized to apply
any method or convention required or permitted by Code Section
704(c). Further, the Partnership shall, to the extent possible,
continue to apply Code Section 704(c) to IGC on and after the
Ninth Amendment Date in the same manner as the Partnership and
Equus previously applied Code Section 704(c) to IGC with respect
to the interest in the Partnership that IGC held indirectly
through its interest in Equus. 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. Sec. 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.
(a) If there is a net decrease during a Partnership fiscal
year in Partnership Minimum Gain then, to the extent required by
Treas. Reg. Sec. 1.704-2(f), each Partner shall be allocated items
of Partnership income and gain for that year (and, if necessary,
for succeeding years) equal to that Partner's share of the net
decrease in Partnership Minimum Gain (within the meaning of
Treas. Reg. Sec. 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. Sec. 1.704-2(f) and be
interpreted consistently with such regulation to effectuate such
intent.
(b) 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. Sec. 1.704-2(i)(4), any Partner with
a share of that Partner Nonrecourse Debt Minimum Gain (as
determined under Treas. Reg. Sec. 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
(PAGE)
the meaning of Treas. Reg. Sec. 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. Sec. 1.704-2(i)(4) and be interpreted consistently with such
regulation to effectuate such intent.
(c) If any Partner unexpectedly receives an adjustment,
allocation, or distribution of the type contemplated by Treas.
Reg. Sec. 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. Sec. 1.704-
1(b)(2)(ii)(d) and be interpreted consistently with such
regulation to effectuate such intent.
(d) Profits of the Partnership shall be allocated among
the Partners in proportion to their Percentage Partnership
Interests.
(e) 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.
Sec. 1.704-1(b)(2)(ii)(c) (including any addition thereto pursuant
to the next to last sentences of Treas. Reg. Sec. 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. Sec. 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
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. 1.704-2(d) and (i)(3), respectively.
(PAGE)
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 Partner 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 Partner 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. Sec. 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 Partner 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
(PAGE)
Nonrecourse Deductions and Partner Nonrecourse Deductions
(within the meaning of Treas. Reg. Sec. 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
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 Partner
shall make such offsetting special allocations of income, gain,
loss, or deductions in whatever manner it determines 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
its discretion under this Section 17(e) the Managing Partner
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
(PAGE)
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 the Managing Partner, provided that
within 75 days of the close of each fiscal year the Managing
Partner 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 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 Partner; provided, however,
that 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 Partner
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 Partner deems relevant, including the reserve for
contingencies.
Nineteen: [Reserved]
Twenty: Transfer of Interests.
(a) Except as provided in this Section, the Partners may
(PAGE)
transfer their interest in the Partnership subject to a right of
first refusal exercisable by the Partnership. 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
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 the Managing Partner, which consent may be given or
withheld in the sole and absolute discretion of the Managing
Partner. A Partner shall cease to be a Partner upon the
transfer of all of its interest in the Partnership.
(b) Unless the Managing Partner consents 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 the Managing
Partner consents 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
(PAGE)
Puerto Rico law, the Managing Partner and its 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 the 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
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
Partner. 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.
(PAGE)
(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) The Managing Partner, 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 Partner 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
Partner in its good faith judgment deems to be in the best
interests of the Partnership and the Partners; (iv) to make any
change that is required to bring the Partnership 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 Partner to facilitate the 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 Partner
may not amend the Partnership Agreement in any manner that would
(PAGE)
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
Partnership shall file with the Secretary of the Treasury of
the Commonwealth of Puerto Rico its option to have the Part-
(PAGE)
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.
EQUUS ENTERTAINMENT CORPORATION
By: /s/ Gretchen Gronau
---------------------------------
Gretchen Gronau
Vice President
INTERSTATE GENERAL COMPANY L.P.
By: INTERSTATE GENERAL MANAGEMENT CORPORATION
Its Managing General Partner
By: /s/ Francisco Arrivi
---------------------------------
Francisco Arrivi
Executive Vice President
(PAGE)
Ratified the Ninth Amended and Restated Partnership Agreement of
Housing Development Associates S.E. dated December 31, 1997 by the
Undersigned.
EQUUS ENTERTAINMENT CORPORATION
By: /s/ Gretchen Gronau
---------------------------------
Gretchen Gronau
Vice President
INTERSTATE GENERAL COMPANY L.P.
By: INTERSTATE GENERAL MANAGEMENT CORPORATION
Its Managing General Partner
By: /s/ Francisco Arrivi
---------------------------------
Francisco Arrivi
Executive Vice President
Affidavit No. 1529
Subscribed before me by Donald G. Blakeman, 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., President of Equus Management Company, the Managing
General Partner of Equus Gaming Company L.P., to me personally known.
In San Juan, Puerto Rico, this 20th day of February, 1998.
/s/ Juan R. Requena Davila
---------------------------------------
NOTARY PUBLIC
(PAGE) FOURTH AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERHIP
OF EQUUS GAMING COMPANY L.P.
The undersigned, desiring to amend the Certificate of
Limited Partnership of Equus Gaming Company L.P. pursuant to
Section 50-73.12 of the Code of Virginia, does hereby certify as
follows:
I. The name of the Limited Partnership iis Equus
Gaming Company L.P.
II. The initial Certificate of Limited Partnership
of Equus Gaming Company L.P. was filed with the State Corporation
Commission on August 2, 1994.
III. The Certificate of Limited Partnership of Equus
Gaming Company L.P. is hereby amended to change the address of
the specified office of the limited partnership required to be
maintained by Section 50-73.4 of the Code of Virginia to:
650 Munoz Rivera Avenue
Doral Building, 7th Floor
Hato Rey, Puerto Rico 00918-4149
IV. The Certificate of Limited Partnership of Equus
Gaming Company L.P. is hereby amended to provide for the
withdrawal of the following general partner:
Name Mailin Address
---- --------------
Interstate General Company L.P. 222 Smallwood Village Center
St. Charles, Maryland 20602
IN WITNESS WHEREOF, the undersigned has executed this
Fourth Amendment to the Certificate of Limited Partnership of
Equus Gaming L.P. to be effective as of December 31, 1997.
EQUUS MANAGEMENT COMPANY,
managing general partner of
Equus Gaming Company L.P.
By: /s/ Gretchen Gronau
----------------------------
Gretchen Gronau
Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 508
<SECURITIES> 0
<RECEIVABLES> 3,106<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 59,332
<DEPRECIATION> 14,276
<TOTAL-ASSETS> 56,187
<CURRENT-LIABILITIES> 1,571
<BONDS> 63,364<F2>
0
0
<COMMON> 0
<OTHER-SE> (12,093)
<TOTAL-LIABILITY-AND-EQUITY> 56,187
<SALES> 0
<TOTAL-REVENUES> 24,298
<CGS> 0
<TOTAL-COSTS> 10,852
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,735
<INCOME-PRETAX> 4,711
<INCOME-TAX> 895
<INCOME-CONTINUING> 3,816
<DISCONTINUED> 0
<EXTRAORDINARY> 459
<CHANGES> 0
<NET-INCOME> 2,479
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes note receivable of $.466 million.
<F2>Net of bond discount of $1.39 million.
</FN>
</TABLE>
