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, 1999 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 SmallCap Market System
beneficial ownership of Class A limited ("Nasdaq/SCMS")
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 21, 2000, the aggregate market value of 3,081,992 Units held by
non-affiliates of the registrant based on the closing price reported on the
NASDAQ/SCMS was $3,266,912.
Documents Incorporated By Reference: Not Applicable
<PAGE>
EQUUS GAMING COMPANY L.P.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's Class A Units and Related Unitholder
Matters 7
Item 6. Selected Financial and Operating Data 7
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 48
PART III
Item 10. Directors and Executive Officers of the Company and EMC 48
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Unitholders and Management 53
Item 13. Certain Relationships and Related Transactions 54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 54
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Equus Gaming Company L.P. (the "Company"), a Virginia limited partnership,
is engaged in thoroughbred racing, wagering and other gaming businesses in the
Caribbean, Central and South America. Through its subsidiaries, the Company
operates four racetracks and manages an extensive off-track betting (OTB) system
in the various countries where the Company operates. Equus Management Company
("EMC") is the general partner of the Company.
The Company has a 99% interest in Housing Development Associates S.E.
("HDA"), the owner of El Comandante Racetrack ("El Comandante"), the only
licensed thoroughbred racing facility in Puerto Rico. El Comandante has
operated since January 1, 1998 as a wholly- owned subsidiary of HDA, El
Comandante Management Company, LLC ("ECMC"). HDA has recently organized two
wholly- owned subsidiaries: Satellite Services International, Inc. ("SSI") and
Agency Betting Network, Inc. ("ABN"). SSI will provide up-link services,
satellite time (contracted from a third party), and leasing of video and data
telecommunication equipment, to transmit (or simulcast) live races from and to
the Company's racetracks and OTB agencies, including live races from outside
the Company's operational territories to the agency distribution network in
order to increase the level of wagering revenues through the Company's OTB
system. ABN is establishing and operating an extensive OTB agency system in
Colombia in conjunction with Los Comuneros Race Track in Medellin, Colombia
("Los Comuneros"), owned and operated by Equus Comuneros S.A.
("Equus-Comuneros"). The Colombia OTB system will be operating in all major
cities in Colombia, including Bogota and Medellin.
The Company has a 55% interest in Galapagos, S.A. ("Galapagos"), the
operator since April 1995 of the V Centenario Racetrack in the Dominican
Republic ("V Centenario") and a 51% interest in Equus Entertainment de Panama,
S.A. ("Equus-Panama"), the operator since January 1, 1998 of the Presidente
Remon Race Track in the Republic of Panama ("Presidente Remon"). Both
racetracks are government-owned and operated by the Company's subsidiaries under
long-term license contracts. The Company also has since early 1999 a
controlling 50% interest in Equus-Comuneros.
At the present time, the Company is contemplating expanding and
implementing a high- technology satellite communication (video and data -VSAT
system) throughout its OTB agencies in all of its operations. It has developed
strategic plans to extend the development of its OTB agency- distribution
wagering system to other countries in South America through its affiliated
companies SSI and ABN.
A. PUERTO RICO OPERATIONS
El Comandante is the leading racetrack in the Caribbean when measured in
gross dollars wagered. Thoroughbred horse racing has been conducted
continuously at El Comandante since 1976 and at a predecessor facility since
1957. Races are currently run 52 weeks per year, generally five days per week
(Monday, Wednesday, Friday, Saturday and Sunday). Wagering is conducted through
facilities at the race track and at independently-owned OTB agencies that are
linked via on-line computers to El Comandante. During 1999, there were
approximately 650 OTB agencies in operation. Management expects to open an
additional 100 OTB agencies in the year 2000.
1
<PAGE>
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. Live races are currently
broadcasted through an agreement with S&E Network, Inc. ("S&E"). For 2000 the
Company is planning to implement a high technology communication system (data
and video-VSAT) with a satellite link (HUB) in Puerto Rico with capacity to
simulcast live races to other operations and to prospective countries in the
Caribbean and South America.
ECMC had a contract with the Puerto Rico horseowners association requiring
that horseowners field sufficient horses to conduct racing operations at El
Comandante in accordance with the racing program approved by the Puerto Rico
Racing Board. The contract obligates ECMC to provide stables and related
facilities. The contract, which establishes the amount to be paid to
horseowners as purses and other economic terms, expired in April 1998. The
Puerto Rico Racing Board has ordered the extension of the contract as an interim
measure until the Company and the horseowners negotiate a new agreement. The
Company is currently negotiating a new contract with the horseowners.
COMPETITION. El Comandante, the only licensed thoroughbred racetrack
facility in Puerto Rico, is operated by ECMC under an operating license granted
by the Puerto Rico Racing Board. 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
throughout 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. Until the expiration of
the Operating License, no other thoroughbred race track license for the San Juan
Region may be issued.
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 to those forms of gambling already
authorized by law.
EMPLOYEES. ECMC had approximately 275 employees as of December 31, 1999.
There were 48 employees working in the mutuel, admissions, and closed circuit
television departments covered by a collective bargaining agreement between ECOC
and El Comandante Racetrack Employees Union, which expired August 23, 1998, 101
employees performing building and premises maintenance services covered by a
collective bargaining agreement between ECOC and the General Workers Union,
which expired May 31, 1999. There were 42 employees performing security guard
services covered by a collective bargaining agreement between ECOC and the
Security Guards Union, which expired January 23, 1999. All the security guards
positions were eliminated at the end of 1999 and an outsourcing agreement for
security services was signed between ECMC and the Rangers American of Puerto
Rico for a period of one year, with renewable options, commencing in January
2000. ECMC is currently evaluating its personnel needs and requirements in
each operational and administrative area in order to improve efficiency and
productivity once it implements a new computerized accounting and management
information system.
B. DOMINICAN REPUBLIC OPERATIONS
In 1995 Galapagos was selected by the Dominican Republic Racing Commission
to operate the government-owned V Centenario racetrack in Santo Domingo pursuant
to a ten-year agreement ending April 2005. The contract may be renewed for
2
<PAGE>
additional ten-year periods by mutual agreement of the parties. The contract
also provides Galapagos with the right to develop off-track betting in the
Dominican Republic and the exclusive right to simulcast live horse races from
other countries into the Dominican Republic.
At December 31, 1999 there were approximately 328 installed and 262
operating OTB agencies in the Dominican Republic. The OTB system in the
Dominican Republic has been negatively impacted by the inability to obtain
dependable broadcasting of live races by commercial television with broad
island-wide penetration.
Currently, live racing is conducted three days per week with a six-race
card. Full card wagering on simultcast races from El Comandante in Puerto Rico
is offered four days a week. During the year 2000 Galapagos will be increasing
the number of live racing and simulcast races. The Company is also implementing
a new racing program to simulcast more live races from Panama, Puerto Rico and
other foreign countries into Galapagos. A new contract is being negotiated with
the government providing for economic and investment incentives to further
develop and improve the racing program and betting options, encourage horse
ownership and import of thoroughbreds, and improve the OTB agencies video and
data communications. As part of the new contract, Galapagos will also receive an
extension of its license for a period of ten years to operate the racetrack and
the distribution system.
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 on November 1, 1997. Lottery games are sold at OTB
agencies selected by Galapagos and at lottery agencies selected by the operator.
Galapagos' commissions (net of fees paid 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 simulcast 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, 1999. 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 262 employees at December 31, 1999. Galapagos
has no agreements with unions and has not experienced any work stoppage or
material labor difficulties.
C. PANAMA OPERATIONS
Equus-Panama operates the government-owned Presidente Remon race track in
Panama City pursuant to a 20 year agreement ending in December 2017. The
contract also gives Equus-Panama the right to develop off-track betting in
Panama and the exclusive right to simulcast horse races from and into Panama and
the right to operate up to 500 slot machines at the racetrack. Upon execution
of the contract, Equus-Panama paid $2.2 million to the Panama Government.
Equus-Panama began simulcasting races from United States racetracks on January
2, 1998 and live racing commenced on February 14, 1998, after major improvements
to the racing strip and facilities were made.
3
<PAGE>
At December 31, 1999, there were 125 OTB agencies installed in Panama City.
At the present time, live racing at Presidente Remon is transmitted via
microwave and cable television. OTB agencies outside the metropolitan broadcast
area are dependent on transmission by radio. Equus-Panama is in the process of
providing a new communication and video system (VSAT) for all OTB agencies and
plans to increase the number of agencies throughout the country, including in
remote parts of the country where video and communication coverage have been
either non-existent or unreliable.
COMPETITION. Equus-Panama faces competition from other forms of legalized
gambling in Panama. There are 12 licensed casinos in Panama offering card and
dice games and slot machines. Also, there are 15 slot machines parlors
currently operating. In addition, the Panama Government has operated a
lottery for more than 50 years.
EMPLOYEES. At December 31, 1999, Equus-Panama had 255 employees.
D. COLOMBIA OPERATIONS
Since the beginning of 1999, Equus-Comuneros has owned and operated Los
Comuneros Racetrack in Medellin, Colombia. Prior to the Company's involvement
in the management of these operations, Los Comuneros hosted one live meet per
week with an average handle of approximately $100,000, and employed an OTB
system limited both in terms of number of sites and technology. During 1999 Los
Comuneros operated approximately 100 OTB agencies. The wagering revenues from
those agencies was minimal due to limitations in the number of live racing and
the lack of simulcast races from other countries such as Panama.
In December 1999 the Racing Board approved a decree allowing for more live
races and the simulcast of live races from other countries. Therefore, the
first year of operations was consumed in obtaining the required permits to allow
the Company to implement its plan to develop a new racing program with extensive
simulcast of live races from other countries, and thus fulfill its objective of
increasing the OTB agency system to more than 600 by the end of the year 2000.
During the fourth quarter of 1999, the Company created ABN, a wholly owned
Puerto Rican subsidiary of HDA, to develop, establish and operate an extensive
OTB agency distribution system throughout Colombia. The OTB agency network will
be equipped with improved video and data communication system and will have the
capacity to penetrate all of the major cities in Colombia at a low cost.
COMPETITION. ABN and Equus-Comuneros face competition from other forms of
legalized gambling in Colombia, including a lottery system.
EMPLOYEES. At December 31, 1999 Equus-Comuneros had 90 employees.
E. VIRGINIA RACING LICENSE
During the year 1999 the Company attempted to acquire a license to own and
operate a horse racetrack in Prince William County, Virginia. On November 17,
1999 the Virginia Racing Commission made a final decision and did not award the
Virginia License to any of the applicants. The Company wrote-off all costs
associated with procuring this license.
4
<PAGE>
ITEM 2. PROPERTIES
EL COMANDANTE. HDA is the owner of El Comandante, situated on a 257-acre
parcel of land in Canovanas, Puerto Rico, approximately 12 miles east of San
Juan. El Comandante properties include the following:
a. A building consisting of a six-level grandstand and clubhouse with
seating for over 10,000 and a total capacity in excess of 25,000,
including glass-enclosed air-conditioned dining rooms with seating
capacity for over 1,400;
b. Racing facilities, including a one-mile oval strip with a
seven-furlong chute and a 65-foot wide exercise track;
c. Barn area and related facilities, including 1,595 horse stalls;
d. Paved parking area that can accommodate 7,250 vehicles;
e. Landscaped infield containing three lakes and a waterfall.
These properties were severely damaged by Hurricane Georges. The
grandstand and clubhouse were rebuilt on a reduced scale to reflect the growth
in OTB and the corresponding decrease in attendance at the racetrack.
ECMC also owns certain race track and telecommunication equipment used in
the operation of El Comandante and the off-track betting system. See Note 5 to
the Company's consolidated financial statements for a description of encumbrance
on El Comandante properties.
V CENTENARIO. Galapagos leases V Centenario from the Dominican Republic
Government. V Centenario is situated on a parcel of land, approximately 7.5
miles east of Santo Domingo, Dominican Republic. V Centenario properties
include the following:
a. A building consisting of grandstand and clubhouse with seating for
over 4,200 and total capacity in excess of 10,000, including an air
conditioned dining room with seating capacity of 400;
b. Racing facilities, including a one-mile oval strip with a
seven-furlong chute and a 1,400 meter exercise track;
c. Barn area and related facilities, 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.
5
<PAGE>
PRESIDENTE REMON. Equus-Panama leases Presidente Remon from the Panama
Government. Presidente Remon is situated on a 175-acre parcel of land in Juan
Diaz, Panama, approximately 5 miles east of downtown Panama City. Presidente
Remon properties include the following:
a. A building consisting of grandstand and clubhouse with seating for
over 2,000 and a total capacity in excess of 10,000, including air
conditioned dining rooms with total seating capacity of 400;
b. Racing facilities, including a one-mile oval strip with a
seven-furlong chute, a ten-furlong chute, and a 1,400 meter
exercise track.
c. Barn area and related facilities, including 1,200 horse stalls;
d. Paved parking area which can accommodate 600 vehicles.
Equus-Panama also owns certain race track and telecommunication equipment
used in the operation of Presidente Remon and the off-track betting system.
LOS COMUNEROS. Equus-Comuneros is the owner of Los Comuneros, situated on a
parcel of land in Medellin, Colombia. Los Comuneros properties include the
following:
a. A building consisting of grandstand and clubhouse with total seating
capacity of 5,500;
b. Racing facilities, including a 1,300-meter oval strip with a
six-furlong chute;
c. Barn area and related facilities, including 300 horse stalls;
d. Parking area, which can accommodate 500 vehicles.
ITEM 3- LEGAL PROCEEDINGS
The Company and certain of its 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 a material adverse impact on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
6
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S 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 National Market System since February 7, 1995 and, effective December 8,
1998, on Nasdaq SmallCap Market System. 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.
<TABLE>
<CAPTION>
CASH PRICE
DISTRIBUTIONS RANGE OF UNITS
--------------- ---------------
TOTAL PER UNIT HIGH LOW
----- -------- ------ ------
<S> <C> <C> <C> <C>
1999 QUARTER
Fourth - - $2.000 $0.969
Third - - 2.000 1.250
Second - - 2.250 1.063
First - - 1.625 0.813
1998 QUARTER
Fourth - - 1.688 0.625
Third - - 1.875 1.125
Second - - 2.000 1.000
First - - 1.875 1.000
</TABLE>
On March 21, 2000, the closing sale price of Units was $1.06 as reported on
Nasdaq. As of March 21, 2000, there were 8,309,824 Units outstanding and
approximately 230 Unitholders of record. From total units outstanding,
3,181,452 have not been registered under the Securities Exchange Act of 1934,
and therefore, cannot be freely traded.
The Company intends to distribute to its Unitholders cash consistent with
the Company's plans for expansion of its business. However, the Company's
principal source of cash has been distributions related to its ownership
interest in HDA. The trust indenture related to the First Mortgage Notes 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 certain debt coverage ratio is met.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial data for the Company.
The historical income statement and balance sheet data is derived from the
audited consolidated financial statements of the Company for each of the years
in the period ended December 31, 1999. This information should be read in
conjunction with, and is qualified in its entirety by, the consolidated
financial statements of the Company and related notes (see Item 8) and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (see Item 7).
7
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
HISTORICAL (1)
----------------------------------------------- PROFORMA
1999 1998 1997 1996 1995 1997 (2)
-------- -------- -------- ------- -------- ---------
EARNINGS STATEMENT DATA:
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions on wagering $66,744 $52,529 $ 4,619 $ 4,513 $ 2,719 $ 59,512
Net revenues from lottery services 546 656 88 - - 88
Income from insurance settlement - 12,856 - - - -
Rental income (3) - - 13,720 14,321 11,429
Gain from sale of Television Stations - - 4,669 581 - 4,669
Other Revenues 4,035 2,931 1,487 3,029 1,938 3,949
-------- -------- -------- ------- -------- ---------
71,325 68,972 24,583 22,444 16,086 68,218
Payments to horseowners 32,697 25,996 2,309 2,257 1,362 29,669
Other expenses 29,954 27,617 6,460 7,390 6,578 23,558
-------- -------- -------- ------- -------- ---------
8,674 15,359 15,814 12,797 8,146 14,991
Financial expenses 8,480 9,109 8,735 9,048 7,398 9,013
Depreciation and amortization 3,594 3,756 2,368 2,649 1,829 3,303
Impairment loss on El Comandante
intangible - 3,136 - - - -
-------- -------- -------- ------- -------- ---------
(3,400) (642) 4,711 1,100 (1,081) 2,675
Provision for income taxes 742 1,110 1,028 400 231 505
Minority interest in (earnings) loss (4) 1,030 228 (878) 127 721 (878)
Extraordinary income (loss) (5) 22 167 (326) - - 1,558
Cumulative effect - (403) - - - -
-------- -------- -------- ------- -------- ---------
Net earnings (loss) $(3,090) $(1,760) $ 2,479 $ 827 $ (591) $ 2,850
======== ======== ======== ======= ======== =========
Net earnings (loss) per unit (6) $ (0.39) $ (0.28) $ 0.39 $ 0.13 $ (0.08) $ 0.45
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
- ----------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 2,308 $ 6,637 $ 508 $ 4,268 $ 814
Race tracks property and
equipment (7) 59,857 47,470 45,056 45,956 47,891
Deferred costs 4,992 5,375 6,316 4,426 4,859
Receivables from ECOC (3) - - 3,106 2,780 1,816
Investment in S&E (8) - - - 2,223 4,862
Total assets 70,943 64,039 56,187 60,586 60,823
First Mortgage Notes and
accrued interest 53,834 56,512 63,681 66,737 66,573
Notes, bonds payable and
capital lease obligations 13,461 9,091 1,876 1,073 2,457
Total liabilities 85,728 78,105 68,280 71,775 72,611
Partners' deficit (14,785) (14,066) (12,093) (11,189) (11,788)
8
<PAGE>
<FN>
(1) Effective March 8, 1995 the Company consolidates the accounts of Housing
Development Associates S.E. ("HDA") and its subsidiaries in its financial
statements.
(2) Effective January 1, 1998, HDA terminated the lease agreement with El
Comandante Operating Company, Inc. ("ECOC") and commenced operating El
Comandante Race Track through a wholly-owned subsidiary. The proforma statement
of operations was prepared as if the accounts of ECOC had been consolidated in
the Company's financial statements since January 1, 1997. This proforma
information is unaudited (see Note 14 to the Company's consolidated financial
statements included in Item 8).
(3) Relates to rent paid by ECOC to HDA until December 31, 1997 (see Note 2,
above).
(4) Includes minority interest in losses of Galapagos, Equus-Panama and
Equus-Comuneros net of the Company's minority interest in HDA's net earnings.
For 1999, 1998 and 1997 the amount recognized as the minority interest in
Galapagos' losses was limited to the minority partners' investment (see Note 1
to the Company's consolidated financial statements).
(5) Represents premium (discount) on the early redemption and the purchase
in the open market of First Mortgage Notes and corresponding write-off of
deferred financing costs and note discount. On a proforma basis in 1997, it
also includes income from the cancellation of certain indebtedness of ECOC.
(6) Net earnings (loss) allocable to the units is based on approximately 99%
interest. The per Unit amount is calculated based on weighted average of Units
outstanding since of 7,796,191 in 1999, 6,342,606 in 1998, 6,333,617 in 1997 and
1996 and 6,223,381 in 1995.
(7) 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 and reduced by a net write-off in 1998 of $919,580 in
connection with damage caused by Hurricane Georges to El Comandante Race Track.
The net book value of the asset resulting from the step-up at December 31, 1999,
1998, 1997, 1996 and 1995 was approximately $4,234,000, $3,970,180, $5,097,000,
$5,274,000 and $5,481,000, respectively.
(8) In 1995 this amount consisted of licenses, property and equipment and
other assets of the Television Stations owned by a S & E Network, Inc, a former
subsidiary of the Company.
</TABLE>
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's results of operations are principally attributed to its
interests in thoroughbred horse race tracks in four countries, each of which is
owned and/or operated by a subsidiary: (i) El Comandante in Puerto Rico, owned
by Housing Development Associates S.E. ("HDA") and operated since January 1,
1998 by El Comandante Management Company, LLC ("ECMC"), (ii) V Centenario in the
Dominican Republic, operated since April 1995 by Galapagos S.A., (iii)
Presidente Remon in Panama, operated since January 1, 1998 by Equus
Entertainment de Panama, S.A. ("Equus-Panama") and (iv) Los Comuneros in
Medellin, Colombia, owned and operated since early 1999 by Equus Comuneros, S.A.
("Equus-Comuneros").
The Company also had an interest in three UHF television stations in Puerto
Rico (the "Television Stations"), which were sold in transactions closed in
August 1996 and January 1997.
The following discussion compares: (i) the results of operations of the
Company for 1999 with the results for 1998 and (ii) the Company's results of
operations for 1998 with results for 1997, on a proforma basis. Effective
January 1, 1998 HDA terminated the lease agreement with El Comandante Operating
Company, Inc. ("ECOC") and commenced operating El Comandante through ECMC, its
wholly-owned subsidiary (the "Proforma Transaction"). As a result, the
Company's historical results of operations for 1998 are not readily comparable
with results of operations for 1997. Accordingly, the unaudited proforma
results for 1997 have also been presented as if the Proforma Transaction had
occurred on January 1, 1997 and the accounts of ECOC had been included in the
Company's historical results of operations, after eliminating all intercompany
transactions (see Note 14 to the Company's consolidated financial statements
included in Item 8).
THE COMPANY'S RESULTS OF OPERATIONS
1999 COMPARED TO 1998
- ------------------------
REVENUES
Consolidated Revenues increased by $2,352,000, or 3.4%, in 1999 to
$71,325,000 from $68,973,000 in 1998. Out of the total revenues of
$68,973,000 in 1998, the Company received $12,857,000 (18.6%) from the insurance
settlement in connection with damage caused by Hurricane Georges to El
Comandante and V Centenario. Therefore, almost all of the revenues for 1999
were derived from operations.
COMMISSIONS ON WAGERING
Commissions on wagering increased by $14,215,000 (27.1%) in 1999 to
$66,744,000 as compared to $52,529,000 in 1998. The increase in commissions was
principally attributed to El Comandante, Galapagos, Panama, and the start-up
operations in 1999 of Equus Comuneros, which accounted for about $1,445,000 or
roughly 10% of the 27.1% increase in total commissions.
PUERTO RICO. Commissions on wagering at El Comandante increased
$10,996,000 (26.8%) from $41,081,000 in 1998 to $52,077,000 in 1999. The
increase in commissions was principally attributed to a full year of continuous
operations in 1999 when compared to 1998 where there was an interruption of
racing operations at El Comandante from September 20 until November 14, 1998,
when 39 racing dates were cancelled, as a result of damage caused to the
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racetrack and Puerto Rico's electrical and telecommunications infrastructure.
A change in the racing schedule effective November 14, 1998, where races are
being held on Saturdays instead of Thursdays, also had a positive impact in
wagering in 1999 as compared to 1998.
PANAMA. Commissions on wagering at Presidente Remon increased by
$1,580,000 (20.2%) from $7,808,000 in 1998 to $9,388,000 in 1999. The increase
in commissions was directly related to more OTB agencies on line and more live
and simulcast race days during 1999. Live racing at Presidente Remon commenced
on February 14, 1998 with two race days per week, increasing to three days in
April 1998. During 1999 the number of live races increased to an average of five
days per week and simulcast of live races from other countries to at least
three days per week.
DOMINICAN REPUBLIC. Commissions on wagering at V Centenario had only a
modest increase during 1999 attributable in part to the competition posed by the
government-licensed electronic lottery and to technical difficulties in
arranging for live broadcasting of races by commercial television with broad
island-wide penetration. This will be corrected during 2000.
NET REVENUES FROM LOTTERY SERVICES
During 1999 net revenues from lottery services by Galapagos in Dominican
Republic decreased by $110,000 as compared to 1998. The decrease in revenues
was mainly due to a reduction in the amount billed to the lottery operator as
reimbursement for telephone line costs, pursuant to an amendment to the contract
effective in late 1998. Also, due to certain disagreements involving cash
payments due to Galapagos from the lottery operator, the OTB agencies stopped
selling lottery tickets in September of 1999. This decision resulted in a
reduction of lottery sales and in commissions earned by Galapagos. These
disagreements have been resolved as of January of 2000 and the OTB agencies will
resume selling lottery tickets during the first quarter of the year 2000.
INCOME FROM INSURANCE SETTLEMENT
Due to damage inflicted by Hurricane Georges to El Comandante and V
Centenario, the Company received in 1998 compensation from the insurance
carriers totaling $10,832,000 for business interruption, which amount was
recognized as income. The company also received compensation totaling
$11,596,000 for damage to the race track facilities and, therefore, recognized a
gain from involuntary conversion of $2,024,000 after writing-off the book value
of property damaged.
OTHER REVENUES
During 1999 other revenues increased by $1,104,000 as compared to 1998.
Excluding revenues of $201,000 earned by Equus-Comuneros in 1999, there was an
increase of $903,000 attributed, in part, to certain fees that are earned based
on the level of wagering at El Comandante. Due to an increase in wagering in
1999 as compared to 1998, there was also an increase in these fees.
EXPENSES
Total expenses increased in 1999 by $5,109,000 (7.3%) when compared to
1998. The increase was primarily attributable to the start-up of operations and
expenses associated with Equus-Comuneros of $3,477,000, and a net increase of
$1,632,000 in expenses of the other racetracks' operations.
11
<PAGE>
PAYMENTS TO HORSEOWNERS
Payments of purses to horseowners increased $6,700,000 in 1999 when
compared to 1998. More than 87% of this increase, or $5,854,000, was principally
related to net increases in gross wagering on races.
El Comandante contract with horseowners expired in April 1998. However,
the Puerto Rico Racing Board has extended the contract as an interim measure
until the Company and the horseowners reach a new agreement. The Company is
currently negotiating with the horseowners.
FINANCIAL EXPENSES
Financial expenses decreased in 1999 by $629,000 when compared to 1998.
Excluding financial expenses of Equus-Comuneros, there was a decrease of
$891,000. The decrease is primarily attributable to a reduction in financing
costs of the First Mortgage Notes, due to the purchase in December 1998 by ECMC
of $7.5 million in principal amount of Notes (treated in the consolidated
financial statements of the Company as a redemption) and the redemption in
January 5, 1999 of $3 million in principal amount of Notes. The decrease was
offset in part by an increase due to interest on the $4 million in unsecured
bonds issued by Equus-Panama in October 1998.
DEPRECIATION AND AMORTIZATION
Depreciation in 1999 decreased by $162,000 when compared to 1998.
Excluding depreciation and amortization of Equus-Comuneros, there was a decrease
of $354,000. The decrease was principally attributed to a reduction in
depreciation of assets of El Comandante due to the write-off of the book value
of property damaged by Hurricane Georges in late 1998. Property at the
racetracks has been replaced and depreciation on these improvements commenced
during the fourth quarter of 1999.
IMPAIRMENT LOSS ON EL COMANDANTE INTANGIBLE
On January 1, 1998, upon termination of the lease agreement for El
Comandante, ECMC assumed net liabilities of ECOC amounting to $3,658,332.
Management made an internal valuation of the tangible assets, in determining
that book value approximated its fair value and allocated the entire amount to
an intangible asset, to be amortized during the remaining period of the license
through December 2004. However, following the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," which was effective for 1998, the Company assessed impairment
of its non- current assets, which included El Comandante intangible asset,
based on a comparison of the aggregated undiscounted future cash flows from
ECMC, as an individual entity, was less than net book value of ECMC's non-
current assets. As result of this assessment, the Company recognized an
impairment loss of El Comandante intangible equivalent to its net book value of
$3,135,713 as of December 31, 1998.
OTHER EXPENSES
Other expenses increased by $2,336,000 to $29,953,000 in 1999 from
$27,617,000 in 1998. Excluding expenses of Equus-Comuneros, there was a minor
increase in other expenses of $159,000. The net increase during 1999 was
attributable to a combination of factors:
(i) Decrease in salaries and payroll costs of El Comandante due to
reduction of personnel in various departments because of partial
closing of several administrative and operational areas at the
racetrack. The Company expects to continue further labor reductions
(such as outsourcing security services and other administrative
functions) in order to reduce administrative and payroll costs and
overtime labor.
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(ii) Increase in marketing costs due to a strong advertising and promotion
campaign in Puerto Rico. Effective February 2000 the Company
terminated the advertising campaign.
(iii)Increase in insurance after heavy damage caused by Hurricane Georges.
The policy for 2000 was recently negotiated with new carriers for all
racetrack operations at very competitive prices.
(iv) Increase in legal fees due to current negotiations by El Comandante of
the contract with horseowners, which expired in April, 1998. It is
expected that these costs will continue during 2000 until a new
contract is signed.
(v) Write-off of approximately $370,000 in costs associated to an
application by the Company for licenses to own and operate a horse
race track in Prince William County, Virginia. On November 17, 1999
the Virginia Racing Commission made a final decision and did not award
the Virginia License to any of the applicants.
PROVISION FOR INCOME TAXES
The provision for income tax is primarily related to deferred Puerto Rico
income taxes on the Company's income and losses related to its interest in El
Comandante, without taking into account results of operations of Galapagos,
Equus-Panama or Equus-Comuneros. Due to accumulated losses, none of these
foreign subsidiaries requires a provision for income taxes.
MINORITY INTEREST
The Company's minority interest is attributed to the income and losses
allocable to the minority partners of HDA, Galapagos, Equus-Panama (effective
October, 1998) and Equus-Comuneros (effective January, 1999). Because
accumulated losses of Galapagos allocable to minority partners had exceeded
their investment, during 1999 and 1998, the Company did not recognize minority
interest in losses of Galapagos of $312,217 and $465,879, respectively. During
2000: (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 $1,087,067.
EXTRAORDINARY ITEM
The extraordinary items in 1999 and 1998 are related to the early
redemption and the purchase in the open market of First Mortgage Notes. In
June of 1999, the Company recognized as income a $22,680 discount on the
purchase in the open market of $189,000 of First Mortgage Notes. In 1998 the
Company recognized as income a $1 million discount on the $7.5 million in First
Mortgage Notes purchased in the open market in December 1998, net of the
$300,000 premium that was paid in connection with the redemption of $3 million
made on January 5, 1999, at 110% of par (premium was accrued at December 31,
1998). The income in 1998 was recorded net of the corresponding write-off of a
portion of the note discount and deferred financing costs.
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CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In connection with the early adoption by the Company of Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities", the Company
wrote-off in 1998 the unamortized balance as of January 1, 1998 of
organizational and certain other deferred costs for $550,000.
1998 COMPARED TO 1997
- ------------------------
REVENUES
Revenues increased in 1998 by $44,389,000 compared to 1997. On a proforma
basis, revenues increased $754,000 (1.1%) from $68,218,000 in 1997 to
$68,972,000 in 1998. The increase in proforma revenues was principally due to
the insurance proceeds received by the Company for damage inflicted by Hurricane
Georges to El Comandante and V Centenario, net of decreases in commissions on
wagering and other categories of revenues.
COMMISSIONS ON WAGERING
Commissions on wagering, on a proforma basis, decreased $6,983,000 from
$59,512,000 in 1997 to $52,529,000 in 1998. The decrease was mainly caused by a
decline in wagering at El Comandante and V Centenario, offset by commissions on
wagering of $7,808,000 at Presidente Remon, where operations commenced during
1998.
PUERTO RICO. Commissions on wagering at El Comandante decreased
$13,812,000 (25%) from $54,893,000 in 1997 to $41,081,000 in 1998. The decline
in wagering was attributable to various factors, principally a strike by union
workers of the Puerto Rico Telephone Company ("PRTC") and Hurricane Georges,
which passed through the Caribbean on September 21-23, 1998.
PRTC Strike. Union workers opposing the privatization of the PRTC went on
strike in early June. The strike, which included significant vandalism of PRTC
installations, disrupted the operations of the telephone company and led to a
decline in wagering. During the strike, an average of 200 agencies per racing
day were affected and unable to take bets due to the disruption of telephone
service. The strike ended July 28 but full restoration of telephone service
within the OTB system did not occur until the middle of August. Management is
evaluating various communications alternatives in order to reduce the dependence
on the PRTC system.
Hurricane Georges. Hurricane Georges caused significant damage island wide
in Puerto Rico forcing suspension of racing operations beginning September 20.
Due to the extensive damage to the racetrack and Puerto Rico's electrical and
telecommunications infrastructure, live racing did not resume until November 14,
1998. Therefore, 39 race days were lost, as compared with 1997.
DOMINICAN REPUBLIC. Commissions on wagering at V Centenario decreased
$979,000 (21%) from $4,619,000 in 1997 to $3,640,000 in 1998. The decline in
wagering was attributable in part to the continuing competition posed by the
government-licensed electronic lottery and Hurricane Georges.
The electronic lottery, which held the first of its weekly drawings in
November 1997, has steadily increased its share of the gaming market. Wagering
on the lottery shows strong cyclical patterns directly linked to the amount
accumulated in its jackpot. The lottery has carried jackpot prizes of over US$2
million at least three times during 1998, which has affected racing wagering
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especially on Saturdays, the day the lotto draw is made, and the best selling
day of the week for racing. The lottery's jackpot competes directly with
racing's Pick-6 wager, which represents roughly 40% of the handle on racing.
Hurricane Georges also caused damage to V Centenario and Dominican
Republic's electrical and telecommunications infrastructure forcing suspension
of both live and simulcast racing operations for over a month. Lack of
television coverage in certain cities has limited the development of new
agencies and an increase in new racing fans.
PANAMA. On January 1, 1998 Equus-Panama took over a 20-year agreement to
operate Presidente Remon. The track was closed for renovations and improvements
until February 14, 1998 when live racing was reinstated on Saturdays and Sundays
to allow for continuing renovations during the week. During this period
Equus-Panama earned commissions on simulcasted races from the United States. In
mid-April racing was added on Thursdays nights, increasing live races to an
average of 24 races per week. In addition to live racing, simulcasting of El
Comandante races began in May 1998, until September 20, 1998 when races at El
Comandante were suspended due to Hurricane Georges. Due to the cancellation of
El Comandante races in the wake of Hurricane Georges, simulcast wagering on U.S.
races was resumed on September 24.
NET REVENUES FROM LOTTERY SERVICES
Net revenues from lottery services by Galapagos increased $568,000 from
$88,000 in 1997 to $656,000 in 1998. The electronic lottery of Dominican
Republic commenced in November 1997 and therefore, the increase in revenues was
attributed to additional draws in 1998 as compared with 1997.
INSURANCE SETTLEMENT
Due to damage inflicted by Hurricane Georges to El Comandante and V
Centenario, the Company received in 1998 compensation from the insurance
carriers totaling $10,832,000, for business interruption and $11,596,000, for
damage to the racetracks' facilities. The Company recognized a gain from
involuntary conversion of $2,024,000 related to the net effect of the property
damage insurance proceeds less the write-off of the book value of property
damaged.
GAIN FROM SALE OF TELEVISION STATIONS
In January 1997 the Company sold its remaining 50% interest in three UHF
television stations in Puerto Rico, resulting in a gain of $4,669,000. There
was no similar gain in 1998.
EXPENSES
Expenses increased in 1998 by $49,742,000 compared to 1997. On a proforma
basis, expenses increased $4,071,000 (6.2%) from $65,543,000 in 1997 to
$69,614,000 in 1998. The increase was attributed, in part, to expenses of
Equus-Panama where operations commenced in 1998.
PAYMENT TO HORSEOWNERS
Payments to horseowners increased by $23,687,000 in 1998. On a proforma
basis, these payments decreased $3,673,000 (12.4%) from $29,669,000 in 1997 to
$25,996,000 in 1998. The decrease was due to a reduction in payments to
horseowners of El Comandante and V Centenario, directly related to a decline in
wagering, net of $3.6 million in payments made to horseowners of Panama, which
was the minimum amount required under the contract for 1998.
15
<PAGE>
FINANCIAL EXPENSES
Financial expenses increased in 1998, by $374,000. On a proforma basis,
these expenses increased $96,000 from $9,013,000 in 1997 to $9,109,000 in 1998.
The increase in financial expenses is primarily attributable to the Panama
operation, which required financing to fund major improvements to Presidente
Remon and the acquisition of equipment. This financing included $4 million in
unsecured bonds, bearing annual interest at 11%. The increase was offset in
part by a reduction in financing cost on the First Mortgage Notes, due to the
redemption in late 1997 of $2.5 million in principal amount.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased in 1998 by $1,388,000. On a
proforma basis, depreciation and amortization increased $453,000 from $3,303,000
in 1997 to $3,756,000 in 1998. The increase was principally attributed to
depreciation at Presidente Remon and amortization of El Comandante intangible
(as discussed below), net of a reduction in depreciation of assets of El
Comandante and V Centenario due to the write-off of the book value of property
damaged by Hurricane Georges.
IMPAIRMENT LOSS ON EL COMANDANTE INTANGIBLE
On January 1, 1998, upon termination of the lease agreement for El
Comandante, ECMC assumed net liabilities of ECOC amounting to $3,658,332.
Management made an internal valuation of the tangible assets, which book value
approximated its fair value and allocated the entire amount to an intangible
asset, to be amortized during the remaining period of the license thru December
2004. However, following the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
the Company assessed impairment of its non current assets, which includes El
Comandante intangible, based on whether it is probable that the aggregated
undiscounted future cash flows from ECMC, as an individual entity, will be less
than net book value of ECMC's non current assets. As result of this assessment,
the Company recognized an impairment loss of El Comandante intangible equivalent
to its net book value as of December 31, 1998 of $3,135,713.
OTHER EXPENSES
Other expenses increased by $21,157,000 in 1998. On a proforma basis,
other expenses increased $4,059,000 (17%) from $23,558,000 in 1997 to
$27,617,000 in 1998. The net increase was principally attributed to a
combination of factors such as:
(i) Expenses of the Panama operation, which commenced in 1998.
(ii) Payroll costs of employees of EEC, the wholly owned subsidiary
of the Company, which effective January 1, 1998, assumed
responsibility for the management of all race tracks
(iii) Decrease in Autotote wagering services, which cost is based on
wagering levels, caused by Hurricane Georges.
PROVISION FOR INCOME TAXES
The provision for income tax is primarily related to Puerto Rico income
taxes on the Company's income From Puerto Rico sources related to its interest
in El Comandante, without taking into account losses of Galapagos and
Equus-Panama. The deferred income taxes are related to the difference between
the tax basis of the Company's investment in HDA and the amount shown in its
financial statements. For the year ended December 31, 1997, approximately
$463,000 of the deferred income tax provision relates to the reversal of the tax
benefit recorded by the Company in prior years for operating losses attributable
to its remaining 50% interest in the Television Stations, which was sold in
January 1997.
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<PAGE>
MINORITY INTEREST
The Company's minority interest is principally attributed to the income and
losses allocable to the minority partners of Galapagos and, effective October
1998, Equus-Panama. Because accumulated losses of Galapagos allocable to
minority partners had exceeded their investment, the Company recognized an
additional $465,879 and $308,971, in losses of Galapagos for 1998 and 1997,
respectively.
EXTRAORDINARY ITEM
The extraordinary items are related to the early redemption and the
purchase in the open market of First Mortgage Notes. For 1998, the Company
recognized as income (i) a $1 million discount on the $7.5 million in First
Mortgage Notes purchased in the open market in December 1998, net of (ii) the
$300,000 premium that was paid in connection with the redemption of $3 million
made on January 5, 1999, at 110% of par (premium was accrued at December 31,
1998). For 1997, the Company recognized as expense the $250,000 premium paid on
the First Mortgage Notes that were redeemed on September 29, 1997, while the
redemption of March 28, 1997, was made at par.
In connection with these redemptions the Company wrote-off a portion of the
note discount and deferred financing costs, which amounts are also included as
extraordinary items. On a proforma basis, in 1997, the Company recognized
income from the cancellation of certain indebtedness of ECOC to Supra.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In connection with the early adoption by the Company of Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities", the Company
wrote-off the unamortized balance as of January 1, 1998 of organizational and
certain other deferred costs for $550,000.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company is the owner of HDA and its consolidated subsidiaries. The
principal source of cash of Equus Gaming Company L.P. (the "Company" or, when
referred to the individual entity, "Equus") is related to its ownership interest
in Housing Development Associates S.E. ("HDA"), the owner and operator (through
its wholly owned subsidiary, El Comandante Management Company LLC, "ECMC") of El
Comandante Race Track in Puerto Rico. Due to certain restrictions under HDA's
indenture for the issuance of its 11.75% First Mortgage Notes due 2003 (the
"Indenture"), cash held by HDA or its consolidated subsidiaries (including ECMC)
is restricted to ensure payment of interest and certain obligations on such
First Mortgage Notes.
The following is a discussion of the liquidity and capital resources of the
Company, including HDA and its consolidated subsidiaries, ECMC, Agency Betting
Network, Inc, ("ABN") and Satellites Services International, Inc. ("SSI"). The
net cash flows from the other foreign subsidiaries of the Company (Equus
Comuneros, S.A., Equus Entertainment de Panama, S.A. and Galapagos, S.A) did not
materially affect the consolidated cash flows of the Company in 1999 and,
therefore, its cash flows activities are not discussed herein.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY (AND ITS CONSOLIDATED
SUBSIDIARIES)
Cash and cash equivalents of the Company and its consolidated subsidiaries
decreased by approximately $4.3 million during 1999. The Company has
historically met its liquidity requirements principally from cash flow generated
by (i) the operations of El Comandante racetrack in Puerto Rico and (ii)
short-term loans and capital leases for acquisition of new equipment.
During 1999 the principal uses of cash of the Company and its consolidated
subsidiaries for its financing and investing activities were as follows:
(i) Capital improvements to El Comandante Race Track and acquisition of
equipment of approximately $8.7 million used to replace racetrack and
facilities property damaged by Hurricane Georges in September 1998. The
insurance carrier compensated HDA and ECMC for these improvements.
(ii) Payments on capital leases for equipment used in El Comandante operations.
(iii)Redemption on January 5, 1999 of First Mortgage Notes at 110% of par and,
purchase in June 1999 in the open market of First Mortgage Notes at
discount. The net cost of these transactions was $3,048,320.
(iv) Investment by Equus of approximately $1.3 million in Equus-Comuneros,
principally during its start-up period and for certain improvements to the
racetrack. The Company has and will continue to make investments in
Colombia through ABN, a new wholly owned subsidiary of HDA.
(v) Investment by HDA of approximately $460,000 in ABN, created for the purpose
of establishing and operating the off-track betting agency system in
Colombia for Los Comuneros racetrack.
(vi) Investment of approximately $200,000 in SSI, a new wholly owned subsidiary
of HDA. SSI will provide up-link satellite services, satellite time
(contracted from a third party), and leasing of video and data
telecommunication equipment, to transmit (or simulcast) live races from and
to the Company's racetracks and OTB agencies, including live races from
outside the Company's operational territories to the agency distribution
network in order to increase the level of wagering revenues through our OTB
system.
In addition to cash available to the Company at the beginning of the year
of $6.6 million and cash flows from by operations during 1999, the Company
obtained additional funds for its financing and investing transactions (as
described above) principally from the following sources:
(i) $650,000 in advances taken under a $2.5 million line of credit
(ii) Proceeds of $3,051,600 from the issuance by the Company of 2,991,764 units
to accredited investors, principally The Wilson Family Limited Partnership,
the owner of a majority of the Company's outstanding units pursuant to the
terms of a private offering.
(iii)Capital leases to purchase equipment for El Comandante operations and
certain equipment for the operations of SSI, consisting of an up-link earth
station located in Panama, necessary to carry races via satellite in
simulcast operations.
(iv) Proceeds from a $5.5 million term loan (considered Refinancing Indebtedness
under the terms of the Indenture). This loan, which is collateralized by
the First Mortgage Notes purchased by the Company in the open market, is
payable in quarterly installments commencing on March 31, 2000 until
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maturity on December 15, 2001. The $2.5 million balance outstanding under the
loan described in (i) above was paid from proceeds of this loan.
For 2000 the projected principal uses of cash of the Company's activities,
other than operating activities of El Comandante, are:
(i) Capital improvements to El Comandante race track and principal payments on
existing capital leases.
(ii) Principal payments amounting to $2.5 million on the $5.5 million term
loan,.
(iii)Additional investments in ABN for its Colombian operations and reduction of
certain financial obligations assumed from Equus-Comuneros of approximately
$1.2 million.
(iv) Additional investments in SSI, principally for the acquisition of the VSAT
equipment and system for the agencies within the Company's OTB system and
the payment of satellite time contracted from a third party.
In addition to cash flow from operating activities of El Comandante, the
Company expects to obtain funds for its other transactions from credit
facilities with certain financial institutions. In February 2000, HDA, a
wholly-owned subsidiary of the Company, drew the amount available under its
$500,000 revolving line of credit, which amount is payable in full on December
15, 2001. Also, the Company is currently negotiating a $2 million credit
facility with a financial institution in Colombia so that HDA and the Company
are able to properly fund the development and operations of the off-track
betting for ABN and meet the expected level of increased wagering from this
operation.
INVESTMENTS IN TELECOMMUNICATIONS EQUIPMENT AND MARKET EXPANSION
The Company's top management has developed and recently implemented
strategic financial plans designed to improve capital resources, liquidity and
capital investments in the Company's distribution network and core assets. As a
result, the Company is in the process of securing substantial credit facilities
with a prominent financial institution to (1) finance the acquisition and
installation of high-technology video and data transmission system (VSAT) with a
communications center or HUB that will be cheaper, more efficient and reliable
than conventional phone lines and commercial air time, and (2) to finance the
purchase of outstanding notes (over $54 million) in order to allow the Company
to make the necessary capital investments to increase the level of wagering
through a combination of increase in the number of off-track betting agencies
and improved racing program, including simulcast of live races from many
jurisdictions to our network.
The cash flow savings from reduction in operating expenses (primarily
telephone and air time costs) to be realized from the new VSAT units will
recover the $ 9 million capital investment in this new technology over the next
four years.
The Company's operational plans call for the installation over the next 12
to 18 months of more than 2,000 VSAT (video and data communication) units for
the OTB agencies in all of its operations, including Puerto Rico, Dominican
Republic, Panama and Colombia with a communications up-link satellite control
center based in Puerto Rico. Satellite Services International, Inc. (SSI), a
wholly-owned subsidiary of HDA (HUB) and the Company, will be the service
provider for all telecommunications and satellite usage time, and will charge
each of its affiliated companies a fee for the equipment and satellite time
usage for transmissions (simulcast) of races from several countries.
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Additionally, the Company is performing due diligence reviews on market
expansion for the acquisition of off-track betting agencies (distribution
network) and interests in joint ventures for racetrack operations in Brazil,
Uruguay and Argentina.
As a result of these capital investments in high-technology and extensive
high-tech distribution network, improved cash flow from better financing, and
market expansion efforts, the Company plans to substantially increase
consolidated wagering commissions during 2000 and future years.
LONG-TERM COMMITMENTS. In addition to capital leases, long-term cash
commitments of the Company (excluding foreign subsidiaries) are a $5.5 million
term loan and the First Mortgage Notes.
In December 1999 HDA obtained a $5.5 million term loan, considered
Refinancing Indebtedness under the terms of the indenture. The loan is
collaterized by the First Mortgage Notes purchased by the Company in the open
market. Interest is payable monthly at a rate equivalent to one point over
prime rate. Principal is payable in quarterly installments commencing on March
31, 2000 until maturity on December 15, 2001. The stated maturity dates of
this term loan are as follows (in thousands):
YEAR ENDING
DECEMBER 31, AMOUNT
-------------- -------
2000 $2,500
2001 3,000
-------
$5,500
======
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
(expressed as percentages of principal amount): if redeemed during the 12-month
period beginning December 15 of years 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 stated maturity dates of First Mortgage Notes, as
reduced by prior redemptions made by HDA and by the Notes purchased by ECMC in
the open market, are as follows (in thousands):
YEAR ENDING NET AMOUNT
DECEMBER 31, (FACE VALUE)
------------ ------------
2001 $ 3,454
2002 10,200
2003 40,800
-----------
$ 54,454
===========
To the extent First Mortgage Notes are not acquired in the open market or
redeemed, Management expects to refinance this obligation not later than
December 2002.
As of March 21, 2000, HDA has advanced to Equus approximately $1.3 million
against its allowable future distributions of profits, which technically is not
in conformity with the terms of the Indenture.
GOVERNMENT MATTERS. 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 regulatory control over El Comandante's racing and wagering
20
<PAGE>
operations. For example, the Racing Administrator determines the monthly racing
program for El Comandante and approves the number of annual race days in excess
of the statutory minimum of 180. The Racing Act also apportions payments of
monies wagered that would be available as commissions to ECMC. The Racing Board
consists of three persons appointed to four-year terms by the Governor of Puerto
Rico. The Governor also appoints the Racing Administrator for a four-year term.
FORWARD-LOOKING STATEMENT
Certain matters discussed and statements made within this Form 10-K are
forward-looking statements within the meaning of the Private Litigation Reform
Act of 1995 and as such may involve known and unknown risks, uncertainties, and
other factors that may cause the actual results, performance or achievements of
the Company to be different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Although the Company
believes the expectations reflected in such forward-looking statements are based
on reasonable assumptions, it can give no assurance that its expectations will
be attained. These risks are detailed from time to time in the Company's filing
within the Securities and Exchange Commission or other public statements.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1999 and 1998, and the related consolidated
statements of operations, comprehensive earnings (loss), changes in partners'
deficit and cash flows for each of the three years in the period ended December
31, 1999. 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 financial statements of
Galapagos, S.A. as of and for the year ended December 31, 1997, which reflect
total assets of 4% and total revenues of 23% of the consolidated totals. These
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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
As explained in Note 1 to consolidated financial statements, effective
January 1, 1998, the Company changed its method of accounting for organizational
and start-up costs in accordance with SOP 98-5, "Reporting of the Costs of
Start-Up Activities". As a result, the Company wrote-off the unamortized
balance of deferred organizational costs of approximately $550,000.
Arthur Andersen LLP
March 23, 2000
San Juan, Puerto Rico
22
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
(SEE NOTE 14)
REVENUES:
Commissions on wagering $66,743,923 $52,528,562 $ 4,618,720
Net revenues from lottery services 545,568 656,145 87,659
Income from business interruption - 10,832,370 -
Gain from involuntary conversion - 2,024,159 -
Rental income from El Comandante Race Track - - 13,720,424
Gain from sale of Television Stations - - 4,669,400
Other revenues 4,035,098 2,931,330 1,486,726
------------ ------------ ------------
71,324,589 68,972,566 24,582,929
------------ ------------ ------------
EXPENSES:
Payments to horseowners 32,697,409 25,996,556 2,309,360
Salaries, wages and employee benefits 11,274,027 11,910,549 1,099,607
Operating expenses 10,001,437 9,798,721 2,622,369
General and administrative 4,196,469 2,558,300 2,076,988
Marketing, television and satellite costs 4,482,285 3,349,619 660,808
Financial expenses 8,479,505 9,109,311 8,734,826
Depreciation and amortization 3,593,839 3,756,052 2,368,041
Impairment loss on El Comandante Intangible - 3,135,713 -
------------ ------------ ------------
74,724,971 69,614,821 19,871,999
------------ ------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES, MINORITY
INTEREST, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT (3,400,382) (642,255) 4,710,930
PROVISION FOR INCOME TAXES 742,153 1,109,611 1,028,145
------------ ------------ ------------
EARNINGS (LOSS) BEFORE MINORITY INTEREST,
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT (4,142,535) (1,751,866) 3,682,785
MINORITY INTEREST IN EARNINGS (LOSSES) (1,029,458) (227,720) 878,033
------------ ------------ ------------
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT (3,113,077) (1,524,146) 2,804,752
EXTRAORDINARY ITEM, NET-
Discount (premium) on early redemption of
First Mortgage Notes and write-off of related
deferred financing costs and note discount 22,680 167,051 (326,013)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET - (402,927) -
------------ ------------ ------------
NET EARNINGS (LOSS) $(3,090,397) $(1,760,022) $ 2,478,739
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
(continues)
23
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(CONTINUED)
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
ALLOCATION OF NET (LOSS) EARNINGS:
General partners $ (30,904) $ (17,600) $ 24,787
Limited partners (3,059,493) (1,742,422) 2,453,952
------------ ------------ -----------
$(3,090,397) $(1,760,022) $2,478,739
------------ ------------ -----------
BASIC AND DILUTED PER UNIT AMOUNTS:
Earnings (loss) before extraordinary item and
cumulative effect of change in accounting
principle, net (0.39) (0.24) 0.45
Extraordinary item, net - 0.02 (0.06)
Cumulative effect of change in accounting
principle, net - (0.06) -
------------ ------------ -----------
Net earnings (loss) $ (0.39) $ (0.28) $ 0.39
------------ ------------ -----------
WEIGHTED AVERAGE UNITS OUTSTANDING 7,796,191 6,342,606 6,333,617
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
24
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
NET EARNINGS (LOSS) $(3,090,397) $(1,760,022) $2,478,739
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments (553,146) 80,043 (56,447)
------------ ------------ -----------
COMPREHENSIVE INCOME (LOSS) $(3,643,543) $(1,679,979) $2,422,292
------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
25
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Unrestricted $ 1,888,995 $ 6,462,992
Restricted 418,938 174,275
------------- -------------
2,307,933 6,637,267
------------- -------------
PROPERTY AND EQUIPMENT:
Land 7,786,980 7,128,858
Building and improvements 56,512,072 44,615,936
Equipment 13,967,887 10,924,669
------------- -------------
78,266,939 62,669,463
Accumulated depreciation (18,409,886) (15,199,341)
------------- -------------
59,857,053 47,470,122
------------- -------------
DEFERRED COSTS, NET:
Financing 2,510,487 3,075,706
Costs of Panama contract 1,980,000 2,090,000
Other 501,505 209,852
------------- -------------
4,991,992 5,375,558
------------- -------------
OTHER ASSETS:
Accounts receivable, net 1,577,634 1,160,468
Notes receivable 1,506,599 1,708,211
Advances to Los Comuneros S. A. - 950,000
Prepayments and other assets 701,362 737,580
------------- -------------
3,785,595 4,556,259
------------- -------------
$ 70,942,573 $ 64,039,206
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
26
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND PARTNERS' DEFICIT
DECEMBER 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
FIRST MORTGAGE NOTES:
Principal, net of note discount of
$885,446 and $1,068,540 $ 53,568,554 $ 56,194,460
Accrued interest 265,900 317,069
------------- -------------
53,834,454 56,511,529
------------- -------------
OTHER LIABILITIES:
Accounts payable and accrued liabilities 11,660,824 8,088,343
Outstanding winning tickets and refunds 1,130,389 519,484
Notes payable 6,226,082 2,841,797
Bonds payable 4,000,000 4,000,000
Capital lease obligations 3,235,507 2,249,076
------------- -------------
26,252,802 17,698,700
------------- -------------
DEFERRED INCOME TAXES 3,165,800 2,628,539
------------- -------------
MINORITY INTEREST 2,474,810 1,266,849
------------- -------------
COMMITMENTS AND CONTINGENCIES, SEE NOTE 4
PARTNERS' DEFICIT
General Partner (781,879) (745,444)
Limited Partners - 10,383,617 units authorized:
8,389,824 and 5,398,060 units issued and outstanding in
1999 and 1998, respectively (14,003,414) (13,320,967)
------------- -------------
(14,785,293) (14,066,411)
------------- -------------
$ 70,942,573 $ 64,039,206
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
27
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1999
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
---------- ------------- -------------
<S> <C> <C> <C>
BALANCES, DECEMBER 31, 1996 $(752,867) $(10,436,112) $(11,188,979)
Net earnings 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)
Net loss for the year (17,600) (1,742,422) (1,760,022)
Currency translation adjustments 800 79,243 80,043
Difference between carrying amount of
investment in Equus-Panama and net book
value after public offering - 463,130 463,130
Purchase of HDAMC Warrants - (756,386) (756,386)
---------- ------------- -------------
BALANCES, DECEMBER 31, 1998 (745,444) (13,320,967) (14,066,411)
Net loss for the year (30,904) (3,059,493) (3,090,397)
Currency translation adjustments (5,531) (547,615) (553,146)
Cash distributions to minority partners of HDA - (20,368) (20,368)
Issuance of Units, net of costs - 2,945,029 2,945,029
---------- ------------- -------------
BALANCES, DECEMBER 31, 1999 $(781,879) $(14,003,414) $(14,785,293)
========== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
28
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (3,090,397) $ (1,760,022) $ 2,478,739
------------- ------------- ------------
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities-
Gain from involuntary conversion - (2,024,159) -
Gain from sale of Television Stations - - (4,669,400)
Depreciation and amortization 4,296,160 4,450,031 3,085,155
Impairment loss on El Comandante intangible - 3,135,713 -
Deferred income tax provision 537,261 1,145,945 893,403
Minority interest (1,029,458) (304,320) 878,033
Extraordinary item 22,680 (273,854) 459,173
Cumulative effect of change in accounting principle - 549,996 -
Currency translation adjustments (28,920) 80,043 (56,447)
Difference in investment in Equus-Panama after
public offering - 463,130 -
Decrease (increase) in assets-
Accounts receivable (206,749) (141,976) -
Rent receivable from ECOC - - (654,307)
Prepayments and other assets 545,597 (161,735) 263,128
Increase (decrease) in liabilities-
Accounts payable and accrued liabilities 1,658,363 1,883,130 (1,248,027)
Outstanding winning tickets and refunds 610,905 (546,129) -
------------- ------------- ------------
Total adjustments 6,405,839 8,255,815 (1,049,289)
------------- ------------- ------------
Net cash provided by operating activities 3,315,442 6,495,793 1,429,450
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10,113,509) (10,218,529) (1,422,626)
Property damage insurance proceeds - 11,595,850 -
Cost of Panama contract - - (2,356,292)
Deferred costs (389,544) (376,774) (307,527)
Collections of note from ECOC - - 326,661
Decrease (increase) in notes receivable, net 201,612 (1,271,966) -
Acquisition of ECOC cash accounts upon -
termination of lease agreement - 1,061,239 -
Sales of Television Stations, net - 6,494,643
Advances to Los Comuneros S.A. - (950,000) -
------------- ------------- ------------
Net cash (used in) provided by investing activities (10,301,441) (160,180) 2,734,859
------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
29
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
(continued)
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of First Mortgage Notes $(3,048,320) $(6,500,000) $(3,487,000)
Payments (to) from affiliates (200,000) 200,000 (415,883)
Payment of financing costs (60,579) - -
Loan proceeds from financial institutions 6,515,000 4,229,920 1,258,079
Issuance of notes payable to Supra & Company S.E. - - 260,000
Payments on notes payable and capital
lease obligations (3,612,813) (3,372,946) (714,213)
Contributions by minority partners 32,143 1,993,410 32,758
Issuance of Units 3,051,600 - -
Issuance of bonds by Equus-Panama - 4,000,000 -
Redemption of 17% minority interest in HDA - - (4,314,284)
Purchase of HDAMC Warrants (see Note 6) - (756,386) -
Cash distributions to minority partners of HDA (20,368) - (544,139)
------------ ------------ ------------
Net cash provided by (used in) financing activities 2,656,663 (206,002) (7,924,682)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (4,329,334) 6,129,611 (3,760,373)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,637,267 507,656 4,268,029
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,307,933 $ 6,637,267 $ 507,656
============ ============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 8,572,220 $ 8,266,411 $ 7,992,439
Income taxes paid - - 262,500
NON-CASH TRANSACTIONS:
Equipment acquired through capital leases 1,668,529 643,050 -
Acquisition of ECOC's non cash accounts upon
termination of lease agreement - (4,719,571) -
Contribution of non-cash assets, net of liabilities
by Los Comuneros S.A. (see Note 1) 2,237,000 - -
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
30
<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 in the
Caribbean, Central and South America. Through its subsidiaries, the Company
operates four racetracks and manages an extensive off-track betting ("OTB")
system in the various countries where the Company operates.
The Company has a 99% interest in Housing Development Associates S.E.
("HDA"), the owner of El Comandante Race Track ("El Comandante"), the only
licensed thoroughbred racing facility in Puerto Rico. El Comandante has operated
since January 1, 1998 as a wholly owned subsidiary of HDA, El Comandante
Management Company, LLC ("ECMC"). HDA has recently organized two wholly-owned
subsidiaries: Satellites Services International, Inc. ("SSI") and Agency
Betting Network, Inc. ("ABN"). SSI will provide up-link services, satellite
time (contracted from a third party), and leasing of video and data
telecommunication equipment to transmit (or simulcast) live races from and to
the Company's racetracks and OTB agencies, including live races from outside the
Company's operational territories to the Company's agency distribution network
in order to increase the level of wagering revenues through the OTB systems.
ABN is establishing and operating an OTB agency system in Colombia for Los
Comuneros Race Track in Medellin, Colombia ("Los Comuneros").
The Company has a 55% interest in Galapagos, S.A. ("Galapagos"), the
operator since April 1995 of the V Centenario Race Track in the Dominican
Republic ("V Centenario") and a 51% interest in Equus Entertainment de Panama,
S.A. ("Equus-Panama"), the operator since January 1, 1998 of the Presidente
Remon Race Track in the Republic of Panama ("Presidente Remon"). Both
racetracks are government-owned and operated by the Company's subsidiaries under
long-term contracts.
The Company also has since 1999 a controlling 50% interest in Equus
Comuneros S.A. ("Equus-Comuneros"), the owner and operator of Los Comuneros for
approximately $2.1 million. In 1999 Equus-Comuneros received as a capital
contribution from the minority stockholder, Los Comuneros S.A., all assets and
liabilities that were employed by the prior operator of Los Comuneros. The
assets mainly consisted of land, buildings and equipment for approximately $4.7
million and liabilities of approximately $2.6 million. The liabilities included
mainly accounts payable to vendors and horseowners and certain financial
obligations with various maturities through 2004.
CONSOLIDATION AND PRESENTATION
The Company consolidates the entities in which it has a controlling
interest. 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 Company has minority partners in HDA, Galapagos, Equus-Panama and
Equus-Comuneros. Therefore, the Company recorded minority interest based on the
income and (losses) of these consolidated subsidiaries that are attributable to
the minority partners, as follows:
31
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
------------ ---------- -----------
<S> <C> <C> <C>
SUBSIDIARY:
HDA $ 650 $ 19,940 $1,063,960
Galapagos - - (185,927)
Equus-Panama (114,688) (324,260) -
Equus-Comuneros (915,420) - -
------------ ---------- -----------
$(1,029,458) $(304,320) $ 878,033
------------ ---------- -----------
</TABLE>
In general, the minority interest is calculated based on the ownership
interest of the minority partners. HDA's minority partners had an 18% interest
until August 20, 1997, when HDA redeemed the 17% interest owned by Supra &
Company S.E. ("Supra"). Following the redemption, HDA has a minority partner
owning a 1% interest. Galapagos' minority partners own a 45% interest.
However, during the years ended December 31, 1999, 1998 and 1997, the Company
did not recognize minority interest in Galapagos' losses amounting to $312,217,
$465,879 and $308,971, respectively, because the minority partners have no legal
obligation to fund such losses in excess of their investment. Equus-Panama
minority partners own a 49% interest effective October 22, 1998 after the
issuance of new stock pursuant to a public offering in Panama for approximately
$2 million. Equus-Comuneros minority partners own a 50% interest effective
January 1, 1999.
OUTSTANDING UNITS
The units of the Company represent an assignment of beneficial ownership of
Class A limited partnership interest (the "Units"). On December 15, 1998, the
Company acquired in treasury 935,557 of its Units in connection with the
repurchase of Warrants issued by HDA Management Corporation ("HDAMC") (see Note
6). During 1999 the Company issued 2,991,764 Units to accredited investors
(including 2,911,764 Units to The Wilson Family Limited Partnership, a major
unitholder of the Company) for $3,051,600 pursuant to the terms of a private
offering that commenced in December 1998 and expired in April 1999. Net income
(loss) per Unit is calculated based on the weighted average of Units
outstanding.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME
The components of other comprehensive income are net losses from changes in
exchange rates due to the translation of assets and liabilities and unsettled
long term intercompany transactions of foreign subsidiaries.
COMMISSIONS ON WAGERING
Commissions on wagering represent income earned by the Company on bets
placed on thoroughbred horse races held at El Comandante (Puerto Rico), V
Centenario (Dominican Republic), Presidente Remon (Panama), and Los Comuneros
(Colombia) principally through wagering facilities located at independently
owned off track betting ("OTB") agencies throughout these countries.
Commissions are based on percentages of wagers established by law that vary by
country and are based on the different types of wagers. Commissions are
presented in the accompanying consolidated financial statements net of
32
<PAGE>
applicable taxes on wagers, amounts payable to winning bettors, commissions to
OTB agencies and other miscellaneous deductions established by law. Commissions
on wagering are recognized upon completion of the races.
NET REVENUES FROM LOTTERY SERVICES
Galapagos has a five-year contract with a private operator to provide the
wagering distribution system for a government-sponsored electronic lottery,
which commenced on November 1, 1997. Lottery games are sold at OTB agencies
selected by Galapagos and at lottery agencies selected by the lottery operator.
Galapagos' commissions are 3% of gross lottery sales. 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. Revenues from
lottery sales are presented in the accompanying consolidated statement of
operations net of fees paid to the company providing wagering services (see Note
4).
INCOME AND GAIN FROM INSURANCE SETTLEMENT
In connection with the settlements reached with the insurance carriers for
damage to El Comandante in Puerto Rico and V Centenario in Dominican Republic
inflicted by Hurricane Georges in 1998, resulting in the suspension of racing
operations for over a month, the Company received total compensation of
$11,595,850 for physical damage to the racetracks properties and $10,832,370 for
business interruption. The Company recognized a gain from involuntary
conversion of $1,813,633 and $210,526 being the net effect of the property
damage insurance proceeds less the write-off of the book-value of property
damaged at El Comandante and V Centenario, respectively.
ADVERTISING EXPENSE
During the years ended December 31, 1999, 1998 and 1997, the Company
incurred advertising costs of $1,594,139, $917,532 and $262,916, respectively.
CASH AND CASH EQUIVALENTS
The Company considers as cash equivalents certificates of deposit with an
original issuance to maturity term of three months or less. Restricted cash
represents accumulated cash in the "Pool Pote" and a bonus amount that is added
to the Pick 6 pool payout for predetermined race days. The Pool Pote is paid
out when there is a sole pool winner. The corresponding payables are recorded
as part of the liability for outstanding winning tickets and refunds.
PROPERTY AND EQUIPMENT
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 to HDAMC for a 15% interest in HDA. A portion of the
step-up was written off in 1998, as a result of damage caused by Hurricane
Georges. 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. Major
replacements and improvements are capitalized and depreciated over their
estimated useful lives. Repairs and maintenance are charged to expense when
incurred.
DEFERRED COSTS
Deferred financing costs are being amortized over the life of the
corresponding debt, using the interest method. Costs of Panama contract (see
Note 3) are amortized over the 20-year period of the Panama license, using the
straight-line method.
33
<PAGE>
ORGANIZATIONAL AND START-UP COSTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting of
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening and organization activities to be expensed as
incurred. The Company made an early adoption of SOP 98-5 effective January 1,
1998 and, accordingly, wrote-off the unamortized balance of organizational and
certain other deferred costs of $549,996. This amount is presented in the
accompanying consolidated statement of income (loss) for the year ended December
31, 1998 as a cumulative effect of a change in accounting principle, net of
provision for income taxes of $70,469 and minority interest of $76,600.
ACCOUNTS RECEIVABLE
Accounts receivable principally consists of amounts due from OTB agencies
on thoroughbred races and from the operator of the electronic lottery in the
Dominican Republic. As of December 31, 1999 and 1998, allowance for doubtful
accounts amounted to $410,328 and $484,293, respectively.
NOTES RECEIVABLE
Notes receivable consist of short-term loans to horseowners to purchase
horses as a means to improve the quality of racing. It also includes certain
payments made to Panama horseowners to guarantee certain minimum amounts
provided under the contract with Panama horseowners (see Note 4). These loans
are payable when wagering in Panama reaches a certain level.
CURRENCIES
The Company consolidates its accounts with Galapagos and Equus-Comuneros
whose functional currency are the Dominican Republic peso and the Colombian
peso, respectively. The United States dollars ("US$") are also a recording
currency in these countries. US$ are exchanged into these foreign currencies
("FC$") and vice versa through commercial banks and/or the central banks of the
respective countries. The Company remeasures the monetary assets and
liabilities of the foreign subsidiaries that were recorded in US$ into the FC$
using the exchange rates in effect at the balance sheet date (the "current
rate") and all other assets and liabilities and capital accounts, at the
historical rates. The Company then translates the financial statements of the
foreign subsidiaries from FC$ into US$ using the current rates, for all assets
and liabilities, and the average exchange rates prevailing during the year, for
revenues and expenses.
For the years ended December 31, 1999, 1998 and 1997, net exchange losses
resulting from remeasurement of accounts, together with losses from foreign
currency transactions, amounted to $25,701, $190,453 and $36,000, respectively,
which amounts are included as operating expenses. Accumulated net losses from
changes in exchange rates due to the translation of assets and liabilities of
the foreign subsidiaries are included in partners' deficit and at December 31,
1999 and 1998 amounted to $656,501 and $103,355 (including $35,595 from
unsettled intercompany transactions in 1998), respectively.
The exchange rates in Dominican Republic as of December 31, 1999 and 1998
were US$1.00 to FC$16.00 and US$1.00 to FC$15.85, respectively. The average
exchange rates in Dominican Republic prevailing during the years ended December
31, 1999, 1998, and 1997, were US$1.00 to FC$16.10, US$1.00 to FC$15.23 and
US$1.00 to FC$14.44, respectively. The exchange rate in Colombia as of December
31, 1999 was US$1.00 to FC$1,874. The average exchange rate in Colombia
prevailing during the year ended December 31, 1999 was US$1.00 to FC$1,733. The
Company also consolidates its accounts with Equus-Panama whose functional
currencies are the Panama balboas and the US$. Because these currencies are of
equivalent value, there is no effect attributed to foreign currency transactions
of Equus-Panama.
34
<PAGE>
RECLASSIFICATIONS
Certain amounts presented for 1998 and 1997 in the accompanying
consolidated financial statements have been reclassified to conform to the 1999
presentation.
2. EL COMANDANTE RACE TRACK:
OPERATING LICENSE
El Comandante is owned by HDA. It is currently operated by HDA's wholly
owned subsidiary, ECMC, pursuant to an operating license granted by the Puerto
Rico Racing Board, which expires on December 14, 2004. The license provides ECMC
the exclusive right to operate a racetrack in the San Juan Region, which
encompasses the northern half of Puerto Rico, and to conduct all types of
authorized betting, throughout the island of Puerto Rico, based on races held at
El Comandante. The Company and HDA are primarily responsible to ensure that
ECMC complies with all terms and provisions of the license and applicable
regulations and orders of the Puerto Rico Racing Board. Upon its expiration in
December 2004, there can be no assurance that a new operating license will be
issued. However, ECMC and its predecessors 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 Puerto Rico 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 Puerto Rico
Racing Board consists of three persons appointed to four-year terms by the
Governor of Puerto Rico. The Governor also appoints the Racing Administrator
for a four-year term.
EL COMANDANTE LEASE AND INTANGIBLE
Until December 31, 1997 HDA leased El Comandante to El Comandante Operating
Company, Inc. ("ECOC") under a lease agreement (the "El Comandante Lease") that
required payments by ECOC to HDA of rent consisting of 25% of the annual
commissions on wagering earned by ECOC. ECOC was required to pay all expenses
of El Comandante except for real property taxes and the annual operating license
fee (paid in 1997 by HDA).
On January 1, 1998, upon termination of the El Comandante lease (i) ECOC
transferred to ECMC, at book value, all assets employed in the racing business,
(ii) ECMC assumed all agreements of ECOC and its liabilities and (iii) ECMC
commenced operating El Comandante. Net liabilities assumed by ECMC amounted to
$3,658,332, including $3.1 million due to HDA at December 31, 1997. Management
made an internal valuation of the tangible assets acquired from ECOC and
concluded that book value approximated its fair value. Due to the underlying
value of the operating license granted by the Puerto Rico Racing Board, ECMC
allocated the $3,658,332 to an intangible asset, to be amortized during the
remaining period of the license through December 2004.
35
<PAGE>
As a result of damage caused by Hurricane Georges to El Comandante and
considering the delay in obtaining a new contract with the Puerto Rico
horseowners association (contract expired in April, 1998, see Note 4), the
Company assessed its investment in ECMC, following the provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". The Company assessed impairment of its non current
assets, which included El Comandante intangible, based on a comparison of the
aggregated undiscounted future cash flows from ECMC, as an individual entity,
was less than net book value of ECMC's non current assets. Accordingly, the
Company recognized an impairment loss of El Comandante intangible equivalent to
its net book value as of December 31, 1998 of $3,135,713 in the consolidated
statement of operations for the year ended December 31, 1998.
3. RACE TRACK LEASES:
V CENTENARIO LEASE
Galapagos leases and operates V Centenario in Santo Domingo, Dominican
Republic from the Government pursuant to a 10-year agreement ending in April
2005. The contract may be renewed for additional ten-year periods by mutual
agreement of the parties. The contract 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. Galapagos pays rent to
the Government 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$15 million), .5% of the next RD$240 million, .75% of
the next RD$240 million and 1% over RD$720 million (approximately US$45
million).
The Government agreed to invest a portion of its tax receipts on
simulcasting wagering to improve horse racing in the Dominican Republic to be
distributed between Galapagos and horseowners. Galapagos' share of these tax
receipts, which is received as reimbursement for repairs and maintenance of the
Government-owned facility at V Centenario, marketing and television costs and
certain other items, is based on the following percentages: 75% effective July,
1997, 65% effective July, 1998 and 50% effective July, 1999. Horseowners are
entitled to the balance as additional purses. The agreement expired in January
2000. The assistance provided by the Government is included in other revenues
and for the years ended December 31, 1999, 1998 and 1997 amounted to $321,358,
$339,782 and $438,169, respectively, excluding amounts paid to horseowners as
additional purses. Management is currently negotiating an extension of this
agreement.
PRESIDENTE REMON LEASE
Equus-Panama leases from the Government and operates Presidente Remon in
Panama City, Republic of Panama pursuant to a 20-year agreement ending in
December 2017. The contract also provides Equus-Panama the right to develop
off-track betting in Panama and the exclusive right to simulcast horse races
from and into Panama as well as the right to operate up to 500 slot machines at
the racetrack. Upon execution of the contract, Equus-Panama paid $2.2 million
to the Panama Government. Equus-Panama began simulcasting races from United
States racetracks on January 2, 1998 and live racing commenced on February 14,
1998.
4. COMMITMENTS AND CONTINGENCIES:
HORSEOWNERS' AGREEMENTS
The Company has separate agreements with the horseowners association of
each country that establishes the amount payable to horseowners as purses in
exchange for the availability of thoroughbred horses for races. Payments to
horseowners are, in general, based on a percentage of wagering.
36
<PAGE>
The Panama contract expires in December 2007. It provides for minimum
guaranteed payments to horseowners in 1999 and 1998 of $4.1 million and $3.8
million, respectively (including loans of $200,000 each year). The Dominican
Republic contract expires in December 2005. The Colombia contract expires on
December 31, 2009. It provides for certain minimum guaranteed payments to
horseowners during the first three years ($1.2 million in 2000, increased in
2001 and 2002 in accordance with an inflation factor).
The Puerto Rico contract expired in April 1998. However, the Puerto Rico
Racing Board has extended the contract as an interim measure until the Company
and the horseowners reach a new agreement. The contract is under negotiation at
the present time.
WAGERING SERVICES AGREEMENTS
The Company has separate agreements with Autotote Systems, Inc.
("Autotote") for providing wagering services, software and equipment to each
racetrack, necessary for the operation of the off-track betting system.
Payments under these contracts are summarized as follows:
<TABLE>
<CAPTION>
EL COMANDANTE V CENTENARIO REMON LOS COMUNEROS
--------------- -------------- ------------- ---------------
Expiration date March 2005 March 2005 January 2008 (d)
<S> <C> <C> <C> <C> <C> <C>
Cost of services, as a
percentage of wagering 0.65% 0.65% (a) 1.00% 1.20%
Minimum amount per year $ 800,800 $ 200,000 (b) $ 330,000 (c) $ -
<FN>
(a) Galapagos also receives services for the distribution system of the
electronic lottery. Fees to Autotote are 2% of gross sales at lottery
agencies and 1% of gross sales at OTB agencies.
(b) For year 1997, minimum annual payment was $175,000.
(c) Based on a minimum monthly payment of $27,500 for 2000, increased each
subsequent year, up to $36,000 in 2007. For years 1999 and 1998, the
minimum annual payment was $300,000 and $318,000, respectively.
(d) This contract is currently being renegotiated.
</TABLE>
OTHER LONG-TERM AGREEMENTS
The Company has also entered in other long-term contracts that are
essential for the operation of its racetracks such as to guarantee television
coverage in Puerto Rico. ECMC has an agreement with S&E Network, Inc. (S&E")
that requires the purchase of television time for a minimum of 910 hours at the
rate of $725 (effective February 1997) per hour, 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 contract is non-cancelable by either party during
the initial term, which expires on December 2006. The term is automatically
extended for successive 5 years periods by request of ECMC. During this
extended term, the contract can be canceled by S&E, upon payment of liquidating
damages of $2 million plus CPI after January 1997.
CONTRIBUTIONS
In connection with the termination of the lease agreement of El Comandante,
ECMC assumed certain commitments made by ECOC to make contributions to several
charitable and educational institutions during a four-year period ending in
2001. These obligations are included in accounts payable and, at December 31,
1999 and 1998 amounted to $350,000 and $450,000, respectively. ECMC expects to
make the remaining contributions as follows: $150,000 in 2000 and $200,000 in
2001.
5. FIRST MORTGAGE NOTES:
On December 15, 1993, pursuant to a private offering, (i) 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 (the "Indenture") between ECCC, HDA
and Banco Popular de Puerto Rico, as trustee (the "Trustee"), and (ii) HDAMC
issued Warrants to purchase 68,000 shares of Class A Common Stock of HDAMC. In
March 1995, the Warrants automatically became exercisable to purchase an
aggregate of 1,205,232 units of the Company from HDAMC (see Note 6). Upon
issuance of the Warrants, HDA recorded note discount of $2,040,000 equal to the
fair value of the Warrants. Such note discount was 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. Payment of the First Mortgage Notes is guaranteed
by HDA. 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 related equipment, structures, machinery and other property, including
intangible property, ancillary to the operations of El Comandante, and (iii)
substantially all of the other assets and property of HDA, including the capital
stock of ECCC owned by HDA.
During the past three years HDA has made early redemptions of First
Mortgage Notes in connection with certain transactions. The Company has also
purchased in the open market First Mortgage Notes which the Company intends to
hold until maturity in cancellation of required partial redemptions in 2000 and
2001, as explained below. Following is a summary of these transactions:
<TABLE>
<CAPTION>
HELD BY THE
FACE (PREMIUM) COMPANY AT
TYPE OF TRANSACTION DATE VALUE DISCOUNT 31-DEC-99
- ------------------------------ ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Redemption Mar-97 $ 737,000 $ - $ -
Redemption Sep-97 2,500,000 (250,000) -
Purchase in open market Dec-98 7,500,000 1,000,000 7,500,000
Redemption, reduced by amount Jan-99
of notes held by the Company 2,620,000 (262,000) (a) (380,000)
Purchase in open market May-99 189,000 22,680 189,000
----------- -----------
$13,546,000 $7,309,000
----------- -----------
<FN>
(a) Recorded as an expense by the Company in 1998
</TABLE>
In connection with these transactions, the Company wrote-off a portion of
the note discount and deferred financing costs. The net effect is included in
the accompanying consolidated statements of income (loss) as extraordinary
items, net of provision for income taxes, as follows:
37
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
------- ---------- ----------
<S> <C> <C> <C>
Discount (premium) $22,680 $ 738,000 $(250,000)
Write-offs - (464,146) (209,173)
Provision for income taxes - (106,803) 133,160
------- ---------- ----------
$22,680 $ 167,051 $(326,013)
------- ---------- ----------
</TABLE>
ECCC is required to partially redeem First Mortgage Notes commencing on
December 15, 2000. The stated maturities of the First Mortgage Notes at
December 31, 1999, reduced by prior redemptions, are as follows (in thousands):
<TABLE>
<CAPTION>
DUE DURING THE YEAR GROSS PURCHASED IN NET
ENDING DECEMBER 31, AMOUNT OPEN MARKET AMOUNT
- ------------------- -------- -------------- --------
<S> <C> <C> <C>
2000 $ 563 $ 563 $ -
2001 10,200 6,746 3,454
2002 10,200 - 10,200
2003 40,800 - 40,800
-------- -------------- --------
61,763 7,309 54,454
Less - discount (943) (58) (885)
-------- -------------- --------
$60,820 $ 7,251 $53,569
-------- -------------- --------
</TABLE>
HDA may also redeem First Mortgage Notes at the following redemption
prices (expressed as percentages of principal amount), in each case together
with accrued and unpaid interest:
DURING THE 12 MONTH PERIOD
BEGINNING ON DECEMBER 15,
- --------------------------
1999 102.75%
2000 101.50%
2001 100.00%
HDA is required 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.
The Indenture contains certain covenants, one of which restricts the amount
of distributions by HDA to its partners, including the Company. Permitted
distributions are limited to approximately 48% of HDA's consolidated net
income. In connection with certain approval required from noteholders (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 met this debt coverage ratio. As of March 10,
2000, HDA has advanced to the Company approximately $1.3 million against its
allowable future distributions of profits, which, technically, is not in
conformity with the terms of the Indenture. HDA intends to cure this default
with the declaration of future permitted distributions.
38
<PAGE>
6. HDAMC WARRANTS
Under the Warrant Agreement, the Company was not a "qualified public
company" and therefore HDA, as guarantor of the obligation, made the offer to
purchase 68,000 outstanding Warrants for cash, at a repurchase price of $15.49
per Warrant. The repurchase offer expired on December 15, 1998 when 48,127
Warrants were tendered for a total purchase price of $745,487. This payment,
together with transaction costs, was charged to partners' deficit. Of the
remaining Warrants, 15,216 were exercised in exchange for 269,688 Units of the
Company and, 4,657 Warrants, neither tendered nor exercised, expired. Therefore,
935,557 of the Units previously held by HDAMC were distributed to the Company
and are currently held in treasury.
7. BONDS AND NOTES PAYABLE AND CAPITAL LEASES:
The Company's outstanding notes payable consist of the following:
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
MATURITY INTEREST ----------------------
BORROWER DESCRIPTION DATE RATE 1999 1998
- --------------- -------------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
HDA/ECMC Note payable (a) 15-Dec-01 P+1.00% $5,500,000 $1,850,000
ECMC Note payable 5-Jan-00 P+1.00% - 649,100
Equus-Panama Term loan 25-Apr-00 10.75% 56,364 -
Equus-Panama Line of credit (b) various 10.75% 204,955 142,697
Equus-Comuneros Term loans (c) various variable 464,763 -
The Company Loan (d) - P+1.00% - 200,000
---------- ----------
$6,226,082 $2,841,797
---------- ----------
<FN>
At December 31, 1999 and 1998, the prime rate (P) was 8.50% and 7.75%,
respectively.
(a) Considered Refinancing Indebtedness under the terms of the Indenture.
Collaterized by the First Mortgage Notes purchased in the open market (see
Note 5). Payable in quarterly installments commencing on March 31, 2000.
Balance outstanding under the credit facility existing at December 31, 1998
was paid from proceeds of the Refinancing Indebtedness.
(b) Maximum outstanding balance is $250,000. Available to finance loans to
Panama horseowners for the acquisition of horses. Payable in equal monthly
installments, principal and interest, with various maturity dates from
April 25, 2000 to December 26, 2000.
(c) Collaterized by a certificate of deposit for $140,000, which is included in
the accompanying balance sheet as of December 31, 1999 as restricted cash.
Management is in the process of renegotiating the terms of these financial
obligations. Interest rates range from 7% to 14.01% over Colombia's Fixed
Term Deposit (FTD) rate. FTD at December 31, 1999 was 15.75%.
(d) Loan from Interstate Business Corporation ("IBC") (see Note 10).
</TABLE>
39
<PAGE>
HDA has a $500,000 revolving line of credit available until December 15,
2001 for its operational needs. Interest is calculated on balances outstanding
at a rate equivalent to one point over prime rate. Principal is due upon
maturity on December 15, 2001. In February 2000 HDA drew $500,000 under this
credit facility.
The Company also guarantees a $250,000 loan of the operator of the
restaurant at Presidente Remon. The proceeds of this loan were used by
Equus-Panama to finance improvements to the restaurant.
In October 1998, Equus-Panama issued $4 million in unsecured bonds pursuant
to a public offering. Interest is payable at 11% rate per annum on a quarterly
basis. The bonds may be redeemed by Equus-Panama prior to June 30, 2001 at a
redemption price of 102% of the principal amount and thereafter at par. There
are certain restrictions that limit the capacity of Equus-Panama to incur
indebtedness and pay dividends to shareholders.
The following table summarizes future minimum payments on capital leases,
notes payable and bonds of the Company and its consolidated subsidiaries:
<TABLE>
<CAPTION>
DUE DURING THE YEAR CAPITAL NOTES BONDS
ENDING DECEMBER 31, LEASES PAYABLE PAYABLE
- ------------------- ----------- ----------- ----------
<S> <C> <C> <C>
2000 $1,444,017 $3,242,588 $ -
2001 953,016 3,117,949 600,000
2002 681,866 46,604 1,000,000
2003 517,755 40,469 1,200,000
2004 299,605 22,020 1,200,000
----------- ----------- ----------
3,896,259 6,469,630 4,000,000
Imputed interest (660,752) (243,548) -
----------- ----------- ----------
$3,235,507 $6,226,082 $4,000,000
----------- ----------- ----------
</TABLE>
8. RETIREMENT PLAN AND PENSION PLAN:
RETIREMENT PLAN
In 1998, the Company established a retirement plan for employees of its
subsidiary, Equus Entertainment Corporation ("EEC"). Employees are eligible to
participate in the retirement plan when they have completed a minimum of 1,000
hours of service. The Retirement Plan is a defined contribution plan which
provides for contributions by the Company for the accounts of eligible employees
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 $160,000) that
exceed that wage base. Eligible employees may also make voluntary contributions
to their accounts and self direct the investment of their account balances in
various investment funds offered under the plan. Contributions to the
Retirement Plan amounted to $49,975 and $52,400 in 1999 and 1998, respectively.
Prior to October 5, 1998, EEC's employees participated in the retirement plan of
Interstate General Company L.P. ("IGC"), a former general partner of the
Company.
40
<PAGE>
PENSION PLAN
ECMC has a non-contributory defined benefit pension plan covering
substantially all of its nonunion employees. As a result of the transfer of
ECOC 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. ECMC'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. Pertinent information on this pension plan as of and for the
years ended December 31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $1,152,797 $ 926,531
Service cost 118,891 86,651
Interest cost 68,073 72,355
Actuarial (loss) gain (339,600) 49,540
Actuarial gain (loss) due to change
in assumptions - 71,246
Benefit paid (405,279) (53,526)
----------- -----------
Benefit obligation at end of year 594,882 1,152,797
----------- -----------
CHANGE IN PLAN ASSETS:
Fair value of plan at beginning of year 623,532 419,389
Actual return on plan assets 53,692 41,660
Employer contribution 206,446 266,009
Benefits paid (405,279) (53,526)
Administrative expenses (50,000) (50,000)
----------- -----------
Fair value of plan at end of year 428,391 623,532
----------- -----------
Funded status (166,491) (529,265)
Unrecognized net actuarial loss 42,584 341,127
Unrecognized transition obligation 65,319 78,383
Accrued benefit cost (58,588) (109,755)
WEIGHTED-AVERAGE ASSUMPTION:
Discount rate 7.90% 6.75%
Expected return on plan assets 7.50% 7.50%
Rate of compensation increase 4.00% 4.50%
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service Cost 118,891 136,651
Interest cost 68,073 72,355
Expected return on plan assets (54,902) (37,808)
Amortization of transition obligations 13,064 13,064
Recognized net actuarial loss 10,153 17,719
----------- -----------
Net periodic benefit cost $ 155,279 $ 201,981
----------- -----------
</TABLE>
41
<PAGE>
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. As a
result, 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. As a result of certain changes in the Company's corporate structure
effective January 1, 1998, the partner's allocable share of the Company's net
taxable income will be approximately equal to cash received during the year.
The provision for income taxes included in the accompanying consolidated
financial statements is attributable to (i) Puerto Rico income taxes on the
results of operations of its Puerto Rico subsidiaries, EEC, HDA and ECMC and
(ii) withholding taxes imposed by foreign countries on income earned by EEC, for
which no foreign tax credit will be available in Puerto Rico, summarized as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- ---------- --------
<S> <C> <C> <C>
Puerto Rico income taxes-
Deferred $375,928 $1,145,945 $893,403
Current 204,892 - -
Federal income tax, current - - 1,582
Foreign income tax, deferred 161,333 - -
-------- ---------- --------
$742,153 $1,145,945 $894,985
-------- ---------- --------
</TABLE>
The deferred income tax asset is mainly attributable to net operating
losses carried-forward, for which a valuation allowance has been recorded. The
deferred income tax liability as of December 31, 1999 and 1998 has the following
components of deferred tax liabilities (assets), net of corresponding valuation
allowance:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Puerto Rico income taxes-
Depreciation $1,536,640 $2,859,688
Gain on involuntary conversion 1,513,569 1,057,413
Net operating losses of ECMC - (924,371)
Contingency reserves - (298,560)
Other (75,083) (94,971)
Foreign withholding income taxes 190,674 29,340
----------- -----------
$3,165,800 $2,628,539
----------- -----------
</TABLE>
10. RELATED PARTY TRANSACTIONS:
LOAN FROM IBC
In 1998 the Company obtained a $200,000 loan from IBC, the sole owner of
Equus Management Company, ("EMC"), the managing general partner of the Company.
The loan accrued interest based on the Citibank prime rate plus 1%, which at
December 31, 1998 was 8.75%. The principal and accrued interest was paid in
March 1999.
42
<PAGE>
TRANSACTION WITH SUPRA
On August 19, 1997, HDA redeemed for $4,075,000 the 17% interest in HDA
held by Supra, thereby increasing the Company's interest in HDA to approximately
99%. The redemption price plus transaction costs of $239,284 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 in interest
of outstanding First Mortgage Notes.
SERVICES AMONG RELATED PARTIES
The following represents a summary of amounts accrued for services rendered
by or from certain related parties, namely, EMC, IBC, American Community
Properties Trust ("ACPT") and Interstate General Company L.P. ("IGC") during the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------
ENTITY NATURE OF SERVICE 1999 1998 1997
- ------------ --------------------------------- -------- -------- --------
<S> <C> <C> <C> <C>
RENDERED BY:
ACPT Support agreement $ 40,400 $ 29,236 $ 28,607
ACPT Rent office space 42,000 42,000 -
EMC Director fees 88,800 98,550 88,200
EMC Management agreement - - 278,673
EMC Expenses in excess of receipts - - 420,958
IBC Accounting services - 3,000 12,000
IGC Services of James J. Wilson 135,000 180,000 -
IGC Other services on Virginia racing 18,041 - -
RENDERED TO:
IGC Services of Thomas B. Wilson
on waste technology matters - 46,800 -
</TABLE>
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 a material
adverse impact on the Company's financial position or results of operations.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
As of December 31, 1999 and 1998 the fair value of the First Mortgage Notes
was approximately $47,920,000 and $50,391,000, respectively, (as compared with
its carrying value of $53,568,554 in 1999 and $56,194,460 in 1998) based on the
market price quoted by a brokerage firm that trades the First Mortgage Notes.
The carrying value of notes payable, capital leases and notes receivable
approximates fair value because these obligations bear interest at variable
rates. The carrying value of accounts receivable and accounts payable
approximates fair value due to the short-term maturity thereof.
43
<PAGE>
13. SEGMENT INFORMATION:
The Company has identified four reportable segments, based on geographical
considerations: Puerto Rico, Dominican Republic, Colombia and Panama. The
accounting policies of the segments are the same as those described in the
summary of accounting policies. The Company evaluates performance based on
profit or loss before income taxes, not including nonrecurring gains and losses
and foreign exchange gains and losses. The following presents the segment
information for the years ended December 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
PUERTO DOMINICAN
1999: RICO REPUBLIC COLOMBIA PANAMA TOTAL
-------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Commissions on wagering 52,076 $ 3,835 $ 1,445 $ 9,388 $66,744
Total revenues 54,681 5,316 1,646 9,682 71,325
Financial expenses 7,602 48 262 568 8,480
Depreciation and amortization 2,508 320 192 573 3,593
Loss before income
taxes, minority interest
and extraordinary item (641) (694) (1,831) (234) (3,400)
Capital improvements 8,671 183 904 356 10,114
Total assets 54,792 1,842 5,120 9,189 70,943
1998:
Commissions on wagering $41,081 $ 3,640 $ - $ 7,808 $52,529
Total revenues 55,350 5,747 - 7,876 68,973
Financial expenses 8,669 121 - 319 9,109
Depreciation and amortization 2,928 364 - 464 3,756
Earnings (loss) before income
taxes, minority interest,
extraordinary item and
cumulative effect 1,518 (815) - (1,345) (642)
Capital improvements 5,373 52 - 4,793 10,218
Total assets 52,455 2,049 950 8,585 64,039
1997:
Total revenues $18,810 $ 5,773 $ - $ - $24,583
Financial expenses 8,656 79 - - 8,735
Depreciation and amortization 1,841 527 - - 2,368
Earnings (loss) before income
taxes, minority interest
and extraordinary item 5,811 (1,100) - 4,711
Capital improvements 649 232 - 542 1,423
Total assets 50,824 2,330 - 3,033 56,187
</TABLE>
44
<PAGE>
Effective January 1, 1998 EEC, which is based in Puerto Rico, provides
management services to the foreign countries in connection with the operation of
the racetracks and the off-track betting system. Fees for these services
represent an intersegment revenue. For the years ended December 31, 1999 and
1998, Puerto Rico recognized revenue of $186,021 and $180,763, respectively,
attributable to Dominican Republic and $159,575 attributable to Panama. No fees
were charged to Panama in 1998 due to restrictions under its bonds.
14. 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 lease agreement with ECOC and
commenced operating El Comandante through its wholly owned subsidiary, ECMC (the
"Proforma Transactions").
The following unaudited proforma consolidated statement of operations
for the year ended December 31,1997 is based upon the historical consolidated
statement of operations of the Company and its subsidiaries, and was prepared as
if the above described transactions had all occurred on January 1, 1997.
Proforma adjustments include 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 Proforma 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 Proforma Transactions have been made.
45
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
1997
-------
(UNAUDITED)
<S> <C>
REVENUES:
Commissions on wagering $59,512
Net revenues from lottery services 88
Gain from sale of Television Stations 4,669
Other revenues 3,949
-------
68,218
-------
EXPENSES:
Payments to horseowners 29,669
Salaries, wages and employee benefits 8,665
Operating expenses 6,969
General and administrative 4,794
Marketing, television and satellite costs 3,130
Financial expenses 9,013
Depreciation and amortization 3,303
-------
65,543
-------
EARNINGS BEFORE INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY ITEM 2,675
PROVISION FOR INCOME TAXES 505
-------
EARNINGS BEFORE MINORITY INTEREST AND
EXTRAORDINARY ITEM 2,170
MINORITY INTEREST IN EARNINGS 878
-------
EARNINGS BEFORE EXTRAORDINARY ITEM 1,292
EXTRAORDINARY ITEM 1,558
-------
NET EARNINGS $ 2,850
=======
ALLOCATION OF NET EARNINGS:
General partners $ 28
Limited partners 2,822
-------
$ 2,850
=======
BASIC AND DILUTED PER UNIT AMOUNTS:
Earnings before extraordinary item 0.20
Extraordinary item 0.25
-------
Net earnings $ 0.45
=======
WEIGHTED AVERAGE UNITS OUTSTANDING 6,334
=======
</TABLE>
46
<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 activities other than managing the business of
the Company. EMC is governed by its Board of Directors, which currently
consists of eight 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.
All officers of EMC are employees of Equus Entertainment Corporation ("EEC"), a
wholly owned subsidiary of the Company.
At present, two of EMC's directors are directors and officers of IGC's
managing general partner and two of EMC's directors are directors and officers
of IBC. Also, one EMC's director is a trustee of American Community Property
Trust ("ACPT"). The adult children of James J. and Barbara A. Wilson own
approximately 99.4% of IBC and 100% of The Wilson Family Limited Partnership
("WFLP"). The Wilson family and companies controlled by them, including IBC and
WFLP, hold approximately a 67% interest in the Company, a 54.25% interest in IGC
and a 50.89% interest in ACPT.
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.
NAME AGE POSITIONS WITH THE COMPANY AND EMC
---- --- ---------------------------------------
James J. Wilson 66 Co-Chairman and Director of EMC
Thomas B. Wilson 37 Co-Chairman, President and Chief Executive
Officer; Director of EMC
Hernan G. Welch 50 Executive Vice President - Finance and
Administration
Gretchen Gronau 35 Vice President and Chief Financial Officer
47
<PAGE>
Juan M. Rivera-Gonzalez 52 Vice Chairman and Director of EMC
Donald J. Kevane 69 Director of EMC
Alberto M. Paracchini 67 Director of EMC
Barbara A. Wilson 63 Director and Secretary of EMC
Mark Augenblick 52 Director of EMC
Kevin Wilson 41 Director of EMC
Charles Cuprill 56 Director of EMC
RELATIONSHIPS. James J. Wilson and Barbara A. Wilson are the parents of Thomas
B. Wilson and Kevin Wilson.
Certain additional information concerning the above persons is set forth below.
James J. Wilson was Chairman and President of EMC from its formation in 1994
- -----------------
until February 1996 when he resigned. He was reelected Chairman of the Board of
Directors of EMC in October 1998. He has been Chairman of the Board and Chief
Executive Officer of the general partner of IGC, since 1986. He is the founder
of IGC and has been Chief Executive Officer of IGC and its predecessors since
1957. He is the founder of IBC and its predecessors.
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").
Hernan G. Welch has been Executive Vice President - Finance and Administration
- ----------------
of EMC and the Company since July of 1999. From 1994 to July of 1999 he was in
public accounting and served as an International Audit and Consulting Partner
with the international firm of Ernst & Young. He was in charge of multinational
engagements involving financial accounting and reporting, and financial
management services for multinational companies in industries such as
entertainment and high technology, energy, telecommunications and financial
services. He served as an expatriate executive in Latin America for the firm
from 1997 to 1999. He started his professional career with the U.S. Treasury
Department in 1974 and then pursued a public accounting career from 1979 through
1999 as a CPA.
Gretchen Gronau 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.
Juan M. Rivera-Gonzalez was Executive Vice President and Chief Operating Officer
- -----------------------
of EMC and the Company since January 1998 and Director of EMC since February
1998, until he resigned in September 1999 to practice law and serve as legal
counsel of the Company. 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.
48
<PAGE>
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 LLP, 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 1992 of the Autoridad de Energia
Electrica (the Puerto Rico Electric Power Authority), and, since 1975, a
director of GM Group, Inc,, a wholly owned subsidiary of Banco Popular de Puerto
Rico.
Alberto M. Paracchini has been a Director of EMC since its formation in 1994.
- -----------------------
He has been a director of BanPonce Corporation, now Popular Inc., and Banco
Popular de Puerto Rico 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.
Mark Augenblick has been a Director of EMC in March, 1998. He has been a
- ----------------
Director and Vice Chairman of IGMC since March 1998. Prior to joining the
Company, Mr. Augenblick was a partner in the Washington, D.C. law firm, Shaw
Pittman, Potts & Trowbridge.
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.
Charles A. Cuprill has been a Director of EMC since December 1999. Mr. Cuprill
- ------------------
has been practicing civil law in Puerto Rico since 1972.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS
Mr. Charles A. Cuprill filed late on March 21, 2000 a Form 5 to report
annual changes in his beneficial ownership of Units of the Company for December
1999.
ITEM 11. EXECUTIVE COMPENSATION
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 the Company during 1999,
employed by its wholly-owned subsidiary EEC effective January 1, 1998. Prior
1998, two of these executives were employees of EMC and, accordingly, their
compensation for years before 1998 is also included in the table.
49
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION ------------
--------------------------------- SECURITIES
OTHER UNDERLYING ALL OTHER
ANNUAL OPTIONS/ COMPEN-
NAME AND PRINCIPAL SALARY BONUS COMPENSATION SAR'S SATION
POSITION YEAR ($) ($) ($) (#) (1) ($) (2)
- --------------------------- ------ ---------- ------------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Thomas B. Wilson 1999 249,800 - - - 9,527
President and CEO 1998 240,200 (3) - - - -
1997 - - - - -
Hernan G. Welch (4) 1999 89,530 - - - -
Executive Vice - - - - - -
President - Finance - - - - - -
and Administration
Gretchen Gronau 1999 130,400 - - - 7,354
VicePresident 1998 125,200 - - 10,000 7,264
and CFO 1997 100,200 - - SAR 5,400
Juan M. Rivera-Gonzalez (5) 1999 240,800 - - - -
Executive Vice 1998 240,200 - - 10,000 10,064
President and COO 1997 180,000 50,000 - SAR 5,400
Angel Blanco-Bottey (6) 1999 105,270 45,500 - - -
Senior Vice 1998 160,200 - - - -
President 1997 - - - - -
<FN>
(1) Represents Unit Appreciation Rights assumed by the Company, as discussed
below.
(2) Reflects contributions to Retirement Plan discussed below.
(3) During 1998 a subsidiary of IGC engaged in the development of solid waste
treatment facilities reimbursed the Company approximately $46,800 for
actual payroll costs attributed to time spent by Mr. Wilson on waste
technology matters.
(4) Mr. Welch was hired as an executive of the Company effective July 1999 with
an annual base salary of $200,000.
(5) Effective September 17, 1999 Mr. Rivera-Gonzalez resigned as an officer of
the Company and was retained as a consultant and Vice Chairman of EMC. His
salary for 1999 includes a payment of $58,400 for accrued and unpaid
vacations.
(6) This executive was an employee of the Company through July 12, 1999.
</TABLE>
50
<PAGE>
RETIREMENT PLAN. In 1998, the Company established its own retirement
plan for employees of its subsidiary EEC. Employees are eligible to participate
in the retirement plan when they have completed a minimum employment period of
1,000 hours. The Retirement Plan is a defined contribution plan which provides
for contributions by the Company for the accounts of eligible employees 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 $160,000) that
exceeded that wage base. Eligible employees may also make voluntary
contributions to their accounts and self direct the investment of their account
balances in various investment funds offered under the plan. Contributions to
the Retirement Plan amounted to $49,975 in 1999. Prior to October 5, 1998,
EEC's employees participated in IGC's retirement plan.
DIRECTORS. Directors of EMC who are not employees of the Company or
any of its subsidiaries 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 1999,
the directors' fees totaled $88,800 of which $15,000 was unpaid as of December
31, 1999. Mr. James Wilson does not receive director's fees; instead, the
Company pays a fee to IGC who, in turn, pays Mr. Wilson's compensation. During
1999 fees to IGC for Mr. Wilson services amounted to $135,000.
The Company entered into a consulting agreement with Juan M.
Rivera-Gonzalez effective October 1, 1999 whereas Mr. Rivera-Gonzalez receives
annual compensation of $100,000 for his services, including his position as Vice
Chairman. The agreement is cancelable by either party upon 30 days written
notice.
UNIT APPRECIATION RIGHTS. As of December 31, 1999, there are 10,000
Unit Appreciation Rights ("UAR") outstanding corresponding to one executive,
fully vested and exercisable, which will expire on October 18, 2004. The UAR
entitle the holder to receive, upon exercise, an amount payable in cash, Units
of the Company, securities in another company or some combination thereof, as
determined by EMC's Board of Directors. The amount received upon exercise is
based on the excess of the fair market value of the UAR over a fixed base price.
During 1999, there were no UAR exercised or granted and 10,000 were canceled.
As of December 31, 1999, the unexercised in-the-money UAR had no value. The
Company intends to adopt a Share Incentive Plan to provide for unit-based
incentive compensation for officers, Key employees and Directors.
51
<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 22, 2000 (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.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (1)
-------------------
NUMBER OF
NAME OF BENEFICIAL OWNERSHIP UNITS PERCENT
- ---------------------------------------------------- --------- --------
<S> <C> <C>
MANAGEMENT AND DIRECTORS
Barbara A. Wilson (2) 50 0.00%
Kevin Wilson (2) 86,397 1.03%
Thomas B. Wilson (2) 86,397 1.03%
Donald J. Kevane 1,000 0.01%
Alberto Paracchini 25,000 0.30%
Charles A. Cupril 10,000 0.12%
Hernan G. Welch 5,000 0.06%
Gretchen Gronau 900 0.01%
All executive officers of EMC and the
Company and directors of EMC,
as a group (8 persons) 214,744 2.56%
OTHER UNITHOLDERS
The Wilson Family Limited Partnership ("WFLP") (2)
222 Smallwood Village Center
St. Charles, Maryland 20602 5,093,088 60.71%
</TABLE>
- --------------------------------------------------------------------------------
(1) The beneficial ownership of Units was determined on the basis of
Units directly and indirectly owned by executive officers and directors of EMC
and Units to be issued under options that are exercisable within the next 60
days.
(2) WFLP is owned by the adult children of James J. and Barbara A.
Wilson, including Kevin Wilson and Thomas Wilson. However, because neither
Kevin Wilson nor Thomas Wilson is a general partner in WFLP, the Units of the
Company owned by WFLP are not considered beneficially owned by them.
52
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information responding to this item appears in Note 10 to the Company's
consolidated financial statements included in Item 8 of this report.
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 Operations for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income (Loss) for the
years ended December 31, 1999, 1998 and 1997
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Changes in Partners' Deficit for
each of the three years in the period ended December 31, 1999
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION REFERENCE
- ------- -------------------- ---------------------
<S> <C> <C>
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
53
<PAGE>
3.6 Fourth Amendment to Certificate of Exhibit 3.6 to Annual
Report
Limited Partnership of the Company on Form 10-K of the Company
for the year ended ecember 31,
1997 ("1997 10-K")
5.1 Form of Unit Certificate Exhibit 5.1 to Form S-11
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 yNo. 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
10.7 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
10.11 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
10.15 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
54
<PAGE>
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
10.20 HDA Note in the amount of Exhibit 10.21 to Form S-4
$68,000,000 to ECCC dated December
15, 1993
10.22 Consulting Agreement dated December Exhibit 10.21 to Form S-11
15, 1993 between ECOC and IGP
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
10.34 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
10.44 Assignment and Assumption of Exhibit 10.44 to 1995
Consulting Agreement dated April 10-K/A
22, 1996
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
55
<PAGE>
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
10.57 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 Exhibit 10.58 to 1997
by and between El Comandante 10-K
Management Company LLC ("ECMC") and
ECOC dated December 19, 1997
10.59 Second Amendment to Control Exhibit 10.59 to 1997
Transfer Agreement by and among 10-K
IBC, IGC, IGP, HDA, EMC and the
Company dated December 19, 1997
10.60 Guaranty Agreement by and between Exhibit 10.60 to 1997
EMC and IGC dated December 30, 1997 10-K
10.61 Agreement to Retire Partnership Exhibit 10.61 to 1997
Interest of Interstate General 10-K
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 Exhibit 10.62 to 1997
Partnership Agreement of HDA 10-K
dated December 31, 1997
10.68 First Amendment to Ninth Amended Exhibit 10.68 to Annual Report on
and Restated Partnership Agreement Form 10-K of the Company for the
of HDA dated October 2, 1998 year ended December 31, 1998
("1998 10-K")
10.69 Stock Purchase Agreement dated Exhibit 10.69 to 1998 10-K
as of March 1, 1999
21 Subsidiaries of the Company Filed herewith
</TABLE>
REPORTS ON FORM 8-K. None
54
<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
March 24, 2000 /s/ Thomas B. Wilson
- ---------------- ----------------------------------------
Thomas B. Wilson
Co-Chairman, President,
Chief Executive Officer and Director
March 24, 2000 /s/ Hernan G. Welch
- ---------------- ----------------------------------------
Hernan G. Welch
Executive Vice President
Finance and Administration
March 24, 2000 /s/ Gretchen Gronau
- ---------------- ---------------------------------------
Gretchen Gronau
Vice President and Chief
Financial 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
- ---- ----- ---------
March 24, 2000 Co-Chairman /s/ James J. Wilson
- ---------------- ------------------------------
James J. Wilson
March 24, 2000 Co-Chairman, President, /s/ Thomas B. Wilson
- ---------------- Chief Executive Officer ------------------------------
and Director Thomas B. Wilson
March 24, 2000 Vice Chairman and Director /s/ Juan M. Rivera
- ---------------- ------------------------------
Juan M. Rivera
March 24, 2000 Director /s/ Donald J. Kevane
- ---------------- ------------------------------
Donald J. Kevane
March 24, 2000 Director /s/ Alberto M. Paracchini
- ---------------- ------------------------------
Alberto M. Paracchini
March 24, 2000 Director /s/ Charles A. Cupril
- ---------------- ------------------------------
Charles A. Cupril
55
<PAGE>
EXHIBIT 21
EQUUS GAMING COMPANY L.P.
LIST OF SUBSIDIARIES OF THE REGISTRANT
1- Equus Entertainment Corporation (see NOTE A)
2- Virginia Turf Club, Inc.
3- Equus Comuneros S.A.
4- Equus Entertainment de Panama, S.A.
5- Galapagos, S.A.
NOTE A:
Equus Entertainment Corporation has a subsidiary, Housing Development
Associates, S.A., which in turn has the following subsidiaries:
1 - El Comandante Capital Corp.
2 - El Comandante Management Company LLC
3 - Agency Betting Network, Inc.
4 - Satellite Services International, Inc.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2308
<SECURITIES> 0
<RECEIVABLES> 3084
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 18410
<TOTAL-ASSETS> 70942
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> (14785)
<OTHER-SE> 70942
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 71325
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 66244
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8480
<INCOME-PRETAX> (3400)
<INCOME-TAX> 742
<INCOME-CONTINUING> (3113)
<DISCONTINUED> 0
<EXTRAORDINARY> 22
<CHANGES> 0
<NET-INCOME> (3090)
<EPS-BASIC> (.39)
<EPS-DILUTED> (.39)
</TABLE>
