SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________TO___________
Commission file number 000-25306
EQUUS GAMING COMPANY L.P.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 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, PR 00918
----------------------------------------------------
(Address of Principal Executive Offices and Zip Code)
(787) 753-0676
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (July 31, 2000). 9,300,381
Class A Units
<PAGE>
EQUUS GAMING COMPANY L.P.
FORM 10 Q
INDEX
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations for the Nine Months and Three
Months ended September 30, 2000 and 1999 (Unaudited) 3
Consolidated Statements of Comprehensive Income (Loss) for the
Nine months and Three Months Ended
September 30, 2000 and 1999 (Unaudited) 5
Consolidated Balance Sheets at September 30, 2000 (Unaudited)
and December 31, 1999 (Audited) 6
Consolidated Statement of Changes in Partners' Deficit for the
Nine Months Ended September 30, 2000 (Unaudited) 8
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 (Unaudited) 9
Notes to Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations 20
Liquidity and Capital Resources 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Material Modifications of Rights of Registrant's Securities 28
Item 3. Default upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Commissions on wagering $47,905,671 $49,594,091
Net revenues from lottery services 170,348 451,529
Other revenues 2,630,702 2,889,234
Gain on sale of assets 179,500 -
------------ ------------
50,886,221 52,934,854
------------ ------------
EXPENSES:
Payments to horseowners 23,156,398 24,366,335
Salaries, wages and employee benefits 7,865,441 8,407,488
Operating expenses 8,318,209 6,296,327
General and administrative 3,164,131 2,660,922
Marketing, television and satellite costs 4,101,756 3,208,836
Financial expenses 7,407,210 6,302,269
Depreciation and amortization 2,819,239 2,705,121
------------ ------------
56,832,384 53,947,298
------------ ------------
(LOSSES) EARNINGS BEFORE INCOME TAXES, MINORITY (5,946,163) (1,012,444)
INTEREST AND EXTRAORDINARY ITEMS
PROVISION FOR INCOME TAXES 243,933 53,872
------------ ------------
(LOSSES) EARNINGS BEFORE MINORITY INTEREST AND (6,190,096) (1,066,316)
EXTRAORDINARY ITEMS
MINORITY INTEREST IN (LOSSES) EARNINGS (377,142) (705,701)
------------ ------------
(LOSSES) EARNINGS BEFORE EXTRAORDINARY ITEMS (5,812,954) (360,615)
EXTRAORDINARY ITEM - DISCOUNT ON EARLY
REDEMPTION OF FIRST MORTGAGE NOTES - 22,680
------------ ------------
NET (LOSSES) EARNINGS $(5,812,954) $ (337,935)
============ ============
ALLOCATION OF NET (LOSSES) EARNINGS:
General partners $ (58,130) $ (3,379)
Limited partners (5,754,824) (334,556)
------------ ------------
$(5,812,954) $ (337,935)
------------ ------------
BASIC AND DILUTED PER UNIT AMOUNTS: $ (0.69) $ (0.04)
============ ============
WEIGHTED AVERAGE UNITS OUTSTANDING 8,364,824 7,579,290
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Commissions on wagering $15,477,239 $16,239,090
Net revenues from lottery services - 185,991
Other revenues 971,273 832,970
------------ ------------
16,448,512 17,258,051
------------ ------------
EXPENSES:
Payments to horseowners 7,524,048 7,940,482
Salaries, wages and employee benefits 2,855,351 2,933,588
Operating expenses 3,183,685 2,342,932
General and administrative 1,013,022 886,263
Marketing, television and satellite costs 1,601,652 996,338
Financial expenses 2,505,038 2,154,667
Depreciation and amortization 903,551 982,834
------------ ------------
19,586,347 18,237,104
------------ ------------
(LOSSES) EARNINGS BEFORE INCOME TAXES, MINORITY (3,137,835) (979,053)
INTEREST AND EXTRAORDINARY ITEMS
PROVISION (BENEFIT) FOR INCOME TAXES 45,862 (276,042)
------------ ------------
(LOSSES) EARNINGS BEFORE MINORITY INTEREST AND (3,183,697) (703,011)
EXTRAORDINARY ITEMS
MINORITY INTEREST IN (LOSSES) EARNINGS (183,692) (274,996)
------------ ------------
NET (LOSSES) EARNINGS $(3,000,005) $ (428,015)
============ ============
ALLOCATION OF NET (LOSSES) EARNINGS:
General partners $ (30,000) $ (4,280)
Limited partners (2,970,005) (423,735)
------------ ------------
$(3,000,005) $ (428,015)
------------ ------------
BASIC AND DILUTED PER UNIT AMOUNTS: $ (0.36) $ (0.05)
============ ============
WEIGHTED AVERAGE UNITS OUTSTANDING 8,364,824 8,439,824
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------ ------------
<S> <C> <C>
NET (LOSSES) EARNINGS $(5,812,954) $ (337,935)
OTHER COMPREHENSIVE (LOSSES) INCOME:
Currency translation adjustments 252,814 (736,253)
------------ ------------
COMPREHENSIVE (LOSSES) INCOME $(5,560,140) $(1,074,188)
------------ ------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------ ------------
NET (LOSSES) EARNINGS $(3,000,005) $ (428,015)
OTHER COMPREHENSIVE (LOSSES) INCOME:
Currency translation adjustments 31,743 (867,014)
------------ ------------
COMPREHENSIVE (LOSSES) INCOME $(2,968,262) $(1,295,029)
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ---------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Unrestricted $ 177,309 $ 1,888,995
Restricted 414,575 418,938
--------------- ---------------
591,884 2,307,933
--------------- ---------------
PROPERTY AND EQUIPMENT:
Land 7,686,417 7,786,980
Building and improvements 57,067,422 56,512,072
Equipment 16,029,856 13,967,887
--------------- ---------------
80,783,695 78,266,939
Accumulated depreciation (21,019,088) (18,409,886)
--------------- ---------------
59,764,607 59,857,053
--------------- ---------------
DEFERRED COSTS, NET:
Financing 2,150,041 2,510,487
Costs of Panama contract 1,897,500 1,980,000
Other 608,500 501,505
--------------- ---------------
4,656,041 4,991,992
--------------- ---------------
OTHER ASSETS:
Accounts receivable, net 2,555,796 1,577,634
Notes receivable 2,616,471 1,506,599
Other assets 1,499,365 701,362
--------------- ---------------
6,671,632 3,785,595
--------------- ---------------
$ 71,684,164 $ 70,942,573
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND PARTNERS' DEFICIT
SEPTEMBER 30 DECEMBER 31
2000 1999
-------------- -------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
FIRST MORTGAGE NOTES:
Principal, net of note discount of
$675,905 and $885,446 $ 53,778,095 $ 53,568,554
Accrued interest 1,865,486 265,900
-------------- -------------
55,643,581 53,834,454
-------------- -------------
OTHER LIABILITIES:
Accounts payable and accrued liabilities 18,223,167 11,660,824
Outstanding winning tickets and refunds 1,064,882 1,130,389
Notes payable 5,379,625 6,226,082
Bonds payable 4,000,000 4,000,000
Capital lease obligations 2,458,872 3,235,507
-------------- -------------
31,126,546 26,252,802
-------------- -------------
DEFERRED INCOME TAXES 3,608,943 3,165,800
-------------- -------------
MINORITY INTEREST 1,650,526 2,474,810
-------------- -------------
COMMITMENTS AND CONTINGENCIES, SEE NOTE 2
PARTNERS' DEFICIT
General Partner (837,481) (781,879)
Limited Partners - 10,383,617 units authorized:
(9,300,381 units issued and outstanding of which
935,557 are in treasury stock in 2000 and 1999) (19,507,952) (14,003,414)
-------------- -------------
(20,345,433) (14,785,293)
-------------- -------------
$ 71,684,164 $ 70,942,573
============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
---------- ------------- -------------
<S> <C> <C> <C>
BALANCES, DECEMBER 31, 1999 $(781,879) $(14,003,414) $(14,785,293)
Net losses for the period (58,130) (5,754,824) (5,812,954)
Currency translation adjustments 2,528 250,286 252,814
---------- ------------- -------------
BALANCES, SEPTEMBER 30, 2000 $(837,481) $(19,507,952) $(20,345,433)
========== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (losses) earnings $(5,812,954) $ (337,935)
------------ ------------
Adjustments to reconcile net (losses) earnings to
net cash provided by operating activities-
Depreciation and amortization 3,509,075 3,226,529
Deferred income tax provision 243,933 42,343
Currency translation adjustments (194,328) 109,673
Minority interest (377,142) (705,701)
Extraordinary item - 22,680
Decrease (increase) in assets-
Accounts receivable (978,163) 279,261
Prepayments and other assets (798,003) 425,443
Deferred costs (324,054) (378,082)
Increase (decrease) in liabilities-
Accrued interest on first mortgage notes 1,599,586 1,538,610
Accounts payable and accrued liabilities 6,773,351 (822,891)
Outstanding winning tickets and refunds (65,507) 1,547,512
Total adjustments 9,388,749 5,285,377
------------ ------------
Net cash provided by operating activities 3,575,795 4,947,442
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (net) (2,346,870) (8,942,056)
(Increase) decrease in notes receivable, net (1,109,872) 565,148
------------ ------------
Net cash used in investing activities (3,456,742) (8,376,908)
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE>
<TABLE>
<CAPTION>
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
(continued)
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of First Mortgage Notes $ - $(3,048,320)
Contribution by minority stockholders - 40,158
Payments to affiliates - (200,000)
Loan proceeds from financial institutions 720,000 825,000
Payments on notes payable and capital
lease obligations (2,423,454) (1,352,206)
Increase in defered costs (119,848) (7,500)
Issuance of units - 3,051,600
Cash distributions to minority partners of HDA - (20,368)
------------ ------------
Net cash used in financing activities (1,823,302) (711,636)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,716,049) (4,141,102)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,307,933 6,637,267
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 591,884 $ 2,496,165
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,589,673 $ 4,527,479
Income taxes paid - -
NON-CASH TRANSACTIONS:
Equipment acquired through capital leases 80,362 1,462,127
Contribution of non-cash assets, net of liabilities
by Los Comuneros S.A. (see Note 1) - 1,959,842
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE>
EQUUS GAMING COMPANY L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
Equus Gaming Company L.P. (the "Company"), a Virginia limited partnership,
is engaged in thoroughbred racing, wagering and other gaming businesses 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 been
operated since January 1, 1998 by the 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 consolidated financial statements as of September 30, 2000 and for the
nine months ended September 30, 2000 and 1999 are unaudited but include all
adjustments (consisting of normal recurring adjustments) which management
considers necessary for a fair presentation of the results of operations of the
interim periods. The operating results for the nine months ended September 30,
2000 are not necessary indicative of the results that may be expected for the
year. Net earnings (losses) per unit are calculated based on weighted average
of Units outstanding. Outstanding warrants to purchase Units do not have a
material dilutive effect on the calculation of earnings per Unit.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, if any, at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
<PAGE>
These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted.
While management believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these financial statements
be read in conjunction with the financial statements and the notes of the
Company included in the Company's Annual Report filed on Form 10-K for the year
ended December 31, 1999.
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
earnings (losses) of these consolidated subsidiaries that are attributable to
the minority partners, as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS THE THREE MONTHS FOR
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SUBSIDIARY:
HDA $ (33,940) $ 21,710 $ (21,848) $ (400)
Galapagos - - - -
Equus-Panama 40,292 (99,604) (73,460) (49,681)
Equus-Comuneros (383,494) (627,807) (88,383) (224,915)
---------- ---------- ---------- ----------
$(377,142) $(705,701) $(183,691) $(274,996)
---------- ---------- ---------- ----------
</TABLE>
In general, the minority interest is calculated based on the ownership
interest of the minority partners. HDA has a minority partner owning a 1%
interest. Galapagos' minority partners own a 45% interest. However, during
the nine months ended September 30, 2000 and 1999 the Company did not recognize
minority interest in Galapagos' losses amounting to $309,058, and $275,758,
respectively, because the minority partners have no legal obligation to fund
such losses in excess of their investment. As of September 30, 2000 the
accumulated losses not allocated to the minority partners amounts to $1,396,123.
Equus-Panama minority partners own a 49% interest. Equus-Comuneros minority
partners own a 50% interest.
CURRENCIES
The Company consolidates its accounts with Galapagos and Equus-Comuneros
whose functional currency are the Dominican Republic peso and the Colombian
peso, respectively. The United States dollars ("US$") 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.
<PAGE>
For the nine months ended September 30, 2000 and 1999, net exchange losses
resulting from re - measurement of accounts, together with losses from foreign
currency transactions, amounted to $150,915 and $50,011, respectively, which
amounts are included as operating expenses. Accumulated net loss from changes
in exchange rates due to the translation of assets and liabilities of the
foreign subsidiaries are included in partners' deficit and at September 30, 2000
and December 31, 1999 amounted to $404,687 and $656,501, respectively.
The current exchange rates in Dominican Republic as of September 30, 2000
and December 31, 1999 were US$1.00 to FC$16.40 and US$1.00 to FC$16.00,
respectively. The average exchange rates in Dominican Republic prevailing
during the nine months ended September 30, 2000 and 1999, were US$1.00 to
FC$16.48, US$1.00 to FC$16.00, respectively. The current exchange rate in
Colombia as of September 30, 2000 and 1999 were US$1.00 to FC$2,212 and $US1.00
to FC$1,500. The average exchange rate in Colombia prevailing during the nine
months ended in September 30, 2000 and 1999 were US$1.00 to FC$2,060 and US$1.00
to FC$1,500. The Company also consolidates its accounts with Equus-Panama whose
functional currencies are the Panama Balboas and the US$. Because these
currencies are of equivalent value, there is no effect attributed to foreign
currency transactions of Equus-Panama.
2. COMMITMENTS AND CONTINGENCIES:
HORSEOWNERS' AGREEMENTS
The Company has separate agreements with the horseowners association in
each country. The agreements establish the amount payable to horseowners as
purses. In general, payments to horseowners are based on a percentage of
wagering.
The agreement with the horseowners in Panama expires in December 2007. It
provided 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 new Puerto Rico 10-year contract expires on December 31, 2010. It
provides for : (1) distribution of "Take" or commissions on wagering on a 50/50
basis between Horseowners and El Comandante Management Company (no change from
prior contract) ; (2) a one-time payment made on July 31, 2000 of $1 million to
Horseowners for Autotote fees charged in prior years ; (3) and a cost sharing
agreement (generally on a 50/50 basis) to defray operating expenses totaling
$2.7 million, of which El Comandante will be responsible for $1.4 million, over
the next 10 years. (copy of agreement was included in Part II - Other
Information filed with the Amended 10Q as of June 30, 2000)
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. The
agreements for El Comandante and V Centenario have expired, refer to note 6 -
legal proceedings. Payments under these contracts are summarized as follows:
<TABLE>
<CAPTION>
PRESIDENTE
EL COMANDANTE V CENTENARIO REMON LOS COMUNEROS
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Expiration date Expired Expired January 2008 (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 $ 330,000 (b) $ -
</TABLE>
(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) Based on a minimum monthly payment of $27,500 for 2000, increased each
subsequent year, up to $36,000 in 2007. For the year 1999 the minimum annual
payment was $300,000. During 2000, management expects to renegotiate for a
fixed fee over the handle instead of a guaranteed minimum payment.
(c) On August 10, 2000, Equus- Comuneros notified Autotote that is was
canceling the existing contract due to Autotote's failure to provide required
equipment and services. Autotote is contesting termination.
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.
3. 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) Housing
Development Associates Management Company ("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. Upon issuance of the Warrants, HDA recorded note
discount of $2,040,000 equal to the fair value of the Warrants. Such note
discount is being amortized using the interest method over the term of the First
Mortgage Notes.
The First Mortgage Notes mature on December 15, 2003 and bear interest at
11.75% payable semiannually. 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.
<PAGE>
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 COMPANY AT (PREMIUM)
TYPE OF TRANSACTION DATE VALUE 30-SEP-2000 DISCOUNT
-------------------------------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Redemption Mar-1997 $ 737,000 $ - $ -
Redemption Sep-1997 2,500,000 - (250,000)
Purchase in open market Dec-1998 7,500,000 7,500,000 1,000,000
Redemption, reduced by amount
of notes held by the Company Jan-1999 2,620,000 (380,000) (262,000) (a)
Purchase in open market May-1999 189,000 189,000 22,680
----------- -----------
$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.
ECCC is required to partially redeem First Mortgage Notes commencing on
December 15, 2000. The stated maturities of the First Mortgage Notes, 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 (766) (90) (676)
$60,997 $ 7,219 $53,778
------------------- -------- --------------
</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,
----------------------------
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.
<PAGE>
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
earnings. In connection with certain approval required from noteholders, 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. For the nine months ended
September 30, 2000 HDA advanced to the Company approximately $1,300,000 against
its allowable future distributions of profits. The Company returned to HDA
$650,000 in August of 2000. Therefore, as of September 30, 2000 the net amount
of distributions which technically were not in conformity with the terms of the
Indenture was $750,000. In October of 2000, the Company returned an additional
amount of $300,000 to El Comandante Management Company, a wholly-owned
subsidiary of HDA. As of November 13, 2000 the net amount of distributions from
HDA to the Company amounted to $450,000. The trustee under the trust indenture
has issued a notice requesting information regarding HDA's plans to cure this
default. The Company intends to cure this default with future distributions to
HDA.
4. BONDS AND NOTES PAYABLE AND CAPITAL LEASES:
The Company's outstanding notes payable consist of the following:
<TABLE>
<CAPTION>
BALANCE AT
MATURITY INTEREST SEPTEMBER 30, DECEMBER 31,
BORROWER DESCRIPTION DATE RATE 2000 1999
----------------- -------------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
HDA/ECMC Note payable (a) 15-Dec-2001 P+1.00% $4,250,000 $5,500,000
HDA Line of credit (b) 15-Dec-2001 P+1.00% 500,000 -
Equus-Panama Term loan (c) 25-Apr-2000 10.75% - 56,364
Equus-Panama Line of credit (d) various 10.75% 268,655 204,955
Equus-Comuneros Term loans (e) various variable 360,970 464,763
------------ ----------
$5,379,625 $6,226,082
------------ ----------
</TABLE>
At September 30, 2000 and December 31, 1999, the prime rate (P) was 9.50%
and 8.50%, respectively.
(a) Considered Refinancing Indebtedness under the terms of the Indenture.
Secured by First Mortgage Notes purchased in the open market (see Note 3).
Payable in quarterly installments commencing on March 31, 2000. The principal
payment due on September 30, 2000 of $625,000 was extended by the bank and
paid on October 13, 2000. All interest payments have been paid on their due
dates.
(b) Revolving line of credit secured by the First Mortgage Notes purchased
in the open market ( See Note 3). 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.
(c) The loan was paid off on April 25, 2000.
(d) 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.
<PAGE>
(e) Secured 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 September 30, 2000 was 7%.
The Company has guaranteed a $250,000 loan to Equus-Panama by the operator
of the restaurant at Presidente Remon. The proceeds of this loan were used 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 TWELVE CAPITAL NOTES BONDS
MONTHS ENDING SEPTEMBER 30, LEASES PAYABLE PAYABLE
--------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
2001 $1,117,191 $2,103,129 $ -
2002 755,119 3,543,001 600,000
2003 585,230 36,915 1,000,000
2004 430,597 27,179 1,200,000
2005 16,846 - 1,200,000
----------- ----------- -----------
2,904,983 5,710,224 4,000,000
Imputed interest (446,111) (330,599) -
----------- ----------- -----------
$2,458,872 $5,379,625 $4,000,000
----------- ----------- -----------
</TABLE>
5. RELATED PARTY TRANSACTIONS:
The following is a summary of amounts accrued for services rendered by or
from certain related parties, namely, EMC, American Community Properties Trust
("ACPT") and Interstate General Company L.P. ("IGC") during the nine and three
months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
NATURE OF SERVICE 2000 1999 2000 1999
--------------------------- -------- -------- ------- -------
<S> <C> <C> <C> <C>
Support agreement $ 24,300 $ 24,300 $ 8,100 $ 8,100
Rent office space 31,500 31,500 10,500 10,500
Directors' fees 82,150 64,250 38,650 20,750
Services of James J. Wilson 101,250 101,250 33,750 33,750
-------- -------- ------- -------
$239,200 $221,300 $91,000 $73,100
======== ======== ======= =======
</TABLE>
On October 19, 2000 subsidiaries of the Company received loans totaling $400,000
from Interstate Business Corporation (IBC). El Comandante Management Company
(ECMC) received $300,000, and Equus Entertainmnet of Panama received $100,000.
The loans carry interest at the corporate prime rate (presently at 9.50%), plus
1%. The interest will accrue on a monthly basis on the principal amount
outstanding. These short term loans are expected to be repaid in less than a
year.
<PAGE>
6. LEGAL PROCEEDINGS:
The Company recently filed suit in Federal District Court in Puerto Rico
for tort action against Autotote Inc., regarding breach of contract with
respect to its wagering system and equipment contract in the Dominican
Republic. All of the Autotote contracts with the Company's racetracks (Puerto
Rico, Dominican Republic, Panama, and Colombia) have an arbitration provision.
The Company has agreed to arbitrate any dispute with respect to lack of
performance and required services. At the present time, the Company cannot
predict the outcome of the arbitration proceedings or the pending tort action
in Federal Court.
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.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Based on the quoted market price, the fair value of the First Mortgage
Notes as of September 30, 200 was approximately $47,920,000 (as compared with
a carrying value of $53,778,095 ). The carrying value of notes payable, capital
leases and notes receivable approximates fair value. These obligations provide
for variable rate interest. The carrying value of accounts receivable and
accounts payable approximates fair value due to their short maturities.
<PAGE>
8. 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 nine and three months ended September 30, 2000 and 1999 (in
thousands).
<TABLE>
<CAPTION>
PUERTO DOMINICAN
2000 - NINE MONTHS RICO * REPUBLIC COLOMBIA PANAMA TOTAL
-------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Commissions on wagering $37,948 $2,445 $ 1,015 $6,497 $47,905
Total revenues 39,717 3,083 1,179 6,908 50,887
Financial expenses 6,687 22 236 463 7,408
Depreciation and amortization 1,935 262 155 466 2,818
Earnings (Loss) before income
taxes and minority interest * (3,501) (687) (1,840) 82 (5,946)
Capital improvements (net) 2,910 100 (886) 223 2,347
Total assets 55,618 1,989 4,523 9,554 71,684
1999 - NINE MONTHS
Commissions on wagering $38,796 $2,895 $ 1,048 $6,855 $49,594
Total revenues 40,617 4,027 1,204 7,087 52,935
Financial expenses 5,646 38 192 426 6,302
Depreciation and amortization 1,818 307 157 423 2,705
Earnings (Loss) before income
taxes and minority interest 1,048 (613) (1,244) (203) (1,012)
Capital improvements (net) 8,081 42 614 205 8,942
Total assets 54,731 1,534 4,326 8,797 69,388
2000 - QUARTER
Commissions on wagering $12,332 $ 828 $ 285 $2,033 $15,478
Total revenues 12,958 1,042 340 2,109 16,449
Financial expenses 2,265 7 76 157 2,505
Depreciation and amortization 609 91 46 157 903
Earnings (Loss) before income
taxes and minority interest * (2,207) (269) (512) (150) (3,138)
Capital improvements (net) 1,621 56 (139) 50 1,588
1999 - QUARTER
Commissions on wagering $12,511 $ 913 $ 386 $2,429 $16,239
Total revenues 13,068 1,349 329 2,513 17,259
Financial expenses 1,913 10 87 145 2,155
Depreciation and amortization 664 142 31 146 983
Earnings (Loss) before income
taxes and minority interest (220) (211) (447) (101) (979)
Capital improvements (net) 3,170 26 (252) (125) 2,819
<FN>
* NON-RECURRING EXPENSE ITEMS (REFER TO EXPLANATION OF EXPENSES ON PAGES 22 AND 23):
</TABLE>
$800,000 in expenses related to termination of financing negotiations; $400,000
to Horseowners under the new contract. The total non-recurring charges to
expense are approximately $1.2 million.
<PAGE>
EEC, based in Puerto Rico, provides management services to its foreign
affiliates in connection with the operation of their racetracks and off-track
betting systems. Fees for these services are included in intersegment revenue.
For the nine months ended September 30, 2000 EEC recognized service fee revenue
of approximately $121,000 attributable to Dominican Republic, and $224,500
attributable to Panama.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's operations consist principally of 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 following discussion compares the results of operations of the Company
for the three months and nine months ended September 30, 2000 with the results
for the three months and nine months ended September 30, 1999.
RESULTS OF OPERATIONS
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER AND NINE
------------------------------------------------------------------------------
MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------
REVENUES
Consolidated Revenues decreased in the third quarter ended September 30,
2000 by $809,000, or (4.7%), as compared to the same quarter in 1999. During
the nine months ended September 30, 2000, revenues decreased $2,048,000, (3.9%),
from the same period in 1999. This decrease was primarily attributable to
temporary interruptions in simulcast of live races from Puerto Rico to Dominican
Republic and agency operations during the first quarter.
COMMISSIONS ON WAGERING
Commissions on wagering decreased by $761,000, (4.7%), to $15,478,000 for
the third quarter ended September 30, 2000 as compared to $16,239,000 in the
third quarter of 1999. During the nine months ended September 30, 2000,
commissions on wagering decreased $1,689,000, (3.4%), to $47,906,000 from
$49,595,000 in the same period for 1999. The decrease in commissions was
attributable to the following operations: El Comandante ($848,000), Galapagos
($450,000), Panama ($358,000) and Colombia ($33,000).
In January 2000, the Puerto Rico horseowners unilaterally decided to cancel
the approval of simulcast of live races from Puerto Rico to the Dominican
Republic in order to put pressure on recent contract negotiations. It was not
until the middle of February that this action was reversed by the Racing Board.
This suspension had an adverse economic impact on commissions on wagering for
the Dominican Republic and Puerto Rico. This resulted in a reduction in
commissions on wagering of approximately $300,000 in the first quarter of the
year. However, in July of 2000 the Puerto Rico Horseowners' Association reached
an agreement with El Comandante Management Company and a new 10-year contract
was signed by both parties.
<PAGE>
PUERTO RICO. Commissions on wagering at El Comandante decreased $179,000,
(1.4%), to $12,332,000 in the third quarter of 2000 as compared to $12,511,000
in the third quarter of 1999. During the nine months ended September 30, 2000,
commissions on wagering decreased $848,000, (2.2%), to $37,948,000 as compared
to $38,796,000 for the nine months ended September 30, 1999. The decrease in
commissions was attributable to interruptions in simulcast of races to the
Dominican Republic and agency operations, as well as to regulatory delays in the
new simulcast racing program.
PANAMA. Commissions on wagering at Presidente Remon decreased by $396,000
(16.3%) to $2,033,000 in the third quarter of 2000 as compared to $2,429,000 in
the third quarter of 1999. During the nine months ended September 30, 2000,
commissions on wagering decreased $358,000, (5.2%), to $6,497,000 as compared to
$6,855,000 for the nine months ended September 30, 1999. The decrease was
primarily attributable to lower levels of betting due to recessionary trends in
the general economy coupled with delays in the installations of new antennas.
DOMINICAN REPUBLIC. Commissions on wagering at V Centenario ("Galapagos")
decreased by $85,000 (9.3%) to $828,000 in the third quarter of 2000 as
compared to $913,000 in the third quarter of 1999. During the nine months ended
September 30, 2000, commissions on wagering decreased $450,000, (15.5%), to
$2,445,000 as compared to $2,895,000 for the nine months ended September 30,
1999. This decrease was primarily attributable to a temporary interruption of
the simulcast races from Puerto Rico and its impact on the racing program in the
Dominican Republic, as well as lower number of agencies in operation due to
transmission and telecommunications interruptions.
NET REVENUES FROM LOTTERY SERVICES
Net revenues from lottery services by Galapagos in the Dominican Republic
during the three and the nine months ended September 30, 2000 decreased by
$187,000 and $281,000, respectively, as compared to the same periods in 1999.
The decrease in revenues was 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.
On June 30, 2000 Autotote breached Galapagos' service agreement to the
Lottery Operations [Dominican International Electronic Lottery, Inc. (LEIDSA)]
by providing directly the same services and refusing to pay to Galapagos its
service fees under the service contract. During the months of July, August and
September 2000, Galapagos did not receive any payments for the service fees
under its service agreement. In late August 2000, the Company started the
process of preparing for legal action for breach of contract to recover its
service fees under the service agreement. The Company has recently filed suit
in Federal Court in Puerto Rico against Autotote for tort action. The Company is
also pursuing arbitration to settle the dispute under breach of contract (refer
to Legal Proceedings Note 6 above).
OTHER REVENUES
Other revenues during the three and the nine months ended September 30,
2000 increased by $138,000, and decreased by $259,000, respectively, as
compared to the same period in 1999.
GAIN ON SALE OF ASSETS
.
The gain of $179,500 is attributable to operations in Panama from the sale
of television license for UHF channel no longer needed for agency operations.
<PAGE>
EXPENSES
For the reasons set forth below, total expenses during the three and the
nine months ended September 30, 2000 increased by $1,350,000 and $2,885,000,
respectively, as compared to the same periods in 1999. Some of these expenses
were non-recurring in nature and are reported below under the appropriate
categories such as payments to horseowners, other expenses, and financial
expenses.
PAYMENTS TO HORSEOWNERS
Payments of purses to horseowners during the three and the nine months
ended September 30, 2000 decreased by $416,000 (5.2%) and $1,210,000 (5.0%),
respectively, as compared to the same period in 1999.
El Comandante contract with horseowners expired in April 1998. However,
the Puerto Rico Racing Board extended the contract as an interim measure until
the Company and the horseowners reached a new 10-year contract signed in July
of 2000 (see Footnote 2, page 13 for summary of provisions under this new
contract).
This new contract with horseowners provides for a non-recurring one-time
cash payment of approximately $1 million to reimburse them for Autotote fees
paid by the horseowners during the period 1998 through 1999. Approximately
$600,000 had been reserved in 1999. Therefore, the difference of $400,000 of
this non-recurring payment was charged to operating expenses in July of 2000
and reflected during the nine months period ended September 30, 2000 in
operating expenses (see table below under Other Expenses).
OTHER EXPENSES
Other expenses during the three and the nine months ended September 30,
2000 increased by $1,495,000 and $2,876,000, respectively, as compared to the
same period in 1999. This increase is primarily attributable to new operations,
including additional expenses relating to the SSI and the VSAT system,
satellite related expenses which have not yet been recovered in revenues (see
tables below).
<PAGE>
<TABLE>
<CAPTION>
OTHER EXPENSES BY COUNTRY
INCREASE (DECREASE) IN THIRD QUARTER ENDED SEPTEMBER 30, 2000 WHEN COMPARED WITH 1999
Salaries, wages Operating General and Marketing , TV Net (decrease)
Country and benefits expenses * administrative and satellite increase
----------------- ----------------- ------------ ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Puerto Rico:
El Comandante $ 55,000 $ 340,000 $ 152,000 $ 100,000 $ 647,000
SSI and VSAT - 500,000 - 500,000 1,000,000
----------------- ------------ ---------------- ---------------- ---------------
Total Puerto Rico 55,000 840,000 152,000 600,000 1,647,000
Dominican Rep. (118,000) (108,000) 132,000 (50,000) (144,000)
Panama 2,000 27,000 3,000 19,000 51,000
Colombia (16,000) 81,000 (159,000) 36,000 (58,000)
----------------- ------------ ---------------- ---------------- ---------------
$ (77,000) $ 840,000 $ 128,000 $ 605,000 $ 1,496,000
================= ============ ================ ================ ===============
</TABLE>
<TABLE>
<CAPTION>
OTHER EXPENSES BY COUNTRY
INCREASE (DECREASE) FOR NINE MONTHS ENDED SEPTEMBER 30, 2000 WHEN COMPARED WITH 1999
Salaries, wages Operating General and Marketing , TV Net (decrease)
Country and benefits expenses * administrative and satellite increase
----------------- ----------------- ------------ ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Puerto Rico:
El Comandante $ (319,000) $ 512,000 $ 448,000 $ - $ 641,000
SSI and VSAT - 1,300,000 - 939,000 2,239,000
----------------- ------------ ---------------- ---------------- ---------------
Total Puerto Rico (319,000) 1,812,000 448,000 939,000 2,880,000
Dominican Rep. (298,000) (200,000) 140,000 (189,000) (547,000)
Panama 62,000 266,000 (31,000) 25,000 322,000
Colombia 12,000 144,000 (55,000) 119,000 220,000
----------------- ----------------- ------------ ---------------- ---------------- ---------------
$ (543,000) $ 2,022,000 $ 502,000 $ 894,000 $ 2,875,000
================= ============ ================ ================ ===============
<FN>
* El Comandante operating expenses also include a one-time, non-recurring charge
of approximately $400,000 for expenses related to horseowners' contract (see
Payments to Horseowners on page 22).
</TABLE>
SSI AND VSAT EXPENSES
The increase in operating expenses and marketing/satellite expenses for
the three and nine months ended September 30, 2000, as compared to the same
periods in 1999, primarily relate to the additional expenses for the planning,
engineering and startup expenses on the wagering system (VSAT) and leased
satellite time. Additionally, the Company has not been able to recover these
additional operating expenses since the new equipment is not yet in service and
the fixed monthly lease cost for the satellite time has not been utilized and
recovered in revenues.
<PAGE>
FINANCIAL EXPENSES
Financial expenses during the three and the nine months ended September 30,
2000 increased by $350,000 (16.2%) and $1,105,000 (17.5%), respectively, as
compared to the same periods in 1999. This increase is primarily attributable to
use of line of credit facilities for development of agency operations, including
additional agencies and improvements in simulcast and transmission of races, and
a non-recurring charge to expense due to recent negotiations with a financial
institution.
The Company was negotiating with a financial institution during the past
nine months for the financing of the VSAT equipment and the First Mortgage
Notes. Recently, the Board of Directors decided to terminate negotiations with
the financial institution due to severe restrictions on certain provisions and
financial covenants. As a result of these negotiations, the Company incurred
approximately $800,000 in non-recurring expenses relating to due diligence
reviews, as well as legal and consulting fees, which were charged to expense
during the quarter and nine months ended September 30, 2000.
DEPRECIATION AND AMORTIZATION
Depreciation and Amortization during the three and the nine months ended
September 30, 2000 decreased by $79,000 (8.0%) and increased by $114,000 (4.2%),
respectively, as compared to the same period in 1999 primarily due to additions
in capital improvements to the facilities at El Comandante during 1999.
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 require 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 and
Equus-Comuneros. Since the accumulated losses of Galapagos allocable to
minority partners had exceeded their investment, for the nine months ended
September 30, 2000 and 1999, the Company did not recognize minority interest in
losses of Galapagos of $309,058 and $275,758, 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 $1,396,123.
<PAGE>
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 for the three and
nine months ended September 30, 2000.
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 $1,291,000 DURING the third quarter of 2000. The
Company has historically met its liquidity requirements principally from cash
flow generated by (i) the operations of El Comandante Race Track in Puerto Rico
and (ii) short-term loans and capital leases for acquisition of new equipment.
During the three and nine months ended September 30, 2000 the principal
uses of cash of the Company and its consolidated subsidiaries for its financing
and investing activities were as follows:
(i) Capital improvements and acquisition of equipment for SSI and El
Comandante for approximately $2.8 million, for the Dominican Republic $100,000,
and for Panama $223,000.
(ii) Payments on capital leases for equipment used in El Comandante
operations.
(iii) The Company continues to invest in Colombia through ABN, a
wholly-owned subsidiary of HDA. For the nine months ended September 30, 2000
the Company has invested $1.9 million.
In addition to cash available to the Company at the beginning of the year and
cash flows from operations during 2000, the Company obtained additional funds
for its financing and investing transactions (as described above) principally
from the following sources:
(i) $500,000 in advances taken under a line of credit.
(ii) 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.
<PAGE>
For the remainder of year 2000 projected uses of cash for Company's activities
are:
(i) Interest Payment of $3.6 million on the First Mortgage Notes due on
December 14, 2000
(ii) Principal payments amounting to $1,250,000 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 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.
(v) Redemption of First Mortgage Notes of $563,000.
COMPANY'S ABILITY TO MAKE INTEREST PAYMENT ON FIRST MORTGAGE NOTES
The ability of the Company to make the interest payment of $3.6 million on
the First Mortgage Notes on December 14, 2000 is dependent on obtaining the
required cash funds through a private placement offering and bank financing.
The Company will not be able to generate all of the funds for interest payment
on the First Mortgage Notes from its operations. Therefore, a private placement
offering and bank financing for additional capital is necessary, as described
below.
PRIVATE PLACEMENT OFFERING FOR EQUUS GAMING COMPANY L.P.
The Board of Directors of the Company approved on November 1, 2000 a
private placement offering to raise a minimum of $4 million and a maximum of $6
million. This would be a private offering solely to "accredited investors" as
defined in Regulation D of the Securities Act. A similar private offering was
made in December of 1998. The Wilson family has indicated an interest in
purchasing units. Pursuant to the Board of Directors' Resolution, the Company
will make the same offer available to any interested "accredited investors". In
order to make this private placement offering, the Board of Directors approved a
resolution on November 1, 2000 to increase the authorized units from 10,383,617
to 20,000,000.
El Comandante Racetrack ( composed of El Comandante Management Company, El
Comandante Capital Corporation, and Housing Development Associates) has set up
SSI and ABN as wholly-owned subsidiaries and has so far advanced approximately
$4.5 million to these subsidiaries to cover their operating expenses. El
Comandante needs those funds for the interest payment of $3.6 million and for
working capital needs during the next quarter.
Therefore, the Board of Directors approved a resolution for a private placement
offering for Equus Gaming so that SSI and ABN could be transferred as
subsidiaries under Equus Gaming in consideration for the $4.5 million advanced
by El Comandante Racetrack, so that 100% of all costs and expenses made by El
Comandante Racetrack on behalf of SSI and ABN would be recovered pursuant to
this transfer. In effect, new capital at Equus Gaming from the private
placement offering will be the used to fund the capital used by El Comandante
Racetrack for SSI and ABN, thus providing the necessary cash funds and
liquidity to make the interest payment on the First Mortgage Notes and for other
working capital needs.
Any remaining proceeds from the private placement offering would be used
to finance development of agencies and expansion in Colombia, Uruguay and St.
Thomas, US Virgins Islands.
<PAGE>
BANK FINANCING FOR EQUUS GAMING, SSI AND ABN, AND EL COMANDANTE
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 a financial institution. The Company is currently seeking a
$14.2 million credit facility with a financial institution so that the Company
can fund: (1) $9.2 million for the purchase of video and data communications
equipment and systems (VSAT) for the agencies, (2) $3 million for the
development and operations of the off-track betting for ABN in Colombia in
order to meet the expected level of increased wagering from this operation, and
(3) a line of credit for El Comandante Racetrack so that it can be used by the
horseowners to discount their promissory notes, collaterized by their purses,
for the purchase of new horses.
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 credit facilities with a
financial institution to 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 television air time 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 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 (HUB)
based in Puerto Rico. Satellite Services International, Inc. (SSI), a
wholly-owned subsidiary of HDA 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.
As a result of these capital investments in high-technology and extensive
high-tech distribution network, improved cash flow from operations, and market
expansion efforts, the Company plans to 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 secured
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. Three principal payments of $625,000 on
this term loan have been made as of the date of this 10Q filing. The remaining
maturity dates of this term loan are as follows (in thousands):
YEAR ENDING
DECEMBER 31, AMOUNT
-------------- ---------
2000 $ 625
2001 3,000
---------
$3,625
=========
<PAGE>
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.
For the nine months ended September 30, 2000, HDA advanced to Equus
approximately $1,300,000 against its allowable future distributions of profits.
The Company returned to HDA $650,000 in August of 2000. Therefore, as of
September 30, 2000 the net amount of distribution, which technically were not in
conformity with the terms of the Indenture totaled $750,000. In October of 2000,
the Company returned an additional distribution amount of $300,000 to HDA. As
of November 13, 2000 the net amount of distributions from HDA to the Company
amounted to $450,000. The Company plans to remedy this situation prior to year
end.
NEW HORSEOWNERS' CONTRACT IN PUERTO RICO. The new contract is effective
July 1, 2000 and expires on December 31, 2010. El Comandante and the
Horseowners settled their dispute regarding the Autotote fees allocated and
charged to Horseowners from April 1998 to December 1999. El Comandante paid the
Horseowners $1,037,403 on July 31, 2000 to settle the allocation of Autotote
fees to Horseowners. In return, the Horseowners agreed to increase the racing
program by adding three imported races per live racing day, increasing the
number of races per day from 7 to 8, and guaranteeing a minimum of at least 8
horses in each race. Additionally, the Horseowners agreed to complement the
live racing program in Puerto Rico with simulcast of races from other racetracks
to Puerto Rico. El Comandante Race Track will receive three simulcast races per
racing day from tracks located in the United States and other jurisdictions.
NEW INVESTMENTS IN URUGUAY AND U. S. VIRGIN ISLANDS.
URUGUAY- The Company has been awarded by the Government of Uruguay the
exclusive rights to operate the racetrack and off track betting agency system
Uruguay. The Company is currently negotiating a contract with the government
which is expected to be finalized prior to December 31, 2000. The Company
expects to receive permission to run live races at least 3 days per week during
the first three years, so as to reach 5 days of live racing a week during the
fourth year of the contract. The live races will be complemented by simulcast
of races from other foreign jurisdictions. The estimated capital investment to
renovate the racetrack and develop the agency system is expected to be $12
million. The Company intends to bring in investors and form strategic alliance
with a slot machine company to cover this capital investment. There is no firm
commitment by the Company to undertake this venture until a definitive agreement
is executed with the government of Uruguay.
<PAGE>
U.S. VIRGIN ISLANDS- The Company was recently awarded the rights to
operate the race track in St. Thomas and the off-track betting agency systems in
St. Thomas and St. John. The Company is currently negotiating a contract with
the Racing Board for the exclusive rights to simulcast unlimited live races
from the U.S. to the Virgin Islands. The total investment in the Virgin
Islands is expected to be approximately $500,000.
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
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-Q 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.
PART II - OTHER INFORMATION
ITEMS 2- 6 NONE
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
/S/ Equus Gaming Company L.P.
---------------------------------
(Registrant)
By: Equus Management Company
Managing General Partner
November 14, 2000 /S/ Thomas Wilson
----------------- ----------------------------------
Co-Chairman, President,
Chief Executive Officer and Director
/S/ Hernan G. Welch
-----------------------------------
November 14, 2000 Executive Vice President and
----------------- Chief Financial Officer
<PAGE>
