-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CHmUnpS2J603xNdykHeKr+9lPbaIGicNtZXy/KCEEqM+WbeAO8ZjB/wuTfN33arg KLVVCXCIggz3ydqeA6bmlQ== 0000911082-99-000001.txt : 19990422 0000911082-99-000001.hdr.sgml : 19990422 ACCESSION NUMBER: 0000911082-99-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAM HOUSTON RACE PARK LTD CENTRAL INDEX KEY: 0000911082 STANDARD INDUSTRIAL CLASSIFICATION: 7948 IRS NUMBER: 760313877 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-67738 FILM NUMBER: 99579840 BUSINESS ADDRESS: STREET 1: ONE SAM HOUSTON PLACE STREET 2: 7575 NORTH SAM HOUSTON PARKWAY CITY: HOUSTON STATE: TX ZIP: 77064 BUSINESS PHONE: 7138078700 MAIL ADDRESS: STREET 1: ONE SAM HOUSTON PLACE STREET 2: 7575 NORTH SAM HOUSTON PARKWAY CITY: HOUSTON STATE: TX ZIP: 77064 10-K 1 UNITED STATES 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 FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 33-67738 SAM HOUSTON RACE PARK, LTD. (Exact name of Registrant as Specified in its Charter) TEXAS Offices) (State or other jurisdiction of incorporation or organization) 76-0313877 (I.R.S. Employer ONE SAM HOUSTON PLACE Identification Number) 7575 NORTH SAM HOUSTON PARKWAY WEST 77064 HOUSTON, TEXAS (Zip Code) (Address of Principal Executive Registrant s telephone number, including area code: (281) 807-8700 - - --------------- Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: None. - - --------------- 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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / - - --------------- TABLE OF CONTENTS PART I Item 1. Business General3 Industry Overview3 Racing Schedules4 Sources of Revenue 4 Purses and Horsemen s Agreements6 Marketing and Business Development7 Competition8 Seasonality of Racing 10 Employees10 Regulation and Taxation10 Item 2. Properties12 Item 3. Legal Proceedings14 Item 4. Submission of Matter to a Vote of Security Holders14 PART II Item 5. Stockholder Matters15 Item 6. Selected Financial Data16 Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations17 Item 7a. Quantitative and Qualitative Disclosures About Market Risk20 Item 8. Financial Statements and Supplementary Data Report of Independent Public Accountants21 Consolidated Balance Sheets22 Consolidated Statements of Operations23 Consolidated Statements of Partners Capital (Deficit)24 Consolidated Statements of Cash Flows25 Notes to Consolidated Financial Statements26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure35 PART III Item 10. Directors and Executive Officers36 Item 11. Executive Compensation39 Item 12. Security Ownership of Certain Beneficial Owners and Management41 Item 13. Certain Relationships and Related Transactions41 PART IV Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K42 PART I ITEM 1. BUSINESS GENERAL Sam Houston Race Park, Ltd., a Texas limited partnership (the"PARTNERSHIP"), owns and operates Sam Houston Race Park, a Class 1 horse racing facility located within the greater Houston metropolitan area (the "RACE PARK"). The Race Park offers pari-mutuel wagering on live thoroughbred and quarter horse racing and on horse and greyhound races simulcast from other racetracks. The managing general partner of the Partnership is SHRP General Partner, Inc. (the "MANAGING GENERAL PARTNER"), a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). The Partnership is also comprised of an additional general partner, SHRP Equity, Inc. (the "ADDITIONAL GENERAL PARTNER") and limited partner interests. As of March 1, 1999, various wholly owned subsidiaries of MAXXAM held, directly or indirectly, an aggregate of 98.3% of the equity in the Partnership and 97.5% of the Partnership s 11% Senior Secured Extendible Notes (the "EXTENDIBLE NOTES"). This Annual Report on Form 10-K contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in the sections to this Item entitled "Sources of Revenue-Simulcasting," "-Marketing and Business Development," "-Competition" and "-Regulation and Taxation-Regulations on Simulcasting" and "-Taxation." These statements also appear in a number of other places (see Item 3. "Legal Proceedings," Item 5. "Stockholder Matters" and Item 7. "Management s Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations," "-Liquidity and Capital Resources" and "-Year 2000"). Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the effectiveness of management s strategies and decisions, general economic and business conditions, new or modified statutory or regulatory requirements, and changing prices and market conditions. This report identifies other factors that could cause such differences. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. INDUSTRY OVERVIEW Pari-mutuel wagering is pooled wagering, under which bettors wager against each other, not the racetrack. Wagering pools are regular wagering pools, multiple two wagering pools and multiple three or more wagering pools. Examples of regular wagers include win (a wager on a specific horse to finish first), place (a wager on a specific horse to finish first or second) and show (a wager on a specific horse to finish first, second or third). Examples of multiple two wagers include daily double (a wager in which the bettor selects the horses that will win two separate races), quinella (a wager in which the bettor selects the horses that will finish first and second, in any order) and exacta (a wager in which the bettor selects the horses that will finish first and second, in the correct order). Examples of multiple three or more wagers include trifecta (a wager in which the bettor selects the horses that will finish first, second and third, in order), superfecta (a wager in which the bettor selects the horses that will finish first, second, third and fourth, in order), and the pick three (a wager in which the bettor selects the winner of three consecutive races). A computerized totalisator system is used to total the amounts wagered and calculate the payouts for each pool based on the amounts wagered on various horses and on the possible outcomes. Pari-mutuel wagering is conducted in a majority of states in the United States and all provinces in Canada. The industry includes racetracks which conduct thoroughbred, quarter horse, harness and greyhound racing and off-track wagering facilities which receive simulcast broadcasts from various racetracks but do not conduct live racing. Off-track wagering is regulated by the individual states in the United States and is not legal in Texas and certain other states. Simulcasting is the process by which live races held at one racing facility are broadcast simultaneously to other locations at which additional wagers may be placed on the race being broadcast. Guest simulcasting is the process whereby the Race Park receives broadcasts from other racetracks. Host simulcasting is the process whereby other racetracks receive broadcasts from the Race Park. Simulcasting is regulated by individual states in the United States and is authorized in Texas but is not currently authorized in all states. For every dollar wagered at the Race Park, a percentage, as defined by state law, is returned to the winning bettors, and the remaining percentage, referred to as the "takeout," is collected by the racetrack. As discussed in more detail below, a percentage of the takeout is reserved for purses to be paid to the owners of future winning horses, as fees and taxes to the state of Texas and as contributions to organizations whose purpose is the furtherance of horse breeding in Texas. The takeout remaining after these deductions is retained by the racetrack and constitutes the racetrack s primary source of revenue. The Partnership s Consolidated Financial Statements and Notes thereto appearing in Item 8 contain additional information regarding the Partnership s revenues and costs of pari-mutuel operations. RACING SCHEDULES The Race Park currently conducts live thoroughbred or quarter horse racing four days a week during meets while simulcasting seven days a week. The Texas Racing Commission (the "RACING COMMISSION") must approve the number of live race days that may be offered at the Race Park each year. The number and scheduling of race days at the Race Park will depend upon a number of factors, including scheduling of live race days at other Texas Class 1 horse racing facilities. Under the Rules of Racing for the state of Texas (the "RULES OF RACING"), Class 1 racetracks may not have overlapping live race schedules for the same breed of horse with other Class 1 racetracks unless each track with overlapping schedules consents. The Racing Commission has licensed two other Class 1 horse racetracks: Retama Park near San Antonio and Lone Star Park at Grand Prairie near Dallas. The Race Park conducted 129 days of live racing during 1998, consisting of 86 days of thoroughbred racing and 43 days of quarter horse racing. For the 1999 calendar year, the Race Park has obtained approval to conduct live racing on 134 days consisting of (i) 57 days of thoroughbred racing beginning on January 1, 1999 and concluding on April 11, 1999, (ii) 44 days of quarter horse racing beginning on July 2, 1999 and concluding on September 12, 1999 and (iii) 33 days of thoroughbred racing beginning on October 28, 1999 and concluding on December 30, 1999. The Race Park has not yet determined what race dates it will request in 2000 and years thereafter. The Race Park also expects to continue offering simulcast wagering 364 days a year. SOURCES OF REVENUE Wagering on Live Races The Texas Racing Act (the "RACING ACT") provides for the takeout percentage on live races depending on the type of wager. The total takeouts are approximately 18%, 21% and 25% from regular wagering pools, multiple two wagering pools and multiple three or more wagering pools, respectively. The Racing Act also provides that a minimum of 7% of all live regular wagering pools and live multiple two wagering pools and a minimum of 8.5% of all live multiple three wagering pools be reserved for purses to be paid to the owners of future winning horses. Furthermore, through December 31, 1998, the state of Texas received 1% of the first $100 million wagered on live racing at each racetrack each year (plus higher percentages for wagering over $100 million). Subsequent to December 31, 1998, this tax was eliminated on the first $100 million wagered. Finally, 1% of live multiple wagering pools is required to be set aside for Texas horse breeding programs. Through December 31, 1998, the Race Park retained, on the first $100 million wagered on live horse racing, 10% of regular wagers, 12% of wagers involving two horses and 14.5% of wagers involving three or more horses after giving effect to the foregoing payments. The betting patterns experienced by the Race Park during its operating history have averaged approximately 41%, 33% and 26% of dollars wagered in the regular, multiple two and multiple three or more wagering pools, respectively. Simulcasting The Race Park currently offers guest simulcast wagering on horse races seven days a week throughout the year and intends to continue doing so. As of March 1, 1999, the Race Park had agreements with approximately 50 racetracks pursuant to which it, at various times, receives simulcast signals. The maximum takeout percentages on guest simulcast racing broadcasts from Texas racetracks are the same as those for live racing. The takeout percentages on guest simulcast racing broadcasts from out-of-state tracks are established by each state but are generally within a few percentage points of the takeout percentages in Texas. The Race Park sets aside amounts from each wagering pool for purses to be paid to the owners of future winning horses in varying amounts. See "Purses and Horsemen s Agreements" below. Furthermore, as of September 1, 1997, the Racing Act required the allocation of 1.25% of all simulcast wagering pools for the state of Texas, 0.25% for the state of Texas for funds previously appropriated to administer and enforce the Racing Act, and 1% of all simulcast multiple wagering pools for Texas horse breeding programs. As of January 1, 1999, the allocation to the state of Texas was reduced by .25% to 1.0%. The Race Park also pays broadcasting racetracks a fee which averages approximately 3% of the amount wagered by its patrons on the broadcast races. After giving effect to the foregoing, the Race Park receives net commissions normally ranging from 6% to 10% on guest simulcast betting at the Race Park. The Race Park also began offering guest simulcast wagering on greyhound races broadcast from a greyhound track in Corpus Christi during March 1998 under cross-breed simulcasting provisions contained in the amendments to the Racing Act enacted during the 1997 legislative session (the "1997 AMENDMENTS"). In June, 1998, the Race Park began offering wagering on races broadcast from certain out-of-state greyhound tracks and in July, 1998, the Race Park began offering wagering on races broadcast from the greyhound track located in the greater Houston metropolitan area ("GULF GREYHOUND"), which generated the highest wagering handle among the greyhound tracks being offered. During December 1998, Gulf Greyhound notified the Race Park that it would no longer send its simulcast signal to the Race Park. Accordingly, the Race Park no longer offers wagering on races broadcast from Gulf Greyhound, but intends to continue to offer wagering on broadcasts from Corpus Christi and certain out-of-state greyhound tracks. Wagering on greyhound signals accounted for 14.5% of the guest handle and 12.3% of total net- pari mutuel commissions for 1998. The maximum takeout percentages on cross-breed simulcast racing broadcast from Texas racetracks and out-of-state racetracks are approximately equal to those percentages used for horse racing described above. In accordance with the 1997 Amendments, 5.5% of each wagering pool is set aside for greyhound purses. In addition, the 1997 Amendments require the allocation of 1.5% of all simulcast wagering pools for the state of Texas, 0.25% for the state of Texas for funds previously appropriated to administer and enforce the Racing Act and 1% of all simulcast multiple wagering pools for Texas greyhound breeding programs. As of January 1, 1999, the 1.5% allocation for the state of Texas was reduced to 1.25%. Also, the Race Park receives 1.5% of wagering on out-of-state horse racing placed at Gulf Greyhound. The Race Park is required to pay 1.5% of amounts wagered on out-of-state greyhound tracks to Gulf Greyhound. Broadcasting race tracks are paid a fee by the Race Park that normally ranges from 2.5% to 3.0% of amounts wagered. After giving effect to the foregoing, the Race Park expects to receive net commissions normally ranging from 10% to 13% on cross-breed simulcast wagering at the Race Park. The Race Park receives commissions from host simulcasting averaging approximately 3% of the amount wagered at the receiving track on the Race Park s races. A portion of this fee is reserved for purses to be paid to the owners of future winning horses, as described in "Purses and Horsemen s Agreements" below. The Race Park also receives 4.5% of the amount wagered at greyhound tracks located in Texas on races conducted at the Race Park which is to be reserved for purses. Through October 1, 1999, the Race Park also receives 80% of the purse funds generated from interstate wagering on horse racing at greyhound tracks located in Texas under a ruling by the Texas Racing Commission. As of March 1, 1999, the Race Park had agreements with approximately 230 racetracks and off-track wagering outlets pursuant to which the Race Park, at various times, broadcasts its races. Simulcasting is an important component of the Race Park s revenues. Guest simulcasting and host simulcasting accounted for approximately 64% and 20%, 63% and 20%, and 63% and 13%, respectively, of the Race Park s net commission revenues during the years ended December 31, 1998, 1997 and 1996, respectively. Food and Beverage Sales Food and beverage sales are another major source of revenue and include catering, restaurant and concession sales. A broad selection of food is available to the patrons of the Race Park, from table dining at the clubhouse level to food court fare at various concession stands throughout the Race Park. Other Revenues Other major sources of revenue include admission, program and parking fees as well as sponsorship agreements and sales of finish line boxes, tables and luxury suites. An admission fee is charged for entry to the Race Park. Preferred and valet parking are available for a fee during live racing. The Race Park also sells programs for live and simulcast racing, various editions of The Daily Racing Form and "tip" sheets. The clubhouse level contains finish line boxes, finish line reserved tables and reserved seating available for sale on a daily or seasonal basis. Luxury suites are also available for rental on a long-term or daily basis. The clubhouse level also contains the Jockey Club which has a capacity of approximately 300 people. Individual and corporate memberships to the Jockey Club are available for sale. PURSES AND HORSEMEN S AGREEMENTS Under the Rules of Racing, the Racing Commission has recognized the Texas Horsemen s Partnership, L.L.P. (the "THP") as the official horsemen s organization for the state of Texas. The recognized horsemen s organization is responsible for negotiating with the Partnership on behalf of all horsemen at the Race Park regarding, among other things, the distribution of purses and guest and host simulcasting agreements. The THP is comprised of two partners, the Texas Thoroughbred HBPA, Inc. and the Texas Horsemen s Benevolent and Protective Association which represents owners of quarter horses. The Partnership has entered into agreements with each partner (the "THP AGREEMENTS"), which expire on December 31, 1999. Under the terms of the contracts, during 1997, the Race Park reserved 30% of the takeout from guest simulcasting and 30% of the commissions received from host simulcasting for purses to be paid to the owners of future winning horses. The percentage reserved for purses increased to 31% during 1998. In accordance with the 1997 Amendments, the amount reserved for purses was mandated by law as of January 1, 1999. The amounts specified in the amended Racing Act approximate 7% of all regular and multiple two horse wagering pools and 8.5% of all multiple three horse wagering pools. The Partnership estimates that net pari-mutuel commissions will decrease by approximately $1.0 million as a result of this provision of the 1997 Amendments. The percentage reserved for purses from host simulcasting increased to 32.5% of commissions received in 1999 and will increase to 34.5% in 2000 and 37.0% thereafter, in accordance with the THP Agreements and Texas Racing Commission rules. Both contracts specify that all guest and host simulcasting agreements are approved by the horsemen. The horsemen have the right to withdraw this approval only for matters involving the integrity or best interests of racing. In accordance with industry practice, the Race Park establishes purses nearly one month in advance of a race, based on the expected wagering pool. These established purses are published in a condition book which generally covers fifteen days of racing. Horsemen then enter their horses in the proposed races based on the conditions of the race, including the purse offered. At any given time, purses generated from wagering may be higher or lower than the amounts included in the projections used to complete the condition book. Therefore, during a live race meet, purses may be over or under paid. Under the terms of the THP Agreements, the Partnership has the ability to manage the level of purses paid so that purses paid are approximately equal to purses generated from wagering within a certain period of time; however, there can be no assurance that any adjustments necessary will be sufficient. When purses paid exceed purses generated within a certain period of time, the excess payments become an additional expense to be paid by the Partnership. During 1994, the Partnership paid purses in excess of purses generated aggregating approximately $4.0 million. Under various amendments to the agreement in effect during 1994, the Partnership has recovered $1.0 million of these purse overpayments. The agreement between the Partnership and the Texas Thoroughbred HBPA, Inc. provides for the recovery of purse overpayments of $0.7 million and $0.6 million during the years ended December 31, 1999 and 2000, respectively. The Partnership will record any future recoveries only as they are earned. During the years ended December 31, 1998, 1997 and 1996, the Race Park has paid purses of approximately $11.1 million, $9.4 million and $9.1 million, respectively. The average daily thoroughbred purse paid increased from $65,000 to $92,000 during the three-year period. The average daily quarter horse purse paid increased from $37,000 to $40,000 during the three-year period. MARKETING AND BUSINESS DEVELOPMENT Management of the Race Park believes that the majority of the patrons for the Race Park reside within a 20 mile radius of the Race Park, which includes the greater Houston metropolitan area, and that a secondary market of occasional patrons can be developed outside the 20 mile radius but within a 50 mile radius of the Race Park. Management recognizes the challenge of introducing pari-mutuel wagering to customers in the greater Houston metropolitan area and has established the following marketing goals to increase attendance and the wagering handle: (i) promote the excitement of horse racing and wagering, (ii) support and expand the existing group of core bettors, (iii) attract new fans currently unfamiliar with horse racing, and (iv) pursue a program of fan education to teach these new fans how to wager. Management uses a number of marketing strategies to have potential customers consider the Race Park as an entertainment alternative. These strategies are designed to bring people to the Race Park for specific promotional events with a view of turning infrequent visitors into occasional visitors and more frequent visitors into regular visitors. Other marketing programs have been developed to appeal to simulcasting customers and the more serious horseplayers. Management utilizes a variety of marketing techniques in support of these objectives including: (i) maintaining a public relations program to distribute news, information, features, handicapping tips and results in local and national broadcast and print media, (ii) maintaining an advertising presence in the market, primarily through newspaper, television and radio campaigns, (iii) coordinating promotional efforts in cooperation with sponsors, suppliers and vendors, (iv) developing a strong group sales program, to appeal to large corporate, civic and affinity groups, (v) holding specialized promotions and on-going programs that are designed to attract unique demographic and/or cultural groups, (vi) providing support for Houston area community events, (vii) focusing attention to customer service and refinements to the Race Park s facilities, (viii) holding handicapping seminars and tournaments both to educate fans and promote the excitement of wagering, and (ix) producing direct mail both to introduce the track to new groups and communicate with existing customers. Racetracks in certain states have begun offering alternative forms of gaming, such as slot machines and video lottery machines, in order to increase both revenues and purses, thereby strengthening both the operations and the racing programs. In 1997, the Race Park invested significant effort and monies lobbying the Texas legislature to authorize additional forms of gaming at racetracks in Texas; however these efforts were not successful. Management intends to continue to invest in efforts to change existing legislation for the benefit of pari-mutuel license holders in the current legislative session, which began in early 1999. There can be no assurance that these efforts will result in legislative changes. Approximately 90 of the Race Park s 300 acres of land remain undeveloped. Management continues to research and study the economic viability of proposals for the commercial development of this property. Future development plans could include the construction and operation of businesses such as restaurants, night clubs, retail shops, hotels or other types of entertainment facilities. During March 1999, the Race Park formed SHRP Valley LLC, a wholly-owned limited liability company, which then entered into a six year agreement with a company to lease a greyhound track located in Harlingen, Texas. A management agreement was also entered into between the parties in connection with the management of the associated pari- mutuel wagering license. The Race Park also has an option to purchase 100% of the equity interest in the company that owns the greyhound track and the wagering license for the term of the lease , subject to certain conditions. The agreements are contingent upon the satisfactory completion of a 90 day due diligence and feasibility study currently being conducted by the Race Park. If the due diligence study is satisfactory, Race Park management plans to re-open the facility and conduct year around horse and dog simulcasting and a season of live greyhound racing at the track. The transaction is also subject to the approval of the Texas Racing Commission. COMPETITION The Partnership faces competition from a variety of wagering and gaming sources, including Gulf Greyhound, the Texas State Lottery, numerous charity operated bingo facilities located in the Houston area and Louisiana casinos located approximately 125 to 150 miles from Houston. Although the Race Park competes with Gulf Greyhound for pari- mutuel wagering dollars, prior to September 1, 1997, the Race Park had the exclusive right to simulcast horse racing in the greater Houston metropolitan area. During 1997, the Texas Legislature authorized cross- breed simulcasting between horse tracks and greyhound tracks at Texas pari-mutuel facilities. This now allows greyhound tracks to display and accept wagers on races broadcast from horse tracks and horse tracks to display and accept wagers on races broadcast from greyhound tracks. Gulf Greyhound began simulcasting horse races as of September 1, 1997 when the legislation became effective. Therefore, the Race Park now competes with Gulf Greyhound for horse racing customers in the Houston market. Management believes that although the competition from Gulf Greyhound has negatively impacted and will continue to negatively impact commissions generated from wagering on horse racing, these negative impacts have been and will continue to be more than offset by the additional commissions generated from wagering on simulcast greyhound racing. The Race Park also competes for wagering dollars with the Texas State Lottery and charity operated bingo facilities. Both the lottery and bingo are relatively easy games to learn versus the more complex nature of handicapping and wagering on horse racing, which places the Race Park at a competitive disadvantage to these forms of wagering. The Race Park attempts to mitigate these factors by providing various fan education programs for customers. The Race Park also competes for wagering dollars with casinos located in the state of Louisiana. Publicly available information indicates that the majority of the customers at riverboat casinos located in Lake Charles, Louisiana come from Houston. Management believes that the location of the Race Park, within a one hour drive of the majority of the population of Houston, is a competitive advantage for the Race Park over the casinos, which are located two hours away for most Houston residents. However, as with the Lottery and bingo, many casino gaming opportunities are easier to learn than horse racing. The Race Park also competes for customers with other forms of entertainment, including the Houston Livestock Show and Rodeo, held annually in February and March, and a wide range of live and televised professional, collegiate and high school sporting events that are available in the Houston area. The Race Park could, in the future, also compete with other forms of gambling in Texas, including casino gambling or other forms of gaming on Indian reservations. Races broadcast from the Race Park compete for wagering dollars and commissions with races simulcast from other racetracks throughout the United States and around the world. The ability of the Race Park to compete with other racetracks for these wagering dollars is dependent on several factors, including the quality and quantity of horses and the timing of live meets. The quality and quantity of the Race Park s horses is dependent on the Race Park s ability to pay purses at a high enough level to attract the highest quality of horses in a sufficient quantity to fill the races conducted by the Race Park. Races broadcast from the Race Park compete with races broadcast from other racetracks where the quality of horses is often higher than the quality of horses racing at the Race Park. However, management believes that the increase in simulcasting activity, which has resulted in increased purses paid, has been improving the quality of the racing program conducted at the Race Park over the past three years. The mild winter conditions in the Houston area also assists the Race Park in attracting horses as it ensures uninterrupted training and racing for horsemen compared to racetracks in the Midwest and East Coast regions, which may be closed temporarily due to inclement weather. By conducting thoroughbred racing during the winter season, the Race Park also faces less competition for simulcast wagering dollars at locations across the country as fewer racetracks conduct live racing during this time of year. Thus, during the winter season, the Race Park has a competitive advantage in attracting higher quality horses which increases the ability of the Race Park to expand the simulcast handle wagered on its thoroughbred races. The Race Park has annually conducted a summer quarter horse meet. Although quarter horse racing does not command the same level of wagering across the United States as thoroughbred racing, the Race Park has been able to export its quarter horse racing signal to approximately 90 racetracks and off-track facilities around the country. This is primarily due to the fact that the level of quarter horse purses paid puts the Race Park among the top quarter horse race tracks in the United States. This level of purse payments enables the Race Park to attract high quality quarter horses. The Race Park conducts its live racing for all thoroughbred and quarter horse races in the evenings. As the majority of racetracks in the United States conduct racing during the day, management believes that night racing significantly increases the ability of the Race Park to export its racing signal to simulcasting facilities at racetracks and off-track locations. Also, the nighttime performances have historically drawn higher attendance than daytime performances. Another competitive factor faced by the Race Park includes the allocation of a sufficient number of live race days by the Racing Commission. While the Class 1 racetracks in Texas are each entitled to approximately 17 weeks of live racing per breed (thoroughbred and quarter horse), many factors are considered in the actual granting of race days. Input is solicited by the Racing Commission from the racetracks, racehorse owners and trainers, and horse breeding organizations. Management works closely with all of the individuals and groups involved in order to try to obtain a schedule that contains an optimal number of live race days and that is in the best economic interest of the Race Park. SEASONALITY OF RACING Handle and commissions from live racing and host simulcasting are affected by the breed of horse running at the Race Park. Generally, revenues generated from thoroughbred racing are higher than revenues generated from quarter horse racing. More than 80% of the Race Park s net pari-mutuel commissions from live racing and host simulcasting are derived from thoroughbred racing. Increased revenues from thoroughbred racing are primarily due to two factors, the overall popularity of thoroughbred races and the timing of the Race Park s thoroughbred meets. Also, as discussed above, the Race Park conducts a winter thoroughbred meet during which the Race Park is able to broadcast its racing signal to a large number of facilities. Races broadcast during the summer quarter horse meet must compete with much stronger thoroughbred signals from around the country. Guest simulcast wagering at the Race Park is also affected by the seasonality of racing throughout the United States. The Triple Crown races in May and June and the Breeders Cup program in the fall, in addition to the high quality racing programs held at United States racetracks throughout the spring, summer and early fall, help to increase guest wagering and attendance during those time periods. As a result, the Partnership s net pari-mutuel commissions from guest simulcast wagering on horse racing have been highest in the second quarter of the year. Thoroughbred and quarter horse racing are conducted in all types of weather; however, racing may be canceled due to extreme local weather conditions. Although the Race Park has rarely been forced to cancel live racing, inclement weather does negatively effect the level of attendance at the Race Park. EMPLOYEES As of March 1, 1999, the Race Park had approximately 115 year-round full-time employees, approximately 75 year-round part-time employees and, due to the seasonal nature of the business, up to approximately 450 seasonal employees. The number of seasonal employees utilized depends principally on whether or not the Race Park is conducting live racing and varies based upon attendance levels. Certain individuals employed by MAXXAM and its wholly owned subsidiaries provide management, legal, financial, corporate development and other services to the Partnership from time to time. These affiliates are reimbursed for their estimated actual costs incurred in providing these services to the Partnership. The Race Park continuously monitors its staffing levels and its use of services provided by MAXXAM employees. REGULATION AND TAXATION Texas Racing Act Under the Racing Act, horse racetracks are classified as Class 1, Class 2, Class 3 or Class 4 racetracks. A Class 1 racetrack must operate in a county with a population of at least 750,000. Only three Class 1 racetracks may be licensed in the state of Texas. The Racing Commission does not limit the number of Class 2 racetracks that may be licensed and operated in Texas or where those racetracks may be located. A Class 2 racetrack is entitled to conduct 60 days of live racing in a calendar year. Class 3 and Class 4 racetracks are generally operated by county fairs for short periods of time. Ownership and operation of horse racetracks in Texas are subject to significant regulation as set forth in the Racing Act and administered by the Racing Commission. The Racing Act provides, among other things, for the allocation of each wagering pool among betting participants, the state of Texas, purses, special equine programs and racetracks. The Racing Act also empowers the Racing Commission to license and regulate substantially all aspects of horse racing in the state. The Racing Commission, among other things, licenses all employees and workers at a racetrack (including jockeys, trainers and veterinarians); regulates the transfer of ownership interests; allocates live race days; approves race programs; regulates the conduct of races; oversees the administration of drugs to horses; sets specifications for the racing surfaces, animal facilities, employee quarters and public areas of racetracks; regulates the types of wagers on horse races and approves all material contracts with racetracks, including management agreements, simulcast agreements, totalisator contracts and concessionaire agreements. The ability of the Race Park to conduct live racing and pari-mutuel wagering is dependent on continued governmental approval of these activities as legalized forms of gaming. Restrictions on Ownership The Racing Act requires that a majority of the ownership interests of a license holder be held at all times by persons who are United States citizens and who have been continuous residents of the state of Texas for the preceding ten years. Additionally, it is illegal under the Racing Act for any person to own a 5% or greater interest in more than two racetrack licenses in the state of Texas (both horse tracks and greyhound tracks are grouped together for this purpose). The Race Park s license (the "LICENSE") is not transferable but is subject to a negative pledge (as security for the Partnership s Extendible Notes). In the event of a foreclosure by the Trustee for the Extendible Notes (the "TRUSTEE") or the holders of Extendible Notes (the "NOTEHOLDERS") following an event of default, a number of restrictions and procedural requirements apply to any proposed or subsequent transfer or use of the License. The Racing Act generally requires pre-approval by the Racing Commission of all transfers or issuances of "pecuniary interests" in the holder of a racetrack license. Interests in the Partnership constitute "pecuniary interests" and generally any transfer of an interest in the Partnership would require the prior approval of the Racing Commission. Regulations on Simulcasting The Race Park is authorized to conduct guest and host simulcasting under the Racing Act and the Federal Interstate Horseracing Act of 1978. In Texas, simulcast broadcasts may only be sent to licensed racetracks, as the Racing Act does not provide for off-track wagering. All simulcast contracts must be approved by the Racing Commission. In accordance with the Rules of Racing, all guest and host simulcasting contracts must also be approved by the horsemen. Since the Race Park is unable to conduct simulcast wagering without the approval of the Racing Commission and the horsemen, the revocation or non-renewal of the approval of either the Racing Commission or the horsemen could have a material adverse effect on the Race Park s consolidated financial position, results of operations or liquidity. Class 1 and Class 2 horse tracks must take signals from Texas Class 1 horse tracks when such signals are made available to them, in preference to signals from other tracks. Class 1 racetracks are not required to take simulcast signals from Class 2 racetracks. Under the Racing Act, a Texas horse track that offers wagering on greyhounds, must take all signals available from Texas greyhound tracks in preference to out-of-state greyhound signals. Likewise, a Texas greyhound track that offers wagering on horses, must take all signals made available from Texas horse tracks in preference to out-of-state horse signals. Taxation The Partnership is subject to significant taxes and fees from state and local agencies. These taxes and fees may be increased at any time as the prospect of significant additional revenue is one of the primary reasons that taxing jurisdictions allow legalized gaming. From time to time, various taxing jurisdictions, including the Texas Legislature, have proposed and enacted changes in the laws and the administration of such laws affecting the taxes and fees paid by the Race Park. Prior to September 1, 1997, the Partnership was required to set aside 0.25% of each simulcast wagering pool for the Texas Commission on Alcohol and Drug Abuse. Under amendments to the Racing Act enacted during 1997, this 0.25% was designated to repay the state of Texas for funds previously appropriated to administer and enforce the Racing Act. This tax will be eliminated during 1999 when all amounts due to the State of Texas, including interest, have been repaid. Also, in accordance with amendments to the Racing Act, the pari-mutuel wagering tax on guest simulcast wagering on horse racing was increased from 1% to 1.25% and the tax on guest wagering on greyhound racing was reduced from 1.5% to 1.25%. Also, as of January 1, 1999, the 1% pari-mutuel wagering tax due to the state of Texas from live racing was eliminated on the first $100 million wagered. The Partnership estimates that the elimination of this tax will increase net pari-mutuel commissions for 1999 and future years by approximately $224,000 per year based on 1998 levels of wagering. There can be no assurance that further changes to the taxes and fees assessed on the Race Park will not be made or that such charges will not have a material adverse effect on the Race Park s consolidated financial position, results of operations or liquidity. Other Regulations The Race Park is required to file certain reports with the Internal Revenue Service regarding certain cash transactions and certain wagering winnings by patrons. The Race Park is also subject to a variety of environmental and other laws and regulations, including laws and regulations dealing with animal waste management and wetlands. The Race Park is subject to other federal, state and local regulations and, on a periodic basis, must obtain various licenses and permits. The Race Park also has an agreement with a company related to the sale of alcoholic beverages. The Race Park derives significant revenues from the sale of alcoholic beverages. The interruption or failure of this company to maintain valid permits and licenses to sell alcoholic beverages could have a material adverse effect on the Race Park s consolidated financial position, results of operations or liquidity. ITEM 2. PROPERTIES The Race Park is located on approximately 300 acres of land (the "SITE") owned by the Partnership. The Site is located in Harris County approximately 18 miles from downtown Houston and approximately 15 miles from Bush Intercontinental Airport. The Site currently includes approximately 90 acres of undeveloped land. The Race Park fronts Sam Houston Parkway, a major tollway, providing ready access to residents of the greater Houston metropolitan area. In 1998, the Race Park added an 80 foot tall electronic message center. The Race Park s buildings and grounds have an aggregate capacity of approximately 18,000 patrons and 10,000 cars. The Grandstand building at the Race Park is an air-conditioned, fully-enclosed structure of approximately 196,700 square-feet with a variety of viewing and simulcasting facilities on three levels. The Grandstand has seating for 6,000 patrons and is designed to accommodate approximately 10,000 total patrons. There are numerous television monitors, an electronic message board, video walls, video replay libraries and odds information boards throughout the Grandstand to increase the flow of information to bettors. Simulcast races are shown on designated television monitors. Each Grandstand level has numerous pari-mutuel betting windows, automated betting machines and concession areas. In addition to the Grandstand, there are three additional areas from which patrons can watch the races: the standee ramp or apron between the Grandstand and the racing ovals; the 30,000 square foot enclosed, air-conditioned simulcast pavilion which is located immediately north of the Grandstand; and the infield area of the racetrack. The simulcast pavilion is typically the only portion of the Race Park that is open to the public on days that only simulcasting is being conducted. The simulcast pavilion was renovated during 1998. These other areas have concession stands and pari-mutuel facilities nearby. A tunnel provides access to the infield. The Race Park has two racing ovals - a one and one-quarter mile dirt track and a one and one-eighth mile turf course. Each racing oval features straightaways or "chutes" to accommodate varying race lengths. The surface of the tracks and the rails have been designed to lessen the risk of injuries to horses and jockeys and are generally considered to be of high quality. The backside contains 16 barns capable of housing a total of approximately 1,200 horses. Each barn contains stalls for onsite stabling, tack rooms, hay and feed storage areas, grooms quarters, wash racks and four outdoor walkers. The Race Park also has a stakes barn for visiting horses, a receiving barn, a holding barn and an isolation facility. An equine veterinary facility is also located at the Race Park. Under the indenture governing the Partnership s Extendible Notes (the "INDENTURE"), substantially all of the Partnership s assets, including the Partnership s properties, are pledged as collateral on the Extendible Notes. The racing license held by the Partnership is also subject to a negative pledge for the benefit of the holders of the Extendible Notes. ITEM 3. LEGAL PROCEEDINGS This section contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See Item 1. "Business-General" for cautionary information with respect to such forward-looking statements. 1995 Plan of Reorganization On April 17, 1995, SHRP, Ltd. and two affiliates (the "DEBTORS") filed voluntary petitions to reorganize under the provisions of Chapter 11 of the United States Bankruptcy Code. On September 22, 1995, the Bankruptcy Court entered an order confirming the Debtors plan of reorganization (the "PLAN"). All transactions called for by the Plan were completed on October 6, 1995 (the "EFFECTIVE DATE") and the case was closed on December 19, 1996. The Plan called for, among other things, a reduction in the Partnership s long-term debt, a significant cash infusion, contribution of additional property and a reorganization of the Partnership. Under the terms of the Plan, the Extendible Notes were issued in exchange for the Partnership s 11-3/4% Senior Secured Notes. The Extendible Notes had an initial aggregate principal amount of $37.5 million, mature on September 1, 2001 and bear interest at the rate of 11% per annum. The maturity date of the Extendible Notes may be extended to September 1, 2003 (with an increase in the rate of interest to 13% per annum) if the Texas legislature passes significant gaming legislation (as defined) between January 1, 2001 and August 15, 2001. Interest on the Extendible Notes accrues in-kind and is not payable in cash until a certain level of cash flow from operations has been achieved. Once cash interest payments commence, interest payments may not thereafter be paid in-kind. The Indenture limits the Partnership s ability to incur additional indebtedness and liens, to engage in transactions with affiliates, to make investments and to make distributions, although the Indenture does allow the Partnership to become involved in certain gaming, entertainment and other ventures. On the Effective Date, a new investor group (the "NEW INVESTOR GROUP") made a capital contribution of cash in the aggregate amount of $5.9 million. Additionally, a wholly owned subsidiary of MAXXAM contributed an approximately 87 acre tract of adjoining land having a fair market value of $2.3 million. Each member of the New Investor Group also provided its pro rata share of a $1.7 million line of credit. This line of credit would be used to fund future cash flow requirements should the cash infusion be insufficient. The Plan provided for the elimination of all existing partnership interests. The Partnership has issued 33.3% of the equity in the Partnership to certain holders of allowed unsecured bankruptcy claims (the "CREDITOR EQUITY"), a majority of which relates to the unsecured deficiency claims attributable to the Original Notes. The Creditor Equity is held in the form of common stock in the Additional General Partner. On the Effective Date, the New Investor Group received 66.7% of the equity in the Partnership. The Managing General Partner was issued a 1% interest in the Partnership in exchange for contributing its pro rata share of the investment made by the New Investor Group. See Note 3 to the Partnership s Consolidated Financial Statements appearing in Item 8 for further information concerning the bankruptcy proceedings. From time to time, the Partnership is involved in various other claims, lawsuits and other proceedings relating to a variety of matters. While uncertainties are inherent in the final outcome of such matters and while it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Partnership s consolidated financial position, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. STOCKHOLDER MATTERS This section contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See Item 1. "Business-General" for cautionary information with respect to such forward-looking statements. There is no established public trading market for the Partnership s ownership interests. The Partnership has eight limited partners in addition to the two general partners. The Partnership interests are not transferable without the consent of the Managing General Partner. Under the Indenture, distributions are restricted except for amounts necessary to pay taxes on income of the Partnership allocated to a partner. The Partnership has not made distributions to its partners since the commencement of operations and it is doubtful that the Partnership will be able to make any distributions to its partners for at least the foreseeable future. See "Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data." ITEM 6. SELECTED FINANCIAL DATA The selected financial data of the Partnership for each of the years in the five-year period ended December 31, 1998 presented below, should be read in conjunction with "Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations" and with the Partnership s Consolidated Financial Statements and Notes thereto appearing in Item 8.
Years Ended December 31, ------------ 1998 1997 1996 1995 1994) ------- -------- -------- -------- -------- (In thousands of dollars, except for attendance) Summary of Operations: Revenues $ 24,195 $ 20,027 $ 20,752 $ 19,679 $ 20,565 Cost and expenses (b) (c) (23,345) (22,250) (23,342) (24,144) (32,463) Income (loss) before depreciation (c) 1,826 (1,295) (1,704) (2,193) (9,875) Income (loss) before reorganization items and other income (expense) 850 (2,223) (2,590) (4,465) (11,898) Reorganization items (d) - - (83) (48,915) - Income (loss) from operations (d) 850 (2,223) (2,673) (53,380) (11,898) Extraordinary item (e) - - - 63,780 - Net income (loss) (6,858) (8,406) (7,622) 5,608 (20,154) Balance Sheet Data (at end of period): Current assets $ 9,990 $ 9,030 $ 7,797 $ 8,384 $ 7,257 Total assets (d) 35,489 34,534 33,937 34,956 77,640 Current liabilities 7,505 8,345 6,456 5,645 16,297 Notes payable (including notes to affiliates), less current portion (e) 41,081 33,393 27,162 22,171 73,244 Partner s equity (deficit) (15,923) (9,065) (659) 6,963 (11,901) Distributions paid to partners $ - $ - $ - $ - $ - Other Data: Total attendance 665,576 608,120 684,122 665,981 805,648 Live handle $ 22,352 $ 20,175 $ 25,620 $ 27,983 $ 49,961 Guest handle 112,139 93,543 88,579 82,381 30,455 Host handle 162,965 128,252 109,648 51,451 35,945 Net pari-mutuel commissions 16,180 13,276 12,917 10,566 8,910 (a) The Race Park began operations on April 29, 1994, therefore amounts for 1994 represent eight months of operations. (b) Includes depreciation expense of $976, $928, $886, $2,272 and $2,023 for 1998, 1997, 1996, 1995 and 1994, respectively. (c) Includes accrued management fees of $750, $750, $750 and $183 for 1998, 1997, 1996 and 1995, respectively, which cannot be paid until two consecutive interest payments on the Extendible Notes have been paid in cash. (d) Reorganization items recorded to implement the Plan. Adjustment of assets to fair value represents the reduction of property and equipment and other assets to their estimated recoverable amounts and reorganization expenses represent the professional fees and expenses necessary to implement the Plan. (e) Extraordinary gain on discharge of liabilities recorded in connection with the Plan represents the gain recognized due to the discharge of current liabilities and long-term debt.
ITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Partnership s Consolidated Financial Statements and Notes thereto appearing in Item 8. This section contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See Item 1. "Business General" for cautionary information with respect to such forward-looking statements. INCOME (LOSS) FROM OPERATIONS The following table presents selected operational information for the years ended December 31, 1998, 1997 and 1996:
December 31, ------------ 1998 1997 1996 ---- ----- ---- Number of live race days 129 143 146 Simulcast only days 235 221 218 Average daily attendance - live race days 3,610 3,176 3,624 Average daily attendance - simulcast only days 849 694 708 Average live per capita wager $ 48 $ 44 $ 48 Average combined live and guest per capita 161 145 139 wager - live race days Average guest per capita wager - simulcast 298 310 263 only days (Amounts in millions) Live handle $ 22.4 $ 20.2 $ 25.6 Guest simulcasting handle - horses 95.9 93.5 88.6 Guest simulcasting handle - greyhounds 16.2 - - Host simulcasting handle 163.0 128.3 109.6 Net pari-mutuel commissions: Live $ 2.7 $2.4 $ 3.0 Guest - horses 8.3 8.3 8.2 Guest - greyhounds 2.0 - - Host 3.2 2.6 1.7 ---- ----- ---- Total net pari-mutuel commissions $ 16.2 $ 13.3 $ 12.9 ==== ==== ==== /TABLE Revenues. The Partnership s principal source of revenues is net pari-mutuel commissions earned on live thoroughbred and quarter horse racing and on simulcast racing as both a guest and host track. During periods between the live racing dates, the Partnership s principal source of revenues is from wagering by Race Park patrons on simulcasts of horse and greyhound racing being conducted at other tracks. Other sources of revenue are food and beverage sales, admission and parking fees, corporate sponsorships and advertising, club memberships, suite rentals and other miscellaneous items. Total revenues for the years ended December 31, 1998, 1997, and 1996 were $24.2, $20.0 and $20.8 million, respectively. Handle and commissions generated from both guest and host simulcasting have continued to increase over the three year period. The increase in handle and commissions from live racing during 1998 as compared to 1997 levels was primarily due to higher average daily attendance and an increase in the live per capita wager. The increase in average daily attendance was partially due to the deletion of Wednesday racing during the spring thoroughbred meet, which generates lower average daily attendance than weekend race days. Management expects handle and commissions from live racing to increase further during 1999 as compared to 1998 due to the allocation by the Racing Commission of five more race days during 1999. Also, in 1999, the Partnership s share of net pari-mutuel commissions from live racing will increase by 1% due to the elimination of the wagering tax on the first $100 million wagered on live racing. Although wagering on live racing decreased during 1997, the combined average live and guest per capita wager has continued to increase over the three year period. Per capita wagering on guest simulcasting is typically higher than per capita wagering on live racing due to increased wagering opportunities from guest simulcasting as compared to live racing. The average combined live and guest per capita wager increased 11% from 1997 to 1998 and 4% from 1996 to 1997. Guest simulcasting handle increased by 20% during 1998 as compared to 1997 due primarily to the introduction of greyhound simulcasting discussed in Item 1, above. Guest simulcasting horse handle increased by 2.5% during 1998 as compared to 1997; however, net pari-mutuel commissions from guest horse simulcasting decreased by .2% for the same time period. This decrease in the ratio of net pari-mutuel commissions to handle is primarily due to incremental, annual increases in the allocation to purses in accordance with the THP Agreement which became effective on January 1, 1997 and extends through 1999, and to a temporary .25% increase in the pari-mutuel wagering tax, which became effective on September 1, 1997 and extended through December 31, 1998. From 1996 to 1997, net pari-mutuel commissions from guest simulcasting increased by 2% due to a 6% increase in guest handle which was substantially offset by the increased pari-mutuel wagering tax and by increases in the allocation of takeout to purses. In 1999 and 2000, net pari-mutuel commissions from guest simulcasting are expected to increase as a result of having a full year of greyhound simulcasting, reductions in the pari-mutuel wagering taxes and a recovery of previously overpaid purses as allowed under the THP Agreement. However, commissions from guest simulcast wagering on horse racing as a percentage of handle will decrease significantly during 1999 and 2000 due to increases in the allocations of takeout to purses of approximately 1% of handle mandated by amendments to the Racing Act as discussed in Item 1, "Purses and Horsemen s Agreements." Net pari-mutuel commissions from host simulcasting increased by 23% from 1997 to 1998 due to increased wagering at the majority of the racetracks and off-track wagering facilities receiving the Race Park's simulcast signal. Net pari-mutuel commissions from host simulcasting increased by 50% from 1996 to 1997 primarily due to an increase in the number of racetracks and off-track facilities receiving the Partnership s simulcast signal and a beneficial change in the commission allocation to purses from host wagering. Management expects average daily host handle to continue to increase during 1999; however, commissions from host simulcasting as a percentage of handle will decrease due to increases in the purse allocations discussed in Item 1, "Purses and Horsemen s Agreements." Revenues generated from food and beverage sales during the year ended December 31, 1998 increased from 1997 levels by 22% primarily due to the increase in average daily attendance on live and simulcast only race days. Revenues generated from admission and parking fees, program sales and other miscellaneous sources have also increased during 1998 compared to 1997 primarily due to the increased average daily attendance and due to increases in group sales and sponsorship revenue. During 1997 these revenues declined compared to 1996 primarily due to a decrease in sponsorship revenue and to a decrease in the number of and prices of sales of luxury suites and seasonal boxes and seat packages. Many of the agreements signed prior to or during the initial thoroughbred meeting in 1994 have expired or have been renewed at lower prices. Income (Loss) From Operations. For the year ended December 31, 1998, the Partnership reported income from operations of $850,000 which is $3.1 million higher than the $2.2 million operating loss for the same period in 1997, despite conducting 14 fewer days of live racing. This improvement is the result of the substantial increase in revenues discussed above as well as the Partnership s continued efforts to reduce and control operating costs and expenses. In particular, salaries and wages and marketing and advertising costs remained virtually unchanged for the year ended December 31, 1998 versus 1997. Overall, revenues increased approximately 21% during 1998 compared to 1997 while costs and expenses increased by 5%. The improvement in 1997 operating losses from 1996 levels is due to the continued decrease in operating costs and expenses, especially salaries and wages and marketing and advertising. Salaries and wages decreased in 1997 over 1996 primarily due to the reduction in staffing in several operating departments and positions that went unfilled during the year. Marketing and advertising decreased in 1997 over 1996 as the advertising program curtailed spending on or eliminated several high cost promotions. These decreases were offset by an increase in management and other professional fees. Management and other professional fees increased primarily due to the cost of lobbying efforts undertaken in 1997 in connection with the 1997 session of the Texas state legislature. Other Income (Expense). Other income (expense) reflects interest earned net of interest expense, including amortization of the original issue and the re-issue discounts on the Original Notes and the Extendible Notes. Interest expense has continued to increase over the three year period due to the increasing balance of the Extendible Notes related to the payment in-kind of accrued interest and the amortization of the discount on the Extendible Notes. Net Loss. Net loss from operations reflects the loss before other income (expense). Other income (expense) is described above. LIQUIDITY AND CAPITAL RESOURCES The net cash provided by operating activities during 1998 of $2 million was $1.5 million more than in 1997 and $3.3 million more than the $1.3 million used in operating activities in 1996. Cash provided by operating activities improved during 1998 compared to 1997 and 1996 primarily due to the increase in income from operations discussed above. Restricted cash consists of deposits held for the benefit of horsemen and funds held for the payment of property taxes. The decrease in restricted cash from December 31, 1997 to December 31, 1998 is due to a decrease in the deposits held for the benefit of horsemen related to the difference in timing of the thoroughbred meets from 1997 to 1998. The Partnership had cash and cash equivalents of $3.8 million and a $1.7 million line of credit at December 31, 1998 available to fund the operating activities of the Partnership. Also, the Partnership is able to defer cash interest payments on the Extendible Notes until certain conditions are met and to defer the payment of management fees until two consecutive interest payments on the Extendible Notes have been paid in cash. The deferral of these items has significantly improved the liquidity of the Partnership. The Partnership is continuing to put forth marketing efforts to increase attendance and pari-mutuel handle at the Race Park in order to generate operating income. Also, management intends to continue to initiate legislative efforts to legalize additional forms of gaming at the Race Park in order to increase revenues. Further, management is analyzing various proposals to develop new forms of businesses at the Race Park in an effort to raise new sources of income and to draw additional attendance to the Race Park. Nonetheless, there can be no assurance that any of these efforts will be successful. The Extendible Notes, together with accrued interest, must be retired in September 2001, unless the applicable extension provisions apply. To the extent the Partnership is unable to repay or refinance the Extendible Notes, alternative sources of funding will be necessary. Although 97.5% of the Extendible Notes are owned by MAXXAM, there can be no assurance that the Partnership will be able to repay or refinance the Extendible Notes or that alternative sources of funding will be available to the Partnership, if needed. YEAR 2000 The Partnership is currently in the process of assessing both its information technology systems and its embedded technology in order to determine that they are, or will be, Year 2000 compliant. Management has already determined that its financial data processing hardware and software are compliant and is presently working with certain key third parties and support groups of its embedded technology to ensure that they are taking appropriate measures to assure compliance. Management believes that the total cost of remediation to the Partnership will not exceed $100,000. The most significant area still being evaluated pertains to certain key third parties, in particular, the firm that provides computerized totalisator services to it and others in the horse racing industry. These totalisator services are required by the Texas Racing Commission in order for the Race Park to conduct pari-mutuel wagering. Management, as well as the national thoroughbred racing industry s association, has received assurances that such systems will be compliant by the second quarter of 1999. However, management is evaluating other third party providers of these and other services and equipment in the event that any such vendors cannot provide evidence of Year 2000 compatibility. While the Partnership believes that its program is sufficient to identify the critical issues and associated costs necessary to address possible year 2000 problems in a timely manner, there can be no assurance that the program, or underlying steps implemented, will be successful in resolving all such issues prior to the year 2000. If the steps taken by the Partnership (or critical third parties) are not made in a timely manner, or are not successful in identifying and remedying all significant year 2000 issues, business interruptions or delays could occur and could have a material adverse impact of the Partnership s results of operations and financial condition. However, based on the information available, the Partnership believes that it will not experience significant business interruptions that would have a material adverse impact on its results of operations or financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Partners of Sam Houston Race Park, Ltd. We have audited the accompanying consolidated balance sheets of Sam Houston Race Park, Ltd. (a Texas limited partnership referred to herein as the "PARTNERSHIP") as of December 31, 1998 and 1997 and the related consolidated statements of operations, partners capital (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Partnership as of December 31, 1998 and 1997, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP March 8, 1999 Houston, Texas CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS)
December 31, ------------ 1998 1997 ------- -------- ASSETS Current assets: Cash and cash equivalents $ 3,764 $ 2,728 Restricted cash 3,608 4,841 Accounts receivable, net of allowance for doubtful accounts of $51 and $163, respectively 2,126 1,133 Prepaid expenses and other current assets 492 328 ------ ------- Total current assets 9,990 9,030 ------- ------- Property and equipment, net of accumulated ------- ------- depreciation of $2,996 and $2,020, respectively 25,499 25,504 $35,489 $34,534 ======= ======= LIABILITIES AND PARTNERS DEFICIT Current liabilities: Accounts payable $ 2,232 $ 2,104 Property taxes payable 1,040 1,118 Other liabilities 1,938 1,593 Amounts due to horsemen 2,295 3,530 ------- ------- Total current liabilities 7,505 8,345 ------- ------- Long term liabilities: Notes payable 41,081 33,393 Deferred management fees 2,826 1,861 ------- ------- Total liabilities 51,412 43,599 ------- ------- Commitments and contingencies (Notes 1 and 10) Partners deficit (15,923 (9,065) ------) ------- $35,489 $34,534 ====== ====== /TABLE CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF DOLLARS)
Years Ended December ------------ 31, 1998 1997 1996 ------ ------ ------- Revenues: Pari-mutuel commissions, net $16,180 $13,276 $12,917 Food and beverage sales 4,110 3,366 3,577 Admissions, parking and other 3,905 3,385 4,258 ------- ------- ------- 24,195 20,027 20,752 ------- ------- ------- Costs and expenses: Cost of pari-mutuel operations 1,846 1,756 1,811 Cost of food and beverage 1,971 1,531 1,544 operations Other operating 3,029 2,433 2,565 Salaries and wages 8,349 8,314 8,624 Management and other professional 1,660 2,266 2,019 fees Marketing and advertising 1,968 1,946 2,457 Utilities 1,261 1,143 1,307 State and local taxes 1,293 1,113 1,185 Depreciation and amortization 976 928 886 General and administrative 992 820 944 ------- ------- ------- 23,345 22,250 23,342 ------ ------- ------- Income (loss) before reorganization 850 (2,223) (2,590) expenses and other income (expense) Reorganization expenses - - (83) ------ ------- ------- Income (loss) from operations 850 (2,223) (2,673) Other income (expense): Interest income 207 214 203 Interest expense (7,915) (6,397) (5,152) ------ ------- ------- (7,708) (6,183) (4,949) ------ ------- ------- Net loss $(6,858) $(8,406) $(7,622) ======= ======= =======
CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL (DEFICIT) (IN THOUSANDS OF DOLLARS) TABLE Managing Addition Limited Total General al Partners ------ Partner General ----- ---- Partner ----- Balance at January 1, 1996 $ 70 $ 2,318 $ 4,575 $ 6,963 Net loss (729) (2,318 (4,575 (7,622 ----- -----) -----) -----) Balance at December 31, 1996 (659) - - (659) Net loss (8,406 - - (8,406 -----) ------ ----- -----) Balance at December 31, 1997 (9,065) - - (9,065) Net loss (6,858 - - (6,858 -----) ------ ------ ----) Balance at December 31, 1998 $(15,923 $ - $ - $(15,923= ====) ====== ====== ===)
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
Years Ended December ------------ 31, 1998 1997 1996 ------ ------ ------- Cash flows from operating activities: Net loss $(6,858) $(8,406) $(7,622) Adjustments to reconcile net loss to net cash providedby (used in)operating activities: Depreciation and amortization 976 928 886 Amortization of deferred financing costs and discounts on long-term debt 2,258 1,360 682 (Increase) decrease in restricted cash 1,233 (1,282) (555) Increase in accounts receivable (993) (102) (356) (Increase) decrease in prepaid expenses and other (164) 249 (302) Increase in accounts payable 128 559 309 Increase in due to affiliates 965 883 729 Increase in accrued interest 5,442 4,886 4,391 Increase in other liabilities 267 142 665 Increase (decrease) in amounts due to horsemen (1,235) 1,257 445 Decrease in accrued reorganization costs - - (526) ------- ------- ------ Net cash provided by (used in) operating activities 2,019 474 (1,254) ------- ------- ------- Cash flows from investing activities: Additions to property and equipment (971) (296) (455) ------- ------- ------- Net cash used in investing activities (971) (296) (455) ------ ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on notes payable (12) (84) (91) ------- ------- ------ Net cash used in financing activities (12) (84) (91) ------ ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,036 94 (1,800) Cash and cash equivalents at beginning of year 2,728 2,634 4,434 ------- ------- ------- Cash and cash equivalents at end of year $ 3,764 $ 2,728 $ 2,634 ======= ======= ======= Supplemental disclosure of cash flow information: Interest paid, net of amounts capitalized $ 13 $ 8 $ 19 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES See Notes 3, 6 and 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS) 1. BASIS OF PRESENTATION AND ORGANIZATION, USE OF ESTIMATES AND FUTURE CASH REQUIREMENTS BASIS OF PRESENTATION AND ORGANIZATION The accompanying consolidated financial statements include the accounts of Sam Houston Race Park, Ltd. (the "PARTNERSHIP"), a Texas limited partnership, and its wholly-owned subsidiary, New SHRP Capital Corp. ("NEW CAPITAL"). The Partnership was formed on June 17, 1990 to apply to the Texas Racing Commission (the "RACING COMMISSION") for a license to acquire, construct and operate a pari-mutuel horse racing facility in Harris County, Texas (the "RACE PARK"), in accordance with the Texas Racing Act (the "RACING ACT"). The Partnership was organized under the laws of the state of Texas and will terminate on December 31, 2090 unless it is earlier dissolved pursuant to the Texas Revised Limited Partnership Act or any provision of its Third Amended and Restated Limited Partnership Agreement (the "AMENDED PARTNERSHIP AGREEMENT"). The managing general partner of the Partnership is SHRP General Partner, Inc. (the "MANAGING GENERAL PARTNER"), a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). The Partnership is also comprised of an additional general partner, SHRP Equity, Inc. (the "ADDITIONAL GENERAL PARTNER") and limited partner interests. As of December 31, 1998, wholly owned subsidiaries of MAXXAM held, directly or indirectly, an aggregate 98.3% interest in the Partnership consisting of a 33.5% general partner interest (including a 32.5% interest by virtue of its ownership of 97.5% of the common stock of the Additional General Partner) and a 64.8% limited partner interest. Certain reclassifications of prior period information were made in order to conform with the current presentations. All significant intercompany transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of revenues and expenses recognized during each period presented. The Partnership reviews all significant estimates affecting its consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their publication. Adjustments made with respect to the use of estimates often relate to improved information that was not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Partnership s consolidated financial statements; accordingly, it is possible that the subsequent resolution of the liquidity issues, described in "Future Cash Requirements" below, could differ in material respects from current estimates. The results of an adverse resolution of such uncertainty could have a material effect on the reported amounts of the Partnership s consolidated assets and liabilities. FUTURE CASH REQUIREMENTS The Partnership generated income from operations of $850 in 1998. In addition, the Partnership had cash and cash equivalents of $3.8 million and a $1.7 million line of credit at December 31, 1998 available to fund the operating activities of the Partnership. Also, the Partnership is able to defer cash interest payments on the Extendible Notes until September 1, 2001 or until certain conditions are met, and to defer the payment of management fees until two consecutive interest payments on the Extendible Notes have been paid in cash. The deferral of these items has significantly improved the liquidity of the Partnership. The Partnership is continuing to put forth marketing efforts to increase attendance and pari-mutuel handle at the Race Park in order to generate operating income. Also, management intends to continue to initiate legislative efforts to legalize additional forms of gaming at the Race Park in order to increase revenues. Further, management is analyzing various proposals to develop new forms of businesses at the Race Park in an effort to raise new sources of income and to draw additional attendance to the Race Park. Nonetheless, there can be no assurance that any of these efforts will be successful. The Extendible Notes, together with accrued interest, must be retired in September 2001, unless the applicable extension provisions apply. To the extent the Partnership is unable to repay or refinance the Extendible Notes, alternative sources of funding will be necessary. Although 97.5% of the Extendible Notes are owned by MAXXAM, there can be no assurance that the Partnership will be able to repay or refinance the Extendible Notes or that alternative sources of funding will be available to the Partnership, if needed. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Restricted Cash The Partnership s restricted cash, as shown on the accompanying consolidated balance sheets at December 31, 1998 and 1997, includes amounts designated for the payment of the items listed in the following table:
December 31, ------------ 1998 1997 ------- ------- Deposits held for the benefit of horsemen $ 2,320 $ 3,510 Property taxes and other 1,288 1,331 ------- ------- $ 3,608 $ 4,841 ======= =======
Cash Equivalents and Concentration of Credit Risk Cash equivalents consist of highly liquid money market instruments with original maturities of three months or less. A substantial portion of the Partnership s cash equivalents ($3,707) at December 31, 1998 was invested in various short-term investment grade marketable securities. The Partnership also holds other amounts in banks and other financial institutions wherein some of the balances exceed federally insured deposit levels. In the event of nonperformance by such financial institutions, the Partnership s exposure to credit loss is represented by the amounts deposited plus any unpaid accrued interest thereon minus the federally insured deposit limitation. The Partnership mitigates its concentration of credit risk with respect to the funds in such accounts by maintaining them at high credit quality financial institutions and monitoring the credit ratings of such institutions. Property and Equipment Property and equipment were written down to estimated fair value as reflected in the sixth amended consolidated plan of reorganization ("the PLAN") as of October 6, 1995 ("the EFFECTIVE DATE"). Additions to property and equipment subsequent to the Effective Date are stated at cost. Prior to the Effective Date, property and equipment were stated at cost. Depreciation is computed principally utilizing the straight-line method at rates based upon the estimated useful lives of the various classes of assets. In accordance with the Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Partnership reviews long-lived assets, which include property and equipment, for impairment whenever events or changes in circumstances indicate the carrying amounts of the Partnership s assets may not be fully recoverable. No adjustments for impairment were recorded in 1998 or 1997. Notes Payable Notes payable includes accrued interest on the Extendible Notes which is allowed to be paid in-kind until a certain level of cash flow from operations has been achieved. Other Liabilities Other liabilities include net liabilities for unclaimed winning pari-mutuel tickets. Unclaimed winning tickets are valid for ninety days after the end of the year in which they are generated. Once the tickets are no longer valid, the remaining amounts held to pay unclaimed winning tickets, net of allowable reimbursements, are transferred to the Texas Racing Commission. The Partnership receives advance payments with respect to private suite and box rentals, Jockey Club memberships and corporate sponsorship agreements. The payments are recorded as deferred revenue and are recognized as income over the term of the respective agreements. Purses and Awards The Racing Act, certain other agreements, and the rules promulgated by the Racing Commission stipulate percentages of the pari-mutuel handle which must be used for the payment of purses and awards depending upon the type of wagers placed. The term "pari-mutuel handle" means the aggregate amounts wagered. Purses are established nearly one month in advance, based on expected pari-mutuel handle and published in a condition book which generally covers fifteen days of live racing. Horsemen then enter their horses in proposed races based upon the conditions of the race being entered, including the purses being offered. In certain circumstances, the Partnership may pay purses and awards in excess of the amounts provided by the pari-mutuel handle. The Partnership may adjust the amounts to be paid for future races during the course of a given meet in order to minimize or eliminate any differences between the amounts provided by the pari-mutuel handle and the actual amounts of purses and awards paid. The agreement between the Partnership and the Texas Thoroughbred HBPA, Inc. also allows the Partnership to recoup various amounts of the previous purse overpayments from certain future meets. The Partnership expenses all purse overpayments when they occur. Recoveries of these amounts are recorded as revenue as they are earned. Income Taxes The Partnership has not made any provisions for income taxes in its Consolidated Statement of Operations as they are the responsibility of its partners. The carrying value of the Partnership s net assets for financial statement purposes was less than the carrying value for income tax reporting purposes by approximately $18,690 at December 31, 1998. The difference primarily results from (i) the adjustment of long-term assets to estimated fair value for financial statement purposes but not for income tax purposes and (ii) the capitalization of costs for income tax purposes that were expensed for financial reporting purposes, a substantial portion of which relates to costs incurred during the start-up period and the reorganization pursuant to the Plan described in Note 3. Fair Value of Financial Instruments The carrying amounts of the Partnership s cash and cash equivalents (including restricted and designated cash) and other notes payable approximate their fair value. The Extendible Notes had a face value of $52,120 and $46,828, a carrying amount of $39,436 and $31,886 and an estimated fair value of $39,116 and $27,160 as of December 31, 1998 and 1997, respectively. Market prices for the Extendible Notes at December 31, 1998 were estimated based on trades that occurred during September 1998. Market prices for the Extendible Notes at December 31, 1997 were estimated based on a trade which occurred during February 1998. 3. 1995 PLAN OF REORGANIZATION Plan of Reorganization On April 17, 1995, the Partnership, SHRP Capital Corp. and SHRP Acquisition, Inc., the Partnership s largest limited partner, filed for reorganization under Chapter 11 of the United States Bankruptcy Code. On September 22, 1995, the United States Bankruptcy Court for the Southern District of Texas, Houston Division entered an order confirming the Plan. The transactions called for by the Plan were completed on the Effective Date and the case was closed on December 19, 1996. Under the terms of the Plan, the Extendible Notes were issued in exchange for the Partnership s 11-3/4% Senior Secured Notes (the "ORIGINAL NOTES"). The Original Notes had an aggregate principal amount of $75,000, would have matured on July 15, 1999 and bore interest at the rate of 11-3/4% per annum. The Extendible Notes had an initial aggregate principal amount of $37,500, mature on September 1, 2001 and bear interest at the rate of 11% per annum. Interest on the Extendible Notes accrues in-kind and is not payable in cash until a certain level of cash flow from operations has been achieved. See Note 6 for further information concerning the terms of the Extendible Notes. On the Effective Date, a new investor group (the "NEW INVESTOR GROUP") made a capital contribution of cash and other consideration described below. Each member of the New Investor Group also provided its pro rata share of the $1,700 line of credit. This line of credit would be used to fund future cash flow requirements should the cash infusion prove to be insufficient. Each member of the New Investor Group has secured such investor s portion of the line of credit with cash held in an escrow account (other than MAXXAM s wholly owned subsidiaries, whose portion of the line of credit is secured by the guaranty of MAXXAM). Borrowings on the line of credit would bear interest at 11% per annum and would be subordinate to the Extendible Notes. Also, a wholly owned subsidiary of MAXXAM provided the holders of the Extendible Notes with Instruments of Adherence ("INSTRUMENTS OF ADHERENCE") having an agreed value of $500. The Instruments of Adherence were executed by MAXXAM and Mr. Charles Hurwitz, Chairman of the Board and Chief Executive Officer of MAXXAM and provide that MAXXAM and Mr. Hurwitz will not, in certain circumstances, make certain investments in specified gaming ventures in the Houston area unless certain holders of the Extendible Notes are afforded a specified opportunity to make an investment in such ventures in an amount at least equal to 19.9% of the aggregate investment made in such ventures by MAXXAM, Mr. Hurwitz and such holders. The Plan provided for the elimination of all existing partnership interests. The Partnership has issued 33.3% of the equity in the Partnership to certain holders of allowed unsecured bankruptcy claims (the "CREDITOR EQUITY"), a majority of which relates to the unsecured deficiency claims attributable to the Original Notes. The Creditor Equity is held in the form of common stock in the Additional General Partner. On the Effective Date, the New Investor Group received 66.7% of the equity in the Partnership. The Managing General Partner was issued a 1% interest in the Partnership in exchange for contributing its pro rata share of the investment made by the New Investor Group. 4. PROPERTY AND EQUIPMENT The major classes of property and equipment are as follows:
Estimated December 31, Useful ------------ Lives 1998 1997 ------- ------- Buildings 5 - 30 years $15,075 $14,390 Equipment, furniture and fixtures 3 - 15 years 2,428 2,127 Race track and other land improvements 5 - 30 years 3,049 3,049 Land 7,943 7,958 ------- ------- 28,495 27,524 Less accumulated depreciation (2,996) (2,020) ------- ------- $25,499 $25,504 ======= =======
Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was $976, $928 and $886, respectively. The Partnership reduced the net carrying value of property and equipment by $40,390 as of the Effective Date, in accordance with the estimated fair asset values described in the Plan. Additionally, the Partnership received an approximately 87 acre tract of land valued at $2,300 as part of the contribution of the New Investor Group. 5. RACING OPERATIONS The Partnership conducted 129, 143 and 146 days of live racing during 1998, 1997 and 1996, respectively. Under the Racing Act, the Partnership s commission revenue is a designated portion of the pari-mutuel handle. The Race Park receives broadcasts of live racing from other racetracks under various guest simulcasting agreements. The Race Park also provides broadcasts of live racing conducted at the Race Park to other racetracks under various host simulcasting agreements. Under these contracts, the Partnership receives pari-mutuel commissions of varying percentages of simulcast pari-mutuel handles. A summary of the pari-mutuel handle, commissions and deductions for the years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996 ------- ------- ------ Live handle $ 22,352 $ 20,175 $ 25,620 Return to public (17,506) (15,830) (20,113) Purses and breeders awards (1,801) (1,608) (2,043) State taxes and fees (224) (202) (256) Breakage (148) (150) (181) ------- ------- ------ Net commissions from live racing 2,673 2,385 3,027 ------- ------- ------- Guest handle 112,139 93,543 88,579 Return to public (88,471) (74,252) (70,650) Purses and breeders awards (7,765) (6,237) (5,282) Host fee (3,537) (2,982) (2,836) State taxes and fees (1,545) (1,246) (1,107) Breakage (509) (526) (539) ------ ------- ------- Net commissions from guest 10,312 8,300 8,165 simulcasting ------- ------- ------- Host handle 162,965 128,252 109,648 Receiving track expenses (158,308) (124,096) (105,887) Purses and breeders awards (1,462) (1,565) (2,036) ------- ------- ------- Net commission from host simulcasting 3,195 2,591 1,725 ------- ------- ------- Total pari-mutuel commissions, net $ 16,180 $ 13,276 $ 12,917 ======= ======= =======
Non-statutory Purse Funding On November 26, 1996, the Race Park entered into a new agreement with the Texas Thoroughbred HBPA, Inc. (the "TTHBPA"). The TTHBPA is a partner of the Texas Horsemen s Partnership, L.L.P. (the "THP"), the official horsemen s organization currently recognized by the Racing Commission. This new agreement provides for the recovery of purse overpayments of $660 and $631 during the years ended December 31, 1999 and 2000, respectively. The Partnership will record any future recoveries only as they are earned. 6. NOTES PAYABLE Notes payable consist of the following:
December, 31 ------------ 1998 1997 -------- -------- 11% Senior Secured Extendible Notes due September 1, 2001 (net of unamortized discount of $12,684 and $14,942 as of December 31, 1998 and 1997, respectively) $ 39,436 $ 31,886 Accrued interest to be paid in-kind 1,433 1,288 -------- --------- 40,869 33,174 Unsecured promissory notes 197 205 Equipment leases - 3 Payable to Limited Partners 23 23 -------- --------- Total 41,089 33,405 Less current portion, included in Other Liabilities (8) (12) -------- --------- $ 41,081 $ 33,393 ========= ========
The Extendible Notes had an initial aggregate principal amount of $37,500, mature on September 1, 2001, bear interest at the rate of 11% per annum and are secured by substantially all the assets of the Partnership. The maturity date of the Extendible Notes may be extended to September 1, 2003 (with an increase in the rate of interest to 13% per annum) if the Texas legislature passes significant gaming legislation (as defined) between January 1, 2001 and August 15, 2001. The indenture governing the Extendible Notes (the "INDENTURE") limits the Partnership s ability to incur indebtedness and liens, to engage in transactions with affiliates, to make investments and to make distributions, although the Indenture does allow the Partnership to become involved in certain gaming, entertainment and other ventures. The Partnership is amortizing the difference between the aggregate principal amount of the Extendible Notes and their estimated fair value as additional interest expense using the effective interest method. Interest on the Extendible Notes accrues in-kind and is not payable in cash until a certain level of cash flow from operations has been achieved. Once cash interest payments commence, interest payments may not thereafter be paid in-kind. The Partnership issued $5,292 and $4,755 of Extendible Notes during the years ended December 31, 1998 and 1997, respectively, as payment in-kind for accrued interest. Interest payments are due on the Extendible Notes on April 1 and October 1 of each year until the Extendible Notes mature. The Partnership has entered into an unsecured promissory note. The note earns interest at 6-1/2% per annum and is due and payable in thirty equal annual installments to the Harris County Toll Road Authority, operator of the Sam Houston Parkway. This note represents one-half of the costs incurred to construct the entrance and exit ramps adjacent to the Race Park. Payments of approximately $8 plus accrued interest are due annually on April 30 through the year 2024. THE NEW INVESTOR GROUP HAS PROVIDED THE PARTNERSHIP WITH A $1,700 LINE OF CREDIT. THIS LINE OF CREDIT WOULD BE USED TO FUND FUTURE CASH FLOW REQUIREMENTS SHOULD THE PARTNERSHIP REQUIRE IT. EACH MEMBER OF THE NEW INVESTOR GROUP, OTHER THAN MAXXAM WHOLLY OWNED SUBSIDIARIES, HAS SECURED THEIR PORTION OF THE LINE OF CREDIT WITH CASH IN THE AMOUNT OF $23, WHICH IS HELD IN AN ESCROW ACCOUNT. THE PORTION OF THE LINE OF CREDIT PROVIDED BY WHOLLY OWNED SUBSIDIARIES OF MAXXAM IS SECURED BY THE GUARANTEE OF MAXXAM. BORROWINGS ON THE LINE OF CREDIT WOULD BEAR INTEREST AT 11% PER ANNUM AND WOULD BE SUBORDINATE TO THE EXTENDIBLE NOTES. THE CASH COLLATERAL FOR THE LINE OF CREDIT IS REFLECTED AS RESTRICTED CASH IN THE BALANCE SHEET. THE SCHEDULED MATURITIES FOR THE PARTNERSHIP S NOTES PAYABLE OUTSTANDING AT DECEMBER 31, 1998 ARE AS FOLLOWS: DECEMBER 31, 1999 - $8; 2000 - $8; 2001 - $53,584; 2002 - $8; 2003 - $8; THEREAFTER $157. IN THE EVENT THE PARTNERSHIP CONTINUES TO ISSUE ADDITIONAL EXTENDIBLE NOTES AS PAYMENT IN-KIND FOR ACCRUED INTEREST, THE TOTAL AMOUNT DUE ON THE EXTENDIBLE NOTES AT MATURITY IN SEPTEMBER 2001 WILL BE $71,242. 7. PARTNERS DEFICIT The Partnership is currently comprised of the Managing General Partner, the Additional General Partner and eight limited partners. The profits and losses of the Partnership are allocated to the partners in accordance with their percentage interests, after giving effect to certain special allocations. However, all net losses (other than nonrecourse deductions) in excess of the positive capital account balance of any limited partner or the Additional General Partner are to be allocated to the Managing General Partner. Income is to be specially allocated to restore a partner s deficit capital account prior to allocating net profits based on the partner s percentage interest. In the event of a capital call by the Partnership to fund operating losses, holders of the Extendible Notes may contribute Extendible Notes in lieu of cash in order to maintain their equity position in the Partnership. So long as the Extendible Notes are outstanding, the Board of Directors of the Additional General Partner are entitled to designate at least one-third of the directors of the Managing General Partner (the "CREDITOR DIRECTORS"), subject to the reasonable approval of the owner of the Managing General Partner. Certain significant events (e.g. mergers, consolidations, the sale of all or the substantial portion of the Partnership s assets, reorganizations, incurrence of debt in excess of $5,000 and voluntary acts of insolvency) require the approval of a majority of all of the directors, including a majority of the Creditor Directors voting as a separate class. 8. MANAGEMENT AGREEMENTS As of the Effective Date, the Managing General Partner began managing the Partnership and the Race Park in accordance with the Amended Partnership Agreement. Annual management fees will be the greater of (a) $750 or (b) an incentive fee equal to .65% of all gross revenues (as defined). Management fees are deferred until two consecutive semi-annual cash interest payments have been made to the holders of the Extendible Notes. Unpaid management fees accrue interest at the rate of 11% per annum. All such management fees are subordinated to the Extendible Notes. As of December 31, 1998 and 1997, the Partnership has accrued $2,826 and $1,861 of management fees, including interest of $399 and $184, respectively, due to the Managing General Partner. 9. RELATED PARTY TRANSACTIONS Management and other professional fees for the years ended December 31, 1998, 1997 and 1996 include $425, $488 and $511 related to costs incurred for services provided by MAXXAM and certain of its subsidiaries. Included in accounts payable at December 31, 1998 and 1997, were obligations to MAXXAM for such costs of $45 and $34, respectively. Management and other professional fees for the years ended December 31, 1998, 1997 and 1996 include $32, $147 and $120 of costs incurred by an affiliate for legal services and to coordinate legislative efforts of the Partnership. Additionally, the Partnership engages affiliates for legal and other consulting services in the normal course of business. During the years ended December 31, 1998, 1997 and 1996, the Partnership incurred fees of $54, $70 and $41, respectively, with respect to these services. 10. COMMITMENTS AND CONTINGENCIES During the 1997 session of the Texas Legislature, the Racing Act was amended to, among other things, implement various tax changes. The pari-mutuel wagering tax on guest simulcasting was increased from 1% to 1.25% through December 31, 1998. The increased wagering tax decreased net pari-mutuel commissions by approximately $280 during 1998. The legislation also eliminated the 1% pari-mutuel wagering tax on the first $100,000 wagering on live racing subsequent to December 31, 1998. The Partnership estimates that the elimination of this wagering tax on live racing will increase net pari-mutuel commissions by $224 based on 1998 live handle. In addition, the 0.25% previously paid to the Texas Commission on Alcohol and Drug Abuse was reallocated to the Racing Commission to repay funds previously appropriated by the state of Texas for the administration and enforcement of the Racing Act. This tax will be eliminated during 1999 when all amounts due to the state of Texas, including interest, have been repaid. In addition, the legislation mandated an increase in the amount of purses to be reserved for the owners of future winning horses from guest simulcasting. This increase is effective as of January 1, 1999. These amounts will no longer be determined under contract with the recognized horsemen s organization and are to be set at an amount that approximates the percentages used for live racing. The Partnership estimates that net pari-mutuel commissions will decrease by approximately $1 million based on 1998 pari-mutuel wagering handle when this provision becomes effective. This loss of net pari-mutuel commissions is expected to be partially offset by recoveries of previously overpaid purses allowed under the Partnership s contract with the recognized horsemen s organization in the amount of $660 and $631 during 1999 and 2000, respectively. The Partnership has entered into noncancellable service and operating lease agreements with several vendors to provide services in addition to agreements for the use of equipment. Certain of these agreements call for contingent rentals based upon a variety of factors, the most significant of which are the number of live racing days and specified percentages of amounts wagered. Future minimum lease and commitment payments under such noncancellable service and lease agreements, having a remaining term in excess of one year at December 31, 1998, are as follows: years ending December 31, 1999 - $479; 2000 - $186; 2001 - $178; 2002 - $178; 2003 - $178; thereafter $78. The Partnership incurred approximately $462, $1,384, and $1,409, including contingent fees and rentals, for the years ended December 31, 1998, 1997 and 1996 for such services and operating lease obligations. The Partnership is contingently liable for liquidating damages to one vendor with respect to a lease for services for approximately $104 at December 31, 1998. The amount of the contingency decreases by approximately $8 for each month the Partnership conducts live or simulcast racing operations. The Partnership is involved in claims and litigation arising in the ordinary course of business. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the ultimate costs that may be incurred, management believes that the outcome of such matters should not have a material adverse effect upon the Partnership s consolidated financial position, results of operation or liquidity. 11. SUBSEQUENT EVENT During March 1999, the Race Park formed SHRP Valley LLP, a wholly-owned limited liability company, which then entered into a six year agreement with a company to lease a greyhound track located in Harlingen, Texas. A management agreement was also entered into between the parties in connection with the management of the associated pari- mutuel wagering license. The Race Park also has an option to purchase 100% of the equity interest in the company that owns the greyhound track and the wagering license for the term of the lease, subject to certain conditions. Lease payments under the terms of the agreement total $300 annually. The agreements are contingent upon the satisfactory completion of a 90 day due diligence and feasibility study currently being conducted by the Race Park. If the due diligence study is satisfactory, Race Park management plans to re-open the facility and conduct year around horse and dog simulcasting and a season of live greyhound racing at the track. The transaction is also subject to the approval of the Texas Racing Commission. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information, as of March 1, 1999, with respect to the executive officers of the Partnership and the directors of the Managing General Partner.
Name Age Position James D. Noteware 46 President (1) Robert L. Bork 60 Senior Vice President and General Manager (2) Ann M. McGovern 38 Vice President of Operations James H. Paulin, 55 Vice President Jr. Michael J. Vitek 36 Vice President of Accounting
THE MANAGING GENERAL PARTNER
Name Age Position - - ------------ ------- ------------ Charles E. 58 Chairman of the Board Hurwitz D. Kent Anderson 57 Director (3) J. Kent Friedman 55 Director (3) James D. Noteware 46 Director Paul N. Schwartz 52 Director (1) Mr. Noteware is not an employee of the Partnership, the Race Park or the Managing General Partner. (2) Principal Executive Officer of the Partnership (3) Until such time as the Extendible Notes are repaid, the Additional General Partner is entitled to designate at least one-third of the directors of the Managing General Partner (the "AGP DIRECTORS"). D. Kent Anderson and J. Kent Friedman currently serve as AGP Directors. A majority vote of the AGP Directors is required with respect to certain significant events (e.g. mergers, consolidations, the sale of all or the substantial portion of the Partnership s assets, reorganizations, incurrence of debt in excess of $5 million, and voluntary acts of insolvency).
James D. Noteware has served as President of the Partnership since August 1994. Mr. Noteware is also President and a Director of the Managing General Partner. Mr. Noteware previously served as interim General Manager of the Partnership from November 1994 through October 1995. Mr. Noteware has served as President and Chief Executive Officer of MAXXAM Property Company ("MPC"), a wholly owned subsidiary of MAXXAM, since January 1993. From November 1990 through December 1992, Mr. Noteware was Chairman, President and Chief Executive Officer of Phoenix Consulting, Inc., a real estate management and consulting company. Mr. Noteware served as a national director in the Real Estate Advisory Services Department of Price Waterhouse from April 1991 through January 1993. Prior to November 1990, Mr. Noteware served as National Director in the Real Estate Advisory Services Department at Laventhol & Horwath. Robert L. Bork has served as Senior Vice President and General Manager of the Partnership since October 1995. Mr. Bork previously served four years as Vice President-General Manager and Chief Operating Officer of Arlington International Racecourse, Inc. in Arlington Heights, Illinois. Prior to such time, Mr. Bork served as Vice President-General Manager of Philadelphia Park in Benslem, Pennsylvania and Garden State Park in Cherry Hill, New Jersey. Mr. Bork is a director and Secretary of the Thoroughbred Racing Association of America, a director of the Thoroughbred Racing Protective Bureau, Chairman of the Thoroughbred Racing Association Technology Committee and a director of the Cy-Fair Chamber of Commerce. Ann M. McGovern has served as Vice President of Operations of the Partnership since September 1994. Ms. McGovern previously served for 11 years with the Racing Division of the Edward J. De Bartolo Corporation, most recently as Director of Operations at Remington Park in Oklahoma City, Oklahoma from April 1991 to October 1994 and prior to that as the Assistant Director of Operations since 1988. James H. Paulin, Jr. has served as Vice President of the Partnership since November 1993. Mr. Paulin has been the Secretary- Treasurer of Federated Development Company ("FEDERATED") from May 1983 to December 31, 1998, and Secretary of Federated from March 1977 to December 31, 1998. Federated is a New York business trust primarily engaged in the management of real estate investments and, through its position as a significant stockholder of MAXXAM, in the businesses conducted by MAXXAM. Michael J. Vitek has served as Vice President of Accounting of the Partnership since November 1994. Mr. Vitek previously served from April 1994 to November 1994 as Vice President, Finance and Chief Financial Officer of Hysan Corporation, a chemical manufacturing and distribution company and a subsidiary of Wedge Group, Inc., a private investment company. Mr. Vitek previously served as Corporate Controller of Wedge Group, Inc. from October 1991 to March 1994. He previously served for six years with the public accounting firm of KPMG Peat Marwick, most recently as a Senior Manager. Charles E. Hurwitz is a Director and the Chairman of the Board and President of the Managing General Partner. Mr. Hurwitz has served as a member of the Board of Directors and the Executive Committee of MAXXAM since August 1978 and was elected as Chairman of the Board and Chief Executive Officer of MAXXAM in March 1980. Mr. Hurwitz also served MAXXAM as President from January 1993 to January 1998. Mr. Hurwitz has served as a director of Kaiser Aluminum Corporation ("KAISER"), a majority-owned subsidiary of MAXXAM, since October 1988, and as a director of Kaiser Aluminum & Chemical Corporation ("KACC"), a fully integrated aluminum producer that is a subsidiary of Kaiser, since November 1988. Mr. Hurwitz is Chairman of the Board, Chief Executive Officer and President of MAXXAM Group Inc. ("MGI"), a wholly owned subsidiary of MAXXAM which is engaged in forest products operations, and MGI s parent, MAXXAM Group Holdings Inc. ("MGHI"). Mr. Hurwitz has been, since January 1974, Chairman of the Board and Chief Executive Officer of Federated. D. Kent Anderson is a Director of the Managing General Partner per the designation of the Additional General Partner. Mr. Anderson has been the Executive Banking Officer of Compass Bank since its April 1996 merger with Post Oak Bank. From 1991 until the merger, Mr. Anderson was Chairman of the Board and Chief Executive Officer of Post Oak Bank. From 1988 through October 1991, Mr. Anderson held several executive positions, including Chairman of the Board, with First Interstate Bank of Texas, N.A. Mr. Anderson is currently a Trustee and member of the Board of Governors of Rice University. He has served on several State of Texas committees and on the Board of the Greater Houston Partnership, the Texas Chamber of Commerce, and the Texas Research League. J. Kent Friedman is a Director of the Managing General Partner per the designation of the Additional General Partner. Mr. Friedman has been a partner of Mayor, Day, Caldwell & Keeton, L.L.P., a Houston law firm, since 1982. Prior to such time Mr. Friedman was a partner at Butler & Binion, a Houston law firm. Mr. Friedman is a member of the Executive Committee of the Board of Directors of the Houston Symphony, President of the Friends of Hermann Park and Co-President of the Foundation for Jones Hall. Paul N. Schwartz is a Director and Vice President of the Managing General Partner. Mr. Schwartz was named a director, President and Chief Operating Officer of MAXXAM in January 1998. Mr. Schwartz has served as Chief Financial Officer of MAXXAM since January 1995. From January 1995 to January 1998 he also served as Executive Vice President of MAXXAM. Prior to that he served as Senior Vice President-Corporate Development of MAXXAM from June 1987 to January 1995, as Vice President-Corporate Development from July 1985 to June 1987 and as Vice President since 1982. Mr. Schwartz also serves as a director and a Vice President and Chief Financial Officer of MGHI, MGI, and Scotia Pacific Company LLC, a subsidiary of MGI engaged in forest products operations. Directors of the Managing General Partner are elected annually to serve for one year and until their successors are duly elected, qualified, and approved by the Racing Commission. Each director of the Managing General Partner is required to be approved by the Racing Commission. The current directors of the Managing General Partner have received the approval of the Racing Commission. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth compensation information, cash and non-cash, for each of the Partnership s last three completed fiscal years with respect to (a) all individuals serving as the Partnership s chief executive officer during the last fiscal year, and (b) the other most highly compensated executive officers of the Partnership (other than the current chief executive officer) who were serving as executive officers of the Partnership at the end of 1998 and who received over $100,000 in aggregate salary and bonus in respect of 1998.
Annual Compensation (a) (b) (c) (d) (e) (f) Name and Year Salary Bonus Other (1) - - ------------ ----- ($) ($) Annual All Principal ------- -------- Compensa Other Position tion (1) Compensa ($) tion ------- ($) ------- Robert L. Bork (2) 1998 216,320 63,333 - - Senior Vice President and 1997 208,000 35,000 - - General Manager 1996 200,000 41,250 - 4,806(3) Ann McGovern 1998 119,000 28,333 - - Vice President of 1997 114,400 15,000 - - Operations 1996 110,000 15,000 - - Michael J. Vitek 1998 107,000 28,333 - - Vice President of 1997 93,600 15,000 - - Accounting 1996 90,000 15,000 - - (1) Excludes perquisites and other personal benefits because the aggregate amount of such compensation is the lesser of either $50,000 or 10% of the total of annual salary and bonus reported for the named executive officer. (2) Mr. Bork served as chief executive officer of the Partnership during 1996, 1997 and 1998. Mr. Bork commenced his employment with the Partnership on October 25, 1995. (3) Reflects reimbursement of moving related expenses.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Agreements have been entered into with each of Messrs. Bork and Vitek and Ms. McGovern regarding their employment. Mr. Bork s agreement provides for a base annual salary of $200,000 and a bonus of $25,000 on the first anniversary date of his employment. The agreement further provides that commencing the second year of employment he will participate in an executive compensation plan of the Partnership. Mr. Bork s agreement also provided for payment of certain relocation expenses. The incentive compensation plan referred to above was provided for in general terms pursuant to the bankruptcy reorganization plan; however, no specific details have been proposed or formulated to date with respect to such an incentive plan. Ms. McGovern s agreement provides for a base annual salary of $110,000 per year, a discretionary bonus of $10,000 in the first year of employment and the payment of certain relocation expenses. The agreement also indicated that Ms. McGovern would be considered for inclusion in the prior employee incentive program of the Partnership. Mr. Vitek s agreement provides for a base annual salary of $90,000 and a discretionary bonus of $15,000 after the first year of employment. On December 30, 1998, Messrs. Bork and Vitek, along with Ms. McGovern, were each awarded a one-time bonus with respect to the Partnership s 1998 operating results. Each of these bonuses is payable in three equal annual installments, with the first of such installments having been received by each of the executives on December 31, 1998, and with the remaining two installments of like amount being due and payable on December 31, 1999 and December 31, 2000 respectively. Each of the executives will receive the remaining installments of the bonus so long as he or she continues to be employed by the Partnership as of the respective payment dates. COMPENSATION OF DIRECTORS AND POLICY COMMITTEE MEMBERS Messrs. Anderson and Friedman receive $25,000 per year, plus reimbursement of expenses, as compensation for their services. The other directors of the Managing General Partner are reimbursed for their expenses but are not otherwise compensated by the Partnership for their services as such. COMPENSATION COMMITTEE REPORT SHRP General Partner, Inc. is the managing general partner of the Partnership, and the names appearing below are all of the directors of SHRP General Partner, Inc. The Board of Directors of SHRP General Partner, Inc. (the "BOARD") acts with respect to compensation matters, as a compensation committee has not been appointed. The executive officers named in the Summary Compensation Table have been retained and are compensated in accordance with their respective individual employment letter agreements. In reaching those agreements, the customary levels and types of pay prevalent for such positions in the horse racing industry were considered and served as guidelines. The individual salary histories and previous experience of the executives were also considered as was the timing within which the Partnership needed to replace previously discharged executives. Other than participation in a group health insurance program which is partially employer-provided, the only non-salary direct compensation being provided to such executives are incentive bonuses. Executives may be considered for a discretionary bonus on an annual basis. The President of the Partnership outlines functions and goals for each executive officer and formulates bonus levels for executive officers (with the advice and consent of the Board in certain instances). D. Kent Anderson J. Kent Friedman Charles E. Hurwitz James D. Noteware Paul N. Schwartz ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT THE PARTNERSHIP The following table sets forth the beneficial ownership of partnership interests in the Partnership as of March 1, 1999 of (i) each person known by the Partnership to beneficially own five percent or more of the outstanding partnership interests, (ii) each director of the Managing General Partner who owns a partnership interest, and (iii) all directors and officers of the Managing General Partner and the Partnership as a group. Except as otherwise indicated below, each of the persons named in the table has sole voting and investment power with respect to the partnership interest shown as beneficially owned by him.
Name and Address of Type of Interest Aggregate Beneficial Owner ------------ Partnership - - ------------ Interest New SHRP Acquisition, Limited Partner 64.8% Inc. (1) SHRP Equity, Inc. (2) Additional General 33.3% Partner (1) MAXXAM owns all of the issued and outstanding shares of common stock of New SHRP Acquisition, Inc. Mr. Charles E. Hurwitz and affiliates of Federated Development Company ("FEDERATED") collectively own 99.2% and 37.7% of MAXXAM s Class A preferred stock and common stock, respectively (resulting in a combined voting control of approximately 68.9%). Mr. Hurwitz is the Chairman of the Board and Chief Executive Officer of MAXXAM and Chairman and Chief Executive Officer of Federated. Federated is wholly owned by Mr. Hurwitz, members of his immediate family and trusts for the benefit thereof. (2) The outstanding shares of stock of SHRP Equity, Inc. were issued to the holders of allowed unsecured claims in connection with the bankruptcy proceedings of the Partnership. Wholly owned subsidiaries of MAXXAM, beneficially own 97.5% of the issued and outstanding stock of SHRP Equity, Inc. which equates to a 32.5% interest in the Partnership.
THE MANAGING GENERAL PARTNER Sam Houston Entertainment Corp., a wholly owned subsidiary of MAXXAM, owns all of the Common Stock of the Managing General Partner of which 3,000 shares are currently issued and outstanding. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain individuals employed by MAXXAM and its wholly owned subsidiaries provide management, legal, financial, corporate development and other services to the Partnership from time to time. These affiliates are reimbursed for their estimated actual costs incurred in providing services to the Partnership. As of March 1, 1999, MAXXAM and its subsidiaries have received an aggregate of $424,590 in respect of such services performed in 1998. J. Kent Friedman, AGP Director, is a partner of a law firm that has provided services to the Partnership. In addition, such law firm has represented MAXXAM in various matters not related to the Partnership. The Partnership had an agreement with Mr. Friedman s law firm to coordinate legislative efforts. As of March 1, 1999, Mr. Friedman s law firm has received an aggregate of $31,492 in respect of such services performed in 1998. See also Notes 8 and 9 to the Consolidated Financial Statements appearing in Item 8. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) INDEX TO FINANCIAL STATEMENTS PAGE 1. FINANCIAL STATEMENTS (APPEARING IN ITEM 8): Report of Independent Certified Public Accountants 21 Consolidated balance sheets at December 31, 1998 and 199722 Consolidated statements of operations for the three years ended December 31, 199823 Consolidated statements of partners capital (deficit) for the three years ended December 31, 199824 Consolidated statements of cash flows for the three years ended December 31, 199825 Notes to consolidated financial statements26 2. FINANCIAL STATEMENT SCHEDULES: All schedules are inapplicable or the required information is included in the financial statements or the notes thereto. (B) REPORTS ON FORM 8-K None. (C) EXHIBITS Reference is made to the Index of Exhibits immediately preceding the exhibits hereto (beginning on page 44) which index is incorporated herein by reference. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. SAM HOUSTON RACE PARK, LTD. Date: March 30, 1999 By: /S/ MICHAEL J. VITEK Michael J. Vitek, Vice President of Accounting Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 30, 1999 By: /S/ ROBERT L. BORK Robert L. Bork, General Manager (Principal Executive Officer) Date: March 30, 1999 By: /S/ MICHAEL J. VITEK Michael J. Vitek, Vice President of Accounting (Principal Financial and Accounting Officer) SAM HOUSTON RACE PARK, LTD. By: SHRP General Partner, Inc. its Managing General Partner Date: March 30, 1999 By:/S/ CHARLES E. HURWITZ Charles E. Hurwitz, Chairman of the Board Date: March 30, 1999 By:/S/ PAUL N. SCHWARTZ Paul N. Schwartz, Director Date: March 30, 1999 By:/S/ JAMES D. NOTEWARE James D. Noteware, Director Date: March 30, 1999 By:/S/ D. KENT ANDERSON D. Kent Anderson, Director Date: March 30, 1999 By:/S/ J. KENT FRIEDMAN J. Kent Friedman, Director Exhibit Description Number 3.1 Third Amended and Restated Limited Partnership Agreement of Sam Houston Race Park, Ltd. dated October 6, 1995 (incorporated herein by reference to Exhibit 3.1 to the Partnership s Form 10-Q dated September 30, 1995) 4.1 Amended and Restated Indenture dated October 6, 1995 by and among the Partnership, New SHRP Capital Corp., SHRP General Partner, Inc. and First Bank National Association, Trustee, including the related form of Note (incorporated herein by reference to Exhibit 4.1 to the Partnership s Form 10-Q dated September 30, 1995) Amended and Restated Deed of Trust, Assignment, Security Agreement and Financing Statement dated October 6, 1995 4.2 among the Partnership, Richard Prokosch, as Trustee, and First Bank National Association, as Mortgagee (incorporated herein by reference to Exhibit 4.2 to the Partnership s Form 10-Q dated September 30, 1995) Deed of Trust, Assignment, Security Agreement and Financing Statement dated October 6, 1995 among the 4.3 Partnership, Richard Prokosch, as Trustee, and First Bank National Association, as Mortgagee (incorporated herein by reference to Exhibit 4.3 to the Partnership s Form 10-Q dated September 30, 1995) Amended and Restated License Negative Pledge dated October 6, 1995 executed by the Partnership in favor of 4.4 Trustee (incorporated herein by reference to Exhibit 4.4 to the Partnership s Form 10-Q dated September 30, 1995) Amended and Restated Real Estate Tax Escrow and Security Agreement dated July 1, 1997 among the Partnership, 4.5 Trustee and Southwest Bank of Texas 9 Voting Agreement dated October 6, 1995 among SHRP General Partner, Inc., Sam Houston Entertainment Corp., SHRP Equity, Inc. and MAXXAM Inc. (incorporated herein by reference to Exhibit 9 to the Partnership s Form 10-Q dated September 30, 1995) 10.1 Form of Line of Credit Agreement dated October 6, 1995 between the Partnership and certain lenders (the "LINE OF CREDIT AGREEMENT") (incorporated herein by reference to Exhibit 10.1 to the Partnership s Form 10-Q dated September 30, 1995) Form of Cash Escrow Agreement with respect to the Line of Credit Agreement (incorporated herein by reference to 10.2 Exhibit 10.2 to the Partnership s Form 10-Q dated September 30, 1995) Guaranty of MAXXAM Inc. dated October 6, 1995 in favor of the Partnership with respect to the obligations of SHRP 10.3 General Partner, Inc. under the Line of Credit Agreement (incorporated herein by reference to Exhibit 10.3 to the Partnership s Form 10-Q dated September 30, 1995) Exhibit Description Number Registration Rights Agreement dated October 6, 1995 among the Partnership, SHRP Equity, Inc. and First Bank 10.4 National Association (incorporated herein by reference to Exhibit 10.5 to the Partnership s Form 10-Q dated September 30, 1995) 10.5 Instrument Adherence of MAXXAM Inc. dated October 6, of 1995 (incorporated herein by reference to Exhibit 10.7 to the Partnership s Form 10-Q dated September 30, 1995) 10.6 Instrument dated of October 6, 1995 (incorporated herein by reference to Adherence Exhibit 10.8 to the Partnership s Form 10-Q dated of Charles September 30, 1995) E. Hurwitz Horsemen s Agreement dated November 26, 1996 between Texas Thoroughbred HBPA, Inc. and the Partnership 10.7 (incorporated herein by reference to Exhibit 10.13 to the Partnership s Form 10-K dated December 31, 1996) Addendum dated December 1, 1997 to Horsemen s Agreement 10.8 between the Texas Thoroughbred HBPA, Inc. and the Partnership Horsemen s Agreement dated March 6, 1997 between the 10.9 Texas Horsemen s Benevolent and Protective Association and the Partnership Addendum dated December 1, 1997 to Horsemen s Agreement 10.10 between the Texas Horsemen s Benevolent and Protective Association and the Partnership 10.11 Totalisato r Services Agreement dated September 8, 1997 between 10.1 to the Autotote Partnership Form 10-Q for the quarter ended September 30, Systems, 1997) Inc. and the Partnershi p (incorpora ted herein by reference to Exhibit 10.12 Promissory Note dated December 13, 1994 by the Partnership in favor of Harris County, Texas (incorporated herein by reference to Exhibit 10.41 to the Partnership s Form 10-K for the year ended December 31, 1994) 10.13 Satellite on Agreement dated February 24, 1998 Transmissi between Autotote Communications Services, Inc. and the Partnership Agreement dated December 30, 1993 between the Partnership and International Sound Corporation (incorporated herein 10.14 by reference to Exhibit 10.45 to the Partnership s Form 10-K for the year ended December 31, 1994) Amendment to Agreement dated December 30, 1993 between the Partnership and International Sound Corporation 10.15 (incorporated herein by reference to Exhibit 10.1 to the Partnership s Form 10-Q dated June 30, 1997) Exhibit Description Number 10.16 Alcoholic Beverage Concession Agreement dated September 19, 1996 between 97, Inc. and the Partnership (incorporated herein by reference to the Partnership s Form 10-K dated December 31, 1996) *10.17 Lease Agreement dated March 3, 1999 between Valley Racing Association and SHRP Valley LLC. *10.18 Management Agreement dated March 3, 1999 between Valley Racing Association and SHRP Valley LLC. Executive Compensation Plans and Arrangements Employment Agreement, dated November 24, 1992 between MAXXAM Property Company and James D. Noteware 10.19 (incorporated herein by reference to Exhibit 10.33 to the Partnership s Form 10-K for the year ended December 31, 1994) 10.20 Letter 1994 between the Agreement, Partnership and Ann M. McGovern (incorporated herein by dated reference to Exhibit 10.34 to the Partnership s Form 10-K August 19, for the year ended December 31, 1994) 10.21 Letter Agreement, dated November 11, 1994 between the Partnership and Michael J. Vitek (incorporated herein by reference to Exhibit 10.35 to the Partnership s Form 10-K for the year ended December 31, 1994) Agreement between the Partnership and Robert L. Bork (incorporated herein by reference to Exhibit 10.10 to the 10.22 Partnership s Form 10-Q dated September 30, 1995) * Included with this filing. EX-10 2 LEASE AGREEMENT BETWEEN VALLEY RACING ASSOCIATION AND SHRP VALLEY LLC LEASE AGREEMENT This Lease ("Lease") is made this 3rd day of March, 1999 between Valley Racing Association, a joint venture comprised of Ladbroke Racing Texas Corporation, a Texas corporation and Ladbroke Racing Management Texas Corporation, a Texas corporation ("Lessor")and SHRP Valley LLC ("Lessee"). If Lessor reorganizes as a corporate entity as described in Section 5(c) of this Agreement any reference to Lessor in this Agreement shall include that corporate entity. 1. Premises. Lessor, for and in consideration of the covenants and agreements of the Lessee contained in this Lease hereby grants, demises and leases to Lessee, and Lessee for and in consideration of the covenants and agreements of the Lessor contained in this Lease and the Management Agreement (defined in Section 4(d) of this Lease), hereby leases and takes from Lessor, for the Rent and upon the terms and conditions provided in this Lease, the following described Property: (a) The land described in Exhibit "A" to this Lease (collectively, the "Land"), together with all of the buildings, improvements and fixtures on the Land, and all of Lessee's improvements that are constructed in accordance with the terms of this Lease (together the "Improvements") and all appurtenances and rights relating to the Land and the Improvements, including also all interest of Lessor in and to adjacent streets, alleys, easements, rights-of-way and rights of ingress and egress to the Land and all other land owned or claimed by Lessor that is adjacent, contiguous to or a part of the Land, whether owned or claimed by deed, limitations or otherwise and whether or not located inside or outside the metes and bounds description of the Land or whether or not held under fence by Lessor (the Land, Improvements, appurtenances and other rights are referred to collectively as the "Premises"). (b) All of the Personal Property described on Exhibit "A-1" to this Lease and all other equipment and personal property owned by Lessor and located in, on or used in connection with the Premises including, without limitation the right to use the name "Valley Greyhound Race Park" and other names used for the Premises, sign rights, all telephone numbers related to the operation of the Premises, all keys and all goodwill relating to the Premises, all of Lessor's right, title and interest in all water, waste water, drainage, telephone and other utilities, utility lines, utility connections, utility commitments, utility capacity and reservations, and other rights, capital recovery charges and other fees paid or deposits made by Lessor, and any reimbursements or other rights belonging to Lessor which pertain to any utilities or utility services provided, to be provided, or available to all or any part of the Property (collectively the "Personal Property"). 2. Use. Lessee may use the Premises and Personal Property for conducting pari-mutuel racing operations pursuant to the pari-mutuel greyhound race track license granted to Lessor by the Texas Racing Commission (the "Commission") for Cameron County, Texas as more fully described in the Management Agreement (the "License") and any and all other uses which will not violate the terms of the License or otherwise prevent Lessor from conducting pari-mutuel wagering at the Premises. 3. Term and Renewal Options. (a) The term of this Lease ("Term") shall begin on the date of this Agreement (the "Commencement Date") and terminate at midnight on the last day of the 72nd calendar month after the Rent Commencement Date (defined in Section 4(b) below), unless sooner terminated in accordance with this Lease. (b) Lessee shall have and is hereby granted a total of eight successive options to extend the term of this Lease for any period of time not exceeding six years for each option, upon the same terms, covenants and conditions as are provided in this Lease, except that the Base Rent shall be $1,000.00 per month. If Lessee shall elect to exercise one or more of these options it shall do so by giving Lessor written notice at least 180 days prior to the expiration of the primary term, or at least 180 days prior to the then current option term, and in that notice Lessee shall state the date to which it elects to extend the Term. Any reference in this Lease to the "Term" shall include any option term exercised in accordance with the terms of this Lease. 4. Rent. (a) Initial Rent. Unless Lessee terminates this Lease in accordance with Section 5(b) below, Lessee shall pay to Lessor the sum of $100,000.00 within 10 days after the Due Diligence Period expires. (b) Base Rent. Subject to the terms and conditions provided in this Lease, Lessee shall pay to Lessor as rent ("Rent") for each Lease Year during the term of this Lease, commencing on the first day of the first month following the expiration of 60 days after the expiration of the Due Diligence Period (defined below) ("Refurbishment Period"), unless the Lease is terminated during the Due Diligence Period (the "Rent Commencement Date"), $300,000.00 per Lease Year, as defined below, in advance and in equal monthly payments of $25,000.00 on or before the first day of each month during the Term. A "Lease Year" shall consist of a 12-month period beginning on the Rent Commencement Date or any anniversary of the Rent Commencement Date. (c) Consideration to Lessee. Lessor and Lessee acknowledge and agree that a material consideration for Lessee's agreement to Lease the Premises from Lessor is Lessor's compliance with the Management Agreement pertaining to the License (the "Management Agreement") between Lessor and Lessee dated the same date as this Lease. A default by Lessor under the Management Agreement shall be deemed to be a default by Lessor under this Lease. A default by Lessee under the Management Agreement shall be deemed to be a default by Lessee under this Lease. (d) Payment. All payments of Rent, Initial Rent and other amounts payable to Lessor under this Lease shall be paid to Lessor at the office of Lessor at 3260 Blume Drive, Suite 500, Richmond, California 94806, or at such other place as Lessor may designate. (e) Late Charge. If any payment of rent is not paid by Lessee when due and such failure to pay is not cured by Lessee within three business days after Lessee receiving written notice from Lessor that it has not received the payment, that payment shall be considered late and an administrative charge of $250.00 shall be due and payable by Lessee to Lessor on demand from Lessor. Lessor and Lessee agree that this administrative charge represents a reasonable estimate of costs and expenses incurred by Lessor and is fair compensation to Lessor for its loss suffered by the late payment by Lessee. The date the payment is received by Lessor shall be considered the effective date for purposes of determining the late charge. Any payments made by check shall not be deemed received if such check is not paid upon presentation to Lessee's indicated bank. Lessor shall immediately notify Lessee if a check is not honored. Acceptance by Lessor of a late rent payment and late charge shall not constitute a waiver of any Lessor's rights and remedies available in connection with any subsequent failure of Lessee to pay rent or to make any other payment due Lessor under this Lease in the manner or time provided for in this Lease. 5. Due Diligence Period. (a) Inspection by Lessee. Lessee and Lessee's representatives and contractors shall have until the expiration of 90 days (the "Due Diligence Period") after Lessee receives the Records (defined below) to determine the feasibility of the Premises for Lessee's purposes and to visit and inspect (including without limitation having engineering and/or environmental tests, soil, and other tests and studies made) the Premises. During the Due Diligence Period, Lessee shall be allowed to inspect the following records (the "Records") pertaining to the Premises, which shall be provided by the Lessor to the extent they are available to Lessor: ad valorem tax and sales and use statements and receipts for the last five years, real and personal property tax renditions, filings and returns for the last five years, utility statements for the last five years, any leases affecting the Premises or the Personal Property, operating statements for the last three years in which the Premises was an operating facility, all pleadings and judgments in any law suit and a brief description of all litigation to which Lessor or the Premises has been named a party and all pending or threatened litigation or claims or administrative or governmental proceedings during the five years immediately preceding the date of this Lease, insurance policies, all contracts and agreements, publications and advertisements, all available plans and specifications for the Improvements, environmental, soil, structural and engineering tests, reports and studies, repairs and capital improvement records, all franchises, business licenses, permits, certificates and evidence of any governmental approvals, and a complete itemized schedule of all debts, obligations and liabilities which affect or relate to the Premises and/or the Personal Property or the operation of the Premises, certified as to its accuracy by Lessor and any other documents relating to the Premises and/or the Personal Property, or any part of the Premises and/or the Personal Property, or to the operation of the Premises. If requested to do so by Lessee, Lessor shall certify to the correctness of any other such document or to the completeness of any such document or production of documents. (b) Termination During Due Diligence. If Lessee, in its sole discretion, is dissatisfied with the condition of the Premises and/or the Personal Property, with the results of the tests and studies, or with the information in any of the Records or other documents, or for any other reason determines that the Premises are not suitable then Lessee shall have the absolute right and option to terminate this Lease, which must be exercised by giving written notice to Lessor prior to the expiration of the Due Diligence Period. In the event of such a termination, the parties shall have no other or further obligation or liability to each other. In the event that no notice of termination is given within the Due Diligence Period, then this Lease shall continue to be binding and in full force and effect against Lessee and Lessor. Lessor hereby acknowledges the receipt from Lessee of $50.00 as consideration for this option. (c) Approvals During Due Diligence. During the Due Diligence Period, Lessor and Lessee shall use their best efforts to obtain the approval from the Commission to issue a resolution approving this Lease, and the Management Agreement, including, without limitation specific approval of Lessee's rights to continue racing operations under the License if it purchases Lessor in accordance with the terms of the Management Agreement and authorizing Lessor to reorganize its business entity status from a joint venture to a corporation (and Lessor shall reorganize) as more specifically described in the Management Agreement. 6. Survey. Within 30 days after the date of this Lease, Lessor shall furnish to Lessee an on-the-ground survey(the "Survey"), including six copies of the survey plat and field notes, of the Land and Improvements, which survey shall be prepared, dated after the date of this Lease, Date, bear the official seal of and be signed and certified (as to all matters in this Section 6(a) through (e) in form reasonably acceptable to Lessee) by a licensed Texas land surveyor who is acceptable to the Title Company (defined below) and to Lessee, in form and substance acceptable to the Title Company for deleting from the Leasehold policy of title insurance at Lessor's expense the printed exceptions pertaining to boundaries and encroachments (other than "shortage in area"). The cost of the Survey shall be split equally between Lessor and Lessee. The Survey shall show (a) the exact location of the Improvements including all parking areas (including the number of parking spaces), fences, walls, and other improvements along the property lines and that they are all located within the boundaries of the Land, and of any setback lines, easements, rights-of-way, roadways, traversing, adjoining or bounding the Land; (b) the number of square feet within the boundaries of the Land and within any easements, rights-of-way and encroachments; (c) that all of the parcels comprise a single contiguous parcel of land with no intervening strips, parcels or easements (except the permitted exceptions) between the Land and the public roads adjacent to the Land and that there is full and complete access to and from the Premises from and to those roads; (d) that none of the Premises lies within the 100 year flood plain (or identify by metes and bounds any portion of the Premises, if any, that may lie within the 100 year flood plain); and (e) that there are no encroachments on the Premises. The surveyor's certificate shall read as follows: "TO LESSEE, LESSOR, TITLE COMPANY AND OTHER PARTIES INTERESTED IN THE TITLE TO THE PROPERTY SURVEYED: The undersigned hereby certifies that this survey was this day made on the ground of the property described hereon and is correct; that there are no discrepancies, conflicts or shortages in area or boundary lines, or any encroachments, or any overlapping of improvements, or any easements or rights of way except as shown hereon; that such property has access to and from Ed Carey Drive and ___ Road, dedicated roadways, as shown hereon; that such property is entirely outside the 100 year flood plain; that, except as shown hereon, there are no visible easements, rights-of-way, drainage ditches, power lines, set back and/or building lines and that this survey conforms to the current Texas Surveyors Association Standards and Specifications for a Category 1A, Condition II Survey." 7. Title Matters. (a) Leasehold Policy of Title Insurance. Lessor shall deliver on or before 10 days after the expiration of the Due Diligence Period ("Policy Issuance Date") a Leasehold Policy of Title Insurance (on a form prescribed by the State Board of Insurance of the State of Texas) (the "Title Policy") issued through Title Agency of Houston, Inc., 5251 Westheimer, Suite 150, Houston, Texas, (the "Title Company"), insuring Lessee's leasehold interest in title to the Land and Improvements in Lessee in the amount of $2,800,000.00 and containing the following exceptions, and none other: (1) standby fees and taxes for the year of the Closing and subsequent years; (2) the standard printed exception pertaining to boundaries and encroachments shall be deleted except for "shortage in area," and (3) other matters which become permitted exceptions under the terms of this Lease (collectively the "Permitted Exceptions"). The cost of the Title Policy shall be split equally between Lessor and Lessee. (b) Title Commitment; Review of Instruments and Survey. Within 15 days after the date of this Lease, Lessor shall obtain and deliver to Lessee (i) a written commitment (the "Commitment") from the Title Company to issue the Leasehold Policy of Title Insurance, which commitment shall be dated after the date of this Lease, and (ii) legible copies of all instruments (the "Instruments") that are referred to in that Commitment. (1) Review of Title. Lessee shall have 30 days after Lessor's receipt of the Commitment, the Instruments and the Survey, in which to review those items. If Lessee fails to give notice to Lessor of an objection to any of the Instruments, the Commitment or the Survey within this 30 day period after all of these items have been received by Lessee, Lessee shall be deemed to have no objection to the Instruments or the Survey and the matters not objected to shall become "Permitted Exceptions." (2) Title Exceptions. If the Commitment, the Instruments or the Survey, or any revisions to the Commitment or Survey disclose any leases, liens, easements, reservations, restrictions, or other exceptions or encumbrances to Lessor's title other than the Permitted Exceptions, those additional exceptions or encumbrances shall be deemed to be defects in or objections to Lessor's title. Subject to the limitations in subsection (4) below, if Lessee gives notice of objection to Lessor, Lessor shall cure or remove the objections prior to the end of the Due Diligence Period. (3) Additional Exceptions. In addition, Lessor shall promptly notify Lessee at or prior to the Closing of any claims or other additional exceptions or encumbrances upon the Premises, or of any threats or notices of intention to condemn all or any part of the Premises, made known to Lessee prior to the Closing and which are not specifically listed in the Commitment (all of which shall also be deemed to be additional exceptions or encumbrances for purposes of this subparagraph). Lessor shall have until the Policy Issuance Date to cure or remove any additional exceptions or encumbrances, in order that the Leasehold Policy of Title Insurance will be issued to Lessee without the additional exceptions or encumbrances, and at or prior to the Policy Issuance Date shall deliver to Lessor a revised Commitment and Survey showing that the additional exceptions or encumbrances have been removed. (4) Cure Obligations. Lessor shall use due diligence in curing or removing any and all objections to the Instruments and any additional exceptions or encumbrances, provided, however, Lessor shall not be required to institute any suit or to spend more than $25,000.00 to remove any exceptions or encumbrances other than additional exceptions or encumbrances caused or created by Lessor after the date of this Lease which Lessee shall cure. If Lessee fails to cure or remove all of those additional exceptions or encumbrances and any objections to the instruments, then Lessee may waive any such exceptions, encumbrances or objections or shall have in addition to all rights and remedies permitted by law, the right to terminate this Lease. 8. Representations of Lessor. Lessor represents and warrants to Lessee that: (a) Title. Lessor is the owner of fee simple title to the Premises and the Personal Property, subject only to the matters that are listed in Exhibit "B" to this Lease, and has the right to lease the Premises and the Personal Property. Lessor hereby warrants and defends the title to the Premises and the Personal Property. (b) Claims. The Premises and the Personal Property are not subject to any prior lease or claims of parties in possession or claims for unpaid labor or materials. (c) Condemnation. There is no pending or threatened condemnation action or agreement in lieu thereof which affects the Premises. Additionally, except as otherwise shown on Exhibit "B," there are no monetary liens or encumbrances upon the Premises and/or the Personal Property that are or may be prior to this Lease. (d) Legal Proceedings. There is no action, suit or proceeding, pending or threatened against or affecting Lessor's title to the Premises. (e) Authorization. The execution, delivery and performance of this Lease by Lessor has been duly authorized and this Lease is valid and enforceable in accordance with its terms and will not be in conflict with any mortgage, indenture or other agreement binding upon Lessor. (f) Zoning. Lessor has no knowledge of any fact, action or proceeding, whether actual, pending or threatened, which could result in the modification or termination of the present zoning classification of the Premises, or the termination of full, free and adequate access to and from the Premises from all adjoining public highways and roads. (g) Improvements. The existing improvements and utilities on the Premises are in full compliance with all applicable building, health and zoning laws and ordinances, including, without limitation, the Americans with Disabilities Act and the Texas Architectural Barriers Act. Lessor knows of no latent or material structural defects in the Premises. (h) Notices. Lessor has not received any notice from any governmental authority having jurisdiction over the Premises requiring or specifying any work to be done on or to the Premises (i) Interference With Use. Lessor has no knowledge of any existing, threatened or contemplated action, circumstances or conditions (including, but not limited to subsurface conditions) which would materially interfere with the use of the Premises for the purposes for which it is intended to be used. (j) Access. The Premises have public access by roadways dedicated to and accepted by the State, City or County where the Premises are located. (k) Environmental. No hazardous waste or substances have been dumped, deposited, buried or otherwise exist on the Premises, and Lessor has no knowledge of any leaks of petroleum or hazardous materials. (l) Flood Plain. The Land is not located in a flood plain or a flood hazard area. (m) Taxes. All ad valorem real and personal property taxes, excise taxes, income taxes and sales and use taxes applicable to the Premises have been paid in full. (n) Books and Records. All books, records, financial statements and other such information provided by Lessor to Lessee are true and correct. 9. Quiet Enjoyment. Lessor hereby agrees that Lessee, upon paying the Rent and upon keeping and performing the covenants and agreements to be kept and performed by Lessee under this Lease, shall and may peaceably and quietly have, hold and enjoy the Premises during the Term. 10. Improvements to the Premises. Lessee may construct upon the Premises, improvements necessary to Lessee's use of the Premises in accordance with this Lease (collectively, "Lessee's Improvements"). All Lessee's Improvements that are from time to time constructed upon the Premises by Lessee or any sublessees shall be and remain the property of Lessee and the sublessees until the expiration of the term of this Lease, upon which the Lessee's Improvements (except for removables as provided in this Lease) that are then located upon the Premises shall become the property of Lessor. All construction by Lessee shall be subject to the following conditions: (a) Approvals. Lessee shall not make or cause to be made, any alterations of or improvements to the Premises which could compromise the structural integrity of the Premises or which will cost in excess of $150,000.00 (as to the improvements then made, not in the aggregate) to complete, without the prior written consent of the Lessor which consent shall not be unreasonably withheld or delayed. If Lessor fails to respond to a request for approval within 10 days of such request, that request shall be deemed approved. All other alterations and improvements shall be permitted without the necessity of Lessee obtaining the consent of Lessor. (b) Expenses. All costs, expenses and charges incurred in connection with any construction shall be Lessee's sole and exclusive obligation and Lessee hereby holds Lessor harmless and indemnifies Lessor from any of such costs, expenses and charges. With respect to any contract for any labor performed or materials delivered to the Premises in accordance with those construction contracts, Lessee may not act as the agent of Lessor. Lessee agrees to indemnify and hold Lessor harmless from all claims arising or alleged to arise from any act or omission of Lessee or Lessee's agents, employees, contractors, subcontractors, laborers, materialmen or invitees or arising from any bodily injury or property damage occurring or alleged to have occurred incident to Lessee's work at the Premises. (c) Liens. At all times prior to, during and subsequent to construction of Lessee's Improvements, Lessee shall keep Lessor's title to the Premises free and clear of all liens and encumbrances including but not limited to those filed by mechanics, laborers, and materialmen and all other security interests; provided, however, that Lessee shall have the right to mortgage and encumber its leasehold interest, but not Lessor's fee title to the Premises. (d) Compliance. All of Lessee's construction at the Premises shall be performed in a good and workmanlike manner in accordance with applicable building codes, regulations and all other legal requirements. (e) Permits. No alterations or construction shall commence until the Lessee has obtained all required permits and authorizations of all municipal departments and governmental subdivisions having jurisdiction. The Lessor shall join, but without expense to the Lessor, in the application for those permits or authorizations whenever such action is necessary and is required by Lessee. (f) Insurance. Workmen's compensation insurance covering all persons employed in connection with the work and with respect to whom death or bodily injury claims could be asserted against the Lessor, the Lessee or the Premises and, to the extent that the insurance required under this Lease does not adequately protect the Lessor with respect to those alterations, general liability insurance for the mutual benefit of the Lessor and the Lessee, with reasonable limits and deductible, shall be maintained by or on behalf of the Lessee at the Lessee's sole cost and expense at all times when any substantial work is in progress in connection with any alterations. Lessee shall also obtain and maintain, or cause the contractor(s) under its construction contract(s) to obtain and maintain, all risk builder's risk insurance to the full insurable value of the improvements to be constructed and materials stored at the Premises in connection with that construction. The builder's risk insurance shall name Lessor as an additional insured and shall be non-cancelable with respect to Lessor without at least 15 days notice from the insurer. All such insurance policies shall be in standard form and shall be in such responsible companies selected in good faith by Lessee. Certificates evidencing liability and workmen's compensation insurance issued by the respective insurers, bearing notations evidencing the payment of premiums or accompanied by other evidence reasonably satisfactory to the Lessor of payment, shall be delivered to the Lessor prior to the commencement of any alterations. Any loss or damage not covered by insurance provided by the Lessee will be borne and paid by the Lessee. 11. Taxes. During the Term, Lessee will pay or caused to be paid to Lessor (or as otherwise provided below), as and when the same shall become due, the following amounts: (a) Real Estate Taxes. Lessee agrees to pay directly to the taxing authorities all current taxes and assessments against the Premises during the term of this Lease after receipt by Lessee directly from the taxing authorities or presentation to Lessee by Lessor, of current tax statements from the applicable taxing authorities. Lessee, however, will pay only the lowest discounted amount and will not be required to pay any penalty, interest or cost accruing by reason of Lessor's failure to secure tax statements from the taxing authorities. Lessor shall upon the Rent Commencement Date direct the taxing authorities to send all tax statements directly to Lessee. Any tax or assessment payable in installments shall be paid in installments and Lessee shall only be responsible for the part that is payable during the term of this Lease. Lessee shall be responsible for the preparation and filing of all real and personal property renditions and/or tax returns relating to the Premises and Personal Property. Lessee, in the name of Lessor but at Lessee's sole expense, may protest any tax levied before any taxing authority or maintain any necessary legal action in reference to tax levied or for the recovery of any taxes paid by Lessee. Taxes for any period less than a calendar year shall be prorated on a daily basis. (b) Personal Property Taxes. Lessee shall pay prior to delinquency all taxes against and levied upon fixtures, furnishings, equipment, inventory and all other personal property of Lessee contained in or upon the Premises. Taxes for any period less than a calendar year shall be prorated on a daily basis. 12. Insurance. (a) Liability Insurance. Lessee shall, at its sole cost and expense, obtain and maintain in full force and effect, for the mutual benefit of Lessor and Lessee, comprehensive public liability insurance in the amount of $25,000,000.00 combined single limit coverage (with a deductible not in excess of $100,000.00), against claims for bodily injury, death or property damage arising out of the use and occupancy of the Premises. A certificate of that insurance shall be furnished to Lessor at the Rent Commencement Date and each renewal certificate of this policy shall be furnished to Lessor within five days after the expiration of the policy it renews. Each policy of insurance shall contain an agreement by the insurer, if obtainable, that the policy shall not be canceled without at least 10 days prior written notice to Lessor. This insurance may be in the form of a general coverage, floater policy or blanket policy issued by insurers of recognized responsibility. This policy shall include the Lessor as additional insured, shall contain cross-liability, severability of interest, and products liability endorsements, shall state that this insurance is primary insurance with respect to other insurance carried by Lessor, and shall include the following coverages: (1) Premises/Operations; (2) Contractual Liability; (3) Property Damage; and (4) Personal Injury Liability. (b) Property Insurance. Lessee shall, at its option, either (A) insure the Improvements covered by this Lease in an amount equal to their full replacement value (exclusive of the cost of excavations, foundations and footings) against loss or damage by fire and such other hazards as are currently found in the standard extended coverage endorsement, in the jurisdiction where the Premises are located, which policy shall include Lessor as an additional insured, and/or (B) elect to be a self-insurer for some or all of such property insurance with extended coverage. (c) General Insurance Requirements. All insurance policies carried by Lessee shall be issued in the name of Lessee and Lessor, as their respective interests may appear. Lessee shall have the right to adjust all losses and execute all proofs of loss in its name and/or in Lessor's name. The proceeds of that insurance shall be payable to and used by Lessee as provided in subsection (d) below. Lessee, in its discretion, may carry any insurance under a blanket fire and other hazards insurance policy or policies. However, a certificate or copy of the certificate evidencing the insurance shall be delivered to Lessor upon written request, unless Lessee has given Lessor notice of self-insurance as permitted under this Lease. At Lessee's option, any of the insurance which Lessee is required to procure under the provisions of this Section 12, may include a deductible for any loss as Lessee deems reasonable. (d) Proceeds of Property Insurance. Upon any property loss involving any of the Improvements, Lessee shall use the proceeds of its property insurance to reconstruct the Improvements in substantially the same design and configuration or, at Lessee's option, in such other design and configuration that is not materially less than the estimated replacement cost of the Improvements immediately prior to the date of the property loss; provided, however, that Lessee may, at its option, terminate this Lease upon any property loss to the Improvements exceeding 50% of the replacement cost in which event all insurance proceeds shall become payable solely to Lessor. During any period of reconstruction or repair of the Premises, this Lease shall continue in full force and effect except that Rent shall be abated for the length of time necessary for the reconstruction or repairs to be completed in proportion to the amount of floor area of the Premises rendered unusable. (e) Subrogation Waiver. Lessor and Lessee do hereby mutually waive as against one another all rights of recovery for damage sustained by either caused by the other, to the extent that the damage is compensated for by insurance maintained by the damaged party, and Lessor and Lessee agree that no party shall have any claim against the other by way of subrogation or assignment. 13. Indemnification. (a) Lessee. Lessee agrees that Lessor shall not be liable or accountable for any loss, theft, injury, death or damage to persons or property, from any cause or causes whatsoever and relating to events occurring during the Term, which at any time may be suffered or sustained by Lessee, or by any person using, occupying, or visiting the Premises and Lessee agrees to indemnify and save Lessor harmless from any and all claims, liabilities, losses, damages, costs and expenses whatsoever arising therefrom. Lessee agrees to pay for all damages done to the Premises by Lessee or any person permitted on the Premises by Lessee. (b) Lessor. Lessor hereby agrees to indemnify Lessee against any damage and expense Lessee may suffer as a result of any defect in title to the Premises which materially impairs Lessee's rights as a Lessee under this Lease, any liability relating to environmental contamination of the Premises or other events that occurred prior to the date of this Lease, and any liability relating to its default under or misrepresentations of Lessor contained in this Agreement. 14. Surrender on Termination. Lessee shall, upon expiration of the Term or upon earlier termination of this Lease for any reason, quit and surrender the Premises and the Improvements in good order, condition and repair, reasonable wear and tear and damage by fire, casualty or other causes not required under this Lease to be repaired by Lessee excepted. 15. Maintenance and Repairs. By acceptance of the Premises during the Due Diligence Period Lessee shall be deemed to have accepted the Premises in its "AS IS" condition. Lessee agrees to maintain the Premises and to keep both the interior and the exterior of the Improvements in good repair consistent with the condition in which the Premises are delivered to Lessee under this Lease, to maintain the surface of any parking area, if any, on the Premises to at least the condition as it exists on the Commencement Date, and be responsible for all glass and casualty damage, reasonable wear and tear excepted. Lessee will make all repairs and replacements at the Premises as it reasonably deems necessary for the operation of the Premises. All damage to the Premises, not caused by Lessor will be the responsibility of Lessee to repair and all maintenance will be performed and replacements and renewals will be made by Lessee at Lessee's cost and expense. In addition, Lessee will have professional preventive maintenance performed on all heating, ventilation and air conditioning equipment in the Premises at least once every 12 months during the term of this Lease and provide Lessor documentation satisfactory to Lessor that such maintenance has been performed upon written request by the Lessor. Lessor, and its agents (and any mortgagee or Deed of Trust beneficiary as to the Premises) will have a right to enter the Premises, at reasonable times which do not disturb or interfere with Lessee's business on the Premises, to inspect the condition of the Premises. 16. Use and Occupancy. Lessee may use and occupy the Premises for any and all lawful purposes. Lessee may, from time to time, grant easements over the Premises and obtain zoning changes and conditional use permits with respect to the Premises, provided they are limited to the term of this Lease. 17. Compliance with Laws. (a) Compliance. Lessee shall comply with all Applicable Laws (defined below) relating to the Premises with respect to Lessee's use of the Premises after the Commencement Date; provided, however, Lessee shall not be obligated to make any structural changes to existing improvements, incur expenses of a capital nature or remediate any environmental contamination of the Premises existing prior to the Commencement Date in order to comply with Applicable Laws. (b) Environmental Compliance. Lessee shall not cause the Premises, or permit the operation of any business or other activity on the Premises, or any occupancy or use of the Premises, to violate any applicable law, statute, ordinance, rule, regulation, order or determination of any federal, state or local governmental authority or any board of fire underwriters (or other body exercising similar function), or any restrictive covenant or deed restriction (recorded or otherwise affecting the Premises, including without limitation, all applicable zoning ordinances and buildings codes, flood disaster laws and health, industrial hygiene, and environmental laws, statutes, ordinances, rules and regulation, the Comprehensive Environmental Response Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et. seq., as amended from time to time, and regulations promulgated thereunder ("CERCLA"), the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et seq., as amended from time to time ("RCRA"), and regulations promulgated thereunder ("Applicable Laws"). Lessee shall obtain or cause to be obtained any permits, licenses or similar authorizations required by Applicable Laws to occupy, operate or use any buildings, improvements, fixtures and equipment now or hereafter located on the Premises and Lessor shall cooperate with Lessee in order to obtain them. Lessee shall not cause or allow any of its employees, licensees or invitees to cause the Release (defined below) of any Hazardous Substance (defined below) at, on or under any of the Premises. Notwithstanding the foregoing, Lessee may keep or permit to be stored, kept and/or used on the Premises Hazardous Substances relating to the operations conducted on the Premises provided they are stored, kept and/or used in compliance with all Applicable Laws. Lessee shall inform Lessor of any pending or threatened investigation, administrative order, or litigation with respect to the Release of a Hazardous Substance on the Premises of which it has actual knowledge, and promptly notify Lessor if Lessee shall receive any written communication from or on behalf of any governmental authority regarding an environmental condition on the Premises which violates any Applicable Laws. Lessee agrees (i) not to release, discharge or dispose of, on or under the Premises, any Hazardous Substance or authorize any other person or entity to do so, (ii) not to cause the Premises to be in violation of, any Applicable Laws, (iii) to give prompt written notice to Lessor upon Lessee's acquiring actual knowledge of (A) the presence of any Hazardous Substance at, on or under the Premises, or any Release occurring at the Premises, with a full description thereof, (B) any proceeding or inquiry by a governmental authority with respect to the presence of any Hazardous Substance on or under the Premises or the migration thereof from the Premises to other property or from other property to the Premises, (C) all claims made or threatened by any third party in writing against Lessor, Lessee or the Premises relating to any loss or injury resulting from any Hazardous Substance or Release, and (iv) to promptly comply with any governmental requirements or Applicable Laws requiring the removal, treatment or disposal of a Hazardous Substance from the Premises or responding to a Release if caused by or attributable to Lessee or any of Lessee's employees, servants, agents, partners, directors, officers, shareholders, licensees, concessionaires, sublessees, contractors, subcontractors, (collectively a "Lessee Responsible Party"). In the event that the Premises is affected by any Release caused by or attributable to Lessee's use, release, deposit, discharge, collection, storage, handling, management of, on, or under, or any Release by Lessee or a Lessee Responsible Party, then Lessee shall perform or cause to be performed at Lessee's cost all necessary Remedial Work (defined below) related thereto, by contractors approved in advance by Lessor, and under the supervision of a consulting engineer approved by Lessor. In the event Lessee fails to timely commence, or cause to be commenced, or fails to diligently prosecute the Remedial Work to be performed, and such failure continues after the applicable cure period under this Lease, Lessee shall be in default under this Lease, Lessor may perform such Remedial Work and all reasonable costs and expenses to perform that work which are incurred by Lessor shall be payable on demand by Lessee to Lessor. Lessor shall have the right to join and participate in, as a party if it so elects, in any legal proceedings or action initiated with respect to the Premises in connection with any Applicable Laws, provided it shall bear the cost of its own attorneys' fees in connection therewith. The terms "Hazardous Substance" and "Release" shall be defined in this Lease to have the same meaning as ascribed to them under CERCLA and RCRA. The term "Remedial Work" shall mean any investigation, site monitoring, containment, cleanup, removal, restoration, or other work of any kind or nature required under any Applicable Law in connection with the then current presence or release of a Hazardous Substance in or into the air, soil, ground water, surface water, or soil vapor at, on, under, or within the Premises, or any part thereof. (c) Right to Contest. Lessee shall have the right to contest by appropriate legal proceedings which shall be conducted diligently and in good faith in the name of Lessor or Lessee or both, and without cost or expense to Lessor, the validity or applicability of any law, ordinance, order, rule or regulation relating to Lessee's use or operation of the Premises and Lessee shall have the right to delay observance thereof and compliance therewith until the contest is finally determined and is no longer subject to appeal, provided that observance and compliance pending the prosecution of that proceeding may be legally delayed without subjecting Lessor to any liability or fine. 18. Eminent Domain. (a) Taking of Premises. If the whole of the Premises shall be taken under the power of eminent domain, the Term shall cease as of the day possession shall be so taken. If any part of the Premises shall be taken under the power of eminent domain, and the portion remaining after the taking will not be adequate, in Lessee's reasonable judgment, for the operation of Lessee's business, Lessee shall have the right to elect either to terminate this Lease or to remain in possession of the remainder of the Premises not so taken. (b) Notice of Election. Lessee shall notify Lessor within 60 days after a taking, of Lessee's election under Section 18(a). If Lessee elects to remain in possession, all of the terms of this Lease shall continue in effect, except that the Rent shall be equitably reduced. (c) Condemnation Award. All damages awarded for taking under the power of eminent domain, whether for the whole or part of the Premises, shall be apportioned between Lessor and Lessee in order to compensate them for the fair value of the Land and Lessee's Improvements, respectively, that are so taken, and the fair value of Lessee's leasehold interest in and to the Premises. On any taking, Lessor and Lessee shall pursue, in their respective individual and separate names and rights, unless otherwise required by law, those remedies and those claims as they may have against the authority exercising the right of eminent domain or other lawful taking as if this Lease and the Term had not expired (whether or not the expiration occurred because of the taking). The award of damages for the taking, if made payable to Lessor and Lessee jointly, shall be apportioned between the parties on equitable and just principles in accordance with their respective fee and leasehold interests, it being understood that Lessee shall be entitled to that award or portion of award for damages to its leasehold, non-removable fixtures, improvements made to the Premises by Lessee and for the loss of value of its leasehold estate for the unexpired Lease term, including renewals. Rent shall be apportioned to the date this Lease terminates. (d) Adjustment to Rent. If Lessee shall not cancel the Lease as provided in Section 18(a) above, this Lease shall not terminate, but the Rent for the Premises shall be reduced, in proportion to the value of the Premises before the taking bears to the value of the Premises after the taking, as of the date when title shall vest in the appropriate authority. 19. Assignment and Subletting. (a) Assignment. Lessee shall not assign this Lease, or any interest therein, and shall not (except as expressly provided in this Agreement) sublet the Premises or any part thereof, or any right or privilege appurtenant thereto, or permit any other person (the agents and servants of Lessee excepted) to occupy or use the Premises, or any portion thereof, without first obtaining the written consent of Lessor, which shall not be unreasonably withheld or delayed. Consent by Lessor to any assignment, subletting, occupation, or use by another person shall not be a consent to any subsequent assignment, subletting, occupation, or use by another person. Consent to an assignment, subletting or other use or occupancy of the Premises by another person shall not release the original named Lessee from liability for the continued performance of the terms and provisions on the part of Lessee to be kept and performed, unless Lessor specifically and in writing releases the original named Lessee from liability or Lessee assigns this Lease to a creditworthy tenant of sufficient financial ability to perform the obligations under the Lease which has the same or better financial ability as Lessee. Any assignment and subletting or consent by Lessee to some other person's use or lease occupancy of the Premises without the prior written consent of Lessor shall be void. This Lease shall not, nor shall any interest therein, be assignable, as to the interest of Lessee, by operation of law without the prior written consent of Lessor. Notwithstanding the foregoing, Lessee shall be permitted without Lessor's consent to sublet or grant concessions as to minor portions of the Premises where consistent with the development and operation of Lessee's continuing business on the Premises. (b) Consent. In the event Lessor consents to an assignment or subletting of the Premises, such assignment or subletting shall not become effective until execution of a formal agreement executed by Lessor, Lessee and the proposed assignee/sublessee. Lessee shall reimburse Lessor's fees and expenses in reviewing and approving the assignment or sublet, such sum not to exceed $1,000.00 upon execution of the required documents. (c) Additional Consideration. If substantially all of Lessee's rights under this Lease are subleased by Lessee to a third party not affiliated with Lessee and the Base Rent payable by the Sublessee exceeds the Base Rent provided for in this Lease, that portion of the rent received by Lessee from the Sublessee in excess of the Base Rent shall be shared equally between Lessor and Lessee. 20. Non-Disturbance; Subordination; Leasehold Mortgages. (a) Non-Disturbance. With respect to any mortgages currently affecting title to the Premises, Lessor shall obtain from the applicable mortgagee, a non-disturbance agreement in form and content reasonably acceptable to Lessee that provides that for as long as Lessee is not in default (beyond any time period given Lessee in the Lease to cure the default) in the payment of any Rent or in the performance of any of the other terms, covenants or conditions of the Lease to be performed by Lessee, Lessee's possession of the Premises and rights and privileges under the Lease shall not be diminished or interfered with by the mortgagee and Lessee's occupancy of the Premises shall not be disturbed during the term of the Lease. If the interests of the Lessor are acquired by the mortgagee or another third party, by reason of the foreclosure of the liens evidenced by the mortgage or other proceedings brought to enforce the rights of the holder of the liens evidenced by deed in lieu of foreclosure or other method and mortgagee or other third party succeeds to the interest of the Lessor under the Lease, the Lease and the rights of Lessee under the Lease shall continue in full force and effect and shall not be terminated or disturbed except in accordance with the terms of the Lease. Additionally, if the mortgagee or any third party succeeds to the interest of Lessor under the Lease, the mortgagee or such third party shall be bound to Lessee under all the terms, covenants and conditions of the Lease, as if that party were named as the Lessor under the Lease, and Lessee shall have the same remedies against that party for the breach of any term, covenant, condition or agreement contained in the Lease that Lessee might have had under the Lease against the Lessor. (b) Fee Mortgage. Any mortgage hereafter placed upon the Premises by Lessor may only encumber Lessor's interest in the Land and this Lease, and it shall be subject and subordinate to this Lease. If Lessor defaults, at any time, in the performance of the obligations of any mortgage or other lien affecting the Premises, Lessee may remedy such default in whole, or in part, charge to Lessor all costs incurred thereby, and be subrogated to the rights of the holder of such mortgage or other lien. (c) Leasehold Mortgage. Lessee may, at its option, from time to time subject its leasehold interest in and to the Premises to the lien of leasehold mortgages not encumbering Lessor's fee title. The holder of that leasehold mortgage is referred to in this Lease as the "Mortgagee." (d) Notice to Mortgagee. When giving notice to the Lessee with respect to any default, the Lessor will also serve a copy of each notice upon the Mortgagee, and no notice to the Lessee shall be effective unless a copy of that notice is served upon the Mortgagee; (e) Mortgagee's Right to Cure. If the Lessee defaults under any of the provisions of this Lease, the Mortgagee shall have the right to cure that default whether the default consists of the failure to pay Rent or the failure to perform any other obligation the Lessee is required to perform, and the Lessor shall accept such payment or performance on the part of a Mortgagee as though the payment or performance had been by the Lessee. (f) Cure Period. The Mortgagee will have the same period after receiving the notice of default to cure the default or causing the default to be cured for the account of Lessee or of the Mortgagee (as the Mortgagee may elect) as is given the Lessee after notice to it, plus an additional period of 10 days for defaults involving payments of money. In the case of any default by the Lessee, other than in the payment of money, the Lessor will take no action to effect a termination by reason of that default without first giving to the Mortgagee reasonable time within which either (i) to obtain possession of the Premises (including possession by a receiver) and cure the default in the case of a default which is susceptible of being cured when the Mortgagee has obtained possession, or (ii) to institute foreclosure proceedings and complete foreclosure, or otherwise acquire the Lessee's interest under this Lease. (g) Injunction, Stay, etc. In the event any Mortgagee is prohibited by any injunction or any bankruptcy or insolvency proceedings involving the Lessee from commencing or completing foreclosure, the time period specified above during which a Mortgagee may commence foreclosure shall be extended for the time period during which such injunction or other prohibition is in force provided that the Mortgagee shall diligently attempt to remove any such prohibition. (h) Foreclosure by Mortgagee. Any Mortgagee may become the legal owner and holder of this Lease by foreclosure of its Mortgage or as a result of the assignment of this Lease in lieu of foreclosure, whereupon the Mortgagee shall immediately become and remain liable under this Lease but only with respect to the period of its ownership of this Lease and only to the extent attributable to that period. Any such Successor may, upon acquiring the leasehold, without further consent of the Lessor, sell and assign this Lease on such terms and to such persons as it deems acceptable and thereafter such purchaser at foreclosure shall be relieved of all obligations under this Lease, provided that the transferee has delivered to the Lessor its written agreement to be bound by all of the provisions of this Lease from and after its acquisition of the Leasehold. Nothing contained herein shall require any Mortgagee or any other person as a condition to its exercise of rights hereunder to cure any default under this Lease not reasonably susceptible of being cured by such person. (i) Further Assurances. The parties agree that the Lessee may secure financing through one or more Mortgagees. The Lessor agrees to cooperate on a reasonable basis with any requirements imposed by a Mortgagee or any other prospective owner or holder of a leasehold mortgage with respect to such certificates, agreements and other matters as may be necessary or appropriate to facilitate the financing. 21. Default; Termination. (a) Defaults. If Lessee defaults in payment of any installment of rent or any other sum to be paid by Lessee and the default continues for 20 days after written notice from Lessor that the payment has become past due; or if Lessees defaults in the performance of a material covenant, agreement or other obligation on its part to be performed under this Lease and the default continues for 30 days after written notice from Lessor specifying the default (provided, however if a default not susceptible of being cured by Lessee within the 30 days, the time to cure shall be extended for such time as may be necessary to cure the default with due diligence); or if Lessee files a voluntary petition in bankruptcy or is adjudicated a bankrupt or insolvent; of if a receiver is appointed for, or execution is levied upon, all or substantially all of Lessee's business or assets or Lessee's leasehold interest hereunder, of if a trustee is appointed for Lessee after a petition has been filed for Lessee's reorganization under the Bankruptcy Act of the United States; or if Lessee shall make an assignment for the benefit of its creditors, Lessor may, by written notice given to Lessee either terminate this Lease effective as of the day of the event of default, or terminate Lessee's right to possession of the Premises, without terminating this Lease, effective as of the date of the event of default. (b) Surrender of Premises. Upon any termination of this Lease or Lessee's right of possession or occupancy of the Premises, Lessee shall promptly surrender and deliver possession of the Premises to Lessor and Lessee hereby grants the Lessor full and free license to enter into and upon the Premises in that event, and, with process of law, to repossess the Premises and to expel or remove Lessee and any others who may be occupying the Premises, without relinquishing any right given to Lessor under this Lease or by operation of law. (c) Damages. If this Lease shall be terminated as provided above, Lessor shall be entitled to recover from Lessee all sums due and payable to Lessor up to the date of the termination, and damages which accrue by reason of Lessee's default under this Lease but in no event shall Lessor be entitled to recover damages for future rents or other compensation due or that might become due under the Lease from and after the date of termination, except for the Termination Fee (defined below). (d) Possession. If Lessee's right to possession only shall be terminated, Lessor at its option, may enter upon, take and hold possession of the Premises without releasing Lessee in whole or in part from its obligation to pay all Rent payable for the Term, and in that case Lessee shall continue to pay to or for the account of Lessor the Rent and other sums payable by Lessee for the remainder of the Term (subject to Lessee's termination rights in (f) below). Lessor, after entry and possession, shall and in good faith take reasonable steps to relet the Premises. If any rental collected by Lessor upon such reletting is insufficient to pay monthly the full amount of the Rent reserved in this Lease and the cost of any repairs necessary for such reletting, Lessee shall pay to Lessor the amount of each monthly deficiency upon demand. (e) Leasehold Mortgagee. Anything contained in this Lease to the contrary notwithstanding, if Lessor receives notice of a mortgage encumbering Lessee's leasehold, the Mortgagee shall be given copies of all notices required to be given to Lessee under this Lease and Lessor shall not attempt to terminate this Lease for any default not involving the payment of money without giving the mortgagee a reasonable time to obtain possession of the Premises. (f) Termination Rights. At any time during the first five years of the Term, Lessee may terminate this Lease and the Management Agreement for any or no reason by giving written notice of termination to Lessor not less than 90 days prior to the termination date and payment of the applicable Termination Fee (defined below), in which event the Lease shall terminate and Lessee and Lessor shall have no further liability under this Lease. In the event Lessee elects to terminate this Lease during the first five years of the Term for reasons other than a default by Lessor or other termination right of Lessee under this Lease, Lessee shall pay to Lessor within 10 days after the effective date of termination, an amount equal to $225,000.00 less a credit against this amount equal to the actual cost of any improvements made to the Premises and fixtures installed in the Premises from and after the date of this Lease, including also costs incurred for carpet, tile, window coverings, wall coverings, electrical work, plumbing work, racetrack surface improvements, furniture and equipment purchases that remain with the Premises, parking lot repairs (crack filling, paving, sealing), rebuilding and/or repairing the tote board, roof and other structural repairs, permanent landscaping, construction of buildings, construction of roads, wiring for telecommunications including for computer systems and any other item that would qualify as a capital expenditure under GAAP. The credit for these actual costs incurred shall be reduced by 10% per year from the date they are incurred. This credit shall in no event exceed $75,000.00 ("Termination Fee"). (g) Remedies Non-Exclusive. In addition to the above-described remedies, Lessor will also have all other remedies provided by law or equity in the event of any default by Lessee. 22. Memorandum. Lessor and Lessee shall execute a Memorandum of Lease in the form attached to this Lease as Exhibit "C" and Lessee may cause that Memorandum to be recorded against the Land. 23. Lessor's Information and Assistance. Lessor shall reasonably assist Lessee and execute any necessary applications or letters of authorization for Lessee to obtain all necessary permits and zoning changes from appropriate governmental authorities. 24. Fixtures. Lessee shall provide, and maintain at its own expense all fixtures of a special nature that may be required by Lessee's business. All trade and other fixtures, equipment and furniture placed on the Premises by Lessee shall remain the property of Lessee, if removal can be done so as not to materially damage the Premises. Lessee may not remove those trade and other fixtures later than 30 days after the expiration of the Term. Any such fixtures, equipment and furniture not so removed shall become Lessor's property. 25. Holding Over. Any hold over after the expiration of the Term of this Lease with the prior written consent of Lessor shall be construed to be a tenancy from month-to-month, cancelable upon 30 days written notice, and at a rental and upon terms and conditions as existed during the last year of the Term. Any holding over after the expiration of the Term of this Lease without the prior written consent of Lessor shall be construed to be a tenancy from month-to-month cancelable upon 30 days written notice (even though such 30 day period includes portions of more than one calendar month), upon the same terms and conditions as existed during the last month of the term of this Lease, except that the Base Rent shall be 150% of the amount payable by Lessee. 26. Notices. Whenever under the terms of this Lease a written notice is required, or whenever a written notice or communication is sent, the same shall be accomplished by certified mail, return receipt requested, postage prepaid, addressed as follows:
To Lessor: Ladbroke Racing Corporation 3260 Blume Drive, Suite 500 Richmond, California 94806 Attn: General Counsel Facsimile: 510/243-9734 With copy to: Winstead Sechrest & Minick P.C. 100 Congress, Suite 800 Austin, Texas 78701 Attn: Timothy E. Young Facsimile: 512/370-2850 To Lessee: c/o Sam Houston Race Park, Ltd. 7575 N. Sam Houston Parkway West Houston, Texas 77064 Attn: President With copy to: MAXXAM Inc. Attn: General Counsel 5847 San Felipe, Suite 2600 Houston, Texas 77057 Notices served by mail shall be deemed complete when deposited with the United States Postal Service. Any change of address shall not be effective unless served upon the parties in the same manner as a notice. 27. Unenforceable Terms. If any term, covenant, condition or provision of this Lease or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of that term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 28. Estoppel Certificates. Lessor and Lessee shall within 15 days after the request of the other, execute and deliver to each other, at such time or times as either Lessor or Lessee may request, a certificate evidencing whether or not (a) the Lease is in full force and effect; (b) the Lease has been modified or amended in any respect and describing those modifications or amendments, if any; and (c) there are any existing defaults under the Lessee to the knowledge of the party executing the certificate, and specifying the nature of the defaults, if any. If either party fails to deliver a certificate within 15 days from the date it is requested, it shall be deemed that the Lease is in full force and effect, unmodified and without default (provided such party shall not be excused from its obligation to provide such certificate). 29. Lessor-Lessee Relations. The relation created by this Lease Agreement is that of Lessor and Lessee. No provision contained in this Lease shall be construed in such a way as to constitute Lessor and Lessee joint venturers or co-partners or to make Lessee the agent of Lessor or to make Lessor liable for this debts of Lessee. 30. Consents. Wherever in this Lease the consent or approval of either party is required, the consent or approval shall not be unreasonably withheld nor delayed, except where otherwise specifically provided. 31. Choice of Law. This Lease shall be governed by and construed in accordance with the law of the state of Texas. 32. Entire Agreement. This Lease contains the entire agreement of the parties hereto with respect to the Lease of the Premises and may not be amended, modified, released, or discharged, in whole or in part except by an instrument in writing signed by the parties to this Lease, their respective successors or assigns. 33. Binding on Successors and Assigns. Except as otherwise provided in this Lease, all covenants, agreements, provisions and conditions of this Lease shall be binding on and inure to the benefit of the parties to this Lease, their respective personal representatives, successors, and assigns. In the event of any assignment of this Lease by Lessee, Lessee shall be and hereby is, entirely freed and relieved of all obligations of Lessee under this Lease which subsequently accrue, except as otherwise specifically provided in this Lease. 34. Attorney's Fees. The prevailing party in any litigation under this Lease, as determined by the Court, shall be entitled to the recovery of its reasonable attorney's fees, as determined by the Court, and court costs, from the other party. 35. Force Majeure. Whenever a period of time is provided in this Lease for either party to do or perform any act or thing, that party shall not be liable or responsible for any delay due to strikes, lockouts, casualties, Acts of God, governmental regulation or control, or other causes beyond the reasonable control of that party, and in any such event the time for performance shall be extended for the amount of time that party is delayed. 36. Brokers. Lessee represents that Lessee has dealt with no broker in connection with this Lease. Lessor hereby agrees to hold Lessee harmless from and against any claim made by any person or entity claiming a commission or fee through or under Lessor or any person or entity affiliated with Lessor in connection with or relating to this Lease, including, without limitation, attorney's fees incurred in defense of such a claim. 37. Landlord's Lien. To secure the payment of all Rent due and to become due under this Lease and the faithful performance of this Lease by Lessee, Lessee hereby gives to Lessor a lien and security interest on all property (including fixtures, equipment, chattels and merchandise) which may be placed in the Premises and also upon all proceeds of any insurance which may accrue to Lessee by reason of destruction of or damage to that property. This lien and security interest is given in addition to the Lessor's statutory lien and may be foreclosed with or without court proceedings by public or private sale, provided Lessor gives Lessee at least 15 days notice of the time and place of the sale. Lessor shall have the right to become the purchaser, upon being the highest bidder at that sale. Contemporaneous with the execution of this Lease (and if requested hereafter by Lessor), Lessee shall execute and deliver to Lessor a Texas Uniform Commercial Code Financing Statement and/or instruments in sufficient form to reflect the existence or extension of this lien and security interest. Lessor shall, in addition to all of the rights hereunder, also have all of the rights and remedies of a secured party under the Texas Uniform Commercial Code (the Texas Business and Commerce Code). Notwithstanding the foregoing, Lessor agrees upon request from time to time by Lessee, to subordinate both its contractual and statutory Landlord's liens to the liens of any third party lender of Lessee making a loan to Lessee relating to the Premises or any seller of personal property to be placed in the Premises, for which such Seller retains a purchase money security interest. Valley Racing Association By: Ladbroke Racing Management Texas By: Ladbroke Racing Texas Corporation, venturer Corporation, venturer By: /S/ GEORGE P. HARBISON By:/S/GEORGE P. HARBISON Name: George P. Harbison Name:George P. Harbison As Its:VP/CFO As Its:VP/CFO SHRP Valley LLC By:/S/ JAMES D. NOTEWARE Name:James D. Noteware As Its:President
EX-10 3 MANAGEMENT AGREEMENT This Management Agreement (the "Management Agreement"), is entered into by and between VALLEY RACING ASSOCIATION, a Texas joint venture ("Owner") comprised of Ladbroke Racing Texas Corporation, a Texas corporation ("LRT") and Ladbroke Racing Management Texas Corporation, a Texas corporation ("LRM") and SHRP VALLEY LLC, a Texas limited liability company ("Manager"). If the Owner reorganizes its business status as a corporation in accordance with Section 3.2 below, any reference to Owner shall include that corporation. WHEREAS, contemporaneously herewith, Owner and Manager have entered into that certain Lease Agreement (the "Lease Agreement") by which Owner has leased to Manager the Valley Greyhound Park, a pari-mutuel greyhound racetrack owned by Owner located in Cameron County, Texas (the "Track"); WHEREAS, the Texas Racing Commission (the "Commission"), as established pursuant to the Racing Act (defined below) issued to Owner, a license authorizing it to conduct greyhound racing, with pari-mutuel wagering, in accordance with the Racing Act (the "License"). A copy of the License is attached to this Agreement as Exhibit "A"; WHEREAS, during the term of the Lease Agreement ownership of the Track and the License will remain with Owner; WHEREAS, during the term of the Lease Agreement upon the terms and conditions hereinafter set forth, Owner desires to engage Manager to manage all aspects of racing operations of the Track; NOW, THEREFORE, in consideration of the premises and the respective undertakings of the parties hereinafter set forth and in the Lease Agreement, it is hereby agreed as follows: 1. DEFINITIONS a. Terms Defined. When used in this Agreement, the following terms shall have the meanings set forth below: "Racing Act" shall mean Texas Civil Statutes, Article 179e, and any rules and regulations promulgated pursuant thereto, as such act, rules and regulations may be amended from time to time. "Term" as to this Management Agreement shall have the meaning set forth in Section 7.1. b. Number and Gender. Whenever the context requires, references in this Agreement to the singular number shall include the plural, and the plural number shall include the singular, and words denoting gender shall include the masculine, feminine and neuter. 2. APPOINTMENT OF MANAGER; APPROVAL a. Manager for Track Operations. Owner hereby engages Manager, as an independent contractor, and not as an agent, servant, employee, partner or joint venturer, to manage the day-to-day operations of the Track during the Lease Term, including, the right to conduct dog racing operations and simulcasting under the License at the Track and exercise all other rights under the License during the Term, in accordance with terms and conditions hereinafter set forth. b. Approval. During the Due Diligence Period, as defined in the Lease Agreement, Owner and Manager shall use their best efforts to obtain approval of this Agreement by the Commission and the issuance by the Commission of a resolution evidencing its determination that Manager is authorized to exercise all of the rights granted to it under this Agreement, and specifically approving the Management Agreement such that Manager, if it exercises the Option (defined in Article X), shall be entitled, as the transferee of the License, to continue all operations authorized under the License. At the same time that approval of the Management Agreement and the Lease Agreement is sought from the Commission, Owner shall use its best efforts to obtain approval from the Commission to reorganize its business entity status from a joint venture entity to a corporate entity by having LRM convey its joint venture interest in Owner to LRT. If such approval is obtained, Owner shall promptly take all action necessary to reorganize as a corporate entity, in a manner reasonably satisfactory to Manager. In the event either of these approvals is not obtained by Owner, Manager may terminate this Agreement within the later to occur of 15 days after receiving written notice that the approval cannot be obtained or the expiration of the Due Diligence Period. c. Internal Approvals. Owner's rights and obligations under this Agreement and the Lease, until March 10, 1999, shall be subject to and conditioned upon Owner conducting an internal review of Manager and its owners, to verify that, in Owner's reasonable determination, Owner does not currently have reason to exercise its rights under Section 8.5(b) of this Agreement. If Owner reasonably determines it is currently entitled to give the notice specified in Section 8.5(b), it shall notify Manager of the reasons therefore and the action required to remove Owner's objection. If Manager fails to cure that objection to Owner's reasonable satisfaction within the Due Diligence Period, Owner may terminate this Agreement. However, if Owner is so entitled and fails to terminate this Agreement on or before March 10, 1999, Manager shall be deemed approved and Owner shall have no further rights to terminate this Agreement under this Section 2.3. 3. RIGHTS OF MANAGER a. Rights Under License. Manager shall have all of the privileges, rights and beneficial and pecuniary interest, now or hereafter arising, in and under the License, that relate to dog racing to be conducted at the Track, simulcasting of dog and horse racing for either races to be conducted at the facility (as to dog racing only) or at other facilities, as either a "guest" or "host" track and other rights granted by or associated with the License. b. Operational Control. Manager shall have exclusive control during the Term of this Agreement relating to all matters associated with conducting dog racing and simulcasting of any kind at the Track and other rights granted by or associated with the License. Manager shall have the right to exercise and control all matters and incidental rights associated with the issuance, maintenance, ownership and continued effectiveness of the License, including, without limitation, preparing and submitting any and all applications and other submittals to be made to the Commission in connection with the issuance and maintenance of the License, application fees, license fees, license certificates and other license credentials and all security deposits and other financial assurances posted with the Commission in connection with the issuance of the License. Any deposits and other assurances made by Manager shall remain the property of Manager upon the termination of this Agreement. 4. OBLIGATIONS OF MANAGER a. Compliance with Laws. Subject to the exceptions in Section 17(a) of the Lease, Manager shall operate the Track in compliance with all applicable governmental laws, rules, ordinances, regulations, orders and decrees of all applicable jurisdictions, governmental authorities and courts (including, without limitation, the rules and regulations of the Commission) (collectively, "Applicable Laws") and shall furnish the Owner promptly with any and all notices of and from any governmental authority which are served upon or received by the Manager, legal or otherwise, relating to the Track, Track operations, and/or the License and which impact the ability of Owner or Manager to maintain the License in good standing, would expose the Owner or Manager to liability or give rise to an enforcement action against the Owner or Manager by the Commission. b. Licenses and Permits. Manager shall acquire and keep in full force and in good standing all licenses and certificates and permits required for the Track operations, including the License. c. Expenses. Manager shall incur and pay all normal and proper operating expenses of the Track, including all ad valorem taxes on the Track, all fees and expenses of any kind including licensing fees, imposed by the Commission. d. Liability Insurance. Manager shall, at its sole cost and expense, obtain and maintain in full force and effect, for the mutual benefit of Owner and Manager, comprehensive public liability insurance in accordance with the terms of the Lease Agreement. e. Reports. Manager shall provide Owner with a copy of all filings made by Manager with the Commission concerning the Track, Track operations and the License which impact the ability of Owner or Manager to maintain the License in good standing, would expose the Owner or Manager to liability or give rise to an enforcement action against the Owner or Manager by the Commission within ten (10) days of the filing of same with the Commission. In addition, Manager shall, within ten (10) days of receipt from the Commission or any other governmental or regulatory agency, provide Owner copies of all material documentation relating to the Track, Track Operations and the License which impact the ability of Owner or Manager to maintain the License in good standing, would expose the Owner or Manager to liability or give rise to an enforcement action against the Owner or Manager by the Commission. f. Other Information. Upon request from Owner, Manager shall provide Owner and/or Ladbroke (defined in Section 4.8) with reasonable details and the identity of the immediate, intermediate and ultimate shareholders, partners or other owners of Manager and such other information relating to Manager and such owners, as may be reasonably requested of Owner and/or Ladbroke by any Gaming Authority (defined in Section 8.5(a)) to which Owner and/or Ladbroke (and its subsidiaries and affiliates) may be subject from time to time, but this shall not require Manager to provide details of or relating to the owners of any company within its group of companies which is quoted on any international stock exchange. g. Disclosures. Ladbroke shall be entitled to provide to any Gaming Authority such financial and other information relating to the Track and Manager that any Gaming Authority may reasonably require from time to time and Manager shall provide that information as may be reasonably required of it from time to time so that Owner and/or Ladbroke (and its subsidiaries and affiliates) may properly respond to any request or demand of that Gaming Authority in a timely manner. h. Requests for Changes. Owner may at any time request that Manager make changes in and to the operation of the Track as it may consider necessary and/or desirable from time to time in order to comply with Applicable Laws. Additionally, Owner may make similar requests for modifications relating to laws applicable to Owner, the ultimate parent corporation of Owner, Ladbroke Group PLC ("Ladbroke"), or any affiliate of Ladbroke including, without limitation, any legislation, statute, statutory instrument, by-law, any public or governmental or statutory or regulatory authority or person, the Ladbroke Betting and Gaming Division Compliance Manual, any directive, guidance and/or advice of any regulatory or governing authority or body to which Ladbroke (or any subsidiary or affiliate of Ladbroke) may be subject wheresoever situated and shall include, but shall not be limited to, membership rules and regulations, terms of admittance, tax or other governmental/statutory/regulatory, reporting and/or filing, gaming license (personal or corporate), liquor license, business and other licenses (whether like or unlike the foregoing), conduct of gaming and house rules, banking, cage and gaming reserves, audit and accounting, credit policies and procedures, security and currency rules and regulations. Notwithstanding the foregoing, although Manager may consider these requests, it shall have no obligation to comply with any such request made by Owner; provided nothing in this Section shall be construed to diminish Owner's rights under Section 8.5 of this Agreement. 5. RESTRICTIONS ON AND OBLIGATIONS OF OWNER AND SHAREHOLDERS a. Documentation and Appearances. Owner shall execute all documentation relating to operations at the Track, as required by the Commission from time to time, as the Owner of the License, in the form of and in accordance with the reasonable direction of Manager, unless such action would expose Owner to liability or jeopardize the license. Owner shall also make any appearances necessary or desirable relating to operations at the Track or as required by the Commission. Upon the request of Manager and subject to the approval of the Commission, a representative of Manager shall be given signatory authority, on behalf of the Owner, to execute applications, reports and other communications relating to the License that relate to operations to be conducted at the Facility and to conduct any oral and written communication with the Commission. b. Relinquishment of Control. Owner shall have no discretionary authority to exercise any control over the License that relates to operations to be conducted at the Track or to execute any written instruments in any way relating to the License that relates to operations to be conducted at the Track and shall not take any such action except as directed by Manager. c. Notices. Owner shall immediately forward to Manager any notice, correspondence, forms, reports or other communication received by Owner from the Commission or any other entity which relates to or affects the operations at the Track or the License. d. Communications. Unless otherwise instructed by the Commission, all communications with third parties concerning the License, including those that relate to operations to be conducted at the Track shall be done in the name of and by the Manager. e. Organizational Restrictions. Owner shall not dissolve, liquidate, merge, terminate or in any way transfer ownership of the License or any interest in the Owner in a manner that would result in the termination, cancellation, revocation of the License or otherwise impede Manager's operation at the Track. f. Duty to Cooperate. Owner will provide full and complete cooperation and assistance to Manager in its efforts to comply with the Racing Act and any and all orders or other requirements of the Commission and to maintain the continued existence of the License. g. Limitations on Manager's Authority. If, pursuant to the provisions of the Racing Act, the scope of Manager's responsibilities or duties under this Agreement violate the Racing Act, Owner and Manager agree to make reasonable modifications to this Agreement, so as to allow operations at the Racetrack to continue in compliance with the Racing Act. h. Limitations on Owner's Actions. Except pursuant to the provisions of Article X, the Owner, LRT and LRM and each of their shareholders shall not, during the Term of this Agreement, sell, assign, transfer, pledge, encumber, charge or in any way dispose of the outstanding venture interests of the Owner or the outstanding capital stock of LRT or LRM. 6. INDEMNIFICATION a. Indemnity by Manager. Subject to the matters for which Owner hereby indemnifies Manager under Section 6.2 below, Manager hereby agrees to indemnify and hold harmless Owner, the venture partners of Owner, the parent corporation of the venture partners, and their employees and agents from and against all losses, costs, damages, expenses and liabilities of whatsoever nature, including, but not limited to, attorneys' fees, costs of litigation, court costs, amounts paid in settlement and amounts paid to discharge judgments relating to any claim, lawsuit, cause of action, or other legal action or proceeding brought against Owner or to which Owner may be a party, even if groundless, false or fraudulent, directly or indirectly resulting from, or arising out of the terms and provisions of or be based upon any claim by any party relative to the management, operation and control by Manager of the Track, the Track operations, and the License. This indemnity provision shall be deemed to be continuing in nature and shall remain in full force and effect and shall survive the expiration or termination of the Management Agreement and the Lease Agreement. b. Indemnity by Owner. Owner hereby agrees to indemnify Manager against any damage and expense Manager may suffer as a result of failure of Owner, LRT, LRM or their shareholders to comply with the terms of this Agreement including, without limitation, the failure of the representations, warranties and covenants in this Agreement and the Lease to be true and correct and/or Owner's gross negligence or intentional misconduct relating to the License or operations at the Track. 7. TERM OF AGREEMENT This Management Agreement shall be effective as of the date hereof and the term hereof shall be conterminous with the Lease Agreement and shall remain in effect for the term of the Lease Agreement (the "Term"). 8. DEFAULT, TERMINATION AND OTHER REMEDIES a. Termination by Owner. Notwithstanding the provisions of Article VII above, Owner may terminate this Agreement: i. in the event of a default in payment due under the Management Agreement or the Lease Agreement by Manager which remains uncured for a period of twenty (20) days after receipt of written notice of default from Owner to Manager, or in the event of a material breach of a non-monetary provision of this Management Agreement or the Lease Agreement by Manager which remains uncured for a period of thirty (30) days following receipt of written notice from Owner to Manager of such material breach (which shall be given promptly after discovery by Owner of such material breach and shall specify in detail the facts constituting such material breach); provided, however, that the foregoing time period for curing a non-monetary material breach shall be extended for so long as may be reasonably required to cure such non- monetary material breach provided Manager commences to cure same within such thirty (30) day period and proceeds diligently to cure same; ii. in the event of a final adjudication by a court of competent jurisdiction, with respect to which all appeals have been exhausted, that Manager has committed acts of fraud against the Owner in connection with the performance of its duties hereunder; or iii. in the event the License is terminated and is not subject to reinstatement. b. Termination by Manager. Notwithstanding the provisions of Article VII above, Manager may, at any time, terminate this Agreement in the event of a material breach (including misrepresentations hereunder or the Lease) of this Management Agreement or the Lease Agreement by Owner, LRT or LRM which remains uncured for a period of thirty (30) days following receipt of written notice from Manager to Owner of such material breach (which shall be given promptly after discovery by Manager of such material breach and shall specify in detail the facts constituting such material breach); provided, however, that the foregoing time period for curing a non-monetary material breach shall be extended for so long as may be reasonably required to cure such non- monetary material breach provided Owner, LRT or LRM commences to cure same within such thirty (30) day period and proceeds diligently to cure same. c. Termination by Owner or Manager. If either Owner, LRT or LRM or Manager is in default under the Lease Agreement (beyond any applicable cure period) the non-defaulting party may terminate this Agreement upon 30 days written notice delivered to the defaulting party. d. Specific Performance. If Owner, LRT or LRM fail to comply with this Agreement or have made false representations and warranties in this Agreement, and Manager is not otherwise in default hereunder, in addition to Manager's right to terminate this Agreement, Manager may enforce specific performance of the terms of this Agreement. If Owner exercises the Put Option, satisfies all of its obligations relating to the Put Option and Manager fails to close in accordance with the terms of the Put Option, Owner shall have the right to specifically enforce the terms and conditions of the Put Option. e. Other Remedies. i. Manager understands and acknowledges that Ladbroke (and its subsidiaries and affiliates) now and may hereafter conduct gaming operations in various countries throughout the world and are and may become subject to the jurisdiction and regulation of various local regulatory authorities throughout the world (each a "Gaming Authority") relating to those gaming operations as are now and may hereafter be conducted by Ladbroke (and its subsidiaries and affiliates). If Ladbroke or any of its affiliates (i) is ordered or required in writing by a Gaming Authority to terminate its relationship with Manager, or (ii) is advised in writing by a Gaming Authority that its relationship with Manager or any director, officer, shareholder or principal of Manager jeopardized its registrations, licenses, findings of suitability, or approvals (collectively "Approvals") or any application by Ladbroke or any of its affiliates for an Approval (an "Application") unless Owner terminates its relationship with Manager or any directors, officers, shareholders or principals of Manager, then Owner shall notify Manager in writing of that order or notice from the Gaming Authority and provide Owner a copy of that order or notice and advise Owner of the steps necessary to remove the objection. Upon receipt of the notice Manager shall have 30 days (or such shorter period as has been ordered or advised by the Gaming Authority) to take steps to eliminate the objection of the Gaming Authority. If Manager has not removed that objection, as determined by Owner in Owner s sole but reasonable judgment, then Owner shall be entitled to require Manager to and Manager shall either: (A) terminate this Agreement and the Lease in exchange for a cash payment from Owner equal to $225,000.00 plus the actual cost of any improvements made to the Premises (defined in the Lease) and fixtures installed in the Premises from and after the date of the Lease and this Management Agreement, including also costs incurred for carpet, tile, window coverings, wall coverings, electrical work, plumbing work, racetrack surface improvements, furniture and equipment purchases that remain with the Premises, parking lot repairs (crack filling, paving, sealing), rebuilding and/or repairing the tote board, roof and other structural repairs, permanent landscaping, construction of buildings, construction of roads, wiring for telecommunications including for computer systems and any other item that would qualify as a capital expenditure under GAAP. The payment due to Manager for these actual costs incurred shall be reduced by 10% per year from the date they are incurred; or (B) exercise the Purchase Option at the Option Price less $225,000.00 ii. If (a)(i) or (a)(ii) above have not occurred but the Owner determines in its reasonable judgment that its relationship with Manager or any directors, officers, shareholders or principals of Manager does or may jeopardize its Approvals or an Application, then Owner shall have the right, but not the obligation, to deliver a written notice to Manager specifying the relevant event or situation and Manager shall have 30 days (or a shorter period if Owner is so advised by the Gaming Authority, but in no event less than 14 days) to take steps to eliminate Owner s objection to Owner s sole but reasonable satisfaction. If Manager has not removed Owner s objection under this subsection (b) within this 30-day period (as may be adjusted as provided above), then Owner shall be entitled to require and Manager shall either: (i) terminate this Agreement and the Lease in exchange for a cash payment equal to $300,000.00 plus the actual cost of any improvements made to the Premises (defined in the Lease) and fixtures installed in the Premises from and after the date of the Lease and this Management Agreement, including also costs incurred for carpet, tile, window coverings, wall coverings, electrical work, plumbing work, racetrack surface improvements, furniture and equipment purchases that remain with the Premises, parking lot repairs (crack filling, paving, sealing), rebuilding and/or repairing the tote board, roof and other structural repairs, permanent landscaping, construction of buildings, construction of roads, wiring for telecommunications including for computer systems and any other item that would qualify as a capital expenditure under GAAP. The payment due to Manager for these actual costs incurred shall be reduced by 10% per year commencing after the expiration of the second lease year, (i.e., years three, four and five); or (ii) Exercise the Purchase Option provided the Option Price shall be as follows: Prior to and until the expiration of Year 2 - $1,350,000.00 Commencing in Year 3 - $1,620,000.00 Commencing in Year 4 - $1,940,000.00 Commencing in Year 5 - $2,330,000.00 Commencing in Year 6 - $2,800,000.00 In all instances this price shall be reduced by (A) the amount of any condemnation awards paid to Owner as described in the Lease (B) any insurance proceeds paid to Owner as described in the Lease and (C) one-half of the Management Fee paid under this Agreement. iii. If Manager intentionally and affirmatively acts in a manner and with the sole purpose of causing Owner to exercise its rights under this Section 8.5, Manager shall not be entitled to the discounted purchase price described above, if Manager exercises the Option. iv. If Manager exercises the Option in accordance with this Section 8.5, the parties shall, except as provided in this Section 8.5, close under the same terms as are provided in Section 10.1 and Closing must occur within 180 days from the date Manager exercises the Option as provided, in Section 10.1. 9. CONSIDERATION Owner and Manager acknowledge and agree that a material consideration for this Management Agreement is the parties agreement under the Lease Agreement. Additionally, if in any Lease Year (as defined in the Lease Agreement), the total amount wagered by patrons of the Track while at the Track, either on live racing or on simulcast racing (whether for horse, greyhound or other form of racing authorized by the Commission) where Manager is the guest track ("On-track Handle") is equal to or greater than $40,000,000.00, Manager shall pay to Owner for that Lease Year only, an amount equal to $200,000.00 within 60 days after the end of that Lease Year ("Management Fee"), provided that one- half of any Management Fee paid under this Agreement shall be credited to the purchase price of the Shares (defined below) if purchased by Manager under Article X of this Agreement. 10. PURCHASE AND PUT OPTIONS; SECURITY a. Manager's Purchase Option. At any time during the Term, Manager shall have the option ("Option") to purchase 100% of the outstanding capital stock of LRT (the "LRT Shares") under the terms and provisions set forth in this Section 10.1 and Exhibit "B" to this Agreement which is incorporated into and made a part of this Agreement. (All terms in Exhibit "B" unless otherwise provided therein shall have the same meaning as provided in this Agreement.) If Manager desires to exercise this Option, Manager shall notify Owner in writing, and in that notice shall specify a date for closing of the purchase, which shall not be sooner than 60 days, nor more than 180 days after the date of the notice. The consideration to be paid by Manager to Owner for the LRT Shares shall be a cash payment equal to $2,800,000.00, reduced by (i) the amount of any condemnation awards paid to Owner as a result of a taking of any part of the land covered by the Lease Agreement, (ii) any insurance proceeds paid to Owner for unrepaired damage to the Track, and (iii) one-half of any Management Fees paid under this Agreement (the "Option Price"). If Owner's business entity cannot be reorganized as a corporation in accordance with Section 2.2, and Manager elects not to terminate this Agreement, the Option shall apply to 100% of the ownership interest in Owner (the "Venture Interests"). b. Owner's Put Option. Provided this Agreement and the Lease Agreement are not earlier terminated in accordance with the terms of this Agreement and the Lease Agreement, Owner shall have the right during the sixth Lease Year only, upon written notice from Owner not more than 240 days nor less than 180 days prior to the expiration of the Term, to require that Manager (and Manager shall) purchase the LRT Shares (or the Venture Interests, as applicable) effective as of the expiration of the Term for the same purchase price and on the same terms and conditions as provided in Section 10.1 above and Exhibit "B" to this Agreement (the "Put Option"). c. Escrow. Immediately upon the execution of this Agreement, Owner shall deliver to Winstead Sechrest & Minick P.C. ("Escrow Agent") the stock certificates representing the LRT Shares and the stock certificates representing 100% of the capital stock of LRT and LRM (together the "Venturer's Shares"), endorsed in blank, and accompanied by stock powers duly endorsed in blank who shall hold the LRT Shares and the Venturer's Shares in escrow in accordance with the Escrow Agreement attached to this Agreement as Exhibit "C" for the benefit of Manager and Owner pending the exercise of either of the Option or the Put Option (if either is exercised) and the closing of the sale of the LRT Shares (or the Venturer Interests, as applicable) in accordance with this Agreement (the "Closing"). d. Grant of Security Interest. To secure the prompt and complete payment, performance and observance of the obligations of Owner, including all renewals, extensions, restructurings and refinancings of any or all of such obligations as set forth in Article 6 of this Agreement (the "Obligations"), Ladbroke Racing Corporation hereby grants to the Manager a continuing security interest, lien and mortgage in and to all right, title and interest of Ladbroke Racing Corporation in all capital stock held by Ladbroke Racing Corporation in LRT and LRM and proceeds of all or any of the property described above and Ladbroke Racing Corporation shall execute and deliver to Manager on the date hereof the Pledge Agreement attached to this Agreement as Exhibit "D". e. If the Manager becomes the Owner of LRT or the venture, Manager shall promptly change the name of that entity so as not to continue the use of the name Ladbroke. 11. MISCELLANEOUS a. Entire Agreement; Waivers. This Agreement contains the entire understanding among the parties hereto concerning the subject matter hereof and may not be changed, modified, altered or terminated except by an agreement in writing executed by the party to be charged therewith. Any waiver by a party of any of its rights under this Agreement or of any breach of this Agreement must be in writing and signed by the party to be charged therewith and shall not constitute a waiver of any other rights or breach or of a future breach. b. Cross Default. A default by Manager under the Lease Agreement shall be a default by Manager under this Management Agreement and a default by Owner under the Lease Agreement shall be a default by Owner under this Management Agreement. c. Remedies Cumulative. Except as otherwise provided herein, each and all of the rights and remedies in this Agreement provided, and each and all of the rights and remedies allowed at law and in equity in like case, shall be cumulative, and the exercise of one right or remedy shall not be exclusive of the right to exercise or resort to any and all other rights or remedies provided in this Agreement or at law or in equity. d. Governing Law. This Agreement shall be construed in accordance with and subject to the laws and decisions of the State of Texas applicable to contracts made and to be performed entirely therein. e. Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original, but which shall together constitute one and the same instrument. f. Time. Time is of the essence in the performance of the terms, conditions and covenants herein contained. g. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Neither party may assign any of its rights or delegate and of its duties, except as provided herein, without the express prior written consent of the other party and any such attempted assignment made without such consent shall be void and of no force or effect. h. Severability. In the event that any one or more provisions of this Agreement shall be deemed to be illegal or unenforceable, such illegality or unenforceability shall not affect any of the remaining legal and enforceable provisions hereof which shall be construed as if such illegal or unenforceable provisions) had not been inserted. i. Notices. All notices, requests (including requests for approvals), demands and other communications hereunder shall be in writing and shall be deemed to have been received upon delivery by hand or one business day after being sent by certified or registered mail, return receipt requested, with postage prepaid: i. If to Manager c/o Sam Houston Race Park, Ltd. 7575 N. Sam Houston Parkway West Houston, Texas 77064 Attn: President With copy to: MAXXAM, Inc. Attn: General Counsel 5847 San Felipe, Suite 2600 Houston, Texas 77057 ii. If to Owner, LRT, LRM or Ladbroke Racing Corporation Ladbroke Racing Corporation 3260 Blume Drive, Suite 500 Richmond, California 94806 Attn: General Counsel Facsimile: (510) 243-9734 With copy to: Winstead Sechrest & Minick P.C. 100 Congress Avenue, Suite 800 Austin, Texas 78701 Attn: Timothy E. Young Facsimile: (512) 370-2850 or to such other person and place as either party shall furnish to the other party in writing pursuant to the provisions of this Section. j. Headings. The headings in the sections and paragraphs of this Agreement are inserted for convenience of reference only and shall not constitute a part hereof. k. Fees and Costs. In the event that either party to this Agreement institutes suit against any other party to enforce any of its rights hereunder, the prevailing party in such action shall be entitled to recover from the other party all reasonable costs thereof, including reasonable attorneys' fees and costs before and at trial and at all appellate levels. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed as of the 3rd day of March, 1999. SHRP VALLEY LLC VALLEY RACING ASSOCIATION By:/S/JAMES D. NOTEWARE By: Ladbroke Racing Texas Name: James D. Noteware Corporation, As Its: President Managing Venturer By:/S/ GEORGE P. HARBISON Name: George P. Harbison Title: VP/CFO Ladbroke Racing Management Texas Corporation, Venturer The undersigned has executed this Agreement as the sole shareholder of LRT and LRM for the sole purpose of acknowledging its agreement to comply with the covenants and conditions, grant the security interest required in this Agreement and to make the representations and warranties which are attributable to it in this Agreement. Ladbroke Racing Corporation By :/S/ GEORGE P. HARBISON Name: George P. Harbison Title: VP/CFO EX-27 4
5 This schedule contains summary financial information extracted from the Company's consolidated balance sheet and consolidated statement of operations and is qualified in its entirety by reference to such consolidated financial statements together with the related footnotes thereto. 1,000 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 3764 0 2177 51 0 9990 28495 2996 35489 7505 41081 0 0 0 (15923) 35489 0 24195 0 23345 0 0 7915 (6858) 0 (6858) 0 0 0 (6858) 0 0
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