-----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, NNf1cPUdxnYoylsDeTIdhEHEZQZ24yvvMFu614LFMcMBOx4ZBX5HoUwvJVXVgzb/ mU0bOPGdi/kPXNoWHyJQKw== 0000928423-97-000001.txt : 19970401 0000928423-97-000001.hdr.sgml : 19970401 ACCESSION NUMBER: 0000928423-97-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUUS GAMING CO LP CENTRAL INDEX KEY: 0000928423 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 541719877 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25306 FILM NUMBER: 97571806 BUSINESS ADDRESS: STREET 1: 222 SMALLWOOD VILLAGE CENTER CITY: ST CHARLES STATE: MD ZIP: 20602 BUSINESS PHONE: 3016456833 MAIL ADDRESS: STREET 1: 222 SMALLWOOD VILLAGECENTER CITY: ST CCHARLES STATE: MD ZIP: 20602 10-K 1 (PAGE) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 000-25306 EQUUS GAMING COMPANY L.P. -------------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 54-1719877 -------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 222 Smallwood Village Center St. Charles, Maryland 20602 ---------------------------------------------------------------- (Address of Principal Executive Offices and Zip Code) Registrant's telephone number, including area code: (301) 843-8600 Securities registered pursuant to Section 12(b) of the Act: Not applicable Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED Class A Units representing assignment Nasdaq National Market System beneficial ownership of Class A limited ("Nasdaq/NMS") partnership interest and evidenced by beneficial assignment certificates ("Units") Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 26, 1997, the aggregate market value of 2,561,874 Units held by non-affiliates of the registrant based on the closing price reported on the NASDAQ was $5,123,748. Documents Incorporated By Reference: Not Applicable (PAGE) EQUUS GAMING COMPANY L.P. 1996 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page PART I Item 1. Business 1 Item 2. Properties 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Registrant's Class A Units and Related Unitholder Matters 9 Item 6. Selected Financial and Operating Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 8. Financial Statements and Supplementary Data 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 72 PART III Item 10. Directors and Executive Officers of the Company and EMC 72 Item 11. Executive Compensation 74 Item 12. Security Ownership of Certain Unitholders and Management 78 Item 13. Certain Relationships and Related Transactions 79 PART IV Item 14. Exhibits, Financial Schedules and Reports on Form 8-K 82 (PAGE) PART I ITEM 1. BUSINESS INTRODUCTION Equus Gaming Company L.P. (the "Company") is a Virginia limited partnership. The Company is managed by its managing general partner, Equus Management Company ("EMC"), which until December 31, 1996 was a wholly owned subsidiary of the Company's other general partner, Interstate General Company L.P. ("IGC"). Effective December 31, 1996, IGC transferred all of the outstanding shares of EMC to IGC's general partner, Interstate Business Corporation ("IBC"). IGC is a publicly traded limited partnership with its units traded on the American Stock Exchange. The Company is the successor owner of the horse racing and wagering business acquired in 1989 by an IGC subsidiary. On February 6, 1995, IGC distributed to its unitholders Class A Units ("Units") representing assignment of a 99% Class A limited partnership interest in the Company (the "Distribution"). The Company's principal income producing asset is its 82% interest in Housing Development Associates S.E. ("HDA"). HDA owns El Comandante Race Track ("El Comandante"), the only licensed thoroughbred racing facility in Puerto Rico, which it leases to El Comandante Operating Company, Inc., a Puerto Rico nonstock corporation ("ECOC"). HDA also owns 55% of the capital stock of Galapagos, S.A. ("Galapagos"), a Dominican Republic corporation that leases and since April 29, 1995 operates V Centenario Race Track, a government-owned racing facility in the Dominican Republic ("V Centenario"). In 1994 HDA formed S&E Network Inc. ("S&E"), a Puerto Rico corporation that owns and operates three UHF television stations in Puerto Rico (the "Television Stations"). HDA sold its interest in S&E to Paxson Communications of San Juan, Inc. ("Paxson") in sales closed in August 1996 (50% interest) and January 1997 (50% interest). The Company also owns Virginia Jockey Club, Inc. ("VJC"), an unsuccessful applicant for licenses to own and operate Virginia's first thoroughbred racing and pari-mutuel wagering facility (the "Virginia License"). VJC is now inactive. El Comandante's Pari-Mutuel Wagering Live thoroughbred horse racing has been conducted continuously at El Comandante since 1976 and a predecessor facility since 1957. ECOC generates commissions ("El Comandante Commissions") from bets placed on El Comandante's thoroughbred horse races through computerized wagering facilities located at El Comandante and V Centenario, and as of December 31, 1996 at 664 independently-owned off-track betting ("OTB") agencies throughout Puerto Rico and 230 independently-owned OTB agencies in the Dominican Republic. ECOC offers bettors win and place wagers, and exotic wagers that include daily double, exacta, quiniela and Pick 6 wagering. Races are run 52 weeks per year, generally five days per week. From 1993 through February 1996 races were generally run four days per week and prior to 1993 three days per week. El Comandante Lease HDA leased El Comandante to ECOC for a term ending December 14, 2004 (the "El Comandante Lease"). Set forth below are the principal terms of the El Comandante Lease in effect through 1996, and as amended effective January 1, (PAGE) 1997. The El Comandante Lease provides for either party to ask for renegotiation during the period of July 1 to August 31, 1997 with any renegotiated terms to be effective January 1, 1998. Rent. The El Comandante Lease provides for payment of rent consisting of 25% of the annual El Comandante Commissions ("Basic Rent"). Through December 31, 1995, the El Comandante Lease also provided for payment of certain fixed rent ("Fixed Rent") of $150,000 in 1994 and $400,000 in 1995. Due to a combination of unanticipated regulatory actions and weather emergencies affecting Puerto Rico racing operations and wagering in 1995, ECOC requested relief from payment of certain future rent obligations. As a result the El Comandante Lease was amended effective January 1, 1996 to eliminate Fixed Rent after 1995 and HDA assumed responsibility for paying El Comandante real property taxes due and payable after December 31, 1995, which taxes were formerly considered to be additional rent under the El Comandante Lease. Pursuant to another amendment effective January 1, 1997, HDA agreed to pay, upon ECOC's request, the annual racing license fee. Taxes and Maintenance. Pursuant to the El Comandante Lease, ECOC is required to pay all real and personal property taxes, utility and sewer charges, all special and general assessments, and all governmental charges of any nature, ordinary or extraordinary, which may be levied or assessed upon El Comandante, except that HDA assumed responsibility for the real property taxes after December 31, 1995 and the annual racing license fee commencing with the 1997 fee. ECOC also pays all other costs and expenses relating to the ownership, operation, maintenance or use of El Comandante. ECOC also operates, repairs, and maintains all the property of HDA that is used in the operation of El Comandante to ensure that it is suitable for a modern, first-class, safe, and clean horse racing facility. The El Comandante Lease requires ECOC to replace personal property when necessary to maintain this standard. Capital Improvements. Under the El Comandante Lease, ECOC may not make capital improvements or other additions to El Comandante that would be required to be capitalized under generally accepted accounting principles without the prior written consent of HDA. HDA is required to fund capital improvements that it approves in its sole and unreviewable discretion subject to a determination by HDA that the cost of any capital improvement is reasonable in relation to the benefit to El Comandante and compatible with HDA's future plans for using El Comandante and with HDA's financing capabilities. Puerto Rico Racing Operations ECOC's revenues are derived principally from wagering. ECOC also generates revenues from fees paid by bettors on all OTB wagers except win-place, clubhouse admissions, concessions, the sale of programs, and other non-wagering activities. The total amounts wagered are distributed principally as commissions to ECOC and the OTB agents, winning bettors and the Puerto Rico Government. The largest single item of expense in operating El Comandante consists of payments to individual horse owners and to a horse owners association (the "Owners Association") pursuant to a contract that expires April 1, 1998. The contract requires the Owners' Association to field sufficient horses to conduct racing operations at El Comandante in accordance with the racing program approved by the Racing Board. The prior owner of El Comandante (PAGE) maintained similar agreements with the Owners' Association since 1957. The contract obligates ECOC to provide horse stables and related facilities, to make annual lump sum payments to the Owners' Association of $55,000 and to pay 50% of El Comandante Commissions as purse monies. In January 1992, ECOC entered into an equipment lease and services agreement with Autotote Systems Inc. ("Autotote") for the computerized tote system installed at El Comandante and related computerized wagering equipment provided to the OTB agencies. Autotote personnel operate and maintain the tote system at El Comandante and maintain the wagering equipment provided to the OTB agencies. Pursuant to the lease and services agreement which expires March 2004, ECOC reimburses Autotote's personal property taxes and pays a fee equal to the greater of $800,800 annually or .65% (.0065) of the pari-mutuel handle. When the on-line wagering system was implemented, the Owners' Association agreed to reimburse ECOC through April 1, 1998 for one-half of the rental fee paid to Autotote by ECOC up to a maximum of $3,461 per race day. ECOC, as a means to improve the quality of racing, agreed to provide limited financing to horse owners to purchase horses. ECOC has advised the Owners' Association that its credit to all members of the Owners' Association as a group will not exceed $500,000 and that it will not extend credit in excess of $50,000 to any single owner, nor lend more than 80 percent of the purchase price for any horse. Since commencing the on-line wagering system, ECOC has arranged for live broadcasts of all of El Comandante's races via commercial television in Puerto Rico. The telecast permits OTB patrons to monitor odds and handicapping information while placing bets until post time and then to view the live racing action. ECOC currently broadcasts races through an agreement with HDA (See "Television Stations"). ECOC's Operating License On December 15, 1989, the Racing Board, at the request of HDA, granted an operating license (the "Operating License") to ECOC. The Operating License provides ECOC with the exclusive right through December 14, 2004, to operate a race track in the San Juan Region (the largest of three regions in Puerto Rico) which includes the San Juan metropolitan area and over three-fourths of the northern half of the Island; the exclusive right to conduct all types of authorized betting, both at El Comandante and off-track, anywhere in Puerto Rico, based on races held at El Comandante; and the right to hold a minimum of 180 day- or night-race days per year. The racing program for El Comandante is approved annually by the Racing Board. From 1993 through January 31, 1996, races were conducted at El Comandante four days a week, generally on Monday, Wednesday, Friday and Sunday, 52 weeks a year, including most holidays. Since February 1, 1996 races have been conducted five days a week by adding Thursdays to the previous racing schedule. The continued validity of the Operating License during its term requires payment by ECOC of an annual license fee, currently $250,000. Pursuant to the Operating License, HDA has an obligation to ensure that ECOC complies with all terms and provisions of the Operating License and applicable laws and regulations. Upon its expiration in December 2004, there can be no assurance that a new operating license will be issued to ECOC, HDA, or any other entity operating El Comandante or that a new operating license will be exclusive. (PAGE) However, since 1957 ECOC and its predecessor have operated the only thoroughbred racing facility in Puerto Rico. Dominican Republic Operations In September 1994, HDA formed Galapagos and in February 1995 transferred a 45% interest to Dominican Republic resident investors (the "Minority Stockholders"). Galapagos was selected by the Dominican Republic Racing Commission to operate the government-owned V Centenario race track pursuant to a ten year lease which commenced April 1995 (the "V Centenario Lease"). The V Centenario Lease also provides Galapagos with the right to develop OTB in the Dominican Republic and the exclusive right to simulcast all horse races, including El Comandante races, into the Dominican Republic. Simulcasting of El Comandante races to the Dominican Republic commenced February 27, 1995 and V Centenario racing operations commenced April 29, 1995. At December 31, 1996 there were 230 agencies in the Dominican Republic taking wagers on El Comandante and V Centenario races. Galapagos' business plan anticipates that approximately 375 agencies will be on-line by the end of 1997 with continuing growth to approximately 450 agencies in 1998. A company controlled by one of Galapagos' Minority Stockholders has entered into a contract to operate a new electronic lottery in the Dominican Republic (the "Lottery Operator") and Galapagos has agreed to provide the wagering distribution system for the lottery which is scheduled to commence June 1997. Galapagos has executed an agreement to sub-contract substantially all of its responsibilities for the distribution system to Autotote which provides the tote equipment for racing in Puerto Rico and the Dominican Republic. Lottery games will be sold at OTB agencies of Galapagos and at lottery agencies selected by the operator. The lottery agencies will also take Pick 6 pool wagers on Galapagos' live and simulcasted races, thereby expanding Pick 6 pool wagering opportunities at no cost to Galapagos. The introduction of an electronic lottery is expected to have a negative effect on wagers on horse races, but it is anticipated that the Pick 6 pool wagers at the new lottery agencies will offset the effect of the electronic lottery on wagers or racing. The financial arrangements are as follows: 1. Galapagos' fees for providing the distribution system, net of fees to Autotote, will be 1% of gross lottery sales at lottery agencies and 2% of gross lottery sales at OTB agencies. 2. Galapagos currently pays for telephone communication costs to each OTB agency. The Lottery Operator will pay Galapagos $100 per month for each OTB agency that sells lottery games as its share of telephone costs. 3. Galapagos will not have any significant costs for supervision of the lottery distribution system provided by Autotote. Television Stations To ensure the availability of television time for El Comandante racing, HDA formed S&E as a wholly-owned subsidiary and on November 17, 1994 S&E acquired the assets and broadcast licenses of the Television Stations for approximately $2 million. S&E commenced broadcasting on a test basis six hours a day and had the official inauguration of its network, TELENET, in June 1995. (PAGE) Paxson provided programming and certain other services to S&E under a Time Brokerage Agreement from February to August 1996 when Paxson purchased a 50% interest in S&E for $4 million. Paxson then assumed responsibility for managing the television operations. In January 1997 Paxson purchased the other 50% interest in S&E for $7 million. Commencing January 1995 S&E produced and broadcasted all El Comandante races, generally 4 hours each race day. At the time that Paxson assumed responsibility for managing the television operations, ECOC and S&E entered into a new agreement (the "S&E-ECOC Agreement") for broadcast time which was effective February 1, 1996. Pursuant to the S&E-ECOC Agreement, ECOC purchases a minimum of 910 hours of television time annually from S&E at $725 per hour (minimum annual amount of $659,750), adjusted annually by CPI. If ECOC needs television time after 7:00 P.M., the cost per hour will be $900, also subject to CPI adjustments. ECOC is responsible for producing and directing the broadcasts and retains the revenues from its sales of advertising time during the broadcasts of the racing program. The term of the S&E-ECOC Agreement expires January 31, 2000, but is renewable for successive one year terms at ECOC's option. The El Comandante television program includes, among other things, presentation of all races, pari-mutuel betting odds and results of pari-mutuel betting. At the time of the second sale to Paxson in January 1997, HDA entered into a broadcast agreement (the "HDA-S&E Agreement") with S&E for television time for El Comandante races for the same minimum number of hours and the same rates as the S&E-ECOC Agreement. The HDA-S&E Agreement is non-cancelable by either party for ten years and thereafter can be cancelled by HDA at five year intervals or by S&E upon payment of liquidated damages of $2 million plus CPI from January 1997. The S&E-ECOC Agreement will remain in place unless ECOC terminates that agreement and accepts an assignment of the HDA-S&E Agreement. HDA has offered to assign the HDA-S&E Agreement to ECOC for an initial term ending January 31, 2002 with an option to extend for additional five years terms. The proposed rates per hour to be paid by ECOC are $525 the first year and $800 during the next four years, plus CPI. Thereafter the rates would be identical to the rates to be paid by HDA to S&E. The ECOC Board of Directors has scheduled a meeting in April 1997 to act upon HDA's offer. IF ECOC does not accept the assignment offer, S&E will continue to broadcast ECOC's racing program under the S&E-ECOC Agreement. If ECOC should terminate the S&E-ECOC Agreement on January 31, 2000 or thereafter as a result of selecting some other television station or finding an alternative way of transmitting its television signal to the public, HDA would be obligated, pursuant to the HDA-S&E Agreement, until January 2007 to purchase the broadcast time from S&E and resell it to other parties. If ECOC does not accept an assignment offer before June 30, 1997, HDA intends to resolve this issue in connection with any renegotiation of the El Comandante Lease (See Item 1 "El Comandante Lease"). Competition El Comandante is the only licensed thoroughbred race track operating in Puerto Rico. Until the expiration of the Operating License, no other thoroughbred race track license for the San Juan Region may be issued to any person. Neither the Racing Act nor ECOC's Operating License precludes the Puerto Rico Government from granting a license to a competitor to construct or operate a race track outside of the San Juan Region (either in the Ponce (PAGE) Region or the Mayaguez Region). Management is not aware of any pending applications for such a license. In addition, Management believes there are significant practical obstacles to establishing a competing race track in Puerto Rico including the availability of construction financing, the need to establish an OTB network and insufficiency of horses in Puerto Rico to conduct racing operations at two tracks. In addition, pursuant to the Interstate Racing Act of 1978, no entity may simulcast its racing program to Puerto Rico without consent of ECOC. ECOC faces competition from other forms of legalized gambling in Puerto Rico. There are 19 licensed casinos in Puerto Rico offering card and dice games, slot machines and other games of chance. The Puerto Rico Government has operated a lottery for more than 50 years and in 1991 commenced an electronic jackpot lottery. In addition, there are numerous cock fighting venues on the Island. ECOC also faces competition from illegal gambling. The Puerto Rico Government may, through legislation, legalize other forms of gambling or grant additional gaming licenses for those forms of gambling already authorized by law. Galapagos faces competition from other forms of gambling in the Dominican Republic. The Dominican Republic Government operates a ticket lottery and instant lottery throughout the country, and an electronic lottery is scheduled to commence in June 1997 (see "Item 1 - Dominican Republic Operations"). There are approximately 600 independent sports betting agencies and wagering on baseball is particularly popular. Approximately 195 of the sports betting agencies were being utilized by Galapagos as OTB agencies at December 31, 1996. Wagering on cock fighting is both legal and popular in the Dominican Republic. Casino gaming is permitted at hotels with a minimum of 100 rooms and there are 25 licensed casinos in operation. Galapagos also faces competition from illegal gambling. Employees The Company does not have any employees, but certain officers of EMC, its managing general partner, also serve as officers of the Company. The Company reimburses IGC for costs incurred in rendering administrative, tax and management support services to the Company. IBC provides accounting services to the Company since the third quarter of 1996. See "Item 13 -- Certain Relationships and Related Transactions". HDA has designated certain persons employed by EMC as officers, but otherwise has no employees. Galapagos had 246 employees at December 31, 1996. Neither company has any agreements with unions and neither has experienced any work stoppage or material labor difficulties. Three EMC officers provide executive management to ECOC pursuant to a consulting agreement, and one also provides services to the Company. See "Item 13 -- ECOC Consulting Agreement". ECOC had approximately 325 employees as of December 31, 1996, including four senior management personnel. There were 92 employees working in the mutuel, admissions, parking and closed circuit television departments covered by a collective bargaining agreement between ECOC and the El Comandante Race Track Employees Union which expires August 23, 1998, 103 employees performing building and premises maintenance services covered by a collective bargaining agreement between ECOC and the General Workers Union which expires May 31, 1999, and 44 employees performing security guard services covered by a collective bargaining agreement between ECOC and the Security Guards Union which expires January 23, 1999. ECOC has not experienced any work stoppage or material labor difficulty since it began operating El Comandante in December 1989. (PAGE) HDA Financing On December 15, 1993, HDA and El Comandante Capital Corp. ("ECCC"), a special purpose finance subsidiary of HDA, together with HDA Management Corporation ("HDAMC"), completed the sale (the "Private Offering") of 68,000 units each consisting of $1,000 principal amount of ECCC's 11.75% First Mortgage Notes due 2003 (the "First Mortgage Notes") and a warrant to purchase one share of Class A Common Stock of HDAMC (the "Warrants"). ECCC loaned the proceeds of the sale of the First Mortgage Notes to HDA and HDAMC contributed the proceeds from the sale of the Warrants to HDA in exchange for a 15% interest in HDA. Following the 1995 Distribution of Units by IGC, HDAMC transferred its 15% interest in HDA to the Company in exchange for 1,205,245 Units. As a result, the Warrants became exercisable to purchase a ratable portion of the Units held by HDAMC, net of Units to be sold by HDAMC to fund payment of HDAMC's income taxes associated with the disposition of Units upon exercise of Warrants. ITEM 2. PROPERTIES El Comandante and related assets consist of the following: a. A 257-acre improved parcel of land located approximately 12 miles east of downtown San Juan in Canovanas, Puerto Rico; b. A six-level grandstand and clubhouse with seating for over 10,000, including private boxes for the Racing Board, Racing Administrator, and other officials and horse owners, and a total capacity in excess of 25,000; c. Racing facilities, including a one-mile oval racing strip with a seven-furlong chute and a 65-foot wide exercise track; d. Food concession services and two glass-enclosed air conditioned dining rooms with a total seating capacity of over 1,400; e. Barn area and related facilities, including 1,595 horse stalls; f. Paved parking area which can accommodate 7,250 vehicles; g. Landscaped infield containing three lakes and a waterfall. El Comandante is encumbered by a mortgage securing the First Mortgage Notes and by the El Comandante Lease. Galapagos leases V Centenario from the Dominican Republic Government (See "Item 1-- Dominican Republic Racing"). V Centenario consists of the following: a. An improved parcel of land located approximately 12 kilometers east of Santo Domingo, Dominican Republic; b. Grandstand and clubhouse with seating for over 4,200 and a total capacity in excess of 10,000; c. Racing facilities, including a one-mile oval strip with a seven-furlong chute and a 1400 meter exercise track and all necessary racing and groundskeeping equipment; (PAGE) d. Food concession services and an air conditioned dining room with a total seating capacity of 400; e. Barn area and related facilities and equipment, including 950 horse stalls; d. Paved parking area which can accommodate 1,100 vehicles. Galapagos also owns certain race track and telecommunication equipment used in the operation of V Centenario and the off-track betting system. ITEM 3. LEGAL PROCEEDINGS Prompted by HDA's then pending sale of S&E, on December 30, 1996 the Racing Board issued an order seeking to impose certain obligations on HDA, ECOC and Paxson in conjunction with the sale, including that (1) in addition to live racing broadcasts, ECOC must rebroadcast races at times of lesser audience, (2) any broadcast agreement for races must be approved by the Racing Board, and (3) HDA, ECOC and Paxson must indemnify third parties for any losses suffered from any discontinuance of racing telecasts and, to secure this indemnity, HDA and ECOC must post a $4 million bond. On January 21, 1997 HDA filed with the Racing Board a motion for reconsideration of the December 30, 1996 order arguing that the Racing Board failed to comply with applicable administrative procedures in issuing the order and that the Racing Board lacked jurisdiction to impose conditions on the S&E sale. In late February, the Owners' Association moved to intervene in the Racing Board proceeding. The Racing Board held a hearing on both motions on March 4, 1997 and determined to postpone ruling on either motion until another, as yet unscheduled, hearing could be held. Based upon facts available to date, Management and legal counsel believe that none of such actions will have a material adverse effect on ECOC's, HDA's or the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. (PAGE) PART II ITEM 5. MARKET FOR REGISTRANT'S CLASS A UNITS AND RELATED UNITHOLDER MATTERS The Units, which represent the assignment of beneficial ownership of the Company's Class A limited partnership interests, have been listed and traded on Nasdaq/NMS since February 7, 1995. The following table sets forth, for the periods indicated, the high and low sales prices per Unit as reported by the Nasdaq Stock Market and cash distributions paid to Unitholders during these periods. Cash Distributions Price Range of Units Total Per Unit High Low 1995 Quarter: First - - $6.00 $4.00 Second $205,135 $0.04 5.50 4.125 Third - - 4.50 3.25 Fourth - - 3.75 2.25 1996 Quarter: First - - 4.00 3.00 Second - - 4.125 3.125 Third - - 3.50 2.50 Fourth - - 3.00 2.25 On March 26, 1997, the closing sale price of Units was $2.00 as reported on Nasdaq/NMS. As of March 26, 1997, there were 6,333,617 Units outstanding and approximately 304 Unitholders of record. The Company intends to distribute quarterly to its Unitholders the maximum possible amount of cash from operations, consistent with the operational needs of the Company, including debt service. The Company's principal source of cash is distributions related to its 82% interest in HDA. The trust indenture related to the First Mortgage Notes (the "Indenture") limits distributions by HDA to its partners, including the Company, to the higher of (i) 8.4% plus the higher of the then applicable federal personal or corporate income tax rate or (ii) the higher of the then applicable Puerto Rico personal or corporate income tax rate, multiplied by HDA's cumulative consolidated net income ("Tax Distributions"). It allows additional cash distributions, if a certain debt coverage ratio is met, equal to 44.25% of the excess of HDA's cumulative consolidated net income after December 31, 1993 over the cumulative amount of the Tax Distributions. ITEM 6. SELECTED FINANCIAL AND OPERATING DATA The Company was incorporated in 1993 and effective March 8, 1995 it consolidates the accounts of HDA and its subsidiaries in its financial statements. Since the Company's historical results of operations for years 1996, 1995 and 1994 are not readily comparable, Management has presented herein certain data on a proforma basis as if the acquisition by the Company of its 82% interest in HDA's profits and the issuance of 1,205,245 Units to HDAMC had all occurred on January 1, 1994 (see Note 18 to the Company's consolidated financial statements). The historical financial information was derived from the consolidated financial statements of the Company which for the years ended December 31, 1993 through 1996 have been audited by Arthur Andersen LLP, independent public accountants. The proforma financial information is unaudited. This information should be read in conjunction with, and is qualified in its entirety by, the consolidated financial (PAGE) statements of the Company and "Management Discussion and Analysis of Financial Conditions and Results of Operations". For the years ended December 31, ------------------------------------------------- Historical (1) Proforma (1) --------------------------------- --------------- 1996 1995 1994 1993 1995 1994 -------- ------- ------- ------- ------- ------- (In thousands, except per Unit amounts) Statement of Income (Loss): Revenues: Rental income from El Comandante Race Track $14,322 $11,429 $ - $ - $14,333 $14,774 Cash distributions from HDA - 134 300 - - - Dominican Republic racing 5,036 3,087 - - 3,098 - Television Stations 1,725 1,344 - - 1,511 - Gain from sale of 50% interest in Television Stations 581 - - - - - Interest income 232 92 55 - 114 840 -------- ------- ------- ------- ------- ------- Total revenues 21,896 16,086 355 - 19,056 15,614 -------- ------- ------- ------- ------- ------- Expenses: Financial 9,048 7,398 - - 9,002 8,616 Depreciation 2,508 1,829 - - 2,163 1,788 General and administrative 1,807 1,115 1 - 1,227 455 Operating costs of Dominican Republic racing 5,972 4,341 - - 4,413 42 Operating costs of Television Stations 1,461 2,350 - - 2,695 237 Other costs - 134 1,761 - 265 2,320 -------- ------- ------- ------- ------- ------- Total expenses 20,796 17,167 1,762 - 19,765 13,458 -------- ------- ------- ------- ------- ------- Income (loss) before provision for income taxes and minority interests 1,100 (1,081) (1,407) - (709) 2,156 Provision for income taxes 400 231 87 - 511 1,035 Minority interests (2) (127) (721) - - (770) (3) -------- ------- ------- ------- ------- ------- Net income (loss) $ 827 $ (591) $(1,494)$ - $ (450) $1,124 ======== ======= ======= ======= ======= ======= Allocation of net income (loss) General partners $ 8 $ (77) $(1,494)$ - $ (4) $ 11 Limited partners 819 (514) - - (446) 1,113 -------- ------- ------- ------- ------- ------- $ 827 $ (591) $(1,494)$ - $ (450) $1,124 ======== ======= ======= ======= ======= ======= Net income (loss) per Unit (3) $ .13 $ (.08) - - $ (.07) $ .18 ======== ======= ======= ======= ======= ======= Weighted average Units outstanding (3) 6,334 6,223 - - 6,334 6,334 ======== ======== ======= ======= ======= ======= (PAGE) December 31, -------------------------------------- 1996 1995 1994 1993 -------- -------- -------- ------- Balance Sheet Data: Cash and cash equivalents 4,268 814 - - Race Tracks property and equipment (4) 45,956 47,891 - - Receivables from ECOC 2,780 1,816 - - Investment in S&E (5) 2,223 4,862 - - Total assets 60,586 60,823 - 800 First Mortgage Notes and accrued interest 66,737 66,573 - - Unsecured partner's loans 415 212 131 654 Notes payable 1,077 2,457 - - Total liabilities 71,775 72,611 524 800 Partner's deficit (11,189) (11,788) (524) - - ----------------------------------------------------------------------------- (1) The accounts of HDA and its subsidiaries have been consolidated in the historical statements of income (loss) as of and for the periods after March 8, 1995 and in the proforma statements of income (loss) commencing on January 1, 1994. (2) Includes HDA's minority interest in losses of Galapagos and the Company's minority interest in HDA's net income, except that in 1995 generally accepted accounting principles limited the amount recognized as the Company's minority interest in HDA (see Note 1 to the Company's consolidated financial statements). (3) Net income (loss) per Unit in the historical statements of income (loss) is calculated based on weighted average of Units outstanding since the Distribution on February 6, 1995. Net income (loss) in the proforma statements of income (loss) and weigthed average of Units outstanding are calculated as if all the outstanding Units of the Company had been issued as of January 1, 1994. Outstanding options and Warrants to purchase Units do not have a material dilutive effect on the calculation of per Unit amounts. (4) Includes a step-up of $5,650,000, resulting from the issuance of Units by the Company for a 15% interest in HDA, net of accumulated depreciation in 1996 of $376,140 and in 1995 of $169,000, attributable to the step-up amount. (5) In 1995 this amount consisted of TV Licenses, property and equipment and other assets of the Television Stations owned by S&E. The accounts of S&E were not consolidated at December 31, 1996. (PAGE) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview of the Company's Operations The Company's principal income producing asset is an 82% interest in HDA in which it is a co-managing partner. HDA owns El Comandante, the only licensed thoroughbred racing facility in Puerto Rico, which it leases to ECOC, and 55% of the capital stock of Galapagos, which leases and operates a race track in the Dominican Republic. HDA formed S&E in November 1994 to own and operate the Television Stations, sold a 50% interest in S&E to Paxson in August 1996 and sold the remaining 50% to Paxson in January 1997. The Company also owns all of the outstanding stock of VJC, an inactive company and a former applicant for licenses to own and operate a thoroughbred racing and wagering facility in Virginia. See Item 1--"Introduction". Overview of HDA's Operations Substantially all of HDA's revenues through 1994 were derived from rent paid by ECOC pursuant to the El Comandante Lease (see Note 9 to the consolidated financial statements of the Company and "Item 1 -- El Comandante Lease"). Commencing in 1995, HDA began to generate revenues from the Dominican Republic racing operations of Galapagos, principally consisting of commissions on wagering for races held at V Centenario and El Comandante simulcasted races, and from television operations of S&E. HDA revenues in 1996 also reflect the sale of a 50% interest in S&E. ECOC had significant growth in revenues from 1991 through 1994 which resulted largely from the conversion, commencing in November 1991 and completed in 1993, of over 570 OTB agencies to an on-line computerized wagering system, the increase in OTB agencies to 636 at December 31, 1994 and the television broadcasting of all of its races. Until November 1991, ECOC televised only Sunday races. With the automation of the OTB agencies, ECOC began televising all of its races throughout Puerto Rico via commercial television. A total of 664 agencies were on-line at December 31, 1996 and applications for 52 additional agencies are in various stages of processing. At the same time that it was automating the OTB agencies, ECOC expanded its betting program to offer one additional daily double wager and four additional exacta wagers, and in 1994 added another daily double wager. The OTB agencies are able to participate in the expanded betting program, including win-place bets which could not be made at agencies prior to automation. In August 1990 ECOC introduced a jackpot pool ("Pool Pote") which is paid out only in the event a single bettor wins the regular pick-six pool. Four percent of the regular daily pool pay-out is added to the Pool Pote if no single bettor wins. Whenever the Pool Pote reaches $1.5 million (as it did in July 1994), the regulations of the Racing Board require $500,000 to be paid out as part of the regular pick-six pool wager on the next Sunday or holiday following the date the Pool Pote reaches $1.5 million. ECOC has asked the Puerto Rico Racing Board ("Racing Board") to permit two new wagers in 1997, a trifecta and a Pick-3 pool wager. The Racing Board has not yet responded to ECOC's request. The automation of OTB agencies, the expanded betting program, the Pool Pote, and the daily broadcasting of races resulted in substantial increases in wagering from $128 million in 1992 to $288 million in 1994 as betting (PAGE) opportunities became more attractive and more convenient to wagering patrons. Wagering decreased to $274 million in 1995 and remained at the same level in 1996. ECOC's Management attributed the 1995 decrease to (i) regulatory changes in OTB agents' commissions and (ii) more frequent, and therefore lower, payouts in 1995 on El Comandante's pick six jackpot wager which caused bettors to shift to other wagers for which ECOC receives lower commissions. In February 1996 ECOC increased its race days from four to five days a week and at the same time reduced the number of races per day, resulting in an increase to approximately 36 races per week from approximately 32 races per week. The average daily wagering handle decreased, as expected, but the extra day compensated for the decrease. The extra race day per week provides an extra Pick-6 pool wager each week; this wager is favored by bettors and provides a higher commission to ECOC than other wagers. Consequently the mix of wagers in 1996 improved ECOC's percentage of the total wagers it received as commissions. As a result ECOC increased its commissions by $1.5 million in 1996 with no significant increase in handle. ECOC management is forecasting a modest $7 million increase in 1997 handle of which $2.6 million is from El Comandante live racing and $4.4 million from simulcasted races to the Dominican Republic. The forecasted increase in live racing handle is based on an expected approval in 1997 of two new bets, the trifecta and Pick-3 pool bet. The increase in simulcasting handle is expected from wagering at additional OTB agencies to be developed by Galapagos in the Dominican Republic. Basis of Presentation The Company was restructured as a limited partnership on August 2, 1994 and acquired a 67% profits interest in HDA. On March 8, 1995, the Company acquired an additional 15% profits interest in HDA. Prior to March 8, 1995, the Company accounted for its investment in HDA under the equity method of accounting. Because HDA is a limited liability partnership, the original partners of HDA only recorded equity in losses of HDA until their investments in HDA were reduced to zero. HDA had an accumulated deficit at the time the partners transferred their interests in HDA to the Company in August 1994. Since the Company received its interest in HDA as capital contributions from related parties whose investments in HDA were zero, the Company did not record any investment in HDA and adopted the same accounting treatment of not recognizing equity in earnings of HDA until HDA's accumulated deficit was eliminated. Prior to March 8, 1995 generally accepted accounting principles did not permit the Company to consolidate the accounts of HDA in the Company's financial statements because HDAMC had the right to approve any sale or disposition of HDA's assets in excess of $500,000 and the incurrence of any debt in excess of $1 million. On March 8, 1995, HDA's partnership agreement was amended to eliminate these approval rights of HDAMC, and commencing as of March 8, 1995 the accounts of HDA have been consolidated with the Company's accounts. Since the Company did not consolidate the accounts of HDA until March 8, 1995, the Company's historical results of operations for 1996, 1995 and 1994 are not readily comparable. Accordingly, management has presented in Item 6 - Selected Financial and Operating Data and in Note 18 to the Company's (PAGE) financial statements the historical audited consolidated statements of income for the year ended December 31, 1996 and unaudited proforma consolidated statements of income (loss) for the years ended December 31, 1995 and 1994. This section reflects Management's discussion and analysis of the financial condition and results of operations of (i) the Company and its consolidated subsidiaries, on a proforma basis, based on statements of income for the year ended December 31, 1996 (historical) and the years ended December 31, 1995 and 1994 (proforma), and (ii) the Company and its consolidated subsidiaries, as of and for each of the three years ended December 31, 1996 which exclude the accounts of HDA and its subsidiaries prior to March 8, 1995. The unaudited proforma consolidated statements of income (loss) for the years ended December 31, 1995 and 1994 are not necessarily indicative of what the actual results of operations of the Company would have been assuming such transactions had been completed as of January 1, 1994, and does not purport to represent the results of operations for future periods. The Company's Proforma Results of Operations 1996 Historical Compared to 1995 Proforma Revenues. The Company and VJC did not have any revenues in the year ended December 31, 1996 and 1995, except for minor amounts of interest income. Accordingly, all other revenues in these years relate to HDA and its subsidiaries. Revenues increased $2,840,000 to $21,896,000 in 1996 from $19,056,000 in 1995. Rental Income from El Comandante. Rental income from El Comandante was $14,322,000 in 1996 and $14,333,000 in 1995. Rental income in 1996 was based on 25% of ECOC's commissions of $57,286,000 from El Comandante wagering on 256 racing days, whereas 1995 rental income was based on 25% of ECOC's commissions of $55,731,000 from wagering on 207 racing days, plus fixed rent of $400,000 (as disclosed previously, fixed rent payments were eliminated effective January 1, 1996). In February 1996, ECOC commenced racing five days a week by adding Thursday to its previous four-day race week. Although the average daily commissions earned by ECOC declined in the 1996 period, the commissions earned on Thursday race days more than offset the decline in average daily commissions. The effect of the additional race day is shown by (1) the comparison of January 1996 and 1995 commissions earned by ECOC before introduction of Thursday racing, and (2) the comparison of February - December, 1995 commissions earned before Thursday racing commenced with commissions earned February - December 1996 after Thursday racing commenced. Whereas the January 1996 commissions were $501,000 less than the January 1995 commissions, the average monthly commissions for the balance of 1996 exceeded by $187,000 the average monthly commissions in the comparable months of 1995. Dominican Republic Racing Revenues. Galapagos began simulcasting El Comandante races on February 27, 1995 to several sports betting agencies in the Dominican Republic, and earned commissions on wagering on El Comandante races of $1,480,000 in 1996 and $1,008,000 in 1995. Galapagos commenced racing operations at V Centenario in April 1995 and earned commissions on V Centenario races of $3,033,000 in 1996 and $1,717,000 in 1995. (PAGE) The increase in commissions is attributable to (1) full year of racing in 1996 versus partial year in 1995 and (2) growth in the number OTB agencies -- 53 agencies when V Centenario opened in April 1995, 163 at December 31, 1995 and 230 at December 31, 1996. Galapagos also had revenues of $523,000 in 1996 and $373,000 in 1995 from Jockey Club and restaurant operations and other miscellaneous sources. Revenues from Television Stations. In August 1996 HDA closed a sale to Paxson of a 50% interest in S&E (see Item 1 - "Introduction") and commencing September 1996 Paxson assumed responsibility for managing the Television Stations. Paxson and S&E previously entered into a Time Brokerage Agreement which commenced February 1996 and terminated upon the closing of the sale. Pursuant to the terms of this agreement, Paxson paid fees of $23,333 monthly to S&E, provided programming, including infomercials, and certain other services to S&E and was entitled to 50% of S&E's operating cash flow from February through August 1996. The accounts of S&E were included in HDA's consolidated financial statements through August 1996, and commencing September 1996 HDA recognized its 50% equity interest in the operations of S&E. S&E commenced television broadcasting in January 1995 on a test basis until June 26, 1995 and earned broadcasting fees and advertising revenues of $1,511,000 in 1995. The 1996 revenues were $1,725,000 which included revenues of $1,669,000 from S&E's operations in the eight months ended August 1996 and $56,000 representing HDA's 50% share of S&E's net income for the four months ended December 31, 1996. The revenues between years are not readily comparable since (1) S&E commenced operations in 1995, (2) the broadcasting and programming format was changed in February 1996 when Paxson began providing infomercials and other services to S&E, and (3) for the period of September to December 1996 the revenues only included the Company's 50% share of S&E's net income. Gain on Sale of 50% Interest in Television Stations. On August 30, 1996, HDA closed the sale of a 50% interest in S&E. The sales price was $4 million, and a gain of $581,000 was recorded in 1996 for this sale. The costs of this sale included approximately $1.5 million for employee severance payments, costs to cancel certain contracts, write-off of deferred costs not recoverable under the revised broadcasting and programming format, legal, accounting and investment bankers' fees, and fees to holders of First Mortgage Notes for consenting to the transaction. HDA closed the sale to Paxson of its remaining 50% interest in S&E on January 21, 1997. Interest Income. Interest income increased to $232,000 in 1996 from $114,000 in 1995, caused primarily by increases in interest income of $83,000 from short-term investments and $33,000 on a note receivable from ECOC. Financial Expenses. Financial expenses were $9,048,000 in 1996 and $9,002,000 in 1995, summarized as follows: 1996 1995 ----------- ----------- Interest on First Mortgage Notes and amortization of related financing costs $ 8,710,000 $ 8,686,000 Interest on capital leases of Galapagos and S&E (leases commenced in third quarter of 1995) 161,000 63,000 (PAGE) Interest on debt under television purchase agreements 51,000 70,000 Interest and financing costs on the Company's bank loan 72,000 64,000 Interest on loans from IGC 39,000 - Interest (interest credit) on Galapagos' minority stockholder loans (86,000) 86,000 Galapagos interest on debt to Dominican Republic Government 91,000 - Other costs 10,000 33,000 ----------- ----------- $ 9,048,000 $ 9,002,000 =========== =========== The stockholders of Galapagos forgave accrued interest in 1996 on their loans to Galapagos and accordingly the 1996 period includes a credit of $89,000 for the reversal of interest accrued in 1995 on minority stockholder loans. Galapagos pays taxes to the Government of the Dominican Republic based on a percentage of wagering. The Government agreed to a deferred payment plan for taxes of approximately $519,000 and interest of $91,000 was accrued in 1996 on this deferred tax liability. The balance of the indebtedness was $473,000 at December 31, 1996. Depreciation. Depreciation increased $345,000 in 1996 to $2,508,000 from $2,163,000 in 1995. The increase is primarily caused by increases in (1) El Comandante depreciation to $1,687,000 in 1996 from $1,618,000 in 1995, which increase is attributable to capital additions, (2) Galapagos depreciation to $456,000 in 1996 from $227,000 in 1995 -- Galapagos depreciation in 1995 was for eight months since it commenced operations April 29, 1995 and (3) S&E depreciation to $158,000 in 1996 and $111,000 in 1995. The Television Stations were operated on a test basis from January to June 26, 1995 and depreciation was recognized from July 1995 through August 1996 when a 50% interest in S&E was sold to Paxson and S&E's accounts were no longer consolidated in the Company's financial statements. General and Administrative Expenses. General and administrative expenses increased $580,000 to $1,807,000 in 1996 from $1,227,000 in 1995. The major changes in expenses are summarized as follows: Increase (Decrease) ---------- El Comandante property taxes of $610,000 in 1996, and none in 1995 $ 610,000 Legal, accounting and consulting fees 86,000 Management fees and administrative support services (75,000) S&E administrative costs ( 45,000) Costs of investigating new business opportunities ( 37,000) Directors' fees and expenses 30,000 Other, net 11,000 ----------- $ 580,000 =========== Operating Costs of Dominican Republic Racing. Galapagos began simulcasting El Comandante races on February 27, 1995 and opened V Centenario in April 1995. Costs incurred in connection with these operations were $4,413,000 in (PAGE) 1995, net of certain costs which were deferred as start-up costs prior to the opening of V Centenario in April 1995, and $5,972,000 while under full operation during 1996. Certain costs, such as horseowners' 50% share of commissions, ECOC's management fee and fees paid to Autotote for providing the wagering system, are directly related to the amount of wagering or to commissions earned by Galapagos. Such costs accounted for $958,000 of the 1996 increase in costs. The other increases in 1996 costs are largely attributable to the additional months that V Centenario operated in 1996, offset in part by credits of $545,000 for funds released for Galapagos' marketing costs from the Required Escrow account upon authorization of the Government. The Required Escrow account is funded from a portion of wagers on pool bets for the purpose of reimbursing Galapagos for foreign exchange losses and/or for other purposes approved by the Government. Operating Costs of Television Stations. S&E commenced television broadcasting in January 1995 on a test basis which ended June 1995 and incurred operating costs of $2,695,000 during 1995, net of certain costs which were deferred as start-up costs during the test period. Operating costs in the 1996 period were $1,461,000 for the January to August period while S&E's accounts were consolidated in the Company's financial statements. The 1996 costs include fees of $272,000 to Paxson pursuant to the Time Brokerage Agreement for the seven months from February through August 1996. Costs between periods are not readily comparable because (i) certain costs were deferred during the 1995 test period, (ii) the change in the broadcasting and programming format which commenced February 1996 resulted in significant reductions in production and programming costs in 1996 and (iii) fees to Paxson of $272,000 in 1996. Other Costs. Other costs in 1995 includes $134,000 related to VJC's application for the Virginia License and VJC's appeal of the grant of the license to another applicant and $131,000 for legal, accounting and other costs incurred in connection with the Distribution. No similar costs were incurred in 1996. Provision for Income Taxes. The Company is subject to Puerto Rico income tax at a 29% rate on its allocable share of HDA's taxable income and an HDA subsidiary is subject to Federal income taxes. HDA had previously provided for deferred Dominican Republic income taxes on accrued interest on loans to Galapagos. The accrued interest was forgiven in 1996 and a tax credit of $19,000 was recorded for reversal of the deferred tax provision applicable to the forgiven interest. The net provisions for income taxes in 1996 and 1995 were as follows: 1996 1995 ------------ ------------ Puerto Rico income taxes of the Company - Current $ 257,000 $ 217,000 Deferred 156,000 269,000 Dominican Republic income tax provision (credit) of HDA (19,000) 19,000 Federal income taxes of HDA subsidiary 6,000 6,000 ------------ ------------ $ 400,000 $ 511,000 ============ ============ Minority Interests. Minority partners own 18% of HDA and the Minority Stockholders hold a 45% interest in Galapagos. The accumulated deficit of HDA was $818,750 at December 31, 1994 and, as explained in Note 1 to the Company's (PAGE) consolidated financial statements, the Company did not recognize the 18% minority partners' share of HDA's net income until such time as the accumulated deficit of HDA was eliminated by earnings of HDA after December 31, 1994. The minority interests in 1996 and 1995 are comprised of the following: 1996 1995 ------------- ------------- Minority Stockholders' share of losses of Galapagos $( 614,000) $( 833,000) Minority partners' share of income of HDA after accumulated deficit was eliminated by HDA's earnings in the 1995 period 487,000 63,000 ------------- ------------- $( 127,000) $( 770,000) ============= ============= 1995 Proforma Compared to 1994 Proforma During 1994, the Company and VJC incurred costs associated with VJC's efforts to obtain the Virginia Licenses, but had no other activities. Accordingly, substantially all proforma revenues and expenses in 1994 relate to HDA and its subsidiaries, except for (i) $55,000 in interest income earned on the receivable from Land Development Associates S.E. ("LDA"), (ii) $1,761,000 in VJC costs, (iii) Puerto Rico income taxes of $1,034,000 applicable to the Company's proforma share of HDA's taxable income and (iv) $207,000 of additional depreciation related to a step up of $5,650,000 in El Comandante assets which is the value assigned to HDAMC's interest in HDA transferred to the Company in March 1995 in exchange for Units. Revenues. Revenues increased $3,442,000 (22%) to $19,056,000 in 1995 from $15,614,000 in 1994. The increase resulted primarily from revenues of $1,511,000 from the Television Stations and $3,098,000 from racing operations in the Dominican Republic, offset in part by decreases of $441,000 in rental income from El Comandante and $726,000 in interest income. Rental Income from El Comandante. Rental income from El Comandante decreased $441,000 (3%) to $14,333,000 in 1995 from $14,774,000 in 1994. Rental income in 1995 was based on 25% of ECOC's commissions of $55,731,000 from El Comandante wagering plus fixed rent of $400,000, whereas 1994 rental income was based on 25% of ECOC's commissions of $58,497,000 from wagering plus fixed rent of $150,000. Despite increased OTB outlets, ECOC's wagering commissions for the 1995 period decreased from the prior year which management attributes principally to (i) legislative increases to OTB agency commissions payable on win-place wagering which reduced the payout to bettors, (ii) more frequent, and therefore lower, payouts in 1995 on El Comandante's pick six jackpot wager which caused bettors to shift to other wagers for which ECOC receives lower commissions. Dominican Republic Racing Revenues. Galapagos began simulcasting El Comandante races on February 27, 1995 to sports betting agencies in the Dominican Republic and commenced racing operations at V Centenario on April 29, 1995. In 1995 Galapagos earned commissions of $1,008,000, net of commissions to ECOC, on wagering on El Comandante simulcasted races and $1,717,000 on V Centenario races. Galapagos also had 1995 revenues of $278,000 from the jockey club and food services operations after the opening (PAGE) of V Centenario, $38,000 from foreign currency exchange transactions and $57,000 from other sources. Revenues from Television Stations. S&E commenced television broadcasting on a test basis in January 1995 and commenced full network operations on June 26, 1995. S&E earned broadcasting fees and advertising revenues of $1,511,000 in 1995, which included revenues of $672,000 from ECOC for producing and broadcasting a four hour program for races run at El Comandante. Interest Income. The Company and HDA earned interest income of $114,000 in 1995, principally from short term investments of HDA, compared to 1994 interest income of $157,000 on short term investments and $683,000 on loans to LDA. On August 2, 1994, HDA distributed the receivable from LDA to its partners, including the Company, and the Company transferred its share of the receivable to its partners, EMC and IGC, on September 30, 1994. Financial Expenses. Financial expenses increased $386,000 to $9,002,000 in 1995 from $8,616,000 in 1994. The increase was primarily caused by additional amortization of $59,000 in 1995 of financial costs related to the First Mortgage Notes, interest of $70,000 in 1995 related to the debt incurred in connection with the acquisition in November 1994 of the Television Stations, interest of $86,000 on loans to Galapagos from Minority Stockholders, interest and amortization of financing costs of $64,000 on a bank loan of the Company and interest of $63,000 on loans to S&E and Galapagos for the acquisition of equipment. Depreciation. Depreciation increased $375,000 in 1995 to $2,163,000 from $1,788,000 in 1994. The increase is attributable to depreciation on additional barns placed in service in October 1994 and other capital improvements at El Comandante, depreciation of $227,000 which commenced May 1995 on assets of Galapagos and depreciation of $111,000 which commenced July 1995 on assets of the Television Stations. General and Administrative Expenses. General and administrative expenses increased $772,000 to $1,227,000 in 1995 from $455,000 in 1994. The Company, excluding HDA and its subsidiaries, did not have any general and administrative expenses in 1994 and $668,000 of the increase was attributable to the Company's expenses in 1995. The principal expenses of the Company in 1995 were services by IGC pursuant to the Support Agreement ($254,000), costs related to investigating potential racing opportunities ($71,000) and related travel expenses ($39,000), public relations and investors' matters ($116,000), legal, accounting and other professional fees ($133,000) and reimbursement to EMC for directors' expenses ($36,000). General and administrative expenses in 1995 also included $25,000 for the Dominican Republic racing operations and $61,000 for the television operations. There were no similar expenses in 1994 for television and Dominican Republic racing operations. Other Costs. Other costs includes (i) $134,000 in 1995 and $1,761,000 in 1994 in VJC costs related to VJC,s application for the Virginia Licenses and the VJC's appeal of the grant of the license to another applicant, and (ii) $131,000 in 1995 and $559,000 in 1994 for legal, accounting and other costs incurred in connection with the Distribution. Operating Costs of Dominican Republic Racing. Galapagos began simulcasting El Comandante races on February 27, 1995 and commenced racing operations at V Centenario on April 29, 1995. Costs incurred in connection with these operations and the opening of V Centenario were $4,413,000 in 1995, net of certain costs which were deferred as start-up costs prior to the (PAGE) opening of V Centenario. Start-up costs of Galapagos charged to expense in 1994 amounted to $42,000. Operating Costs of Television Stations. S&E officially launched its television operations on June 26, 1995, after commencing broadcasting on a test basis for six hours a day in January 1995 and increasing to eighteen hours a day on April 29, 1995. Television operating costs charged to expense during 1995 were $2,695,000, net of certain costs which were deferred as start-up costs during the test period. Start-up costs charged to expense in 1994 amounted to $237,000. Other Costs. Other costs of $265,000 in 1995 and $2,320,000 in 1994 include (i) $134,000 in 1995 and $1,761,000 in 1994 in costs related to VJC's application for the Virginia License and VJC's appeal of the grant of the license to another applicant, and (ii) $131,000 in 1995 and $559,000 in 1994 for legal, accounting and other costs incurred in connection with the Distribution. Provision for Income Taxes. The provision for income taxes is attributable to (i) Puerto Rico tax on the Company's Puerto Rico source income, which is its 82% distributable share of HDA's consolidated net income (excluding Galapagos' losses, for which a deduction will not be available to HDA) (ii) federal income tax of HDA's corporate subsidiary, ECCC, and (iii) Dominican Republic tax on interest income earned by HDA on stockholders loans to Galapagos (which loans and interest are eliminated in the consolidated financial statements). Minority Interests. Minority interests of $770,000 for 1995 is the minority shareholders' share of net losses of Galapagos ($833,000), less the minority partners' share of net income of HDA ($63,000). Losses attributable to minority shareholders of Galapagos in 1994 were $3,000. Liquidity and Capital Resources of HDA and the Company Liquidity of HDA HDA has cash and cash equivalents of $4,038,000 at December 31, 1996 and management is forecasting 1997 sources and uses of cash as follows: SOURCES OF CASH: Receipts from ECOC Rental income for 1997 $14,550,000 Collection of note and 1996 rent receivable 1,000,000 Sale of 50% interest in S&E 7,000,000 Interest income 435,000 ----------- 22,985,000 ----------- USES OF CASH: Debt service on First Mortgage Notes 7,925,000 Payment of property taxes and racing license of El Comandante 860,000 General and administrative, expenses and costs of Noteholder approvals 1,020,000 Costs related to sale of S&E and to S&E broadcast agreement 440,000 (PAGE) Uses of Excess Proceeds from sale of S&E for redemption of First Mortgage Notes, investment in Galapagos and/or El Comandante capital improvements 3,237,000 Cash distributions to partners (Company's 82% share is $2,862,000) 3,490,000 Unforeseen uses 500,000 ----------- 17,472,000 ----------- NET CASH FLOW 5,513,000 CASH, beginning of year 4,038,000 ----------- CASH, end of year $ 9,551,000 =========== HDA's principal source of cash is rental income from the lease of El Comandante to ECOC, augmented in 1997 by proceeds of the sale of HDA's remaining 50% interest in S&E. The rental income is based on ECOC's commissions on wagering. ECOC management is forecasting a $924,000 increase (4.5%) in its 1997 commissions, resulting from a $635,000 increase from El Comandante live racing and $289,000 increase from simulcasting as additional OTB agencies are developed in the Dominican Republic. HDA sold a 50% interest in S&E in August 1996 for $4 million and the remaining 50% for $7 million in January 1997. The Indenture requires HDA to use approximately $7.5 million of these proceeds by January 1998 to offer to redeem First Mortgage Notes to the extent these proceeds are not used in HDA's racing business. HDA made an offer, which expired on March 25, 1997, to redeem up to $5 million of the First Mortgage Notes at par plus accrued interest. Prior to January 1998 HDA plans to use the other $2.5 million as investment in Galapagos, for capital improvements for El Comandante and/or for redemption of additional First Mortgage Notes. In response to the $5 million repurchase offer that expired on March 25, 1997, First Mortgage Notes in the principal amount of $737,000 were tendered and redeemed on March 28, 1997. As a result, HDA may retain $4,263,000 of the $5 million offered for partnership purposes. Galapagos had a cash flow deficit from operations of approximately $1.1 million in 1996. Management expects Galapagos to have a positive cash flow in 1997 as a result of the following: 1. An intensified effort in 1997 to expand the OTB network which grew from 163 to 230 OTB agencies in 1996, with a goal of 375 agencies by the end of 1997 and further growth in 1998 to a maximum of 450 agencies. 2. The Lottery Operator, a company controlled by one of Galapagos' Minority Stockholders, has a contract with the Government to operate an electronic lottery in the Dominican Republic. Galapagos will permit OTB agencies to sell lottery tickets and the Lottery Operator will pay Galapagos $100 per month per OTB agency as partial reimbursement for telephone line costs for OTB agencies. The reimbursement is forecasted to be $230,000 from June to December 1997. Each lottery location that is not an OTB agency will also sell the Pick-6 pool wagers for Galapagos' live racing and El Comandante's simulcasted races. The Dominican bettors favor the pool bet and in 1996 approximately 67% of Galapagos' commissions were earned from this wager. Galapagos will manage the distribution system for the Lottery Operator. The lottery is tentatively scheduled to open in June 1997 with 485 agencies selling lottery games, with agencies forecasted to grow to 725 locations by (PAGE) year-end and to 900 in 1998. Forecasted cash flow for the management contract is $275,000 for 1997. 3. The Government receives taxes on wagering on simulcasted races from El Comandante. Galapagos, the Horseowners' Association and the Breeders' Association have proposed that the Government invest, commencing April 1997, these tax receipts to improve racing in the Dominican Republic. Pursuant to the proposal, Galapagos would receive 75% of the taxes in the first year, 65% in the second year and 50% thereafter as reimbursement for repairs and maintenance at V Centenario, marketing costs (including television costs of V Centenario races) and certain other items benefitting racing in the Dominican Republic. If approved effective April 1997, these Government expenditures are forecasted to reduce Galapagos' operating costs by approximately $1 million in 1997. The balance of the tax revenues would be used to increase the purses paid to horseowners. The President of the Dominican Republic appoints the members of the Racing Commission and of the Patronato Hipodromo V Centenario ("Patronato"), a seven member commission that oversees the contractual relationship between the Government and Galapagos. Both commissions support the proposal. On March 26, 1997 the President of the Patronato, the President of the Breeders' Association, a representative of the Horseowners' Association and the general manager of Galapagos met with a Presidential aide to discuss the proposal. The aide informed the group that he will meet with the President to discuss this matter which he expects to conclude by April 15, 1997. Subject to approval by holders of a majority in principal amount of the First Mortgage Notes, HDA expects to make capital contributions, together with the Minority Stockholders, to Galapagos to improve Galapagos' working capital position until these additional sources of revenues materialize. ECOC had rent and loans payable to HDA of approximately $2.8 million at December 31, 1996 and the indebtedness has increased in the first quarter of 1997 to an amount which approaches the limit permitted by the El Comandante Lease and the Indenture. ECOC's 1997 forecasts show cash flow from El Comandante operations, collection of its 1996 receivable of approximately $900,000 from Galapagos and financing of its horseowners' loans which will provide approximately $335,000 to ECOC (see Note 2 to ECOC's financial statements). ECOC's forecast also includes a $1 million reduction in 1997 in its debt to HDA, most of which can be accomplished when ECOC collects its receivable from Galapagos. As discussed above, HDA and the Minority Stockholders plan to make capital contributions to Galapagos which will provide funds to Galapagos to pay its debt to ECOC, which in turn can use a significant portion, if not all, of the amount collected to reduce its debt to HDA. The Company's management has reviewed ECOC's forecasts and believes that ECOC's cash position will be significantly improved in 1997 and that, assuming the planned capital contributions are made to Galapagos, ECOC will be able to reduce its debt to HDA and avoid a default under the El Comandante Lease and the Indenture. Liquidity of the Company The Company's principal sources of cash have been distributions related to its 82% interest in HDA, proceeds from bank loans and loans from IGC. Indenture restrictions presently limit HDA's ability to make distributions ("Permitted Distributions") to its partners, including the Company, to approximately 48% of HDA's cumulative consolidated net income since January 1, 1994 (see Item 5 and Note 6 to the Company's Consolidated Financial Statements). (PAGE) Management forecasts approximately $2.8 million in cash distributions from HDA to the Company in 1997 and the only other forecasted source of cash of the Company is approximately $265,000 from commissions and guarantee fees related to the sale of S&E. The Company's forecasted cash needs are approximately $2.1 million, including payment of bank debt and interest ($531,000), administrative expenses and costs of investigating new business opportunities ($675,000), income taxes ($257,000) and reduction of payables ($690,000), including $412,000 to IGC. The Company's bank debt will be paid in full in 1997 and Management believes the line of credit can be renewed if needed. The forecast of 1997 net cash flow of approximately $900,000, coupled with cash of $175,000 at December 31, 1996 and bank loans, if needed, should provide the Company with funds to expand its business and/or make modest cash distributions to partners. EMC's directors will consider cash distributions at their April 1997 meeting and thereafter on a quarterly basis. The Company is negotiating with the Government of Panama to operate the Presidente Remon race track in Panama City which is owned and presently managed by the Government. If an agreement to operate the Presidente Remon track is concluded, the operation should require modest capital investment that Management expects to fund from current operations. The Company's Historical Results of Operations 1996 Compared to 1995 The Company did not consolidate the accounts of HDA until March 8, 1995. Accordingly, the Company's historical results of operations for 1996, 1995 and 1994 are not readily comparable and the discussion below is limited to a comparison of revenues and expenses of the Company and VJC for these years. Revenues. With the exception of a cash distribution of $134,000 received from HDA in February 1995 and insignificant amounts of interest income in 1996 and 1995, the revenues of the Company in its consolidated statements of income (loss) for the years ended December 31, 1996 and 1995 are entirely from the consolidation of the accounts of HDA. Because the Company had a zero investment in HDA when the cash distribution of $134,000 was received in February 1995 and since the distribution was received prior to the consolidation of HDA's accounts as of March 8, 1995, the distribution represented revenue to the Company that was not eliminated in the consolidated financial statements. Expenses, other than Income Taxes. Substantially all of the expenses, other than income taxes, for 1996 and 1995 are HDA expenses for 1996 and HDA expenses from March 8, 1995 to December 30, 1996. Expenses of the Company and its subsidiary VJC during 1996 and 1995, and excluding the expenses of HDA and its subsidiaries, were as follows: a. Interest and amortization of financing costs of $113,000 in 1996 included $72,000 related to a bank loan closed March 1995 and renegotiated in May 1996 and $39,000 of interest on loans from IGC, compared to $64,000 in 1995 related to the bank loan; b. Depreciation of $207,000 in 1996 and $169,000 in 1995 related to a step-up of $5,650,000 in El Comandante assets. The step-up is the value assigned HDAMC's interest in HDA which was transferred to the Company in March (PAGE) 1995 in exchange for Units of the Company; c. General and administrative expenses were $661,000 in 1996 and $669,000 in 1995. The changes in expenses were primarily reductions in 1996 in IGC and EMC support services of $82,000 and costs of $37,000 related to investigating new business opportunities, and increases in 1996 in legal, accounting and consulting fees of $78,000 and Directors' fees and expenses of $35,000. d. Other Costs in 1995 are $134,000 related to VJC's application for the Virginia License And VJC's appeal of the grant of the license to another applicant. No similar costs were incurred in 1996. Provision for Income Taxes. The Company is subject to Puerto Rico income tax at a 29% rate on its allocable share of HDA's taxable income and ECCC, an HDA subsidiary, is subject to Federal income taxes. HDA had previously provided for deferred Dominican Republic income taxes on interest accrued on Stockholders' loans to Galapagos. The accrued interest was forgiven in 1996 and a tax credit was recorded for reversal of the deferred tax provision applicable to the forgiven interest. The net provisions for income taxes in 1996 and 1995 were as follows: 1996 1995 ------------ ------------ Puerto Rico income taxes of the Company Current $ 257,000 $ 217,000 Deferred 156,000 (10,000) Dominican Republic income tax provision (credit) of HDA (19,000) 19,000 Federal income taxes of HDA subsidiary 6,000 5,000 ------------ ----------- $ 400,000 $ 231,000 ============ =========== Minority Interests. Minority partners own 18% of HDA and Minority Stockholders hold a 45% interest in Galapagos. As explained in Note 1 to the Company's consolidated financial statements, the Company did not recognize the 18% minority partners' share of HDA's net income until such time as the accumulated deficit of HDA at December 31, 1994 was eliminated by earnings of HDA in 1995. The minority interests in 1996 and 1995 are comprised of the following: 1996 1995 ------------- ------------- Minority Stockholders' share of losses of Galapagos $( 615,000) $( 784,000) Minority partners' share of income of HDA after accumulated deficit was eliminated by HDA's earnings in the 1995 period 487,000 63,000 ------------- ------------- $( 128,000) $( 721,000) ============= ============= 1995 Compared to 1994 Revenues. Revenues were $16,086,000 for 1995 as compared with revenues of $355,000 in 1994. All of the revenues for 1995 were generated by HDA and its subsidiaries during the period from March 8 to December 31, 1995, except (PAGE) for $2,000 of interest income earned by the Company and a cash distribution of $134,000 from HDA to the Company in February 1995. Because the Company had a zero investment in HDA, the cash distribution represented revenue to the Company, and since the distribution was received prior to the consolidation of HDA's accounts as of March 8, 1995, the revenue of $134,000 was not eliminated in the consolidated financial statements. HDA's primary sources of revenue during the period from March 8 to December 31, 1995 were (i) rental income of $11,429,000 from ECOC pursuant to the El Comandante Lease, (ii) Galapagos' commissions of $1,002,000, net of commissions to ECOC, from wagers on El Comandante races simulcasted to the Dominican Republic, commissions of $1,718,000 on V Centenario races, revenues of $273,000 from jockey club and food services operations at V Centenario, and other Galapagos income of $95,000, (iii) Television Station revenues of $1,344,000 and (iv) interest income of $92,000. The Company's revenues during 1994 consisted of cash distributions from HDA of $300,004 and interest income of $55,000 earned on a receivable from an affiliate, LDA, which was distributed by HDA to the Company on August 2, 1994. On September 30, 1994 the Company transferred a portion of the receivable to IGC in satisfaction of the Company's obligation to repay certain loans and the remainder of the receivable was distributed to its partners. Expenses. Expenses were $17,167,000 in 1995 and $1,762,000 in 1994. Expenses of HDA and its subsidiaries during the period from March 8 to December 31, 1995 were $16,130,000 and the Company's and VJC's expenses were $1,037,000 for the year. The HDA expenses were financial ($7,333,000), depreciation ($1,660,000), operating costs of the Television Stations ($2,351,000), operating costs of Dominican Republic racing ($4,341,000) and administrative expenses and management fees ($445,000). The expenses of the Company and VJC in 1995 were primarily interest and amortization of financing costs of $64,000 on a bank loan, administrative expenses of $415,000, reimbursements of $255,000 to IGC for administrative services pursuant to the Support Agreement, depreciation of $169,000 related to a step-up of $5,650,000 in El Comandante assets, which is the value assigned to HDAMC's interest in HDA transferred to the Company in March 1995 in exchange for Units, and costs of $134,000 related to VJC's appeal contesting the award of the Virginia Licenses to another applicant. Expenses during 1994, consisted of the write off of VJC costs of $1,761,000 related to VJC's application for the Virginia Licenses and VJC's appeal of the grant of the license to another applicant, and administrative expenses of $1,300. Provision for Income Taxes. The Company is subject to Puerto Rico income tax at a 29% rate on its Puerto Rico source income, which is its distributable share of HDA's net taxable income and ECCC, an HDA corporate subsidiary, is subject to federal income taxes. The current provision of $222,000 and $87,000 for the years ended December 31, 1995 and 1994, respectively, relates to the Puerto Rico tax liability of the Company ($217,000 in 1995 and $87,000 in 1994) and the 1995 federal tax liability of $5,000 of HDA's subsidiary, ECCC. Minority Interests. Minority interests of $721,000 for 1995 is the Minority Stockholders' share of net losses of Galapagos ($784,000), less the minority partners' share of net income of HDA ($63,000). (PAGE) The Minority Stockholders acquired a 45% interest in Galapagos in February 1995 and their 45% share of Galapagos' net loss for the period from March 8 to December 31, 1995 was $784,000. As explained in Note 1 to the Company's consolidated financial statements, the Company did not recognize the 18% minority partners' share of HDA's net income until the accumulated deficit of HDA was eliminated by earnings in 1995. HDA's accumulated earnings as of December 31, 1995 were $353,000 (1995 earnings in excess of the accumulated deficit at March 8, 1995) and the minority partners' 18% share was $63,000 in 1995. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (PAGE) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the partners of Equus Gaming Company L.P.: We have audited the accompanying consolidated balance sheets of Equus Gaming Company L.P. (a Virginia limited partnership) (the Company) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income (loss), changes in partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1996 and 1995 financial statements of Galapagos, S.A., which statements reflect total assets and total revenues of 4 percent and 23 percent in 1996 and 19 percent and 5 percent in 1995, respectively, of the consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for this entity, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors, provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Equus Gaming Company L.P. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP March 27, 1997 Washington, D.C. (PAGE) EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 ----------- ----------- ----------- REVENUES: Rental income from El Comandante Race Track $14,321,401 $11,428,711 $ - Cash distribution from Housing Development Associates S.E.("HDA") - 134,000 300,004 Dominican Republic racing- Commissions on wagering 4,513,252 2,718,646 - Other revenues 523,348 368,186 - Television Stations 1,724,991 1,344,338 - Gain from sale of 50% interest in Television Stations 581,120 - - Interest income 232,048 91,775 54,714 ----------- ----------- ----------- Total revenues 21,896,160 16,085,656 354,718 ----------- ----------- ----------- EXPENSES: Financial 9,048,141 7,397,759 - Depreciation 2,508,116 1,828,841 - General and administrative 1,807,104 1,114,807 1,321 Operating costs of Dominican Republic racing 5,971,818 4,341,046 - Operating costs of Television Stations 1,461,312 2,350,412 - Other costs - 133,713 1,761,000 ----------- ----------- ----------- Total expenses 20,796,491 17,166,578 1,762,321 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS 1,099,669 (1,080,922) (1,407,603) PROVISION FOR INCOME TAXES: Current 263,163 222,164 87,000 Deferred 136,860 8,991 - ----------- ----------- ----------- INCOME (LOSS) BEFORE MINORITY INTERESTS 699,646 (1,312,077) (1,494,603) MINORITY INTERESTS (127,577) (720,792) - ----------- ----------- ----------- NET INCOME (LOSS) $ 827,223 $ (591,285) $(1,494,603) =========== =========== =========== ALLOCATION OF NET INCOME (LOSS): General Partners $ 8,272 $ (77,247) $(1,494,603) Limited Partners 818,951 (514,038) - ----------- ----------- ----------- $ 827,223 $ (591,285) $(1,494,603) =========== =========== =========== NET INCOME (LOSS) PER UNIT $ 0.13 $ (0.08) - =========== =========== =========== WEIGHTED AVERAGE UNITS OUTSTANDING 6,333,617 6,223,381 - =========== =========== =========== The accompanying notes are an integral part of these consolidated statements. (PAGE) EQUUS GAMING COMPANY L.P. CONSOLIDATED BALANCE SHEETS ASSETS December 31, --------------------------- 1996 1995 ----------- ------------ CASH AND CASH EQUIVALENTS $ 4,268,029 $ 814,292 ----------- ------------ ASSETS RELATED TO RACE TRACKS: Property and equipment- Land 7,128,858 7,128,858 Buildings and improvements 48,138,946 48,105,723 Equipment 2,669,639 2,389,924 ----------- ------------ 57,937,443 57,624,505 Less accumulated depreciation (11,981,552) (9,733,479) ----------- ------------ 45,955,891 47,891,026 Receivables from El Comandante Operating Company, Inc. ("ECOC") 2,780,416 1,816,310 Deferred costs- Financing 4,055,866 4,388,926 Organizational and other 370,120 470,286 Other 932,566 580,288 ----------- ------------ 54,094,859 55,146,836 ----------- ------------ ASSETS RELATED TO TELEVISION STATIONS: TV Licenses - 1,061,290 Property and equipment - 2,413,983 ----------- ------------ - 3,475,273 Less accumulated depreciation and amortization - (137,620) ----------- ------------ - 3,337,653 Investment in S & E Network Inc. ("S&E") 1,825,243 - Deferred costs - 1,158,668 Other 398,199 365,765 ----------- ------------ 2,223,442 4,862,086 ----------- ------------ $60,586,330 $60,823,214 =========== ============ (PAGE) EQUUS GAMING COMPANY L.P. CONSOLIDATED BALANCE SHEETS (continued) LIABILITIES AND PARTNERS' DEFICIT December 31, --------------------------- 1996 1995 ----------- ------------ LIABILITIES RELATED TO RACE TRACKS: First Mortgage Notes- Principal, net of bond discount of $1,596,261 and $1,760,161, respectively $66,403,739 $66,239,879 Accrued interest 332,918 332,918 Minority interest in Galapagos 111,427 816,216 Notes payable 577,388 523,562 Accounts payable and accrued liabilities 2,157,681 1,092,765 Accrued income taxes 437,692 231,980 ----------- ------------ 70,020,845 69,237,320 ----------- ------------ LIABILITIES RELATED TO TELEVISION STATIONS: Note payable - 1,365,848 Obligations under TV Purchase Agreements - 474,661 Accounts payable and accrued liabilities - 464,414 ----------- ------------ - 2,304,923 ----------- ------------ OTHER LIABILITIES: Unsecured partner's loans 415,883 211,629 Notes payable and accrued interest 500,000 566,885 Accounts payable and accrued liabilities 287,976 226,710 Minority interest in HDA 550,605 63,559 ----------- ------------ 1,754,464 1,068,783 ----------- ------------ PARTNERS' DEFICIT: General Partners 24,854 (760,803) Limited Partners (11,213,833) (11,027,009) ----------- ------------ (11,188,979) (11,787,812) ----------- ------------ $60,586,330 $60,823,214 =========== ============ The accompanying notes are an integral part of these consolidated balance sheets. (PAGE) EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT) FOR THE THREE YEARS ENDED DECEMBER 31, 1996 General Limited Partners Partners Total ----------- ------------ ------------ BALANCES, December 31, 1993 $ 100 $ - $ 100 Net loss for the year (1,494,603) - (1,494,603) Capital contributions 4,128,582 - 4,128,582 Distributions to partners- Receivable from Land Development Associates S.E. ("LDA") (2,933,296) - (2,933,296) Cash (225,000) - (225,000) ----------- ------------ ------------ BALANCES, December 31, 1994 (524,217) - (524,217) Net loss for the year (77,247) (514,038) (591,285) Issuance of partnership units - 5,650,000 5,650,000 Effect of consolidation of HDA (158,406) (15,682,238) (15,840,644) Currency translation adjustments (933) (92,388) (93,321) Cash distributions to partners - (388,345) (388,345) ----------- ------------ ------------ BALANCES, December 31, 1995 (760,803) (11,027,009) (11,787,812) Net income for the period 818,951 8,272 827,223 Currency translation adjustments (33,294) (336) (33,630) Cash distributions to partners - (194,760) (194,760) ----------- ------------ ------------ BALANCES, December 31, 1996 $ 24,854 $(11,213,833) $(11,188,979) =========== ============ ============ The accompanying notes are an integral part of this consolidated statement. (PAGE) EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 827,223 $ (591,285) $(1,494,603) ----------- ----------- ----------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Gain from sale of 50% interest in Television Stations (581,120) - - Equity in earnings (55,533) - - Depreciation 2,508,116 1,828,841 - Amortization 853,035 798,773 - VJC costs write-off - - 1,761,000 Deferred income tax provision 136,860 8,991 - Currency translation adjustments (33,630) (93,321) - Forgiveness of interest (173,754) - - Increase in assets- Rent receivable from ECOC (1,188,067) (796,146) - Deferred costs (97,598) (36,971) (960,691) Other (435,306) (756,985) (54,714) Increase (decrease) in liabilities- Accrued interest 66,703 (1,359,409) - Accounts payable and accrued liabilities 1,040,160 (60,293) 159,909 Accrued income taxes 68,852 134,315 87,000 Minority interests (127,577) (720,792) - ----------- ----------- ----------- Total adjustments 1,981,141 (1,052,997) 992,504 ----------- ----------- ----------- Net cash provided by (used in) operating activities 2,808,364 (1,644,282) (502,099) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (554,214) (1,790,109) - Loan to ECOC - (1,000,000) - Collections of note from ECOC 207,594 - - Effect of deconsolidation of S&E (129,948) - - Sale of 50% interest in Television Stations Proceeds 4,000,000 - - Costs (418,950) - - Effect of consolidation of HDA cash accounts - 3,429,221 - ----------- ----------- ----------- Net cash provided by investing activities 3,104,482 639,112 - ----------- ----------- ----------- (PAGE) EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (continued) 1996 1995 1994 ----------- ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of obligations under TV Purchase Agreements (607,076) (387,077) - Loans from minority stockholders - 1,057,750 - Loans from general partner, net 204,254 80,762 727,099 Loans from financial institutions 448,418 2,799,525 - Payments on notes payable (1,810,441) (360,114) - Increase in deferred costs (499,504) (983,039) - Cash distributions to partners (194,760) (388,345) (225,000) ----------- ----------- ----------- Net cash (used in) provided by financing activities (2,459,109) 1,819,462 502,099 ----------- ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 3,453,737 814,292 - CASH AND CASH EQUIVALENTS, beginning of year 814,292 - - ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 4,268,029 $ 814,292 $ - =========== =========== =========== SUPPLEMENTAL INFORMATION: Interest paid $ 8,269,562 $ 8,165,847 - Income taxes paid 194,310 94,844 - NONCASH TRANSACTIONS: Effect of consolidation of HDA's non cash accounts - (19,269,865) - Step-up in value of assets related to race tracks - 5,650,000 - Capital contribution of receivable from LDA - - 4,128,582 Disposition of receivable from LDA and accrued interest - In payment of unsecured partner's loans - - 1,250,000 As a distribution to partners - - 2,933,296 The accompanying notes are an integral part of these consolidated statements. (PAGE) EQUUS GAMING COMPANY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: Equus Gaming Company L.P. (the "Company") was formed initially on September 17, 1993 as a general partnership between Interstate General Company L.P. ("IGC") and one of its general partners, Interstate Business Corporation ("IBC"). Through a series of transactions completed on August 2, 1994, the Company was restructured as a Virginia limited partnership between IGC and its then wholly owned subsidiary, Equus Management Company ("EMC"), for the purpose of succeeding to substantially all of IGC's ownership interest in real estate assets employed in thoroughbred racing and related wagering businesses. On February 6, 1995, IGC distributed to its unitholders 5,128,372 Class A Units ("Units") representing in the aggregate beneficial assignment of a 99% Class A limited partnership interest in the Company (the "Distribution"). On March 8, 1995 an additional 1,205,245 Units were issued by the Company to HDA Management Corporation ("HDAMC"). The Units are listed for trading on the Nasdaq National Market System under the symbol "EQUUS". EMC serves as managing partner of the Company and IGC and EMC together hold a 1% general partnership interest in the Company. Effective December 31, 1996, IGC transferred all of the outstanding shares of EMC to IBC (see Note 15). The Company's principal income producing asset is an 82% interest in Housing Development Associates S.E. ("HDA") in which it is a co-managing partner. HDA owns El Comandante Race Track ("El Comandante"), the only licensed thoroughbred racing facility in Puerto Rico, located in 257 acres of land, which it leases to El Comandante Operating Company, Inc., a Puerto Rico non-stock corporation ("ECOC"). HDA also owns 55% of the capital stock of Galapagos, S.A. ("Galapagos"), a corporation that leases and operates a race track in the Dominican Republic. In 1994 HDA formed S & E Network Inc. ("S&E"), a Puerto Rico corporation that owns and operates since 1995 three UHF television stations in Puerto Rico (the "Television Stations"). HDA sold its interest in S&E to Paxson Communications of San Juan, Inc. ("Paxson") in sales closed in August 1996 (50% interest) and January 1997 (50% interest). The Company also owns Virginia Jockey Club, Inc. ("VJC"), an unsuccessful applicant for licenses to own and operate Virginia's first thoroughbred racing and pari-mutuel wagering facility, which is now inactive. The accompanying consolidated financial statements include the accounts of the Company and its consolidated subsidiaries, HDA and VJC, after eliminating all inter-company transactions. The accounts of HDA and its subsidiaries have been consolidated since March 8, 1995 (see Note 4), Accordingly, the consolidated statement of loss for the year ended December 31, 1995 only includes results of operations of HDA and its subsidiaries for the period from March 8 to December 31, 1995. Since HDA's ownership interest in S&E was reduced to 50% on August 30, 1996 and Paxson assumed responsibility for management of S&E, commencing September 1, 1996 the accounts of S&E are not consolidated in the financial statements of HDA or the Company. HDA had an accumulated deficit of $818,750 at December 31, 1994 which resulted principally from an extraordinary item in 1993 related to financing. HDA is a limited liability partnership and the partners do not have any legal obligation to fund any portion of such deficit. Accordingly, generally accepted accounting principles did not permit the Company to record any minority partners' interest in HDA's accumulated deficit, nor did they permit (PAGE) the recognition of the minority partners' 18% share of HDA's net income until the accumulated deficit was eliminated by earnings. As of December 31, 1995 the accumulated deficit had been eliminated and a minority interest of $63,560 was recorded for the year ended December 31, 1995 representing the minority partners' 18% interest in HDA's net income in excess of the December 31, 1994 accumulated deficit of $818,750. For the year ended December 31, 1996 a minority interest of $487,000 was recorded representing the minority partners' 18% interest in HDA's net income for the period. A minority interest of $614,600 and $784,300 was also recorded related to the minority stockholders' interest in the net losses of Galapagos for the year ended December 31, 1996 and 1995, respectively. Net income (loss) per Unit is calculated based on weighted average of Units outstanding since the Distribution on February 6, 1995. Outstanding options and warrants to purchase Units do not have a material dilutive effect on the calculation of earnings per Unit. Outstanding Warrants and Options In connection with the Distribution, the Company agreed to make available for no consideration up to 100,000 Units of the Company for distributions by IGC (i) to a limited number of employees upon the exercise by employees of options and appreciation rights, under certain employees plans of IGC and (ii) to Oppenheimer & Co., Inc. upon the exercise of certain warrants. Pursuant to the terms of a Control Transfer Agreement effective December 31, 1996 (see Note 15), the obligation of the Company to make its Units available to IGC was reduced from 100,000 to 50,000 Units. 2. BACKGROUND INFORMATION: El Comandante Lease and the Operating License HDA leases El Comandante to ECOC under a lease agreement, as amended, (El "Comandante Lease") that expires on December 14, 2004 (See Note 9). ECOC operates El Comandante and pays rent to HDA based upon 25% of ECOC's share of wagering revenues. On December 15, 1989, the Puerto Rico Racing Board (the "Racing Board") granted a license to ECOC to operate El Comandante, which will expire on December 14, 2004 (the "Operating License"). The Operating License provided ECOC with: (i) the exclusive right to operate a race track in the area of Puerto Rico known as the San Juan Region, which approximates the northern half of Puerto Rico, as delineated in maps produced by the Puerto Rico Planning Board and Government Development Administration; (ii) the exclusive right to conduct all types of authorized betting, both at El Comandante and off-track, anywhere in Puerto Rico, based on races held at El Comandante; and (iii) the right to hold a minimum 180 day or night race days per year. The Operating License requires payment of an annual license fee, currently $250,000. HDA has the primary obligation to ensure that ECOC complies with all terms and provisions of the Operating License and applicable regulations and orders of the Racing Board. S & E Network Inc., Television Stations and Agreements with Paxson On November 17, 1994 S&E acquired the assets and broadcast licenses (the "TV Licenses") of three dormant Television Stations under certain agreements (the "TV Purchase Agreements") that required total payments and assumption of (PAGE) rescheduled debts of approximately $2 million. S&E commenced broadcasting six hours a day in January 1995 on a test basis and increased the testing to eighteen hours a day in April 1995. It officially launched the television network under the trade name of TELENET on June 26, 1995. On August 30, 1996 HDA closed the sale to Paxson of a 50% interest in S&E, at which time HDA received $4 million and assumed approximately $1.7 million of S&E's debt (see Note 7). Upon closing, Paxson assumed responsibility for managing the Television Stations. HDA funded approximately $1 million in transaction costs in connection with the sale, including capital expenditures, employee severance costs and payment of certain liabilities of S&E. The sale was made pursuant to certain agreements effective February 1996, one of which required Paxson to pay fees of $23,333 monthly to S&E and to provide programming (mainly infomercials) and certain other services to S&E until closing. Paxson was also entitled to 50% of S&E's operating cash flow generated during that period. Commencing September 1996, HDA accounted for its investment in S&E under the equity method of accounting until January 1997 when Paxson purchased the remaining 50% interest in S&E for $7 million. Galapagos, S.A. and V Centenario Race Track HDA has a 55% ownership interest in Galapagos, a Dominican Republic corporation selected by the Dominican Republic Racing Commission to operate and manage the V Centenario Race Track ("V Centenario"), a government owned horse race track in Santo Domingo, Dominican Republic. The remaining 45% interest in Galapagos is owned by residents of the Dominican Republic ("Minority Stockholders"). Galapagos began simulcasting El Comandante races on February 27, 1995 through independently-owned sports betting agencies in the Dominican Republic. Racing operations at V Centenario commenced on April 29, 1995. At December 31, 1996, there were 230 off track betting ("OTB") agencies in the Dominican Republic. 3. SUMMARY OF ACCOUNTING POLICIES: Principles of Consolidation The Company consolidates in its financial statements the accounts of entities in which it has a controlling interest in excess of 50% (see Note 4). Pervasiveness of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Pronouncements In 1996, the Company implemented SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 121 establishes standards for identifying impairment for long-lived assets and certain identifiable intangibles to be held and used by an entity. Generally, if the sum of the expected future cash flows (undiscounted and (PAGE) without interest charges) is less than the carrying amount of the asset, an impairment loss is assumed to have occurred. An adjustment to reflect this impairment would be recorded to the extent that an asset's market value was less than its carrying value. As of December 31, 1996, no adjustment has been recorded under SFAS No. 121. Rental Income from El Comandante Race Track Rental income represents rent earned under the El Comandante Lease (see Note 9). Basic Rent, as defined in Note 9, is recognized when wagering commissions are earned by ECOC. Fixed Rent, as defined in Note 9, was recognized in 1995 and 1994 in equal monthly installments. Revenues from Dominican Republic Racing Commissions on wagering represent income earned by Galapagos on El Comandante races simulcasted into the Dominican Republic and on races held at V Centenario (see Note 10). Other revenues include income earned on the Jockey Club and food services operations. Revenues from Television Stations Revenues from Television Stations represent income earned by S&E until August 1996 while HDA consolidated the accounts of S&E into its financial statements. The revenues were primarily (i) from contracts for the production and broadcasting of television programs which was recognized when the programs had been completed and delivered, (ii) advertising income from sale of air time, recognized at the time of broadcast and (iii) fees paid by Paxson since February 1996 (see Note 2), recognized monthly. Revenues from Television Stations included income earned from a contract with ECOC (see Note 11) of $452,000 for the eight months ended August 31, 1996 and of $547,000 for the period after March 8, 1995 to December 31, 1995. During the 1996 period, revenues from Television Stations also included HDA's $55,533 share of S&E's net income for the period after August 31, 1996, recognized under the equity method of accounting for investments. Cash Equivalents The Company considers as cash equivalents certificates of deposit with an issuance to maturity term of six months or less. Management intends to hold these certificates until maturity. Property and Equipment of the Race Tracks Land, buildings and improvements, and equipment are stated at cost plus a step-up of $5,650,000 of El Comandante assets on March 8, 1995 resulting from the issuance of Units of the Company to HDAMC for a 15% profits interest in HDA. Composite depreciation is calculated for the property related to El Comandante, using the straight-line method, over the estimated useful lives of the buildings and equipment; five to seven years for machinery and equipment, 35 years for buildings and 10 to 15 years for land improvements. Under the composite depreciation method, any gain or loss of property retired or sold is charged against accumulated depreciation, unless the amount involved is material. Depreciation, using the straight-line method, commenced May 1, 1995 for the property and equipment related to V Centenario where racing commenced on April 29, 1995. (PAGE) TV Licenses and Property and Equipment of the Television Stations The TV Licenses and land and equipment used in the operation of the Television Stations at December 31, 1995 are stated at cost. Depreciation and amortization of S&E was included in the accompanying consolidated financial statements through August 1996 when HDA sold a 50% interest in S&E and ceased consolidating the accounts of S&E in its financial statements. Composite depreciation was calculated for the property and equipment acquired under the TV Purchase Agreements. All property and equipment was depreciated using the straight-line method over their estimated useful lives, ranging from 5 to 10 years. The TV Licenses were amortized using the straight-line method over a period of 20 years. Depreciation and amortization commenced July 1, 1995. Deferred Costs Deferred financing costs are being amortized since December 5, 1993 over the 10 year life of the first mortgage notes using the interest method. Organizational and other costs related to El Comandante are being amortized using the straight-line method over a period of 5 to 15 years that commenced on December 15, 1989. Organizational and other costs related to V Centenario are being amortized using the straight-line method over a period of five years ending May 1, 2000. Deferred costs related to Television Stations at December 31, 1995 included a noncompetition agreement entered into in connection with the acquisition of the Television Stations and certain organizational, start-up and other costs which were being amortized, using the straight-line method, over a period of 3 to 10 years that commenced July 1, 1995. Upon the closing of the sale to Paxson on August 30, 1996, S&E wrote-off approximately $1 million of deferred costs and broadcast contract rights which did not have any future benefit to S&E under Paxson's management of the Television Stations. The write-off has been included in the accompanying consolidated financial statements as a reduction of the gain from the sale of the 50% interest in the Television Stations. Currencies HDA consolidates its accounts with Galapagos whose functional currency is Dominican Republic pesos ("RD$"), although United States dollars ("US$") are also a recording currency. US$ are exchanged into RD$ and vice versa through commercial banks and/or the Central Bank of the Dominican Republic. Galapagos remeasures its monetary assets and liabilities recorded in US$ into RD$ using the exchange rate in effect at the balance sheet date (the "current rate") and all other assets and liabilities and capital accounts, at the historical rates. Galapagos then translates its financial statements from RD$ into US$ using the current rate, for all assets and liabilities, and the average exchange rate prevailing during the year for results of operations. Net exchange gains or losses resulting from remeasurement of accounts, together with gains or losses from foreign currency transactions are included in operating results of Dominican Republic racing. In 1996 Galapagos recognized a net loss of $82,000 (included in operating costs) and in 1995 recognized a net gain of $37,000 (included in other revenues). Also, the following accumulated net losses from changes in exchange rates are included in the partners' deficit: December 31, ---------------------------- 1996 1995 ------------ ------------ Translation of assets and liabilities $ 126,950 $ 26,700 (PAGE) Unsettled intercompany transactions of a long term nature - 66,600 ------------ ------------ $ 126,950 $ 93,300 ============ ============ The exchange rates as of December 31, 1996 and December 31, 1995 were US$1.00 to RD$13.97 and US$1.00 to RD$13.46, respectively and the average exchange rate prevailing during the year ended December 31, 1996 was US$1.00 to RD$13.75. 4. INVESTMENT IN HDA: In August 1994 IBC and a subsidiary of IGC, Interstate General Properties Limited Partnership S.E. ("IGP"), together transferred a 67% interest in the profits and 26.35% interest in the capital of HDA to the Company as capital contributions, which transfers were accounted for at book value. On March 8, 1995, HDAMC transferred an additional 15% interest in the profits and a portion of its capital interest of HDA to the Company in exchange for 1,205,245 Units which were valued at $5,650,000, resulting in a step-up of the cost of El Comandante assets by that amount. On February 7, 1996, (i) HDAMC transferred to the Company its remaining capital interest in HDA for no additional consideration, and (ii) IGP transferred to the Company all but 1% of its profits and capital interest in HDA, as capital contributions. As a result of these transactions the Company now holds an 82% interest in both the profits and capital of HDA. Prior to March 8, 1995, the Company accounted for its investment in HDA under the equity method of accounting. Because HDA is a limited liability partnership, the original partners of HDA only recorded equity in losses of HDA until their investments in HDA were reduced to zero. HDA had an accumulated deficit at the time the partners transferred their interests in HDA to the Company in August 1994. Since the Company received its interest in HDA as capital contributions from related parties whose investments in HDA were zero, the Company did not record any investment in HDA and adopted the same accounting treatment of not recognizing equity in earnings of HDA until HDA's accumulated deficit was eliminated. The Company did, however, recognize revenues of $134,000 and $300,004 in the years ended December 31, 1995 and 1994, respectively, from cash distributions that were received from HDA prior to consolidation of HDA's accounts in the Company's financial statements effective March 8, 1995. Prior to March 8, 1995 generally accepted accounting principles did not permit the Company to consolidate the accounts of HDA in the Company's financial statements because HDAMC had the right to approve any sale or disposition of HDA's assets in excess of $500,000 and the incurrence of any debt in excess of $1 million. On March 8, 1995, HDA's partnership agreement was amended to eliminate these approval rights of HDAMC, and commencing as of March 8, 1995 the accounts of HDA have been consolidated with the Company's accounts. 5. RECEIVABLES FROM EL COMANDANTE OPERATING COMPANY, INC.: Receivables from ECOC as of December 31, 1996 and 1995 consist of (i) a note receivable and accrued interest of $796,203 and $1,020,164, respectively, and (ii) unpaid rent under the El Comandante Lease of $1,984,213 and $796,146, (PAGE) respectively. The note accrues interest at 5.75% and is due in monthly installments of $30,309, including interest, over a three year period that commenced May 1, 1996. Under the El Comandante Lease, ECOC is required to pay HDA its Basic Rent for each race day on the 29th day following such racing day. Unless paid by the 29th day the Basic Rent becomes due and payable and constitutes an extension of credit. Under the Indenture (as defined in Note 6), the maximum outstanding amount of credit that HDA can extend is $2 million, including the note and the Basic Rent that has become due and payable. ECOC's payable to HDA has increased in the first quarter of 1997 to an amount that approaches the limit estalished in the El Comandante Lease and the Indenture. HDA amended the El Comandante Lease effective January 1, 1997 to (i) provide for HDA, upon ECOC's request, to pay the annual racing license fee of $250,000 (previously paid by ECOC) commencing with year 1997 and, (ii) permit ECOC, subject to the approval of the holders of First Mortgage Notes, to obtain financing of its loans to horseowners which will increase ECOC's 1997 cash position by approximately $335,000. Also, HDA will seek approval of the holders of its First Mortgage Notes to make, together with Galapagos' Minority Stockholders, an additional investment in Galapagos, to provide Galapagos with working capital and funds to pay its debt to ECOC, which amounted to approximately $900,000 at December 31, 1996. The payment of Galapagos debt to ECOC will in turn provide funds to ECOC to reduce its debt to HDA. Furthermore, ECOC management is forecasting positive cash flow from El Comandante operations in 1997. HDA believes that appropriate steps have been taken to improve ECOC's liquidity and that, assuming Galapagos reduces its debt to ECOC, HDA's receivable from ECOC will remain below the level that would cause an event of default under the El Comandante Lease and the Indenture. 6. LIABILITIES RELATED TO RACE TRACKS: First Mortgage Notes Pursuant to a private offering made in December 15, 1993, El Comandante Capital Corp. ("ECCC"), a single-purpose wholly owned subsidiary of HDA, issued first mortgage notes in the aggregate principal amount of $68 million (the "First Mortgage Notes") under an indenture dated December 15, 1993 (the "Indenture") between ECCC, HDA and Banco Popular de Puerto Rico, as trustee (the "Trustee"), and HDAMC issued Warrants to purchase 68,000 shares of Class A Common Stock of HDAMC. As a result of the Distribution, in March 1995 the Warrants automatically became exercisable to purchase Units of the Company from HDAMC. Upon issuance of the Warrants, HDAMC and HDA recorded additional equity of $1,912,800, equal to the fair value of the Warrants of $2,040,000, less offering costs of $127,200, and recorded debt discount of $2,040,000. Such debt discount is being amortized using the interest method over the term of the First Mortgage Notes. The First Mortgage Notes mature on December 15, 2003 and bear interest at 11.75% from December 15, 1993, payable semiannually. Payment of the First Mortgage Notes is guaranteed by HDA and the First Mortgage Notes are secured by a first mortgage on El Comandante and by certain other collateral which together encompass a lien on (i) the fee interests of HDA in the land and fixtures comprising El Comandante, (ii) all property rights of HDA in and to all related equipment, structures, machinery and other property, including intangible property, ancillary to the operations of El Comandante, (iii) substantially all of the other assets and property of HDA and ECOC, including the capital stock of ECCC owned by HDA. (PAGE) ECCC is required to redeem First Mortgage Notes in the principal amount of $6,800,000 on December 15, 2000, $10,200,000 on December 15, 2001 and 2002, and the balance at maturity. ECCC and HDA may redeem First Mortgage Notes on or after December 15, 1998 at the following redemption prices (expressed as percentages of principal amount): if redeemed during the 12-month period beginning December 15 of years 1998 at 104.125%, 1999 at 102.75%, 2000 at 101.5%, and 2001 and thereafter at 100% of principal amount, in each case together with accrued and unpaid interest. Any such redemptions would offset the mandatory redemptions due December 15, 2000, 2001 and 2002. ECCC also may redeem up to one-third of the principal amount of the First Mortgage Notes from net proceeds of an equity offering by HDA at any time on or before December 15, 1996 at a redemption price of 110% of the principal amount. ECCC is required to offer to purchase First Mortgage Notes, at face value, to the extent that HDA has accumulated excess cash flow, asset sales with net proceeds in excess of $5 million ("Excess Proceeds Offer"), or a total taking or casualty, or in the event of a change of control of HDA. Due to the sale of the remaining 50% interest in S&E in January 1997, HDA is required to use approximately $7.5 million of these proceeds to redeem First Mortgage Notes, at par, to the extent these proceeds are not invested in HDA's racing business by January 1998. HDA made an Excess Proceeds Offer, which expired on March 25, 1997, to redeem up to $5 million of First Mortgage Notes and expects to use the remaining $2.5 million (i) as investment in Galapagos, (ii) for capital improvements for El Comandante, and/or (iii) as an offer to redeem additional First Mortgage Notes. In response to the Excess Proceeds Offer, First Mortgage Notes in the principal amount of $737,000 were tendered and subsequently redeemed and the remaining $4,263,000 will be retained by HDA for business purposes permitted by the Indenture. The Indenture contains certain covenants, one of which restricts the amount of distributions to HDA's partners, including the Company. Permitted distributions include amounts intended to be sufficient to provide funds for HDA's partners to pay income taxes on their allocable share of HDA's taxable income ("Tax Distributions"). Tax Distributions are equal to the higher of (i) 8.4% plus the higher of the then applicable federal personal or corporate income tax rate or (ii) the higher of the then applicable Puerto Rico personal or corporate income tax rate, multiplied by HDA's consolidated net income. HDA is permitted to make additional cash distributions to partners and other Restricted Payments, as defined under the Indenture, equal to 44.25% of the excess of HDA's cumulative consolidated net income after December 31, 1993 over the cumulative amount of the Tax Distributions, provided that HDA meets a certain minimum debt coverage ratio. HDA does not yet meet the debt coverage ratio. Minority Interest in Galapagos A founders' agreement between HDA and the Minority Stockholders of Galapagos (the "Founders Agreement") gives HDA the right to make calls for stockholder loans, up to a maximum of $3,516,000, to be provided in accordance with ownership interests. As of December 31, 1995, HDA had made loans of $1,842,500, which were eliminated in the accompanying consolidated financial statements, and the Minority Stockholders had made loans of $1,507,750. These loans bore interest at a rate equal to 2% over prime rate, which at December 31, 1995 was 10.5%. In 1996 HDA and the Minority Stockholders contributed these loans to the capital of Galapagos and forgave accrued interest thereon. The minority interest in Galapagos represents the Minority Stockholders' investment (loans and/or capital), net of their share of Galapagos' accumulated losses. (PAGE) Notes Payable Galapagos has obtained a $1.1 million line of credit from a financial institution for the acquisition of wagering equipment for off-track betting agencies in the Dominican Republic. The loans are guaranteed by HDA and collateralized by wagering equipment. The notes are payable in monthly installments, including interest at 10.75%, as follows: Original Loans Under Line Monthly Number of Period of Credit Payment Installments Ending ------------- ------------- ------------- ------------- $106,168 $ 4,759 25 July 1998 448,000 11,525 48 July 1999 101,525 2,612 48 December 1999 92,250 2,373 48 December 2000 7. LIABILITIES RELATED TO TELEVISION STATIONS: In connection with the first sale to Paxson on August 30, 1996, HDA assumed S&E's obligations under a note payable and TV Purchase Agreements. The note payable consisted of a $1.4 million loan that was obtained in September 22, 1995 for the financing of equipment of the Television Stations. The note was payable in monthly installments of $23,788, including interest at 10.75%, for a period of 7 years. In September 1996, HDA prepaid the $1,270,700 balance of the note. The obligation under TV Purchase Agreements consisted of a non-interest bearing debt assumed in connection with the acquisition of the Television Stations, payable in monthly installments of $9,357, including imputed interest at 12%, through October 2001. In December 1996, and in connection with the second sale to Paxson of its remaining 50% interest in S&E, HDA was required to prepay the $542,706 balance of the debt to eliminate liens on S&E's properties. The unamortized imputed interest of $132,400 which was deferred in the books will be written-off in 1997 as a cost of the second sale to Paxson which was closed in January 1997. 8. OTHER LIABILITIES: Notes Payable During 1995 the Company borrowed $850,000 from a bank. The loan was payable in quarterly installments of $100,000 commencing May 31, 1995 and the Company assigned to the bank the first $100,000 of quarterly distributions from HDA. The December 31, 1995 loan balance was $550,000 and in May 1996 it was increased to $700,000, also payable in quarterly installments of $100,000 commencing August 31, 1996 and a final payment of $200,000 in November 1997. As of December 31, 1996 the loan balance was $500,000. The interest is payable monthly based on the Citibank prime rate plus 2%, which at December 31, 1996 and December 31, 1995 was 10.25% and 10.5%, respectively. Unsecured Partner's Loans During 1996 and 1995 the Company received advances from IGC. The outstanding payables to IGC, including accrued interest, were $415,883 and $211,629 at December 31, 1996 and 1995, respectively. The advances accrue interest based on the Citibank prime rate plus 1%, which at December 31, 1996 (PAGE) and 1995 was 9.25% and 9.5%, respectively. The principal amount of the outstanding loans at December 31, 1996 was converted into a prommisory note which is due and payable, together with accrued interest, on June 30, 1997. 9. EL COMANDANTE LEASE: El Comandante is operated by ECOC pursuant to the Operating License issued annually pursuant to a 15-year exclusive franchise ending December 2004 covering the San Juan Region of Puerto Rico (see Note 2). The El Comandante Lease with ECOC expires December 14, 2004. The El Comandante Lease provides for payment of rent consisting of 25% ("Basic Rent") of the annual commissions earned by ECOC ("ECOC Commissions"). ECOC Commissions consist of all payments received by ECOC on all monies wagered with respect to horse racing occurring at El Comandante, whether wagered at El Comandante or at other betting facilities in Puerto Rico or any other country. Through December 31, 1995 the El Comandante Lease also provided for payment of certain fixed rent ("Fixed Rent") of $150,000 in 1994 and $400,000 in 1995. The El Comandante Lease provides for ECOC to pay all El Comandante expenses except that, pursuant to (i) an amendment effective January 1, 1996, HDA assumed the obligation to pay real property taxes on El Comandante and (ii) an amendment effective January 1, 1997, HDA assumed the obligation to pay, upon ECOC's request, the annual racing license fee. The El Comandante Lease also contains certain covenants of ECOC including maintenance obligations; financial reporting requirements; insurance requirements; compliance with laws; limitations on indebtedness; limitations on liens; limitations on other activities; limitations on affiliate transactions; acceptance of EMC consulting services; and acceptance of amendments necessary to maintain HDA's tax status. Pursuant to the amendment executed by HDA effective January 1, 1997, HDA agreed that ECOC could obtain financing, not to exceed $1 million, to enable ECOC to make loans to horseowners for the purchase of horses. The amendment to permit the $1 million of financing is subject to the approval of the holders of the First Mortgage Notes. The following events of default under the El Comandante Lease are also events of default under the Indenture: ECOC's failure to (i) pay Basic Rent, in the aggregate, in an amount equal to one month's average Basic Rent (based on the preceding 12 months) for a period of 30 days, (ii) maintain the required insurance coverage, (iii) comply with any covenant relating to the maintenance, repair, condition or improvement of El Comandante, or (iv) comply with any covenant restricting ECOC's ability to create liens on El Comandante or to become liable for any indebtedness, other than capital leases and trade payables incurred in the ordinary course of business, indebtedness to HDA and certain indebtedness to a former owner of ECOC. ECOC granted a security interest in substantially all of its assets (excluding cash) to HDA to secure ECOC's obligations under the El Comandante Lease, which security interest was then assigned to the Trustee as additional security for HDA's obligations under the First Mortgage Notes. If the El Comandante Lease is terminated prior to December 2004, ECOC will assign the Operating License to HDA to the extent permitted by law and sell at book value its equipment to HDA. Also, HDA would be required to assume up to $1.9 million of ECOC's obligations under the agreements with a former owner of ECOC. (PAGE) The El Comandante Lease provides for either party to ask for renegotiation during the period of July 1 to August 31, 1997 with the results of such renegotiations to be effective on January 1, 1998. 10. DOMINICAN REPUBLIC OPERATIONS: On September 28, 1994, Galapagos entered into an agreement with the Dominican Republic Government pursuant to which Galapagos leases and operates V Centenario (the "V Centenario Lease") for an initial term of 10 years which commenced April 1995. The V Centenario Lease also provides Galapagos with the right to develop off-track betting in the Dominican Republic and the exclusive right to simulcast horse races, including El Comandante races, into the Dominican Republic. The V Centenario Lease may be renewed for additional ten year periods by mutual agreement of the parties. A portion of wagering in the Dominican Republic is set aside and reserved for covering losses from currency fluctuations and for other purposes approved by the Dominican Republic Racing Commission, including use by Galapagos for advertising, television and radio coverage and marketing costs. The V Centenario Lease provides for payments of rent to the Dominican Republic Government based on a percentage of the annual wagering on races run at V Centenario ("V Centenario Wagering"). Galapagos' rent is .25% of the first RD$240 million (approximately US$18.5 million under current official exchange rates) of V Centenario Wagering during the year, .5% of the next RD$240 million, .75% of the next RD$240 million and 1% of V Centenario Wagering over RD$720 million (approximately US$55 million under current official exchange rates). Racing operations at V Centenario commenced on April 29, 1995. Galapagos has an agreement with Dominican Republic horseowners whereby they receive 50% of Galapagos' commissions on V Centenario Wagering and 50% of commissions earned by Galapagos on El Comandante's simulcasted races, after deducting payments to ECOC for its commissions on simulcasted races. Galapagos receives wagering services, software and equipment under a service agreement with Autotote Systems, Inc. ("Autotote") for a ten year period ending March 15, 2005. Service fees during 1995 are .65% (.0065) of total wagering and thereafter are the greater of (a) .65% of total wagering or (b) $150,000 in 1996, $175,000 in 1997 and thereafter $200,000 annually. As required under the Founders Agreement, ECOC provides executive management services to Galapagos pursuant to a management agreement for the term of the V Centenario Lease ("ECOC Management Agreement"). Fees to ECOC under the ECOC Management Agreement consist of 1% of wagering on simulcasted races and on V Centenario Wagering, with a maximum amount of $250,000 annually, adjusted by CPI commencing January 1996. During the year ended December 31, 1996 and 1995, Galapagos incurred fees of $236,000 and $141,000, respectively. Galapagos also reimburses ECOC for out-of-pocket expenses related to Galapagos. A corporation controlled by one of the Minority Stockholders of Galapagos has entered into a contract to operate a new electronic lottery in the Dominican Republic and Galapagos has agreed to provide the wagering distribution system for the lottery, which is scheduled to commence in June 1997. Galapagos has executed an agreement to sub-contract substantially all of its responsibilities for the distribution system to Autotote. Lottery games will be sold at OTB agencies of Galapagos and at lottery agencies selected by the operator. The lottery agencies will also take Pick 6 pool wagers on Galapagos' live and simulcasted races. Galapagos' fees (net of fees (PAGE) to Autotote) will be 1% of gross lottery sales at lottery agencies and 2% of gross lottery sales at OTB agencies. In addition, the lottery operator will pay Galapagos $100 per month for each OTB agency that sells lottery games as reimbursement for its share of telephone costs. Assets and liabilities related to Dominican Republic racing amounted to $2,649,000 and $2,529,000, respectively, as of December 31, 1996 and to $3,125,000 and $2,985,000, respectively, as of December 31, 1995. 11. S&E and Television Contracts with ECOC In 1995 ECOC entered into an agreement with S&E for the broadcast of a four-hour television program for all races run at El Comandante. For the period from January 1995 to January 1996, S&E was responsible for the production of the racing show and was entitled to revenues from sales of advertising time. The agreement required fixed monthly payments by ECOC to S&E of $56,000. In connection with the first sale to Paxson, ECOC and S&E entered into a new agreement (the "S&E-ECOC Agreement") for broadcast time which was effective February 1, 1996. Pursuant to the S&E-ECOC Agreement, ECOC purchases a minimum of 910 hours of television time at $725 per hour (minimum annual amount of $659,750), adjusted annually by CPI, or $900, also subject to CPI adjustments, if ECOC needs television time after 7:00 PM. ECOC assumed responsibility for producing the racing show and directing the broadcasts and is entitled to the revenues from its sales of advertising time during the broadcasts of the racing program. The term of the S&E-ECOC Agreement expires January 31, 2000 but is renewable for succesive one year terms at ECOC's option. In connection with the second sale to Paxson in January 1997, HDA entered into a broadcast agreement (the "HDA-S&E Agreement") with S&E for broadcast time for the same minimum number of hours and the same rates as the S&E-ECOC Agreement. The HDA-S&E Agreement is non-cancellable by either party for ten years and thereafter can be cancelled by HDA at five year intervals or by S&E upon payment of liquidated damages of $2 million plus CPI after January 1997. The S&E-ECOC Agreement will remain in place unless ECOC terminates that agreement and accepts an assignment of the HDA-S&E Agreement. HDA has offered to assign the HDA-S&E Agreement to ECOC for an initial term ending January 31, 2002 with an option to extend for additional five years terms. The proposed rates per hour to be paid by ECOC are $525 the first year and $800 during the next four years, plus CPI. Thereafter the rates would be identical to the rates to be paid by HDA to S&E. IF ECOC does not accept the assignment offer, S&E will continue to broadcast ECOC's racing program under the S&E-ECOC Agreement. If ECOC should terminate the S&E-ECOC Agreement on January 31, 2000 or thereafter as a result of selecting some other television station or finding an alternative way of transmitting its television signal to the public, HDA would be obligated, pursuant to the HDA-S&E Agreement, to purchase the broadcast time from S&E until January 2007 and resell it to other parties. 12. UNIT INCENTIVE AWARDS Five employees of the Company's managing general partner, EMC, who were previously employed by IGP, participated in IGC's Unit Incentive Plan and Unit Option Plan ("IGC's Employee Plans"). Effective December 31, 1996 the (PAGE) Company agreed, pursuant to the terms of a Control Transfer Agreement (see Note 15), to provide these employees with unit incentive awards ("Replacement Awards") that provide benefits substantially equivalent to the awards in IGC's Employee Plans. When the Company assumed the obligations for the Replacement Awards, IGC transferred to the Company 75,000 of its unregistered Class A limited Partnership Units ("IGC Units") and reduced the Company's obligation to deliver its Units to IGC from 100,000 to 50,000 Units (See Note 1 -- Outstanding Warrants and Options). There are 20,000 IGC Units that are allocated to unit options held by one employee. Upon exercise of any portion of these options, the Company is required under the Control Transfer Agreement to deliver to IGC the $4.00 exercise price that it receives. Upon lapse of any portion of these options, the Company is required to return to IGC the unused portion of the 20,000 IGC Units. Under the Replacement Awards, the Unit Appreciation Rights entitle the holders to receive upon exercise, an amount payable in cash, Units of the Company, IGC Units or some combination thereof, as determined by EMC's Directors. The amount received upon exercise is based on the excess of the fair market value of the IGC's Units on the exercise date, plus 50% of the fair market value of the Company's Units on the exercise date, over the $4 base price of the Unit Appreciation Rights. These plans are summarized on the following tables: Unit Appreciation Unit Rights (UAR) Options ------------ ----------- Number outstanding at December 31, 1996 76,500 20,000 ============ =========== At December 31, 1996, the dates that UAR and options become exercisable and the expiration dates are as follows: Options UAR UAR Expiring Expiring Expiring 1-1-03 5-15-04 10-18-04 ---------- ---------- ---------- Options and UAR exercisable as of December 31, 1996 20,000 22,600 8,000 May 15, 1997 - 11,300 - October 18, 1997 - - 4,000 May 15, 1998 - 11,300 - October 18, 1998 - - 4,000 May 15, 1999 - 11,300 - October 18, 1999 - - 4,000 ---------- ---------- ---------- 20,000 56,500 20,000 ========== ========== ========== 13. MANAGEMENT AGREEMENTS: The Company does not have any employees. The Company's activities are presently managed by one of its general partners, EMC, pursuant to the partnership agreement, without compensation. The Company reimburses EMC for its costs and expenses, including compensation of officers and directors, in excess of amounts EMC receives from other sources, which sources are primarily collections for services pursuant to a racing consulting agreement with ECOC, cash distributions from its 1% interest in the Company, fees pursuant to the (PAGE) management agreement with HDA, and reimbursements for services rendered to IGP and IGC since August 16, 1996. Two former employees of IGP were transferred to EMC on August 16, 1996 and they continue to render limited services to IGC and IGP. A portion of their employment costs, based on the amount of time spent on IGP and IGC matters, are reimbursed to EMC pursuant to the terms of the Control Transfer Agreement (see Note 15). Prior to August 16, 1996 all administrative support services were provided by IGC and IGP to EMC and the Company pursuant to a three-year support agreement effective as of February 6, 1995 ("IGC Support Agreement"). Since that date IGC and IGP continue to provide limited services to the Company pursuant to the Support Agreement and the Company reimburses them for expenses incurred in providing such services. Also, effective August 1996 IBC has been providing certain accounting services to the Company in exchange for a fee of $5,000 in the third quarter of 1996 and a monthly fee of $1,000 thereafter. HDA does not have any employees. HDA's activities were managed by IGP pursuant to a management agreement (the "Management Agreement") until August 1996 when it was assigned to EMC. The Management Agreement has a term of 15 years ending December 31, 2004. Management fees, effective December 15, 1993, are $250,000 per annum payable monthly in equal installments, with annual CPI adjustments after 1993. 14. INCOME TAXES: Federal Income Taxes The Company and HDA have been organized as partnerships, which are not taxable entities for federal income tax purposes and incur no federal income tax liability. Instead, each partner is required to take into account in computing its income tax liability such partner's allocable share of the Company's and HDA's income. VJC and ECCC are corporations subject to federal income tax on their taxable income and a current provision for ECCC income taxes of $5,860 and $4,950 has been provided for the years ended December 31, 1996 and 1995, respectively. The reconciliation between the Company's consolidated net book income (loss) and net taxable loss per United States partnership return allocable to holders of Units for the years ended December 31, 1996 and 1995 is as follows: 1996 1995 ----------------------- ---------------------- Total Per Unit Total Per Unit ----------- -------- ----------- -------- Net income (loss) per books $ 827,223 $ 0.13 $ (591,285) $ (0.10) Taxable (income) loss not allocable to Unitholders (1,226,754) (0.20) (1,168,309) (0.19) Book income from HDA before consolidation and unrecorded minority interests - - 345,361 0.06 Difference in gain from sale of 50% interest in Television Stations (1,286,325) (0.21) - - Additional tax depreciation (169,827) (0.03) (576,185) (0.09) (PAGE) Losses from corporate subsidiaries not deductible by the Company 1,617,945 0.26 2,315,405 0.37 Write-off of receivables from VJC (30,991) - (387,412) (0.06) Other, none of which is individually significant 96,027 0.02 (153,785) (0.02) ----------- -------- ----------- -------- Net taxable loss $ (172,702) $ (0.03) $ (216,210) $ (0.03) =========== ======== =========== ======== Puerto Rico Income Taxes HDA, a partnership organized under the laws of the Commonwealth of Puerto Rico, received a ruling from the Puerto Rico Treasury Department approving its special partnership status effective January 1, 1993. As a special partnership, HDA is not a taxable entity in Puerto Rico. Instead, HDA's partners are taxed on their distributive share of HDA's taxable income. As a result of its investment in HDA, the Company is subject to Puerto Rico income tax as a foreign corporation. As such, it pays Puerto Rico income tax on its Puerto Rico source income, which is its distributable share of HDA's net taxable income. Residents of the United States who are unitholders in the Company are generally entitled to a federal tax credit for their prorata share of Puerto Rico income taxes paid by the Company. Under the Puerto Rico Internal Revenue Code of 1994, effective for taxable years commencing after June 30, 1995, (i) the Company is not considered to be engaged in a Puerto Rico trade or business solely by reason of being a partner in HDA, (ii) the Company's distributive share of HDA's taxable income is taxed at a 29% tax rate and, (iii) distributions by the Company to residents of the United States are not subject to income and withholding taxes. A current provision for income taxes of $257,300 and $217,200 for the years ended December 31, 1996 and 1995, respectively, has been provided in the accompanying consolidated financial statements as a result of the Company's tax liability for its distributable share of HDA's net taxable income. The deferred income tax provision for the years ended December 31, 1996 and 1995 includes a provision of $156,020 and a credit of $10,170, respectively, related to the difference between the tax basis of the Company's investment in HDA and the amount reported in the financial statements. S&E is a corporation organized under the laws of the Commonwealth of Puerto Rico and was subject to Puerto Rico income tax. Since S&E had accumulated net operating losses, no provision for Puerto Rico income tax was recorded. Dominican Republic Income Tax Galapagos is a Dominican Republic corporation subject to income taxes on taxable income generated in the Dominican Republic. Since Galapagos has accumulated net operating losses, no provision for Dominican Republic income tax has been recorded. However, HDA was subject to withholding taxes in Dominican Republic upon interest collected from Galapagos on its stockholder loans, which loans and interest were eliminated in the accompanying consolidated financial statements. These loans were contributed to the capital of Galapagos and accrued interest forgiven in 1996 before any interest had been collected. The deferred income tax provision for the years ended December 31, 1996 includes a credit of $19,161 for the reversal of prior year's taxes on interest that was forgiven. (PAGE) Net Operating Losses S&E and Galapagos have adopted the provisions of SFAS No. 109, "Accounting for Income Taxes". This standard required S&E and Galapagos to recognize deferred income tax benefits for losses carryforwards and the tax benefits recognized must be reduced by a valuation allowance in certain circumstances. S&E and Galapagos have established a valuation allowance for the total amount of tax benefits related to the net operating loss carryforwards available to offset future taxable income. 15. RELATED PARTY TRANSACTIONS: IBC, IGC, IGP, HDA, EMC and the Company entered into a Control Transfer Agreement effective as of December 31, 1996, as amended, with respect to the following matters: (i) IGC sold its stock in EMC to IBC, (ii) IBC agreed to use its best efforts to obtain approval of Nasdaq to the continued listing of the Company's Units following the substitution of IBC for IGC as a general partner and, following such approval, IGC agreed it will transfer its general partnership interest in the Company to IBC, (iii) the Company agreed to grant Replacement Awards (see Note 12) to five employees transferred from IGP to EMC and, to fund EMC's obligations under the Replacement Awards, the number of Units of the Company that it previously agreed to make available to IGC in connection with the Distribution was reduced from 100,000 to 50,000 Units and IGC transfered 75,000 IGC Units to the Company, (iv) IGP assigned its interest in the HDA Management Agreement to EMC effective August 16, 1996, (v) IBC agreed to provide certain accounting services to the Company commencing in the third quarter of 1996, (vi) EMC agreed that two officers who were IGP employees until August 16, 1996 would continue to provide certain administrative, management and tax services to IGC and IGP (one serves as a director of IGC's managing general partner without compensation) and IGC and IGP agreed to reimburse EMC for the employees' time spent on those matters, (vii) IBC irrevocably assigned to IGC all rights to any distributions received by EMC from the Company in respect to EMC's general partnership interest in the Company to the extent that such distributions and other cash receipts of EMC exceed EMC's expenses incurred in the ordinary course of business in its capacity as managing general partner of the Company. The following represents a summary of amounts accrued with respect to services rendered by certain related parties during the years ended December 31, 1996, 1995 and 1994 (in the case of HDA, for the periods after March 8, 1995): Services Rendered For the years ended December 31, - ----------------------- -------------------------------- To By Concept 1996 1995 1994 - ----------- --------- --------------------- ---------- ---------- ---------- HDA HDAMC Directors fees and expenses - 5,500 - HDA IGP Management Agreement 169,278 215,400 - HDA EMC Management Agreement 101,414 - - The Company IBC Accounting Services 8,000 - - The Company IGC/IGP Support Agreement 117,198 254,364 - The Company EMC Expenses in excess of receipts 54,783 - - The Company EMC Directors fees and expenses 71,500 36,069 - (PAGE) 16. LEGAL PROCEEDINGS On December 30, 1996 the Racing Board issued an order seeking to impose certain obligations on HDA, ECOC and Paxson in conjunction with the second sale of S&E, including that (i) in addition to live racing broadcasts, ECOC must rebroadcast races at times of lesser audience, (ii) any broadcast agreement for races must be approved by the Racing Board, and (iii) HDA, ECOC and Paxson must indemnify third parties for any losses suffered from any discontinuance of racing telecasts and, to secure this indemnity, HDA and ECOC must post a $4 million bond. On January 21, 1997 HDA filed with the Racing Board a motion for reconsideration of the order arguing that the Racing Board failed to comply with applicable administrative procedures in issuing the order and that the Racing Board lacked jurisdiction to impose conditions on the S&E sale. The Racing Board held a hearing on March 4, 1997 and determined to postpone ruling until another, as yet unscheduled, hearing could be held. Based upon facts available to date, Management and legal counsel believe that none of such actions will have a material adverse effect on the Company's financial position or results of operations. 17. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS No. 107 requires disclosure of the fair value of certain financial instruments, including cash, evidence of ownership interests in other entities and contracts that impose either and obligation to deliver a financial instrument or cash such as loans or notes payable, or a right to receive a financial instrument or cash such as loans or notes receivable. The estimated fair values of the Company's financial instruments are as follows: December 31, 1996 December 31, 1995 ------------------------ ------------------------ Carrying Carrying Fair Value Value Fair Value Value ----------- ----------- ----------- ---------- Cash and cash equivalents $ 4,268,029 $ 4,268,029 $ 814,292 $ 814,292 Receivables from ECOC- Note and accrued interest 756,350 796,203 940,000 1,020,164 First Mortgage Notes 64,600,000 66,403,739 58,000,000 66,239,879 Payable to stockholders - - 1,597,916 1,597,916 Notes payable 1,143,560 1,143,560 2,439,410 2,439,410 Obligations under TV Purchase Agreements - - 474,661 474,661 The carrying value of cash and cash equivalents approximates fair value because of the liquid nature of these assets. The note receivable from ECOC bears interest at a rate lower than prime rate and accordingly, was discounted based on the expected collection date assuming a rate of 10.5%. The fair value of the First Mortgage Notes was based on the market price as quoted by a brokerage firm that trades the First Mortgage Notes. The carrying value of notes payable and obligations under TV Purchase Agreements approximates fair value because these obligations bear interest at market. 18. UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS): The Company acquired a 67% interest in profits of HDA in August 1994 and increased its interest in profits to 82% on March 8, 1995. The following unaudited proforma consolidated statement of income (loss) for the years ended (PAGE) December 31, 1995 and 1994 are based upon the historical consolidated statement of the Company and VJC, and HDA and subsidiaries, and were prepared as if the acquisition by the Company of its 82% interest in HDA's profits, the elimination of certain approval rights of HDAMC, the Distribution, and the issuance of 1,205,245 Units to HDAMC had all occurred on January 1, 1994. The unaudited proforma consolidated statement is not necessarily indicative of what the actual results of operations of the Company would have been assuming such transactions had been completed as of January 1, 1995, and does not purport to represent the results of operations for future periods. In Management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. (PAGE) 18. UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS) (continued): FOR THE YEARS ENDED DECEMBER 31, (In thousands except per unit amounts) 1996 1995 1994 ---------- ---------- ---------- Historical Proforma Proforma (Audited) (Unaudited) (Unaudited) REVENUES: Rental income from El Comandante Race Track $ 14,322 $ 14,333 $ 14,774 Dominican Republic racing- Commissions on wagering 4,513 2,725 - Other revenues 523 373 - Television Stations 1,725 1,511 - Gain from sale of 50% interest in Television Stations 581 - - Interest income 232 114 840 ---------- ---------- ---------- Total revenues 21,896 19,056 15,614 ---------- ---------- ---------- EXPENSES: Financial 9,048 9,002 8,616 Depreciation 2,508 2,163 1,788 General and administrative 1,807 1,227 455 Operating costs of Dominican Republic racing 5,972 4,413 42 Operating costs of Television Stations 1,461 2,695 237 Other costs - 265 2,320 ---------- ---------- ---------- Total expenses 20,796 19,765 13,458 ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS 1,100 (709) 2,156 PROVISION FOR INCOME TAXES 400 511 1,035 MINORITY INTERESTS (127) (770) (3) ---------- ---------- ---------- NET INCOME (LOSS) $ 827 $ (450) $ 1,124 ========== ========== ========== ALLOCATION OF NET INCOME (LOSS): General partners $ 8 $ (4) $ 11 Limited partners 819 (446) 1,113 ---------- ---------- ---------- $ 827 $ (450) $ 1,124 ========== ========== ========== NET INCOME (LOSS) PER UNIT $ .13 $ (0.07) $ .18 ========== ========== ========== WEIGHTED AVERAGE UNITS OUTSTANDING 6,334 6,334 6,334 ========== ========== ========== (PAGE) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of El Comandante Operating Company, Inc.: We have audited the accompanying statements of net assets (liabilities) of El Comandante Operating Company, Inc. (a Puerto Rico nonstock corporation) (ECOC) as of December 31, 1996 and 1995, and the related statements of revenues and expenses, changes in net assets (liabilities) and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of ECOC's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets (liabilities) of El Comandante Operating Company, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, effective August 1, 1994, El Comandante Operating Company was reorganized by means of a merger into ECOC, which became the surviving entity. The financial statements relating to periods prior to August 1, 1994, were restated to reflect the financial position and results of operations of the new reporting entity. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule II - Allowance for Doubtful Accounts Receivable is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP March 27, 1997 San Juan, Puerto Rico (PAGE) EL COMANDANTE OPERATING COMPANY, INC. STATEMENTS OF REVENUES AND EXPENSES FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 ----------- ----------- ----------- REVENUES: Commissions on wagering $57,285,607 $55,731,364 $58,497,279 Other 2,728,516 2,329,179 2,550,112 ----------- ----------- ----------- Total revenues 60,014,123 58,060,543 61,047,391 ----------- ----------- ----------- EXPENSES: Payments to horse owners and horse owners'association 28,561,893 27,851,823 29,358,224 Track rent 14,321,402 14,332,841 14,774,318 Salaries, wages and employee benefits 7,314,033 6,866,856 6,256,806 Operating expenses 5,721,396 5,853,875 6,157,862 General and administrative 2,804,546 2,783,343 2,875,903 Marketing and satellite transmission costs 2,607,337 2,178,155 1,550,681 ----------- ----------- ----------- Total expenses 61,330,607 59,866,893 60,973,794 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (1,316,484) (1,806,350) 73,597 CREDIT FOR DEFERRED INCOME TAXES (94,200) (53,007) (160,130) ----------- ----------- ----------- NET INCOME (LOSS) $(1,222,284) $(1,753,343) $ 233,727 =========== =========== =========== The accompanying notes are an integral part of these statements. (PAGE) EL COMANDANTE OPERATING COMPANY, INC. STATEMENTS OF NET ASSETS (LIABILITIES) December 31, ------------------------ 1996 1995 ----------- ----------- ASSETS: CURRENT ASSETS: Cash, including restricted cash of $494,653 and $903,562, respectively $ 1,116,330 $ 2,883,447 Accounts receivable, net 1,379,932 954,809 Prepayments and supplies inventory 242,468 291,717 Notes receivable 335,248 310,944 ----------- ----------- Total current assets 3,073,978 4,440,917 ----------- ----------- DEFERRED COSTS, net: Organizational costs 28,015 36,355 Deferred tax asset 652,337 558,137 Telecommunication installation costs 185,905 257,829 Noncompetition agreement 145,833 395,833 ----------- ----------- Total deferred costs 1,012,090 1,248,154 ----------- ----------- FURNITURE AND EQUIPMENT, net 3,964,066 3,469,371 ----------- ----------- Total assets $ 8,050,134 $ 9,158,442 ----------- ----------- (PAGE) EL COMANDANTE OPERATING COMPANY, INC. STATEMENTS OF NET ASSETS (LIABILITIES) (continued) December 31, ------------------------ 1996 1995 ----------- ----------- LIABILITIES: CURRENT LIABILITIES: Current portion of capital lease obligations $ 707,917 $ 560,128 Rent payable to Housing Development Associates S.E. ("HDA") 1,984,213 796,146 Accounts payable and accrued liabilities 3,299,930 2,911,948 Outstanding winning tickets and refunds 784,897 2,095,794 ----------- ----------- Total current liabilities 6,776,957 6,364,016 ----------- ----------- CAPITAL LEASE OBLIGATIONS 1,223,557 1,318,962 ----------- ----------- NOTE PAYABLE TO HDA, and accrued interest 796,203 1,020,164 ----------- ----------- OTHER LIABILITIES: Notes 2,450,000 2,450,000 Accrued interest 145,303 124,902 ----------- ----------- 2,595,303 2,574,902 ----------- ----------- Total liabilities 11,392,020 11,278,044 ----------- ----------- NET ASSETS (LIABILITIES) $(3,341,886) $(2,119,602) =========== =========== The accompanying notes are an integral part of these statements. (PAGE) EL COMANDANTE OPERATING COMPANY, INC. STATEMENTS OF CHANGES IN NET ASSETS (LIABILITIES) FOR THE THREE YEARS ENDED DECEMBER 31, 1996 Amount ------------- BALANCES, December 31, 1993 $ 150,014 Net income for the year 233,727 Contributions of cash 250,000 Acquisition of shareholder's interest in ECOC in connection with its reorganization into a nonstock corporation (1,000,000) ------------ BALANCES, December 31, 1994 (366,259) Net loss for the year (1,753,343) ------------ BALANCES, December 31, 1995 (2,119,602) Net loss for the year (1,222,284) ------------ BALANCES, December 31, 1996 $ (3,341,886) ============ The accompanying notes are an integral part of these statements. (PAGE) EL COMANDANTE OPERATING COMPANY, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(1,222,284) $(1,753,343) $ 233,727 ----------- ----------- ----------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization 698,102 590,244 565,333 Deferred tax credit (94,200) (53,007) (160,130) Provision for bad debts 100,008 100,000 225,968 Amortization of noncompetition agreement 250,000 250,000 104,167 (Increase) decrease in current assets- Accounts receivable (503,621) (361,232) (136,011) Prepayments and supplies inventory 49,249 306,905 (106,179) Increase (decrease) in current liabilities- Accounts payable and accrued liabilities 387,982 100,302 295,554 Outstanding winning tickets and refunds (1,310,897) 501,042 689,422 Accrued interest 20,401 42,244 20,282 Rent payable 1,188,069 796,146 - ----------- ----------- ----------- Total adjustments 785,093 2,272,644 1,498,406 ----------- ----------- ----------- Net cash (used in) provided by operating activities (437,191) 519,301 1,732,133 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase (decrease) in notes receivable (24,304) 72,995 (215,978) Capital expenditures (484,196) (411,167) (226,049) Payments of telecommunication installation costs (9,586) (17,738) (28,692) ----------- ----------- ----------- Net cash used in investing activities (518,086) (355,910) (470,719) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from note payable - 1,000,000 - Payments on note payable (207,594) - - Payments of capital lease obligations (604,246) (488,275) (288,387) Payments of organizational costs - (6,470) (41,700) Cash contributions - - 250,000 ----------- ----------- ----------- Net cash (used in) provided by financing activities (811,840) 505,255 (80,087) ----------- ----------- ----------- (PAGE) EL COMANDANTE OPERATING COMPANY, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (continued) 1996 1995 1994 ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH (1,767,117) 668,646 1,181,327 CASH, beginning of year 2,883,447 2,214,801 1,033,474 ----------- ----------- ----------- CASH, end of year $ 1,116,330 $ 2,883,447 $ 2,214,801 =========== =========== =========== SUPPLEMENTAL INFORMATION: Interest paid $ 168,849 $ 246,495 $ 228,600 NONCASH TRANSACTIONS: Equipment acquired through capital leases 656,630 429,211 602,542 Issuance of notes payable - - 1,750,000 The accompanying notes are an integral part of these statements. (PAGE) EL COMANDANTE OPERATING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: El Comandante Operating Company ("ECOC") was created under Delaware law as a 60% owned subsidiary of Housing Development Associates S.E. ("HDA"), a Puerto Rico partnership, to operate El Comandante Race Track ("El Comandante"), the only thoroughbred race track and off-track betting operation in Puerto Rico. El Comandante was acquired by HDA on December 14, 1989, and ECOC leased El Comandante from HDA and started operations on that date. On August 1, 1994, ECOC was reorganized by means of a merger into a Puerto Rico nonstock corporation named El Comandante Operating Company, Inc. (also referred to as "ECOC" or "New ECOC"), which became the surviving entity (see Note 4). An equity section is not presented in the financial statements since New ECOC is a non-stock corporation. 2. SUMMARY OF ACCOUNTING POLICIES: Pervasiveness of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Commissions on Wagering ECOC earns commissions ("ECOC Commissions") on bets placed on El Comandante's thoroughbred horse races through wagering facilities at El Comandante and at wagering facilities located at independently owned off-track betting agencies throughout Puerto Rico, and from wagering on races simulcasted outside Puerto Rico, principally to Dominican Republic. ECOC offers bettors win and place, daily double, exacta, quiniela and pool wagering. Commissions are based on percentages of wagers established by law and vary for the different types of wagers in Puerto Rico, as follows: 26% of daily double and pool wagers; 20% of exacta and quiniela wagers; and 25% of losing wagers on win and place wagers. ECOC Commissions on wagers in Puerto Rico during the years ended December 31, 1996, 1995 and 1994 averaged 21.27%, 20.56% and 20.31%, respectively. Commissions on simulcasted races are negotiated with wagering facilities outside Puerto Rico. ECOC Commissions on wagers on simulcasted races during the years ended December 31, 1996 and 1995 averaged 6.20% and 6.36%, respectively. Restricted Cash Restricted cash represents (i) accumulated cash in the "Pool Pote" which is funded by 4% of the amounts payable to winners of the daily Pick 6 pool and (ii) a bonus amount which is added to the Pick 6 pool payout of predetermined race days. The Pool Pote is paid out when there is a sole pool winner or when it reaches $1.5 million, $500,000 is paid out as part of the regular Pick-6 pool on the following Sunday or Holiday. The corresponding payables are recorded as part of the liability for outstanding winning tickets and (PAGE) refunds. Accounts Receivable Accounts receivable include balances from pool agents, simulcasting commissions, fees earned under a management agreement described in Note 4 and other miscellaneous amounts. As of December 31, 1996 and 1995, reserves for doubtful accounts amounted to $292,087 and $171,735, respectively. Notes Receivable Notes receivable consist of unsecured short term loans to horse owners, with interest at 2% over prime rate and with various maturity dates. These loans provide financing to horse owners to purchase horses as a means to improve the quality of racing. ECOC has advised the Confederacion Hipica de Puerto Rico (the "Confederacion"), a horse owners' association, that its credit line to all members of the Confederacion, as a group, will not exceed $500,000 and it will not extend credit in excess of $50,000 to any single owner, nor lend more than 80% of the purchase price of any horse. Organizational Costs Legal fees and other costs incurred in the reorganization of ECOC into a nonstock corporation were recorded as deferred costs and are amortized on a straight-line basis over a period of five years that commenced on August 1, 1994. Amortization expense for the years ended December 31, 1996, 1995 and 1994 was $8,340, $8,340 and $3,475, respectively. Telecommunication Installation Costs These costs are related to the installation of telephone lines by Puerto Rico Telephone Company ("PRTC") and to excise taxes on the off-track telecommunication equipment. The costs are amortized on a straight-line basis over the remaining life of an agreement with PRTC expiring on April 1, 1999. Amortization expense for the years ended December 31, 1996, 1995 and 1994 was $60,000 in each period. Noncompetition Agreement These costs are related to a Noncompetition Agreement entered into with the majority owner of Supra and former President of ECOC which prohibits him from investing or participating in horse racing operations anywhere in the Caribbean for a period of three years from August 1, 1994. The amount of $750,000 payable under the agreement was recorded as a deferred cost and is being amortized on a straight-line basis over the noncompete period. Amortization expense for the years ended December 31, 1996, 1995 and 1994 was $250,000, $250,000 and $104,167, respectively. Furniture and Equipment Furniture and equipment is stated at cost and depreciated on a straight-line basis over their estimated useful lives, which range from 5 to 10 years. Major replacements and improvements are capitalized and depreciated over their estimated useful lives. Repairs and maintenance are charged to expense when incurred. As of December 31, 1996 and 1995, furniture and equipment was as follows: (PAGE) December 31, -------------------------- 1996 1995 ---------- ----------- Furniture $ 399,088 $ 338,314 Equipment 4,948,516 3,987,222 Motor vehicles 799,145 726,138 ---------- ----------- 6,146,749 5,051,674 Less - Accumulated depreciation (2,182,683) (1,582,303) ---------- ----------- $3,964,066 $ 3,469,371 ========== =========== For information with respect to pledged assets, see Note 4. Working Capital At December 31, 1996, current liabilities exceed current assets. Management believes that the following sources of cash will enable ECOC to reduce its payables, including rent to HDA, and improve its cash position in 1997: 1. ECOC has receivables from Galapagos, S.A. ("Galapagos") of $900,000 at December 31, 1996 for commissions on simulcasted races to the Dominican Republic, management fees and reimbursable out-of-pocket costs. ECOC has been advised that the stockholders of Galapagos, including HDA, plan to make capital contributions to Galapagos in 1997 to enable Galapagos to pay this debt in full. 2. Management is forecasting increased wagering at El Comandante as a result of the planned introduction of two new bets (Pick 3 pool bet and trifecta) in the second quarter of 1997 and increased wagering on simulcasting from additional off track betting agencies to be opened in the Dominican Republic by Galapagos. 3. HDA agreed to pay ECOC's license fee of $250,000 and has offered to ammend the El Comandante Lease, and, subject to the approval of holders of HDA's first mortgage notes, to permit ECOC to borrow up to $1 million to fund loans to horseowners, which would improve ECOC's 1997 cash position by approximately $335,000. 4. Better control over operating costs with budgeted decreases in controllable costs. 3. PENSION PLAN: ECOC has a non-contributory defined benefit pension plan covering substantially all of its nonunion employees. Benefits are based on the employee's years of service and highest average earnings over five consecutive years during the last 15 years of employment. ECOC's policy is to fund an amount not less than the ERISA minimum funding requirement or more than the maximum deductible under the Puerto Rico tax law. The net periodic pension expense for the years ended December 31, 1996, 1995 and 1994, respectively, included the following components: (PAGE) 1996 1995 1994 ---------- ---------- ---------- Service cost $ 80,475 $ 88,613 $ 42,041 Interest cost 54,471 44,982 36,201 Actual return on plan assets (29,061) (13,768) (12,024) Amortization of transitional asset 16,690 (1,701) (1,464) ---------- ---------- ---------- Net pension expense $ 122,575 $ 118,126 $ 64,754 ========== ========== ========== Reconciliation of the funded status and the amounts recognized in the accompanying statements of net assets (liabilities) follows: 1996 1995 1994 ---------- ---------- ---------- Accumulated benefit obligations - Vested $ 383,675 $ 350,061 $ 177,572 Non-vested 23,828 15,400 28,058 ---------- ---------- ---------- $ 407,503 $ 365,461 $ 205,630 ========== ========== ========== Actuarial present value of projected benefit obligations (723,857) $(661,354) $(494,392) Plan assets at fair value 352,889 333,167 336,118 ---------- ---------- ---------- Under funded status (370,968) (328,187) (158,274) Item not yet recognized in earnings - Unrecognized transitional obligation 234,975 198,008 100,221 ---------- ---------- ---------- Accrued pension expense $(135,993) $(130,179) $ (58,053) ========== ========== ========== Assumptions used for the above computations included: 1996 1995 1994 Discount rate 8% 8% 8% Expected rate of increase in future compensation levels 5% 5% 5% Expected long-term rate of return on assets 8% 8% 8% 4. THE OPERATING LICENSE, EL COMANDANTE LEASE AND OTHER COMMITMENTS: Operating License On December 15, 1989, the Puerto Rico Racing Board (the "Racing Board") granted a license to ECOC to operate El Comandante, which will expire on December 14, 2004 (the "Operating License"). The Operating License provides ECOC with: (1) the exclusive right to operate a race track in the area of Puerto Rico known as the San Juan Region, which approximates the northern half of Puerto Rico, as delineated in maps produced by the Puerto Rico Planning Board and Government Development Administration; (2) the exclusive right to conduct all types of authorized betting, both at El Comandante and off-track, anywhere in Puerto Rico, based on races held at El Comandante; and (3) the right to hold a minimum of 180 day or night race days per year. The Operating License requires payment of an annual license fee, currently $250,000. (PAGE) Upon its expiration in December 2004, there can be no assurance that a new Operating License will be issued to ECOC if ECOC's lease of El Comandante is extended beyond that date. However, ECOC and the prior owner of El Comandante have continuously operated the only thoroughbred racing facility in Puerto Rico since 1957. El Comandante's horse racing and pari-mutuel wagering operations are subject to substantial government regulation. Pursuant to the Puerto Rico Horse Racing Industry and Sport Act (the "Racing Act"), the Racing Board and the Puerto Rico Racing Administrator (the "Racing Administrator") exercise significant regulatory control over ECOC's racing and wagering operations. For example, the Racing Administrator determines the monthly racing program for El Comandante and approves the number of annual race days in excess of the statutory minimum of 180. The Racing Act also apportions payments of the wagering handle and thus the Racing Act could be amended through legislation to reduce the share of monies wagered that would be available as ECOC Commissions. The Racing Board consists of three persons appointed to four- year terms by the Governor of Puerto Rico. The Racing Administrator is also appointed by the Governor for a four-year term. El Comandante Lease HDA has leased El Comandante to ECOC under a lease agreement, as amended, (the "El Comandante Lease") for a term of 15 years ending December 14, 2004. The El Comandante Lease provides for payment of rent consisting of 25% of the annual ECOC Commissions ("Basic Rent"). Through December 31, 1995 the El Comandante Lease also provided for payment of certain fixed rent ("Fixed Rent") of $150,000 in 1994 and $400,000 in 1995. The El Comandante Lease provides for ECOC to pay all El Comandante expenses except that, pursuant to an amendment effective January 1, 1996, HDA assumed the obligation to pay real property taxes on El Comandante. The El Comandante Lease also contains certain covenants of ECOC including obligations to spend not less than $500,000 per calendar year, adjusted from a base year of 1993 according to the CPI, to repair and maintain El Comandante and related facilities; financial reporting requirements; insurance requirements; compliance with laws; limitations on indebtedness; limitations on liens; limitations on other activities; limitations on affiliate transactions; acceptance of EMC consulting services; and acceptance of amendments necessary to maintain HDA's tax status. ECOC granted a security interest in substantially all of its assets (excluding cash) to HDA to secure ECOC's obligations under the El Comandante Lease, which security interest was then assigned as additional security for first mortgage notes of HDA. If the El Comandante Lease is terminated prior to December 2004, ECOC will assign its Operating License to HDA to the extent permitted by law and sell at book value its equipment to HDA. The El Comandante Lease provides for either party to ask for renegotiation during the period of July 1 to August 31, 1997 with the results of such renegotiation to be effective on January 1, 1998. Reorganization of ECOC On December 13, 1993, ECOC entered into a series of agreements with Supra and its majority owner ("Supra Agreements") incident to the reorganization of ECOC as a Puerto Rico nonstock corporation (the "ECOC Reorganization"). The Supra Agreements provide for ECOC to pay accrued interest and principal on a note payable to Supra in the principal amount of $200,000, to purchase ECOC's stock owned by Supra for $1,000,000 and to pay $500,000 to Supra and Supra's (PAGE) majority owner as compensation for past services rendered in connection with management of ECOC. On December 15, 1993, Interstate General Properties Limited Partnership S.E. ("IGP") purchased from Supra an 80% interest in the $200,000 note. In addition, the majority owner of Supra and former President of ECOC entered into a Noncompetition Agreement that became effective upon the ECOC Reorganization and prohibits him from investing or participating in horse racing operations anywhere in the Caribbean for a period of three years. The Noncompetition Agreement provides for payment of $750,000. The obligations under the Supra Agreements and Noncompetition Agreement are subordinated to ECOC's working capital cash balance of $700,000, excluding restricted cash and payables to winning bettors, and donations of $300,000 per year. Thereafter, until the obligations are paid, Supra and its majority owner will have priority on ECOC's Excess Cash Flow, as defined in the Supra Agreements, after payment of the Basic Rent, provided that ECOC has a working capital cash balance of at least $700,000. No payments of these obligations have been made as of December 31, 1996. On August 1, 1994, the ECOC Reorganization was completed as follows: (i) ECOC assigned the rights under the Supra Agreements and Noncompetition Agreement to a Puerto Rico nonstock corporation, El Comandante Operating Company, Inc. ("New ECOC"), which assumed the obligations to Supra and its majority owner and became a 40% owner of ECOC; (ii) HDA contributed its 60% interest in ECOC to ECOC's capital and consequently, New ECOC became the 100% owner of ECOC; and (iii) ECOC was merged into New ECOC, which became the surviving entity and continues the same business conducted by ECOC and assumed all of ECOC's responsibilities under the El Comandante Lease and the Operating License. At the time of the ECOC Reorganization, ECOC recorded additional obligations of $1,750,000 to Supra and its majority owner for the purchase price of ECOC's stock owned by Supra and the amount payable under the Noncompetition Agreement. ECOC is required to distribute its net cash flow (after payment of rent and operating expenses, taxes, certain obligations to Supra and funding of working capital) for charitable, educational and other matters of public interest in Puerto Rico. Consulting Agreement Pursuant to a consulting agreement between ECOC and IGP executed on December 15, 1993 (the "Consulting Agreement"), and as required under the El Comandante Lease, ECOC retained as executive management three racing consultants then employed by IGP. In April 1996, IGP assigned its interest in the Consulting Agreement to Equus Management Company ("EMC") and the three racing consultants became employees of EMC. Except for $25,000 of the salary and related payroll costs of one consultant, ECOC reimburses all of payroll and fringe benefit costs with respect to the employment of the consultants. Fees incurred by ECOC pursuant to the Consulting Agreement during the years ended December 31, 1996, 1995 and 1994 were $894,000, $871,000 and $778,000, respectively. Horse Owners' Agreement and Wagering Service Agreement ECOC has an agreement with the Confederacion whereby 50% of wagering commissions received by ECOC on races held at El Comandante are to be paid to the Confederacion through April 1, 1998, plus an annual fixed amount of $55,000 from 1993 to 1998. The Confederacion also receives a minimum of $500 per race day for ECOC's wagering commissions on El Comandante races simulcasted outside Puerto Rico ("Simulcasting Commissions") and when (PAGE) Simulcasting Commissions exceed simulcasting expenses plus $500, the Confederacion receives $500 plus 50% of Simulcasting Commissions. ECOC receives wagering services, software and equipment under a service agreement with Autotote Systems, Inc, effective through March 15, 2005. The service agreement requires minimum annual payments which consist of the greater of $800,800 annually or .65% (.0065) of total wagering. The Confederacion agreed to reimburse ECOC an amount equal to .325% (.00325) of wagering for each race day up to a maximum of $3,461 per race day until April 1998. An amendment to the agreement effective January 1, 1996 included a formula to calculate the maximum annual contribution, which amount was $773,226 for 1996, versus $886,016 which would have been the contribution based on $3,461 per race day. Management Services Agreement ECOC provides executive management services to Galapagos pursuant to a management agreement effective September 28, 1994. Fees are the lesser of (i) 1% of amounts wagered on races run at the government owned V Centenario Race Track in the Dominican Republic which is operated by Galapagos, and on El Comandante races simulcasted in the Dominican Republic or (ii) $250,000 annually, adjusted by CPI commencing January 1996. During the years ended December 31, 1996 and 1995, ECOC earned fees of $236,000 and $141,000, respectively. Galapagos also reimburses ECOC for out-of-pocket expenses related to the services. Television Contracts Since commencing the on-line wagering system in 1992, ECOC has arranged for live broadcasts of El Comandante's races via commercial television in Puerto Rico. In 1995 ECOC entered into an agreement with S & E Network Inc. ("S&E"), the owner of three UHF television stations network known as TELENET, for the broadcast of all races run at El Comandante. ECOC also agreed to pay $150,000 for certain improvements to provide facilities at El Comandante for S&E's television studio and administrative offices. For the period from January 1995 to January 1996, S&E was also responsible for the production of the racing show and was entitled to revenues from sales of advertising time. The agreement required fixed monthly payments by ECOC to S&E of $56,000. ECOC and S&E entered into a new agreement (the "S&E-ECOC Agreement") effective February 1, 1996 which requires ECOC to purchase a minimum of 910 hours of television time at $725 per hour (minimum annual amount of $659,750), adjusted annually by CPI, or $900, also subject to CPI adjustments, if ECOC needs television time after 7:00 PM. ECOC assumed responsibility for producing the racing show and directing the broadcasts and is entitled to the revenues from its sales of advertising time during the broadcasts of the racing program. The term of the S&E-ECOC Agreement expires January 31, 2000 but is renewable for succesive one year terms at ECOC's option. 5. CAPITAL LEASE OBLIGATIONS: ECOC has entered into certain equipment lease agreements which have been classified as capital leases. The present value of future minimum lease payments under capital leases is as follows: (PAGE) Due during year ending December 31, 1997...........................................$ 707,917 1998........................................... 688,283 1999........................................... 357,531 2000........................................... 100,708 2001........................................... 46,962 Thereafter..................................... 30,073 ---------- Minimum lease payments......................... 1,931,474 Less - Current portion........................ (707,917) ---------- $1,223,557 ========== 6. PAYABLES TO HOUSING DEVELOPMENT ASSOCIATES S.E.: The payables to HDA as of December 31, 1996 and 1995 consists of (i) a note payable and accrued interest of $796,203 and $1,020,164, respectively, and (ii) unpaid rent under the El Comandante Lease of $1,984,213 and $796,146, respectively. The note accrues interest at 5.75% and is payable in monthly installments of $30,309, including interest, over a three year period that commenced May 1, 1996. Under the El Comandante Lease ECOC is required to pay HDA its Basic Rent for each race day on the 29th day following such racing day. ECOC's failure to pay Basic Rent, in the aggregate, in an amount equal to one month's average Basic Rent (based on the preceding 12 months) for a period of 30 days is an event of default under the El Comandante Lease. ECOC is not in default of this lease covenant. 7. OTHER LIABILITIES: Other liabilities consist of unsecured notes of $160,000 to IGP and $40,000 to Supra, including accrued interest, and $500,000 of accrued past service costs payable to Supra and Supra's majority owner under the Supra Agreements. They also include $1,750,000 payable to Supra and Supra's majority owner for the purchase of ECOC's stock and for the amount payable under the Noncompetition Agreement. The unsecured notes bear interest at 2.5% over the prime rate, without a stated maturity date. The interest rate at December 31, 1996 and 1995 was 10.75% and 11%, respectively. 8. INCOME TAXES: Deferred tax assets of $652,337 and $558,137, net of valuation allowances of $1,342,047 and $1,419,433, were recorded as of December 31, 1996 and 1995, respectively. These assets arise from the difference between the tax basis of certain liabilities and their reported amounts in the financial statements (which will result in deductible amounts in future years when such liabilities are finally settled) and from the benefits of net operating loss carryforwards ("NOL") which are available to offset future taxable income and expire in various dates through 2003. The deferred credit for income taxes for the years ended December 31, 1996 and 1995 is net of an increase in the valuation allowance of $310,493 and $572,943, respectively. (PAGE) 9. LEGAL PROCEEDINGS: HDA sold its interest in S&E in sales closed in August 1996 (50% interest) and January 1997 (50% interest). On December 30, 1996 the Racing Board issued an order seeking to impose certain obligations on HDA, ECOC and the current owner of S&E in conjunction with the sale of S&E by HDA, including that (i) in addition to live racing broadcasts, ECOC must rebroadcast races at times of lesser audience, (ii) any broadcast agreement for races must be approved by the Racing Board, and (iii) HDA, ECOC and the current owner of S&E must indemnify third parties for any losses suffered from any discontinuance of racing telecasts and, to secure this indemnity, HDA and ECOC must post a $4 million bond. The Racing Board held a hearing on March 4, 1997 and determined to postpone ruling until another, as yet unscheduled, hearing could be held. Also, ECOC has been named as a defendant in various lawsuits arising out of its normal business operations, including employment-related claims. Based upon facts available to date, management and legal counsel believe that none of such actions will have a material adverse effect on ECOC's financial position or results of operations. 10. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS No. 107 requires disclosure of the fair value of certain financial instruments, including cash, evidence of ownership interests in other entities and contracts that impose either and obligation to deliver a financial instrument or cash such as loans or notes payable, or a right to receive a financial instrument or cash such as loans or notes receivable. The estimated fair values of ECOC's financial instruments are as follows: December 31, 1996 December 31, 1995 ------------------------ ------------------------ Carrying Carrying Fair Value Value Fair Value Value ----------- ----------- ----------- ---------- Cash $ 1,116,330 $ 1,116,330 $ 2,883,447 $2,883,447 Notes receivable 335,248 335,248 310,944 310,944 Capital lease obligations 1,931,474 1,931,474 1,879,090 1,879,090 Note payable to HDA and accrued interest 756,350 796,203 940,000 1,020,164 Other liabilities 2,595,303 2,595,303 2,574,902 2,574,902 The carrying value of cash approximates fair value because of the liquid nature of these assets. The carrying value of the notes receivable approximates fair value because these notes bear interest at a rate higher than prime rate. The carrying value of the capital lease obligations approximates fair value because these obligations bear interest at market. The note payable to HDA bears interest at a rate lower than prime rate and accordingly, was discounted based on the expected payment date assuming an interest rate of 10.5%. For other liabilities the carrying value approximates fair value. (PAGE) EL COMANDANTE OPERATING COMPANY, INC. SCHEDULE -II- ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE For Year Balance Provision Balance ended Beginning Charged to End of December 31, of Year Expense Write-Offs Recoveries Year ------------ ---------- ----------- ---------- ---------- --------- 1994 567,450 225,968 (679,538) 135,007 248,887 1995 248,887 100,000 (192,025) 14,873 171,735 1996 171,735 100,008 0 20,344 292,087 In late 1991, ECOC commenced a conversion of off-track betting agencies to an on-line system. Under the on-line system, ECOC now has daily receivables from agents for the difference between amounts wagered at the agencies, less (1) payouts made by agents to winnings bettors and (2) agents' commissions. Commencing in 1992, the provision for bad debts and the write-off of uncollectible receivables increased significantly as a result of (1) this change in way of doing business through agents, (2) the significant increase in wagering resulting from the on-line system, which increases the amount of daily receivables and (3) certain inconviniences in the conversion of agencies to the on-line system. (PAGE) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND EMC General Partners; Managing Partner of the Company The General Partners of the Company are IGC and EMC. EMC is the Managing General Partner and, as such, has full and exclusive responsibility and authority to manage the Company, including declaring and authorizing cash distributions, making employment decisions, determining executive compensation and making investment decisions and other decisions normally made by executive officers and directors of a corporation. EMC was incorporated on July 29, 1994 under the Delaware General Corporation Law as a wholly owned subsidiary of IGC. Effective December 31, 1996 IGC transferred all of the common stock of EMC to IBC, an affiliate of IGC. EMC does not engage in any significant activities other than managing the business of the Company. EMC is governed by its Board of Directors, which currently consists of five persons. Directors will be elected in the future either by IBC, as the parent company of EMC, or by the directors then holding office subject to certain limitations, including that at least two of the directors be independent of the Company, IBC and IGC. Thus, Unitholders do not have the power to elect EMC's directors. The officers of EMC are elected by its Board of Directors. At present, one of EMC's directors is a director of IGC's managing general partner and one is an officer and director of IBC. Approximately 99.4% of IBC is owned by the adult children of James J. and Barbara A. Wilson. IGC is managed by its Managing General Partner, Interstate General Management Corporation ("IGMC"). The Wilson family and companies controlled by them, including IBC, hold a 54.1% interest in IGC. Directors and Executive Officers of the Company and EMC The table below sets forth the name, age and positions with the Company and EMC of each director and executive officer of EMC and each executive officer of the Company. James J. Wilson resigned as a director in March 1996. John E. Hans resigned as a director in August 1996. J. Michael Wilson resigned as a director in September 1996 and was replaced by Kevin Wilson. Name Age Positions with the Company and EMC Donald G. Blakeman 64 President of EMC and the Company; Director of EMC Juan M. Rivera-Gonzalez 49 Vice President of EMC and Executive Vice President of the Company Donald Drew 56 Senior Vice President of EMC Gretchen Gronau 32 Vice President, Chief Financial Officer and Treasurer of EMC (PAGE) and the Company Rafael Otero 41 Vice President of EMC Donald J. Kevane 65 Director of EMC Alberto M. Paracchini 64 Director of EMC Barbara A. Wilson 60 Director and Secretary of EMC Kevin Wilson 38 Director of EMC Certain additional information concerning the above persons is set forth below. Donald G. Blakeman has been the President of EMC, the Company and HDA since January 1996 and a Director of EMC since its formation in 1994. Prior to January 1996, he was Executive Vice President and Chief Financial Officer of EMC since its formation in 1994, and Executive Vice President of HDA since its formation in 1989. He has been a Director of Interstate General Management Corporation ("IGMC"), the managing partner of IGC, since its formation in 1986. He was Executive Vice President of IGC and IGMC from 1986 until August 1996 and Secretary from December 1990 to 1995. He was a Director of IGC's predecessor companies from 1970 to 1990 and served in various executive positions in those companies. Juan M. Rivera-Gonzalez has been Executive Vice President of the Company since January 1996 and was a Vice President of the Company from September 1995 to January 1996. He has been a Vice President of EMC since January 1996. He was a Vice President of IGC from 1993 to April 1996. From April 1991 to January 1994 he was President and General Manager of ECOC. Donald Drew has been a Senior Vice President of EMC since its formation in 1994 and was a Director from its formation in 1994 to January 1996. He was a Senior Vice President of IGC from February 1992 to April 1996. He was President of HDA from December 1993 to January 1996. Gretchen Gronau has been Vice President and Chief Financial Officer of the Company and EMC since August 1996. From May 1990 to August 1996 she served in various tax and financial management positions with IGC, including Vice President from August, 1994 to August, 1996. Rafael Otero has been a Vice President of EMC since April 1996. He joined IGC in July, 1987. From 1987 to April 1996 he was an employee of IGC or ECOC and served in the following positions: Vice President of IGC from February 1992 to April 1993; Treasurer and Senior Vice President of ECOC from April 1993 to December 1993; Vice President of IGC from December 1993 to April 1996. Donald J. Kevane has been a Director of EMC since its formation in 1994. He is a certified public accountant and senior partner in the Puerto Rico accounting firm of Kevane Peterson Soto & Pasarell, which he founded in 1975. He is also a director of Venture Capital Fund, Inc., a Puerto Rico-based venture capital firm. Alberto M. Paracchini has been a Director of EMC since its formation in 1994. He has been a director of BanPonce Corporation since January 1991, was Chairman of the Board from January 1991 to April 1993. He is Vice Chairman of the Board of Puerto Rican Cement Company, Inc. and a director of Venture Capital Fund, Inc., a Puerto Rico-based venture capital firm. (PAGE) Barbara A. Wilson has been a Director of EMC since January 1996 and IGMC since December 1995. She has been a Director of Interstate Business Corporation since 1987, Chairman of the Board since March 1996, Secretary since 1990 and Treasurer since 1993. Kevin Wilson has been a Director of EMC since September 1996. He has been the President, Director and majority owner since 1989 of Community Homes, Inc., a homebuilding company of which he was a co-founder. Section 16(a) Beneficial Ownership Reporting Requirements Kevin Wilson filed late on March 31, 1997 a Form 5 to report his beneficial ownership of Units during 1996. Barbara Wilson has not yet filed one Form 4 with respect to an indirect acquisition of Units in December 1996 by Wilson Family Limited Partnership in which she has a 1% general partnership interest. ITEM 11. EXECUTIVE COMPENSATION The Company does not have any employees. EMC has five employees who are officers of EMC and/or the Company, and were previously employees of Interstate General Properties Limited Partnership S.E. ("IGP"), a subsidiary of IGC. Three of these officers, Messrs. Drew, Rivera and Otero, became employees of EMC on April 22, 1996. They render services to ECOC pursuant to a consulting agreement and all of their compensation and related costs, except for $25,000 of Mr. Rivera's annual salary and related costs which are paid by the Company, were reimbursed by ECOC to IGP until April 22, 1996 and are now reimbursed by ECOC to EMC (See Item 13-- ECOC Consulting Agreement). The other two officers, Mr. Blakeman and Ms. Gronau, became employees of EMC on August 16, 1996. They continue to render limited services to IGC and IGP and a portion of their employment costs, based on amount of time spent on IGC and IGP matters, are reimbursed to EMC pursuant to the terms of a Control Transfer Agreement (See Item 13.-- Control Transfer Agreement and Reservations of Units for Issuance to IGC). Until August 16, 1996, administrative support services were provided by IGC and IGP to the Company and EMC pursuant to a Master Support and Services Agreement (the "Support Agreement"), and since that date they continue to provide limited services pursuant to the Support Agreement. Also, IBC has been providing certain accounting services to the Company for fees of $5,000 for the third quarter of 1996 and $1,000 per month thereafter. HDA does not have any employees. Its managing partners are the Company and IGP, but the Company has exclusive authority to manage HDA. HDA did not pay compensation to the managing partners except payments for services originally rendered by IGP and now rendered by EMC pursuant to a management agreement (See "Item 13--HDA Management Agreement"). The Company reimburses EMC for its costs and expenses, including compensation of officers and directors, in excess of amounts EMC receives from other sources, which sources are primarily for services pursuant to the ECOC Consulting Agreement, cash distributions from the Company, fees pursuant to the HDA Management Agreement, and reimbursements for services rendered to IGP and IGC by Mr. Blakeman and Ms. Gronau since August 16, 1996. The 1996 compensation for Mr. Blakeman and Ms. Gronau, which is summarized in the following table, includes compensation through August 15, 1996 paid by IGP and thereafter paid by EMC. (PAGE) Long-Term Compensation Annual Compensation(1) Awards --------------------------- ------------ Securities Underlying Other Annual Options/ All Other Name & Principal Salary Bonus Compensation SAR's Compensation Position ($) ($) ($) # (2) ($)(1)(3) - ----------------- ------ ----- ------------ ---------- ------------ 1. Donald G. Blakeman 46,500 President 315,200 - - SAR 9,492 2. Gretchen Gronau 10,000 VP, Treas. and CFO 90,200 - SAR 4,692 3. Donald Drew 20,000 Senior VP - - - Options - 4. Juan M. Rivera 10,000 Executive VP - - - SAR - 5. Rafael Otero 10,000 VP - - - SAR - (1) The annual and other compensation paid to Messrs. Drew, Rivera and Otero is omitted since all but $25,000 of such compensation was reimbursed to IGP and EMC by ECOC. (2) Represents replacement awards granted by the Company for stock appreciation rights and Unit Options originally granted by IGC. The obligations for replacement awards were assumed pursuant to the Control Transfer Agreement (See Item 13-- Control Transfer Agreement and Reservation of Units for Issuance to IGC). (3) Reflects contributions to Retirement Plan discussed below. Employment Agreements. Messrs. Drew and Rivera entered into employment agreements with IGP which were assigned to EMC as of April 22, 1996. Mr. Drew's agreement, which expires December 31, 1997 provides for a base salary of $340,000 annually, plus an annual bonus payable no later than April 30 of each year, equal to (a) 3% of Basic Rent (as defined in the El Comandante Lease) payable by ECOC for the prior calendar year, (b) less $340,000. Mr. Rivera's agreement provides for a base salary of $180,000 annually, plus an annual bonus payable by April 30 of each year equal to .33% of the Basic Rent payable by ECOC to HDA for the previous year. The initial term of the agreement expires May 31, 1998, and continues thereafter for successive one-year terms, provided however that EMC or Mr. Rivera may terminate the agreement 90 days after notice of termination. If terminated for reasons other than cause, Mr. Rivera will receive 6 months' base salary as severance payment. All compensation paid by EMC to Messrs. Drew and Rivera pursuant to their employment agreements is reimbursed to EMC by ECOC pursuant to the terms of the ECOC Consulting Agreement, except for $25,000 of Mr. Rivera's annual salary plus related fringe benefits which are paid by the Company. (PAGE) Retirement Plan. Messrs. Drew, Rivera, Blakeman and Otero and Ms. Gronau were all members of IGC's retirement plan (the "Retirement Plan") as employees of IGP and continue under the same plan as employees of EMC. Contributions to the Retirement Plan in 1996 were amounts equal to 4% of base salaries and wages not in excess of the U.S. Social Security taxable wage base, and 8% of salaries (limited to $150,000) that exceeded that wage base. Contributions to the Retirement Plan in 1996 on behalf of Mr. Blakeman and Ms. Gronau were $11,031 by IGP and $3,153 by EMC. Contributions to the Retirement Plan in 1996 by IGP and EMC on behalf of Messrs. Drew, Rivera and Otero were $26,900, all of which was reimbursed to IGP and EMC by ECOC. Directors. Directors of EMC who are neither existing officers or employees of the Company, EMC or any of their affiliates, receive directors' fees established by the Board of Directors of EMC. Directors of EMC, with the exception of Mr. Blakeman, are compensated at a rate of $3,750 per quarter, $1,000 per meeting and out-of-pocket travel reimbursements for meetings. In 1996, the directors' fees and expenses totaled $71,500. Stock Options and Stock Appreciation Rights. Five employees of EMC who were previously employed by IGP (the "Transferred Employees") participated in IGC's Unit Incentive Plan and Unit Option Plan ("Employee Plans"). Effective December 31, 1996 the Company agreed, pursuant to the terms of a Control Transfer Agreement, to provide the Transferred Employees with unit incentive awards ("Replacement Awards") that will provide benefits substantially equivalent to the awards in the Employee Plans of IGC. When the Distribution was made in 1995, the Company agreed to make available to IGC for no consideration up to 100,000 Units of the Company for distributions by IGC (1) to a limited number of employees upon the exercise by employees of options and appreciation rights under the Employee Plans of IGC and (2) to Oppenheimer & Co., Inc. ("Oppenheimer"), upon the exercise of certain warrants. Pursuant to the terms of the Control Transfer Agreement, the obligation of the Company to make its Units available to IGC was reduced from 100,000 to 50,000 Units, and IGC transferred 75,000 of its unregistered Class A Limited Partnership Units ("IGC Units") to the Company which are to be used to satisfy the Company's obligations under the Replacement Awards. The Replacement Awards include (1) an option granted to Donald Drew to purchase 20,000 IGC Units and 10,000 Units of the Company (the "Drew Option") and (2) Unit Appreciation Rights to four EMC employees. The replacement Unit Appreciation Rights entitle the holders to receive upon exercise, an amount payable in cash, Units of the Company, IGC Units or some combination thereof, as determined by EMC's Directors. The amount received upon exercise is based on the excess of the fair market value of IGC Units on the exercise date, plus 50% of the fair market value of the Company's Units on the exercise date, over the base price of the Unit Appreciation Rights. The 1996 activity under these plans is summarized on the following tables: (PAGE) OPTIONS / UNIT APPRECIATION RIGHTS ("UAR") OBLIGATIONS ASSUMED BY THE COMPANY 1996 Percent of Total Options/ Number of UAR Granted Base Options/UAR to Employees Price Expiration Name Granted in 1996 ($) Date - --------------------- ------------ -------------- ------- ----------- Unit Appreciation Rights- Donald G. Blakeman 46,500 60.79% $4.00 5-15-04 Juan M. Rivera 10,000 13.07 4.00 10-18-04 Rafael Otero 10,000 13.07 4.00 5-15-04 Gretchen Gronau 10,000 13.07 4.00 10-18-04 Options- Donald Drew 1/ 20,000 100 4.00 01-01-03 1/ The Drew option covers 20,000 IGC Units and 10,000 Company Units and entitles Mr. Drew to purchase for $4.00 one IGC Unit and one-half Company Unit. Potential Realizable Value at Assumed Annual Rate of Appreciation for Term of Options and UAR ------------------------------------ 0% 5% 10% ($) ($) ($) ------ -------- ------- Unit Appreciation Rights- Donald G. Blakeman 5,812 89,047 207,390 Juan M. Rivera 1,250 20,400 46,100 Rafael Otero` 1,250 19,150 44,600 Gretchen Gronau 1,250 20,400 46,100 Options- Donald Drew 2,500 30,600 66,100 AGGREGATED OPTION / UAR EXERCISES IN 1996 AND DECEMBER 31, 1996 AND DECEMBER 31, 1996 OPTION / UAR VALUES Number of Securities Value of Underlying Unexercised Unexercised In-the-money Options Options and UAR at and UAR at December 31, December 31, 1996 1996 Units ------------ ------------ Acquired Value Exercisable/ Exercisable/ Exercise Realized Unexercisable Unexercisble (#) ($) (#) ($) -------- -------- ------------- ------------ Unit Appreciation Rights- Donald G. Blakeman - - 27,900/18,600 3,487/2,325 Juan M. Rivera - - 6,000/ 4,000 750/ 500 Rafael Otero - - 6,000/ 4,000 750/ 500 Gretchen Gronau - - 6,000/ 4,000 750/ 500 Options- Donald Drew - - 10,000/10,000 1,250/1,250 (PAGE) ITEM 12. SECURITY OWNERSHIP OF CERTAIN UNITHOLDERS AND MANAGEMENT The following table sets forth certain information regarding the Units that are beneficially owned as of March 26, 1997 (i) by each director of EMC or executive officer of EMC or the Company, (ii) by all directors of EMC and executive officers of EMC or the Company, as a group, and (iii) by each person who is known by EMC or the Company to beneficially own more than 5% of the outstanding Units. Beneficial Ownership (1) Name of Beneficial Owner Number Percent - ------------------------ ----------- -------- Management and Directors Barbara A. Wilson (2) 1,700,804 26.81% Kevin Wilson 86,397 1.36% Donald J. Kevane 1,000 .02% Alberto M. Paracchini -- -- Donald G. Blakeman 188,695 2.97% Gretchen Gronau -- -- Donald Drew 10,000 .16% Juan M. Rivera-Gonzalez -- -- Rafael Otero -- -- All executive officers of EMC and the Company and directors of EMC, as a group (9 persons) 1,986,896 31.32% Other Unitholders HDA Management Corporation Doral Building 7th floor 650 Munoz Rivera Avenue, Hato Rey, PR 00918 1,205,245 19.00% Wilson Family Limited Partnership (3) 222 Smallwood Village Center St. Charles, Maryland 20602 1,685,465 26.57% Wilson Securities Corporation 222 Smallwood Village Center St. Charles, Maryland 20602 586,102 9.24% - ------------------------------------------------------------------------------ (1) The beneficial ownership of Units is determined on the basis of Units owned by executive officers and directors of EMC or to be issued to an EMC executive officer under options which are exercisable within the next 60 days. (2) Includes 1,685,465 Units (26.57%) owned by the Wilson Family Limited Partnership that are attributable to Barbara A. Wilson, as general partner, and 15,289 Units (.24%) owed by her husband. Does not include 518,382 Units (8.17%) held by the children of Barbara A. Wilson. (3) These Units are reflected as beneficially owned by Barbara A. Wilson. See Note (2) above. (PAGE) ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Common Officers and Directors The Company is managed by EMC, which was originally a wholly owned subsidiary of IGC until the EMC stock was sold to IBC effective December 31, 1996. Donald G. Blakem%w, President of EMC and the Company and a director of EMC, serves as a director of IGMC, IGC's managing general partner. Barbara A. Wilson, a Director and Secretary of EMC, is an officer and director of IBC. See "Management of the Company -- Directors and Executive Officers of the Company and EMC." IGC Loans to the Company During 1995 and 1996 IGC made loans to the Company. As of December 31, 1996, unpaid loans and accrued interest and unpaid amounts owed for services under the Support Agreement amounted to $415,883. Administrative Support Services IGC and IGP provided substantially all of the administrative support services to EMC and the Company through June, 1996 pursuant to a three year Support Agreement effective as of February 6, 1995, and they continue to provide limited administrative support and office space pursuant to the Support Agreement. During 1996 the Company incurred $171,981 for these services. Control Transfer Agreement and Reservation of Units for Issuance to IGC IBC, IGC, IGP, HDA, EMC and the Company entered into a Control Transfer Agreement, effective as of December 31, 1996, with respect to the following matters: 1. IGC sold its interest in EMC, a wholly-owned subsidiary, to IBC. 2. IBC will use its best efforts to obtain approval of the Nasdaq Stock Market to the continued listing of the Company's Units following the substitution of IBC for IGC as a general partner and, following such approval, IGC will transfer its general partnership interest in the Company to IBC. 3. The Company agreed to grant Replacement Awards to five employees transferred from IGP to EMC. The number of Units that the Company had agreed to make available to IGC in connection with the Distribution was reduced from 100,000 to 50,000 Units and IGC transferred 75,000 IGC Units to the Company to fund the Company's obligations under the Replacement Awards (See Item 12-- Stock Options and Stock Appreciation Rights). 20,000 of the IGC units are allocated to the Drew Option. Upon exercise of any portion of the Drew Option, the Company is required to deliver to IGC the exercise price that it receives. Upon lapse of any portion of the Drew Option, the Company is required to return the unused portion of the 20,000 IGC Units to IGC. 4. IGP assigned its interest in the HDA Management Agreement to EMC effective August 16, 1996. (PAGE) 5. IBC agreed to provide certain accounting services to the Company commencing in the third quarter of 1996. Fees in 1996 were $5,000 during the third quarter and $1,000 per month thereafter. 6. Two EMC officers who were IGP employees until August 16, 1996 continue to provide certain administrative, management and tax services to IGC and IGP and one serves as a director of IGMC without compensation. IGC and IGP agreed to reimburse EMC for the percentage of the employees' time spent on matters of IGC, IGC and IGMC. Reimbursements in 1996 were $59,542. 7. IBC irrevocably assigned to IGC all rights to any distributions received by EMC from the Company in respect of EMC's general partnership interest in the Company to the extent that such distributions and other cash receipts of EMC exceed EMC's expenses incurred in the ordinary course of business in its capacity as managing general partner of the Company. HDA Management Agreement IGP provided management services to HDA pursuant to the HDA Management Agreement until August 16, 1996 when the agreement was assigned to EMC. The Agreement has a term of 15 years ending in December 2004. Pursuant to this agreement, HDA pays an annual management fee of $250,000, adjusted annually after 1993 by the percentage increase in CPI over the prior year. Fees paid in 1996 pursuant to this agreement were $270,692. ECOC Consulting Agreement Pursuant to a consulting agreement between ECOC and IGP which was assigned by IGP to EMC on April 22, 1996 (the "Consulting Agreement"), ECOC retained as executive management three racing consultants previously employed by IGP until April 22, 1996 when they became employees of EMC. IGP also assigned to EMC the employment agreements of Donald Drew and Juan M. Rivera. Pursuant to the El Comandante Lease, ECOC is required to retain the services of the three consultants under the Consulting Agreement. Except for $25,000 of the salary plus related fringe benefits of Mr. Rivera which were paid by the Company, pursuant to the Consulting Agreement ECOC reimbursed all of IGP's and EMC's payroll, fringe benefits and out-of-pocket disbursements with respect to the employment of the consultants in 1996. Fees incurred in 1996 pursuant to the Consulting Agreement were $894,162, of which $406,000 was paid to IGP and $488,062 to EMC. Pursuant to an employment agreement which expires December 31, 1997, one of the consultants, Donald Drew, is entitled to receive compensation, up to a maximum of $500,000, from HDA in connection with certain sales of equity interests in HDA or a sale of El Comandante. As a result of the issuance of a 15% interest in HDA to HDAMC in connection with the Private Offering, Mr. Drew received $75,000 from HDA in 1994. HDA and IGP Guarantees of ECOC Agreements With Supra In 1993, ECOC, HDA and Supra entered into a series of agreements incident to the planned reorganization of ECOC as a Puerto Rico nonstock corporation (collectively the "Supra Agreements"). The Supra Agreements provide for ECOC to pay accrued interest and principal on an outstanding note payable to Supra in the principal amount of $200,000, to purchase ECOC stock owned by Supra for $1,000,000, and to pay Supra $200,000 for past services rendered by Supra's officers in connection with management of ECOC. In December 1993 IGP purchased from Supra an 80% interest in the $200,000 note payable. In addition, ECOC and Ruben Velez Lebron, the President and majority owner of (PAGE) Supra and former President of ECOC, entered into a Noncompetition Agreement prohibiting Mr. Velez from investing or participating in horse racing operations anywhere in the Caribbean for a period of three years following the ECOC reorganization. The Noncompetition Agreement provides for payment to Mr. Velez of $750,000. ECOC also agreed to pay Mr. Velez $300,000 in compensation for past services. Payment of these obligations is to be made quarterly out of Excess Cash Flow of ECOC as defined in the Supra Agreements. Pursuant to the Supra Agreements, until these obligations are paid in full, HDA and ECOC may not make certain amendments to the El Comandante Lease without Supra's consent. In the event of termination of the El Comandante Lease, HDA will be required to assume up to $1.9 million of ECOC's obligations under the Supra Agreements and agreements with Mr. Velez. In addition, IGP has guaranteed payment of any ECOC's obligations to Supra and Mr. Velez that are not subject to the guarantee of HDA. (PAGE) ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K Index to Financial Statements. (i) Financial Statements (included in Item 8) Equus Gaming Company L.P. Report of Independent Public Accountants Consolidated Statements of Income (Loss) for the three years ended December 31, 1996 Consolidated Balance Sheets as of December 31, 1996 and 1995 Consolidated Statements of Changes in Partners' Equity (Deficit) for the three years ended December 31, 1996 Consolidated Statements of Cash Flows for the three years ended December 31, 1996 Notes to Consolidated Financial Statements El Comandante Operating Company, Inc. Report of Independent Public Accountants Statements of Revenues and Expenses for the three years ended December 31, 1996 Statements of Net Assets (Liabilities) as of December 31, 1996 and 1995 Statements of Changes in Net Assets (Liabilities) for the three years ended December 31, 1996 Statements of Cash Flows for the three years ended December 31, 1996 Notes to Financial Statements (ii) Financial Statements Schedules (included in Item 8) El Comandante Operating Company, Inc. Schedule II - Allowance for Doubtful Accounts Receivable (PAGE) Exhibits. Exhibit Number Exhibit Description Reference - ----------------------------------------------------------------------------- 3.1 First Amended and Restated Limited Exhibit 3.1 to Registration Partnership Agreement of Equus Statement on Form S-11 Gaming Company L.P. (the "Company") No. 33-90982 of the Company ("Second Form S-11") 3.2 Certificate of Limited Partnership Exhibit 3.1 to Registration of the Company Statement on Form S-11 No. 33-82750 of the Company ("Form S-11") 3.3 First Amendment to Certificate of Exhibit 3.2 to Form S-11 Limited Partnership of the Company 3.5 Second Amendment to Certificate of Exhibit 3.3 to Form S-11 Limited Partnership of the Company 3.5 Third Amendment to Certificate of Exhibit 3.5 to Form S-11 Limited Partnership of the Company 5.1 Form of Unit Certificate Exhibit 5.1 to Form S-11 10.1 Sixth Amended and Restated Exhibit 2.2. to Current Partnership Agreement of Housing Report on Form 8-K of Development Associates S.E. ("HDA") March 23, 1995 ("Form 8-K") 10.2 Indenture dated December 15, 1993, Exhibit 5.1 to Registration among El Comandante Capital Corp. Statement on Form S-5 ("ECCC"), as Issuer, Banco Popular No. 33-75285 of HDA, de Puerto Rico as Trustee ("Banco ECCC and El Comandante Popular") and HDA as Guarantor Operating Company, Inc. (the "Indenture") ("ECOC") ("Form S-5") 10.3 First Supplemental Indenture dated Exhibit 10.27 to Form S-11 December 22, 1994 to the Indenture 10.4 Second Supplemental Indenture dated Exhibit 10.28 to Form S-11 December 22, 1994 to the Indenture 10.5 Warrant Agreement dated December 15, Exhibit 10.3 to Form S-4 1993, among HDA Management Corporation ("HDAMC"), HDA and Banco Popular as Warrant Agent 10.6 HDA Guaranty of certain obligations Exhibit 10.5 to Form S-4 Ruben Velez Lebron and Supra & Company, S.E. ("Supra")dated December 14, 1993 10.7 Amended and Restated Management Exhibit 10.6 to Form S-4 Agreement dated December 15, 1993, between Interstate General Properties Limited Partnership S.E. ("IGP") and HDA (PAGE) 10.8 Amended and Restated Lease Agreement Exhibit 10.8 to Form S-4 dated December 15, 1993, between HDA and ECOC 10.9 Rent Escrow Agreement dated December Exhibit 10.10 to Form S-4 15, 1993, between HDA as Landlord, ECOC as Tenant and Banco Popular as Escrow Agent 10.10 Collateral Assignment of HDA's Exhibit 10.11 to Form S-4 Interests under the Lease dated December 15, 1993, between HDA and Banco Popular 10.11 Stock Pledge Agreement dated Exhibit 10.12 to Form S-4 December 15, 1993, between HDA and Banco Popular 10.12 Pledge Agreement (Mortgage Notes) Exhibit 10.13 to Form S-4 dated December 15, 1993 between HDA and Banco Popular 10.13 Chattel Mortgage dated December Exhibit 10.15 to Form S-4 15, 1993, between ECOC and HDA 10.14 Assignment Agreement (General Exhibit 10.15 to Form S-4 Intangibles) dated December 15, 1993, between ECOC and HDA 10.15 Assignment Agreement (General Exhibit 10.16 to Form S-4 Intangibles) dated December 15, 1993, between HDA and Banco Popular 10.16 Pledge Agreement between ECCC and Exhibit 10.17 to Form S-4 Banco Popular 10.17 Mortgage Note of $52,000,000 of HDA Exhibit 10.18 to Form S-4 10.18 Mortgage Note of $26,000,000 of HDA Exhibit 10.19 to Form S-4 10.19 Deed of Modification and Extension Exhibit 10.20 to Form S-4 of First Mortgage to Secure Additional Mortgage Note, No. 43, dated December 15, 1993 10.20 HDA Note in the amount of Exhibit 10.21 to Form S-4 $68,000,000 to ECCC dated December 15, 1993 10.21 Master Support and Services Exhibit 10.20 to Form S-11 Agreement dated December 9, 1994, between Interstate General Company L.P. ("IGC") and the Company 10.22 Consulting Agreement dated December Exhibit 10.21 to Form S-11 15, 1993 between ECOC and IGP 10.23 Closing Agreement dated November 16, Exhibit 10.26 to Form S-11 1994, among Multi-Media Television, (PAGE) Inc., JEM Communications, Inc. Tele 38, Inc., S & E Network, Inc. and HDA 10.25 Conversion Agreement dated February Exhibit 2.3 to Form 8-K 3, 1995, between the Company and IGP (the "Conversion Agreement") 10.25 First Amendment to the Conversion Exhibit 2.3 to Form 8-K Agreement dated March 6, 1995 10.26 Lease Agreement dated September 28, Exhibit 10.21 of the Annual 1994 between the Dominican Republic Report on Form 10-K of and Galapagos, S.A.("Galapagos") HDA for the year ended December 31, 1994 ("1994 HDA 10-K") 10.27 Founders' Agreement among Exhibit 10.22 to 1994 Galapagos, HDA and Minority HDA 10-K Stockholders 10.28 Management Agreement dated September Exhibit 10.23 to 1994 28, 1994, between Galapagos and HDA 10-K ECOC 10.29 Broadcasting, Marketing and Exhibit 10.25 to 1994 Production Agreement dated March 30, HDA 10-K 1995 between ECOC and S&E 10.30 Amended and Restated Distribution Exhibit 2.1 to Form S-11 Agreement dated November 22, 1994 between the Company and IGC (the "Distribution Agreement") 10.31 First Amendment to the Distribution Exhibit 10.31 to Second Agreement dated February 3, 1995 Form S-11 10.32 Registration Rights Agreement dated Exhibit 10.32 to Second February 6, 1995 between the Company Form S-11 and IGC 10.33 Amended and Restated Registration Exhibit 10.29 to Form S-11 Rights Agreement with respect to the Warrants dated December 12, 1994 by and among HDA, HDAMC, the Company and Oppenheimer & Co., Inc. and The Argosy Securities Group L.P. 10.34 Third Supplemental Indenture dated Exhibit 10.34 to Annual February 27, 1996 to the Indenture Report on Form 10-K of the Company for the year ended December 31, 1995 ("1995 10-K") 10.35 Fourth Supplemental Indenture dated Exhibit 10.35 to 1995 10-K February 27, 1996 to the Indenture 10.36 First Amendment to Amended and Exhibit 10.36 to 1995 10-K (PAGE) Restated Lease Agreement dated March 28, 1996 10.37 Seventh Amended and Restated Exhibit 10.37 to 1995 10-K Partnership Agreement of HDA dated February 7, 1996 10.38 Stock Purchase Agreement by and Exhibit 10.38 to 1995 10-K among S&E Network Inc. ("S&E"), HDA and Paxson Communications of San Juan, Inc. ("Paxson") dated January 31, 1996 10.39 Time Brokerage Agreement by and Exhibit 10.39 to 1995 10-K between Paxson and S&E dated January 31, 1996 10.40 Escrow Agreement dated January 31, Exhibit 10.40 to 1995 10-K 1996 by and among Paxson, S&E and First Union National Bank of Florida 10.41 Guaranty by Paxson in favor of S&E Exhibit 10.41 to 1995 10-K and HDA dated January 31, 1996 10.42 Broadcast Agreement between ECOC and Exhibit 10.42 to 1995 10-K S&E dated February 1, 1996 10.43 First Amendment to the Amended and Exhibit 10.43 to AnnualReport Restated Registration Rights on Form 10-K/A of the Company Agreement dated August 15, 1995 for the year ended December 31, 1995 ("1995 10-K/A") 10.44 Assignment and Assumption of Exhibit 10.44 to 1995 10-K/A Consulting Agreement dated April 22, 1996 10.45 Assignment and Assumption of Exhibit 10.1 to Quarterly Employment Agreements dated Report on Form 10-Q of the April 22, 1996 Company for the quarter ended June 30, 1996 10.46 Stock Purchase Agreement by and Exhibit 10.1 to Quarterly between HDA and Paxson dated Report on Form 10-Q of the November 12, 1996 Company for the quarter ended September 30, 1996 10.47 Employment Agreement between IGP Filed herewith and Donald Drew dated December 14, 1993 10.48 Employment Agreement between IGP Filed herewith and Juan Manuel Rivera dated June 1, 1995 10.49 Closing Agreement by and among S&E, Filed herewith Paxson, Equus and HDA dated January 21, 1997 (PAGE) 10.50 Control Transfer Agreement by and Filed herewith among IBC, IGC, IGP, HDA, EMC and the Company dated December 31, 1996 10.51 Amendment to Control Transfer Filed herewith Agreement by and among IBC, IGC, IGP, HDA, EMC and the Company dated March 25, 1997 10.52 Broadcast Agreement among S&E, Filed herewith HDA and Paxson dated January 21, 1997 10.53 Second Amendment to Amended and Filed herewith Restated Lease Agreement dated March 31, 1997 21 Subsidiaries of the Company Exhibit 22 of the Annual Report on Form 10-K of the Company for the year ended December 31, 1994 Reports on Form 8-K. None (PAGE) (PAGE) SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Equus Gaming Company L.P. ----------------------------------- (Registrant) By: Equus Management Company Managing General Partner March 31, 1997 /s/ Donald G. Blakeman - ----------------- ------------------------------ Date Donald G. Blakeman President Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date Title Signature - ----------------- ----------------------- -------------------------- March 31, 1997 President and Director /s/ Donald G. Blakeman - ----------------- -------------------------- Donald G. Blakeman March 31, 1997 Vice President and /s/ Gretchen Gronau - ----------------- Chief Financial Officer -------------------------- Gretchen Gronau March 31, 1997 Director /s/ Donald J. Kevane - ----------------- -------------------------- Donald J. Kevane March 31, 1997 Director /s/ Alberto M. Paracchini - ----------------- -------------------------- Alberto M. Paracchini March 31, 1997 Director /s/ Barbara A. Wilson - ----------------- -------------------------- Barbara A. Wilson March 31, 1997 Director /s/ Kevin Wilson - ----------------- -------------------------- Kevin Wilson EX-10 2 (PAGE) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered this 14th day of December, 1993 between INTERSTATE GENERAL PROPERTIES LIMITED PARTNERSHIP S.E., a Maryland partnership (the "Company") and MR. DONALD DREW, a resident of San Juan, Puerto Rico (the "Executive"). Background The Company and Executive desire to enter into this Agreement to evidence the employment of Executive as Senior Vice President of the Company, and to set forth the respective rights and duties hereto. This Agreement also sets forth certain covenants and agreements by Executive regarding post-employment competition with the Company, and the disclosure of confidential information and trade secrets of the Company. NOW THEREFORE, the parties agree as follows: 1. EMPLOYMENT. (a) The Company hereby employs Executive as Senior Vice President and Executive hereby accepts such employment on the terms and conditions set forth herein. Subject to the general supervision and authority of the managing general partner of the Company, Executive will perform such duties and exercise such authority as is customarily performed and exercised by such officer of a substantial business enterprise, in good faith and in accordance with standards of reasonable commercial judgment. (b) At all times during the term hereof, Executive will devote his best efforts to his employment hereunder. Executive's major area of responsibility during the term hereof is to serve as the chief executive consultant to El Comandante Operating Company ("ECOC"), the operator of the El Comandante Race Track in Canovanas, Puerto Rico (the "Race Track), under a consulting agreement between the Company and ECOC, and to provide, senior management services in connection with gaming industry business conducted by the Company or its affiliates. (c) Except for travel as required in connection with such duties, Executive's duties will be performed in Puerto Rico during the term of this Agreement. Executive will devote his full working time and attention to the business of the Company (including at least eighty-five percent of his working time in performing services for ECOC) and his services hereunder will be at all times on behalf of and for the benefit of the Company. (PAGE) (d) Executive shall not, without the prior written consent of the Company, directly or indirectly, during the term of his employment: (i) other than in the performance of duties naturally inherent to the business of the Company, its affiliates or ECOC and in furtherance thereof, devote any appreciable amount of his business time, energies, and attention to the business of any other person or firm, whether for compensation or otherwise; provided, however, that Executive may accept directorships approved by the managing general partner of the Company, which approval shall not be unreasonable withheld, and invest his assets in such form and manner as will not violate subparagraph (ii) below; or (ii) engage in any activity competitive with or adverse to the business or welfare of the Company its affiliates or ECOC whether alone, as a partner, or an officer, director, employee, or shareholder of any other corporation or otherwise, directly or indirectly. Notwithstanding anything contained in this paragraph 1 to the contrary, the ownership of not more than five percent (5%) of the stock or other interest of any publicly-traded corporation or other entity shall not be deemed violative of this subparagraph (ii). (e) The agreement between Housing Development Associates S.E. ("HDA") and Executive, attached hereto and marked "Attachment A", in no way violates this Agreement. 2. TERM. (a) This Agreement shall begin as of January 1, 1993 ("the Commencement Date") and shall remain in effect through December 31, 1997 (the "Termination Date"). (b) This Agreement may be extended by the Company and the Executive for a mutually agreeable period, subject to the concurrence of HDA, the owner of the Race Track, or its successor. 3. COMPENSATION. (a) For all services which Executive may render to the Company, the Company agrees to pay the Executive, and Executive agrees to accept, a salary (the "Annual Salary") of Three Hundred Forty Thousand Dollars ($340,000) per year, and remain at that level during the term of this Agreement. The Annual Salary for each calendar year or portion thereof during the term hereof (PAGE) shall be paid to Executive on the regularly-recurring pay periods established by the Company, but in no event in less than equal semi-monthly installments, less required payroll deductions. (b) In addition to the Annual Salary, the Company shall provide Executive with a Company car suitable to his position, and will pay the cost of his membership and dues at the Dorado Beach Country Club. 4. VACATION AND OTHER BENEFITS. (a) Executive shall be entitled to four weeks vacation each year, as well as other employment benefits, including medical, dental and hospitalization and life insurance, which benefits will not be less than the benefits and coverage provided by the Company to other Senior Vice Presidents. (b) The Executive will participate in the Company's pension plan. (c) The Company will pay to Executive, on an annual basis, within one hundred twenty (120) days after the closing of books for the corresponding fiscal year, a Bonus equal to (a) 3% of Basic Rent (as defined in the Lease Agreement between ECOC and HDA) payable by ECOC for the calendar year, less (b) $340,000 and less (c) any amounts paid or payable by the Company for such calendar year pursuant to the Company's profit sharing plan. Except as otherwise provided herein, nothing herein is intended or shall be construed to require the Company to institute or continue in effect any particular plan or benefit. Expenditures for the purposes of satisfying the obligations set forth in this paragraph are to be borne by the Company to the extent so provided by any plan described herein or so determined with respect to any benefit described herein. Such expenditures in the aggregate, shall, in all events, be reasonable. 5. EXPENSES. The Company or ECOC shall pay all reasonable expenses incurred by Executive in the performance of his responsibilities and duties hereunder, all in accordance with the respective policies of the Company or ECOC in effect from time to time during the term hereof. Executive shall submit periodic statements to the Company or ECOC of all expenses so incurred. (PAGE) 6. NON-COMPETITION. Executive expressly covenants and agrees that, during the term of his employment hereunder and for a period of two (2) years thereafter, he will not, directly or indirectly either himself of for any other person, partnership, corporation, company or entity, participate (as defined below) in any enterprise involved in the horse racing or gaming industries in Puerto Rico, Virginia or any territory where the Company or any affiliate for whom Executive has performed services is engaged in the gaming business (collectively "Prohibited Activities"). For purposes of this agreement, the term "participate" means acting as a consultant or advisor to, or acquiring any direct or indirect interest in any enterprises, whether as a stockholder, partner, officer, director, employee or otherwise (other than by ownership of less than five percent of the stock of a publicly-held corporation). Executive hereby acknowledges and agrees that the injury and damage to the Company arising out of his participation in Prohibited Activities will be immediate and irrevocable. Accordingly, Executive hereby agrees that the restrictions upon him under this paragraph 6 are reasonable in scope, duration, and geographic territory. 7. NON-DISCLOSURE. (a) Executive specifically acknowledges that, in his fiduciary capacity hereunder, he will become aware of: (i) valuable and sensitive information relative to the business of ECOC, the Company, its affiliates, and their respective clients, including technical information, designs, systems, processes, procedures, and improvements, whether patentable or not, which is of value to the Company (Trade Secrets"), and (ii) proprietary and confidential data or information that is valuable to ECOC, the Company, its affiliates, and their respective clients, and that is unknown to the general public, including such information as financial, marketing, and distribution plans and projections, and the services supplied to same. (b) Executive agrees that, except as required and authorized by the Company in the conduct of its business or by supoena, or other court or governmental order, during his employment with the Company and for a period of two (2) years thereafter, he will not, in any manner, directly or indirectly, divulge, disclose, or (PAGE) communicate to any competitor or any other person any Confidential Information. Executive understands and acknowledges that all such information is confidential in nature and that it is essential to the success of the Company that such Confidential Information be kept secret and not revealed to any Competitor or other person whatsoever. (c) Executive agrees that all Trade Secrets of the Company shall remain the exclusive property of the Company, and Executive expressly covenants that such Trade Secrets shall be kept secret and shall not be disclosed by him to any Competitor of the Company or any other person or entity. 8. NON-SOLICITATION. During the period of his employment with the Company and for a period of two (2) years after the termination thereof for any reason whatsoever, Executive shall not, directly or indirectly, solicit, divert, induce, or take away (a) any employees of the Company or (b) any business or business opportunity of ECOC, the Company or any other affiliate of which be became aware in connection with his employment hereunder. 9. REMEDIES, DAMAGES, INJUNCTIONS, AND SPECIFIC PERFORMANCE. (a) The parties agree that any of the covenants, agreements, and services to be rendered by Executive hereunder shall survive any termination of this Agreement and are special, unique, and of an extraordinary character. In the event of the breach or threatened breach by Executive of any term or provision hereof to be performed by him hereunder, including without limitation paragraphs 6., 7. or 8., the Company may institute and prosecute proceedings in any court of competent jurisdiction, at law, or in equity, to (i) obtain damages for any breach of this Agreement, (ii) order the specific performance hereof by Executive, (iii) enjoin Executive from breaching such provision(s), and (iv) obtain any other remedies available at law or in equity. (b) If any legal proceeding is initiated by the Company to enforce any of the provisions of paragraph 6, 7 or 8, the period of time set forth in the provision(s) under which such proceedings arose, during which Executive is prohibited from taking certain actions or from engaging in certain activities, shall be extended by the period of time beginning with the date any such action or (PAGE) proceeding is dismissed, with or without prejudice. If the Company seeks to enjoin Executive from breaching any provision(s), Executive hereby waives the defense that the Company has, or will then have, an adequate remedy at law. 10. ILLNESS, INCAPACITY, OR DEATH DURING EMPLOYMENT. (a) If, by reason of illness or incapacity, Executive is unable to perform his services or discharge his duties hereunder for ninety (90) or more consecutive days, then, upon sixty (60) days prior notice, the Company may terminate the employment of Executive. In the event of such termination, Executive shall have the right to assume payment obligations for and continue coverage with any and all insurance policies or health protection plans previously afforded by the Company, to the extent permitted under the terms of any such policies or plan. (b) In the event of Executive's death, all obligations of the Company under this Agreement shall terminate, except that Executive's legal heirs shall be paid all salaries and other accrued benefits and shall receive reimbursement of all expenses reasonably incurred by Executive in performing his responsibilities and duties for the Company prior to and including such date. 11. TERMINATION OF EMPLOYMENT (a) The employment of Executive under this Agreement and the term hereof may be terminated by the Company by reason of Executive's: (i) failure to perform his responsibilities in accordance with the standards described in paragraph 1(a) and (b), or (ii) negligence or willful misconduct of Executive, or (iii) commission of a fraud or felony during the term of this Agreement, or any extension, renewal, modification, or amendment of same; or (iv) breach of any material provision hereof. (b) If HDA sells the Race Track, this Agreement will be deemed terminated on sale closing date. (c) In the event that the employment of Executive under this Agreement is terminated by the Company pursuant to paragraph 10, 11(a) or 11(b) or if Executive's employment under this Agreement is voluntarily terminated by the parties for any reason whatsoever, then, in any such event, Executive shall forfeit all (PAGE) rights Executive might otherwise have to any Annual Salary, or incentive compensation past the effective date of termination. 12. SEPARABILITY AND REFORMATION. All provisions of this Agreement shall be considered as separate terms and conditions and in the event any one shall be held illegal, invalid or unenforceable, all other provisions shall be enforced as if the illegal, invalid, or unenforceable provision were not a part of this Agreement. If the scope of any provision contained in this Agreement is too broad to permit enforcement of such provision to its full extent, then such provision shall be enforced to the maximum extent permitted by law, and the Executive hereby consents that such scope may be modified accordingly in any proceeding brought to enforce such provision. 13. ASSIGNMENT; BINDING AGREEMENT. The rights and obligations of the Company shall inure to the benefit of and shall be binding upon the successors and assigns of the Company. This Agreement may be assigned by the Company to any entity that will employ Executive in the capacity described in paragraph 1 hereof and that will assume the obligations of the Company hereunder, and such assignment shall be binding upon Executive. 14. NOTICES. Any notice to be given to the Company shall be addressed to such party at the address of its principal place of business, and any notice to be given to Executive shall be addressed to him at his home address last shown on the records of the Company, or to such other address as a party may hereafter designate in writing to the other. Any such notice have been duly given or hand delivered or enclosed in a properly sealed envelope, addressed as aforesaid, postage prepaid, registered or certified mail, return receipt requested, and deposited in a post office or branch post office regularly maintained by the United States Government. 15. WAIVER. Either party's failure to enforce any provision hereof shall not in any way be construed as a waiver of any such provision or provisions as to the future violation thereof, nor prevent that party from thereafter enforcing any other provision of this Agreement. The rights granted the parties herein are cumulative, and the waiver by a party of any (PAGE) single remedy shall not constitute a waiver of such party's right to assert all other remedies available to him or it under the circumstances. 15. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the Commonwealth of Puerto Rico and the parties bind themselves to submit to the jurisdiction of the courts of the Commonwealth of Puerto Rico for the resolution of any and all disputes concerning this Agreement. 17. CAPTIONS AND PARAGRAPH HEADING. Captions and paragraph headings used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. 18. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be an original but all of which, when taken together, shall constitute one and the same instrument. 19. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the entire Agreement of the parties with respect to the subject matter hereof and may not be changed orally, but only by an agreement in writing signed by the party against whom the enforcement of any waiver, change modification, extension, or discharge is sought. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written. INTERSTATE GENERAL PROPERTIES DONALD DREW LIMITED PARTNERSHIP S.E. By: /s/ Donald G. Blakeman Donald Drew ------------------------- ----------------------- Donald G. Blakeman Donald Drew Executive Vice President (PAGE) Attachment A December 14, 1993 Mr. Donald Drew 1485 Ashford Avenue Apt. 1703 N Condado, Puerto Rico 00907 Dear Don: This will serve to confirm our agreement regarding the terms under which you will be compensated by Housing Development Associates S.E. (hereinafter "HDA") for your participation in the sale or any of the other contemplated transactions described below involving El Comandante Race Track (hereinafter "the Race Track") during the term of your employment agreement dated December 14, 1993, ("Employment Agreement") with Interstate General Properties Limited Partnership S.E., which expires December 31, 1997 unless terminated earlier pursuant to the terms of the Employment Agreement: If the Race Track is sold, you will receive $500,000. If a portion of HDA's interest is sold in connection with a refinancing or otherwise, you will receive a prorata portion of $500,000 (i.e. if 25% sold, you receive $125,000). If the balance of HDA's interest or the Race Track is later sold, you will be paid an additional portion of the $500,000. If HDA becomes a publicly traded partnership or corporation and sells interests to third party investors, you will receive a prorata share of the $500,000 (i.e. if 25% sold to public, you receive $125,000). If you so desire, you my take the amount received (i.e. $125,000) or any portion thereof and invest it at the time of the public offering in the publicly traded partnership or corporation thus created at the public issue price, and HDA will reimburse you for 25% of the public issue price. The total compensation paid pursuant to this paragraph and the preceding paragraph will never exceed $500,000 in the aggregate. In addition, HDA will give you options to purchase units or shares equal to the number of shares you purchase pursuant to the above paragraph, at the original issue price to third parties. The options will contain the same terms and conditions as any other options issued by HDA. If no other options are issued by HDA, the vesting provisions commencing on the date the options are granted and termination terms will be on the same basis as set forth in the IGC Unit Option Plan, as amended and restated as of December 14, 1992. (PAGE) Attachment A Mr. Donald Drew December 14, 1993 Page - 2- This letter agreement shall automatically terminate upon the termination of the Employment Agreement. We trust the foregoing reflects our complete agreement on this matter. If you concur, please sign the copy of this letter which is enclosed for this purpose. Very truly yours, HOUSING DEVELOPMENT ASSOCIATES S.E. By: Interstate General Properties Limited Partnership S.E., its Managing Partner By: Interstate General Company L.P., its General Partner By: Interstate General Management Corporation, its Managing General Partner By /s/ Donald G. Blakeman ------------------------- Donald G. Blakeman Executive Vice President AGREED: /s/ Donald Drew December 13, 1993 - -------------------- ---------------------- Donald Drew Date EX-10 3 (PAGE) EMPLOYMENT AGREEMENT AGREEMENT dated as of June 1, 1995, by and between Interstate General Properties Limited Partnership S.E., a Maryland Limited Partnership (the "Company") and Juan Manuel Rivera (the "Executive"), a resident of Puerto Rico. Whereas, pursuant to a consulting agreement dated December 15, 1993 (the "Consulting Agreement") the Company provides certain consulting services to El Comandante Operating Company Inc. ("ECOC"); and Whereas, ECOC is the lessee and operator of the El Comandante Race Track in Canovanas, Puerto Rico ("El Comandante") pursuant to a lease agreement dated December 15, 1993 with Housing Development Associates S.E. ("HDA"); and Whereas, the Company is a managing partner of HDA and serves as HDA's management agent pursuant to a Management Agreement dated December 15, 1993; and Whereas, Interstate General Company L.P. ("IGC") owns 100% of the partnership interests of the Company; and Whereas, Equus Gaming Company L.P. ("Equus") owns an 82% profits interest in HDA; and Whereas, IGC provides certain administrative and support services to Equus pursuant to a Master Support and Services Agreement dated December 9, 1994 (the "Support Agreement"); and Whereas, Executive is currently an employee of the Company and officer of IGC and since December 15, 1993 has provided services to ECOC pursuant to the Consulting Agreement; and Whereas, the Company and IGC wish to expand Executive's responsibilities to include providing certain services to Equus pursuant to the Support Agreement; IN CONSIDERATION OF THE PREMISES and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: (PAGE) 1. Employment. The Company shall employ the Executive and the Executive hereby agrees to serve the Company, on the terms and conditions set forth herein. The Executive represents and warrants that neither the execution by him of this Agreement nor the performance by him of his duties and obligations hereunder will violate any agreement to which he is a party or by which he is bound. 2. Term. The Company shall employ the Executive and the terms and conditions of this Agreement shall extend for an initial term commencing on June 1, 1995 and expiring on May 31, 1998, and thereafter for successive one-year terms provided, however, that either party may terminate this Agreement ninety (90) days after such party has delivered written notice to the other party of its intent so to terminate this Agreement. 3. Position and Duties. The Executive shall continue to serve as Senior Vice President of the Company and IGC and shall serve as Executive Vice President of Equus. The Executive shall have such authority and responsibilities as shall be set forth in Exhibit A attached hereto captioned "Job Description and Delegation of Authority" as the same may be amended from time to time by the President or the Board of Directors (the "Board") of the Managing General Partner of IGC. 4. Place of Performance. In connection with this employment by the Company, the Executive shall be based at ECOC's principal executive offices which, as of the date of this Agreement, are located in Canovanas, Puerto Rico. 5. Compensation. (a) Base Salary. The Executive shall receive a Base Salary commencing as of June 1, 1995 at the rate of $180,000 per year, payable in substantially equal semi-monthly installments. (b) Benefit Plans. The Executive shall be eligible to participate in such benefit plans as may be established from time to time by the Company on the same basis as comparable senior executive employees of the Company. Any discretionary benefits under such plans shall be at the full discretion and determination of the Board. (PAGE) (c) Expenses. During the term of his employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures presently in effect for the Company's senior executive officers) in connection with his services herein. The Executive shall account to the Company for such expenses in accordance with Company policy. (d) Vacations. The Executive shall be entitled to the number of paid vacation days determined by the Company for its senior executive officers, which shall in any event be no less than 4 weeks per year. The Executive shall also be entitled to all paid holidays given to the Company's senior executive officers. (e) Certain Specified Benefits. In addition to benefits to which the Executive is eligible under subsection (b) of this section, the Company shall provide for the Executive's business use a suitable automobile, together with payment of the cost of maintenance, insurance and operating expenses thereof, and the Executive shall be entitled to receive bonuses determined in accordance with the Bonus Plan set forth on Exhibit B attached hereto (collectively the "Specified Benefits"). 6. Withholding. Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive or his estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provisions for payment of taxes and withholdings as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold compensation have been satisfied. 7. Unauthorized Disclosure. During the period of his employment hereunder, and for a period of three (3) years thereafter, the Executive shall not, without the written consent of the Board or a person authorized by the Board, disclose to any person other than as required by law or court order, or other than to an authorized employee of the Company or its Affiliates, or to a person to whom disclosure is necessary or appropriate in connection with the performance by (PAGE) the Executive of his duties as an executive of the Company (e.g., disclosure to the Company's or its Affiliates' outside accountants or bankers of financial data properly requested by such persons and approved by an authorized officer of the Company), any confidential information obtained by him while in the employ of the Company with respect to any of ECOC's, Equus', HDA's, the Company's or any of their respective Affiliates' products, services, customers, suppliers, marketing techniques, methods or future plans; provided, however, that confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by the Executive) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Company. The Executive shall be allowed to disclose confidential information to his attorney solely for the purpose of ascertaining whether such information is confidential within the intent of this Agreement; provided, however, that the Executive (a) discloses to his attorney the provisions of this Section 7 and (b) agrees not to waive the attorney-client privilege with respect thereto. 8. Non-Competition. (a) While the Executive is employed by the Company hereunder, the Executive shall use his best efforts to make available to Equus business opportunities in the thoroughbred racing and gaming industry that come to his attention or to the attention of persons (other than natural persons) under his control. (b) While the Executive is employed by the Company hereunder and for a period of two (2) years thereafter (the "Non-Compete Period"), the Executive agrees that he shall not compete with ECOC, Equus, HDA, the Company or any of their respective Affiliates without the prior written consent of the Board. For purposes of this Agreement, the term "compete" shall mean (i) participating as a more than five (5%) percent stockholder, an officer, a director, an employee, a partner, an agent, a consultant, or in any other individual or representative capacity in any business entity engaged in the business of thoroughbred racing operations or management or legalized gaming in the Caribbean, Central America or South America during the Non-Compete Period; or (ii) employing or soliciting for employment any employees of ECOC, Equus, HDA, the Company or any of their respective Affiliates. (PAGE) (c) In the event the restrictions against engaging in a competitive activity contained in this Section 8 shall be determined by any court of competent jurisdiction to be unenforceable by reason of their extending for too great a period of time or over too great a geographical area or by reason of their being too extensive in any other respect, this Section 8 shall be interpreted to extend only over the maximum period of time for which it may be enforceable and over the maximum geographical area as to which it may be enforceable and to the maximum extent in all other respects as to which it may be enforceable, all as determined by such court in such action. (d) The Executive acknowledges that a breach of the restrictions against engaging in a competitive activity contained in this Section 8 will cause irreparable damage to the Company, Equus, HDA, or any of their respective Affiliates, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such breach will be inadequate. Accordingly, the Executive and the Company agree that if the Executive breaches the restrictions against engaging in a competitive activity contained in this Section 8, then the Company, Equus, HDA or any of their respective Affiliates shall be entitled to equitable relief, including but not limited to injunctive relief, without posting bond or other security. 9. Termination. Upon termination of the Executive's employment hereunder, all payment and benefit obligations of the Company hereunder shall immediately terminate except as follows: (a) In the event of a termination by the Executive, whether voluntarily or due to the Executive's death or disability, the Executive, or his estate, shall continue to receive his Base Salary and benefits (excluding the Specified Benefits) for which the Executive would remain eligible under the terms of the Company's benefit plans (collectively "Severance Compensation"), for a period commencing on the effective date of the Executive's termination determined by the Board (the "Termination Date") and ending six months following the Termination Date; (b) In the event of a Qualifying Termination (defined below) by the Company, the Executive shall receive Severance Compensation for a period commencing on the Termination Date and ending six months following the Termination Date; (PAGE) (c) For purposes of this Agreement, "Qualifying Termination" shall mean any termination of the Executive by the Company other than a termination approved by the Board arising from the Executive's (1) willful, reckless or negligent inattention to the welfare of the Company, (2) unethical conduct, (3) repeated disregard of the Company's written rules, policies and regulations, (4) conviction of a felony or other criminal offense relating to fraud or theft or (5) failure or refusal by the Executive to perform his obligations under this Agreement, including any lawful directive of the Board, Chairman of the Board or President relating to the business of the Company or its Affiliates. 10. Notices. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or facsimile transmission or when received by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: Interstate General Properties Limited Partnership 650 Munoz Rivera Avenue Doral Building, 7th Floor Hato Rey, Puerto Rico 00918 Attention: President, Managing Partner If to the Executive: Mr. Juan Manuel Rivera Palma Sola O-A-11 Garden Hills Guaynabo, PR 00966 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the transactions contemplated herein, and supersedes all prior oral or written agreements, commitments or understandings with respect to the matters provided for (PAGE) herein. 12. Headings. The recitals and section headings contained in this Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof. 13. Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Governing Law. This Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto, shall be governed by and construed in accordance with the laws of the State of Maryland (excluding the choice-of-law rules thereof). 15. Miscellaneous. Except as provided in Section 16 below, no provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or director as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party so chosen. 16. Assignment. Without consent of the Executive, the Company may assign the benefits and obligations under this Agreement to any Affiliate. Such assignment shall be binding upon the Executive and shall discharge the Company of its obligations hereunder. 17. Arbitration. (a) Any dispute or controversy arising between the Executive and the Company relating to this Agreement shall be submitted to private, binding arbitration, upon the written request of either the Executive or the Company, before a panel of three arbitrators, under the auspices of and in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). In the event of such dispute or controversy, the Company and the Executive shall independently and simultaneously select one arbitrator each, both of whom must have no past or present familial or business (PAGE) relationships with the parties and must possess expertise in the area of compensation of senior management employees. These two arbitrators shall jointly agree upon and select a third arbitrator who also possesses such credentials. These three arbitrators shall hear and decide the dispute or controversy by majority vote, and their decision and award shall be final and conclusive upon the parties, and their heirs, administrators, executors, successors, and assigns. The arbitrators shall have no power or authority to add to, subtract from, or otherwise modify the terms of this Agreement. Wherever the Commercial Arbitration Rules of the AAA conflict with the procedures set forth in this section, the terms of this section shall govern. The Executive and the Company agree that the arbitration must be initiated by personally delivering a statement of claim to the AAA and to the party against whom the claim is asserted no later than ninety (90) days after the basis of the claim becomes known, or reasonably should have been known or discovered, by the party asserting the claim. In the event arbitration is not initiated within such ninety (90) day period, such claim, dispute, or controversy shall be irrevocably time-barred. A judgment based upon such arbitration award may be entered in any court having jurisdiction thereof. (b) Notwithstanding the foregoing, any action brought by the Company seeking a temporary restraining order, temporary and/or permanent injunction, and/or a decree of specific performance of the terms of this Agreement may be brought in a court of competent jurisdiction without the obligation to proceed first to arbitration. (PAGE) IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. INTERSTATE GENERAL PROPERTIES LIMITED PARTNERSHIP, S.E. By: Interstate General Company, L.P., its Managing Partner By: Interstate General Management Corporation, its Management Partner By: /s/ Donald G. Blakeman -------------------------------- Name: Donald G. Blakeman Title: Executive Vice President JUAN MANUEL RIVERA /s/ Juan Manuel Rivera ----------------------------------- (PAGE) Exhibit B BONUS PLAN Subject to the prorations set forth below, the Executive shall be entitled to an annual bonus equal to .33 percent of the cumulative amount of Basic Rent payable by ECOC to HDA during 1995 and each year thereafter pursuant to that certain Amended and Restated Lease Agreement dated December 15, 1993. Such bonus shall be payable on or before April 30, 1996 and each year thereafter with respect to Basic Rent paid by ECOC during the preceding year. In the event Executive's employment or this Agreement is terminated prior to completion of any year, the bonus for such year shall be prorated based on the number of days elapsed in such year prior to the date of such termination. EX-10 4 (PAGE) CLOSING AGREEMENT THIS CLOSING AGREEMENT is entered into as of January 21, 1997, by and among S&E Network, Inc. ("S&E"), Paxson Communications of San Juan, Inc. ("Buyer"), Paxson Communications Corporation ("PCC"), Equus Gaming Company L.P. ("Equus") and Housing Development Associates S.E. ("HDA"). RECITALS A. The parties hereto are parties to a Stock Purchase Agreement dated as of November 12, 1996 as amended by that certain Amendment to Stock Purchase Agreement of even date herewith (the "Purchase Agreement") pursuant to which Buyer has agreed to purchase from HDA on the date hereof fifty percent (50%) of the issued and outstanding shares of the common stock of S&E on the terms and conditions set forth therein. B. The Purchase Agreement provides for HDA and S&E to enter into a certain form of Broadcast Agreement (the "Broadcast Agreement") which permits HDA to assign to El Comandante Operating Company, Inc. ("ECOC") HDA's rights to televise a certain horse racing program produced by ECOC. C. Under section 6.8 of the Purchase Agreement, HDA is required to cause ECOC to terminate that certain Broadcast Agreement dated as of February 1, 1996 by and between ECOC and S&E (the "Existing Broadcast Agreement") and ECOC, to date, has declined to terminate the Existing Broadcast Agreement (the "ECOC Refusal"). D. The Puerto Rico Racing Board (the "Racing Board") has issued an order dated as of December 30, 1996 and attached hereto as Exhibit 1 (the "Racing Board Order") by which the Racing Board purports to consent to the sale of the S&E shares to Buyer subject to certain conditions including that certain amendments be made to the Broadcast Agreement. E. HDA has advised Buyer that in the opinion of HDA's Puerto Rico counsel the Racing Board Order is invalid and unenforceable; however, delaying consummation of the transactions contemplated by the Purchase Agreement (the "Closing") while challenging the Racing Board Order would be disruptive to the parties' respective businesses. F. Accordingly, to avoid delaying the Closing, the parties desire to provide for certain respective obligations as set forth herein. (PAGE) AGREEMENTS In consideration of the above and the covenants and agreements herein and in the Purchase Agreement, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. Agreement to Close. Notwithstanding the ECOC Refusal and the pendency of the Racing Board Order and the effect of these matters on any conditions to Closing under the Purchase Agreement, Buyer, PCC and HDA agree to complete the Closing as of the date hereof and to otherwise consummate the transactions contemplated by the Purchase Agreement in accordance with the terms of the Purchase Agreement. Except as otherwise expressly provided in this Closing Agreement, Buyer, PCC and HDA hereby waive, forever release and covenant not to sue one another with respect to, any claim (including, but not limited to, any claim for breach of the Purchase Agreement) arising from or related to the Racing Board Order and the ECOC Refusal. 2. Suspension of Broadcast Agreement. Notwithstanding the execution and delivery by HDA, PCC and S&E of the Broadcast Agreement, the parties' rights and obligations under the Broadcast Agreement are hereby suspended until such time as the Existing Broadcast Agreement is terminated. Immediately at such time, the parties' rights and obligations under the Broadcast Agreement will be restored automatically as if such rights and obligations commenced as of the date hereof and were never suspended. Upon any termination of the Existing Broadcast Agreement, S&E and PCC shall have no obligations to ECOC other than, to the extent assigned by HDA to ECOC, obligations that would exist under the Broadcast Agreement assuming no suspension of it in accordance with this section 2. 3. Indemnity Agreements. (a) HDA and Equus hereby agree to indemnify and hold harmless S&E, Buyer and PCC from any obligations, liabilities, damages, claims, losses, proceedings, expenses and costs, including reasonable attorneys' fees and expenses (collectively, "Losses") incurred by S&E, Buyer and/or PCC (including, but not limited to, Losses arising from claims asserted by third parties) resulting from (i) any violation or alleged violation of the Racing Board Order or any breach by S&E of the Existing Broadcast Agreement, or (ii) any violation or alleged violation of any prior order of the Racing Board arising from consummation of the transactions contemplated by the Purchase Agreement, or (iii) any (PAGE) violation or alleged violation of any subsequent order of the Racing Board issued within 18 months of the date hereof arising from consummation of the transactions contemplated by the Purchase Agreement or relating to the Existing Purchase Agreement, or (iv) the performance by S&E, Buyer or PCC of any obligations or alleged obligations imposed by the Racing Board Order that are not required to be performed by S&E or PCC by the terms of the Broadcast Agreement, or (v) any untrue representation, breach of warranty or non-fulfillment of any covenant by HDA or Equus contained herein; provided, however that HDA and Equus shall have no liability to S&E, Buyer or PCC to the extent that any Losses of PCC, S&E or Buyer are attributable to any breach by S&E or PCC of their respective obligations under the Broadcast Agreement disregarding Section 2 of this Agreement. (b) The procedure for any indemnification provided in this Closing Agreement shall be governed by Section 10.4 of the Purchase Agreement which shall be incorporated herein by reference except that the words "Section 10.2 and 10.3" appearing in Section 10.4(e) of the Purchase Agreement shall be deleted and the words "this Section 3" shall be substituted in lieu thereof. (c) If any action is brought against PCC, S&E or Buyer by any person claiming any breach by PCC or S&E of the Broadcast Agreement (or breach of the Existing Broadcast Agreement in a manner that would also state a claim for breach of the Broadcast Agreement if it were not suspended under Section 2 hereof), PCC, Buyer and S&E agree that none of them shall assert as a defense to such action their rights or HDA's and Equus' obligations under subsections (a) or (b) of this Section 3. 4. IRS Escrow. Notwithstanding any other provision of the Purchase Agreement, at Closing, Buyer shall deliver $700,000 of the Purchase Price to First Union Bank of Florida, as escrow agent, pursuant to an Indemnification Escrow Agreement in substantially the form attached hereto as Exhibit 2. The escrowed funds shall bear interest for the account of HDA. Promptly upon delivery by HDA to Buyer of evidence reasonably satisfactory to Buyer that HDA has recorded in the appropriate local filing office in Puerto Rico one or more IRS certificates of discharge reflecting the discharge of liens identified on Schedule 1 attached hereto (the "Release Certificate"), Buyer and HDA shall promptly direct the escrow agent to release the escrowed funds and accrued interest to HDA. In the event that funds remain in escrow at such time as Buyer intends to sell substantially all of the assets or stock of S&E in a bona fide transaction to a third party, Buyer shall deliver notice to HDA (PAGE) at least 45 days prior to closing of such proposed sale (a "Sale Notice"). If Buyer does not receive the Release Certificate within 15 days following delivery of the Sale Notice, Buyer may seek to obtain the Release Certificate and receive reimbursement of its expenses from the escrowed funds. 5. Representations and Warranties. HDA and Equus jointly and severally represent, warrant and covenant to S&E, Buyer and PCC as follows: (a) The execution, delivery and performance of this Agreement by HDA and Equus have been duly authorized by all necessary partnership actions on the part of HDA and Equus. (b) This Agreement has been duly executed and delivered by HDA and Equus and constitutes the legal, valid and binding obligation of HDA and Equus, enforceable in accordance with its terms except as the enforceability of this Agreement may be affected by bankruptcy, insolvency or similar laws affecting creditors' rights generally. (c) The execution, delivery and performance by HDA and Equus of this Agreement (with or without the giving of notice, the lapse of time, or both): (i) do not require the consent of any third party; (ii) do not conflict with any provision of the Partnership Agreements of HDA or Equus; (iii) do not conflict with, result in a breach of, or constitute a default under any applicable law, judgment, order, ordinance, injunction, decree, rule, regulation or ruling of any court or governmental instrumentality; and (iv) do not conflict with, constitute grounds for termination of or result in a breach of, constitute a default under, or accelerate or permit the acceleration of any performance required by the terms of any Material Contract (as defined in the Purchase Agreement). 6. Reliance. HDA and Equus acknowledge that S&E, Buyer and PCC's agreement to complete the Closing as of the date hereof and to otherwise consummate the transactions contemplated by the Purchase Agreement in accordance with the terms of the Purchase Agreement is based on S&E, Buyer and PCC's good faith reliance upon the legality, validity, binding effect and enforceability of each agreement of HDA and Equus set forth in this Agreement. If any action is brought by S&E, Buyer or PCC to enforce this Agreement, HDA and Equus agree to waive any defense relating in any way to the legality, validity, binding effect or enforceability of this Agreement. (PAGE) 7. Appeal. HDA shall determine in its sole discretion the manner in which it may oppose the validity and enforceability of the Racing Board Order through administrative and/or judicial appeals or other actions. Such opposition shall be at HDA's sole cost and expense and HDA shall indemnify S&E, Buyer and PCC for all costs or expenses incurred by S&E, Buyer or PCC, including reasonable attorneys' fees and expenses, if and to the extent S&E, Buyer or PCC are required to participate in such appeals. HDA will not, without the prior written consent of Buyer, consent to the entry of any judgment or enter into any settlement with the Racing Board if such judgment or settlement imposes or could reasonably be expected to impose any obligation or liability on S&E, Buyer or PCC not otherwise existing as an obligation of S&E, Buyer or PCC under the Broadcast Agreement. Upon the request of Buyer, HDA shall cause its counsel to promptly provide to Buyer copies of all memoranda, correspondence, pleadings and other documents prepared by such counsel in connection with any administrative and/or judicial appeal or other action taken by HDA in opposing the validity and enforceability of the Racing Board Order, provided that HDA may redact any portions of such documents the disclosure of which would waive any attorney/client privilege of HDA. 8. Governing Law. This Agreement shall be governed, construed and enforced in accordance with the laws of the State of Florida (without regard to the choice of law provisions thereof). 9. Counterparts. This Agreement may be signed in counterparts with the same effect as if the signature on each counterpart were upon the same instrument, 10. Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. This Agreement may not be assigned or transferred by HDA or Equus without the prior written consent of Buyer. This Agreement may not be assigned or transferred by S&E, Buyer or PCC without the prior written consent of HDA; provided, however, that S&E, Buyer and/or PCC may, without the prior written consent of HDA, assign or transfer their rights and interests hereunder to one or more parties that acquire the stock of S&E or all or substantially all of the assets of the Stations (as defined in the Purchase Agreement). 11. Notices. All notices, demands, and requests required or permitted to be given under the provisions of this Agreement shall be in writing and shall be addressed as follows: (PAGE) If to Buyer, S&E or PCC: Paxson Communications of San Juan, Inc. 601 Clearwater Park Road West Palm Beach, FL 33401 Attn: Mr. Lowell W. Paxson with copies (which shall John R. Feore, Jr., Esq. not constitute notice) to: Dow, Lohnes & Albertson 1200 New Hampshire Ave., N.W. Suite 800 Washington, D.C. 20036 If to HDA or Equus: Equus Management Company 650 Munoz Rivera Ave., 7th Floor Hato Rey Puerto Rico 00918 Attention: President with a copy (which shall W. Andrew Jack, Esq. not constitute notice) to: Covington & Burling 1201 Pennsylvania Avenue, N.W. Washington, D.C. 20044-7566 or to any other or additional persons and addresses as the parties may from time to time designate in a writing delivered in accordance with this Section 10. A notice mailed by registered or certified mail, postage prepaid and return receipt requested, shall be deemed to have been duly delivered and received on the date of receipt shown on the return receipt. 12. Entire Agreement. This Agreement and the Purchase Agreement, together with all other documents to be delivered or previously delivered by the parties pursuant hereto or thereto, collectively represent the entire understanding and agreement among the parties with respect to the subject matter of this Agreement. This Agreement supersedes all prior negotiations among the parties and cannot be amended, supplemented, or changed except by an agreement in writing that makes specific reference to this Agreement and that is signed by the party against which enforcement of any such amendment, supplement, or modification is sought. 14. Waiver of Compliance; Consents. Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, representation, warranty, covenant, agreement, or condition herein may be waived by the party entitled to the benefits thereof only by a written instrument signed by the party granting such waiver, but such waiver or (PAGE) failure to insist upon strict compliance with such obligation, representation, warranty, covenant, agreement, or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 12. 14. Delivery of Opinion. On or prior to February 1, 1997 counsel to PCC shall deliver to HDA its opinion as to the enforceability against and binding effect on PCC of the Closing Agreement, Purchase Agreement and Broadcast Agreement in form and substance reasonably satisfactory to counsel to HDA. (PAGE) IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PAXSON COMMUNICATIONS OF SAN JUAN, INC. By: /s/ William L. Watson ------------------------------------ Name: William L. Watson Title: Secretary PAXSON COMMUNICATIONS CORPORATION By: /s/ William L. Watson ------------------------------------ Name: William L. Watson Title: Assistant Secretary S & E NETWORK INC. By: /s/ William L. Watson ------------------------------------ Name: William L. Watson Title: Secretary HOUSING DEVELOPMENT ASSOCIATES S.E. By: Equus Gaming Company, L.P. its managing partner By: Equus Management Company, its managing general partner By: /s/ Donald G. Blakeman -------------------------- Name: Donald G. Blakeman Title: President (PAGE) EQUUS GAMING COMPANY, L.P. By: Equus Management Company, its managing general partner By: Donald G. Blakeman -------------------------- Name: Donald G. Blakeman Title: President EX-10 5 (PAGE) CONTROL TRANSFER AGREEMENT This Control Transfer Agreement (this "Agreement"), dated as of December 31, 1996, is entered into by and among Interstate Business Corporation, a Delaware corporation ("IBC"), Interstate General Company L.P., a Delaware limited partnership (IGC"), Interstate General Properties Limited Partnership S.E., a Maryland limited partnership ("IGP"), Housing Development Associates S.E., a Puerto Rico partnership ("HDA"), Equus Management Company, a Delaware corporation ("EMC"), and Equus Gaming Company L.P., a Virginia limited partnership ("Equus"). W I T N E S S E T H: WHEREAS, EMC, Equus and HDA are all commonly controlled, directly or indirectly by IGC; WHEREAS, IGC wishes to divest itself of control of EMC, Equus and HDA by transferring such control to IBC; WHEREAS, in anticipation of the control transfer to be effected by this Agreement, in April 1996 IGP transferred to EMC certain employees that perform consulting services for El Comandante Operating Company, Inc. ("ECOC") and IGP assigned to EMC its rights under that certain Consulting Agreement dated as of December 15, 1993 by and between IGP and ECOC, and in August 1996 IGP transferred certain employees that perform services for Equus and HDA to the payroll of EMC and IGP assigned to EMC that certain Amended and Restated Management Agreement dated as of December 15, 1993 by and between IGP and HDA (all such employees are referred to herein as the "Transferred Employees"); WHEREAS, in transferring control, IGC, Equus and EMC wish to preserve the employee benefits presently enjoyed by EMC employees and wish to provide for continued funding of certain EMC and Equus expenses; WHEREAS, the Board of Directors of each of IBC, EMC and the managing general partner of IGC has determined that the transactions contemplated by this agreement are fair to each of IBC, IGC and Equus and are at least as favorable to each such company as would be available for substantially comparable transactions between unrelated parties; NOW THEREFORE, in consideration of the foregoing premises and the mutual covenants contained in this Agreement and for other good and valuable consideration, the receipt and (PAGE) sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Transfer of Stock. For and in consideration of the undertakings set forth in Section 3 hereof, IGC hereby sells, assigns, transfers and conveys to IBC, and IBC hereby purchases, acquires and accepts from IGC, all of IGC's right title and interest in and to 100 shares of the Common Stock of EMC (the "EMC Stock"). IGC and EMC represent and warrant to IBC that the EMC Stock constitutes all of the issued and outstanding shares of capital stock of EMC. IBC hereby acknowledges receipt of Certificate No._____ representing the EMC Stock, duly endorsed by IGC. IBC shall surrender such stock certificate to EMC and EMC shall issue to IBC a stock certificate evidencing IBC's ownership of the EMC Stock and bearing the following legend: Certain dividend and transfer rights with respect to the shares represented by this certificate have been irrevocably assigned to Interstate General Company L.P., or its successors or assigns, in accordance with that certain Control Transfer Agreement dated as of December 31, 1996. The Shares represented by this certificate have not been registered under the Securities Act of 1933. Such Shares have been acquired for investment and may not be pledged, offered, sold or transferred except in compliance with the registration requirements of the Securities Act of 1933 or an exemption therefrom, or upon delivery to Equus Management Company ("EMC"), if requested, of an opinion of counsel, in form and substance reasonably satisfactory to EMC, that registration under such Act is not required. 2. Transfer of IGC GP Interest. For and in consideration of the undertakings set forth in Section 3 hereof, IGC shall, if and when it receives Nasdaq Approval (as hereinafter defined), sell, assign, transfer and convey to IBC, and IBC shall purchase, acquire and accept from IGC, all of IGC's right, title and interest in an to IGC's general partnership interest (the "IGC GP Interest"). Upon the transfer to IBC of the IGC GP Interest, IGC shall withdraw as a general partner of Equus. 3. IBC Undertakings. For and in full consideration of the transfer of the EMC Stock and the IGC GP Interest to IBC by IGC, IBC hereby agrees to: (a) forever indemnify and hold harmless IGC, and its successors and assigns from and against any and all liability and expense (including, without limitation, any liability for debts (PAGE) or obligations incurred by Equus) which IGC may incur as a result of its serving as a general partner of Equus; (b) use its best efforts to obtain the approval of Nasdaq Stock Market to the continued listing of Equus' Class A Limited Partnership Units ("Equus Units") on the Nasdaq Stock Market in the event of and following the withdrawal of IGC as a general partner of Equus ("Nasdaq Approval"); (c) irrevocably assign to IGC all rights to any distributions received by EMC from Equus in respect of its .99% general partnership interest in Equus to the extent that such distributions exceed the expenses and liabilities of EMC incurred in the ordinary course of business in its capacity as managing general partner of Equus; and (d) not transfer or otherwise dispose of any EMC stock other than (i) to an affiliate or IBC who agrees to remain bound by the terms of this Agreement, or (ii) to any party in an arm's length transaction for fair value which such value is hereby irrevocably assigned to IGC. 4. Assignment of Master Support Agreement. IGC, hereby assigns to IBC all rights and IBC hereby assumes all obligations under that certain Master Services and Support Agreement between IGC and Equus dated as of December 9, 1994. (the "Support Agreement"). Equus hereby consents to such assignment. 5. Unit Transfer to Fund Employee Benefits. IGC, Equus and EMC hereby amend that certain Distribution Agreement dated as of August, 1994 to reduce by 50,000 the number of Equus Units that Equus is obligated to deliver to IGC from time to time to fund employee benefit obligations of IGC (the "Relinquished Units"). IGC hereby transfers and conveys to Equus 75,000 Class A Limited Partnership Units of IGC (the "Reserved IGC Units"). Equus shall offer the Transferred Employees unit incentive awards ("Replacement Awards") that will provide benefits substantially equivalent to incentive compensation awards issued to such Transferred Employees by IGC and until Equus' obligations with such Replacement Awards have been satisfied, Equus shall use the Relinquished Units and the Reserved IGC Units solely to satisfy obligations under such Replacement Awards. IGC is issuing the Reserved Units to Equus without registration under the Securities Act of 1933. The Unit certificate evidencing the Reserved Units shall bear the following legend: (PAGE) Transfer of the Units represented by this certificate are subject to certain restrictions in accordance with that certain Control Transfer Agreement dated as of December 31, 1996. The Units represented by this certificate have not been registered under the Securities Act of 1933. Such Units have been acquired for investment and may not be pledged, offered, sold or transferred except in compliance with the registration requirements of the Securities Act of 1933 or an exemption therefrom, or upon delivery to Interstate General Company, L.P. ("IGC"), if requested, of an opinion of counsel, in form and substance reasonably satisfactory to IGC, that registration under such Act is not required. 6. Assignment of HDA Management Agreement. IGP hereby assigns to EMC all rights, and EMC hereby assumes from IGP all obligations under that certain Amended and Restated Management Agreement dated December 15, 1993 by and between IGP and HDA (the "HDA Management Agreement"). IGP shall provide EMC office space and office equipment and supplies (including telecommunications equipment and services) suitable to permit EMC to perform the obligations assumed under the HDA Management Agreement. EMC shall reimburse IGP for its direct costs incurred in providing such administrative support. 7. Further Actions. The parties hereto shall promptly execute and deliver all such documents, instruments and agreements and take such other actions as may be necessary or desirable to carry into effect the transactions contemplated hereby. 8. Amendments; Waivers. Any provisions of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by all of the parties hereto. No failure or delay by any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 9. Severability. Should any provision of this Agreement for any reason be declared invalid or unenforceable, such decision shall not affect the validity or enforceability of any of the other provisions of this Agreement, which remaining provisions shall remain in full force and effect, and the application of such invalid or unenforceable provision to persons or circumstances other than those as to which it is held invalid (PAGE) or unenforceable shall be valid and be enforced to the fullest extent permitted by law. 10. Headings. The descriptive headings of the several Sections of this Agreement are inserted for convenience only, do not constitute a part of this Agreement and shall not affect in any way the meaning or interpretation of this Agreement. 11. Applicable Law. The validity and interpretation of this Agreement and the performance by the parties of their respective obligations hereunder shall be governed by the laws of the State of Delaware without regard to its choice of law provisions. 12. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart signed by the party to be charged thereby. 13. Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the subject matters hereof, and supersedes all previous agreements and understandings among the parties with respect to such matters. 14. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and transferees. (PAGE) IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. INTERSTATE GENERAL PROPERTIES INTERSTATE BUSINESS CORPORATION LIMITED PARTNERSHIP S.E. By: Interstate General Company L.P., /s/ James Michael Wilson its General Partner ------------------------- Name: James Michael Wilson Title: President By: Interstate General Management Corporation, its Managing INTERSTATE GENERAL COMPANY L.P. General Partner By:Interstate General Management Corporation, its Managing By: /s/ James Michael Wilson General Partner -------------------------- Name: James Michael Wilson Title: Vice Chairman By: /s/ James Michael Wilson -------------------------- EQUUS GAMING COMPANY L.P. Name: James Michael Wilson Title: Vice Chairman By: Equus Management Company, its Managing General Partner EQUUS MANAGEMENT COMPANY By: /s/ Donald G. Blakeman By: /s/ Donald G. Blakeman -------------------------- ---------------------------- Name: Donald G. Blakeman Name: Donald G. Blakeman Title: President Title: President HOUSING DEVELOPMENT ASSOCIATES, S.E. By: Equus Gaming Company L.P., its Managing General Partner By: Equus Management Company, its Managing General Partner By: /s/ Donald G. Blakeman ------------------------------ Name: Donald G. Blakeman Title: President EX-10 6 (PAGE) AMENDMENT TO CONTROL TRANSFER AGREEMENT This Amendment to Control Transfer Agreement (this "Amendment"), dated as of March 25, 1997, is entered into by and among Interstate Business Corporation, a Delaware corporation ("IBC"), Interstate General Company L.P., a Delaware limited partnership ("IGC"), Interstate General Properties Limited Partnership S.E., a Maryland limited partnership ("IGP"), Housing Development Associates S.E., a Puerto Rico partnership ("HDA"), Equus Management Company, a Delaware corporation ("EMC"), and Equus Gaming Company L.P., a Virginia limited partnership ("Equus"). W I T N E S S E T H: WHEREAS, the parties hereto are parties to that certain Control Transfer Agreement dated as of December 31, 1996 (the "Agreement"); and WHEREAS, the parties hereto now wish to amend Sections 4, 5 and 6 of the Agreement; NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Amendments. Sections 4, 5 and 6 of the Agreement are hereby amended and restated in their entirety as follows: 4. Assignment of Master Support Agreement. Effective as of October 1, 1996, IBC assumed certain obligations of IGC under that certain Master Services and Support Agreement between IGC and Equus dated as of December 9, 1994 (the "Support Agreement") with respect to the provision of accounting services to Equus. Equus hereby consents to such assumption and confirms payment to IBC of $5,000 for such services provided during the third quarter of 1996 and $1,000 per month thereafter. IBC shall continue to provide such accounting services for the remaining term of the Support Agreement. 5. Unit Transfers to Fund Employee Benefits. IGC, Equus and EMC hereby amend that certain Distribution Agreement dated as of August, 1994 to reduce by 50,000 the number of Equus Units that Equus is obligated to deliver to IGC from time to time to fund employee benefit obligations of IGC (the "Relinquished Units"). IGC hereby transfers and conveys to Equus 75,000 Class A Limited Partnership Units of IGC (the "Reserved Units"). Equus shall offer the Transferred Employees unit incentive awards ("Replacement Awards") that will provide benefits substantially equivalent to incentive compensation awards issued to such Transferred Employees by IGC and until Equus' obligations with such Replacement Awards have been satisfied, Equus shall use the (PAGE) Relinquished Units and the Reserved Units solely to satisfy obligations under such Replacement Awards. IGC is issuing the Reserved Units to Equus without registration under the Securities Act of 1933. The Unit certificate evidencing the Reserved Units shall bear the following legend: Transfer of the Units represented by this certificate are subject to certain restrictions in accordance with that certain Control Transfer Agreement dated as of December 31, 1996 as it may be amended from time to time. The Units represented by this certificate have not been registered under the Securities Act of 1933. Such Units have been acquired for investment and may not be pledged, offered, sold or transferred except in compliance with the registration requirements of the Securities Act of 1933 or an exemption therefrom, or upon delivery to Interstate General Company L.P. ("IGC"), if requested, of an opinion of counsel, in form and substance reasonably satisfactory to IGC, that registration under such Act is not required. The Replacement Awards will include an option granted to Donald Drew to purchase up to 20,000 Reserved Units for an exercise price of $4.00 per Unit (the "Drew Option"). In the event that the Drew Option, or any portion thereof, is exercised, Equus shall deliver the option price received by Equus to IGC within five (5) business days of its receipt thereof. In the event that the Drew Option lapses without being fully exercised, Equus shall return to IGC within (5) business days of such lapse the number of Units for which the Drew Option remained exercisable upon the date of its lapse. Equus shall not reduce the exercise price of the Drew Option without the written consent of IGC. 6. Assignment of HDA Management Agreement. IGP hereby assigns to EMC all rights, and EMC hereby assumes from IGP all obligations under that certain Amended and Restated Management Agreement dated December 15, 1993 by and between IGP and HDA (the "HDA Management Agreement"). IGP shall provide EMC office space and office equipment and supplies (including telecommunications equipment and services) suitable to permit EMC to perform the obligations assumed under the HDA Management Agreement. EMC shall reimburse IGP for its direct costs incurred in providing such administrative support. The terms of this Section shall be (PAGE) effective retroactively to August 16, 1996. 2. Effectiveness of Amendment. This Amendment shall be effective as of the date hereof. Except as expressly amended hereby, all other provisions of the Agreement shall remain in full force and effect. (PAGE) IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written. INTERSTATE GENERAL COMPANY L.P. By: Interstate General Management Corporation, its managing general partner By: /s/ Edwin L. Kelly ---------------------------------- Name: Edwin L. Kelly Title: President EQUUS GAMING COMPANY L.P. By: Equus Management Company, its managing general partner By: /s/ Donald G. Blakeman ---------------------------------- Name: Donald G. Blakeman Title: President INTERSTATE BUSINESS CORPORATION By: /s/ James Michael Wilson ---------------------------------- Name: James Michael Wilson Title: President EQUUS MANAGEMENT COMPANY By: /s/ Donald G. Blakeman ---------------------------------- Name: Donald G. Blakeman Title: President (PAGE) HOUSING DEVELOPMENT ASSOCIATES S.E. By: Equus Gaming Company, L.P. its managing general partner By: Equus Management Company, its managing general partner By: /s/ Donald G. Blakeman ------------------------------ Name: Donald G. Blakeman Title: President INTERSTATE GENERAL PROPERTIES LIMITED PARTNERSHIP S.E. By: Interstate General Company L.P., its managing general partner By: Interstate General Management Corporation, its managing general partner By: /s/ Edwin L. Kelly -------------------------------- Name: Edwin L. Kelly Title: President EX-10 7 (PAGE) BROADCAST AGREEMENT THIS AGREEMENT is entered into this 21st day of January, 1997, among S&E NETWORK INC. ("S&E"), licensee of Stations WSJN-TV, San Juan, Puerto Rico, WKPV(TV), Ponce, Puerto Rico and WJWN-TV, San Sebastian, Puerto Rico ("the Stations"), HOUSING DEVELOPMENT ASSOCIATES S.E. ("HDA"), and PAXSON COMMUNICATIONS CORPORATION ("Paxson") and constitutes the term and conditions by which HDA will provide certain programming for broadcast on the Stations. TERMS AND CONDITIONS 1. Description of Programming. HDA shall provide to S&E, at HDA's sole expense, up to four (4) hours, every Monday, Wednesday, Thursday, Friday and Sunday, of programming (the "Programming") for broadcast on the Stations. HDA may adjust this schedule provided that all hours selected for broadcast represent no more than 1040 hours annually. The Programming shall be professionally produced, of high quality and appeal, and shall consist of programs that feature horse racing and race-related information or such other programming not incompatible with S&E's general programming criteria. 2. Payment. In consideration of the rights to broadcast the Programming, HDA shall pay to S&E $725 per hour net for each hour of broadcast time, with a minimum of 910 hours per year totalling $659,750.00. During the Initial Term (as defined below), HDA shall be required to purchase and pay for the minimum number of hours specified in the preceding sentence. Until December 31, 2011, this rate per hour shall increase or decrease annually consistent with the annual percentage changes in the Consumer Price Index For Wage Earners 1967-100 issued and published by the Bureau of Labor Statistics of the Commonwealth of Puerto Rico Department of Labor ("CPI"). After December 31, 2011 this rate per hour shall be the lower of the (i) pre-December 31, 2011 rate with continued CPI adjustments, or (ii) lowest current rate on the Stations for the same time period on other days of the week on which the Programming is not broadcast. Hours after 7 p.m. shall be available until (i) December 31, 2011, at the rate of Nine Hundred Dollars ($900) per hour adjusted annually by the percentage changes in CPI, and (ii) after December 31, 2011, at the lowest current rate on the Stations for the same time period on other days of the week. Additional hours may be acquired by HDA with thirty days prior written notice to S&E at the lower of (i) the rates set forth above or (ii) the lowest current rate on the Stations for the same time period conditions. HDA shall be responsible for all production expenses associated with this programming on the Stations and shall have the right to sell commercial advertising within (PAGE) such programming and retain all revenues generated thereby. S&E shall bill HDA on a monthly basis and HDA shall make the payments to S&E required by this Agreement on a monthly basis within 10 days of the end of each month. 3. Representations and Warranties. HDA represents and warrants that all material included in the Programming, including but not limited to script material, films, videotapes, audiotapes, music, and still photographs, shall be original works of authorship and will be free of any liability or limitation on ownership. HDA shall be responsible for clearing all rights (except music performance rights) to material owned by third parties included in the Programming, and for obtaining all necessary releases from individuals appearing in the Programming. 4. Term. The initial term of this Agreement shall commence on January 21, 1997 and shall expire on December 31, 2006 (the "Initial Term"). The Initial Term shall be automatically extended for successive five (5) year periods (each an "Extended Term") unless HDA notifies S&E in writing of its intention not to renew the term at least six (6) months prior to the expiration of the Initial Term or any subsequent Extended Term. S&E may not terminate this Agreement during the Initial Term, except pursuant to Section 5(b). S&E may terminate this Agreement during any Extended Term, in accordance with the provisions of either Section 5(b) or Section 6. All conditions of ownership and copyright and all representations and warranties in this Agreement shall survive its expiration or termination. 5. Remedies Upon Breach. (a) Injunctive Relief. S&E agrees that a breach of this Agreement during the Initial Term will cause irreparable harm to HDA. In the event of any breach of this Agreement during the Initial Term, S&E agrees that, in addition to its other remedies (except as otherwise provided in Section 6), HDA shall be authorized and entitled to obtain from any court of competent jurisdiction injunctive relief, whether preliminary or permanent. (b) Termination. In the event either party shall breach, default or fail to perform any material term or condition of this Agreement (other than as a result of a Force Majeure Event under Section 13), and shall fail to cure the same within ten (10) days after receipt of written notice from the aggrieved party, the aggrieved party, so long as it is not in material breach or default of this Agreement, may, in addition to any other remedies (except as otherwise provided in Section 6), elect to terminate this Agreement by written notice thereof to the breaching party. (PAGE) 6. Remedies Upon Termination. In the event that S&E elects to terminate this Agreement after expiration of the Initial Term (other than pursuant to Section 5(b)) or HDA terminates this Agreement pursuant to Section 5(b), S&E shall pay HDA a termination fee in the amount of Two Million Dollars ($2,000,000) adjusted annually by the annual percentage change in CPI, the payment of which termination fee, if HDA elects to receive such fee, shall be the sole and exclusive remedy available to HDA upon such termination. 7. Compliance. HDA warrants that the Programming shall comply with the Communications Act of 1934, as amended, all applicable rules and regulations of the Federal Communications Commission, and all other state and federal laws pertaining to the production, duplication, distribution and broadcast of programs. HDA shall refrain from accepting any compensation, gift or gratuity whatsoever (regardless of value or form) if such compensation, gift or gratuity is received directly or indirectly, under any express or implied agreement, understanding or authorization, affecting in any way the content of the Programming, in a manner contrary to the Communications Act of 1934, as amended, or the rules and regulations of the Federal Communications Commission. 8. Guaranty by Paxson. In consideration of the execution and delivery of this Agreement by HDA, Paxson agrees as follows: (a) Paxson hereby guarantees the full, complete and timely performance by S&E of each and every obligation of S&E under this Agreement. If any default shall be made by S&E in the performance of any of such obligation, then Paxson will itself perform or cause to be performed such obligation upon receipt of notice from HDA specifying in summary form the default; (b) Paxson waives presentment, protest, demand or action in respect of any of the obligations of S&E under this Agreement and Paxson waives all notices of nonperformance, notices of protest, notices of dishonor and notices of acceptance of this guaranty; and (c) this guaranty shall be deemed a continuing guaranty, and the above consents and waivers of Paxson shall remain in full force and effect until the satisfaction in full of all obligations of S&E under this Agreement. 9. Prohibition of Assignment. Neither party shall assign this Agreement, or any of its rights or obligations under the Agreement, without the express prior written consent of the other party provided that HDA may assign its rights and obligations under this Agreement to El Comandante Operating Company, Inc. or to any successor operator of the El (PAGE) Comandante Race Track. Notwithstanding such assignment, HDA shall remain liable during the Initial Term to purchase and pay for the minimum number of broadcast hours required under Section 2 hereof to the extent that such hours are not purchased by HDA's assignee. All claims and conditions of this Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of the parties. 10. No Joint Venture. The parties do not intend to create a joint venture by this Agreement, and neither S&E nor HDA shall represent to any third party that it is the other's agent for any purposes whatsoever in connection with the Programming or any derivative works thereof. 11. Independent Contractor. HDA is an independent contractor under this Agreement, and shall not, under any circumstances or for any purposes, be entitled to any compensation or benefits of an employee of S&E, including but not limited to medical, disability or retirement insurance or benefits. 12. Notice. Notice under this Agreement shall be in writing, sent via hand delivery or first-class mail, and shall be effective upon receipt by personal delivery or at the addresses below, or at such other address as may be designated in writing by either party: To S&E: S&E Network Inc. El Comandante Race Track Canonvanas, Puerto Rico 00729 To HDA: Housing Development Associates S.E. 650 Munoz Rivera Avenue, 7th Floor Hato Rey Puerto Rico 00918 Notice must be provided to HDA notwithstanding any assignment made by HDA pursuant to Section 9 of this Agreement. 13. Force Majeure. Any failure or impairment of the Stations' facilities, any delay or interruption in the broadcast of programs, any inability to conduct racing at El Comandante race track, or failure at any time to furnish broadcast facilities or programming, in whole or in part, due to Acts of God, strikes, lockouts, material or labor restrictions by any governmental authority, civil riot, floods and any other cause not reasonably within the control of S&E or HDA (a "Force Majeure Event"), shall not constitute a breach of this Agreement and any party shall be relieved from liability to the other party to the extent that any failure to perform is caused by any Force Majeure Event. (PAGE) 14. Entire Agreement. This document contains the entire agreement and understanding between the parties relating to the Programming, supersedes all prior agreements between them, whether written or oral, relating to this subject, and may be altered or amended only by written instrument executed by both of them. 15. Waivers and Amendments. Any amendment or supplementation of this Agreement or any waiver of any term or condition hereof shall be effective only if in writing. A waiver of any breach of any of the terms or conditions of this Agreement shall not in any way be construed as a waiver of any subsequent breach. 16. Severability. In the event that any one or more of the provisions contained in this Agreement shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in any other respect and the remaining provisions of this Agreement shall not, at the election of the party for whom the benefit of the provision exists, be in any way impaired. 17. Counterparts. This Agreement may be executed in one or more counterparts, all of which together shall constitute one and the same instrument. 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Puerto Rico, without regard to the conflict- of-laws rules thereof. (PAGE) IN WITNESS WHEREOF, the parties have executed this Agreement on the date written above. S&E NETWORK INC. /s/ William L. Watson - ------------------------------------- Name: William L. Watson Title: Secretary HOUSING DEVELOPMENT ASSOCIATES S.E. /s/ Donald G. Blakeman - ------------------------------------- Name: Donald G. Blakeman Title: President PAXSON COMMUNICATIONS CORPORATION /s/ William L. Watson - ------------------------------------- Name: William L. Watson Title: Assistant Secretary EX-10 8 (PAGE) SECOND AMENDMENT TO AMENDED AND RESTATED LEASE AGREEMENT THIS SECOND AMENDMENT TO THE AMENDED AND RESTATED LEASE AGREEMENT (the "Amendment") is made as of the 31st day of March 1997, by and between HOUSING DEVELOPMENT ASSOCIATES S.E., a Puerto Rico special partnership (hereinafter called "Landlord"), and EL COMANDANTE OPERATING COMPANY, INC., a Puerto Rico nonstock corporation (hereinafter called "Tenant"). W I T N E S S E T H: WHEREAS, Landlord owns the real property and improvements comprising the El Comandante Race Track located in Canovanas, Puerto Rico; WHEREAS, Landlord and Tenant's predecessor in interest, El Comandante Operating Company, a Delaware corporation ("ECOC"), entered into an Amendment and Restated Lease Agreement, dated as of December 15, 1993, as amended by the First Amendment to the Amended and Restated Lease Agreement, dated as of March 28, 1996 (collectively, the "Lease"). WHEREAS, the Lease required Tenant to pay all the operating expenses of the El Comandante Race Track, including the annual license fee payable to the Puerto Rico Racing Board (the "License Fee"); WHEREAS, the Lease also limits the types, amounts and sources of Indebtedness that Tenant may incur; WHEREAS, Tenant has requested certain amendments to the Lease; WHEREAS, after consideration of Tenant's request, Landlord has determined that accepting Tenant's requests under the terms and conditions set forth herein is in the best interests of Landlord; NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. Definitions. Except as otherwise defined herein, all capitalized terms used herein shall have the same meanings as set forth in the Lease. (PAGE) 2. Amendment to Section 3(d). Subsection (d) of Section 3 of the Lease is amended to read as follows: (d) Notwithstanding the foregoing provisions of this Section, Landlord shall assume responsibility for (1) paying any real property taxes assessed against the demised premises that become due and payable on or after January 1, 1996 and (2) paying, at the request of Tenant, any annual license fee in respect of the Race Track License (as defined in Section 4 hereof) commencing with the 1997 fee for the Race Track License. 3. Amendment of Section 13(c)(IV). Subsection (iv) of Subsection (c) of Section 13 of the Lease is amended to read as follows: (iv) "Permitted Indebtedness" means (1) purchase money Indebtedness, including capitalized lease obligations, in respect of purchase of machinery, equipment and other personal property necessary for or incident to the Race Track Operation in accordance with the terms of the Lease, (2) trade payables incurred in the ordinary course of business, (3) Indebtedness outstanding on the date of this Lease, including certain Indebtedness to Supra and Company S.E. and Ruben Velez Lebron in an aggregate principal amount not in excess of $2.6 million, (4) Indebtedness to Landlord; (5) Indebtedness to any other party in an aggregate amount not in excess of $1 million; provided however, that the total amount of such Indebtedness shall not exceed outstanding loans to horse owners pursuant to Section 28(l) hereof plus payments received from horse owners in respect of such loans during the current calendar month and that if such Indebtedness is secured, it is secured solely by promissory notes payable by the horse owners, (6) any renewals, extensions, substitutions, refundings, refinancing or replacements of any of the foregoing in principal amounts not in excess of, and on substantially the same terms as, the foregoing. 4. Effectiveness of Amendments. The amendment to the Lease reflected in Section 2 hereof shall be effective as of January 1, 1997. The amendment to the Lease reflected in Section 3 hereof shall become effective upon Landlord receiving consent form the holders of a majority of the principal amount of issued and outstanding 11 3/4% First Mortgage Notes due 2003 under that certain Trust Indenture dated as of December 15, 1993, as amended to date. (PAGE) 5. Effect of Amendments. Except as expressly amended hereby, all other provisions of the Lease shall remain in full force and effect. (PAGE) IN WITNESS WHEREOF, the Landlord and Tenant have executed this instrument as of the day and year first above written. LANDLORD: HOUSING DEVELOPMENT ASSOCIATES S.E. By: Equus Gaming Company L.P., its managing partner By: Equus Management Company, its managing partner By: /s/ Donald G. Blakeman ----------------------------- Name: Donald G. Blakeman Title: President TENANT: EL COMANDANTE OPERATING COMPANY, INC. By: ----------------------------- Name: Title: EX-27 9
5 1000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 4,268 0 2,780 0 0 0 57,937 11,981 60,586 2,446 66,404 0 0 0 (11,189) 60,586 0 21,896 0 11,748 0 0 9,048 1,100 400 700 0 0 0 827 0 0 Inlcudes note receivable of $.792 million. Net of bond discount of $1.59 million.
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