-----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, ESy4rizkI05e02OZzPlNqOQedY2AO1/p/quX18hrrK8lProBWPgQn8zo0q4w2IDy 9KXIdL9sPocU14NSEOxByw== 0000928423-98-000002.txt : 19980410 0000928423-98-000002.hdr.sgml : 19980410 ACCESSION NUMBER: 0000928423-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980409 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: SEC FILE NUMBER: 000-25306 FILM NUMBER: 98590144 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, 1997 COMMISSION FILE NUMBER 000-25306 EQUUS GAMING COMPANY L.P. (Exact name of registrant as specified in its charter) Virginia 54-1719877 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 650 Munoz Rivera Avenue Doral Building, 7th Floor Hato Rey, Puerto Rico 00918 (Address of Principal Executive Offices and Zip Code) Registrant's telephone number, including area code: (787) 753-0676 Securities registered pursuant to Section 12(b) of the Act: Not applicable Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED Class A Units representing assignment Nasdaq National Market System beneficial ownership of Class A limited ("Nasdaq/NMS") partnership interest and evidenced by beneficial assignment certificates ("Units") Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 25, 1998, the aggregate market value of 2,499,167 Units held by non-affiliates of the registrant based on the closing price reported on the NASDAQ was $3,123,959. Documents Incorporated By Reference: Not Applicable (PAGE) EQUUS GAMING COMPANY L.P. 1997 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page PART I Item 1. Business 1 Item 2. Properties 6 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Registrant's Class A Units and Related Unitholder Matters 9 Item 6. Selected Financial and Operating Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 8. Financial Statements and Supplementary Data 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 65 PART III Item 10. Directors and Executive Officers of the Company and EMC 65 Item 11. Executive Compensation 68 Item 12. Security Ownership of Certain Unitholders and Management 72 Item 13. Certain Relationships and Related Transactions 73 PART IV Item 14. Exhibits, Financial Schedules and Reports 74 (PAGE) PART I ITEM 1. BUSINESS GENERAL Equus Gaming Company L.P. (the "Company") is a Virginia limited partnership. The Company is managed by its managing general partner, Equus Management Company ("EMC"), which until December 31, 1996 was a wholly owned subsidiary of the Company's other general partner, Interstate General Company L.P. ("IGC"). Effective December 31, 1996, IGC transferred all of the outstanding shares of EMC to IGC's general partner, Interstate Business Corporation ("IBC"). IGC is a publicly traded limited partnership with its units traded on the American Stock Exchange. The Company is the successor owner of the horse racing and wagering business acquired in 1989 by an IGC subsidiary. On February 6, 1995, IGC distributed to its unitholders Class A Units ("Units") representing assignment of a 99% Class A limited partnership interest in the Company (the "Distribution"). The Company is engaged in thoroughbred racing, wagering and other gaming businesses through its 99% owned subsidiary, Housing Development Associates S.E. ("HDA"). HDA owns El Comandante Race Track ("El Comandante"), the only licensed thoroughbred racing facility in Puerto Rico. El Comandante was leased to El Comandante Operating Company, Inc., a Puerto Rico non-stock Corporation ("ECOC") until December 31, 1997 when the lease was terminated due to certain events of default of the terms of the lease. HDA also has interests of (i) 55% in Galapagos, S.A. ("Galapagos"), which operates since April 1995 the V Centenario Race Track in the Dominican Republic ("V Centenario"), (ii) 100% in Equus Gaming de Panama, S.A. ("EGP"), which operates since January 1, 1998 the Presidente Remon Race Track in the Republic of Panama ("Presidente Remon"), and (iii) 100% in El Comandante Management Company, LLC ("ECMC"), which operates El Comandante since January 1, 1998. In 1997 the Company formed Equus Entertainment Corporation ("EEC"), as a wholly-owned Puerto Rico corporate subsidiary, for the purpose of replacing the Company once certain approvals are obtained. The Company also owns Virginia Jockey Club, Inc. ("VJC"), an unsuccessful applicant for licenses to own and operate Virginia's first thoroughbred racing and pari-mutuel wagering facility. VJC is now inactive. HDA was the previous owner of S & E Network Inc. ("S&E"), which owned and operated three UHF television stations in Puerto Rico (the "Television Stations"), until sold to Paxson Communications of San Juan, Inc. ("Paxson") in transactions closed in August 1996 (50% interest) and January 1997 (50% interest). A. Puerto Rico Operations Live thoroughbred horse racing has been conducted continuously at El Comandante since 1976 and at a predecessor facility since 1957. ECOC generates commissions from bets placed on El Comandante's thoroughbred horse races through computerized wagering facilities located at El Comandante and V Centenario, and as of December 31, 1997 at 672 independently-owned (PAGE) off-track betting ("OTB") agencies throughout Puerto Rico, and from bets placed on races simulcasted outside Puerto Rico. ECOC offers bettors win and place wagers and exotic wagers that include daily double, exacta, quiniela, trifecta, and Pick 3 and Pick 6 pool wagers. Races are run 52 weeks per year, generally five days per week (Monday, Wednesday, Thursday, Friday and Sunday). From 1993 through February 1996 races were generally run four days per week and prior to 1993 three days per week. The total amounts wagered are distributed principally as commissions to the operating company and the OTB agents, winning bettors and the Puerto Rico Government. Operating License. On December 15, 1989, the Puerto Rico Racing Board (the"PR Racing Board"), at the request of HDA, granted an operating license (the "Operating License") to ECOC, which has been assigned to ECMC. The Operating License provides ECMC with the exclusive right through December 14, 2004, to operate a race track in the San Juan Region (the largest of three regions in Puerto Rico) which includes the San Juan metropolitan area and over three-fourths of the northern half of the Island; the exclusive right to conduct all types of authorized betting, both at El Comandante and off-track, anywhere in Puerto Rico, based on races held at El Comandante; and the right to hold a minimum of 180 day- or night-race days per year. The racing program for El Comandante is approved annually by the PR Racing Board. The continued validity of the Operating License during its term requires payment of an annual license fee, currently $250,000. Pursuant to the Operating License, HDA has an obligation to ensure that the operator complies with all terms and provisions of the Operating License and applicable laws and regulations. Upon its expiration in December 2004, there can be no assurance that a new operating license will be issued to ECMC, HDA, or any other entity operating El Comandante or that a new operating license will be exclusive. However, since 1957 ECOC and its predecessor have operated the only thoroughbred racing facility in Puerto Rico. El Comandante Lease. Until December 31, 1997 HDA leased El Comandante to ECOC under a lease agreement, as amended, (the "El Comandante Lease") that required payments of rent by ECOC to HDA consisting principally of 25% ("Basic Rent") of the annual commissions earned by ECOC. These commissions consist of all payments received by ECOC on all monies wagered with respect to horse racing occurring at El Comandante, whether wagered at El Comandante or at other betting facilities in Puerto Rico or any other country. The El Comandante Lease provided for ECOC to pay all El Comandante expenses except that, pursuant to (i) an amendment effective January 1, 1996, HDA assumed the obligation to pay real property taxes on El Comandante and (ii) an amendment effective January 1, 1997, HDA assumed the obligation to pay the annual racing license fee. Due to ECOC's default for unpaid Basic Rent and for certain other reasons permitted under the El Comandante Lease, HDA terminated the El Comandante Lease on December 31, 1997. In connection therewith, on January 1, 1998 at HDA's direction (i) ECOC transferred to ECMC, at book value, all assets employed in the racing business, (ii) ECMC assumed all agreements and (PAGE) liabilities of ECOC and (iii) ECOC assigned to ECMC the Operating License. Among the agreements assumed by ECMC are the horseowners' agreement and wagering service agreement. The termination of the El Comandante Lease and the assignment of the Operating License to ECMC are subject to the approval of the PR Racing Board, which has not make a final determination on this matter but is permitting ECMC to operate El Comandante until the review process is concluded. Racing Operations. Commencing in January 1998, HDA's revenues, through its wholly owned subsidiary ECMC, will be derived principally from commissions on wagering. ECMC will also generate revenues from fees paid by bettors on all OTB wagers except win-place, clubhouse admissions, concessions, the sale of programs, and other non-wagering activities. The largest single item of expense in operating El Comandante consists of payments to individual horse owners and to a horse owners association (the "Owners Association") pursuant to a contract that expired April 1, 1998. The contract requires the Owners' Association to field sufficient horses to conduct racing operations at El Comandante in accordance with the racing program approved by the PR Racing Board. Management is in the process of renegotiating the contract but does not expect significant economic changes. The prior owner of El Comandante maintained similar agreements with the Owners' Association since 1957. The contract obligates ECMC to provide horse stables and related facilities, to make annual lump sum payments to the Owners' Association of $55,000 and to pay 50% of El Comandante's commissions as purse monies. As a means to improve the quality and quantity of horses of racing, ECMC provides limited financing to horse owners to purchase horses. Total credit available to all members of the Owners' Association as a group is not to exceed $500,000 and not more than $50,000 to any single owner, nor more than 80% of the purchase price for any horse. ECOC had an equipment lease and services agreement with Autotote Systems Inc. ("Autotote") for the computerized tote system installed at El Comandante and related computerized wagering equipment provided to the OTB agencies. Autotote personnel operate and maintain the tote system at El Comandante and maintain the wagering equipment provided to the OTB agencies. Pursuant to the lease and services agreement which expires March 2004, ECOC was required to reimburse Autotote's personal property taxes and to pay a fee equal to the greater of $800,800 annually or .65% (.0065) of the pari-mutuel handle. When the on-line wagering system was implemented, the Owners' Association agreed to reimburse ECOC for one-half of the rental fee paid to Autotote by ECOC up to a maximum of $3,461 per race day. This agreement was also assumed by ECMC. Since commencing the on-line wagering system, all of El Comandante's races have been broadcasted via commercial television in Puerto Rico. The telecast permits OTB patrons to monitor odds and handicapping information while placing bets until post time and then to view the live racing action. The races are currently broadcasted through an agreement with S&E. Competition. El Comandante is the only licensed thoroughbred race track (PAGE) operating in Puerto Rico. Until the expiration of the Operating License, no other thoroughbred race track license for the San Juan Region may be issued to any person. Neither the Racing Act nor ECMC's Operating License precludes the Puerto Rico Government from granting a license to a competitor to construct or operate a race track outside of the San Juan Region (either in the Ponce Region or the Mayaguez Region). Management is not aware of any pending applications for such a license, even though it has been published in the press that the legislature is conducting an investigation on the viability of establishing another race track in the southern part of the island. Management believes there are significant practical obstacles to establishing a competing race track in Puerto Rico including the availability of financing, the need to establish an OTB network and insufficiency of horses in Puerto Rico to conduct racing operations at two tracks. In addition, pursuant to the Interstate Racing Act of 1978, no entity may simulcast its racing program to Puerto Rico without consent of ECMC. ECMC faces competition from other forms of legalized gambling in Puerto Rico. There are 19 licensed casinos in Puerto Rico offering card and dice games, slot machines and other games of chance. The Puerto Rico Government has operated a ticket lottery for more than 50 years and in 1991 commenced an electronic jackpot lottery. In addition, there are numerous cock fighting venues on the Island. ECMC also faces competition from illegal gambling. The Puerto Rico Government may, through legislation, legalize other forms of gambling or grant additional gaming licenses for those forms of gambling already authorized by law. Employees. ECOC had approximately 316 employees as of December 31, 1997. There were 90 employees working in the mutuel, admissions, and closed circuit television departments covered by a collective bargaining agreement between ECOC and the El Comandante Race Track Employees Union which expires August 23, 1998, 106 employees performing building and premises maintenance services covered by a collective bargaining agreement between ECOC and the General Workers Union which expires May 31, 1999, and 43 employees performing security guard services covered by a collective bargaining agreement between ECOC and the Security Guards Union which expires January 23, 1999. ECOC has not experienced any work stoppage or material labor difficulty since it began operating El Comandante in December 1989. Effective January 1, 1998, all of ECOC's employees were transferred to ECMC and the three collective bargaining agreements have been assumed by ECMC. B. Dominican Republic Operations Galapagos was selected by the Dominican Republic Racing Commission to operate the government-owned V Centenario race track pursuant to a ten year lease which commenced April 1995 (the "V Centenario Lease"). The V Centenario Lease also provides Galapagos with the right to develop OTB in the Dominican Republic and the exclusive right to simulcast all horse races, including El Comandante races, into the Dominican Republic. Simulcasting of El Comandante races to the Dominican Republic commenced February 27, 1995 and V Centenario racing operations commenced April 29, 1995. At December 31, 1997 there were 302 agencies in the Dominican Republic (PAGE) taking wagers on El Comandante and V Centenario races. Galapagos' business plan anticipates that approximately 400 agencies will be installed by the end of 1998 with continuing growth to approximately 450 agencies in 1999. Galapagos has a five year contract with a private operator to provide the wagering distribution system for a government-sponsored electronic lottery, which commenced in November 1, 1997. Galapagos has an agreement with Autotote which provides wagering equipment, software and related services. Lottery games are sold at OTB agencies of Galapagos and at lottery agencies selected by the operator. Galapagos' commissions (net of fees to Autotote) are 1% of gross lottery sales at lottery agencies and 2% of gross lottery sales at OTB agencies. In addition, the lottery operator pays Galapagos a monthly fee for each OTB agency that sells lottery games as reimbursement for a 50% share of telephone line costs. Galapagos is also permitted to identify the lottery agencies to take Pick 6 pool wagers on Galapagos' live and simulcasted races. Competition. Galapagos faces competition from other forms of gambling in the Dominican Republic. The Dominican Republic Government operates a ticket lottery and instant lottery throughout the country, and an electronic lottery commenced operations in November 1997. There are approximately 600 independent sports betting agencies and wagering on baseball is particularly popular. Approximately 200 of the sports betting agencies were being utilized by Galapagos as OTB agencies at December 31, 1997. Wagering on cock fighting is both legal and popular in the Dominican Republic. Casino gaming is permitted at hotels with a minimum of 100 rooms and there are 25 licensed casinos in operation. Galapagos also faces competition from illegal gambling. Employees. Galapagos had 167 employees at December 31, 1997. Galapagos has no agreements with unions and has not experienced any work stoppage or material labor difficulties. C. Panama Operations EGP has a contract with the Panama Government for the operation of Presidente Remon in Panama City and for the development of off-track betting in Panama for a period of 20 years that commenced on January 1, 1998. The contract grants EGP exclusive rights to simulcast horse races from and to the country and the right to operate up to 500 slot machines at the race track. EGP began simulcasting races from United States race tracks on January 2, 1998 and live racing commenced on February 14, 1998, after major improvements to the racing strip were made. Simulcasting of El Comandante races is expected to commence in April 1998. EGP has entered into certain contracts and commitments in connection with the Panama operation. An agreement with horseowners provides for minimum guaranteed payments to horseowners as purses in 1998 and 1999 of $3.6 million and $3.9 million, respectively. An agreement with Autotote for wagering services, software and equipment requires minimum monthly payments of $25,000 in 1998. Service fees will be based on 1% (.01) of total wagering. (PAGE) Management expects that 49% of the capital stock of EGP will be sold in 1998 to Panamanian investors. Competition. EGP faces competition from other forms of legalized gambling in Panama. There are 8 licensed casinos in Panama offering card and dice games and slot machines. Also, there are 15 slot machines parlors currently operating and EGP is authorized to install up to 500 slot machines at Presidente Remon. In addition, the Panama Government has operated a lottery for more than 50 years. Employees. EGP currently has 280 employees, including the general manager who is also an employee of EMC. D. Television Stations To ensure the availability of television time for El Comandante racing, HDA formed S&E as a wholly-owned subsidiary and on November 17, 1994 S&E acquired the assets and broadcast licenses of the Television Stations for approximately $2 million. S&E commenced broadcasting on a test basis six hours a day and had the official inauguration of its network, TELENET, in June 1995. Paxson provided programming and certain other services to S&E under a Time Brokerage Agreement from February to August 1996 when Paxson purchased a 50% interest in S&E for $4 million. Paxson then assumed responsibility for managing the television operations. In January 1997 Paxson purchased the other 50% interest in S&E for $7 million. E. HDA Financing On December 15, 1993, HDA and El Comandante Capital Corp. ("ECCC"), a special purpose finance wholly-owned subsidiary of HDA, together with HDA Management Corporation ("HDAMC"), completed the sale of 68,000 units each consisting of $1,000 principal amount of ECCC's 11.75% First Mortgage Notes due 2003 (the "First Mortgage Notes") and a warrant to purchase one share of Class A Common Stock of HDAMC (the "Warrants"). ECCC loaned the proceeds of the sale of the First Mortgage Notes to HDA and HDAMC contributed the proceeds from the sale of the Warrants to HDA in exchange for a 15% interest in HDA. Following the 1995 Distribution of Units by IGC, HDAMC transferred its 15% interest in HDA to the Company in exchange for 1,205,245 Units. As a result, the Warrants became exercisable to purchase a ratable portion of the Units held by HDAMC, net of Units to be sold by HDAMC to fund payment of HDAMC's income taxes associated with the disposition of Units upon exercise of Warrants. ITEM 2. PROPERTIES El Comandante. HDA is the owner of El Comandante, the only licensed thoroughbred racing facility in Puerto Rico. El Comandante and related assets consist of the following: (PAGE) a. A 257-acre improved parcel of land located approximately 12 miles east of downtown San Juan in Canovanas, Puerto Rico; b. A six-level grandstand and clubhouse with seating for over 10,000, including private boxes for the PR Racing Board, Racing Administrator, and other officials and horse owners, and a total capacity in excess of 25,000; c. Racing facilities, including a one-mile oval racing strip with a seven-furlong chute and a 65-foot wide exercise track; d. Food concession services and two glass-enclosed air conditioned dining rooms with a total seating capacity of over 1,400; e. Barn area and related facilities, including 1,595 horse stalls; f. Paved parking area which can accommodate 7,250 vehicles; g. Landscaped infield containing three lakes and a waterfall. El Comandante is encumbered by a mortgage securing the First Mortgage Notes. V Centenario. Galapagos leases V Centenario from the Dominican Republic Government. V Centenario and related assets consist of the following: a. An improved parcel of land located approximately 12 kilometers east of Santo Domingo, Dominican Republic; b. Grandstand and clubhouse with seating for over 4,200 and a total capacity in excess of 10,000; c. Racing facilities, including a one-mile oval strip with a seven-furlong chute and a 1400 meter exercise track and all necessary racing and groundskeeping equipment; d. Food concession services and an air conditioned dining room with a total seating capacity of 400; e. Barn area and related facilities and equipment, including 950 horse stalls; d. Paved parking area which can accommodate 1,100 vehicles. Galapagos also owns certain race track and telecommunication equipment used in the operation of V Centenario and the off-track betting system. Presidente Remon. EGP operates Presidente Remon under an exclusive contract granted by the Panama Government. Presidente Remon and related assets consist of the following: a. A 175-acres improved parcel of land located approximately 5 miles east of downtown Panama in Juan Diaz, Panama; (PAGE) b. Grandstand and clubhouse with seating for over 2,000 and a total capacity in excess of 10,000; c. Racing facilities, including a one-mile oval strip with a seven- furlong chute, a ten-furlong chute and a 1,400 meter exercise track and all necessary racing and groundskeeping equipment; d. Food concession services and an air conditioned dining room with a total seating capacity of 200; e. Barn area and related facilities and equipment, including 1,200 horse stalls; f. Paved parking area which can accommodate 600 vehicles. ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. (PAGE) PART II ITEM 5. MARKET FOR REGISTRANT'S CLASS A UNITS AND RELATED UNITHOLDER MATTERS The Units, which represent the assignment of beneficial ownership of the Company's Class A limited partnership interests, have been listed and traded on Nasdaq/NMS since February 7, 1995. The following table sets forth, for the periods indicated, the high and low sales prices per Unit as reported by the Nasdaq Stock Market and cash distributions paid to Unitholders during these periods. Cash Distributions Price Range of Units Total Per Unit High Low 1997 Quarter: First - - $3.375 $1.75 Second - - 3.00 1.75 Third - - 2.75 1.75 Fourth - - 2.25 0.75 1996 Quarter: First - - 4.00 3.00 Second - - 4.125 3.125 Third - - 3.50 2.50 Fourth - - 3.00 2.25 On March 25, 1998, the closing sale price of Units was $1.25 as reported on Nasdaq/NMS. As of March 26, 1998, there were 6,333,617 Units outstanding and approximately 279 Unitholders of record. The Company intends to distribute quarterly to its Unitholders the maximum possible amount of cash from operations, consistent with the operational needs of the Company, including debt service. The Company's principal source of cash has been distributions related to its interest in HDA. The trust indenture related to the First Mortgage Notes (the "Indenture") limits distributions by HDA to its partners, including the Company, to approximately 48% of HDA's consolidated net income. It allows additional cash distributions, if a certain debt coverage ratio is met. Nasdaq has notified the Company that it does not qualify for continued listing under the new maintenance criteria that became effective on February 23, 1998 which requires a minimum of $4 million in net tangible assets and market public float of at least $5 million . The Company submitted on March 27, 1998 a written hearing to support its arguments in favor of an exception. The Units of the Company will continue listed pending final determination of the Nasdaq Listing Review Committee. (PAGE) ITEM 6. SELECTED FINANCIAL AND OPERATING DATA The Company was organized in 1993 and effective March 8, 1995 it consolidates the accounts of HDA and its subsidiaries in its financial statements. Since the Company's historical results of operations for years 1997, 1996, and 1995 are not readily comparable, Management has presented herein certain data on a proforma basis as if the consolidation of HDA's account into the Company's financial statements and the issuance of 1,205,245 Units to HDAMC had all occurred on January 1, 1995. The historical financial information was derived from the consolidated financial statements of the Company which for the years ended December 31, 1993 through 1997 have been audited by Arthur Andersen LLP, independent public accountants. The proforma financial information is unaudited. This information should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements of the Company and "Management's Discussion and Analysis of Financial Condition and Results of Operations". (PAGE) For the years ended December 31, Historical (1) Proforma(1) 1997 1996 1995 1994 1993 1995 (In thousands, except per Unit amounts) Income Statement Data: Revenues: Rental income (2) $13,720 $14,322 $11,429 $ - $ - $14,333 Commissions on wagering 4,619 4,513 2,719 - - 2,724 Other revenues: Cash distributions - - 134 300 - - Net lotto revenues 88 - - - - - Other racing revenues 782 523 368 - - 374 Television Stations - 1,725 1,344 - - 1,511 Gain from sale of Television Stations 4,669 581 - - - - Interest income 420 232 92 55 - 114 ------- ------- ------- ------- ------- ------- 24,298 21,896 16,086 355 - 19,056 Financial expenses 8,735 9,048 7,398 - - 9,002 Depreciation 2,323 2,508 1,829 - - 2,163 Other expenses 8,529 9,240 7,940 1,762 - 8,600 ------- ------- ------- ------- ------- ------- 4,711 1,100 (1,081) (1,407) - (709) Provision for income taxes 895 400 231 87 - 511 Minority interest (3) 878 (127) (721) - - (770) Extraordinary item (4) 459 - - - - - ------- ------- ------- ------- ------- ------- Net income (loss) $ 2,479 $ 827 $ (591) $(1,494)$ - $ (450) ======= ======= ======= ======= ======= ======= Net income (loss) per Unit (5) $ 0.39 $ .13 $ (.08) - - $ (.07) December 31, 1997 1996 1995 1994 1993 Balance Sheet Data: Cash and cash equivalents $ 508 $ 4,268 $ 814 $ - $ - Race Tracks property and equipment (6) 45,056 45,956 47,891 - - Receivables from ECOC 3,106 2,780 1,816 - - Investment in S&E (7) - 2,223 4,862 - - Total assets 56,187 60,586 60,823 - 800 First Mortgage Notes and accrued interest 63,681 66,737 66,573 - - Unsecured partner's loans - 415 212 131 654 Notes payable 1,876 1,073 2,457 - - Total liabilities 68,280 71,775 72,611 524 800 Partner's deficit (12,093) (11,189) (11,788) (524) - - --------------------------------------------------------------------------- (PAGE) (1) The accounts of HDA and its subsidiaries have been consolidated in the historical statements of income (loss) as of and for the periods after March 8, 1995. The proforma statement of loss was prepared as if the accounts of HDA and its subsidiaries had been included commencing on January 1, 1995. (2) Represents rent paid by ECOC pursuant to the El Comandante Lease, which was terminated by HDA effective December 31, 1997. Commencing in 1998 a wholly owned subsidiary of HDA is operating El Comandante. (3) Includes HDA's minority interest in losses of Galapagos and the Company's minority interest in HDA's net income, except that generally accepted accounting principles limited the amount recognized in 1995, as the Company's minority interest in HDA and in 1997, as HDA's minority interest in Galapagos (see Note 1 to the Company's consolidated financial statements). (4) Represents premium on early redemption of First Mortgage Notes and write-off of related deferred financing costs and note discount. (5) Net income (loss) allocable to the units is based on approximately 99% interest. The per Unit amount in the historical statements of income (loss) is calculated based on weighted average of Units outstanding since the Distribution on February 6, 1995 amounting to 6,333,617 in 1997 and 1996 and 6,223,381 in 1995. The per Unit amount in the proforma statement of income (loss) is calculated as if all the outstanding Units of the Company had been issued as of January 1, 1995 amounting to 6,333,617. Outstanding options and Warrants to purchase Units do not have a material dilutive effect on the calculation of per Unit amounts. (6) Includes a step-up of $5,650,000, resulting from the issuance of Units by the Company for a 15% interest in HDA on March 8, 1995, net of related accumulated depreciation in 1997, 1996 and 1995 of $583,190, $376,140 and $169,000, respectively. (7) In 1995 this amount consisted of licenses, property and equipment and other assets of the Television Stations owned by S&E. The accounts of S&E were not consolidated at December 31, 1996. (PAGE) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The table below summarizes the results of operations of the Company and its consolidated subsidiaries for each of the three years in the period ended December 31, 1997. Because the Company did not consolidate the accounts of HDA until March 8, 1995 (see Note 1 to the Company's financial statements) the Company's historical results of operations for 1997 and 1996 are not readily comparable with results of operations for 1995. Accordingly, the unaudited proforma results for 1995 have been presented as if the accounts of HDA had been included in the Company's financial statements since January 1, 1995. The Company's results of operations are principally attributed to its indirect interests in two race tracks: El Comandante in Puerto Rico and V Centenario in Dominican Republic. The Company also had an interest in certain Television Stations in Puerto Rico which were sold in transactions closed in August 1996 and January 1997. For the years ended December 31, 1997 1996 1995 1995 Proforma Revenues: Puerto Rico $14,137 $14,551 $11,519 $14,446 Dominican Republic 5,488 5,036 3,087 3,098 Television Stations 4,669 2,306 1,344 1,511 Other 4 3 136 1 -------- -------- -------- -------- 24,298 21,896 16,086 19,056 Expenses: Financial 8,735 9,048 7,398 9,002 Depreciation 2,323 2,508 1,829 2,163 Operations Puerto Rico 1,356 1,091 381 472 Dominican Republic 6,010 6,011 4,357 4,438 Television Stations - 1,477 2,399 2,756 Other 1,163 661 803 934 -------- -------- -------- -------- 4,711 1,100 (1,081) (709) Provision for income taxes 895 400 231 511 Minority interest 878 (127) (721) (770) Extraordinary item 459 - - - -------- -------- -------- -------- Net income (loss) $ 2,479 $ 827 $ (591) $ (450) ======== ======== ======== ======== THE COMPANY'S RESULTS OF OPERATIONS 1997 COMPARED TO 1996 Puerto Rico Operations (PAGE) Overview. El Comandante had significant growth in revenues from 1991 through 1994 which resulted largely from (i) the conversion (commencing in November 1991 and completed in 1993) of over 570 OTB agencies to an on-line computerized wagering system, (ii) the increase in OTB agencies to 636 at December 31, 1994, (ii) the expansion of betting program to offer additional wagers, (iv) the broadcasting of all of its races throughout Puerto Rico via commercial television (until November 1991, ECOC televised only Sunday races) and, (v) the introduction in August 1990 of a jackpot pool ("Pool Pote"), which is paid out only in the event a single bettor wins the regular pick-six pool. These actions resulted in substantial increases in wagering from $128 million in 1992 to $288 million in 1994 as betting opportunities became more attractive and more convenient to wagering patrons. However, due to regulatory changes in OTB agents' commissions and other uncontrollable factors, wagering decreased to $274 million in 1995, remained at the same level in 1996 and decreased to $266 million in 1997. In February 1996 the number of race days at El Comandante was increased from four to five days a week and, at the same time, the number of races per day was reduced, resulting in an increase to approximately 36 races per week from approximately 32 races per week. The average daily wagering handle decreased, as expected, but the extra day has compensated for the decrease. The extra race day per week provides an extra Pick-6 pool wager each week; this wager is favored by bettors and provides a higher commission to ECOC than other wagers. The mix of wagers usually affects ECOC's percentage of the total wagers it received as commissions. Revenues. Decreased in 1997 by $414,000 (2.8%) from 1996. Revenues from the Puerto Rico operations include (i) rental income earned from the lease of El Comandante to ECOC and (ii) interest income from short term investments and a note receivable from ECOC. The El Comandante Lease, which was terminated effective December 31, 1997, required payment of rent consisting of 25% of ECOC's commissions on wagering. In 1997, rental income decreased by $601,000 (4.2%), when there was commissions on wagering of $54,882,000 (20.6% average take) on 258 race days, compared to 1996, when there was commissions on wagering of $57,286,000 (20.8% average take) on 256 race days. The decrease is attributable, at least in part, to additional gaming opportunities that are available to the public, particularly slot machines in new casino hotels and up-graded slot machines in existing casino hotels. In August 1997 ECOC implemented two new wagers, a Pick 3 and Trifecta, which helped to slow the decline in wagering. Due to ECOC's default for unpaid rent and for certain other defaults under the El Comandante Lease, HDA terminated the El Comandante Lease. Effective January 1, 1998 El Comandante is operated by ECMC, a wholly owned subsidiary of HDA (see Note 2 to the Company's consolidated financial statements). Expenses. Increased in 1997 by $265,000 from 1996. The increase was caused primarily by HDA's assumption, effective January 1997, of the obligation to pay the annual fee of $250,000 for the El Comandante racing license, which was paid by ECOC through 1996. (PAGE) Dominican Republic Operations The accounting records of Galapagos are maintained in Dominican Republic pesos and converted to U.S. dollars based on the average exchange rate during the reporting period. Consequently, fluctuations in exchange rates have an effect in the results of operations of Galapagos, when reported in U.S. dollars. The average exchange rate for 1997 was 14.44 pesos to one U.S. dollar, compared to 13.75 pesos to one U.S. dollar in 1996. Revenues. Increased in 1997 by $452,000 (9%) from 1996. Revenues from the Dominican Republic operations include commissions on wagering of Galapagos of $4,619,000 in 1997, when there were 363 race days and an average of 233 agencies on line, and $4,513,000 in 1996, when there were 361 race days and an average of 198 agencies on line. The $106,000 (2.3%) increase in commissions on wagering was attributable primarily to the introduction in August 1997 of new wagers with local pool bets on simulcasted races from El Comandante and to more agencies on line during 1997. The increase in revenues from other sources was attributed to $88,000 in net fees earned under a contract for providing the distribution system of an electronic lottery that commenced in November 1997, and $438,000 of economic assistance in 1997 received from the Dominican Republic Government to improve racing, offset in part by a reduction in restaurant revenues at V Centenario when Galapagos discontinued operating the restaurant in August 1997 and sub- leased it to a third party. The Government provided economic assistance from July 1997 thru January 1998 from taxes it received on wagering on simulcasted races from El Comandante. Management requested an extension beyond January 31, 1998 but no response has been received from the Government. However, a portion of the Government's taxes are being set aside in a restricted account pending the Government's final decision. If the economic assistance is not extended, it could have an adverse effect in Galapagos' financial conditions and its future results of operations. Expenses. Expenses from the Dominican Republic operations in 1997 remained at the same level as in 1996. An intensified effort by the management of Galapagos reduced controllable costs in 1997 in a broad range of expense categories. These reductions were offset by (i) increased expenditures for advertising and television, primarily related to the expansion of OTB agencies outside the Santo Domingo metropolitan area where television coverage of the races commenced July 1997 and (ii) reduced funds available for reimbursement of expenses arising from an account funded from a portion of wagers on pool bets. The decrease in these funds resulted from an agreement with horseowners effective July 1997 whereby they are entitled to 25% of these funds as purses, whereas Galapagos previously received the entire amount. Galapagos' share will further be reduced to 65% in July 1998 and to 50% in July 1999. Television Stations The Television Stations were sold in transactions closed in August 1996 (50%) and January 1997 (50%), resulting in gains of $581,000 and $4,669,000, respectively. During 1996 the revenues and expenses of the Television Stations were $1,725,000 and $1,477,000, respectively, while in 1997 there were no operations. (PAGE) Financial Expenses Financial expenses decreased in 1997 by $313,000 (3.5%) as compared with 1996. Excluding financial expenses in 1996 related to the Television Stations, the decrease was $175,000 and was primarily caused by interest savings attributable to (i) final payments of the Company's loan during 1997 (outstanding balance at December 31, 1996 was $500,000) and (ii) redemption of $3,237,000 of First Mortgage Notes in 1997. Depreciation Depreciation decreased in 1997 by $185,000 (7.3%) as compared with 1996. Excluding depreciation in 1996 related to the Television Stations, the change was not significant. Other expenses Other expenses increased in 1997 by $502,000 as compared with 1996, principally due to $320,000 in non recurring costs incurred by HDA for the cancellation of certain ECOC obligations to Supra aggregating $2,290,000; the cancellation was done in connection with HDA's redemption in August 1997 of Supra's 17% interest in HDA. The cancellation relieved HDA of its guarantee of approximately $1.6 million of the $2,290,000 obligation which would have become due upon termination of the El Comandante Lease. There was also an increase in costs and expenses reimbursed by the Company to EMC, its managing general partner, for services rendered by EMC's executives to the Company. Effective January 1, 1998, the only significant services rendered by EMC to the Company will be services of Directors since employees of EMC were transferred to a new wholly-owned subsidiary of the Company. Provision for Income Taxes The provision for income tax is primarily related to Puerto Rico income taxes on the Company's distributive share of HDA's income from Puerto Rico sources, without taking into account Galapagos losses or expenses of the Company. The deferred income taxes are related to the difference between the tax basis of the Company's investment in HDA and the amount reported in the financial statements. In 1997, approximately $463,000 of the deferred income tax provision is related to the reversal of the tax benefit recorded by the Company in prior years for the accumulated operating losses of the Television Stations, as a result of the sale of S&E in January 1997. See Note 9 to the Company's consolidated financial statements for composition of the provision for income taxes. Minority Interest The minority interest in 1996 was based on 18% of HDA's net income reduced by 45% of Galapagos' net losses. For 1997, the bases for recognition of minority interest changed as follows: (i) following redemption of Supra's 17% interest in HDA in August 1997, minority interest in HDA was based on 1% of HDA's net income and (ii) because accumulated losses of Galapagos allocable to minority stockholders exceeded their (PAGE) investment, minority interest in Galapagos' net losses was reduced by $308,971. Commencing in 1998, (i) if and while Galapagos continues generating losses, no minority interest in Galapagos' net losses will be recognized by the Company, and (ii) if Galapagos generates profits, no minority interest in Galapagos' net income will be recognized by the Company, up to $308,971. Extraordinary Item On September 29, 1997 HDA redeemed First Mortgage Notes in the principal amount of $2.5 million at 110% of par. This redemption was made in connection with the approval obtained from the holders of First Mortgage Notes to redeem the 17% interest in HDA owned by Supra. The $250,000 premium and related bond discount and deferred financing costs were written-off in 1997 as an extraordinary item. There were no similar charges in the comparable period of 1996. However, the Company is required to make an offer by December 1, 1998 to redeem $3 million in First Mortgage Notes, at 110% of par. If redeemed, the Company will also recognize an extraordinary item in 1998 for the premium and related write-offs. 1996 (HISTORICAL) COMPARED TO 1995 (PROFORMA) The following discussion of results of operations for 1996 as compared to 1995 is made based on unaudited proforma balances for 1995 as if the accounts of HDA had been included in the Company's financial statements at December 31, 1995. Puerto Rico Operations Revenues. Increased in 1996 by $105,000 (1%) from 1995, principally due to an increase in interest income on short term investments. Rental income from El Comandante did not change significantly: $14,322,000 in 1996 and $14,333,000 in 1995. Rental income in 1996 was based on 25% of ECOC's commissions of $57,286,000 from El Comandante wagering on 256 racing days, whereas 1995 rental income was based on 25% of ECOC's commissions of $55,731,000 from wagering on 207 racing days, plus fixed rent of $400,000 (eliminated effective January 1, 1996). In February 1996, ECOC commenced racing five days a week by adding Thursday to its previous four-day race week. Although the average daily commissions earned by ECOC declined in the 1996 period, the commissions earned on Thursday race days more than offset the decline in average daily commissions. The effect of the additional race day is shown by (1) the comparison of January 1996 and 1995 commissions earned by ECOC before introduction of Thursday racing, and (2) the comparison of February - December, 1995 commissions earned before Thursday racing commenced with commissions earned February - December 1996 after Thursday racing commenced. Whereas the January 1996 commissions were $501,000 less than the January 1995 commissions, the average monthly commissions for the balance of 1996 exceeded by $187,000 the average monthly commissions in the comparable months of 1995. (PAGE) Expenses. Increased in 1996 by $619,000 from 1995. The increase was caused primarily by HDA's assumption, effective January 1996, of the obligation to pay real property taxes on El Comandante, which were paid by ECOC through 1995. Dominican Republic Operations Revenues. Revenues in 1996 increased by $1,938,000 from 1995 due to increased commissions on wagering. Galapagos began simulcasting El Comandante races on February 27, 1995 to several sports betting agencies in the Dominican Republic and commenced live racing operations at V Centenario in April 1995. The increase in commissions is attributable to (i) full year of racing in 1996 versus partial year in 1995 and (ii) growth in the number OTB agencies -- 53 agencies when V Centenario opened in April 1995, 163 at December 31, 1995 and 230 at December 31, 1996. Galapagos also had revenues of $523,000 in 1996 and $373,000 in 1995 from Jockey Club and restaurant operations and other miscellaneous sources. Expenses. Increased in 1996 by $1,573,000 from 1995. Costs incurred in connection with the Dominican Republic operations prior to the opening of V Centenario in April 1995, where deferred as start up costs, whereas under full operation during 1996 all operating costs were expensed. Certain costs, such as horseowners' 50% share of commissions, ECOC's management fee and fees paid to Autotote for providing the wagering system, are directly related to the amount of wagering or to commissions earned by Galapagos and, accordingly, accounted for a portion of the increase. The other increases in 1996 costs are largely attributable to the additional months that V Centenario operated in 1996, offset in part by credits of $545,000 for funds released for Galapagos' marketing costs from a restricted account upon authorization of the Government. Television Stations Overview. On August 30, 1996, HDA closed the sale of a 50% interest in Television Stations to Paxson, and consequently, the accounts of S&E were included in the Company's consolidated financial statements only through August 1996. The sales price was $4 million, and a gain of $581,000 was recorded in 1996 for this sale. The costs of this sale included approximately $1.5 million for employee severance payments, costs to cancel certain contracts, write-off of deferred costs not recoverable under the revised broadcasting and programming format, legal, accounting and investment bankers' fees, and fees to holders of First Mortgage Notes for consenting to the transaction. Commencing September 1996 Paxson assumed responsibility for managing the Television Stations. Revenues. S&E commenced television broadcasting in January 1995 on a test basis until June 26, 1995, and therefore, did not have a full year of operations in 1995. Also pursuant to the terms of a brokerage agreement effective February 1996, Paxson provided S&E programming, including infomercials, and changed the programming format. For the period from September to December 1996 the revenues only included the Company's 50% share (PAGE) of S&E's net income. Consequently, the revenues between years are not readily comparable. Expenses. Decreased in 1996 by $1,279,000 from 1995. Operating costs incurred during the 1995 test period were deferred as start-up costs while operating costs in the period from January to August, 1996 were expensed. The 1996 costs include fees of $272,000 to Paxson pursuant to the time brokerage agreement for the seven months from February through August 1996. Costs between periods are not readily comparable because (i) certain costs were deferred during the 1995 test period, (ii) the change in the broadcasting and programming format which commenced February 1996 resulted in significant reductions in production and programming costs in 1996 and (iii) fees to Paxson of $272,000 in 1996. Financial Expenses Financial expenses in 1996 increased by $46,000 from 1995. The increase was primarily caused by interest in 1996 on a debt to the Dominican Republic Government and on advances to the Company by its general partner, net of a $86,000 reversal of interest on loans to minority stockholders. Galapagos pays taxes to the Government of the Dominican Republic based on a percentage of wagering. The Government agreed to a deferred payment plan for taxes of approximately $519,000 and interest of $91,000 was accrued in 1996 on this deferred liability. The balance of the indebtedness was $473,000 at December 31, 1996. Depreciation Depreciation increased in 1996 by $345,000 from 1995. The increase is primarily caused by capital additions to El Comandante during the year. Property and equipment of V Centenario was not depreciated until the commencement of its live racing operations on April 29, 1995, while there was a full year of depreciation in 1996. Depreciation of $207,000 in 1996 and $169,000 in 1995 was related to a step-up of $5,650,000 in El Comandante assets. The step-up is the value assigned HDAMC's interest in HDA which was transferred to the Company in March 1995 in exchange for Units of the Company. Other Expenses Other expenses decreased in 1996 by $273,000 from 1995. The decrease results from 1995 costs of (i) $134,000 in 1995, related to the application by VJC, a subsidiary of the Company (currently inactive), for a license to operate a race track in Virginia and VJC's appeal of the grant of the license to another applicant and (ii) $131,000 for legal, accounting and other costs incurred in connection with the distribution in February 1995 by IGC to its unitholders of a 99% interest in the Company. No similar costs were incurred in 1996. There were also reductions in 1996 in IGC and EMC support services of $82,000 and costs of $37,000 related to investigating new business opportunities, and increases in 1996 in legal, accounting and consulting fees (PAGE) of $86,000 and Directors' fees and expenses of $30,000. Provision for Income Taxes The Company is subject to Puerto Rico income tax at a 29% rate on its allocable share of HDA's taxable income and ECCC, an HDA subsidiary, is subject to Federal income taxes. HDA had previously provided for deferred Dominican Republic income taxes on interest accrued on Stockholders' loans to Galapagos. The accrued interest was forgiven in 1996 and a tax credit was recorded for reversal of the deferred tax provision applicable to the forgiven interest. 1996 COMPARED TO 1995 (HISTORICAL) The Company did not consolidate the accounts of HDA until March 8, 1995. Accordingly, the Company's historical results of operations for 1996 and 1995 are not readily comparable and the discussion below is limited to a comparison of revenues and expenses of the Company and VJC for these years. Other Revenues. The Company received a cash distribution of $134,000 from HDA in February 1995 and insignificant amounts of interest income in both years. Because the Company had a zero investment in HDA when the cash distribution of $134,000 was received in February 1995 and since the distribution was received prior to the consolidation of HDA's accounts as of March 8, 1995, the distribution represented revenue to the Company that was not eliminated in the consolidated financial statements. Other Expenses. The changes in expenses were primarily reductions in 1996 in IGC and EMC support services of $82,000 and costs of $37,000 related to investigating new business opportunities, and increases in 1996 in legal, accounting and consulting fees and Directors' fees and expenses. In 1995 there were also costs of $134,000 related to VJC's application for licenses to own and operate Virginia's first thoroughbred racing and pari-mutuel wagering facility and to VJC's appeal of the grant of the license to another applicant. No similar costs were incurred in 1996. Financial Expenses. Related to interest and amortization of financing costs on a bank loan and interest on loans from IGC. Provision for Income Taxes. The Company is subject to Puerto Rico income tax at a 29% rate on its allocable share of HDA's taxable income and ECCC, an HDA subsidiary, is subject to federal income taxes. HDA had previously provided for deferred Dominican Republic income taxes on interest accrued on Stockholders' loans to Galapagos. The accrued interest was forgiven in 1996 and a tax credit was recorded for reversal of the deferred tax provision applicable to the forgiven interest. (PAGE) LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of cash during the year was distributions from HDA, which are eliminated in the Company's consolidated financial statements. Pursuant to the Indenture for the issuance of its First Mortgage Notes, HDA's ability to make distributions to its partners is restricted to approximately 48% of HDA's consolidated book income. In connection with the redemption in August 1997 of a 17% interest owned by a minority partner (a transaction that required the approval of holders of First Mortgage Notes), HDA agreed to reduce its distributions by 17%. Because cash held by HDA and its subsidiaries is not readily available to the Company, capital resources and liquidity of the Company and HDA are discussed separately. Liquidity and Capital Resources of the Company. Cash of the Company at December 31, 1997 was approximately at the same level as December 31, 1996. The Company's sources of cash for 1997 were $2,480,000 in cash distributions from HDA and $320,000 in commissions related to the sale of the Television Stations. These sources were sufficient to cover the operating activities of the Company and its financial obligations with respect to a bank loan and advances received in prior years from a general partner. At December 31, 1997, the Company had paid all of its loans. Effective January 1, 1998, EMC transferred to the Company (i) its agreements to provide certain management services to HDA and each of its subsidiaries and (ii) the executives rendering these services. Management estimates 1998 cash requirements in approximately $1.9 million and cash receipts of approximately $2.3 million from the following sources (arising from transactions that will be eliminated in the Company's consolidated financial statements): (i) cash distributions from HDA, estimated at $500,000 (see "Liquidity and Capital Resources of HDA") (ii) estimated fees of $1.4 million earned by the Company under these management agreements and (iii) collection of approximately $400,000 of its receivables from subsidiaries. The Company's liquidity greatly depends on the ability of its subsidiaries to pay the 1998 fees for services and their 1997 payables to the Company and HDA's ability to make cash distributions to the Company. Because Galapagos has generated losses in prior years and EGP is a start-up operation, there is no assurance that the entire amount of these fees will be collected. Liquidity and Capital Resources of HDA. Cash and cash equivalents of HDA, excluding its consolidated subsidiaries, decreased by $3,674,000 during 1997 to $363,000 at December 31, 1997. HDA's 1997 uses of cash for financing and investing activities were (i) redemption of $3,487,000 in First Mortgage Notes, (ii) redemption of a minority 17% interest in HDA for $4 million, (iii) cash distributions to partners of $3,024,000, (iv) capital improvements to El Comandante of $619,000, (v) investment in Galapagos of $1,491,500, and (vi) investment in EGP of $2,875,000 (of which $2.2 million was paid to the Panama Government for the right to operate Presidente Remon). The $7 million proceeds of sale in January 1997 of a 50% interest in the Television Stations and proceeds of a $1 million loan in December 1997, together with HDA's beginning (PAGE) cash balance and cash flows from operations (primarily from its rental activities related to El Comandante) were sufficient to cover HDA's 1997 capital requirements and financial obligations. The $1 million loan from a financial institution is payable in four quarterly installments of $250,000, commencing April 1, 1998. Due to an ECOC default for unpaid rent and certain other reasons permitted under the El Comandante Lease, HDA terminated the El Comandante Lease on December 31, 1997. On January 1, 1998, ECOC transferred to ECMC, a wholly owned subsidiary of HDA, all assets employed in the racing business and the Operating License, and ECMC assumed all agreements of ECOC and its liabilities, including certain capital leases. At December 31, 1997 ECOC's liabilities exceeded assets by $3 million including certain payables to HDA amounting to $3.1 million. The termination of the El Comandante Lease and the assignment of the Operating License to ECMC are subject to the approval of the PR Racing Board. The Racing Board has not given final approval but has permitted ECMC to operate El Comandante until the review process is concluded. Management expects that approval of these transactions to be subject to making the Company and HDA (i) primarily responsible to ensure that ECMC complies with all terms and provisions of the Operating License and applicable regulations and orders of the Racing Board, and (ii) jointly liable with ECMC with respect to all financial commitments with horseowners. As a result of the termination of the El Comandante Lease, commencing in 1998 HDA's principal source of revenues will be commissions on wagering on El Comandante's races and on simulcasted races, principally to the Dominican Republic and Panama. Management has projected commissions on wagering for 1998 at the same level as in 1997, approximately $55 million. During 1997 wagering in Puerto Rico on El Comandante races declined, in part due to additional gaming opportunities, particularly additional and up-graded slot machines. However, Management expects to partially offset this negative effect by expanding simulcasting of El Comandante races in the Caribbean and Central America countries and installing local telephone betting in the Dominican Republic, Panama and, subject to the approval of the PR Racing Board, in Puerto Rico. Capital requirements and financial obligations of HDA in 1998 and anticipated cash distributions to partners are expected to be covered by cash flows from operations and net cash flows from its investment in EGP (see discussion below). HDA has budgeted $1.4 million in capital improvements to El Comandante. The 1998 financial requirements of HDA and ECMC consist of (i) principal payments on capital leases, (ii) principal payments on the December 1997 loan of $1 million discussed above and (iii) $3.3 million for redemption of First Mortgage Notes. HDA is required to make an offer not later than December 1, 1998 to redeem First Mortgage Notes in the principal amount of $3 million at 110% of par or it will have to pay a penalty of $971,000, equal to 1.5% of the principal amount of outstanding First Mortgage Notes. HDA's ability to redeem the $3.3 million of First Mortgage Notes and make (PAGE) distributions to partners will partly depend on recovering from EGP $1,375,000 of the funds invested in Panama in 1997 and any additional funds invested in 1998. The recovery requires the closing of an underwriting of EGP's equity and debt securities. In January 1998, EGP received a $1.5 million bridge loan from an investment banker in Panama and an underwriting proposal to raise, in a private placement of registered securities, approximately $1.5 million from the sale of 49% of EGP's capital stock and $3.5 million of EGP's unsecured debt. The unsecured debt is proposed to contain the following terms: (i) 11% interest rate, (ii) interest payments during the first two years, monthly payments of principal and interest for next four years, and a balloon principal payment at maturity in six years and (iii) requirement for HDA to maintain a capital investment in EGP of $1.5 million, the maximum amount permitted under HDA's Indenture once EGP ceases to be a wholly owned subsidiary of HDA. Upon closing of the underwriting, the bridge loan and accrued interest will be repaid, HDA will recover all funds invested in EGP in excess of the $1.5 million permitted amount, and the balance of the proceeds after offering costs will be available for EGP's capital improvements to Presidente Remon, acquisition of equipment and working capital. Under the contract for the operation of Presidente Remon, EGP is required to invest $4 million during the first four years in capital improvements and acquisition of wagering and race track equipment. Management expects the EGP underwriting to close in June 1998 but there can be no assurance that this deadline will be met. If the Offering is not closed before June 15, 1998 and as a consequence HDA does not recover $1,375,000 of its investment at December 31, 1997 and any additional funds invested in 1998 by that date, HDA may temporarily need another source of funds to make the $3.8 million interest payment on its First Mortgage Notes due on June 15, 1998. In addition to capital leases assumed from ECOC, HDA's long-term cash commitments are charitable contributions of $550,000 and repayment commencing in 2000 of First Mortgage Notes. In connection with the termination of the El Comandante Lease, ECMC assumed commitments to make contributions of $550,000 to certain charitable and educational institutions as follows: $100,000 in 1998, $100,000 in 1999, $150,000 in 2000 and $200,000 in 2001. Management expects to satisfy these obligations. HDA's First Mortgage Notes bear interest at 11.75%, payable semiannually on June 15 and December 15, and are secured by El Comandante assets. The First Mortgage Notes are redeemable, at the option of HDA, at redemption prices decreasing from 104.125% to 101.5% of par, depending upon the redemption date (see Note 6 to the Company's consolidated financial statements). The stated maturity dates are as follows: $3,563,000 in 2000 (decreased by any amount of First Mortgage Notes redeemed in 1998), $10,200,000 in 2001, $10,200,000 in 2002 and $40,800,000 in 2003 at maturity. Management expects to refinance this obligation in 2001. Year 2000 Computer Issue. Many computer systems in use today were designed and developed using two digits, rather than four, to specify the year. (PAGE) As a result, such systems will recognize the year 2000 as "00". This could cause many computer applications to fail completely or to create erroneous results unless corrective measures are taken. The Company and its subsidiaries utilize software and related computer technologies essential to its operations that will be affected by the year 2000 issue. The Company is studying what actions will be necessary to make its computer systems Year 2000 compliant. The expense associated with these actions cannot presently be determined, but could be significant. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (PAGE) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the partners of Equus Gaming Company L.P.: We have audited the accompanying consolidated balance sheets of Equus Gaming Company L.P. (a Virginia limited partnership) (the Company) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income (loss), changes in partners' deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1997 and 1996 balance sheets of Galapagos S.A. which reflect total assets of 4% each year nor the statement of net income (loss) for the years ended December 31, 1997, 1996 and 1995 which reflect total revenues of 23%, 23% and 19%, respectively, of the consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for this entity, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors, provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Equus Gaming Company L.P. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP March 31, 1998 San Juan, Puerto Rico (PAGE) EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995 ----------- ----------- ----------- REVENUES: Rental income from El Comandante Race Track $13,720,424 $14,321,401 $11,428,711 Cash distribution from Housing Development Associates S.E.("HDA") - - 134,000 Dominican Republic operations- Commissions on wagering from racing 4,618,720 4,513,252 2,718,646 Net revenues on lotto sales 87,659 - - Other revenues 781,641 523,348 368,186 Television Stations - 1,724,991 1,344,338 Gain from sale of Television Stations 4,669,400 581,120 - Interest income 419,823 232,048 91,775 ----------- ----------- ----------- 24,297,667 21,896,160 16,085,656 ----------- ----------- ----------- EXPENSES: Financial 8,734,827 9,048,141 7,397,759 Depreciation 2,322,732 2,508,116 1,828,841 General and administrative 2,233,488 1,807,104 1,114,807 Operating costs of Dominican Republic racing 5,976,140 5,971,818 4,341,046 Operating costs of Television Stations - 1,461,312 2,350,412 Other costs 319,550 - 133,713 ----------- ----------- ----------- 19,586,737 20,796,491 17,166,578 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEM 4,710,930 1,099,669 (1,080,922) PROVISION FOR INCOME TAXES: Current 1,582 263,163 222,164 Deferred 893,403 136,860 8,991 ----------- ----------- ----------- INCOME (LOSS) BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM 3,815,945 699,646 (1,312,077) MINORITY INTEREST IN INCOME (LOSS) 878,033 (127,577) (720,792) ----------- ----------- ----------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 2,937,912 827,223 (591,285) EXTRAORDINARY ITEM - Premium on early redemption of First Mortgage Notes and write-off of related deferred financing costs and note discount 459,173 - - ------------ ----------- ----------- NET INCOME (LOSS) $ 2,478,739 $ 827,223 $ (591,285) =========== =========== =========== (continues) (PAGE) EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, (continued) 1997 1996 1995 ----------- ----------- ---------- ALLOCATION OF NET INCOME (LOSS): General Partners $ 24,787 $ 8,272 $ (77,247) Limited Partners 2,453,952 818,951 (514,038) ----------- ----------- ----------- $ 2,478,739 $ 827,223 $ (591,285) =========== =========== =========== BASIC AND DILUTED PER UNIT AMOUNTS: Net income (loss) before extraordinary item $ 0.46 $ 0.13 $ (0.08) Extraordinary item (0.07) - - ----------- ----------- ----------- Net income (loss) per unit $ 0.39 $ 0.13 $ (0.08) =========== =========== =========== WEIGHTED AVERAGE UNITS OUTSTANDING 6,333,617 6,333,617 6,223,381 =========== =========== =========== The accompanying notes are an integral part of these consolidated statements. (PAGE) EQUUS GAMING COMPANY L.P. CONSOLIDATED BALANCE SHEETS ASSETS December 31, --------------------------- 1997 1996 ----------- ------------ CASH AND CASH EQUIVALENTS $ 507,656 $ 4,268,029 ----------- ------------ ASSETS RELATED TO RACE TRACKS: Property and equipment- Land 7,128,858 7,128,858 Buildings and improvements 48,855,905 48,138,946 Equipment 3,346,834 2,669,639 ----------- ------------ 59,331,597 57,937,443 Less accumulated depreciation (14,275,812) (11,981,552) ----------- ------------ 45,055,785 45,955,891 Receivables from El Comandante Operating Company, Inc. ("ECOC") 3,106,497 2,780,416 Deferred costs- Financing 3,565,586 4,055,866 Costs of Panama contract 2,356,292 - Organizational and other 393,704 370,120 Other 1,201,839 932,566 ----------- ------------ 55,679,703 54,094,859 ----------- ------------ ASSETS RELATED TO TELEVISION STATIONS: Investment in S & E Network Inc. ("S&E") - 1,825,243 Other - 398,199 ----------- ------------ - 2,223,442 ----------- ------------ $56,187,359 $60,586,330 =========== ============ (continues) (PAGE) EQUUS GAMING COMPANY L.P. CONSOLIDATED BALANCE SHEETS (continued) LIABILITIES AND PARTNERS' DEFICIT December 31, --------------------------- 1997 1996 ----------- ------------ LIABILITIES RELATED TO RACE TRACKS: First Mortgage Notes- Principal, net of note discount of $1,398,887 and $1,596,261, respectively $63,364,113 $66,403,739 Accrued interest 317,069 332,918 Minority interest in Galapagos - 111,427 Notes payable 615,697 572,550 Accounts payable and accrued liabilities 1,355,592 2,162,519 Accrued income taxes 1,069,902 437,692 ----------- ------------ 66,722,373 70,020,845 ----------- ------------ OTHER LIABILITIES: Unsecured partner's loans - 415,883 Notes payable 1,260,000 500,000 Accounts payable and accrued liabilities 215,531 287,976 Minority interest in HDA 82,631 550,605 ----------- ------------ 1,558,162 1,754,464 ----------- ------------ PARTNERS' DEFICIT: General Partners (728,644) (752,867) Limited Partners - 6,383,617 units authorized; 6,333,617 units issued and outstanding in 1997 and 1996 (11,364,532) (10,436,112) ----------- ------------ (12,093,176) (11,188,979) ----------- ------------ $56,187,359 $60,586,330 =========== ============ The accompanying notes are an integral part of these consolidated balance sheets. (PAGE) EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 General Limited Partners Partners Total ----------- ------------ ------------ BALANCES, December 31, 1994 $ (524,217) $ - $ (524,217) Net loss for the year (77,247) (514,038) (591,285) Issuance of partnership's units - 5,650,000 5,650,000 Effect of consolidation of HDA (158,406) (15,682,238) (15,840,644) Currency translation adjustments (933) (92,388) (93,321) Cash distributions to minority partners of HDA - (388,345) (388,345) ----------- ------------- ------------ BALANCES, December 31, 1995 (760,803) (11,027,009) (11,787,812) Net income for the year 8,272 818,951 827,223 Currency translation adjustments (336) (33,294) (33,630) Cash distributions to minority partners of HDA - (194,760) (194,760) ----------- ------------ ------------ BALANCES, December 31, 1996 (752,867) (10,436,112) (11,188,979) Net income for the year 24,787 2,453,952 2,478,739 Currency translation adjustments (564) (55,883) (56,447) Cash distributions to minority partners of HDA - (544,139) (544,139) Redemption of 17% minority interest in HDA - (2,782,350) (2,782,350) ----------- ------------ ------------ BALANCES, December 31, 1997 $ (728,644) $(11,364,532) $(12,093,176) =========== ============ ============ The accompanying notes are an integral part of this consolidated statement. (PAGE) EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 2,478,739 $ 827,223 $(591,285) ----------- ----------- ----------- Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities- Extraordinary item 459,173 - - Gain from sale of Television Stations (4,669,400) (581,120) - Equity in earnings - (55,533) - Depreciation 2,322,732 2,508,116 1,828,841 Amortization 762,423 853,035 798,773 Deferred income tax provision 893,403 136,860 8,991 Currency translation adjustments (56,447) (33,630) (93,321) Forgiveness of interest - (173,754) - (Increase) decrease in assets- Rent receivable from ECOC (654,307) (1,188,067) (796,146) Deferred costs (2,356,292) (97,598) (36,971) Other 263,128 (435,306) (756,985) Increase (decrease) in liabilities- Accrued interest (2,805) 66,703 (1,359,409) Accounts payable and accrued liabilities (984,030) 1,040,160 (60,293) Accrued income taxes (261,192) 68,852 134,315 Minority interest 878,033 (127,577) (720,792) ----------- ----------- ----------- Total adjustments (3,405,581) 1,981,141 (1,052,997) ----------- ----------- ----------- Net cash (used in) provided by operating activities (926,842) 2,808,364 (1,644,282) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,422,626) (554,214) (1,790,109) Loan to ECOC - - (1,000,000) Collections of note from ECOC 326,661 207,594 - Effect of the consolidation of S&E - (129,948) - Sales of Television Stations - Proceeds 7,000,000 4,000,000 - Costs (505,357) (418,950) - Effect of consolidation of HDA cash accounts - - 3,429,221 ----------- ----------- ----------- Net cash provided by investing activities 5,398,678 3,104,482 639,112 ----------- ----------- ----------- (continues) (PAGE) EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (continued) 1997 1996 1995 ----------- ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemption of First Mortgage Notes (3,237,000) - - Premium on redemption of First Mortgage Notes (250,000) - - Loans and contributions from minority stockholders 32,758 - 1,057,750 (Payments to) loans from general partner, net (415,883) 204,254 80,762 Loans from financial institutions 1,258,079 448,418 2,799,525 Issuance of notes payable to Supra 260,000 - - Payments on notes payable (714,213) (2,417,517) (747,191) Increase in deferred costs (307,527) (499,504) (983,039) Redemption of 17% minority interest in HDA (4,314,284) - - Cash distributions to minority partners of HDA (544,139) (194,760) (388,345) ----------- ----------- ----------- Net cash (used in) provided by financing activities (8,232,209) (2,459,109) 1,819,462 ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,760,373) 3,453,737 814,292 CASH AND CASH EQUIVALENTS, beginning of year 4,268,029 814,292 - ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 507,656 $ 4,268,029 $ 814,292 =========== =========== =========== SUPPLEMENTAL INFORMATION: Interest paid $ 7,992,439 $ 8,269,562 $ 8,165,847 Income taxes paid 262,500 194,310 94,844 NONCASH TRANSACTIONS: Effect of consolidation of HDA's non cash accounts - - (19,269,865) Step-up in value of assets related to race tracks - - 5,650,000 Units appreciation rights 106,534 - - The accompanying notes are an integral part of these consolidated statements. (PAGE) EQUUS GAMING COMPANY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: Equus Gaming Company L.P. (the "Company"), a Virginia limited partnership, is engaged in thoroughbred racing, wagering and other gaming businesses through its 99% indirectly owned subsidiary, Housing Development Associates S.E. ("HDA"). HDA owns El Comandante Race Track ("El Comandante"), the only licensed thoroughbred racing facility in Puerto Rico, located in 257 acres of land. El Comandante was leased to El Comandante Operating Company, Inc., a Puerto Rico non-stock corporation ("ECOC") until December 31, 1997 (see Note 2). HDA also has interests of: (i) 55% in Galapagos, S.A. ("Galapagos"),a company that operates since April 1995 the V Centenario Race Track in the Dominican Republic ("V Centenario"), (ii) 100% in Equus Gaming de Panama, S.A. ("EGP"), a company that operates since January 1, 1998 the Presidente Remon Race Track in the Republic of Panama ("Presidente Remon"), and (iii) 100% in El Comandante Management Company, LLC ("ECMC"), the company that operates El Comandante since January 1, 1998, following termination by HDA of its lease agreement with ECOC. HDA was also the owner of S & E Network Inc. ("S&E"), which owned and operated three UHF television stations in Puerto Rico (the "Television Stations"), until sold to Paxson Communications of San Juan, Inc. ("Paxson") in transactions closed in August 1996 (50% interest) and January 1997 (50% interest). In 1997 the Company formed Equus Entertainment Corporation ("EEC"), as a wholly-owned Puerto Rico corporate subsidiary, for the purpose of replacing the Company once certain approvals are obtained. Consolidation and Presentation The Company consolidates in its financial statements the accounts of entities in which it has a controlling interest in excess of 50%. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries after eliminating all significant inter-company transactions. All of the entities included in the consolidated financial statements are hereinafter referred to collectively, when practicable, as the "Company". The accounts of HDA and its subsidiaries have been consolidated since March 8, 1995 and the accounts of S&E have been excluded from the consolidation since September 1, 1996 due to the reductions in ownership interests. Prior to March 8, 1995 the Company had an interest in HDA in excess of 50%. However, generally accepted accounting principles ("GAAP") did not permit the Company to consolidate the accounts of HDA in its financial statements because HDA Management Corporation ("HDAMC"), a partner in HDA (see Note 6), had the right to approve any sale or disposition of HDA's assets in excess of $500,000 and the incurrence of any debt in excess of $1 million. On March 8, 1995, HDA's partnership agreement was amended to eliminate these approval rights of HDAMC, and effective such date the accounts of HDA have been consolidated with the Company's accounts. The Company recognized in 1995 revenues of $134,000 from cash distributions that were received from HDA prior to consolidation of HDA's accounts in the Company's financial statements. (PAGE) During the years ended December 31, 1997, 1996 and 1995 the Company recorded minority interest in the income and (losses) of consolidated subsidiaries, as follows: For the Year Ended December 31, -------------------------------------------- Subsidiary 1997 1996 1995 - ----------------- ------------ ------------ ------------- HDA $1,063,960 $ 487,046 $ 63,559 Galapagos (185,927) (614,623) (784,351) ------------ ------------ ------------- $ 878,033 $ (127,577) $ (720,792) ============ ============ ============= Minority interest in HDA represents the minority partners' share in HDA's net income based on approximately 1% since August 20, 1997, when HDA redeemed a 17% interest owned by Supra & Company S.E. ("Supra") (see Note 10), and 18% from January 1, 1996 until the date of redemption. For 1995 the recorded minority interest represents an 18% interest in HDA's net income in excess of the December 31, 1994 accumulated deficit of $818,750. Because HDA is a limited liability partnership and the partners do not have any legal obligation to fund any portion of such deficit, GAAP did not permit the Company to record the minority partners' share of HDA's net income until the accumulated deficit of HDA was eliminated by earnings. Minority interest in Galapagos represents the minority stockholders' 45% share in Galapagos net losses. In 1997 the Company recognized $308,971 of losses attributable to the minority interest because they have no legal obligation to fund such losses in excess of their investment. Outstanding Units, Warrants and Options On February 6, 1995, Interstate General Company L.P. ("IGC"), a publicly traded limited partnership, distributed to its unitholders 5,128,372 Class A Units ("Units") representing in the aggregate beneficial assignment of a 99% Class A limited partnership interest in the Company (the "Distribution"). On March 8, 1995 an additional 1,205,245 Units were issued by the Company to HDAMC. The Units are listed for trading on the Nasdaq National Market System ("Nasdaq") under the symbol "EQUUS". In connection with the Distribution and pursuant to the Control Transfer Agreement (see Note 10) the Company agreed to make available to IGC for no consideration 50,000 Units of the Company for Oppenheimer & Co., Inc. upon the exercise of certain warrants. IGC was a general partner of the Company until December 31, 1997. Net income (loss) per Unit is calculated based on the weighted average of Units outstanding since the Distribution on February 6, 1995. Outstanding options and warrants to purchase Units do not have a material dilutive effect on the calculation of earnings per Unit. Pervasiveness of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and (PAGE) liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 "Reporting Comprehensive Income", which is effective for fiscal years beginning after December 15, 1997. The statement establishes standards for reporting of comprehensive income and its components. The Company plans to adopt SFAS No. 130 in 1998 and the impact on the Company's financial statements is not expected to be significant. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information", which is effective for fiscal years beginning after December 15, 1997. The Company plans to adopt SFAS No. 131 in 1998. Rental Income from El Comandante Race Track Rental income represents rent earned under the El Comandante Lease, recognized when wagering commissions are earned by ECOC. In 1995 a portion of rental income, the fixed rent, was recognized in equal monthly installments. Revenues from Dominican Republic Operations Commissions on wagering represent income earned by Galapagos on bets placed on El Comandante's races simulcasted into the Dominican Republic and on live races held at V Centenario Race Track principally through wagering facilities located at independently owned off track betting ("OTB") agencies throughout the Republic. Revenues on lotto sales are fees earned under a contract for the distribution system of an electronic lottery, net of fees paid to the company providing the equipment, software and related services for the distribution system. In 1997, other revenues include $438,169 arising from Government tax receipts on El Comandante's simulcasted races, a portion of which have been released to Galapagos as reimbursement of certain costs (see Note 3). Revenues from Television Stations Revenues from Television Stations were primarily: (i) from contracts for the production and broadcasting of television programs, recognized when the programs had been completed and delivered and (ii) advertising income from sale of air time, recognized at the time of broadcast. In 1996 it also included HDA's $55,533 share of S&E's net income from August 31, 1996 to December 31, 1996, recognized under the equity method of accounting for investments. Cash Equivalents The Company considers as cash equivalents certificates of deposit with an issuance to maturity term of three months or less. Management intends to hold these certificates until maturity. (PAGE) Property and Equipment and Depreciation Land, buildings and improvements, and equipment are stated at cost plus a step-up of $5,650,000 of El Comandante assets on March 8, 1995 resulting from the issuance of Units of the Company to HDAMC for a 15% profits interest in HDA. Depreciation is calculated using the straight-line method over the estimated useful lives of the property: five to ten years for equipment, 35 years for buildings, and 10 to 15 years for land improvements. For the property related to El Comandante and the Television Stations, the composite depreciation method was used, where any gain or loss of property retired or sold is charged against accumulated depreciation, unless the amount involved is material. Costs paid by S&E for the licenses to operate the Television Stations were amortized, until sold, using the straight-line method over a period of 20 years. Deferred Costs Deferred financing costs are being amortized since December 15, 1993 over the 10 year life of the first mortgage notes using the interest method. Costs of Panama contract (see Note 4) will be amortized commencing January 1, 1998 over the 20-year period of the Panama license, using the straight line method. Organizational and other costs are being amortized using the straight-line method over the period of estimated benefit, ranging from 5 to 15 years. Upon the closing of the sale to Paxson on August 30, 1996, S&E wrote-off approximately $1 million of deferred costs and broadcast contract rights which did not have any future benefit to S&E under Paxson's management of the Television Stations. The write-off has been included in the accompanying consolidated financial statements as a reduction of the gain from the sale of Television Stations. Currencies The Company consolidates its accounts with Galapagos whose functional currency is the Dominican Republic peso ("RD$"), although United States dollars ("US$") are also a recording currency. US$ are exchanged into RD$ and vice versa through commercial banks and/or the Central Bank of the Dominican Republic. Galapagos remeasures its monetary assets and liabilities recorded in US$ into RD$ using the exchange rate in effect at the balance sheet date (the "current rate") and all other assets and liabilities and capital accounts, at the historical rates. Galapagos then translates its financial statements from RD$ into US$ using the current rate, for all assets and liabilities, and the average exchange rate prevailing during the year for the revenues and expenses. For the years ended December 31, 1997, 1996 and 1995, net exchange gains and (losses) resulting from remeasurement of accounts, together with gains and (losses) from foreign currency transactions, amounted to $(36,000) and $(82,000) (included in operating costs) and $37,000 (included in other revenues). Accumulated net losses from changes in exchange rates due to the translation of assets and liabilities of Galapagos are included in partners' deficit and at December 31, 1997 and 1996 amounted to $183,400, including $52,200 from unsettled intercompany transactions, and $126,950, respectively. The exchange rates as of December 31, 1997 and 1996 were US$1.00 to RD$14.50 (PAGE) and US$1.00 to RD$13.97, respectively, and the average exchange rates prevailing during the years ended December 31, 1997, 1996, and 1995, were US$1.00 to RD$14.44, US$1.00 to RD$13.75, and US$1.00 to RD$13.00, respectively. The Company also consolidates its accounts with EGP whose functional currencies are the Panama colones and the US$. Because these currencies are of equivalent value, there is no effect attributed to foreign currency transactions of EGP. Reclassifications Certain amounts presented for 1996 and 1995 in the accompanying consolidated financial statements have been reclassified to conform with the 1997 presentation. 2. EL COMANDANTE LEASE AND PUERTO RICO RACING OPERATIONS: Operating License On December 15, 1989, the Puerto Rico Racing Board (the "PR Racing Board") granted ECOC a license to operate El Comandante, which expires on December 14, 2004 (the "Operating License"). The Operating License, which requires payment of an annual license fee (currently $250,000), provides ECOC with: (i) the exclusive right to operate a race track in the area of Puerto Rico known as the San Juan Region, which approximates the northern half of Puerto Rico, as delineated in maps produced by the Puerto Rico Planning Board and Government Development Administration; (ii) the exclusive right to conduct all types of authorized betting, both at El Comandante and off-track, anywhere in Puerto Rico, based on races held at El Comandante; and (iii) the right to hold a minimum 180 day or night race days per year. Upon its expiration in December 2004, there can be no assurance that a new Operating License will be issued. However, ECOC and the prior owner of El Comandante have continuously operated the only thoroughbred racing facility in Puerto Rico since 1957. El Comandante's horse racing and pari-mutuel wagering operations are subject to substantial government regulation. Pursuant to the Puerto Rico Horse Racing Industry and Sport Act (the "Racing Act"), the PR Racing Board and the Puerto Rico Racing Administrator (the "Racing Administrator") exercise significant regulatory control over El Comandante's racing and wagering operations. For example, the Racing Administrator determines the monthly racing program and approves the number of annual race days in excess of the statutory minimum of 180. The Racing Act also apportions payments of the wagering handle and thus the Racing Act could be amended through legislation to reduce the share of monies wagered that would be available as commissions. The PR Racing Board consists of three persons appointed to four-year terms by the Governor of Puerto Rico. The Racing Administrator is also appointed by the Governor for a four-year term. (PAGE) El Comandante Lease Until December 31, 1997 HDA leased El Comandante to ECOC under a lease agreement, as amended, (the "El Comandante Lease") that required payments by ECOC to HDA of rent consisting of 25% ("Basic Rent") of the annual commissions earned by ECOC. These commissions consist of all payments received by ECOC on all monies wagered with respect to horse racing occurring at El Comandante, whether wagered at El Comandante or at other betting facilities in Puerto Rico or any other country. In 1995, the El Comandante Lease also provided for payment of certain fixed rent of $400,000. The El Comandante Lease provided for ECOC to pay all El Comandante expenses except that, pursuant to (i) an amendment effective January 1, 1996, HDA assumed the obligation to pay real property taxes on El Comandante and (ii) an amendment effective January 1, 1997, HDA assumed the obligation to pay the annual racing license fee. Termination of El Comandante Lease and Agreements Assumed On October 31, 1997, HDA notified ECOC the termination of the El Comandante Lease effective December 31, 1997 due to the existing default for unpaid Basic Rent (see Note 5) and for certain other reasons permitted under the El Comandante Lease. On January 1, 1998 at HDA's direction, ECOC transferred to ECMC, at book value, all assets employed in the racing business and ECMC assumed all agreements of ECOC and its liabilities, including the $3.1 million due to HDA and $550,000 in commitments made by ECOC's Board of Directors to make contributions to several charitable and educational institutions during a four year period commencing in 1998. At December 31, 1997, ECOC's liabilities exceeded its assets by approximately $3 million (see unaudited proforma financial statements in Note 13). Effective January 1, 1998, ECMC commenced operating El Comandante pursuant to the Operating License. Among the agreements assumed by ECMC upon termination by HDA of El Comandante Lease are the horse owners' agreement and wagering service agreement. The agreement with the Confederacion Hipica de Puerto Rico (the "Confederacion"), which expires on April 1, 1998, provides for payment to horseowners of (i) 50% of wagering commissions received by the operating company on races held at El Comandante, (ii) an annual fixed amount of $55,000 from 1993 to 1998, and (iii) a minimum of $500 per race day for wagering commissions on El Comandante races simulcasted outside Puerto Rico ("Simulcasting Commissions"). When Simulcasting Commissions exceed simulcasting expenses plus $500, the Confederacion receives $500 plus 50% of Simulcasting Commissions. The agreement with Autotote Systems, Inc. ("Autotote") for wagering services, software and equipment, which expires on March 15, 2005, requires minimum annual payments which consist of the greater of $800,800 annually or .65% (.0065) of total wagering. The Confederacion agreed to reimburse the operating company an amount equal to .325% (.00325) of wagering for each race day up to a maximum of $3,461 per race day until April 1998. Management is in the process of renegotiating the agreement with the Confederacion and does not expect any significant changes in the economic terms of the contract that might materially affect the financial position of ECMC or the Company. (PAGE) ECMC also assumed an agreement with S&E for the broadcast of El Comandante's races effective February 1, 1997 (the "S&E Broadcast Agreement") which requires the purchase of television time for a minimum of 910 hours at the rate of $725 per hour (minimum annual amount of $659,750), adjusted annually by CPI, or at the rate of $900 per hour, also subject to CPI adjustments, if television time after 7:00 PM is needed. The S&E Broadcast Agreement is non-cancelable by either party for ten years and thereafter can be cancelled by HDA, at five year intervals, or by S&E, upon payment of liquidated damages of $2 million plus CPI after January 1997. ECOC was, and ECMC will be, responsible for producing the racing show and directing the broadcast and is entitled to the revenues from the sales of advertising time during the broadcasts of the racing program. The termination of the El Comandante Lease and the assignment of the Operating License to ECMC are subject to the approval of the PR Racing Board. The Puerto Rico Racing Board has not made a final determination on this matter but has temporarily permitted ECMC to operate El Comandante until their review process is concluded. Management expects that approval of these transactions will be subject to making the Company and HDA (i) primarily responsible to ensure that ECMC complies with all terms and provisions of the Operating License and applicable regulations and orders of the PR Racing Board, and (ii) jointly liable with ECMC with respect to all financial commitments with the Confederacion. 3. DOMINICAN REPUBLIC OPERATIONS: V Centenario Lease The V Centenario is leased from the Dominican Republic Government and operated by Galapagos pursuant to a 10 year agreement ending in April 2005 (the "V Centenario Lease"). The V Centenario Lease may be renewed for additional ten year periods by mutual agreement of the parties. The V Centenario Lease also provides Galapagos with the right to develop off-track betting in the Dominican Republic and the exclusive right to simulcast horse races, into the Dominican Republic. The V Centenario Lease provides for payments of rent based on a percentage of the annual wagering on races run at V Centenario ("V Centenario Wagering"), as follows: .25% of the first RD$240 million (approximately US$16.5 million), .5% of the next RD$240 million, .75% of the next RD$240 million and 1% over RD$720 million (approximately US$49.6 million). The Dominican Republic Government agreed to invest tax receipts on simulcasted races from July 1997 through January 1998 to improve horse racing. Galapagos was entitled to 75% of the tax receipts, as reimbursement for repairs and maintenance at V Centenario, marketing and television costs and certain other items. Horseowners are entitled to the balance of the tax receipts as additional purses. Galapagos requested an extension beyond January 1998, which is expected to be approved, but no formal response has been received from the Government. If extended, pursuant to an agreement with horse owners, Galapagos's share in these tax receipts will be reduced to 65% in July 1998 and to 50% in July 1999 and years thereafter. (PAGE) Horse Owners' Agreement and Wagering Services Agreement Galapagos has an agreement with Dominican Republic horseowners whereby they receive 50% of Galapagos' commissions on V Centenario Wagering and 50% of commissions earned by Galapagos on El Comandante's simulcasted races, after deducting payments to ECOC for its commissions. Galapagos receives wagering services, software and equipment under a service agreement with Autotote for a ten year period ending March 15, 2005. Service fees during 1995 were .65% (.0065) of total wagering and thereafter are the greater of (a) .65% of total wagering or (b) $150,000 in 1996, $175,000 in 1997 and thereafter $200,000 annually. Consulting Agreement Galapagos receives executive management services pursuant to an agreement for the term of the V Centenario Lease. Services under this agreement were rendered by ECOC until June 30, 1997 when it was assigned to Equus Management Company ("EMC"), the managing general partner of the Company. Fees consist of 1% of wagering on simulcasted races and on V Centenario Wagering, with a maximum amount of $250,000 annually, adjusted by CPI commencing in January 1996. Galapagos also reimburses the out-of-pocket expenses in connection with these services. During the years ended December 31, 1997, 1996 and 1995, Galapagos incurred fees of $224,000, $236,000 and $141,000, respectively. Lottery Galapagos has a five year contract with a private operator to provide the wagering distribution system for a government-sponsored electronic lottery, which commenced in November 1, 1997. Galapagos has an agreement with Autotote to obtain wagering equipment, software and related services. Lottery games are sold at OTB agencies of Galapagos and at lottery agencies selected by the operator. Galapagos' commissions (net of fees to Autotote) are 1% of gross lottery sales at lottery agencies and 2% of gross lottery sales at OTB agencies. In addition, the lottery operator pays Galapagos a monthly fee for each OTB agency that sells lottery games as reimbursement for a 50% share of telephone line costs. Galapagos is also permitted to identify the lottery agencies to take Pick 6 pool wagers on Galapagos' live and simulcasted races. Assets and liabilities related to Dominican Republic operations amounted to $2,288,000 and $1,692,000, respectively, as of December 31, 1997 and to $2,649,000 and $2,529,000, respectively, as of December 31, 1996. 4. REPUBLIC OF PANAMA OPERATIONS: EGP has a contract with the Panama Government for the operation of Presidente Remon in Panama City and for the development of off-track betting in Panama for a period of 20 years that commenced on January 1, 1998. The contract grants EGP exclusive rights to simulcast horse races from and to the country and the right to operate up to 500 slot machines at the race track. Upon execution of the contract, $2.2 million was paid to the Panama Government. EGP is required to invest up to $4 million in improvements to (PAGE) Presidente Remon and for the acquisition of wagering and related equipment in a period of four years. EGP began simulcasting races from United States race tracks on January 2, 1998 and live racing commenced on February 14, 1998, after major improvements to the racing strip were made. EGP has entered into certain contracts and commitments in connection with this operation, which should be in effect during 1998. An agreement with horseowners provides for minimum guaranteed payments to horseowners as purses in 1998 and 1999 of $3.6 million and $3.9 million, respectively. An agreement with Autotote for wagering services, software and equipment requires minimum monthly payments of $25,000 in 1998. Service fees will be based on 1% (.01) of total wagering. Management expects that 49% of the capital stock of EGP will be sold to Panamanian investors for approximately $1.5 million and that EGP will raise an additional $3.5 million in unsecured debt by June 30, 1998. The Company has received an underwriting proposal from an investment banker in Panama with the following terms: (i) 11% interest rate, (ii) maturity in six years, (iii) no principal amortization during first two years, a balloon payment on maturity and (iv) requirement for HDA to maintain an investment in the capital of EGP of $1.5 million. In connection with this proposal, in January 1998 EGP received a $1.5 million bridge loan, which will be repaid together with accrued interest at 11%, from proceeds of the issuance of debt securities described above. As of December 31, 1997, assets related to Panama operations amounted to $3,033,000. 5. RECEIVABLES FROM EL COMANDANTE OPERATING COMPANY, INC.: Receivables from ECOC as of December 31, 1997 and 1996 consisted of (i) a note receivable and accrued interest of $467,977 and $796,203, respectively, and (ii) unpaid rent under the El Comandante Lease of $2,638,520 and $1,984,213, respectively. The note accrued interest at 5.75% and is due in monthly installments of $30,309, including interest, over a three year period that commenced on May 1, 1996. HDA assumed ECOC's liabilities in connection with the termination of El Comandante Lease effective January 1, 1998 and, consequently, these receivables will be eliminated from the Company's consolidated financial statements. Under the El Comandante Lease, ECOC was required to pay HDA its Basic Rent for each race day on the 29th day following such racing day when it became due and payable. Thereafter, unpaid Basic Rent constituted an extension of credit and an event of default under the El Comandante Lease. During 1997 ECOC was in default with respect to this provision. Under the Indenture (as defined in Note 6), the maximum outstanding amount of credit that HDA could extend to ECOC was $2 million, excluding the portion of the rent that has not become due and payable (but which has been accrued and included in rent receivable). During 1997 ECOC's payable to HDA increased to an amount that approached the limit established in the El Comandante Lease and the Indenture. The Indenture also required HDA to commence appropriate proceedings to enforce ECOC's obligation to pay rent if unpaid rent exceeded the monthly average for 30 days. (PAGE) As a result of the event of default related to payment of Basic Rent and for certain other reasons permitted under the El Comandante Lease, on October 31, 1997, HDA issued to ECOC a 60-day notice for the termination of the El Comandante Lease (see Note 2). 6. FIRST MORTGAGE NOTES: Pursuant to a private offering, El Comandante Capital Corp. ("ECCC"), a single-purpose wholly owned subsidiary of HDA, issued first mortgage notes in the aggregate principal amount of $68 million (the "First Mortgage Notes") under an indenture dated December 15, 1993 (the "Indenture") between ECCC, HDA and Banco Popular de Puerto Rico, as trustee (the "Trustee"), and HDAMC issued Warrants to purchase 68,000 shares of Class A Common Stock of HDAMC. Upon issuance of the Warrants, HDAMC and HDA recorded additional equity of $1,912,800, equal to the fair value of the Warrants of $2,040,000, less offering costs of $127,200, and recorded debt discount of $2,040,000. Such debt discount is being amortized using the interest method over the term of the First Mortgage Notes. The First Mortgage Notes mature on December 15, 2003 and bear interest at 11.75% payable semiannually. In March 1995 the Warrants automatically became exercisable to purchase Units of the Company from HDAMC. Payment of the First Mortgage Notes is guaranteed by HDA and the First Mortgage Notes are secured by a first mortgage on El Comandante and by certain other collateral which together encompass a lien on (i) the fee interests of HDA in the land and fixtures comprising El Comandante, (ii) all property rights of HDA in and to all related equipment, structures, machinery and other property, including intangible property, ancillary to the operations of El Comandante, (iii) substantially all of the other assets and property of HDA, including the capital stock of ECCC owned by HDA. ECCC is required to offer to purchase First Mortgage Notes, at face value, to the extent that HDA has accumulated excess cash flow, asset sales with net proceeds in excess of $5 million (to the extent these proceeds are not invested in HDA's racing business within a year), or a total taking or casualty, or in the event of a change of control of HDA. As a result of the sale of the Television Stations, HDA redeemed on March 28, 1997, $737,000 in First Mortgage Notes, at par. In connection with the Noteholders Approval (as described in Note 10), HDA redeemed on September 29, 1997 First Mortgage Notes in the principal amount of $2.5 million, at 110% of par. The $250,000 premium paid and corresponding write-off of note discount and deferred financing costs are included in the accompanying consolidated statement of income (loss) for the year ended December 31, 1997 as an extraordinary item. HDA has to make an offer not later than December 1, 1998 to redeem First Mortgage Notes in the principal amount of $3 million at 110% of par or it will have to pay a penalty equal to 1.5% of the principal amount of outstanding First Mortgage Notes. ECCC is required to redeem First Mortgage Notes in the principal amount of $6,800,000 on December 15, 2000, $10,200,000 on December 15, 2001 and 2002, and the balance at maturity. However, the 1997 redemptions have reduced the amount due on December 15, 2000. The stated maturities of the First Mortgage Notes at December 31, 1997, reduced by early redemptions are (PAGE) as follows (in thousands): Year Amount ---- ------- 1998 $ - 1999 - 2000 3,563 2001 10,200 2002 10,200 2003 40,800 -------- 64,763 Less note discount (1,399) -------- $63,364 ======== The amount due in 2000 will be reduced by any redemptions of First Mortgage Notes in 1998 pursuant to the $3 million offer. As discussed in Note 4, Management expects the EGP underwriting to close in June 1998 but there can be no assurance that this deadline will be met. If the Offering is not closed before June 15, 1998 and as a consequence HDA does not recover $1,375,000 of its investment at December 31, 1997 and any additional funds invested in 1998 by that date, HDA may temporarily need another source of funds to make the $3.8 million interest payment on its First Mortgage Notes due on June 15, 1998. ECCC and HDA may also redeem First Mortgage Notes on or after December 15, 1998 at the following redemption prices (expressed as percentages of principal amount): if redeemed during the 12-month period beginning December 15 of years 1998 at 104.125%, 1999 at 102.75%, 2000 at 101.5%, and 2001 and thereafter at 100% of principal amount, in each case together with accrued and unpaid interest. The Indenture contains certain covenants, one of which restricts the amount of distributions to HDA's partners, including the Company. These distributions are equal to approximately 48% of HDA's consolidated net income. In connection with the Noteholders Approval (see Note 10), HDA agreed to temporarily reduce these distributions by 17%. HDA is permitted to make additional cash distributions to partners and other Restricted Payments, as defined under the Indenture, equal to 44.25% of the excess of HDA's cumulative consolidated net income after December 31, 1993 over the cumulative amount of the 48% Distributions, provided that HDA meets a certain minimum debt coverage ratio. HDA has not meet this debt coverage ratio. 7. NOTES PAYABLE: The Company's outstanding notes payable consist of the following: (i) Capital leases of Galapagos for the acquisition of wagering equipment for OTB agencies in the Dominican Republic. The loans are guaranteed by HDA and collateralized by wagering equipment. The notes are payable in monthly installments, including interest at 10.75%. As of December 31, 1997 and 1996, loan balance was $615,697 and $572,550, respectively. (PAGE) (ii) A loan of the Company paid in November 1997. As of December 31, 1996 the loan balance was $500,000 and interest rate was based on the Citibank prime rate plus 2%, equivalent to 10.25%. (iii) A $1 million loan borrowed by HDA in December 1997 for working capital purposes and temporary investments in Panama. The loan is payable in four quarterly installments of $250,000 commencing April 1, 1998. The Company has assigned up to $250,000 of quarterly distributions from HDA to the bank and has also guaranteed the loan. The note bears interest, payable monthly, based on Citibank prime rate plus 1/2%. At December 31, 1997 the interest rate was 9%. (iv) Notes payable to Supra related to a transaction described in Note 10. The $260,000, plus accrued interest at 8.5%, is payable in three installments during 1998. In connection with the termination of the El Comandante Lease, effective January 1, 1998 ECMC assumed certain obligations under capital leases, originated mainly for the acquisition of wagering related equipment. These obligations were not reflected in the Company's consolidated financial statements until the transfer. The following table summarizes future minimum principal payments on notes payable and capital leases of the Company and its subsidiaries: Galapagos HDA ECMC ---------- ---------- ---------- Due during year ending December 31, 1998 $ 260,706 $1,010,000 $ 513,417 1999 190,232 250,000 510,131 2000 92,137 - 445,225 2001 72,622 - 35,936 2002 - - 10,443 ---------- ---------- ---------- $ 615,697 $1,260,000 $1,515,152 ========== ========== ========== 8. UNIT INCENTIVE AWARDS Various employees of the Company's managing general partner, EMC, who were previously employed by a subsidiary of IGC, participated in IGC's Unit Incentive Plan and Unit Option Plan ("IGC's Employee Plans"). Effective December 31, 1996 the Company agreed to the terms of a Control Transfer Agreement (see Note 10) to provide these employees with unit incentive awards ("Replacement Awards") that provide benefits substantially equivalent to the awards in IGC's Employee Plans. When the Company assumed the obligations for the Replacement Awards, IGC transferred to the Company 75,000 of its unregistered Class A limited Partnership Units ("IGC Units"), which are included as part of other assets. Also, there are 20,000 IGC Units that are allocated to unit options held by one ex-employee. These unit options are fully vested and exercisable at December 31, 1997 and will expire on March 31, 1998. The Company is required (PAGE) to return to IGC the portion of the 20,000 IGC Units that is not exercised. The Company will use the IGC Units to partially satisfy its obligations under these plans, which at December 31, 1997 amounted to $91,709 (included in accrued liabilities). Under the Replacement Awards, the Unit Appreciation Rights entitle the holders to receive upon exercise, an amount payable in cash, Units of the Company, IGC Units or some combination thereof, as determined by EMC's Directors. The amount received upon exercise is based on the excess of the fair market value of the IGC's Units, plus 50% of the fair market value of the Company's Units, over the $4 base price of the Unit Appreciation Rights ("UAR"). The fair market values of the units are determined based on the average for a 20 day period commencing 10 days before the exercise date. These plans are summarized on the following tables: UAR Options ------------ ----------- Outstanding at December 31, 1996 76,500 20,000 Cancelled (18,600) - ------------ ----------- Outstanding at December 31, 1997 57,900 20,000 ============ =========== At December 31, 1997, the dates that the outstanding UAR become exercisable and their expiration dates are as follows: UAR Expiring ------------------------------------------------ March 31, 1998 May 15, 2004 October 18, 2004 -------------- ------------ ---------------- UAR exercisable at December 31, 1997 27,900 6,000 16,000 May 15, 1998 - 2,000 - October 18, 1998 - - 4,000 May 15, 1999 - 2,000 - ------------ ------------ ------------ 27,900 10,000 20,000 ============ ============ ============ 9. INCOME TAXES: The Company is organized as a partnership, which is not a taxable entity for United States tax purposes and incurs no federal income tax liability. Instead, each partner is required to take into account in computing its income tax liability such partner's allocable share of the Company's net taxable income. The reconciliation between the Company's consolidated net income (loss) per books and its net taxable income (loss), per United States partnership return, allocable to holders of Units is as follows: (PAGE) December 31, ----------------------------------------------------- 1997 1996 1995 --------------- ----------------- ----------------- (In thousands except per Unit amounts) Total Per unit Total Per Unit Total Per Unit ------- ------- ------- -------- -------- -------- Net income (loss) per books $2,478 $ 0.39 $ 827 $ 0.13 $ (591) $ (0.10) Taxable (income) loss not allocable to Unitholders (1,216) (0.19) (1,226) (0.20) (1,168) (0.19) Book income from HDA before consolidation and unrecorded minority interest - - - - 345 0.06 Difference in gain from sale of Television Stations (1,083) (0.17) (1,286) (0.21) - - Additional tax depreciation (257) (0.04) (169) (0.03) (576) (0.09) Losses from corporate subsidiaries not deductible by the Company 806 0.13 1,617 0.26 2,315 0.37 Write-off of receivables - - (30) - (387) (0.06) Disallowed costs related to partnership interest redemption 260 0.04 - - - - Deferred taxes 893 0.14 172 0.03 (10) - Other, none of which is individually significant 167 0.02 (75) (0.01) (143) (0.02) ------- ------- -------- -------- -------- -------- Net taxable income (loss) $2,048 $ 0.32 $ (172) $ (0.03) $ (216) $ (0.03) ======= ======= ======== ======== ======== ======== The Company is subject to Puerto Rico income taxes at a 29% tax rate on its Puerto Rico source income. The provision for income taxes included in the accompanying consolidated financial statements is attributed to (i) Puerto Rico income taxes on the Company's distributive share of HDA's income from Puerto Rico sources and (ii) ECCC's United States income taxes on its taxable income, as follows: (PAGE) For the years ended December 31, ------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Puerto Rico income taxes - Deferred $ 893,403 $ 156,021 $ (10,170) Current - 257,300 217,200 Federal income tax- current 1,582 5,863 4,964 Dominican Republic-deferred - (19,161) 19,161 ----------- ----------- ----------- $ 894,985 $ 400,023 $ 231,155 =========== =========== =========== The deferred income taxes are related to the difference between the Puerto Rico tax basis of the Company's investment in HDA and the amount reported in the financial statements. The 1996 credit for Dominican Republic income tax is due to the reversal of a provision previously recorded on interest earned by HDA on certain loans to Galapagos, which interest was forgiven in September 1996 before any interest had been collected. Galapagos has deferred income tax benefits for losses carryforwards, which have been fully reserved by a valuation allowance. 10. RELATED PARTY TRANSACTIONS: Unsecured Partner's Loans During 1996 and 1995 the Company received advances from IGC, which until December 31, 1997 was a general partner. The advances accrued interest based on the Citibank prime rate plus 1%, which at December 31, 1996 was 9.25%. The loans and accrued interest were paid in 1997. Transactions With Supra On August 19, 1997, HDA redeemed for $4,075,000 the 17% interest held by Supra, thereby increasing the Company's interest in HDA to approximately 99%. The redemption price plus transaction costs of $238,724 were recorded in partners' deficit, net of the book value of Supra's minority interest in HDA of $1,531,934. The transaction required the approval from the majority of holders of outstanding First Mortgage Notes (the "Noteholders Approval"). In connection with the redemption, HDA agreed to pay $260,000 to Supra and Ruben Velez Lebron and his wife ("Velez"), the principal owners of Supra, in exchange for Supra's and Velez's cancellation of certain promissory notes and other obligations of ECOC aggregating $2,290,000 . The cancellation relieved HDA of its guarantee of approximately $1.6 million of these obligations which would become due upon termination of the El Comandante Lease. The $260,000 and transaction costs of $59,550 are included in the 1997 consolidated statement of income (loss) as other costs. Upon closing of these transactions, there were certain mutual releases granted among the parties, including the filing by Supra of a motion to dismiss the Supra complaint against the Company and other related parties. (PAGE) Management Agreements IGC and IGP provided substantially all of the administrative support services to EMC and the Company through June, 1996 pursuant to a three year support service agreement effective as of February 6, 1995, and continue to provide limited administrative support and office space. The Company reimburses IGC and IGP for expenses incurred in providing such services. In December 1997, EMC prepaid IGP $80,000, in these type of expenses to be applied against actual charges made by IGP. Since August 1996 Interstate Business Corporation ("IBC"), the sole stockholder of EMC and a general partner in IGC, has been providing certain accounting services to the Company for a monthly fee of $1,000. IGP provided management services to HDA pursuant to a management agreement until August 16, 1996 when the agreement was assigned to EMC. The Agreement has a term of 15 years ending in December 2004. Pursuant to this agreement, HDA pays an annual management fee of $250,000, adjusted annually after 1993 by the percentage increase in CPI over the prior year. Pursuant to terms of its partnership agreement, the Company reimburses EMC for its costs and expenses, including compensation of EMC's officers and directors, in excess of amounts of EMC's cash receipts. Effective January 1, 1998, all officers of EMC were transferred to EEC, a wholly owned subsidiary of the Company and, consequently, substantially all services rendered by EMC will primarily be services of its Directors. EEC will also assume EMC's rights to all management agreements with the Company's consolidated subsidiaries. The following represents a summary of amounts accrued with respect to services rendered by certain related parties during the years ended December 31, 1997, 1996 and 1995 (in the case of HDA, for the periods after March 8, 1995): Services Rendered For the years ended December 31, - ----------------------- -------------------------------- To By Concept 1997 1996 1995 - ----------- -------- --------------------- --------- --------- ---------- HDA IGP Management agreement $ - $ 169,278 $ 215,400 HDA EMC Management agreement 278,673 101,414 - The Company IBC Accounting services 12,000 8,000 - The Company IGC/IGP Support agreement 28,607 117,198 254,364 The Company EMC Expenses in excess of receipts 420,958 54,783 - The Company EMC Directors fees and expenses 88,200 71,500 36,069 Control Transfer Agreement Pursuant to the terms of a Control Transfer Agreement effective as of December 31, 1996, as amended, the following agreements were made: 1. IGC sold its interest in EMC to IBC. 2. IGC guaranteed EMC up to $20 million (the "IGC Guarantee") for payment of EMC's liabilities in excess of assets, arising from EMC status as general (PAGE) partner of the Company, should EMC or the Company become insolvent. IGC withdrew as general partner of the Company following execution of the IGC Guarantee, which is effective until December 31, 2001. 3. IBC irrevocably assigned to IGC all rights to any distributions received by EMC from the Company in respect of EMC's general partnership interest in the Company to the extent that such distributions and other cash receipts of EMC exceed EMC's expenses incurred in the ordinary course of business in its capacity as managing general partner of the Company. 4. IBC contributed to the capital of EMC 50,000 units of IGC and agreed to maintain in EMC at all times prior to termination of the IGC Guaranty sufficient capital to provide EMC with tangible net worth of at least $200,000. 5. EMC shall use its best efforts to obtain the approval of Nasdaq to continue listing the Units of the Company without relying on the IGC Guarantee. 6. The Company granted Replacement Awards to various executives of EMC, previously employed by IGP. The number of Units that the Company had agreed to make available to IGC in connection with the Distribution was reduced from 100,000 to 50,000 Units. IGC transferred 75,000 IGC Units to the Company to fund the Company's obligations under the Replacement Awards and the Company is required to return to IGC the portion of 20,000 IGC Units that are not exercised under option units, expiring on March 31, 1998, held by one ex-employee of EMC (see Note 8). Transaction with IGP On December 16, 1997, the Company purchased from IGP a .19790099% interest in HDA for a purchase price of $30,000, thereby increasing the Company's ownership in HDA to exactly 99%. 11. LEGAL PROCEEDINGS: Certain of the Company's subsidiaries are presently named as defendants in various lawsuits and might be subject to certain other claims arising out of its normal business operations. Management, based in part upon advice from legal counsel, believes that the results of such actions will not have an adverse impact on the Company's financial position or results of operations. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS: The balance sheet carrying amounts of cash and cash equivalents, receivables and other current assets approximate fair value due to the liquid and short term nature of these items. As of December 31, 1997 and 1996 the fair value of the First Mortgage Notes were $64,763,000 and $64,600,000, respectively, based on the market price as quoted by a brokerage firm that trades the First Mortgage Notes. The carrying value of notes payable approximates fair value because these obligations bear interest at variable rates. (PAGE) 13. UNAUDITED PROFORMA FINANCIAL STATEMENTS: In August 1997, HDA redeemed a 17% interest owned by a minority partner, thereby increasing the Company's interest in HDA to approximately 99% and effective January 1, 1998, it terminated the El Comandante Lease and commenced operating El Comandante through its wholly owned subsidiary, ECMC (the "Proforma Transactions"). The following unaudited proforma consolidated statement of loss for the year ended December 31, 1997 is based upon the historical consolidated statement of the Company and its subsidiaries, and were prepared as if the above described transactions had all occurred on January 1, 1997 and excluding the following non recurring transactions: (i) extraordinary items, (ii) gain from sale of Television Stations and (iii) provision for $550,000 in charitable and educational contributions committed by ECOC's Board of Directors in connection with the termination of the El Comandante Lease. Proforma adjustments also includes results of operations of ECOC for the year ended December 31, 1997. The unaudited proforma consolidated statement is not necessarily indicative of what the actual results of operations of the Company would have been assuming such transactions had been completed as of January 1, 1997, and does not purport to represent the results of operations for future periods. In Management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. PROFORMA CONSOLIDATED STATEMENT OF LOSS FOR THE YEAR ENDED DECEMBER 31, 1997 (In thousands except per unit amounts) (Unaudited) REVENUES: Commissions on wagering $ 59,512 Lottery services 88 Other revenues 3,244 Interest income 420 ---------- 63,264 EXPENSES: Financial 8,735 Depreciation 2,323 General and administrative 2,333 Operating costs of racing 50,997 ----------- (1,124) PROVISION FOR INCOME TAXES 372 MINORITY INTEREST (129) ----------- NET LOSS $ (1,367) =========== ALLOCATION OF NET LOSS: General partners $ (14) Limited partners (1,353) ----------- $ (1,367) =========== NET LOSS PER UNIT $ (0.21) =========== WEIGHTED AVERAGE UNITS OUTSTANDING 6,334 =========== (PAGE) The following unaudited proforma consolidated balance sheet was presented as if the Proforma Transactions had taken place on December 31, 1997 (amounts in thousands): AT DECEMBER 31, 1997 (Unaudited) ASSETS: Cash and cash equivalents $ 1,569 Property and equipment, net 48,829 Deferred costs, net 6,316 Other 2,572 ----------- $ 59,286 =========== LIABILITIES: First mortgage notes and accrued interest $ 63,681 Notes payable 3,391 Accounts payable and accrued liabilities 7,783 Minority interest in HDA 82 ----------- 74,937 PARTNERS' DEFICIT: (15,651) ----------- $ 59,286 =========== (PAGE) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of El Comandante Operating Company, Inc.: We have audited the accompanying statements of net liabilities El Comandante Operating Company, Inc. (a Puerto Rico nonstock corporation in process of liquidation) (ECOC) as of December 31, 1996, and the related statements of operations for each of the two years in the period ended December 31, 1996 and cash flows for each of the three years in the period ended December 31, 1997. In addition, we have audited the statements of net liabilities in liquidation as of December 31, 1997 and the related statements of operations and transactions in liquidation for the year ended December 31, 1997. These financial statements are the responsibility of ECOC's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable bases for our opinion. As discussed in Note 1, effective January 1, 1998, ECOC discontinued its operations upon termination of its lease of El Comandante Race Track. As a result, ECOC has changed its basis of accounting as of December 31, 1997 from the going concern basis to a liquidation basis. Accordingly, the carrying values of assets are presented at estimated realizable values and liabilities are presented at estimated settlement amounts. In our opinion, the financial statements referred to above present fairly, in all material respects, the net liabilities of El Comandante Operating Company, Inc. as of December 31, 1996, and the results of its operations for each of the two years in the period ended December 31, 1996 and its cash flows for each of the three years in the period ended December 31, 1997, its net assets in liquidation as of December 31, 1997 and results of operations and transactions in liquidation for the year ended December 31, 1997 in conformity with generally accepted accounting principles on the bases described in the preceding paragraph. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule II - Allowance for Doubtful Accounts Receivable is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP March 17, 1998 San Juan, Puerto Rico (PAGE) EL COMANDANTE OPERATING COMPANY, INC. (In Process of Liquidation) STATEMENTS OF OPERATIONS AND TRANSACTIONS IN LIQUIDATION FOR THE YEAR ENDED DECEMBER 31, 1997 AND OPERATIONS FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1996 1997 1996 1995 ----------- ----------- ----------- REVENUES: Commissions on wagering $54,881,688 $57,285,607 $55,731,364 Other 2,474,084 2,728,516 2,329,179 ----------- ----------- ----------- Total revenues 57,355,772 60,014,123 58,060,543 ----------- ----------- ----------- EXPENSES: Payments to horse owners and horse owners' association 27,359,694 28,561,893 27,851,823 Track rent 13,720,424 14,321,401 14,332,841 Salaries, wages and employee benefits 7,565,816 7,314,034 6,866,856 Operating expenses 5,294,508 5,721,396 5,853,875 General and administrative 2,982,159 2,804,546 2,783,343 Marketing and satellite transmission costs 2,469,002 2,607,337 2,178,155 ----------- ----------- ----------- Total expenses 59,391,603 61,330,607 59,866,893 ----------- ----------- ----------- LOSS BEFORE DEFERRED TAX BENEFIT AND EXTRAORDINARY ITEMS (2,035,831) (1,316,484) (1,806,350) DEFERRED TAX BENEFIT (522,819) (94,200) (53,007) ----------- ----------- ----------- LOSS BEFORE EXTRAORDINARY ITEMS (1,513,012) (1,222,284) (1,753,343) EXTRAORDINARY ITEMS: Forgiveness of indebtedness, net of deferred income taxes of $487,500 1,884,222 - - ---------- ----------- ----------- NET INCOME (LOSS) $ 371,210 $(1,222,284) $(1,753,343) ========== =========== =========== The accompanying notes are an integral part of these statements. (PAGE) EL COMANDANTE OPERATING COMPANY, INC. (In Process of Liquidation) STATEMENTS OF NET LIABILITIES IN LIQUIDATION AS OF DECEMBER 31, 1997 AND NET LIABILITIES AS OF DECEMBER 31, 1996 1997 1996 ----------- ----------- ASSETS: CURRENT ASSETS: Cash, including restricted cash of $424,994 and $494,653, respectively $1,061,239 $ 1,116,330 Accounts receivable, net 538,009 1,379,932 Prepayments and supplies inventory 277,658 242,468 Notes receivable 436,245 335,248 ----------- ----------- Total current assets 2,313,151 3,073,978 ----------- ----------- DEFERRED COSTS, net: Organizational costs - 28,015 Deferred tax asset 687,656 652,337 Telecommunication installation costs 118,724 185,905 Noncompetition agreement - 145,833 ----------- ----------- Total deferred costs 806,380 1,012,090 ----------- ----------- FURNITURE AND EQUIPMENT, net 3,773,324 3,964,066 ----------- ----------- Total assets 6,892,855 8,050,134 ----------- ----------- (continues) (PAGE) EL COMANDANTE OPERATING COMPANY, INC. (In Process of Liquidation) STATEMENTS OF NET LIABILITIES IN LIQUIDATION AS OF DECEMBER 31, 1997 AND NET LIABILITIES AS OF DECEMBER 31, 1996 (continued) 1997 1996 ----------- ----------- LIABILITIES: CURRENT LIABILITIES: Current portion of capital lease obligations 513,417 707,917 Rent payable to Housing Development Associates S.E. ("HDA") 2,638,520 1,984,213 Accounts payable and accrued liabilities 4,245,126 3,299,930 Outstanding winning tickets and refunds 996,756 784,897 ----------- ----------- Total current liabilities 8,393,819 6,776,957 ----------- ----------- CAPITAL LEASE OBLIGATIONS 1,001,735 1,223,557 ----------- ----------- NOTE PAYABLE TO HDA, and accrued interest 467,977 796,203 ----------- ----------- OTHER LIABILITIES: Notes - 2,450,000 Accrued interest - 145,303 ----------- ----------- - 2,595,303 ----------- ----------- Total liabilities 9,863,531 11,392,020 ----------- ----------- NET LIABILITIES IN LIQUIDATION (1997) AND NET LIABILITIES (1996) $(2,970,676) $(3,341,886) =========== =========== The accompanying notes are an integral part of these statements. (PAGE) EL COMANDANTE OPERATING COMPANY, INC. (In Process of Liquidation) STATEMENTS OF CASH FLOWS FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 371,210 $(1,222,284)$(1,753,343) ----------- ----------- ----------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Forgiveness of indebtedness (2,371,722) - - Depreciation and amortization 809,165 698,102 590,244 Deferred tax benefit (35,319) (94,200) (53,007) Provision for bad debts 50,008 100,008 100,000 Amortization of noncompetition agreement 145,833 250,000 250,000 (Increase) decrease in assets- Accounts receivable 791,915 (503,621) (361,232) Prepayments supplies inventory and organization costs (26,850) 49,249 306,905 Increase (decrease) in liabilities- Accounts payable and accrued liabilities 945,196 387,982 100,302 Outstanding winning tickets and refunds 211,859 (1,310,897) 501,042 Accrued interest (143,071) 20,401 42,244 Rent payable 654,307 1,188,069 796,146 ----------- ----------- ----------- Total adjustments 931,321 785,093 2,272,644 ----------- ----------- ----------- Net cash provided by (used in) operating activities 1,402,531 (437,191) 519,301 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase (decrease) in notes receivable (100,997) (24,304) 72,995 Capital expenditures (292,788) (484,196) (411,167) Payments of telecommunication installation costs - (9,586) (17,738) ----------- ----------- ----------- Net cash used in investing activities (393,785) (518,086) (355,910) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from note payable - - 1,000,000 Payments on note payable (408,736) (207,594) - Payments of capital lease obligations (655,101) (604,246) (488,275) Payments of organizational costs - - (6,470) ----------- ----------- ----------- Net cash (used in) provided by financing activities (1,063,837) (811,840) 505,255 ----------- ----------- ----------- (continues) (PAGE) EL COMANDANTE OPERATING COMPANY, INC. (In Process of Liquidation) STATEMENTS OF CASH FLOWS FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 (continued) 1997 1996 1995 ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH (55,091) (1,767,117) 668,646 CASH, beginning of year 1,116,330 2,883,447 2,214,801 ----------- ----------- ----------- CASH, end of year $1,061,239 $ 1,116,330 $ 2,883,447 =========== =========== =========== SUPPLEMENTAL INFORMATION: Interest paid $ 235,466 $ 168,849 $ 246,495 =========== =========== =========== NONCASH TRANSACTIONS: Equipment acquired through capital leases $ 238,779 $ 656,630 $ 429,211 =========== =========== =========== Forgiveness of indebtedness $2,371,722 $ - $ - =========== =========== =========== The accompanying notes are an integral part of these statements. (PAGE) EL COMANDANTE OPERATING COMPANY, INC. (In Process of Liquidation) NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: El Comandante Operating Company, Inc. ("ECOC") is a Puerto Rico non- stock corporation which leased from Housing Development Associates S.E. ("HDA") the El Comandante Race Track ("El Comandante"), the only thoroughbred race track and off-track betting operation in Puerto Rico. Due to an existing default for unpaid rent (see Note 4) and for certain other reasons permitted under the lease agreement (the "El Comandante Lease"), HDA terminated the El Comandante Lease effective December 31, 1997. On January 1, 1998, ECOC transferred to HDA, at book value, all assets employed in the racing business and HDA assumed all agreements and liabilities of ECOC. As a result of the termination of El Comandante Lease and the cease of its racing operations, ECOC changed its basis of accounting for 1997 from a going concern basis to a liquidation basis. Accordingly, the carrying values of assets as of December 31, 1997 are presented at estimated realizable values and liabilities are presented at estimated amounts. The carrying amount assigned to all assets and liabilities did not change from historical cost amounts, as they represent a fair estimate of liquidating values. No significant transactions in liquidation were recorded as part of changing ECOC's basis of accounting from a liquidation to a going concern basis. On December 31, 1997, the Board of Directors of ECOC made commitments with several educational and charitable institutions to make contributions totalling $550,000 in a period of four years commencing in 1998, which was recorded in the accompanying financial statements. In connection with the termination of the El Comandante Lease, HDA assumed this contingent liability. 2. SUMMARY OF ACCOUNTING POLICIES: Pervasiveness of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Commissions on Wagering ECOC earned commissions ("ECOC Commissions") on bets placed on El Comandante's thoroughbred horse races through wagering facilities at El Comandante and at wagering facilities located at independently owned off- track betting ("OTB") agencies throughout Puerto Rico, and from wagering on races simulcasted outside Puerto Rico, principally to Dominican Republic. El Comandante offers bettors win and place, daily double, exacta, trifecta, quiniela and pool wagering. Commissions are based on percentages of wagers (PAGE) established by law and vary for the different types of wagers in Puerto Rico, as follows: 26% of daily double and pool wagers; 20% of exacta, trifecta and quiniela wagers; and 25% of losing wagers on win and place wagers. ECOC Commissions on wagers in Puerto Rico during the years ended December 31, 1997, 1996 and 1995 averaged 21.08%, 21.27% and 20.56%, respectively. Commissions on simulcasted races are negotiated with wagering facilities outside Puerto Rico. ECOC Commissions on wagers on simulcasted races during the years ended December 31, 1997 and 1996 and 1995 averaged 6.34%, 6.20% and 6.36%, respectively. Restricted Cash Restricted cash represents (i) accumulated cash in the "Pool Pote" which is funded by 4% of the amounts payable to winners of the daily Pick 6 pool and (ii) a bonus amount which is added to the Pick 6 pool payout of predetermined race days. The Pool Pote is paid out when there is a sole pool winner or when it reaches $2 million, $1 million is paid out as part of the regular Pick-6 pool on the following Sunday or Holiday. The corresponding payables are recorded as part of the liability for outstanding winning tickets and refunds. Accounts Receivable Accounts receivable include balances from pool agents, simulcasting commissions, fees earned under a management agreement described in Note 4 and other miscellaneous amounts. As of December 31, 1997 and 1996, reserves for doubtful accounts amounted to $290,067 and $292,087, respectively. Notes Receivable Notes receivable consist of unsecured short term loans to horse owners, with interest at 2% over prime rate and with various maturity dates. These loans provide financing to horse owners to purchase horses as a means to improve the quality of racing. ECOC has advised the Confederacion Hipica de Puerto Rico (the "Confederacion"), a horse owners' association, that its credit line to all members of the Confederacion, as a group, will not exceed $500,000 and it will not extend credit in excess of $50,000 to any single owner, nor lend more than 80% of the purchase price of any horse. Telecommunication Installation Costs These costs are related to the installation of telephone lines by the Puerto Rico Telephone Company ("PRTC") and to excise taxes on the off-track telecommunication equipment. The costs are amortized on a straight-line basis over the remaining life of an agreement with PRTC expiring on April 1, 1999. Amortization expense for the years ended December 31, 1997, 1996 and 1995 was approximately $60,000 in each year. Noncompetition Agreement These costs are related to a Noncompetition Agreement entered into with the majority owner of Supra & Company S.E. ("Supra") and former President of ECOC which prohibited him from investing or participating in horse racing operations anywhere in the Caribbean for a period of three years from August 1, 1994. The amount of $750,000 payable under the agreement was recorded as (PAGE) a deferred cost and was amortized on a straight-line basis over the noncompete period. Amortization expense for the years ended December 31, 1997, 1996 and 1995 was $145,833, $250,000 and $250,000, respectively. Furniture and Equipment Furniture and equipment is stated at cost and depreciated on a straight-line basis over their estimated useful lives, which range from 5 to 10 years. Major replacements and improvements are capitalized and depreciated over their estimated useful lives. Repairs and maintenance are charged to expense when incurred. As of December 31, 1997 and 1996, furniture and equipment was as follows: December 31, Useful -------------------------- Lives 1997 1996 -------- ---------- ----------- Furniture 10 $ 429,467 $ 399,088 Equipment 4-14 5,299,105 4,948,516 Motor vehicles 6 937,537 799,145 ---------- ----------- 6,666,109 6,146,749 Less - Accumulated depreciation (2,892,785) (2,182,683) ---------- ----------- $3,773,324 $3,964,066 ========== =========== For information with respect to pledged assets, see Note 4. 3. PENSION PLAN: ECOC has a non-contributory defined benefit pension plan covering substantially all of its nonunion employees. As a result of the transfer of the company's assets, liabilities and commitments, HDA is now the sponsor of the nonunion employees pension plan. Benefits are based on the employee's years of service and highest average earnings over five consecutive years during the last 15 years of employment. ECOC's policy is to fund an amount not less than the ERISA minimum funding requirement or more than the maximum deductible under the Puerto Rico tax law. The net periodic pension expense for the years ended December 31, 1997, 1996 and 1995, respectively, included the following components: 1997 1996 1995 ---------- ---------- ---------- Service cost $ 81,851 $ 80,475 $ 88,613 Interest cost 62,012 54,471 44,982 Actual return on plan assets (31,478) (29,061) (13,768) Amortization of transitional asset 22,964 16,690 (1,701) ---------- ---------- ---------- Net pension expense $ 135,349 $122,575 $ 118,126 ========== ========== ========== (PAGE) Reconciliation of the funded status and the amounts recognized in the accompanying statements of net liabilities follows: 1997 1996 1995 ---------- ---------- ---------- Accumulated benefit obligations - Vested $ 564,891 $ 383,675 $ 350,061 Non-vested 35,211 23,828 15,400 ---------- ---------- ---------- $ 600,102 $ 407,503 $ 365,461 ========== ========== ========== Actuarial present value of projected benefit obligations $(926,531) $(723,857) $(661,354) Plan assets at fair value 465,855 352,889 333,167 ---------- ---------- ---------- Under funded status (460,676) (370,968) (328,187) Item not yet recognized in earnings - Unrecognized transitional obligation 286,893 234,975 198,008 ---------- ---------- ---------- Accrued pension expense $(173,783) $(135,993) $(130,179) ========== ========== ========== Assumptions used for the above computations included: 1997 1996 1995 ---------- ---------- ---------- Discount rate 7.5% 8% 8% Expected rate of increase in future compensation levels 4.5% 5% 5% Expected long-term rate of return on assets 7.5% 8% 8% 4. THE OPERATING LICENSE AND EL COMANDANTE LEASE: Operating License On December 15, 1989, the Puerto Rico Racing Board (the "Racing Board") granted ECOC a license to operate El Comandante, which expires on December 14, 2004 (the "Operating License"). The Operating License, which requires payment of an annual license fee (currently $250,000), provides ECOC with: (i) the exclusive right to operate a race track in the area of Puerto Rico known as the San Juan Region, which approximates the northern half of Puerto Rico, as delineated in maps produced by the Puerto Rico Planning Board and Government Development Administration; (ii) the exclusive right to conduct all types of authorized betting, both at El Comandante and off-track, anywhere in Puerto Rico, based on races held at El Comandante; and (iii) the right to hold a minimum 180 day or night race days per year. El Comandante's horse racing and pari-mutuel wagering operations are subject to substantial government regulation. Pursuant to the Puerto Rico Horse Racing Industry and Sport Act (the "Racing Act"), the Racing Board and the Puerto Rico Racing Administrator (the "Racing Administrator") exercises significant regulatory control over ECOC's racing and wagering operations. (PAGE) For example, the Racing Administrator determined the monthly racing program for El Comandante and approved the number of annual race days in excess of the statutory minimum of 180. The Racing Act also apportions payments of monies wagered that would be available as ECOC Commissions. The Racing Board consists of three persons appointed to four-year terms by the Governor of Puerto Rico. The Racing Administrator is also appointed by the Governor for a four-year term. El Comandante Lease Until December 31, 1997 HDA leased El Comandante to ECOC under a lease agreement, as amended, (the "El Comandante Lease") that required payments by ECOC to HDA of rent consisting of 25% ("Basic Rent") of the annual commissions earned by ECOC. These commissions consist of all payments received by ECOC on all monies wagered with respect to horse racing occurring at El Comandante, whether wagered at El Comandante or at other betting facilities in Puerto Rico or any other country. In 1995 the El Comandante Lease also provided for payment of certain fixed rent of $400,000. The El Comandante Lease provided for ECOC to pay all El Comandante expenses except that, pursuant to (i) an amendment effective January 1, 1996, HDA assumed the obligation to pay real property taxes on El Comandante and (ii) an amendment effective January 1, 1997, HDA assumed the obligation to pay the annual racing license fee. Termination of El Comandante Lease and Assignment of Operating License Due to the existing default for unpaid Basic Rent and for certain other reasons permitted under the El Comandante Lease, HDA terminated the El Comandante Lease. In connection therewith on January 1, 1998 at HDA's direction (i) ECOC transferred, at book value, to El Comandante Management Company, LLC ("ECMC"), a wholly owned subsidiary of HDA, all assets employed in the racing business, (ii) ECMC assumed all agreements and liabilities of ECOC, including the $3.1 million payable to HDA, and (iii) ECOC assigned to ECMC the Operating License. The termination of the El Comandante Lease and the assignment of the Operating License to ECMC are subject to the approval of the Racing Board, which has not make a final determination on this matter but has temporarily permitted ECMC to operate El Comandante until their review process is concluded. Consulting Agreement Pursuant to a consulting agreement between ECOC and Interstate General Properties Limited Partnership S.E. ("IGP") (the "Consulting Agreement"), and as required under the El Comandante Lease, ECOC retained as executive management three racing consultants then employed by IGP. In April 1996, IGP assigned its interest in the Consulting Agreement to Equus Management Company ("EMC") and the three racing consultants became employees of EMC. Except for $25,000 of the annual salary and related payroll costs of one consultant, ECOC reimbursed all of payroll and fringe benefit costs with respect to the employment of the consultants. The Consulting Agreement was cancelled effective July 1, 1997. Fees incurred by ECOC pursuant to the Consulting Agreement during the years ended December 31, 1997, 1996 and 1995 were $560,700, $894,000 and $871,000, respectively. (PAGE) Horse Owners' Agreement and Wagering Service Agreement ECOC had an agreement with the Confederacion whereby 50% of wagering commissions received by ECOC on races held at El Comandante are to be paid to the Confederacion through April 1, 1998, plus an annual fixed amount of $55,000 from 1993 to 1998. The Confederacion also receives a minimum of $500 per race day for ECOC's wagering commissions on El Comandante races simulcasted outside Puerto Rico ("Simulcasting Commissions") and when Simulcasting Commissions exceed simulcasting expenses plus $500, the Confederacion receives $500 plus 50% of Simulcasting Commissions. ECOC received wagering services, software and equipment under a service agreement with Autotote Systems, Inc, effective through March 15, 2005. The service agreement required minimum annual payments which consist of the greater of $800,800 annually or .65% (.0065) of total wagering. The Confederacion had agreed to reimburse ECOC an amount equal to .325% (.00325) of wagering for each race day up to a maximum of $3,461 per race day until April 1998. 5. PAYABLES TO HOUSING DEVELOPMENT ASSOCIATES S.E.: Under the El Comandante Lease, ECOC was required to pay HDA its Basic Rent for each race day on the 29th day following such racing day. ECOC's failure to pay Basic Rent, in the aggregate, in an amount equal to one month's average Basic Rent (based on the preceding 12 months) for a period of 30 days was an event of default under the El Comandante Lease. During 1997 ECOC was in default of this provision. As a result of the event of default related to payment of Basic Rent and for certain other reasons permitted under the El Comandante Lease, on October 31, 1997, HDA notified ECOC of the termination of the El Comandante Lease effective December 31, 1997. Effective January 1, 1998 ECMC assumed all ECOC's liabilities, including this payable to HDA. 6. OTHER LIABILITIES AND EXTRAORDINARY ITEM: Other liabilities at December 31, 1996 consisted of (i) unsecured notes of $160,000 to IGP and $40,000 to Supra, including accrued interest, (ii) $500,000 of accrued past service costs payable to Supra and Supra's majority owner, Ruben Velez Lebron and his wife ("Velez"), under a series of agreements executed on December 13, 1993 incident to the reorganization of ECOC as a nonstock corporation (the "Supra Agreements") and (iii) $1,750,000 payable to Supra and Velez for the purchase of ECOC's stock and for the amount payable under the Noncompetition Agreement. The unsecured notes of $200,000 bore interest at 2.5% over the prime rate, without a stated maturity date, which at December 31, 1996 was 10.75%. In connection with the purchase by HDA of Supra's 17% interest in HDA the obligations to Supra and Velez were canceled on August 19, 1997 in exchange for a payment by HDA of $260,000 to Supra and Velez. In December 1997 ECOC paid IGP $210,000 in cancellation of the note and accrued interest which totalled $291,722. The cancellation of the obligations to Supra and Velez and the amount of discount in cancellation of the IGP note have been (PAGE) recorded in the accompanying statement of operations and transactions in liquidation for the year ended December 31, 1997 as extraordinary items. 7. INCOME TAXES: Deferred tax assets of $687,656 and $652,337, net of valuation allowances of $1,272,848 and $1,729,926, were recorded as of December 31, 1997 and 1996, respectively. These assets arose from the difference between the tax basis of certain liabilities and their reported amounts in the financial statements (which will result in deductible amounts in future years when such liabilities are finally settled) and from the benefits of net operating loss carryforwards ("NOL") which are available to offset future taxable income in 1998, mainly from the gain on the transfer of assets and liabilities on January 1, 1998 to HDA upon termination of the El Comandante Lease. Any tax deficiency of ECOC will be assumed by ECMC. The deferred credit for income taxes for the years ended December 31, 1997, 1996 and 1995 is net of an increase (decrease) in the valuation allowance of ($457,078), $310,493 and $572,943, respectively. 8. LEGAL PROCEEDINGS: ECOC has been named as a defendant in various lawsuits and might be subject to certain other claims arising from its normal business operations, including employment-related claims. Based upon facts available to date, management and legal counsel believe that none of such actions will have a material adverse effect on ECOC's financial position or results of operations. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS: The balance sheet carrying value of cash and receivables approximates fair value because of the liquid nature of these assets. The carrying value of the notes receivable approximates fair value because these notes bear interest at a rate higher than prime rate. The carrying value of the capital lease obligations approximates fair value because these obligations bear interest at market. (PAGE) EL COMANDANTE OPERATING COMPANY, INC. SCHEDULE -II- ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE For Year Balance Provision Balance ended Beginning Charged to End of December 31, of Year Expense Write-Offs Recoveries Year ------------ ---------- ----------- ---------- ---------- --------- 1995 248,887 100,000 (192,025) 14,873 171,735 1996 171,735 100,008 0 20,344 292,087 1997 292,087 50,008 ( 91,416) 39,388 290,067 Under the on-line off-track betting system, ECOC has daily receivables from agents for the difference between amounts wagered at the agencies, less (1) payouts made by agents to winnings bettors and (2) agents' commissions. The uncollectible receivables are the result of significant volume in wagering resulting from the on-line system, which increases the amount of daily receivables. (PAGE) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND EMC Managing Partner of the Company Equus Management Company ("EMC") is the managing general partner of the Company and, as such, has full and exclusive responsibility and authority to manage the Company, including declaring and authorizing cash distributions, making employment decisions, determining executive compensation and making investment decisions and other decisions normally made by executive officers and directors of a corporation. EMC does not engage in any significant activities other than managing the business of the Company. EMC is governed by its Board of Directors, which currently consists of seven persons. Directors will be elected in the future either by Interstate Business Corporation ("IBC"), as the parent company of EMC, or by the directors then holding office subject to certain limitations, including that at least two of the directors be independent of the Company, IBC and Interstate General Company L.P. ("IGC"). Thus, Unitholders do not have the power to elect EMC's directors. The officers of EMC are elected by its Board of Directors. At present, two of EMC's directors are directors of IGC's managing general partner and two are officers and directors of IBC. Approximately 99.4% of IBC is owned by the adult children of James J. and Barbara A. Wilson. IGC is managed by its managing general partner, Interstate General Management Corporation ("IGMC"). The Wilson family and companies controlled by them, including IBC and Wilson Family Limited Partnership ("WFLP"), hold approximately a 54.1% interest in IGC and a 42.6% interest in the Company. Directors and Executive Officers of the Company and EMC The table below sets forth the name, age and positions with the Company and EMC of each director and executive officer of EMC and each executive officer of the Company. (PAGE) Name Age Positions with the Company and EMC - ------------------------ ------- ----------------------------------- Thomas B. Wilson 35 President and Chief Executive Officer of EMC and the Company; Director of EMC Juan M. Rivera-Gonzalez 50 Executive Vice President and Chief Operating Officer of EMC and the Company; Director of EMC Gretchen Gronau 33 Vice President, Chief Financial Officer and Treasurer of EMC and the Company Rafael Otero 42 Senior Vice President of EMC and the Company Carlos R. Rodriguez 52 Senior Vice President of EMC and the Company Angel Blanco-Bottey 58 Senior Vice President of EMC and the Company Donald G. Blakeman 65 Director of EMC Donald J. Kevane 66 Director of EMC Alberto M. Paracchini 65 Director of EMC Barbara A. Wilson 61 Director and Secretary of EMC Kevin Wilson 39 Director of EMC Relationships Barbara A. Wilson is the mother of Thomas B. Wilson and Kevin Wilson. Certain additional information concerning the above persons is set forth below. Thomas B. Wilson has been President and Chief Executive Officer of EMC and the Company since January 1998 and Director of EMC since February 1998. He has been a Director of IGMC since December 1995 a Director of IBC since 1994 and a Vice President of IBC since September 1994. From 1994 to December 1997 he was President of El Comandante Operating Company, Inc.("ECOC"). Juan M. Rivera-Gonzalez has been Executive Vice President and Chief Operating Officer of EMC and the Company since January 1998 and Director of EMC since February 1998. From January 1996 to December 1997 he was Executive Vice President of the Company. From September 1995 to December 1995 he served as Vice President of the Company and was also Vice President of IGC from 1994 to April 1996. From April 1991 to December 1993 he was President and General Manager of ECOC. (PAGE) Gretchen Gronau is a Certified Public Accountant and has been Vice President and Chief Financial Officer of the Company and EMC since August 1996. From May 1990 to August 1996 she served in various tax and financial management positions with IGC, including Vice President from August 1994 to August 1996. She has served as Assistant Treasurer of IBC since October 1996. Rafael Otero has been Senior Vice President of EMC and the Company since January 1998 and Vice President of EMC since April 1996. From 1987 to April 1996 he was an employee of IGC or ECOC and served in the following positions: Vice President of IGC from February 1992 to April 1993; Treasurer and Senior Vice President of ECOC from April 1993 to December 1993; Vice President of IGC from December 1993 to April 1996. He is currently serving as General Manager of EGP. Carlos R. Rodriguez has been Senior Vice President of EMC and the Company since January 1998. Prior to January 1998 he was Vice President of IGC since 1989. Angel Blanco-Bottey has been Senior Vice President of EMC and the Company since January 1998. He joined ECOC in 1997 as Executive Vice President and Chief Financial Officer. From 1993 to 1997 he engaged in selective consulting work and served in several boards of directors. Prior to 1993 he served as Executive Vice President of Banco-Central Hispano- P.R., a commercial bank, from which he retired. He is currently serving as Executive Vice President of ECMC. Donald G. Blakeman, until retired effective December 31, 1997, served as the President of EMC and the Company since January 1996 and a Director of EMC since its formation in 1994. Since 1994, he was Executive Vice President of EMC until January, 1996 and Chief Financial Officer of EMC until August 1996. He has been a Director of IGMC since its formation in 1986. He was Executive Vice President of IGC and IGMC from 1986 until August 1996 and Secretary from December 1990 to 1995. He was a Director of IGC's predecessor companies from 1970 to 1986 and served in various executive positions in those companies. Donald J. Kevane has been a Director of EMC since its formation in 1994. He is a certified public accountant and senior partner in the Puerto Rico accounting firm of Kevane Peterson Soto & Pasarell, which he founded in 1975. He is also a director since 1990 of Venture Capital Fund, Inc., a Puerto Rico-based venture capital firm and a director since 1985 of Universal Insurance Co., a subsidiary of Kirby Industries. Alberto M. Paracchini has been a Director of EMC since its formation in 1994. He has been a director of BanPonce Corporation since January 1991, and was Chairman of the Board from January 1991 to April 1993. He is Vice Chairman of the Board of Puerto Rican Cement Company, Inc. and a director of Venture Capital Fund, Inc., a Puerto Rico-based venture capital firm. Barbara A. Wilson has been a Director of EMC since January 1996 and Secretary of EMC since August 1996. She served as Director of IGMC from December 1995 to 1996. She has been a Director of IBC since 1987, Chairman of the Board since March 1996, Secretary since 1990 and Treasurer since 1993. (PAGE) Kevin Wilson has been a Director of EMC since September 1996. He has been the President, Director and majority owner since 1989 of Community Homes, Inc., a homebuilding company of which he was a co-founder. Section 16(a) Beneficial Ownership Reporting Requirements WFLP filed late on March 31, 1998 a Form 5 to report changes in its beneficial ownership of Units during 1997 and a Form 4 with respect to its acquisition of Units in January 1998. ITEM 11. EXECUTIVE COMPENSATION Until December 31, 1997 the Company did not have any employees. EMC had five employees who were officers of EMC and/or the Company, and were previously employees of Interstate General Properties Limited Partnership S.E. ("IGP"), a subsidiary of IGC. Three of these employees rendered services to ECOC pursuant to a consulting agreement that was cancelled effective June 30, 1997. ECOC reimbursed to EMC all of their compensation and related costs, except for $25,000 of one employee's annual salary which was paid by the Company. The Company reimbursed EMC for its costs and expenses, including compensation of officers and directors, in excess of amounts EMC received from other sources, which sources were primarily cash distributions from the Company and reimbursements and fees for (i) services pursuant to the consulting agreement with ECOC, (ii) services pursuant to the management agreement with HDA, and (iii) limited services rendered to IGP and IGC by Mr. Blakeman and Ms. Gronau. All employees and management contracts of EMC were transferred to a wholly- owned subsidiary of the Company on January 1, 1998. Consequently, EMC's only significant costs will be Directors' fees and expenses. The Company will reimburse all costs of EMC in excess of any cash it receives, which will primarily be distributions from the Company. Summary Compensation Table. The following table sets forth the aggregate compensation with respect to the Chief Executive Officer and each of the other four most highly compensated executive officers of EMC. (PAGE) Long-Term Compensation Annual Compensation(1) Awards --------------------------- ------------ Securities Underlying Other Annual Options/ All Other Name & Principal Salary Bonus Compensation SAR's Compensation Position Year ($) ($) ($) # (2) ($)(1)(3) - ------------------ ----- ------- ----- ------------ ---------- ---------- Donald G. Blakeman(4) 27,900 President 1997 315,200 - - SAR 9,420 1996 315,200 - - 9,492 Donald Drew(5) 20,000 9,420 Senior Vice Options President 1997 385,800 161,620 - - 1996 - - - Juan M. Rivera 10,000 9,420 Executive Vice SAR President 1997 180,200 50,000 - 1996 - - - Rafael Otero 10,000 8,200 Vice President 1997 135,200 47,500 - SAR - 1996 - - - Gretchen Gronau 10,000 Vice President SAR and CFO 1997 100,200 - - 5,400 1996 90,200 - - 4,692 (1) The annual and other compensation paid to Messrs. Drew, Rivera and Otero for 1996 was omitted since all but $25,000 of such annual compensation was reimbursed to EMC by ECOC. For 1997 the entire amount of compensation has been included. However, the consulting agreement with ECOC was cancelled effective June 30, 1997. (2) Represents Replacement Awards granted by the Company for unit Appreciation Rights and Unit Options. (3) Reflects EMC's contributions to Retirement Plan discussed below. (4) Retired effective December 31, 1997. (5) His employment terminated on September 30, 1997 but continued receiving compensation until end of year while on vacations. His salary for 1997 includes a payment of $45,600 for accrued vacations and unpaid at December 31, 1997. His bonus include $71,620 payable on April 1998 pursuant to his employment agreement. (PAGE) Employment Agreements. Messrs. Drew and Rivera entered into employment agreements with IGP which were assigned to EMC as of April 22, 1996. Mr. Drew's agreement, which expired December 31, 1997, provided for a base salary of $340,000 annually, plus an annual bonus payable no later than April 30 of each year, equal to (a) 3% of Basic Rent (as defined in the El Comandante Lease) payable by ECOC for the prior calendar year, (b) less $340,000. Effective January 1, 1998 Mr. Drew is no longer an employee of EMC but will be entitled to a bonus of $71,620 in 1998 based on Basic Rent of El Comandante for 1997. Mr. Rivera's agreement, which was cancelled effective December 31, 1997, provided for a base salary of $180,000 annually, plus an annual bonus payable by April 30 of each year equal to .33% of the Basic Rent payable by ECOC to HDA for the previous year. Mr. Rivera remains as an employee without any formal bonus arrangement. Retirement Plan. The EMC employees were all members of IGC's retirement plan (the "Retirement Plan") as employees of IGP and continue under the same plan as employees of EMC. Contributions to the Retirement Plan in 1996 and 1997 were in amounts equal to 4% of base salaries and wages not in excess of the U.S. Social Security taxable wage base, and 8% of salaries (limited to $150,000) that exceeded that wage base. Directors. Directors of EMC who are not employees of the Company, EMC or any of their affiliates, receive directors' fees established by the Board of Directors of EMC. These Directors are compensated at a rate of $3,750 per quarter, $1,000 per meeting and out-of-pocket expenses for meetings. In 1997, the directors' fees totaled $88,200. Unit Options and Unit Appreciation Rights. The five employees of EMC who were previously employed by IGP (the "Transferred Employees") participated in IGC's Unit Incentive Plan and Unit Option Plan ("Employee Plans"). Effective December 31, 1996 the Company agreed, pursuant to the terms of a Control Transfer Agreement, to grant the Transferred Employees unit incentive awards ("Replacement Awards") that provide benefits substantially equivalent to the awards in the Employee Plans of IGC. When the Company assumed the obligations for the Replacement Awards, IGC transferred to the Company 75,000 of its unregistered Class A limited Partnership Units ("IGC Units"), which are to be used to satisfy the Company's obligations under the Replacement Awards. The Replacement Awards include (i) Unit Appreciation Rights to four EMC employees and (ii) an option granted to Donald Drew to purchase 20,000 IGC Units and 10,000 Units of the Company ("Drew Options"). The Drew Options were fully vested and exercisable at December 31, 1997 but expired on March 31, 1998 without being exercised. The Company is required to return to IGC the 20,000 IGC Units. The Unit Appreciation Rights entitle the holders to receive upon exercise, an amount payable in cash, Units of the Company, IGC Units or some combination thereof, as determined by EMC's Directors. The amount received upon exercise is based on the excess of the fair market value of the IGC's Units, plus 50% of the fair market value of the Company's Units, over the $4 base price of the Unit Appreciation Rights ("UAR"). The fair market values of the units are determined based on the average for a 20 day period commencing 10 days before the exercise date. (PAGE) The 1996 activity under these plans is summarized on the following tables: AGGREGATED OPTION / UAR EXERCISES IN 1997 AND DECEMBER 31, 1997 OPTION / UAR VALUES Number of Securities Value of Underlying Unexercised Unexercised In-the-money Options Options and UAR at and UAR at December 31, December 31, 1997 1997 Units ------------ ------------ Acquired Value Exercisable/ Exercisable/ Exercise Realized Unexercisable Unexercisble (#) ($) (#) ($) -------- -------- ------------- ------------ Unit Appreciation Rights- Donald G. Blakeman - - 27,900/ - 36,300/ - Juan M. Rivera - - 8,000/ 2,000 10,495/2,625 Rafael Otero - - 6,000/ 4,000 7,870/5,250 Gretchen Gronau - - 8,000/ 2,000 10,495/2,625 Options- Donald Drew - - 20,000/ - 26,240/ - (PAGE) ITEM 12. SECURITY OWNERSHIP OF CERTAIN UNITHOLDERS AND MANAGEMENT The following table sets forth certain information regarding the Units that are beneficially owned as of March 25, 1998 (i) by each director of EMC or executive officer of EMC or the Company, (ii) by all directors of EMC and executive officers of EMC or the Company, as a group, and (iii) by each person who is known by EMC or the Company to beneficially own more than 5% of the outstanding Units of the Company. Except where noted, the address for the beneficial owner is Doral Building, 7th Floor, 650 Munoz Rivera Avenue, Hato Rey, PR 00918. Beneficial Ownership (1) Name of Beneficial Owner Number - -------------------------- of Units Percent ----------- -------- Management and Directors Barbara A. Wilson (2) 50 - Kevin Wilson (2) 86,397 1.36% Thomas B. Wilson (2) 86,397 1.36% Donald J. Kevane 1,000 .02% Donald G. Blakeman 186,894 2.95% Gretchen Gronau 900 0.01% All executive officers of EMC and the Company and directors of EMC, as a group (6 persons) 361,438 5.71% Other Unitholders HDA Management Corporation 1,205,245 19.03% Wilson Family Limited Partnership(2) 222 Smallwood Village Center St. Charles, Maryland 20602 2,267,721 35.80% - -------------------------------------------------------------------------- (1) The beneficial ownership of Units is determined on the basis of Units directly and indirectly owned by executive officers and directors of EMC and units to be issued under options which are exercisable within the next 60 days. (2) WFLP is owned by the adult children of Barbara Wilson, including Kevin Wilson and Thomas Wilson. However, because none of them is a general partner in WFLP, the units of the Company owned by WFLP are not considered beneficially owned by them. (PAGE) ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Except for the matter discussed below concerning Thomas B. Wilson, the information responding to this item appears in Note 10 to the Company's consolidated financial statements included in Item 8 of this report. Thomas B. Wilson has been serving as Vice President of Caribe Waste Technologies, Inc. ("CWT") a subsidiary of IGC engaged in the development of municipal solid waste treatment facilities and has been, and will continue to be, devoting time to this operation. CWT will reimburse the Company for actual payroll costs attributed to time spent by Mr. Wilson on waste technology matters. (PAGE) ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K Index to Financial Statements. (i) Financial Statements (included in Item 8) Equus Gaming Company L.P. Report of Independent Public Accountants Consolidated Statements of Income (Loss) for the years ended December 31, 1997, 1996 and 1995 Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Changes in Partners' Deficit for each of the three years in the period ended December 31, 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements El Comandante Operating Company, Inc. Report of Independent Public Accountants Statements of operations and Transactions in Liquidation for the year ended December 31, 1997 and Operations for each of the two years in the period ended December 31, 1996 Statements of Net Liabilities in Liquidation as of December 31, 1997 and Net Liabilities as of December 31, 1996 Statements of Cash Flows for the three years in the period ended December 31, 1997 Notes to Financial Statements (ii) Financial Statements Schedules (included in Item 8) El Comandante Operating Company, Inc. Schedule II - Allowance for Doubtful Accounts Receivable (PAGE) Exhibits. Exhibit Number Exhibit Description Reference - --------------------------------------------------------------------------- 3.1 First Amended and Restated Limited Exhibit 3.1 to Registration Partnership Agreement of Equus Statement on Form S-11 Gaming Company L.P. (the "Company") No. 33-90982 of the Company ("Second Form S-11") 3.2 Certificate of Limited Partnership Exhibit 3.1 to Registration of the Company Statement on Form S-11 No. 33-82750 of the Company ("Form S-11") 3.3 First Amendment to Certificate of Exhibit 3.2 to Form S-11 Limited Partnership of the Company 3.4 Second Amendment to Certificate of Exhibit 3.3 to Form S-11 Limited Partnership of the Company 3.5 Third Amendment to Certificate of Exhibit 3.5 to Form S-11 Limited Partnership of the Company 3.6 Fourth Amendment to Certificate of Filed herewith Limited Partnership of the Company 5.1 Form of Unit Certificate Exhibit 5.1 to Form S-11 10.1 Sixth Amended and Restated Exhibit 2.2. to Current Partnership Agreement of Housing Report on Form 8-K of Development Associates S.E. ("HDA") March 23, 1995 ("Form 8-K") 10.2 Indenture dated December 15, 1993, Exhibit 5.1 to Registration among El Comandante Capital Corp. Statement on Form S-5 ("ECCC"), as Issuer, Banco Popular No. 33-75285 of HDA, de Puerto Rico as Trustee ("Banco ECCC and El Comandante Popular") and HDA as Guarantor Operating Company, Inc. (the "Indenture") ("ECOC") ("Form S-5") 10.3 First Supplemental Indenture dated Exhibit 10.27 to Form S-11 December 22, 1994 to the Indenture 10.4 Second Supplemental Indenture dated Exhibit 10.28 to Form S-11 December 22, 1994 to the Indenture 10.5 Warrant Agreement dated December 15, Exhibit 10.3 to Form S-4 1993, among HDA Management Corporation ("HDAMC"), HDA and Banco Popular as Warrant Agent (PAGE) 10.6 HDA Guaranty of certain obligations Exhibit 10.5 to Form S-4 Ruben Velez Lebron and Supra & Company, S.E. ("Supra")dated December 14, 1993 10.7 Amended and Restated Management Exhibit 10.6 to Form S-4 Agreement dated December 15, 1993, between Interstate General Properties Limited Partnership S.E. ("IGP") and HDA 10.8 Amended and Restated Lease Agreement Exhibit 10.8 to Form S-4 dated December 15, 1993, between HDA and ECOC 10.9 Rent Escrow Agreement dated December Exhibit 10.10 to Form S-4 15, 1993, between HDA as Landlord, ECOC as Tenant and Banco Popular as Escrow Agent 10.10 Collateral Assignment of HDA's Exhibit 10.11 to Form S-4 Interests under the Lease dated December 15, 1993, between HDA and Banco Popular 10.11 Stock Pledge Agreement dated Exhibit 10.12 to Form S-4 December 15, 1993, between HDA and Banco Popular 10.12 Pledge Agreement (Mortgage Notes) Exhibit 10.13 to Form S-4 dated December 15, 1993 between HDA and Banco Popular 10.13 Chattel Mortgage dated December Exhibit 10.15 to Form S-4 15, 1993, between ECOC and HDA 10.14 Assignment Agreement (General Exhibit 10.15 to Form S-4 Intangibles) dated December 15, 1993, between ECOC and HDA 10.15 Assignment Agreement (General Exhibit 10.16 to Form S-4 Intangibles) dated December 15, 1993, between HDA and Banco Popular 10.16 Pledge Agreement between ECCC and Exhibit 10.17 to Form S-4 Banco Popular 10.17 Mortgage Note of $52,000,000 of HDA Exhibit 10.18 to Form S-4 10.18 Mortgage Note of $26,000,000 of HDA Exhibit 10.19 to Form S-4 10.19 Deed of Modification and Extension Exhibit 10.20 to Form S-4 of First Mortgage to Secure Additional Mortgage Note, No. 43, dated December 15, 1993 (PAGE) 10.20 HDA Note in the amount of Exhibit 10.21 to Form S-4 $68,000,000 to ECCC dated December 15, 1993 10.21 Master Support and Services Exhibit 10.20 to Form S-11 Agreement dated December 9, 1994, between Interstate General Company L.P. ("IGC") and the Company 10.22 Consulting Agreement dated December Exhibit 10.21 to Form S-11 15, 1993 between ECOC and IGP 10.23 Closing Agreement dated November 16, Exhibit 10.26 to Form S-11 1994, among Multi-Media Television, Inc., JEM Communications, Inc. Tele 38, Inc., S & E Network, Inc. and HDA 10.25 Conversion Agreement dated February Exhibit 2.3 to Form 8-K 3, 1995, between the Company and IGP (the "Conversion Agreement") 10.25 First Amendment to the Conversion Exhibit 2.3 to Form 8-K Agreement dated March 6, 1995 10.26 Lease Agreement dated September 28, Exhibit 10.21 of the Annual 1994 between the Dominican Republic Report on Form 10-K of and Galapagos, S.A.("Galapagos") HDA for the year ended December 31, 1994 ("1994 HDA 10-K") 10.27 Founders' Agreement among Exhibit 10.22 to 1994 Galapagos, HDA and Minority HDA 10-K Stockholders 10.28 Management Agreement dated September Exhibit 10.23 to 1994 28, 1994, between Galapagos and HDA 10-K ECOC 10.29 Broadcasting, Marketing and Exhibit 10.25 to 1994 Production Agreement dated March 30, HDA 10-K 1995 between ECOC and S&E 10.30 Amended and Restated Distribution Exhibit 2.1 to Form S-11 Agreement dated November 22, 1994 between the Company and IGC (the "Distribution Agreement") 10.31 First Amendment to the Distribution Exhibit 10.31 to Second Agreement dated February 3, 1995 Form S-11 10.32 Registration Rights Agreement dated Exhibit 10.32 to Second February 6, 1995 between the Company Form S-11 and IGC (PAGE) 10.33 Amended and Restated Registration Exhibit 10.29 to Form S-11 Rights Agreement with respect to the Warrants dated December 12, 1994 by and among HDA, HDAMC, the Company and Oppenheimer & Co., Inc. and The Argosy Securities Group L.P. 10.34 Third Supplemental Indenture dated Exhibit 10.34 to Annual February 27, 1996 to the Indenture Report on Form 10-K of the Company for the year ended December 31, 1995 ("1995 10-K") 10.35 Fourth Supplemental Indenture dated Exhibit 10.35 to 1995 10-K February 27, 1996 to the Indenture 10.36 First Amendment to Amended and Exhibit 10.36 to 1995 10-K Restated Lease Agreement dated March 28, 1996 10.37 Seventh Amended and Restated Exhibit 10.37 to 1995 10-K Partnership Agreement of HDA dated February 7, 1996 10.38 Stock Purchase Agreement by and Exhibit 10.38 to 1995 10-K among S&E Network Inc. ("S&E"), HDA and Paxson Communications of San Juan, Inc. ("Paxson") dated January 31, 1996 10.39 Time Brokerage Agreement by and Exhibit 10.39 to 1995 10-K between Paxson and S&E dated January 31, 1996 10.40 Escrow Agreement dated January 31, Exhibit 10.40 to 1995 10-K 1996 by and among Paxson, S&E and First Union National Bank of Florida 10.41 Guaranty by Paxson in favor of S&E Exhibit 10.41 to 1995 10-K and HDA dated January 31, 1996 10.42 Broadcast Agreement between ECOC and Exhibit 10.42 to 1995 10-K S&E dated February 1, 1996 10.43 First Amendment to the Amended and Exhibit 10.43 to Annual Restated Registration Rights Report on Form 10-K/A of Agreement dated August 15, 1995 the Company for the year ended December 31, 1995 ("1995 10-K/A") 10.44 Assignment and Assumption of Exhibit 10.44 to 1995 Consulting Agreement dated April 10-K/A 22, 1996 (PAGE) 10.45 Assignment and Assumption of Exhibit 10.1 to Quarterly Employment Agreements dated Report on Form 10-Q of the April 22, 1996 Company for the quarter ended June 30, 1996 10.46 Stock Purchase Agreement by and Exhibit 10.1 to Quarterly between HDA and Paxson dated Report on Form 10-Q of the November 12, 1996 Company for the quarter ended September 30, 1996 10.47 Employment Agreement between IGP Exhibit 10.47 to Annual and Donald Drew dated Report on Form 10-K of the December 14, 1993 Company for the year ended December 31, 1996 ("1996 10-K") 10.48 Employment Agreement between IGP Exhibit 10.48 to 1996 10-K and Juan Manuel Rivera dated June 1, 1995 10.49 Closing Agreement by and among S&E, Exhibit 10.49 to 1996 10-K Paxson, Equus and HDA dated January 21, 1997 10.50 Control Transfer Agreement by and Exhibit 10.50 to 1996 10-K among IBC, IGC, IGP, HDA, EMC and the Company dated December 31, 1996 10.51 Amendment to Control Transfer Exhibit 10.51 to 1996 10-K Agreement by and among IBC, IGC, IGP, HDA, EMC and the Company dated March 25, 1997 10.52 Broadcast Agreement among S&E, Exhibit 10.52 to 1996 10-K HDA and Paxson dated January 21, 1997 10.53 Second Amendment to Amended and Exhibit 10.53 to 1996 10-K Restated Lease Agreement dated March 31, 1997 10.54 Letter Agreement dated May 13, Exhibit 10.1 on Quarterly 1997 by and between Equus Gaming Report on Form 10-Q of the Company L.P., HDA, Supra & Company for the Quarter Company S.E. and Ruben Velez and ended March 31, 1997 his wife 10.55 Letter Agreement dated July 18, Exhibit 10.1 on Quarterly 1997 by and between Equus Gaming Report on Form 10-Q of the Company L.P., HDA, Supra & Company for the Quarter Company S.E. and Ruben Velez and ended June 30, 1997 his wife (PAGE) 10.56 Eight Amended and Restated Exhibit 10.1 on Quarterly Partnership Agreement of HDA dated Report on Form 10-Q of the August 19, 1997 Company for the Quarter ended September 30, 1997 10.57 Fifth Supplemental Indenture dated Exhibit 10.2 on Quarterly November 14, 1997 to the Indenture Report on Form 10-Q of the Company for the Quarter ended September 30, 1997 10.58 Asset Purchase and Sale Agreement Filed herewith by and between El Comandante Management Company LLC ("ECMC") and ECOC dated December 19, 1997 10.59 Second Amendment to Control Filed herewith Transfer Agreement by and among IBC, IGC, IGP, HDA, EMC and the Company dated December 19, 1997 10.60 Guaranty Agreement by and between Filed herewith EMC and IGC dated December 30, 1997 10.61 Agreement to Retire Partnership Filed herewith Interest of Interstate General Company, L.P. in Equus Gaming Company, L.P. by and among the Company, IGC, EMC, EMTC and HDA dated December 30, 1997 10.62 Ninth Amended and Restated Filed herewith Partnership Agreement of HDA dated December 31, 1997 21 Subsidiaries of the Company Filed herewith Reports on Form 8-K. None (PAGE) SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Equus Gaming Company L.P. ----------------------------------- (Registrant) By: Equus Management Company Managing General Partner April 8, 1998 /s/ Thomas B. Wilson - ----------------- ------------------------------ Date Thomas B. Wilson President & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date Title Signature - ----------------- ----------------------- ------------------------ April 8, 1998 President, Chief /s/ Thomas B. Wilson - ----------------- Executive Officer and ------------------------ Director Thomas B. Wilson April 8, 1998 /s/ Juan M. Rivera - ----------------- Executive Vice President, ------------------------ Chief Operating Officer Juan M. Rivera and Director April 8, 1998 Vice President and /s/ Gretchen Gronau - ----------------- Chief Financial Officer ------------------------ Gretchen Gronau April 8, 1998 Director /s/ Donald J. Kevane - ----------------- ------------------------ Donald J. Kevane April 8, 1998 Director /s/ Alberto M. Paracchini - ----------------- ------------------------- Alberto M. Paracchini April 8, 1998 Director /s/ Barbara A. Wilson - ----------------- ------------------------- Barbara A. Wilson April 8, 1998 Director /s/ Kevin Wilson - ----------------- ------------------------- Kevin Wilson April 8, 1998 Director /s/ Donald G. Blakeman - ----------------- ------------------------- Donald G. Blakeman EX-10 2 (PAGE) ASSET PURCHASE AND SALE AGREEMENT BETWEEN EL COMANDANTE MANAGEMENT COMPANY LLC (the "Buyer") and EL COMANDANTE OPERATING COMPANY LLP (the "Seller") (PAGE) ASSET PURCHASE AND SALE AGREEMENT This Asset Purchase and Sale Agreement dated as of December 19, 1997 made between the Persons appearing on the cover page hereto. RECITALS (a) Seller is lessee and operator of the El Comandante Race Track located in Canovanas, Puerto Rico (the "Race Track") pursuant to that certain Amended and Restated Lease Agreement dated as of December 15, 1993, as amended, by and between Housing Development Associates S.E. ("HDA") and Seller (the "Lease"). (b) The Lease proved that (i) upon an event of default, all of Seller's contracts and agreements for the operation of the Race Track shall be assigned to HDA, and (ii) upon termination of the Lease, Seller shall sell and HDA shall purchase all of Seller's personal property used in the operation of the Race Track. (c) On October 31, 1997 HDA delivered to Seller a Notice of Termination citing uncured events of default and other grounds for terminating the Lease effective December 31, 1997. (d) As a result of the foregoing HDA has formed Buyer as a wholly owned subsidiary for the purpose of acquiring the Assets (defined below ) and assuming the Contracts (defined below). (e) Effective on the Closing Date, Buyer and HDA shall enter into a lease agreement (the "New Lease") providing for Buyer to operate the Race Track on substantially the same terms as the Lease. AGREEMENT In consideration of the foregoing recitals, which are incorporated herein and made a part hereof, the mutual covenants herein contained and other good and valuable consideration (the receipt, adequacy and sufficiency of which are hereby acknowledged by the parties by their execution hereof), the parties hereto, intending to be legally bound, hereby agree as follows: (PAGE) ARTICLE 1 DEFINITIONS; CONSTRUCTION Section 1.1 Definitions. For purposes of this Agreement, unless the context clearly indicates otherwise, the following capitalized terms have the following meanings: "Agreement" this Asset Purchase and Sale Agreement and Bill Of Sale, including all Exhibits and Schedules hereto. "Applicable Law" any applicable law, rule, regulation, or ordinance of any Governmental Authority to which Seller, the Business or the Assets is subject. "As Is" the condition and state of repair of the Assets existing on the Closing Date. "Assets" Tenant's Personal Property, the Contracts, the Franchises, the Intellectual Property, the Receivables, and the Permits owned or held by Seller as of the Closing Date. "Auditors" Arthur Andersen LLP or such other independent public accounting and auditing firm as may be selected by Buyer and acceptable to Seller to prepare an audit of the Business as of the Closing Date. "Business" the operation in the Demised Premises of the business known as El Comandante racetrack and related off-track betting operations. "Buyer" has the meaning set forth in the cover page of this Agreement. "Closing Date" as of 12:01 a.m. San Juan Time on January 1, 1998. "Closing Date Balance Sheet" an audited, statement of assets and liabilities of Seller as of the Closing Date to be prepared and examined by and accompanied by the report of the Auditors. "Commonwealth" the Commonwealth of Puerto Rico. "Contracts" all of the rights and obligations by or against Seller in and under contracts, leases of personal property, licenses, purchase and sales orders, non-competition agreements, permits, employee contracts, insurance contracts, agents contracts, (PAGE) horse owners contracts, television contracts, off -track betting transmission contracts, and supplier contracts, marketing programs, promotional programs and advertising programs, and all claims, rights and obligations by or against Seller whether contingent or otherwise, including those listed on Exhibit "A". "Demised Premises" shall have the meaning assigned thereto in the Lease. "Dollar" or "$" United States of America dollars. "Encumbrance" any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, lease, lien (statutory or otherwise), security interest or preferential arrangement of any kind or nature whatsoever, including any conditional sale or other title retention agreement. "Environmental Laws" all Applicable Laws existing on the Closing Date relating to the protection of the environment, including all applicable requirements pertaining to reporting, licensing, permitting, investigation and remediation of emissions, discharges, releases or threatened releases of Hazardous Materials, whether solid, liquid or gaseous in nature, into the air, surface water, ground water or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, whether solid, liquid or gaseous in nature. "Financial Statements" the unaudited interim statement of assets and liabilities of Seller and the related statements of sales, costs and expenses for the period ended November 30, 1997, prepared by Seller. "Franchises" all franchises of the Seller. "Governmental Authority" any government of any nation, state, the Commonwealth or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "HDA" has the meaning set forth in the Recitals of this Agreement. "Intellectual Property" Trade Names and any other inventions, know how, patents, trade names, trademarks, designs, service names, (PAGE) service marks, copyrights and logos, if any, owned by Seller or as to which Seller has rights. "Lease" has the meaning set forth in the Recitals of this Agreement. "Liabilities" the liabilities of the Business on the Closing Date, as shown in the Closing Date Balance Sheet, including but not limited to those shown in Exhibit "B". "License" the license to operate the Business issued by the Commonwealth's Racing Board.. "Material Adverse Change" a material adverse change in the Business (financially or otherwise), taken as a whole; provided, however, that neither (i) the effects of any events, circumstances or conditions resulting from changes, developments or circumstances in worldwide national or local conditions (political, economic, regulatory or otherwise) that adversely affect industries related to any products of the Business generally, or adversely affect a broad group of industries generally, in each case where such events, circumstances or conditions do not adversely affect the Business disproportionately, nor (ii) any effects of competition or changes in price of products, raw materials or component products, shall be deemed to give rise to a Material Adverse Change. "Material Adverse Effect" an effect that would result in a Material Adverse Change; provided, however, that neither (i) the effects of any events, circumstances or conditions resulting from changes, developments or circumstances in worldwide, national or local conditions (political, economic, regulatory or otherwise) that adversely affect industries related to any products of the Business generally, or adversely affect a broad group of industries generally, in each case where such events, circumstances or conditions do not adversely affect the Business disproportionately, nor (ii) any effects of competition or changes in prices of products, raw materials or component products, shall constitute a Material Adverse Effect. "Motor Vehicles" all automobiles, trucks, forklifts, and other motor driven vehicles (whether on wheels or tracks) owned by Seller and used exclusively by the Business. "New Lease" has the meaning set forth in the Recitals of this Agreement. (PAGE) "Notice of Termination" the letter of HDA to Seller dated October 31, 1997, whereby the Lease was terminated effective December 31, 1997 (Exhibit "C" ). "Party" a Person named as entering into this Agreement. "Permit" all approvals, authorizations, consents, licenses, franchises, orders and other permits of any Governmental Authority. "Person" any natural person, corporation, limited partnership, general partnership, joint venture, association, company, trust, joint stock company, bank, trust company, land trust, vehicle trust, business trust, real estate investment trust, estate, limited liability company or other organization irrespective of whether it is a legal entity, and any Governmental Authority. "Receivables" all amounts payable by any person to Seller as of the Closing Date whether contingent or otherwise arising from the operations of the Business. "Seller" has the meaning set forth in the cover page of this Agreement. "Settlement Date" 15 calendar days after the date in which the Closing Date Balance Sheet is notified by the Auditors to Buyer. "Tax" any tax, charge, fee, levy, duty, impost, withholding or other assessment, together with any interest and penalties, additions to tax and additional amounts imposed by any Governmental Authority. "Tenant's Personal Property" shall have the meaning assigned thereto in the Lease. Section 1.2 Rules of Construction. 1.2.1 Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with generally accepted accounting principles, as in effect from time to time, applied on a consistent basis. 1.2.2 All the agreements or instruments herein defined shall mean such agreements or instruments as the same may (PAGE) from time to time be supplemented or amended or the terms thereof waived or modified to the extent permitted by, and in accordance with, the terms thereof and of this Agreement. 1.2.3 Unless this Agreement clearly requires otherwise, words of masculine gender shall be construed to include the correlative words of feminine and neuter genders and vice versa, and words of singular number shall be construed to include correlative words of plural number and vice versa. 1.2.4 The words "herein", "hereof", and "hereunder" and words of similar import refer to this Agreement as a whole. 1.2.5 This Agreement and all the provisions hereof shall be liberally construed to effectuate the purposes set forth herein and to sustain the validity hereof. 1.2.6 All references herein to particular articles, sections, or exhibits, are references to articles, sections, or exhibits of this Agreement unless some other reference is established. ARTICLE 2 PURCHASE AND SALE OF ASSETS Section 2.1 Purchase and Sale - As Is. Subject to the terms and conditions hereof, Seller hereby sells, assigns, transfers, grants, bargains, delivers and conveys to Buyer, and Buyer purchases from Seller, on an As Is basis, all of the right, title and interest of Seller in and to the Assets. Section 2.2 Assignability and Consents. Anything in this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign any order, Contract, agreement, lease, commitment, license, Franchise, permits, authorization or concession if an attempted assignment thereof, without the consent of another party thereto or any Governmental Authority, would constitute a breach thereof. Seller shall use all reasonable efforts and Buyer shall cooperate in all reasonable respects with Seller to obtain all consents and waivers and to resolve all impracticalities of assignments or transfers necessary to convey the Assets to Buyer. Section 2.3 Assumption of Liabilities. Buyer hereby assumes, and shall hereinafter pay, perform and discharge as and (PAGE) when due, the Liabilities. Section 2.4 Transfer Taxes. Buyer shall be responsible for all transfer, registration, excise and similar taxes and fees assessed or payable in connection with the transfer of the Assets. Section 2.5 Purchase Price. Buyer, in consideration for the sale, transfer, conveyance and assignment of the Assets, shall pay to Seller, on the Settlement Date, an amount equal to the difference, if any, between the depreciated book value of the Assets and the aggregate amount owed by Seller on the Liabilities, all pursuant to the Closing Date Balance Sheet. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Except as set forth on the Disclosure Schedule, Seller hereby represents and warrants to Buyer as follows: Section 3.1 Corporate Organization of the Company. Seller is a duly organized and validly existing corporation under the laws of the Commonwealth, and in good standing under the laws of the Commonwealth. Seller has the power and authority to own, lease and operate the Assets, to own and to conduct its business as presently being conducted. Seller is duly qualified and in good standing to do business as a foreign corporation in each jurisdiction in which the properties owned or leased by it or the nature of the business conducted by it makes such qualification necessary. Section 3.2 Power and Authority to Sell. Seller has full right, power and authority to enter into this Agreement and the other agreements, documents and instruments to be executed and delivered by Seller pursuant hereto and to consummate the transactions contemplated of it hereunder and thereunder; and the consummation by Seller of all transactions contemplated of it hereunder and thereunder has been duly authorized by all necessary corporate action. This Agreement constitutes, and when executed and delivered each of the other agreements, documents and instruments to be executed by Seller pursuant hereto will constitute a legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with its terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization or moratorium laws or other similar laws affecting enforcement of creditor's rights generally or by general principles of equity (regardless of whether such enforcement is (PAGE) considered in a proceeding in equity or at law). Section 3.3 Financial Statements. Correct and complete copies of the Financial Statements are attached hereto as Schedule 3.3. The Financial Statements fairly present, in all material respects, the assets, liabilities, gross income, cost and expenses of Seller as of the date thereof. Section 3.4 Taxes. Seller has timely filed, all federal, Commonwealth, local and foreign Tax reports and returns required to be filed by it for the Business prior to the date hereof, and the full amount of Taxes, if any, together with interest and penalties thereon, shown to be due on such Tax returns have been timely paid. To the knowledge of Seller, the foregoing Tax returns reflected accurately the facts regarding the income, business, assets, operations and activities of the Business and any other information required to be shown thereon. To the knowledge of Seller, there are no claims pending against Seller for deficient or past due taxes, nor is any unassessed tax deficiency proposed against Seller. Section 3.5 No Conflict or Violation. Neither the execution and delivery by Seller of this Agreement nor the consummation of the transactions contemplated to be consummated by Seller hereby nor compliance by Seller with any of the provisions hereof will: (i) violate or conflict with any provision of the certificate of incorporation, bylaws, or comparable organizational documents of Seller; (ii) violate or conflict with, in any material respect any Applicable Law, or any order, judgment, writ, injunction, decree or award applicable to Seller, or constitute an event which, with the giving of notice, lapse of time, or both, would result in any such violation or conflict; (iii) except as set forth on Schedule 3.5, result in a violation or breach of, or constitute a default (or an event which, with the giving or notice or the lapse of time or both, would become a default) under any material agreement, note, bond, mortgage, indenture, license, permit or instrument to which Seller is a party or by which any of the Assets are bound, or (iv) result in the imposition of any Encumbrance on any Asset , or an event which, with the giving of notice, lapse of time, or both, would result in any such imposition. Section 3.6 Litigation and Proceedings. There is no action, suit, proceeding or investigation pending or, to the knowledge of Seller, threatened against or directly affecting the Assets or the Business before any Governmental Authority which (PAGE) challenges the validity of this Agreement or otherwise seeks to prevent the consummation of the transactions contemplated hereunder or which, if adversely determined, would have a Material Adverse Effect. No judgment, order, writ, injunction, decree or assessment of any Governmental Authority is presently in effect which would have a Material Adverse Effect. Section 3.7 Consents and Approvals. Except as set forth on Schedule 3.7, no consent, approval or authorization of any Person, nor any declaration, filing or registration with any Governmental Authority or other Person, is required to be made or obtained by Seller or the Business in connection with the execution and delivery by Seller of this Agreement and the consummation by Seller of the transactions contemplated to be consummated by Seller hereunder. Section 3.8 Assets; Title. Since November 30, 1997, there have been no acquisitions or dispositions of Assets except in the ordinary course of business and consistent with the past practices of the Business. The Seller possesses good and marketable title to the Assets (other than property leased to Seller, in which the case Seller possesses a valid right to use such property), and none of the Assets are subject to any Encumbrances. (PAGE) Section 3.9 Contracts. 3.9.1 Schedule 3.9 lists (i) all employment Contracts to which Seller is a party with employees of the Business; and (ii) each written Contract to which Seller is a party which (a) is not terminable by Seller on one hundred twenty or fewer days' notice at any time without penalty, or (b) has a remaining term, as of the date of this Agreement, of over one year in length, or involves the receipt or payment after the Closing Date of more than $200,000. 3.9.2 To Seller's knowledge, the Seller is not in breach or violation of, or in default under any of the Contracts, and no event has occurred which, with the giving of notice, lapse of time, or both, would constitute such a breach, violation or default by the Seller, excluding in any case such breaches, violations and defaults which, individually or in the aggregate, would not have a Material Adverse Effect. All of the Contracts (a) constitute the valid and binding obligation of Seller, enforceable against Seller in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization or moratorium laws or other similar laws affecting enforcement of creditor's rights generally or by general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law) and (b) to Seller's knowledge, constitute the valid and binding obligation of the other parties thereto, enforceable against such parties in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization or moratorium laws or other similar laws affecting enforcement of creditor's rights generally or by general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). Section 3.10 Environmental Matters. To the knowledge of Seller, except as set forth on Schedule 3.10, neither the ownership or use of the Assets, violates Environmental Laws and no condition or event has occurred with respect to the Business or Assets which, with the giving of notice, lapse of time, or both, would constitute a violation of Environmental Laws, excluding in any event such violations, conditions and events which, individually or in the aggregate, would not have a Material Adverse Effect. (PAGE) Section 3.11 Material Adverse Change; Absence of Undisclosed Liabilities. Except (a) for liabilities and obligations incurred in the ordinary course of business since November 30, 1997 , since said date, Seller has not incurred any liabilities or obligations (whether direct, indirect, accrued, contingent or otherwise) material to the Business that would be required to be reflected or reserved against in a balance sheet of the Business, or in the notes thereto. Section 3.12 Permits. Seller has all Permits necessary for the conduct of the Business except for any Permits the absence of which would not have a Material Adverse Effect. Seller has not received notice that it is operating the Business in default or violation of any of the Permits, except for any such defaults or violations which would not have a Material Adverse Effect. A complete and correct list of all material Permits is set forth on Schedule 3.12. Section 3.13 Compliance with Laws. Seller, in operating the Business, is in compliance with all Applicable Laws, except such non-compliance which would not have a Material Adverse Effect. Section 3.14 Employees; Labor Matters; Benefit Plans. 3.14.1 Except as set forth in Schedule 3.14 and for such violations, claims, changes, disputes, actions, grievances and arbitrations which, individually or in the aggregate, would not have a Material Adverse Effect, to Seller's knowledge, Seller, in operating the Business, is in material compliance with all Applicable Laws respecting employment practices, terms and conditions of employment, wages and hours, there is no unfair labor practice complaint against Seller arising from the operation of the Business pending before the National Labor Relations Board or other agency, there is no claim or charge before the Equal Employment Opportunity Commission or other similar state agency arising from the operation of the Business, and there is no labor strike, material dispute, slowdown or stoppage pending against the Business. 3.14.2 Seller maintains a pension plan with respect to employees of the Business, which Buyer assumes pursuant to the terms of this Agreement. A copy of said plan has been delivered to Buyer prior to the date hereof. Seller maintains no other employee benefit plan, including, without limitation, deferred compensation or severance plan. (PAGE) ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer makes the following representations and warranties to Seller: Section 4.1 Organization. Buyer is a duly organized and validly existing limited liability company, in good standing under the laws of the State of Delaware, and has the power and authority to own, lease and operate its assets and properties and to conduct its business as now being conducted. Section 4.2 Authorization. Buyer has full right, power and authority to enter into this Agreement and the other agreements, documents and instruments to be executed and delivered by Buyer pursuant hereto and to consummate the transactions contemplated of it hereunder and thereunder and the consummation by Buyer of all transactions contemplated of it hereunder and thereunder has been duly authorized by all necessary corporate action. This Agreement constitutes, and when executed and delivered each of the other agreements, documents and instruments to be executed and delivered by Buyer pursuant hereto will constitute a legal, valid and binding obligation of Buyer enforceable against the Buyer in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization or moratorium laws or other similar laws affecting enforcement of creditor's rights generally or by general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). Section 4.3 No Conflict or Violation. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated to be consummated by Buyer hereby nor compliance by Buyer with any of the provisions hereof will: (i) violate or conflict with any provision of the certificate of formation, operating agreement, or comparable organizational documents of Buyer; (ii) violate or conflict with, in material respect, any Applicable Law or any order, judgment, writ, injunction, decree or award applicable to Buyer, or constitute an event which, with the giving of notice, lapse of time, or both, would result in any such violation or conflict; or (iii) result in a violation or breach of, or constitute a default (or an event which, with the giving of notice or the lapse of time or both, would become a default) under any material agreement, note, bond, mortgage, indenture, license, permit or instrument to which Buyer (PAGE) is a party or by which any of its assets are bound. Section 4.4 Litigation and Proceedings. There is no action, suit, proceeding or investigation pending or, to the knowledge of Buyer, threatened before any Governmental Authority which challenges the validity of this Agreement or otherwise seeks to prevent the consummation of the transactions contemplated hereunder or which, if adversely determined, would adversely affect the ability of Buyer to perform its obligations hereunder. Section 4.5 Consents and Approvals. No consent, approval or authorization of any Person, nor any declaration, filing or registration with any Governmental Authority or other Person, is required to be made or obtained by Buyer in connection with the execution and delivery by Buyer of this Agreement and the consummation by Buyer of the transactions contemplated to be consummated by Buyer hereunder. Section 4.6 Brokers. No agent, broker or other Person acting pursuant to express or implied authority of Buyer is entitled to a commission or finder's fee in connection with the transactions contemplated by this Agreement or, pursuant to express or implied authority of Buyer, will be entitled to make any claim against Seller for a commission or finder's fee. Section 4.7 Financial Ability to Close. Buyer specifically represents and warrants to Seller that Buyer presently has and at Closing will have the financial ability to perform Buyer's obligations under this Agreement. Section 4.8 Employment of Business Employees. Buyer will offer employment to all the employees of the Business. Said offer of employment will be under terms and conditions substantially equivalent to those prevailing immediately prior to the Closing Date, except for pension plan, long and short term disability insurance coverage, life insurance coverage and medical insurance coverage now being provided by Seller. Buyer shall recognize the vacation leave accumulated (and accrued on the books) as of the Closing Date. ARTICLE 5 FURTHER AGREEMENTS Section 5.1 Assignment of Contracts. Seller assigns, (PAGE) transfers and delivers to Buyer, and Buyer accepts and assumes all of Seller's obligations in the Contracts. Section 5.2 Assignment of Permits. Seller assigns, transfers and delivers to Buyer, and Buyer accept and assumes all of Seller's obligations in the Permits. Section 5.3 Racing License. Upon termination of the Lease, Seller hereby surrenders all right in the License. Seller shall use its best efforts to cause the Racing Board to grant a new license to Buyer to operate the Race Track and the Business commencing on the Closing Date. Section 5.4 Survival of Covenants, Representations and Warranties. All representations, warranties and covenants made by the Parties in this Agreement shall survive the Closing Date and continue in full force and effect thereafter. Section 5.5 Power of Attorney. Seller hereby irrevocably constitutes and appoints Buyer its true and lawful attorney-in-fact with full power of substitution and in name and stead of Seller, but on behalf of and for the benefit of Buyer, to (i) demand and receive the Assets, including to execute any document or instrument necessary or appropriate to confirm unto Buyer clear title to the Assets, (ii) collect for the account of Buyer all receivables payable to Seller on the Closing Date, and (iii) institute, prosecute, defend or settle, in the name of Seller or otherwise, but for the benefit of Buyer, any and all proceedings at law or equity which Buyer may deem proper relating to the Assets or the Business. ARTICLE 6 GENERAL PROVISIONS Section 6.1 Amendment and Modification. No amendment, modification, supplement, termination, consent or waiver of any provision of this Agreement, nor consent to any departure therefrom, will in any event be effective unless the same is signed by the Party against whom enforcement of the same is sought. Any waiver of any provision of this Agreement and any consent to any departure from the terms of any provision of this Agreement shall be effective only in the specific instance and for the specific purpose for which given. Section 6.2 Approvals and Consents. If any provision (PAGE) hereof requires the approval or consent of any Party to any act or omission, such approval or consent is not to be unreasonably withheld or delayed except as set forth herein. Section 6.3 Assignments. No Party may assign or transfer any of its rights or obligations under this Agreement to any other Person without the prior consent of the other Party. Section 6.4 Captions. Captions contained in this Agreement have been inserted herein only as a matter of convenience and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. Section 6.5 Compliance with Law. None of the terms or provisions of this Agreement require any of the Parties to take any action prohibited by, or contrary to, Applicable Law. Section 6.6 Facsimile Execution. For purposes of executing this Agreement, a document (or signature page thereto) signed and transmitted by facsimile machine or telecopier shall be treated as an original document. The signature of any Party thereon, for purposes hereof, shall be considered as an original signature, and the document transmitted shall be considered to have the same binding effect as an original signature on an original document. At the request of any Party, any facsimile or telecopy document shall be re-executed in original form by the Parties who executed the facsimile or telecopy document. No Party may raise the use of a facsimile machine or telecopier machine as a defense to the enforcement of this Agreement or any amendment or other document executed in compliance with this Section. Section 6.7 Counterparts. This Agreement may be executed by the Parties on any number of separate counterparts, and all such counterparts so executed constitute one agreement binding on all the Parties notwithstanding that all the Parties are not signatories on the same counterpart. Section 6.8 Entire Agreement. This Agreement constitutes the entire agreement among the Parties pertaining to the subject matter hereof and supersedes all prior agreements, letters of intent, understandings, negotiations and discussions of the Parties, whether oral or written. Section 6.9 Exhibits and Schedules. All of the Exhibits and Schedules attached to this Agreement are deemed incorporated (PAGE) herein by reference. Section 6.10 Failure or Delay. No failure on the part of any Party to exercise, and no delay in exercising, any right, power or privilege hereunder operates as a waiver thereof; nor does any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof, or the exercise of any other right, power or privilege. No notice to or demand on any Party in any case entitles such Party to any other or further notice or demand in similar or other circumstances. Section 6.11 Further Assurances. The Parties will execute and deliver such further instruments and do such further acts and things as may be required to carry out the intent and purpose of this Agreement. Section 6.12 Governing Law. This Agreement and the rights and obligations of the Parties hereunder are to be governed by and construed and interpreted in accordance with the laws of the Commonwealth applicable to contracts made and to be performed wholly within the Commonwealth, without regard to choice or conflict of laws rules. Section 6.13 Legal Fees, Costs. All legal and other costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby are to be paid by the Party incurring such costs and expenses; provided, however, that the provision of this Section 6.13 shall not in any way limit the rights of any Party hereto against the other Party with respect to a breach by such other Party of its obligations hereunder. Section 6.14 Notices. All notices, consents, requests, demands and other communications hereunder are to be in writing, and are deemed to have been duly given or made: (a) when delivered in person; (b) on the date noted on the return receipt of the delivery date or attempted delivery date, when mailed by United States mail, first class, return receipt requested first class postage prepaid; (c) in the case of overnight courier services, on the day of delivery by the overnight courier service with payment provided for; or (d) in the case of telex or telecopy or fax, when sent, verification received, in each case addressed as follows: (PAGE) (i) if to Buyer: ------------------------------------- ------------------------------------- ------------------------------------- Fax #: ( ) with a copy to: -------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- Fax #: ( ) (ii) if to Seller: -------------------------------------------------------- Attention: --------------------------------------------- -------------------------------------------------------- -------------------------------------------------------- Fax #: ( ) ] with a copy to: Fiddler, Gonzalez & Rodriguez Chase Manhattan Bank Building Fifth Floor Hato Rey, Puerto Rico Post Office Box 363507 San Juan, Puerto Rico 00936-3507 Attention: Julio L. Aguirre, Esquire Fax # (787) 759-3108 (PAGE) and to: Covington & Burling 1201 Pennsylvania Avenue, NW Washington, D.C. 20004 Attention: Andrew Jack, Esquire Fax #: (202) 778-5232 or to such other address as any Party may designate by notice to the other Parties in accordance with the terms of this Section. Section 6.15 Publicity. Any publicity release, advertisement, filing, public statement or announcement made by or at the request of any Party regarding this Agreement hall be first reviewed by and must be satisfactory and consented to the other Parties, which consent will not be unreasonably withheld. Section 6.16 Severability. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction is, as to such jurisdiction, ineffective to the extent of any such prohibition, unenforceability or non-authorization without invalidating the remaining provisions hereof, or affecting the validity, enforceability or legality of such provision in any other jurisdiction, unless the ineffectiveness of such provision would result in such a material change as to cause completion of the transactions contemplated hereby to be unreasonable. Section 6.17 Successors and Assigns. All provisions of this Agreement are binding upon, inure to the benefit of, and are enforceable by or against, the Parties and their respective administrators or other legal representatives and permitted successors and assigns. Section 6.18 Third-Party Beneficiary. This Agreement is solely for the benefit of the Parties and their respective successors and permitted assigns, and no other Person has any right, benefit, priority or interest under, or because of the existence of, this Agreement. Section 6.19 Bulk Sales Law. Buyer hereby waives compliance by Seller with the laws or any jurisdiction, including without limitation the laws of the Commonwealth, relating to bulk transfers which may be applicable in connection with the transfer of the Assets to Buyer. (PAGE) Section 6.20 Signature Warranty. Each Person executing this Agreement warrants that he is authorized to do so on behalf of the Party for whom he signs this Agreement. Section 6.21 Effectiveness. This Agreement shall be effective as of the date hereof upon the approval by the Commonwealth's Racing Board of the New Lease. IN WITNESS WHEREOF, Buyer and Seller have caused this Agreement to be executed by their respective officers, as of the date first set forth above. EX-10 3 (PAGE) AMENDMENT TO CONTROL TRANSFER AGREEMENT This Second Amendment to Control Transfer Agreement (this "Amendment"), dated as of December 19, 1997, is entered into by and among Interstate Business Corporation, a Delaware corporation ("IBC"), Interstate General Company L.P., a Delaware limited partnership ("IGC"), Interstate General Properties Limited Partnership S.E., a Maryland limited partnership ("IGP"), Housing Development Associates S.E., a Puerto Rico partnership ("HDA"), Equus Management Company, a Delaware corporation ("EMC"), and Equus Gaming Company L.P., a Virginia limited partnership ("Equus"). W I T N E S S E T H: WHEREAS, the parties hereto are parties to that certain Control Transfer Agreement dated as of December 31, 1996 as amended by the amendment thereto dated as of March 31, 1997 (the "Agreement"); and WHEREAS, the parties hereto now wish to amend Sections 2, and 3 of the Agreement; NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Amendments. Sections 2, and 3 of the Agreement are hereby amended and restated in their entirety as follows: 2. Execution of Net Worth Guaranty IGC shall execute and deliver to EMC a Guaranty Agreement in the form attached hereto as Exhibit A. Following execution and delivery by IGC of the Guaranty Agreement, IGC may withdraw as a general partner of Equus. 3. IGC Undertakings. For and in full consideration of the transfer of the EMC Stock and execution and delivery by IGC of the Guaranty Agreement, IBC hereby agrees to: (a) forever indemnify and hold harmless IGC, and its successors and assigns from and against any and all liability and expense (including, without limitation, any liability for debts or obligations incurred by Equus) which IGC may incur as a result of its serving as a general partner of Equus; (b) contribute to the capital of EMC 50,000 IGC Class A Units and maintain in EMC at all times prior to termination of the Guaranty Agreement sufficient capital to (PAGE)provide EMC with tangible net worth of at least $200,000. (c) irrevocably assign to IGC all rights to any distributions received by EMC from Equus in respect of its .99% general partnership interest in Equus to the extent that such distributions exceed the expenses and liabilities of EMC incurred in the ordinary course of business in its capacity as managing general partner of Equus; and (d) not transfer or otherwise dispose of any EMC stock other than (i) to an affiliate or IBC who agrees to remain bound by the terms of this Agreement, or (ii) to any party in an arm's length transaction for fair value which such value is hereby irrevocably assigned to IGC. 2. Effectiveness of Amendment. This Agreement shall be effective as of the date hereof. Except as expressly amended hereby, all other provisions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as o9f the date first above written. (PAGE) INTERSTATE GENERAL COMPANY L.P. By: Interstate General Management Corporation, its managing general partner By: /s/ Francisco Arrivi ---------------------------------- Name: Francisco Arrivi Title: Executive Vice President EQUUS GAMING COMPANY L.P. By: Equus Management Company, its managing general partner By: /s/ Gretchen Gronau ----------------------------- Name: Gretchen Gronau Title: Vice President INTERSTATE BUSINESS CORPORATION By: /s/ Gretchen Gronau ------------------------------ Name: Gretchen Gronau Title: Assistant Secretary EQUUS MANAGEMENT COMPANY By: /s/ Gretchen Gronau -------------------------------- Name: Gretchen Gronau Title: Vice President (PAGE) HOUSING DEVELOPMENT ASSOCIATES S.E. By: Equus Gaming Company, L.P. its managing general partner By: Equus Management Company, its managing general partner By: /s/ Gretchen Gronau ------------------------------- Name: Gretchen Gronau Title: Vice President INTERSTATE GENERAL PROPERTIES LIMITED PARTNERSHIP S.E. By: Interstate General Company, L.P., its managing general partner By: Interstate General Management Corporation, its managing general partner By: /s/ Francisco Arrivi ------------------------------- Name: Francisco Arrivi Title: Executive Vice President EX-10 4 (PAGE) GUARANTY THIS GUARANTY AGREEMENT (this "Agreement") is made as of December 30, 1997, by and between EQUUS MANAGEMENT COMPANY, a Delaware corporation ("EMC"), and INTERSTATE GENERAL COMPANY, L.P., a Delaware limited partnership (the "Guarantor" of "IGC"). WHEREAS, EMC is the managing general partner of Equus Gaming Company L.P. (the "Partnership") and the Guarantor is a general partner of the Partnership; WHEREAS, the Partnership is a publicly traded partnership which is listed on the Nasdaq Market ("Nasdaq"); WHEREAS, Nasdaq approved the listing of the Partnership's Class A Limited Partnership Stock Units ("Units") on Nasdaq on the condition that the Guarantor retain certain liability with respect to the debts of the Partnership; WHEREAS, pursuant to a Stock Purchase Agreement dated as of December 31, 1996, (the "EMC Purchase Agreement") IGC sold all of the outstanding capital stock of EMC to Interstate Business Corporation, a Delaware Corporation ("IBC"); WHEREAS, pursuant to the EMC Purchase Agreement, IBC agreed to use its best efforts to permit IGC to withdraw as a general partner of the Partnership without affecting the continued listing of Units on Nasdaq; WHEREAS, in connection with the foregoing obligation, IBC has contributed certain assets to EMC to increase its net tangible assets and EMC has caused the Partnership to redeem IGC's general partnership interest pursuant to a Redemption Agreement between the Partnership and IGC of even date; WHEREAS, as partial inducement to EMC to cause the Partnership to enter into the Redemption Agreement, the Guarantor has agreed to provide the guaranty provided hereunder; and WHEREAS, the Guarantor has determined that the Redemption Agreement will result in direct and/or indirect financial benefits to the Guarantor and is otherwise in Guarantor's interest; (PAGE) NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Guaranty. The Guarantor for itself, its successors and assigns, guarantees to EMC (the "Guaranty"): (a) in the case of the insolvency of the Partnership and the insolvency of EMC, the payment of any and all liabilities of EMC which exceed the assets of EMC, arising from EMC's status as a general partner of the Partnership (the "Liabilities"), provided, however, that (i) the Guarantor shall pay only that portion of the Liabilities which exceed Two Hundred Thousand Dollars (US $200,000.00); and (ii) Notwithstanding any other provision of this Agreement, the Guarantor shall not be required to pay more than Twenty Million Dollars (U.S. $20,000,000.00) pursuant to this Guaranty. 2. Nasdaq Listing. Upon the execution of this Agreement, EMC shall use its best efforts to obtain, as soon as reasonably practical, the approval of Nasdaq to continue listing the Units without relying on this Guaranty. 3. Termination. (a) Guarantor may elect to terminate the Guaranty by written notice to EMC upon the occurrence of any one of the following events: (i) Nasdaq confirms the Partnership that Nasdaq will continue the listing of the Units of this Guaranty; (ii) The consolidated partners' equity of the Partnership, as determined in accordance with generally accepted accounting principles falls below negative Twenty Million Dollars (US $20,000,000.00); or (iii) Ten (10) days following delivery of written notice to EMC of non payment when due of the fee set forth in Section 4 hereof, unless such payment is made before (PAGE) the expiration of the ten (10) days. (b) EMC May elect to terminate the Guaranty at any time upon written notice to Guarantor. 4. Guaranty Fee. If this Guaranty has not terminated by the fourth anniversary of its inception, then beginning on the fourth anniversary of this Guaranty and on each anniversary thereafter until this Guaranty is terminated, EMC shall cause the Partnership to pay to the Guarantor, a fee equal to 2% of the amount by which the Consolidated partners' equity is less than Four Million Dollars ($4,000,000.00). 5. Representations and Warranties. The Guarantor represents and warrants to EMC, effective as of the date of the execution by the Guarantor of this Agreement, that: (a) Good Standing. The Guarantor is a limited partnership duly organized, validly existing and in good standing, under the laws of the State of Delaware and has the power and authority to own its property and to carry on its business and is duly qualified or registered in each jurisdiction in which the character of the properties owned by it therein or in which the transaction of its business makes such qualification necessary. (b) Authority. The Guarantor has full power and authority to execute and deliver this Agreement and to incur the obligations provided for herein, all of which have been duly authorized by all proper and necessary action of its managing general partner. No consent or approval of any public authority is required as a condition to the validity of this Agreement. (c) Binding Agreement. This Agreement constitutes the valid and legally binding obligation of the Guarantor in accordance with its terms. (d) No Conflicts. None of the execution, delivery or performance of this Agreement will violate (i) any provision of law or of the partnership agreement of the Guarantor, or any order of any court or other agency of government to which the Guarantor or any affiliate thereof is subject, or (ii) any indenture, agreement or other instrument to which the Guarantor is a party or by which any of the (PAGE) property or assets of the Guarantor is bound, or be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of the Guarantor. 6. Waivers. Except as expressly set forth below, the Guarantor hereby waives notice of the following acts, events and/or conditions and hereby agrees that the creation or existence of any such act, event or condition or the performance thereof by the Partnership (in any number of instances) shall in no way release or discharge the Guarantor from liability hereunder, in whole or in part: (a) the addition of or partial or entire release of any other guarantor, maker, surety, endorser, indemnitor or other party or parties primarily or secondarily liable for the payment of the Liabilities; (b) the institution of any suit or the obtaining of any judgment against any other guarantor, maker, surety, endorser, indemnitor or other party primarily or secondarily liable for the payment of the Liabilities; (c) acceptance of this Guaranty; (d) all rights to require the marshalling of assets of the Partnership or any party or parties and all rights accorded by law to the Guarantor which might impair the right of action against the Guarantor; (e) the taking or retaining of the primary or secondary obligation of any party or parties, in addition to the Guarantor, with respect to the Liabilities; (f) the taking or retaining of a lien and security interest in any property to secure the Liabilities or any of the liabilities of the Guarantor hereunder or the impairment of any collateral therefor, including, without limitation, the substitution, exchange, surrender or release thereof, (g) the failure of the Partnership at any time or times to assert any claim or demand or to enforce any right or remedy against EMC, or any other person or entity; or (PAGE) (h) any lack of validity of the Redemption Agreement. 7. Conditional Guaranty. The Guaranty is a conditional guaranty on the terms and conditions set forth herein. It guarantees the performance of EMC as a general partner and it is conditioned upon the requirement that the Partnership first attempt to collect any of its liabilities from the assets of EMC. Payments by the Guarantor hereunder are immediately due and payable upon the insolvency of EMC. Any such payments may be required by EMC in any number of installments, and shall remain in full force and effect until satisfaction in full of the Liabilities, notwithstanding any intermediate or temporary payment or settlement of the whole or any part of the Liabilities. 8. Notices. All notices and other communications provided for hereunder shall be in writing (including telegraphic communication) and mailed by certified mail, return receipt requested, or delivered by overnight delivery, or telegraphed or deliver if to the Guarantor or to EMC, at their address at 222 Smallwood Village Center, Waldorf, Maryland 20602, or sent by telecopier (telecopier number (301) 870-8481), as to each party, at such other address as shall be designated by such party in a written notice to the other party. All such notices and communications shall, when mailed, be effective on the date received as indicated in the receipt and, when sent by overnight delivery or telecopier or telegraphed, be effective when delivered to the overnight delivery service company or when sent by telecopier or telegraph, respectively, addressed as aforesaid. 9. Successors and Assigns. All obligations, covenants and agreements of the Guarantor shall be binding on it and its successors and assigns. 10. No Delay or Waiver Severability. No delay on the part of EMC in the exercise of any right or remedy shall operate as a waiver thereof, and no single exercise by EMC of any right or remedy shall preclude other or further exercise thereof or the exercise of any right or remedy; no waiver by EMC of any right or remedy shall be effective unless in writing nor, in any event, operate as a waiver of any other or future right or remedy that may accrue to EMC. If any part of this Guaranty shall be adjudged invalid, then such partial (PAGE) invalidity shall not cause the remainder of the Guaranty to be or to become invalid, and if a provision hereof is held invalid in one or more of its applications, it is agreed that said provision shall remain in effect in valid applications that are severable from the invalid application or applications. 11. Governing Law. This Agreement shall be construed under the laws of the Commonwealth of Virginia (excluding the conflicts of laws principles thereof). IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. INTERSTATE GENERAL COMPANY, L.P. By: Interstate General Management Corporation Its: Managing General Partner By: /s/ Francisco Arrivi --------------------------------- Name: Francisco Arrivi ------------------------------- Title: Executive Vice President ------------------------------- EQUUS GAMING COMPANY, L.P. By: Equus Management Company Its: Managing General Partner By: /s/ Gretchen Gronau --------------------------------- Name: Gretchen Gronau ------------------------------- Title: Vice President ------------------------------- EX-10 5 (PAGE) AGREEMENT TO RETIRE PARTNERSHIP INTEREST OF INTERSTATE GENERAL COMPANY, L.P. IN EQUUS GAMING COMPANY, L.P. This AGREEMENT TO RETIRE PARTNERSHIP INTEREST OF INTERSTATE GENERAL COMPANY, L.P. IN EQUUS GAMING COMPANY, L.P. (the "Agreement") is entered into and shall be effective as of December 30, 1997 by and among Equus Gaming Company, L.P., a Virginia limited partnership (the "Partnership"), Interstate General Company, L.P., a Delaware limited partnership and general partner of the Partnership (the "Retiring Partner"), Equus Management Company, a Delaware Corporation and managing general partner of the Partnership ("EMC"), Equus Management Title Company, a Delaware Corporation and limited partner of the Partnership ("EMTC" and together with EMC, the "Continuing Partners"), and Housing Development Associates S.E., a Puerto Rico Partnership ("HDA") (HDA, the Retiring Partner, the Continuing Partners, and the Partnership are sometimes referred to individually as a "Party" and collectively as the "Parties"), based on the following facts: A. The Retiring Partner and the Continuing Partners formed the Partnership pursuant to that certain agreement dated February 6, 1995, which agreement has been amended from time to time (as amended, the "Partnership Agreement"). B. The Parties have agreed that the Retiring Partner's entire right, title, and interest in the Partnership (the "Redemption Interest") shall be retired and redeemed by the Partnership and the Retiring Partner shall withdraw from the Partnership, all as set forth herein. Based on the foregoing, and in consideration of the mutual agreements, covenants, and conditions contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Parties hereby agree as follows: 1. Retirement, Redemption, and Withdrawal. The Redemption Interest shall be retired and redeemed by the Partnership effective as of 9:00 a.m. Eastern Time on December 31, 1997, (the "Effective Date"), all in accordance with the provisions set forth in this Agreement. The Retiring Partner shall sell, assign, and transfer the entire Redemption Interest to the Partnership and withdraw from the Partnership as of the close of business on the Effective Date. (PAGE) 2. Consideration for Redemption Interest; Indemnification Provisions. In consideration for the retirement and redemption of the Redemption Interest, the Partnership agrees to distribute to the Retiring Partner consideration (the "Redemption Consideration") composed of the following: (a) On the Effective Date, the Partnership shall distribute to the Retiring Partner a portion of its partnership interest in HDA, such portion being equal to the product of (a) the Partnership's interest in HDA immediately prior to the Effective Date and (b) the Retiring Partner's Partnership interest in the Partnership immediately prior to the Effective Date. (b) As among the Parties and subject to the Guaranty Agreement (of even date herewith by and between Retiring Partner and EMC (the "Guaranty Agreement")) and Section 7.7 of the Partnership Agreement, the Retiring Partner shall be relieved of all responsibility for liabilities of the Partnership whether known or unknown the Partnership and EMC shall indemnify, defend, protect, and hold harmless the Retiring Partner from such liabilities, subject to the Guaranty Agreement and Section 7.7 of the Partnership Agreement. Liabilities to which the Retiring Partner remains subject pursuant to Section 7.7 of the Partnership Agreement are referred to herein as "Contingent Liabilities". (c) The Redemption Consideration provided for in this Section 2 is the total consideration payable by the Partnership to the Retiring Partner for the Redemption Interest, and the Retiring Partner shall not retain an interest in, or be entitled to receive distributions of, any other Partnership assets. 3. Continuation of Partnership; Adjustment of EMC Percentage Interest. The Parties hereby agree that the Partnership shall continue and shall not be dissolved because of the retirement and redemption of the Redemption Interest or the withdrawal of the Retiring Partner. Pursuant to Section 7.3 of the Partnership Agreement, the partnership interest of EMC shall be increased from .99% to 1%. 4. Tax Matters. The Parties agree that: (a) To the extent possible, the tax and other attributes that the Retiring Partner held indirectly in HDA through its interest in the Partnership (including its share of Section 704(c) property under Treas. Reg. Sec. 1.704-3 and its share of HDA's (PAGE) nonrecourse liabilities under Section 752 of the Internal Revenue Code of 1986 (the "Code")) immediately before the Effective Date shall continue to be held by the Retiring Partner through its direct interest in HDA on and after the Effective Date. (b) The Parties shall each file all required Federal, state, and local income tax returns and related returns and reports in a manner consistent with the provisions of this Section 4. 5. Representations, Warranties, and Covenants. (a) Of Each Party. The Partnership, the Retiring Partner, and the Continuing Partners each hereby represents and warrants to and covenants to each other Party that: (i) Neither the execution nor the delivery of this Agreement, the incurrence of the obligations herein set forth, the consummation of the transactions herein contemplated, nor the compliance with the terms of this Agreement will conflict with, or result in a breach of, any of the terms, conditions, or provisions of, or constitute a default under, any bond, note, or other evidence or indebtedness or any contract, indenture, mortgage, deed of trust, loan agreement, lease, or other agreement or instrument to which such Party is a party or by which such Party may be bound. (ii) Such Party has the right, power, legal capacity, and authority to execute and enter into this Agreement and to execute all other documents and perform all other acts as may be necessary in connection with the performance of this Agreement. (iii) No approval or consent not heretofore obtained by any person or entity is necessary in connection with the execution of this Agreement by such Party or the performance of such Party's obligations under this Agreement. (iv) Such Party has received independent tax and legal advice from attorneys of his choice with respect to the advisability of executing this Agreement. (v) Such Party has made such investigation of the facts pertaining to this Agreement, and all of the matters pertaining thereto, as he deems necessary. (PAGE) (vi) Except as expressly provided herein, no person has made any statement or representation to such Party regarding any fact relied upon by such Party in entering into this Agreement and each Party specifically does not rely upon any statement, representation, or promise of any other person in executing this Agreement. (vii) Such Party relies on the finality of this Agreement as a material factor inducing his execution of this Agreement, and the obligations under this Agreement. (viii) Such Party will not take any action which would interfere with the performance of this Agreement by any other Party or which would adversely affect any of the rights provided for herein. (b) Additional Representation, Warranty, and Covenant of the Retiring Partner. The Retiring Partner hereby represents and warrants to and covenants to each other Party that the Retiring Partner owns the Redemption Interest free and clear of any and all liens, claims, encumbrances, and adverse equities. 6. Releases and Indemnification. (a) By Each Party. For value received, each Party for himself and for each and all of his past, present, and future predecessors, successors, assigns, affiliates, licensees, transferees, principals, servants, agents, partners, associates, officers, directors, employees, representatives, shareholders, attorneys, insurers, legal representatives, descendants, dependents, heirs, executors, administrators, and all other persons (collectively, the "Successors in Interest") hereby and forever releases and discharges and agrees to indemnify and hold harmless each other Party and each and all of each other Party's Successors in Interest, from any and all claims, demands, liens, causes of action, suits, obligations, controversies, debts, costs, expenses, damages, judgments, and orders of whatever kind or nature, in law, equity, or otherwise, whether known or unknown, suspected or unsuspected, and whether or not concealed or hidden, which have existed, do presently exist, or may exist, relating to the Partnership or its activities, assets, liabilities, or partners, other than the obligations to the Retiring Partner set forth in this Agreement. (PAGE) (b) After-Discovered Facts. It is understood by each Party that there is a risk that subsequent to the execution of this Agreement, a Party may discover facts different from or in addition to the facts which he now knows or believes to be true with respect to the subject matter of this Agreement, or that certain debts, claims, expenses, or liabilities presently known may be or become greater than a Party now expects or anticipates. Each Party intends this Agreement to apply to all unknown or unanticipated results, as well as those known and anticipated, and it is the intention of each Party to hereby fully, finally, absolutely, and forever resolve any and all claims and disputes which have existed, do exist, or may exist relating to the Partnership or its activities, assets, liabilities, or partners, other than the obligations to the Retiring Partner set forth in this Agreement. 7. Miscellaneous. (a) Statement of Partnership; Other Filings. The Partnership may prepare and file fictitious business name statements and such other statements or documents as the Continuing Partners deem appropriate to reflect the withdrawal of the Retiring Partner from the Partnership and the continuation of the Partnership. (b) Name of Partnership. The Partnership may, in the sole discretion of the Continuing Partners, continue to use Equus Gaming Company, L.P. as the name of the Partnership after the Effective Date. (c) Attorneys' Fees to Enforce This Agreement or in Subsequent Litigation. In the event any Party shall maintain or commence any action, proceeding, or motion against any other Party to enforce this Agreement or any provision thereof, the prevailing Party therein shall be entitled to recover his actual attorneys' fees and costs therein incurred. Each Party agrees that if such Party hereafter commences, joins in, or in any manner asserts against any other Party any of the claims released hereunder, then it will pay to the other Party, in addition to any other damages caused to the other Party thereby, all actual attorneys' fees and costs incurred in defending or otherwise responding to such suit or claim. (d) Severability. Each provision of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or (PAGE) invalidity shall not affect the legality or validity of the remainder of the Agreement. (e) Survival. All of the terms, representations, warranties, and other provisions of this Agreement shall survive and remain in effect after the Effective Date. (f) Costs. Each Party shall pay its own legal fees and expenses incidental to the execution of this Agreement and the consummation of the transactions contemplated hereby. (g) Execution of Documents. Each Party agrees to execute all documents necessary to carry out the purpose of this Agreement and to cooperate with each other for the expeditious filing of any and all documents and the fulfillment of the terms of this Agreement. (h) Successors and Assigns. This Agreement shall inure to the benefit of the transferees, successors, assigns, heirs, beneficiaries, executors, administrators, partners, agents, employees, and representatives of each Party. (i) Controlling Law. This Agreement has been entered into in the Commonwealth of Virginia and the Agreement, including any rights, remedies, or obligations provided for thereunder, shall be construed and enforced in accordance with the laws of the State of Delaware. (j) Counterpart Execution. This Agreement may be executed in multiple counterparts each of which may be deemed an original and shall become effective when the separate counterparts have been exchanged among the Parties. (k) Construction. Every covenant, term, and provision of this Agreement shall be construed simply according to its fair meaning and not strictly for or against any Party. (l) Headings. Section and other headings contained in this Agreement are for reference purposes only and are not intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof. (m) Incorporation by Reference. Every exhibit, schedule, and other appendix attached to this Agreement and referred to herein is hereby incorporated in this Agreement by reference. (PAGE) (n) Variation of Provisions. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, singular or plural, as the identity of the person or persons may require. (o) Notices. Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be in writing and shall be delivered personally to the Party or to an officer of the Party to whom the same is directed, or sent by regular, registered, or certified mail, addressed to the person to whom directed at the following address, or to such other address as such Party may from time to time specify by notice to the Parties: (i) If to the Partnership or the Continuing Partners: Equus Gaming Co., L.P. 222 Smallwood Village Center St. Charles, MD 20602 (ii) If to the Retiring Partner: Interstate General Company 222 Smallwood Village Center St. Charles, MD 20602 Any such notice shall be deemed to be delivered, given, and received for all purposes as of the date so delivered, if delivered personally or if sent by regular mail, or as of the date on which the same was deposited in a regularly maintained receptacle for the deposit of United States mail, if sent by registered or certified mail, postage and charges prepaid. Any Party may from time to time specify a different address by choice to the other Parties. (p) Amendments. Any amendment to this Agreement shall be in writing and executed by each Party hereto. (q) Entire Agreement. This Agreement contains the entire understanding among the Parties and supersedes any prior written or oral agreements between them respecting the subject matter of this Agreement. There are no representations, agreements, arrangements, or understandings, oral or written, between the Parties relating to the subject matter of this Agreement that are not fully set forth herein. This Agreement (PAGE) amends and restates the Partnership Agreement with respect to the subject matter of this Agreement. This Agreement shall be considered part of the Partnership Agreement for all purposes under the Code. IN WITNESS WHEREOF, the Parties hereto have approved and executed this Agreement as of the date first set forth above. PARTNERSHIP EQUUS GAMING COMPANY, L.P. a Virginia partnership By: EQUUS MANAGEMENT COMPANY its Managing General Partner By: /s/ Gretchen Gronau ------------------------------ CONTINUING PARTNERS: EQUUS MANAGEMENT COMPANY, a Delaware corporation By: /s/ Gretchen Gronau ------------------------------ Its: Vice President ------------------------------ EQUUS MANAGEMENT TITLE COMPANY, a Delaware corporation. By: /s/ Gretchen Gronau ------------------------------ Its: Vice President ------------------------------ RETIRING PARTNER: INTERSTATE GENERAL COMPANY, L.P. By: Interstate General Management Company, its managing general partner By: /s/ Francisco Arrivi ------------------------------ HOUSING DEVELOPMENT ASSOCIATES S.E. By: EQUUS GAMING COMPANY, L.P. a Virginia partnership By: EQUUS MANAGEMENT COMPANY its Managing General Partner By: /s/ Gretchen Gronau ------------------------------ EX-10 6 (PAGE) NINTH AMENDED AND RESTATED PARTNERSHIP AGREEMENT HOUSING DEVELOPMENT ASSOCIATES S.E. Dated: December 31, 1997 (PAGE) This amended and restated partnership agreement (hereinafter referred to as the "Agreement") is made effective as of the 31st day of December, 1997 (hereinafter referred to as the "Ninth Amendment Date"), by and between INTERSTATE GENERAL COMPANY, L.P., a limited partnership duly organized and existing under the laws of the State of Delaware (hereinafter referred to as "IGC"), and EQUUS GAMING COMPANY L.P., a limited partnership organized and existing under the laws of the Commonwealth of Virginia (hereinafter referred to as "Equus") and constitutes a restatement of the Deed of Constitution of Special Partnership executed by certain of said parties as of the 14th day of February, 1989, including any amendments thereof (hereinafter referred to as the "Deed"). WHEREAS As of February 14, 1989, Interstate General Properties Limited Partnership S.E., a limited partnership duly organized and existing under the laws of the State of Maryland (hereinafter referred to as "IGP") and SUPRA AND COMPANY S.E., a special partnership organized and existing under the laws of the Commonwealth of Puerto Rico (hereinafter referred to as "SUPRA"), executed a Deed of Constitution of Special Partnership whereby they formed a special partnership (hereinafter the "Partnership") for the purpose of conducting the business of land development in general, building and sale of residential and/or commercial properties, the ownership of a race track, and the leasing of buildings and structures. As of April 15, 1992, IGP, SUPRA and Interstate Business Corporation, a corporation organized and existing under the laws of the State of Delaware (hereinafter referred to as "IBC") subscribed a "Second Amended and Restated Partnership Agreement" whereby IBC was admitted to the Partnership with a thirty-one percent (31%) ownership interest as of September 30, 1991. As of December 15, 1993, IGP, SUPRA, IBC and HDA MANAGEMENT CORPORATION, a corporation organized and existing under the laws of the State of Delaware (hereinafter referred to as "HDAMC") subscribed a "Third Amended and Restated Partnership Agreement" whereby HDAMC was admitted to the Partnership with a one-percent (1%) interest. On July 21, 1994, the Puerto Rico Racing Board approved HDAMC's acquisition of a fifteen percent (15%) interest. As of that date, IGP, SUPRA, IBC, and HDAMC subscribed a "Fourth (PAGE) Amended and Restated Partnership Agreement" whereby HDAMC's interest became fifteen percent (15%). As of August 1, 1994, IGP, SUPRA, HDAMC and Equus subscribed a "Fifth Amended and Restated Partnership Agreement" whereby IBC transferred its entire ownership interest in the Partnership to Equus, IGP transferred a forty and sixty-five one hundredths percent (40.65%) interest in the profits (but not its interest in the capital) of the Partnership to Equus, IBC withdrew from the Partnership, Equus was admitted to the Partnership, and Equus was designated a Managing Partner. As of March 8, 1995, IGP, Supra, HDAMC and Equus subscribed a "Sixth Amended and Restated Partnership Agreement" whereby HDAMC transferred to Equus its entire Fifteen percent (15%) Profits Interest (as that term is defined in the Sixth Amended and Restated Partnership Agreement) and a portion of its Capital Interest (as that term is defined in the Sixth Amended and Restated Partnership Agreement) and IGP was designated a Managing Partner. On February 7, 1996, IGP, SUPRA, and Equus subscribed a "Seventh Amended and Restated Partnership Agreement" whereby HDAMC transferred its entire ownership interest in the Partnership to Equus, IGP transferred all of its interest except for one percent of the total profits and capital of the Partnership to Equus, and HDAMC resigned as a Managing Partner and withdrew from the Partnership. On August 19, 1997, Equus and IGP subscribed an "Eighth Amended and Restated Partnership Agreement" whereby the Partnership redeemed SUPRA's Partnership interest and SUPRA withdrew from the Partnership. On December 16, 1997, Equus purchased from IGP a 0.20990099% interest in HDA. On December 30, 1997: (i) IGP transferred its remaining 0.99009901% interest in HDA to IGC; (ii) IGP resigned as Managing Partner; (iii) IGP withdrew from the Partnership and (iv) IGC was admitted to the Partnership with a 0.99009901% interest. On the Ninth Amendment Date: (1) Equus distributed an interest in HDA to IGC in complete redemption of IGC's general partner interest in Equus, pursuant to an Agreement to Retire Partnership Interest of Interstate General Company, L.P. in Equus Gaming Company, L.P. (hereinafter the "Redemption Agreement"); (2) Equus contributed its entire (PAGE) remaining interest in HDA to Equus Entertainment Corporation ("EEC"); (3) EEC was admitted to the Partnership with a 99% interest and was designated a Managing Partner (as that term is defined in Section 6); (4) Equus resigned as a Managing Partner and withdrew from the Partnership; (5) IGC was admitted to the Partnership with a 1% interest; and (6) Equus and the Managing Partner consented to the above-described transfers. Now EEC and IGC (collectively the "Partners" and individually a "Partner") desire to amend the Eighth Amended and Restated Partnership Agreement and to set forth the rights and obligations of the Partners in connection with the Partnership, their participation in any profits or liabilities derived therefrom, and their participation in any loss that may arise from such venture. Accordingly, the Partners agree herein as follows: One: Constitution of Partnership. The Partners hereby associate themselves as a partnership under the laws of the Commonwealth of Puerto Rico and have elected to be treated as a Special Partnership in accordance with the provisions of the Puerto Rico Income Tax Act of 1954, as amended (the "ITA") and Act Number 3 of September 27, 1985, amending Article 1589 of the Civil Code of Puerto Rico, for the purpose of engaging in the business of land development in general, the building and sale of residential and/or commercial properties, owning of a race track, leasing of buildings and structures, and performing any and all acts and services necessary or desirable in connection with the foregoing, including but not limited to the purchase, lease or otherwise the acquisition and use of real or personal property, entering into, making, performing and carrying out of contracts, borrowing money for the purposes of the Partnership and securing any such borrowing through the issuance of required loan documents, collateral agreements, securities and other guarantees proper or necessary to secure repayment thereof, and in general to do and perform any and all acts authorized to be done by partnerships under the laws of the Commonwealth of Puerto Rico. Two: Name and Principal Office of Partnership. The name of the Partnership shall be HOUSING DEVELOPMENT ASSOCIATES S.E., and the principal offices of the Partnership shall be located at 650 Munoz Rivera Avenue, Doral Building, Seventh Floor, Hato Rey, Puerto Rico 00918; postal address shall be G.P.O. Box 363908, San Juan, Puerto Rico 00936-3908, which location may be (PAGE) changed by the Managing Partner of the Partnership from time to time. Three: Term of Partnership. The term of the Partnership shall commence as of the date of execution of the Deed and shall continue for a period of 50 years from the date thereof, unless sooner terminated as provided in Section 22 hereof (except as otherwise provided, references to "Section" shall refer to Sections of this Agreement), and may be extended and continued for such additional periods as the Partners may agree. Four: [Reserved] Five: Limited Purpose. The relationship between the Partners shall be limited to the performance of the specific purposes and objectives of the Partnership as set forth in this Agreement. Nothing herein shall be construed to create a general purpose partnership between the Partners; nor to authorize any Partner to act as general agent for any other; nor to confirm or grant to any Partner any proprietary interest in, or to subject any Partner to any liabilities for or in respect of, the business, assets, profits or obligations of any other Partner, except only to the extent and for the business contemplated by this Agreement. Six: Management of the Partnership. The business and affairs of the Partnership shall be supervised and controlled exclusively by the managing partner, EEC (the "Managing Partner"). The Managing Partner has exclusive authority to manage the Partnership, including to retain other persons to perform services for the Partnership. In furtherance of and subject to the foregoing, the Managing Partner shall have the power and authority to act on behalf of the Partnership in all acts and contracts, and, among others, to apply for and obtain loans, to approve the execution of contracts, execution of deeds, granting of mortgages over its real and personal properties and acquisition of assets and real property deemed by it necessary or convenient for its business, either by lease or outright purchase, to apply for and obtain any required license, permit or governmental authorization, and to perform any other act which the Partnership is authorized to do pursuant to the terms hereof as well as under the laws of the Commonwealth of Puerto Rico. Without the approval or authorization of the Managing Partner, no party (including no Partner) may act on behalf of the Partnership and no Partner shall be considered to (PAGE) be the agent of another. Notwithstanding the foregoing, the Managing Partner may appoint officers of the Partnership and delegate to such officers such powers, duties and authority as it shall deem appropriate. The actions of the Managing Partner require no ratification by any other Partners. The Managing Partner shall be the agent of the Partnership for the conduct of the Partnership's business. The Partnership shall reimburse the Managing Partner for all reasonable out-of-pocket expenses incurred by the Managing Partner in connection with management of the Partnership, including reasonable directors' fees for directors who are not then existing officers or employees of the Partnership or any Managing Partner, and the reasonable cost of directors' and officers' liability insurance. Seven: Percentage Partnership Interests. The Percentage Partnership Interest of EEC and IGC shall be, respectively, Ninety Nine percent (99%) and One (1%). Eight: [Reserved] Nine: Appointment of Manager. The Managing Partner shall have authority to appoint and employ such managers, employees, consultants and agents for the Partnership, as it shall deem appropriate, and may delegate to such managers, employees, consultants and agents any and all offices, powers and authority hereunder. Ten: Limited Responsibility. The Partners shall not be personally liable for the debts, liabilities or obligations of the Partnership. Each Partner's liability and obligations with regards to the Partnership, shall be limited to the capital contribution actually made by such Partner to the Partnership. Eleven: Books and records. The Partnership shall maintain at its principal office full and proper records and books of account based upon generally accepted accounting principles, consistently applied. The fiscal year of the Partnership shall be the calendar year, or such other fiscal year as shall be determined by the Managing Partner and permitted by law. Twelve: Inspection of Books, Appointment of Accountants. Each of the Partners shall have the right at all reasonable times to have any and all of the Partnership's records and books of account inspected at its own expense by its own employees, attorneys or accountants. (PAGE) The Managing Partner shall at all times name and appoint such independent nationally recognized accounting and auditing firm (the "Partnership Accountants") as in its sole discretion shall be determined. Thirteen: Bank Account. The Partnership shall maintain such bank accounts as shall be approved by the Managing Partner. The Managing Partner shall determine the individuals authorized to draw checks against the Partnership bank accounts. Such drawings shall require not less than two (2) signatures. Fourteen: Profits, Losses, and Tax Allocations. (a) The net income or net loss, respectively, for federal and Puerto Rico tax purposes shall be determined annually by the Partnership Accountants. The Partnership Accountants shall prepare the income tax returns for the Partnership as soon as possible after the end of each of the Partnership's fiscal years. (b) For purposes of this Agreement the terms "Profits" and "Losses" mean the income or loss of the Partnership for "book" purposes under Treas. Reg. Sec. 1.704-1(b)(2)(iv). In particular, and without limitation, the terms "Profits" and "Losses" mean, for any fiscal year, the net income or net loss, respectively, of the Partnership as reported by the Partnership for federal income tax purposes, except that (i) items of income, gain, loss, and deduction relating to property contributed to the Partnership shall be computed as if the basis of the property to the Partnership at the time of contribution were equal to its fair market value on that date (for purposes of this clause (i), (A) the amount of any depreciation, amorti- zation, or other cost recovery deduction allowable for any period with respect to property contributed to the Partnership shall be an amount that bears the same ratio to the fair market value of the property on the date of contribution as the federal income tax depreciation, amortization, or other cost recovery deduction bears to the adjusted tax basis of the property on the date of contribution; provided, however, that if the adjusted tax basis of the property on the date of contribution is zero, depreciation, amortization, or other cost recovery deduction shall be determined with reference to the fair market value of the property on the date of contribution using any reasonable method selected by the Managing Partner and (B) gain or loss resulting from any disposition of such property with respect to (PAGE) which gain or loss is recognized for federal income tax purposes shall be computed under this sentence as if such property had an adjusted basis on the date of contribution equal to its fair market value on such date and all subsequent adjustments were made in accordance with subclause (A) of this clause (i)), (ii) any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses shall be added to such taxable income or loss, and any related expenses not allowed as a deduction pursuant to Section 265 of the Internal Revenue Code of 1986 (hereinafter referred to as "Code") shall be subtracted from such taxable income or loss, (iii) any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treas. Reg. Sec. 1.704-1(b) and not otherwise taken into account under this Section 14(b) shall be subtracted from such income or loss, and (iv) if there has been an adjustment to the Partners' capital accounts pursuant to Section 17(d) to reflect the unrealized income, gain, loss, or deduction inherent in Partnership property: (A) depreciation, amortization, or other cost recovery deductions with respect to such property for each fiscal year or other period shall equal an amount which bears the same ratio to the fair market value of such property on the date of such adjustment as the federal income tax depreciation, amortization, or other cost recovery deductions for such year or other period bears to the adjusted tax basis of such property on such date (provided, however, that if the adjusted tax basis of the property on the date of such adjustment is zero, depreciation, amortization, or other cost recovery deduction shall be determined with reference to the fair market value of the property on the date of adjustment using any reasonable method selected by the Managing Partner); and (B) gain or loss resulting from any disposition of such property with respect to which gain or loss is recognized for federal income tax purposes shall be computed under this sentence as if such property had an adjusted basis on the date of such adjustment equal to its fair market value on such date and all subsequent adjustments for depreciation, amortization, or other cost recovery deductions were made in accordance with subclause (A) of this clause (iv). The term "Profits" means a net positive amount and the term "Losses" means a net negative amount for the Partnership fiscal year determined after making the adjustments described in this Section 14(b) and after removing any amounts of income or gain allocated under Sections 16(a), 16(b), or 16(c) of this Agreement. (PAGE) (c) In the event of any changes in any Partner's Percentage Partnership Interest during the fiscal year, then for purposes of this Agreement, the Managing Partner shall take into account the requirements of Code Section 706(d) and shall have the right to select any reasonable method of determining the varying interests of the Partners during the year which is consistent with the terms of this Agreement and which satisfies Code Section 706(d). (d) All items of income, gain, loss, and deduction, and all tax preferences, depreciation, accelerated cost recovery system deduction and investment interest and other tax items of the Partnership for each fiscal year (collectively referred to as "Partnership Tax Items") shall be allocated for federal tax purposes to the Partners in accordance with this Section 14(d). (i) Except as provided in Sections 14(d)(ii) and (iii), Partnership Tax Items shall be allocated for tax purposes in accordance with the allocations of Profits, Losses, or other items under Sections 15 and 16 hereof. For purposes of the preceding sentence, an allocation to a Partner of a share of Profits or Losses shall be treated as an allocation to such Partner of the same share of each Partnership Tax Item that is taken into account in computing such Profits or Losses. (ii) Gain or loss upon sale or other disposition of any property contributed to the Partnership or any depreciation, amortization, or other cost recovery deduction allowable with respect to the basis of property contributed to the Partnership shall be allocated for tax purposes among the contributing and non-contributing Partners so as to take into account the difference between the adjusted tax basis and the fair market value of the property on the date of its contribution to the extent permitted by Treas. Reg. Sec. 1.704-3 or such superseding regulations as may be promulgated in accordance with Code Section 704(c). (iii) If there has been an adjustment to the Partners' capital accounts pursuant to Section 17(d) to reflect the unrealized income, gain, loss or deduction inherent in Partnership property, then Partnership Tax Items with respect to such property and, if necessary, other property, shall be allo- cated to the Partners for federal income tax purposes so as to take into account the difference between the adjusted tax basis of such property and the value at which it is reflected in the (PAGE) Partners' capital accounts. In making allocations pursuant to this Section 14(d), the Managing Partner is authorized to apply any method or convention required or permitted by Code Section 704(c). Further, the Partnership shall, to the extent possible, continue to apply Code Section 704(c) to IGC on and after the Ninth Amendment Date in the same manner as the Partnership and Equus previously applied Code Section 704(c) to IGC with respect to the interest in the Partnership that IGC held indirectly through its interest in Equus. The allocations under this Section 14(d)(iii) are intended to comply with paragraphs (b)(2)(iv)(f)(4) and (b)(4)(i) of Treas. Reg. Sec. 1.704-1 and shall be interpreted consistently with such regulation to effectuate such intent. Fifteen: Allocation of Losses. Losses of the Partner- ship shall be allocated among the Partners in proportion to their Percentage Partnership Interests. Sixteen: Special Allocations and Allocation of Profits. Certain items of income or gain required to be allocated to a Partner under federal income tax regulations and the Profits of the Partnership shall be allocated to the Partners in accordance with the provisions of this Section 16. (a) If there is a net decrease during a Partnership fiscal year in Partnership Minimum Gain then, to the extent required by Treas. Reg. Sec. 1.704-2(f), each Partner shall be allocated items of Partnership income and gain for that year (and, if necessary, for succeeding years) equal to that Partner's share of the net decrease in Partnership Minimum Gain (within the meaning of Treas. Reg. Sec. 1.704-2(g)(2)). It is the intent of the Partners that this Section 16(a) constitute a Partnership Minimum Gain Chargeback provision under Treas. Reg. Sec. 1.704-2(f) and be interpreted consistently with such regulation to effectuate such intent. (b) If there is a net decrease during a Partnership fiscal year in Partner Nonrecourse Debt Minimum Gain then, to the extent required by Treas. Reg. Sec. 1.704-2(i)(4), any Partner with a share of that Partner Nonrecourse Debt Minimum Gain (as determined under Treas. Reg. Sec. 1.704-2(i)(5)) at the beginning of such fiscal year shall be allocated items of Partnership income and gain for such fiscal year (and, if necessary, for succeeding years) equal to that Partner's share of the net decrease in the Partner Nonrecourse Debt Minimum Gain (within (PAGE) the meaning of Treas. Reg. Sec. 1.704-2(i)(4)). It is the intent of the Partners that this Section 16(b) constitute a Partner Nonrecourse Debt Minimum Gain chargeback provision under Treas. Reg. Sec. 1.704-2(i)(4) and be interpreted consistently with such regulation to effectuate such intent. (c) If any Partner unexpectedly receives an adjustment, allocation, or distribution of the type contemplated by Treas. Reg. Sec. 1.704-1(b)(2)(ii)(d)(4), (5), or (6) that causes or increases a deficit in such Partner's Adjusted Capital Account Balance items of Partnership income and gain shall be allocated to all such Partners in proportion to such deficits being offset to eliminate such deficits as quickly as possible. It is the intent of the Partners that this Section 16(c) constitute a qualified income offset provision under Treas. Reg. Sec. 1.704- 1(b)(2)(ii)(d) and be interpreted consistently with such regulation to effectuate such intent. (d) Profits of the Partnership shall be allocated among the Partners in proportion to their Percentage Partnership Interests. (e) For purposes of this Section 16: (i) The term "Adjusted Capital Account Balance" means a Partner's capital account balance (a) increased by any amount that such Partner is obligated to restore under Treas. Reg. Sec. 1.704-1(b)(2)(ii)(c) (including any addition thereto pursuant to the next to last sentences of Treas. Reg. Sec. 1.704-2(g)(1) and (i)(5) after taking into account thereunder any changes during such fiscal year in Partnership Minimum Gain and in Partner Nonrecourse Debt Minimum Gain) and (b) decreased by any adjustments, allocations, and distributions specified in Treas. Reg. Sec. 1.704-1(b)(2)(ii)(d)(4), (5), and (6) as are reasonably expected to be made to such Partner. A distribution or allocation will result in a Partner having a deficit Adjusted Capital Account Balance to the extent such distribution or allocation either will create or increase a deficit balance in such Partner's capital account after making the adjustments described in the preceding sentence. (ii) The terms "Partnership Minimum Gain" and "Partner Nonrecourse Debt Minimum Gain" shall have the meaning set forth in Treas. Reg. 1.704-2(d) and (i)(3), respectively. (PAGE) Seventeen: Capital Accounts. Separate capital accounts shall be maintained for each Partner. All allocations of Partnership income, gain, Profit and Loss and all capital contributions by and all distributions to the Partners shall be credited or charged, as the case may be, to the separate capital accounts of the Partners in accordance with this Section 17. (a) The capital accounts of each Partner shall be increased by: (i) The amount of any cash contributed to the Partnership by or on behalf of such Partner; (ii) The fair market value of any property other than cash contributed to the Partnership by or on behalf of such Partner; and (iii) The amount of any Profits or items of income or gain allocated to such Partner under Section 16 of this Agreement or to such Partner under a similar provision in a predecessor Partnership agreement of the Partners. (b) The capital accounts of each Partner shall be reduced by: (i) The amount of any cash distributed to such Partner, (ii) The fair market value of any property other than cash distributed to such Partner; and (iii) The amount of any Losses or items of deduction or loss allocated to such Partner under Section 15 of this Agreement or to such Partner under a similar provision in a predecessor Partnership agreement of the Partners. (c) If any property other than cash is distributed to a Partner, the capital accounts of the Partners shall be adjusted to reflect the manner in which gain or loss that has not previously been reflected in the capital accounts would be allocated among the Partners under Sections 15 and 16 of this Agreement if the distributed property had been sold by the Partnership for a price equal to its fair market value on the date of distribution. (PAGE) (d) The Managing Partner may, upon the occurrence of one of the events described in Section 17(d)(ii), increase or decrease the capital accounts of the Partners in accordance with Section 17(d)(i) to reflect a revaluation of Partnership property. (i) Any adjustments made under this Section 17(d) shall reflect the manner in which the unrealized income, gain, loss, or deduction inherent in Partnership property (to the extent that it has not been reflected in the capital accounts previously) would be allocated among the Partners under Sections 15 and 16 if the Partnership had sold all of its property for its fair market value on the date of adjustment. The adjustments described in this Section 17(d)(i) shall be based on the fair market value of Partnership property on the date of adjustment. (ii) The Managing Partner may make the capital account adjustments described in this Section 17(d) upon the occurrence of the following events: (A) a contribution of money or other property (other than a de minimis amount) to the Partnership by a new or existing Partner as consideration for an interest in the Partnership; (B) a distribution of money or other property (other than a de minimis amount) by the Partnership to a retiring or continuing Partner as consideration for an interest in the Partnership; or (C) the liquidation of the Partnership. (iii) The adjustments described in this Section 17(d) are intended to comply with Treas. Reg. Sec. 1.704-1(b)(2)(iv)(f) and shall be interpreted consistently with such regulation to effectuate such intent. See Section 14(b)(iv) for special rules for the computation of Profits and Losses in the case of an Adjustment under this Section 17(d). (e) The Managing Partner shall have the authority to make such changes in the allocations of Profits or Losses to the Partners under Sections 15 and 16 of this Agreement, and to make such adjustments to the capital accounts of IGP and Equus as is necessary in order that the allocations of Profits or Losses to IGP and Equus have substantial economic effect (or are otherwise recognized for United States federal tax purposes) and are consistent with the economic arrangement of the Partners. The allocations set forth in Sections 16(a), 16(b), and 16(c), and such part of the allocations under Section 15 that constitute (PAGE) Nonrecourse Deductions and Partner Nonrecourse Deductions (within the meaning of Treas. Reg. Sec. 1.704-2(c) and (i)(2), respectively), together with allocations made under similar provisions in a predecessor Partnership agreement of the Partners (collectively referred to as the "Regulatory Allocations") are intended to comply with certain requirements of the Treasury Regulations promulgated under Code Section 704(b). It is the intent of the Partners that, to the greatest extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Partnership income, gain, loss, or deduction pursuant to this Section 17(e). Therefore, notwithstanding any other provisions of Sections 15 and 16 (other than the Regulatory Allocations), the Managing Partner shall make such offsetting special allocations of income, gain, loss, or deductions in whatever manner it determines appropriate so that, after the Regulatory Allocations and such offsetting allocations are made, each Partner's capital account balance is, to the greatest extent possible, equal to the capital account balance such Partner would have had if the Regulatory Allocations were not part of the Partnership Agreement and all Partnership items were allocated pursuant to Sections 15 and 16 (without regard to the Regulatory Allocations). In exercising its discretion under this Section 17(e) the Managing Partner shall take into account future Regulatory Allocations that, although not yet made, are likely to offset other Regulatory Allocations previously made to the extent that taking into account such future Regulatory Allocations would not affect the economic arrangement of the Partners. The preceding two sentences are intended to eliminate, to the greatest extent possible, any economic distortions which may result from application of the Regulatory Allocations and shall be interpreted in a manner consistent therewith. (f) The transferee of an interest in the Partnership shall succeed to the capital account of the transferor of such interest to the extent it relates to the transferred interest. Eighteen: Cash Distributions. (a) To the extent permitted by the Annual Tax Payment Agreement as defined in that certain indenture by and among the Partnership, the Partnership's subsidiary, El Comandante Capital Corp., and Banco Popular de Puerto Rico, as Trustee, dated as of December 15, 1993, (the "Indenture", and the closing of which is (PAGE) referred to herein as the "Closing"), the Partnership shall distribute to the Partners for each fiscal year an amount equal to the product of (i) the Partnership's net income for such fiscal year determined in accordance with generally accepted accounting principles, consistently applied, and (ii) the highest of the then applicable highest United States federal or Puerto Rico personal or corporate income tax rate (the "Highest Tax Rate"). Such distributions shall be made at such times as shall be determined by the Managing Partner, provided that within 75 days of the close of each fiscal year the Managing Partner shall determine the maximum amount permitted to be distributed under this Section 18(a) for such fiscal year ("Maximum Annual Amount") and shall distribute within 90 days of the close of such fiscal year the excess of the Maximum Annual Amount for such fiscal year over the aggregate distributions previously made in respect of such fiscal year. Distributions under this Section 18(a) shall be made in proportion to the Partners' Percentage Partnership Interests. (b) To the extent permitted by the Indenture, the Partnership shall make cash distributions of funds (to the extent that such funds have not been distributed under Section 18(a)) to the Partners in such amounts and at such times as shall be determined by the Managing Partner; provided, however, that all distributions under this Section 18(b) shall be made to the Partners in proportion to their Percentage Partnership Interests. In any year in which there has been a change in the Percentage Partnership Interests of the Partners, distributions shall be made under this Section 18(b) to reflect properly such change. (c) In determining the amount available under Section 18(b) for distribution to the Partners, the Managing Partner shall take into consideration the anticipated needs of the Partnership for working capital and future expansion, amounts needed to pay or reserve against existing and anticipated operating expenses and obligations, and such other factors as the Managing Partner deems relevant, including the reserve for contingencies. Nineteen: [Reserved] Twenty: Transfer of Interests. (a) Except as provided in this Section, the Partners may (PAGE) transfer their interest in the Partnership subject to a right of first refusal exercisable by the Partnership. The transferring Partner is required to advise the Partnership by written notice of the price, terms and conditions of a third-party bona fide written offer to purchase any interest in the Partnership at least sixty (60) days prior to the proposed transfer. Said right of first refusal shall be exercisable by the Partnership at the price and on the terms and conditions set forth in such written offer and the Partnership must notify the transferring Partner of its intention to purchase its interest in the Partnership at least thirty (30) days prior to the proposed date of transfer. In the case of a gratuitous transfer of an interest in the Partnership, said right of first refusal shall be at fair market value as determined by an independent appraisal. Until admitted to the Partnership as a Partner, a transferee of an interest in the Partnership pursuant to this Section 20 shall be entitled to receive the distributions from this Partnership to which the transferor would otherwise be entitled but shall not become entitled to exercise any rights of a Partner. However, in the case of any purported transfer not permitted under any other subsection of this Section 20, the purported transfer shall be void and the purported transferee shall not receive any distribution. Notwithstanding any other provision of this Section 20, a transferee of an interest in this Partnership shall be admitted as a Partner only with the consent of the Managing Partner, which consent may be given or withheld in the sole and absolute discretion of the Managing Partner. A Partner shall cease to be a Partner upon the transfer of all of its interest in the Partnership. (b) Unless the Managing Partner consents to the transfer, no Partner shall transfer any interest in the Partnership to any other person to the extent that such transfer, if effected, would cause a termination of the Partnership for federal income tax purposes under Code Section 708(b). Unless the Managing Partner consents to the transfer, any attempt to transfer an interest in the Partnership that, if effected, would cause a termination of the Partnership is not effective to transfer the interest in the Partnership to the purported transferee thereof and the purported transferee shall not be entitled to any rights as a Partner of the Partnership. Twenty-One: Indemnification. The Partnership shall indemnify, to fullest extent of (PAGE) Puerto Rico law, the Managing Partner and its shareholders, partners, directors, officers, employees, and agents against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by any of those persons in connection with any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, if such person's actions did not constitute gross negligence, willful misconduct or fraud. Twenty-Two: Termination of the Partnership. (a) The Partnership may be terminated at any time by the mutual agreement of all the Partners. (b) The Partnership shall be terminated if the Managing Partner is adjudicated bankrupt or insolvent, or if an assignment of its assets is made for the benefit of its creditors, or if a trustee is appointed to take care of its assets, or if a voluntary petition for relief in bankruptcy is filed by such Managing Partner. (c) Upon the termination of the Partnership on account of an event described in subsection (b) above, a majority in interest of the Partners other than such Managing Partner shall have a right of first refusal to purchase the assets of the Partnership at their then fair market value as determined by independent appraisal. Twenty-Three: Liquidation of Partnership. Upon termination of the Partnership for any reason, the Partnership shall continue its business solely for the purpose of winding up its affairs and shall be liquidated as rapidly as business judgment permits. All decisions with respect to the disposition of the Partnership's assets, collections, or compromise of any amounts receivable and payment or compromise of any amounts payable by the Partnership, shall be made by the Managing Partner. The assets of the Partnership shall be applied for the following in the following manner: (a) First, to the payment or provision for payment of all debts and obligations of the Partnership to creditors, other than the Partners, and for the expenses of winding up the affairs of the Partnership. (PAGE) (b) Second, to the payment of all amounts payable by the Partnership to the Partners, other than in respect to Partners' capital accounts. (c) Third, all remaining assets of the Partnership shall be distributed to the Partners in accordance with the positive balance in each Partner's capital account as adjusted under Section 17 to reflect all Partnership operations up to and including the liquidation. Twenty-Four: Amendments. (a) Except as provided in subsection (b) below, amendments to this Agreement require the prior approval of all Partners. (b) The Managing Partner, after thirty (30) days notice to the Partners and subject to subsection (c) below, may amend this Agreement, without the approval of the other Partners: (i) to change the name of the Partnership or its registered agent or registered office or the location of its principal registered office; (ii) to make any change necessary or advisable in the good faith opinion of the Managing Partner to ensure that the Partnership will not be treated as an association taxable as a corporation for federal income tax purposes and will remain qualified as a special partnership under the ITA; (iii) to make any change that is necessary or desirable to satisfy any requirements contained in any opinion, directive, order, ruling or regulation of any federal or state agency (including the Puerto Rico Racing Board), compliance with which the Managing Partner in its good faith judgment deems to be in the best interests of the Partnership and the Partners; (iv) to make any change that is required to bring the Partnership into compliance with the Puerto Rico Racing Industry and Sport Act; (v) to make any change necessary or desirable in the good faith opinion of the Managing Partner to facilitate the public trading of Partnership interests including changes that may be necessary to ensure that the Partnership interests may qualify as Listed Securities (as that term is defined in the offering memorandum issued in connection with the Closing); (vi) to make any change that is of an inconsequential nature and does not affect the Partners in any material respect; and (vii) to make any other changes similar to the foregoing. (c) Notwithstanding the foregoing, the Managing Partner may not amend the Partnership Agreement in any manner that would (PAGE) disproportionately and inequitably affect the interests of the Partners without the consent of Partners holding seventy percent (70%) of the Percentage Interests of the Partnership. Twenty-Five: Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matters hereof. Twenty-Six: Notices. Any and all notices or other communication or deliveries required or permitted to be given pursuant to any of the provisions of this Agreement, shall be deemed to have been duly given for all purposes to be sent by certified or registered mail, return receipt requested, and postage pre-paid, hand delivered or sent by telegraph or telex to the parties hereto at the following addresses: (a) IGP: P.O. Box 363908, San Juan, Puerto Rico 00936-3908; (b) Equus: 222 Smallwood Village Center, St. Charles, Maryland 20602; or at such other address as any Partner may have specified by notice given to the other Partners in accordance with this section. The date of giving any such notice shall be the date the same is deposited in the mail, as such date appears in the postage cancellation affixed by the United States Postal Service. Twenty-Seven: Waiver of Provisions. Except as provided in Section 4, no waiver of the provisions hereof shall be effective unless in writing and signed by the party to be charged with such waiver and no waiver shall be deemed a continuing waiver or waivers in respect of any subsequent breach or default, of either a similar or different nature, unless expressly so stated in writing. Twenty-Eight: Separability. Should any clause, section or part of this Agreement be held or declared to be void or illegal for any reason, all other clauses, sections or parts of this Agreement which can be affected without the illegal clause, section or part, shall nevertheless continue in full force and effect. Twenty-Nine: Governing Law. This Agreement shall be governed, interpreted and construed in accordance with the laws of the Commonwealth of Puerto Rico. It is the intention of the parties that the Partnership be governed by the provisions of Special Partnerships of the Civil Code of Puerto Rico. The Partnership shall file with the Secretary of the Treasury of the Commonwealth of Puerto Rico its option to have the Part- (PAGE) nership operate as a Special Partnership under the provisions of Act Number 8 of July 1985, as may be amended from time to time. Thirty: Jurisdiction of Courts. Each of the parties hereto consents to the jurisdiction of the Courts of the Common- wealth of Puerto Rico, with respect to any matter arising under this Agreement, and shall subject itself to the jurisdiction of such Courts and agrees that service of process upon it, may be made in any matter permitted by the laws of the Commonwealth of Puerto Rico. Thirty-One: Successors. This Agreement and the various rights and obligations arising hereunder shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Thirty-Two: Headings. The headings or captions under sections of this Agreement are for convenience and reference only and do not in any way modify or interpret or construe the intent of the parties to affect any of the provisions of this Agreement. Thirty-Three: Certain Terms. The use of the term Partner in this document shall be understood to include and mean the singular and/or plural as the identity of the parties or the situation so requires. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the date and year first above written. EQUUS ENTERTAINMENT CORPORATION By: /s/ Gretchen Gronau --------------------------------- Gretchen Gronau Vice President INTERSTATE GENERAL COMPANY L.P. By: INTERSTATE GENERAL MANAGEMENT CORPORATION Its Managing General Partner By: /s/ Francisco Arrivi --------------------------------- Francisco Arrivi Executive Vice President (PAGE) Ratified the Ninth Amended and Restated Partnership Agreement of Housing Development Associates S.E. dated December 31, 1997 by the Undersigned. EQUUS ENTERTAINMENT CORPORATION By: /s/ Gretchen Gronau --------------------------------- Gretchen Gronau Vice President INTERSTATE GENERAL COMPANY L.P. By: INTERSTATE GENERAL MANAGEMENT CORPORATION Its Managing General Partner By: /s/ Francisco Arrivi --------------------------------- Francisco Arrivi Executive Vice President Affidavit No. 1529 Subscribed before me by Donald G. Blakeman, of legal age, married and resident of San Juan, Puerto Rico, in his capacity as Executive Vice President of Interstate General Management Corporation, the Managing General Partner of Interstate General Company L.P., the Managing General Partner of Interstate General Properties Limited Partnership S.E., President of Equus Management Company, the Managing General Partner of Equus Gaming Company L.P., to me personally known. In San Juan, Puerto Rico, this 20th day of February, 1998. /s/ Juan R. Requena Davila --------------------------------------- NOTARY PUBLIC EX-10 7 (PAGE) FOURTH AMENDMENT TO CERTIFICATE OF LIMITED PARTNERHIP OF EQUUS GAMING COMPANY L.P. The undersigned, desiring to amend the Certificate of Limited Partnership of Equus Gaming Company L.P. pursuant to Section 50-73.12 of the Code of Virginia, does hereby certify as follows: I. The name of the Limited Partnership iis Equus Gaming Company L.P. II. The initial Certificate of Limited Partnership of Equus Gaming Company L.P. was filed with the State Corporation Commission on August 2, 1994. III. The Certificate of Limited Partnership of Equus Gaming Company L.P. is hereby amended to change the address of the specified office of the limited partnership required to be maintained by Section 50-73.4 of the Code of Virginia to: 650 Munoz Rivera Avenue Doral Building, 7th Floor Hato Rey, Puerto Rico 00918-4149 IV. The Certificate of Limited Partnership of Equus Gaming Company L.P. is hereby amended to provide for the withdrawal of the following general partner: Name Mailin Address ---- -------------- Interstate General Company L.P. 222 Smallwood Village Center St. Charles, Maryland 20602 IN WITNESS WHEREOF, the undersigned has executed this Fourth Amendment to the Certificate of Limited Partnership of Equus Gaming L.P. to be effective as of December 31, 1997. EQUUS MANAGEMENT COMPANY, managing general partner of Equus Gaming Company L.P. By: /s/ Gretchen Gronau ---------------------------- Gretchen Gronau Vice President EX-27 8
5 1000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 508 0 3,106 0 0 0 59,332 14,276 56,187 1,571 63,364 0 0 0 (12,093) 56,187 0 24,298 0 10,852 0 0 8,735 4,711 895 3,816 0 459 0 2,479 0 0 Includes note receivable of $.466 million. Net of bond discount of $1.39 million.
-----END PRIVACY-ENHANCED MESSAGE-----