-----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, NMhhgD49vXnq6TIqR/D0+z6gHCLcQvz5BMaKfWRHzOD59sXNHVcYd4ImlB/xPLSL lX7N7xbY924ZdOsXfIBdmg== 0001015402-00-000760.txt : 20000328 0001015402-00-000760.hdr.sgml : 20000328 ACCESSION NUMBER: 0001015402-00-000760 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 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: 578978 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 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 000-25306 EQUUS GAMING COMPANY L.P. ------------------------- (Exact name of registrant as specified in its charter) Virginia 54-1719877 -------- --------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 650 Munoz Rivera Avenue Doral Building, 7th Floor Hato Rey, Puerto Rico 00918 ---------------------------- (Address of Principal Executive Offices and Zip Code) Registrant's telephone number, including area code: (787) 753-0676 Securities registered pursuant to Section 12(b) of the Act: Not applicable Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED Class A Units representing assignment Nasdaq SmallCap Market System beneficial ownership of Class A limited ("Nasdaq/SCMS") partnership interest and evidenced by beneficial assignment certificates ("Units") Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 21, 2000, the aggregate market value of 3,081,992 Units held by non-affiliates of the registrant based on the closing price reported on the NASDAQ/SCMS was $3,266,912. Documents Incorporated By Reference: Not Applicable EQUUS GAMING COMPANY L.P. 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page ---- PART I Item 1. Business 1 Item 2. Properties 5 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II Item 5. Market for Registrant's Class A Units and Related Unitholder Matters 7 Item 6. Selected Financial and Operating Data 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 48 PART III Item 10. Directors and Executive Officers of the Company and EMC 48 Item 11. Executive Compensation 50 Item 12. Security Ownership of Certain Unitholders and Management 53 Item 13. Certain Relationships and Related Transactions 54 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 54 PART I ITEM 1. BUSINESS GENERAL Equus Gaming Company L.P. (the "Company"), a Virginia limited partnership, is engaged in thoroughbred racing, wagering and other gaming businesses in the Caribbean, Central and South America. Through its subsidiaries, the Company operates four racetracks and manages an extensive off-track betting (OTB) system in the various countries where the Company operates. Equus Management Company ("EMC") is the general partner of the Company. The Company has a 99% interest in Housing Development Associates S.E. ("HDA"), the owner of El Comandante Racetrack ("El Comandante"), the only licensed thoroughbred racing facility in Puerto Rico. El Comandante has operated since January 1, 1998 as a wholly- owned subsidiary of HDA, El Comandante Management Company, LLC ("ECMC"). HDA has recently organized two wholly- owned subsidiaries: Satellite Services International, Inc. ("SSI") and Agency Betting Network, Inc. ("ABN"). SSI will provide up-link services, satellite time (contracted from a third party), and leasing of video and data telecommunication equipment, to transmit (or simulcast) live races from and to the Company's racetracks and OTB agencies, including live races from outside the Company's operational territories to the agency distribution network in order to increase the level of wagering revenues through the Company's OTB system. ABN is establishing and operating an extensive OTB agency system in Colombia in conjunction with Los Comuneros Race Track in Medellin, Colombia ("Los Comuneros"), owned and operated by Equus Comuneros S.A. ("Equus-Comuneros"). The Colombia OTB system will be operating in all major cities in Colombia, including Bogota and Medellin. The Company has a 55% interest in Galapagos, S.A. ("Galapagos"), the operator since April 1995 of the V Centenario Racetrack in the Dominican Republic ("V Centenario") and a 51% interest in Equus Entertainment de Panama, S.A. ("Equus-Panama"), the operator since January 1, 1998 of the Presidente Remon Race Track in the Republic of Panama ("Presidente Remon"). Both racetracks are government-owned and operated by the Company's subsidiaries under long-term license contracts. The Company also has since early 1999 a controlling 50% interest in Equus-Comuneros. At the present time, the Company is contemplating expanding and implementing a high- technology satellite communication (video and data -VSAT system) throughout its OTB agencies in all of its operations. It has developed strategic plans to extend the development of its OTB agency- distribution wagering system to other countries in South America through its affiliated companies SSI and ABN. A. PUERTO RICO OPERATIONS El Comandante is the leading racetrack in the Caribbean when measured in gross dollars wagered. Thoroughbred horse racing has been conducted continuously at El Comandante since 1976 and at a predecessor facility since 1957. Races are currently run 52 weeks per year, generally five days per week (Monday, Wednesday, Friday, Saturday and Sunday). Wagering is conducted through facilities at the race track and at independently-owned OTB agencies that are linked via on-line computers to El Comandante. During 1999, there were approximately 650 OTB agencies in operation. Management expects to open an additional 100 OTB agencies in the year 2000. 1 Since commencing the on-line wagering system, all of El Comandante's races have been broadcasted via commercial television in Puerto Rico. The telecast permits OTB patrons to monitor odds and handicapping information while placing bets until post time and then to view the live racing. Live races are currently broadcasted through an agreement with S&E Network, Inc. ("S&E"). For 2000 the Company is planning to implement a high technology communication system (data and video-VSAT) with a satellite link (HUB) in Puerto Rico with capacity to simulcast live races to other operations and to prospective countries in the Caribbean and South America. ECMC had a contract with the Puerto Rico horseowners association requiring that horseowners field sufficient horses to conduct racing operations at El Comandante in accordance with the racing program approved by the Puerto Rico Racing Board. The contract obligates ECMC to provide stables and related facilities. The contract, which establishes the amount to be paid to horseowners as purses and other economic terms, expired in April 1998. The Puerto Rico Racing Board has ordered the extension of the contract as an interim measure until the Company and the horseowners negotiate a new agreement. The Company is currently negotiating a new contract with the horseowners. COMPETITION. El Comandante, the only licensed thoroughbred racetrack facility in Puerto Rico, is operated by ECMC under an operating license granted by the Puerto Rico Racing Board. The operating license provides ECMC with the exclusive right through December 14, 2004, to operate a race track in the San Juan Region (the largest of three regions in Puerto Rico) which includes the San Juan metropolitan area and over three-fourths of the northern half of the Island; the exclusive right to conduct all types of authorized betting throughout Puerto Rico, based on races held at El Comandante; and the right to hold a minimum of 180 day or night-race days per year. Until the expiration of the Operating License, no other thoroughbred race track license for the San Juan Region may be issued. ECMC faces competition from other forms of legalized gambling in Puerto Rico. There are 19 licensed casinos in Puerto Rico offering card and dice games, slot machines and other games of chance. The Puerto Rico Government has operated a ticket lottery for more than 50 years and in 1991 commenced an electronic jackpot lottery. In addition, there are numerous cock fighting venues on the Island. ECMC also faces competition from illegal gambling. The Puerto Rico Government may, through legislation, legalize other forms of gambling or grant additional gaming licenses to those forms of gambling already authorized by law. EMPLOYEES. ECMC had approximately 275 employees as of December 31, 1999. There were 48 employees working in the mutuel, admissions, and closed circuit television departments covered by a collective bargaining agreement between ECOC and El Comandante Racetrack Employees Union, which expired August 23, 1998, 101 employees performing building and premises maintenance services covered by a collective bargaining agreement between ECOC and the General Workers Union, which expired May 31, 1999. There were 42 employees performing security guard services covered by a collective bargaining agreement between ECOC and the Security Guards Union, which expired January 23, 1999. All the security guards positions were eliminated at the end of 1999 and an outsourcing agreement for security services was signed between ECMC and the Rangers American of Puerto Rico for a period of one year, with renewable options, commencing in January 2000. ECMC is currently evaluating its personnel needs and requirements in each operational and administrative area in order to improve efficiency and productivity once it implements a new computerized accounting and management information system. B. DOMINICAN REPUBLIC OPERATIONS In 1995 Galapagos was selected by the Dominican Republic Racing Commission to operate the government-owned V Centenario racetrack in Santo Domingo pursuant to a ten-year agreement ending April 2005. The contract may be renewed for 2 additional ten-year periods by mutual agreement of the parties. The contract also provides Galapagos with the right to develop off-track betting in the Dominican Republic and the exclusive right to simulcast live horse races from other countries into the Dominican Republic. At December 31, 1999 there were approximately 328 installed and 262 operating OTB agencies in the Dominican Republic. The OTB system in the Dominican Republic has been negatively impacted by the inability to obtain dependable broadcasting of live races by commercial television with broad island-wide penetration. Currently, live racing is conducted three days per week with a six-race card. Full card wagering on simultcast races from El Comandante in Puerto Rico is offered four days a week. During the year 2000 Galapagos will be increasing the number of live racing and simulcast races. The Company is also implementing a new racing program to simulcast more live races from Panama, Puerto Rico and other foreign countries into Galapagos. A new contract is being negotiated with the government providing for economic and investment incentives to further develop and improve the racing program and betting options, encourage horse ownership and import of thoroughbreds, and improve the OTB agencies video and data communications. As part of the new contract, Galapagos will also receive an extension of its license for a period of ten years to operate the racetrack and the distribution system. LOTTERY. Galapagos has a five year contract with a private operator to provide the wagering distribution system for a government-sponsored electronic lottery, which commenced on November 1, 1997. Lottery games are sold at OTB agencies selected by Galapagos and at lottery agencies selected by the operator. Galapagos' commissions (net of fees paid to Autotote) are 1% of gross lottery sales at lottery agencies and 2% of gross lottery sales at OTB agencies. In addition, the lottery operator pays Galapagos a monthly fee for each OTB agency that sells lottery games as reimbursement for a 50% share of telephone line costs. Galapagos is also permitted to identify the lottery agencies to take Pick 6 pool wagers on Galapagos' live and simulcast races. COMPETITION. Galapagos faces competition from other forms of gambling in the Dominican Republic. The Dominican Republic Government operates a ticket lottery and instant lottery throughout the country, and an electronic lottery commenced operations in November 1997. There are approximately 600 independent sports betting agencies and wagering on baseball is particularly popular. Approximately 200 of the sports betting agencies were being utilized by Galapagos as OTB agencies at December 31, 1999. Wagering on cock fighting is both legal and popular in the Dominican Republic. Casino gaming is permitted at hotels with a minimum of 100 rooms and there are 25 licensed casinos in operation. Galapagos also faces competition from illegal gambling. EMPLOYEES. Galapagos had 262 employees at December 31, 1999. Galapagos has no agreements with unions and has not experienced any work stoppage or material labor difficulties. C. PANAMA OPERATIONS Equus-Panama operates the government-owned Presidente Remon race track in Panama City pursuant to a 20 year agreement ending in December 2017. The contract also gives Equus-Panama the right to develop off-track betting in Panama and the exclusive right to simulcast horse races from and into Panama and the right to operate up to 500 slot machines at the racetrack. Upon execution of the contract, Equus-Panama paid $2.2 million to the Panama Government. Equus-Panama began simulcasting races from United States racetracks on January 2, 1998 and live racing commenced on February 14, 1998, after major improvements to the racing strip and facilities were made. 3 At December 31, 1999, there were 125 OTB agencies installed in Panama City. At the present time, live racing at Presidente Remon is transmitted via microwave and cable television. OTB agencies outside the metropolitan broadcast area are dependent on transmission by radio. Equus-Panama is in the process of providing a new communication and video system (VSAT) for all OTB agencies and plans to increase the number of agencies throughout the country, including in remote parts of the country where video and communication coverage have been either non-existent or unreliable. COMPETITION. Equus-Panama faces competition from other forms of legalized gambling in Panama. There are 12 licensed casinos in Panama offering card and dice games and slot machines. Also, there are 15 slot machines parlors currently operating. In addition, the Panama Government has operated a lottery for more than 50 years. EMPLOYEES. At December 31, 1999, Equus-Panama had 255 employees. D. COLOMBIA OPERATIONS Since the beginning of 1999, Equus-Comuneros has owned and operated Los Comuneros Racetrack in Medellin, Colombia. Prior to the Company's involvement in the management of these operations, Los Comuneros hosted one live meet per week with an average handle of approximately $100,000, and employed an OTB system limited both in terms of number of sites and technology. During 1999 Los Comuneros operated approximately 100 OTB agencies. The wagering revenues from those agencies was minimal due to limitations in the number of live racing and the lack of simulcast races from other countries such as Panama. In December 1999 the Racing Board approved a decree allowing for more live races and the simulcast of live races from other countries. Therefore, the first year of operations was consumed in obtaining the required permits to allow the Company to implement its plan to develop a new racing program with extensive simulcast of live races from other countries, and thus fulfill its objective of increasing the OTB agency system to more than 600 by the end of the year 2000. During the fourth quarter of 1999, the Company created ABN, a wholly owned Puerto Rican subsidiary of HDA, to develop, establish and operate an extensive OTB agency distribution system throughout Colombia. The OTB agency network will be equipped with improved video and data communication system and will have the capacity to penetrate all of the major cities in Colombia at a low cost. COMPETITION. ABN and Equus-Comuneros face competition from other forms of legalized gambling in Colombia, including a lottery system. EMPLOYEES. At December 31, 1999 Equus-Comuneros had 90 employees. E. VIRGINIA RACING LICENSE During the year 1999 the Company attempted to acquire a license to own and operate a horse racetrack in Prince William County, Virginia. On November 17, 1999 the Virginia Racing Commission made a final decision and did not award the Virginia License to any of the applicants. The Company wrote-off all costs associated with procuring this license. 4 ITEM 2. PROPERTIES EL COMANDANTE. HDA is the owner of El Comandante, situated on a 257-acre parcel of land in Canovanas, Puerto Rico, approximately 12 miles east of San Juan. El Comandante properties include the following: a. A building consisting of a six-level grandstand and clubhouse with seating for over 10,000 and a total capacity in excess of 25,000, including glass-enclosed air-conditioned dining rooms with seating capacity for over 1,400; b. Racing facilities, including a one-mile oval strip with a seven-furlong chute and a 65-foot wide exercise track; c. Barn area and related facilities, including 1,595 horse stalls; d. Paved parking area that can accommodate 7,250 vehicles; e. Landscaped infield containing three lakes and a waterfall. These properties were severely damaged by Hurricane Georges. The grandstand and clubhouse were rebuilt on a reduced scale to reflect the growth in OTB and the corresponding decrease in attendance at the racetrack. ECMC also owns certain race track and telecommunication equipment used in the operation of El Comandante and the off-track betting system. See Note 5 to the Company's consolidated financial statements for a description of encumbrance on El Comandante properties. V CENTENARIO. Galapagos leases V Centenario from the Dominican Republic Government. V Centenario is situated on a parcel of land, approximately 7.5 miles east of Santo Domingo, Dominican Republic. V Centenario properties include the following: a. A building consisting of grandstand and clubhouse with seating for over 4,200 and total capacity in excess of 10,000, including an air conditioned dining room with seating capacity of 400; b. Racing facilities, including a one-mile oval strip with a seven-furlong chute and a 1,400 meter exercise track; c. Barn area and related facilities, including 950 horse stalls; d. Paved parking area, which can accommodate 1,100 vehicles. Galapagos also owns certain race track and telecommunication equipment used in the operation of V Centenario and the off-track betting system. 5 PRESIDENTE REMON. Equus-Panama leases Presidente Remon from the Panama Government. Presidente Remon is situated on a 175-acre parcel of land in Juan Diaz, Panama, approximately 5 miles east of downtown Panama City. Presidente Remon properties include the following: a. A building consisting of grandstand and clubhouse with seating for over 2,000 and a total capacity in excess of 10,000, including air conditioned dining rooms with total seating capacity of 400; b. Racing facilities, including a one-mile oval strip with a seven-furlong chute, a ten-furlong chute, and a 1,400 meter exercise track. c. Barn area and related facilities, including 1,200 horse stalls; d. Paved parking area which can accommodate 600 vehicles. Equus-Panama also owns certain race track and telecommunication equipment used in the operation of Presidente Remon and the off-track betting system. LOS COMUNEROS. Equus-Comuneros is the owner of Los Comuneros, situated on a parcel of land in Medellin, Colombia. Los Comuneros properties include the following: a. A building consisting of grandstand and clubhouse with total seating capacity of 5,500; b. Racing facilities, including a 1,300-meter oval strip with a six-furlong chute; c. Barn area and related facilities, including 300 horse stalls; d. Parking area, which can accommodate 500 vehicles. ITEM 3- LEGAL PROCEEDINGS The Company and certain of its subsidiaries are presently named as defendants in various lawsuits and might be subject to certain other claims arising out of its normal business operations. Management, based in part upon advice from legal counsel, believes that the results of such actions will not have a material adverse impact on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 6 PART II ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS The Units, which represent the assignment of beneficial ownership of the Company's Class A limited partnership interests, have been listed and traded on Nasdaq National Market System since February 7, 1995 and, effective December 8, 1998, on Nasdaq SmallCap Market System. The following table sets forth, for the periods indicated, the high and low sales prices per Unit, as reported by the Nasdaq Stock Market, and cash distributions paid to Unitholders during these periods.
CASH PRICE DISTRIBUTIONS RANGE OF UNITS --------------- --------------- TOTAL PER UNIT HIGH LOW ----- -------- ------ ------ 1999 QUARTER Fourth - - $2.000 $0.969 Third - - 2.000 1.250 Second - - 2.250 1.063 First - - 1.625 0.813 1998 QUARTER Fourth - - 1.688 0.625 Third - - 1.875 1.125 Second - - 2.000 1.000 First - - 1.875 1.000
On March 21, 2000, the closing sale price of Units was $1.06 as reported on Nasdaq. As of March 21, 2000, there were 8,309,824 Units outstanding and approximately 230 Unitholders of record. From total units outstanding, 3,181,452 have not been registered under the Securities Exchange Act of 1934, and therefore, cannot be freely traded. The Company intends to distribute to its Unitholders cash consistent with the Company's plans for expansion of its business. However, the Company's principal source of cash has been distributions related to its ownership interest in HDA. The trust indenture related to the First Mortgage Notes limits distributions by HDA to its partners, including the Company, to approximately 48% of HDA's consolidated net income. It allows additional cash distributions, if certain debt coverage ratio is met. ITEM 6. SELECTED FINANCIAL AND OPERATING DATA The following table sets forth selected financial data for the Company. The historical income statement and balance sheet data is derived from the audited consolidated financial statements of the Company for each of the years in the period ended December 31, 1999. This information should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements of the Company and related notes (see Item 8) and "Management's Discussion and Analysis of Financial Condition and Results of Operations" (see Item 7). 7
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------- HISTORICAL (1) ----------------------------------------------- PROFORMA 1999 1998 1997 1996 1995 1997 (2) -------- -------- -------- ------- -------- --------- EARNINGS STATEMENT DATA: - ---------------------------------------- Revenues: Commissions on wagering $66,744 $52,529 $ 4,619 $ 4,513 $ 2,719 $ 59,512 Net revenues from lottery services 546 656 88 - - 88 Income from insurance settlement - 12,856 - - - - Rental income (3) - - 13,720 14,321 11,429 Gain from sale of Television Stations - - 4,669 581 - 4,669 Other Revenues 4,035 2,931 1,487 3,029 1,938 3,949 -------- -------- -------- ------- -------- --------- 71,325 68,972 24,583 22,444 16,086 68,218 Payments to horseowners 32,697 25,996 2,309 2,257 1,362 29,669 Other expenses 29,954 27,617 6,460 7,390 6,578 23,558 -------- -------- -------- ------- -------- --------- 8,674 15,359 15,814 12,797 8,146 14,991 Financial expenses 8,480 9,109 8,735 9,048 7,398 9,013 Depreciation and amortization 3,594 3,756 2,368 2,649 1,829 3,303 Impairment loss on El Comandante intangible - 3,136 - - - - -------- -------- -------- ------- -------- --------- (3,400) (642) 4,711 1,100 (1,081) 2,675 Provision for income taxes 742 1,110 1,028 400 231 505 Minority interest in (earnings) loss (4) 1,030 228 (878) 127 721 (878) Extraordinary income (loss) (5) 22 167 (326) - - 1,558 Cumulative effect - (403) - - - - -------- -------- -------- ------- -------- --------- Net earnings (loss) $(3,090) $(1,760) $ 2,479 $ 827 $ (591) $ 2,850 ======== ======== ======== ======= ======== ========= Net earnings (loss) per unit (6) $ (0.39) $ (0.28) $ 0.39 $ 0.13 $ (0.08) $ 0.45
DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- BALANCE SHEET DATA: - ---------------------------- Cash and cash equivalents $ 2,308 $ 6,637 $ 508 $ 4,268 $ 814 Race tracks property and equipment (7) 59,857 47,470 45,056 45,956 47,891 Deferred costs 4,992 5,375 6,316 4,426 4,859 Receivables from ECOC (3) - - 3,106 2,780 1,816 Investment in S&E (8) - - - 2,223 4,862 Total assets 70,943 64,039 56,187 60,586 60,823 First Mortgage Notes and accrued interest 53,834 56,512 63,681 66,737 66,573 Notes, bonds payable and capital lease obligations 13,461 9,091 1,876 1,073 2,457 Total liabilities 85,728 78,105 68,280 71,775 72,611 Partners' deficit (14,785) (14,066) (12,093) (11,189) (11,788) 8 (1) Effective March 8, 1995 the Company consolidates the accounts of Housing Development Associates S.E. ("HDA") and its subsidiaries in its financial statements. (2) Effective January 1, 1998, HDA terminated the lease agreement with El Comandante Operating Company, Inc. ("ECOC") and commenced operating El Comandante Race Track through a wholly-owned subsidiary. The proforma statement of operations was prepared as if the accounts of ECOC had been consolidated in the Company's financial statements since January 1, 1997. This proforma information is unaudited (see Note 14 to the Company's consolidated financial statements included in Item 8). (3) Relates to rent paid by ECOC to HDA until December 31, 1997 (see Note 2, above). (4) Includes minority interest in losses of Galapagos, Equus-Panama and Equus-Comuneros net of the Company's minority interest in HDA's net earnings. For 1999, 1998 and 1997 the amount recognized as the minority interest in Galapagos' losses was limited to the minority partners' investment (see Note 1 to the Company's consolidated financial statements). (5) Represents premium (discount) on the early redemption and the purchase in the open market of First Mortgage Notes and corresponding write-off of deferred financing costs and note discount. On a proforma basis in 1997, it also includes income from the cancellation of certain indebtedness of ECOC. (6) Net earnings (loss) allocable to the units is based on approximately 99% interest. The per Unit amount is calculated based on weighted average of Units outstanding since of 7,796,191 in 1999, 6,342,606 in 1998, 6,333,617 in 1997 and 1996 and 6,223,381 in 1995. (7) Includes a step-up of $5,650,000, resulting from the issuance of Units by the Company for a 15% interest in HDA on March 8, 1995, net of related accumulated depreciation and reduced by a net write-off in 1998 of $919,580 in connection with damage caused by Hurricane Georges to El Comandante Race Track. The net book value of the asset resulting from the step-up at December 31, 1999, 1998, 1997, 1996 and 1995 was approximately $4,234,000, $3,970,180, $5,097,000, $5,274,000 and $5,481,000, respectively. (8) In 1995 this amount consisted of licenses, property and equipment and other assets of the Television Stations owned by a S & E Network, Inc, a former subsidiary of the Company.
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's results of operations are principally attributed to its interests in thoroughbred horse race tracks in four countries, each of which is owned and/or operated by a subsidiary: (i) El Comandante in Puerto Rico, owned by Housing Development Associates S.E. ("HDA") and operated since January 1, 1998 by El Comandante Management Company, LLC ("ECMC"), (ii) V Centenario in the Dominican Republic, operated since April 1995 by Galapagos S.A., (iii) Presidente Remon in Panama, operated since January 1, 1998 by Equus Entertainment de Panama, S.A. ("Equus-Panama") and (iv) Los Comuneros in Medellin, Colombia, owned and operated since early 1999 by Equus Comuneros, S.A. ("Equus-Comuneros"). The Company also had an interest in three UHF television stations in Puerto Rico (the "Television Stations"), which were sold in transactions closed in August 1996 and January 1997. The following discussion compares: (i) the results of operations of the Company for 1999 with the results for 1998 and (ii) the Company's results of operations for 1998 with results for 1997, on a proforma basis. Effective January 1, 1998 HDA terminated the lease agreement with El Comandante Operating Company, Inc. ("ECOC") and commenced operating El Comandante through ECMC, its wholly-owned subsidiary (the "Proforma Transaction"). As a result, the Company's historical results of operations for 1998 are not readily comparable with results of operations for 1997. Accordingly, the unaudited proforma results for 1997 have also been presented as if the Proforma Transaction had occurred on January 1, 1997 and the accounts of ECOC had been included in the Company's historical results of operations, after eliminating all intercompany transactions (see Note 14 to the Company's consolidated financial statements included in Item 8). THE COMPANY'S RESULTS OF OPERATIONS 1999 COMPARED TO 1998 - ------------------------ REVENUES Consolidated Revenues increased by $2,352,000, or 3.4%, in 1999 to $71,325,000 from $68,973,000 in 1998. Out of the total revenues of $68,973,000 in 1998, the Company received $12,857,000 (18.6%) from the insurance settlement in connection with damage caused by Hurricane Georges to El Comandante and V Centenario. Therefore, almost all of the revenues for 1999 were derived from operations. COMMISSIONS ON WAGERING Commissions on wagering increased by $14,215,000 (27.1%) in 1999 to $66,744,000 as compared to $52,529,000 in 1998. The increase in commissions was principally attributed to El Comandante, Galapagos, Panama, and the start-up operations in 1999 of Equus Comuneros, which accounted for about $1,445,000 or roughly 10% of the 27.1% increase in total commissions. PUERTO RICO. Commissions on wagering at El Comandante increased $10,996,000 (26.8%) from $41,081,000 in 1998 to $52,077,000 in 1999. The increase in commissions was principally attributed to a full year of continuous operations in 1999 when compared to 1998 where there was an interruption of racing operations at El Comandante from September 20 until November 14, 1998, when 39 racing dates were cancelled, as a result of damage caused to the 10 racetrack and Puerto Rico's electrical and telecommunications infrastructure. A change in the racing schedule effective November 14, 1998, where races are being held on Saturdays instead of Thursdays, also had a positive impact in wagering in 1999 as compared to 1998. PANAMA. Commissions on wagering at Presidente Remon increased by $1,580,000 (20.2%) from $7,808,000 in 1998 to $9,388,000 in 1999. The increase in commissions was directly related to more OTB agencies on line and more live and simulcast race days during 1999. Live racing at Presidente Remon commenced on February 14, 1998 with two race days per week, increasing to three days in April 1998. During 1999 the number of live races increased to an average of five days per week and simulcast of live races from other countries to at least three days per week. DOMINICAN REPUBLIC. Commissions on wagering at V Centenario had only a modest increase during 1999 attributable in part to the competition posed by the government-licensed electronic lottery and to technical difficulties in arranging for live broadcasting of races by commercial television with broad island-wide penetration. This will be corrected during 2000. NET REVENUES FROM LOTTERY SERVICES During 1999 net revenues from lottery services by Galapagos in Dominican Republic decreased by $110,000 as compared to 1998. The decrease in revenues was mainly due to a reduction in the amount billed to the lottery operator as reimbursement for telephone line costs, pursuant to an amendment to the contract effective in late 1998. Also, due to certain disagreements involving cash payments due to Galapagos from the lottery operator, the OTB agencies stopped selling lottery tickets in September of 1999. This decision resulted in a reduction of lottery sales and in commissions earned by Galapagos. These disagreements have been resolved as of January of 2000 and the OTB agencies will resume selling lottery tickets during the first quarter of the year 2000. INCOME FROM INSURANCE SETTLEMENT Due to damage inflicted by Hurricane Georges to El Comandante and V Centenario, the Company received in 1998 compensation from the insurance carriers totaling $10,832,000 for business interruption, which amount was recognized as income. The company also received compensation totaling $11,596,000 for damage to the race track facilities and, therefore, recognized a gain from involuntary conversion of $2,024,000 after writing-off the book value of property damaged. OTHER REVENUES During 1999 other revenues increased by $1,104,000 as compared to 1998. Excluding revenues of $201,000 earned by Equus-Comuneros in 1999, there was an increase of $903,000 attributed, in part, to certain fees that are earned based on the level of wagering at El Comandante. Due to an increase in wagering in 1999 as compared to 1998, there was also an increase in these fees. EXPENSES Total expenses increased in 1999 by $5,109,000 (7.3%) when compared to 1998. The increase was primarily attributable to the start-up of operations and expenses associated with Equus-Comuneros of $3,477,000, and a net increase of $1,632,000 in expenses of the other racetracks' operations. 11 PAYMENTS TO HORSEOWNERS Payments of purses to horseowners increased $6,700,000 in 1999 when compared to 1998. More than 87% of this increase, or $5,854,000, was principally related to net increases in gross wagering on races. El Comandante contract with horseowners expired in April 1998. However, the Puerto Rico Racing Board has extended the contract as an interim measure until the Company and the horseowners reach a new agreement. The Company is currently negotiating with the horseowners. FINANCIAL EXPENSES Financial expenses decreased in 1999 by $629,000 when compared to 1998. Excluding financial expenses of Equus-Comuneros, there was a decrease of $891,000. The decrease is primarily attributable to a reduction in financing costs of the First Mortgage Notes, due to the purchase in December 1998 by ECMC of $7.5 million in principal amount of Notes (treated in the consolidated financial statements of the Company as a redemption) and the redemption in January 5, 1999 of $3 million in principal amount of Notes. The decrease was offset in part by an increase due to interest on the $4 million in unsecured bonds issued by Equus-Panama in October 1998. DEPRECIATION AND AMORTIZATION Depreciation in 1999 decreased by $162,000 when compared to 1998. Excluding depreciation and amortization of Equus-Comuneros, there was a decrease of $354,000. The decrease was principally attributed to a reduction in depreciation of assets of El Comandante due to the write-off of the book value of property damaged by Hurricane Georges in late 1998. Property at the racetracks has been replaced and depreciation on these improvements commenced during the fourth quarter of 1999. IMPAIRMENT LOSS ON EL COMANDANTE INTANGIBLE On January 1, 1998, upon termination of the lease agreement for El Comandante, ECMC assumed net liabilities of ECOC amounting to $3,658,332. Management made an internal valuation of the tangible assets, in determining that book value approximated its fair value and allocated the entire amount to an intangible asset, to be amortized during the remaining period of the license through December 2004. However, following the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which was effective for 1998, the Company assessed impairment of its non- current assets, which included El Comandante intangible asset, based on a comparison of the aggregated undiscounted future cash flows from ECMC, as an individual entity, was less than net book value of ECMC's non- current assets. As result of this assessment, the Company recognized an impairment loss of El Comandante intangible equivalent to its net book value of $3,135,713 as of December 31, 1998. OTHER EXPENSES Other expenses increased by $2,336,000 to $29,953,000 in 1999 from $27,617,000 in 1998. Excluding expenses of Equus-Comuneros, there was a minor increase in other expenses of $159,000. The net increase during 1999 was attributable to a combination of factors: (i) Decrease in salaries and payroll costs of El Comandante due to reduction of personnel in various departments because of partial closing of several administrative and operational areas at the racetrack. The Company expects to continue further labor reductions (such as outsourcing security services and other administrative functions) in order to reduce administrative and payroll costs and overtime labor. 12 (ii) Increase in marketing costs due to a strong advertising and promotion campaign in Puerto Rico. Effective February 2000 the Company terminated the advertising campaign. (iii)Increase in insurance after heavy damage caused by Hurricane Georges. The policy for 2000 was recently negotiated with new carriers for all racetrack operations at very competitive prices. (iv) Increase in legal fees due to current negotiations by El Comandante of the contract with horseowners, which expired in April, 1998. It is expected that these costs will continue during 2000 until a new contract is signed. (v) Write-off of approximately $370,000 in costs associated to an application by the Company for licenses to own and operate a horse race track in Prince William County, Virginia. On November 17, 1999 the Virginia Racing Commission made a final decision and did not award the Virginia License to any of the applicants. PROVISION FOR INCOME TAXES The provision for income tax is primarily related to deferred Puerto Rico income taxes on the Company's income and losses related to its interest in El Comandante, without taking into account results of operations of Galapagos, Equus-Panama or Equus-Comuneros. Due to accumulated losses, none of these foreign subsidiaries requires a provision for income taxes. MINORITY INTEREST The Company's minority interest is attributed to the income and losses allocable to the minority partners of HDA, Galapagos, Equus-Panama (effective October, 1998) and Equus-Comuneros (effective January, 1999). Because accumulated losses of Galapagos allocable to minority partners had exceeded their investment, during 1999 and 1998, the Company did not recognize minority interest in losses of Galapagos of $312,217 and $465,879, respectively. During 2000: (i) if and while Galapagos continues generating losses, no minority interest in Galapagos' net losses will be recognized by the Company, and (ii) if Galapagos generates profits, no minority interest in Galapagos' net income will be recognized by the Company up to $1,087,067. EXTRAORDINARY ITEM The extraordinary items in 1999 and 1998 are related to the early redemption and the purchase in the open market of First Mortgage Notes. In June of 1999, the Company recognized as income a $22,680 discount on the purchase in the open market of $189,000 of First Mortgage Notes. In 1998 the Company recognized as income a $1 million discount on the $7.5 million in First Mortgage Notes purchased in the open market in December 1998, net of the $300,000 premium that was paid in connection with the redemption of $3 million made on January 5, 1999, at 110% of par (premium was accrued at December 31, 1998). The income in 1998 was recorded net of the corresponding write-off of a portion of the note discount and deferred financing costs. 13 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE In connection with the early adoption by the Company of Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", the Company wrote-off in 1998 the unamortized balance as of January 1, 1998 of organizational and certain other deferred costs for $550,000. 1998 COMPARED TO 1997 - ------------------------ REVENUES Revenues increased in 1998 by $44,389,000 compared to 1997. On a proforma basis, revenues increased $754,000 (1.1%) from $68,218,000 in 1997 to $68,972,000 in 1998. The increase in proforma revenues was principally due to the insurance proceeds received by the Company for damage inflicted by Hurricane Georges to El Comandante and V Centenario, net of decreases in commissions on wagering and other categories of revenues. COMMISSIONS ON WAGERING Commissions on wagering, on a proforma basis, decreased $6,983,000 from $59,512,000 in 1997 to $52,529,000 in 1998. The decrease was mainly caused by a decline in wagering at El Comandante and V Centenario, offset by commissions on wagering of $7,808,000 at Presidente Remon, where operations commenced during 1998. PUERTO RICO. Commissions on wagering at El Comandante decreased $13,812,000 (25%) from $54,893,000 in 1997 to $41,081,000 in 1998. The decline in wagering was attributable to various factors, principally a strike by union workers of the Puerto Rico Telephone Company ("PRTC") and Hurricane Georges, which passed through the Caribbean on September 21-23, 1998. PRTC Strike. Union workers opposing the privatization of the PRTC went on strike in early June. The strike, which included significant vandalism of PRTC installations, disrupted the operations of the telephone company and led to a decline in wagering. During the strike, an average of 200 agencies per racing day were affected and unable to take bets due to the disruption of telephone service. The strike ended July 28 but full restoration of telephone service within the OTB system did not occur until the middle of August. Management is evaluating various communications alternatives in order to reduce the dependence on the PRTC system. Hurricane Georges. Hurricane Georges caused significant damage island wide in Puerto Rico forcing suspension of racing operations beginning September 20. Due to the extensive damage to the racetrack and Puerto Rico's electrical and telecommunications infrastructure, live racing did not resume until November 14, 1998. Therefore, 39 race days were lost, as compared with 1997. DOMINICAN REPUBLIC. Commissions on wagering at V Centenario decreased $979,000 (21%) from $4,619,000 in 1997 to $3,640,000 in 1998. The decline in wagering was attributable in part to the continuing competition posed by the government-licensed electronic lottery and Hurricane Georges. The electronic lottery, which held the first of its weekly drawings in November 1997, has steadily increased its share of the gaming market. Wagering on the lottery shows strong cyclical patterns directly linked to the amount accumulated in its jackpot. The lottery has carried jackpot prizes of over US$2 million at least three times during 1998, which has affected racing wagering 14 especially on Saturdays, the day the lotto draw is made, and the best selling day of the week for racing. The lottery's jackpot competes directly with racing's Pick-6 wager, which represents roughly 40% of the handle on racing. Hurricane Georges also caused damage to V Centenario and Dominican Republic's electrical and telecommunications infrastructure forcing suspension of both live and simulcast racing operations for over a month. Lack of television coverage in certain cities has limited the development of new agencies and an increase in new racing fans. PANAMA. On January 1, 1998 Equus-Panama took over a 20-year agreement to operate Presidente Remon. The track was closed for renovations and improvements until February 14, 1998 when live racing was reinstated on Saturdays and Sundays to allow for continuing renovations during the week. During this period Equus-Panama earned commissions on simulcasted races from the United States. In mid-April racing was added on Thursdays nights, increasing live races to an average of 24 races per week. In addition to live racing, simulcasting of El Comandante races began in May 1998, until September 20, 1998 when races at El Comandante were suspended due to Hurricane Georges. Due to the cancellation of El Comandante races in the wake of Hurricane Georges, simulcast wagering on U.S. races was resumed on September 24. NET REVENUES FROM LOTTERY SERVICES Net revenues from lottery services by Galapagos increased $568,000 from $88,000 in 1997 to $656,000 in 1998. The electronic lottery of Dominican Republic commenced in November 1997 and therefore, the increase in revenues was attributed to additional draws in 1998 as compared with 1997. INSURANCE SETTLEMENT Due to damage inflicted by Hurricane Georges to El Comandante and V Centenario, the Company received in 1998 compensation from the insurance carriers totaling $10,832,000, for business interruption and $11,596,000, for damage to the racetracks' facilities. The Company recognized a gain from involuntary conversion of $2,024,000 related to the net effect of the property damage insurance proceeds less the write-off of the book value of property damaged. GAIN FROM SALE OF TELEVISION STATIONS In January 1997 the Company sold its remaining 50% interest in three UHF television stations in Puerto Rico, resulting in a gain of $4,669,000. There was no similar gain in 1998. EXPENSES Expenses increased in 1998 by $49,742,000 compared to 1997. On a proforma basis, expenses increased $4,071,000 (6.2%) from $65,543,000 in 1997 to $69,614,000 in 1998. The increase was attributed, in part, to expenses of Equus-Panama where operations commenced in 1998. PAYMENT TO HORSEOWNERS Payments to horseowners increased by $23,687,000 in 1998. On a proforma basis, these payments decreased $3,673,000 (12.4%) from $29,669,000 in 1997 to $25,996,000 in 1998. The decrease was due to a reduction in payments to horseowners of El Comandante and V Centenario, directly related to a decline in wagering, net of $3.6 million in payments made to horseowners of Panama, which was the minimum amount required under the contract for 1998. 15 FINANCIAL EXPENSES Financial expenses increased in 1998, by $374,000. On a proforma basis, these expenses increased $96,000 from $9,013,000 in 1997 to $9,109,000 in 1998. The increase in financial expenses is primarily attributable to the Panama operation, which required financing to fund major improvements to Presidente Remon and the acquisition of equipment. This financing included $4 million in unsecured bonds, bearing annual interest at 11%. The increase was offset in part by a reduction in financing cost on the First Mortgage Notes, due to the redemption in late 1997 of $2.5 million in principal amount. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased in 1998 by $1,388,000. On a proforma basis, depreciation and amortization increased $453,000 from $3,303,000 in 1997 to $3,756,000 in 1998. The increase was principally attributed to depreciation at Presidente Remon and amortization of El Comandante intangible (as discussed below), net of a reduction in depreciation of assets of El Comandante and V Centenario due to the write-off of the book value of property damaged by Hurricane Georges. IMPAIRMENT LOSS ON EL COMANDANTE INTANGIBLE On January 1, 1998, upon termination of the lease agreement for El Comandante, ECMC assumed net liabilities of ECOC amounting to $3,658,332. Management made an internal valuation of the tangible assets, which book value approximated its fair value and allocated the entire amount to an intangible asset, to be amortized during the remaining period of the license thru December 2004. However, following the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", the Company assessed impairment of its non current assets, which includes El Comandante intangible, based on whether it is probable that the aggregated undiscounted future cash flows from ECMC, as an individual entity, will be less than net book value of ECMC's non current assets. As result of this assessment, the Company recognized an impairment loss of El Comandante intangible equivalent to its net book value as of December 31, 1998 of $3,135,713. OTHER EXPENSES Other expenses increased by $21,157,000 in 1998. On a proforma basis, other expenses increased $4,059,000 (17%) from $23,558,000 in 1997 to $27,617,000 in 1998. The net increase was principally attributed to a combination of factors such as: (i) Expenses of the Panama operation, which commenced in 1998. (ii) Payroll costs of employees of EEC, the wholly owned subsidiary of the Company, which effective January 1, 1998, assumed responsibility for the management of all race tracks (iii) Decrease in Autotote wagering services, which cost is based on wagering levels, caused by Hurricane Georges. PROVISION FOR INCOME TAXES The provision for income tax is primarily related to Puerto Rico income taxes on the Company's income From Puerto Rico sources related to its interest in El Comandante, without taking into account losses of Galapagos and Equus-Panama. The deferred income taxes are related to the difference between the tax basis of the Company's investment in HDA and the amount shown in its financial statements. For the year ended December 31, 1997, approximately $463,000 of the deferred income tax provision relates to the reversal of the tax benefit recorded by the Company in prior years for operating losses attributable to its remaining 50% interest in the Television Stations, which was sold in January 1997. 16 MINORITY INTEREST The Company's minority interest is principally attributed to the income and losses allocable to the minority partners of Galapagos and, effective October 1998, Equus-Panama. Because accumulated losses of Galapagos allocable to minority partners had exceeded their investment, the Company recognized an additional $465,879 and $308,971, in losses of Galapagos for 1998 and 1997, respectively. EXTRAORDINARY ITEM The extraordinary items are related to the early redemption and the purchase in the open market of First Mortgage Notes. For 1998, the Company recognized as income (i) a $1 million discount on the $7.5 million in First Mortgage Notes purchased in the open market in December 1998, net of (ii) the $300,000 premium that was paid in connection with the redemption of $3 million made on January 5, 1999, at 110% of par (premium was accrued at December 31, 1998). For 1997, the Company recognized as expense the $250,000 premium paid on the First Mortgage Notes that were redeemed on September 29, 1997, while the redemption of March 28, 1997, was made at par. In connection with these redemptions the Company wrote-off a portion of the note discount and deferred financing costs, which amounts are also included as extraordinary items. On a proforma basis, in 1997, the Company recognized income from the cancellation of certain indebtedness of ECOC to Supra. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE In connection with the early adoption by the Company of Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", the Company wrote-off the unamortized balance as of January 1, 1998 of organizational and certain other deferred costs for $550,000. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW The Company is the owner of HDA and its consolidated subsidiaries. The principal source of cash of Equus Gaming Company L.P. (the "Company" or, when referred to the individual entity, "Equus") is related to its ownership interest in Housing Development Associates S.E. ("HDA"), the owner and operator (through its wholly owned subsidiary, El Comandante Management Company LLC, "ECMC") of El Comandante Race Track in Puerto Rico. Due to certain restrictions under HDA's indenture for the issuance of its 11.75% First Mortgage Notes due 2003 (the "Indenture"), cash held by HDA or its consolidated subsidiaries (including ECMC) is restricted to ensure payment of interest and certain obligations on such First Mortgage Notes. The following is a discussion of the liquidity and capital resources of the Company, including HDA and its consolidated subsidiaries, ECMC, Agency Betting Network, Inc, ("ABN") and Satellites Services International, Inc. ("SSI"). The net cash flows from the other foreign subsidiaries of the Company (Equus Comuneros, S.A., Equus Entertainment de Panama, S.A. and Galapagos, S.A) did not materially affect the consolidated cash flows of the Company in 1999 and, therefore, its cash flows activities are not discussed herein. 17 LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY (AND ITS CONSOLIDATED SUBSIDIARIES) Cash and cash equivalents of the Company and its consolidated subsidiaries decreased by approximately $4.3 million during 1999. The Company has historically met its liquidity requirements principally from cash flow generated by (i) the operations of El Comandante racetrack in Puerto Rico and (ii) short-term loans and capital leases for acquisition of new equipment. During 1999 the principal uses of cash of the Company and its consolidated subsidiaries for its financing and investing activities were as follows: (i) Capital improvements to El Comandante Race Track and acquisition of equipment of approximately $8.7 million used to replace racetrack and facilities property damaged by Hurricane Georges in September 1998. The insurance carrier compensated HDA and ECMC for these improvements. (ii) Payments on capital leases for equipment used in El Comandante operations. (iii)Redemption on January 5, 1999 of First Mortgage Notes at 110% of par and, purchase in June 1999 in the open market of First Mortgage Notes at discount. The net cost of these transactions was $3,048,320. (iv) Investment by Equus of approximately $1.3 million in Equus-Comuneros, principally during its start-up period and for certain improvements to the racetrack. The Company has and will continue to make investments in Colombia through ABN, a new wholly owned subsidiary of HDA. (v) Investment by HDA of approximately $460,000 in ABN, created for the purpose of establishing and operating the off-track betting agency system in Colombia for Los Comuneros racetrack. (vi) Investment of approximately $200,000 in SSI, a new wholly owned subsidiary of HDA. SSI will provide up-link satellite services, satellite time (contracted from a third party), and leasing of video and data telecommunication equipment, to transmit (or simulcast) live races from and to the Company's racetracks and OTB agencies, including live races from outside the Company's operational territories to the agency distribution network in order to increase the level of wagering revenues through our OTB system. In addition to cash available to the Company at the beginning of the year of $6.6 million and cash flows from by operations during 1999, the Company obtained additional funds for its financing and investing transactions (as described above) principally from the following sources: (i) $650,000 in advances taken under a $2.5 million line of credit (ii) Proceeds of $3,051,600 from the issuance by the Company of 2,991,764 units to accredited investors, principally The Wilson Family Limited Partnership, the owner of a majority of the Company's outstanding units pursuant to the terms of a private offering. (iii)Capital leases to purchase equipment for El Comandante operations and certain equipment for the operations of SSI, consisting of an up-link earth station located in Panama, necessary to carry races via satellite in simulcast operations. (iv) Proceeds from a $5.5 million term loan (considered Refinancing Indebtedness under the terms of the Indenture). This loan, which is collateralized by the First Mortgage Notes purchased by the Company in the open market, is payable in quarterly installments commencing on March 31, 2000 until 18 maturity on December 15, 2001. The $2.5 million balance outstanding under the loan described in (i) above was paid from proceeds of this loan. For 2000 the projected principal uses of cash of the Company's activities, other than operating activities of El Comandante, are: (i) Capital improvements to El Comandante race track and principal payments on existing capital leases. (ii) Principal payments amounting to $2.5 million on the $5.5 million term loan,. (iii)Additional investments in ABN for its Colombian operations and reduction of certain financial obligations assumed from Equus-Comuneros of approximately $1.2 million. (iv) Additional investments in SSI, principally for the acquisition of the VSAT equipment and system for the agencies within the Company's OTB system and the payment of satellite time contracted from a third party. In addition to cash flow from operating activities of El Comandante, the Company expects to obtain funds for its other transactions from credit facilities with certain financial institutions. In February 2000, HDA, a wholly-owned subsidiary of the Company, drew the amount available under its $500,000 revolving line of credit, which amount is payable in full on December 15, 2001. Also, the Company is currently negotiating a $2 million credit facility with a financial institution in Colombia so that HDA and the Company are able to properly fund the development and operations of the off-track betting for ABN and meet the expected level of increased wagering from this operation. INVESTMENTS IN TELECOMMUNICATIONS EQUIPMENT AND MARKET EXPANSION The Company's top management has developed and recently implemented strategic financial plans designed to improve capital resources, liquidity and capital investments in the Company's distribution network and core assets. As a result, the Company is in the process of securing substantial credit facilities with a prominent financial institution to (1) finance the acquisition and installation of high-technology video and data transmission system (VSAT) with a communications center or HUB that will be cheaper, more efficient and reliable than conventional phone lines and commercial air time, and (2) to finance the purchase of outstanding notes (over $54 million) in order to allow the Company to make the necessary capital investments to increase the level of wagering through a combination of increase in the number of off-track betting agencies and improved racing program, including simulcast of live races from many jurisdictions to our network. The cash flow savings from reduction in operating expenses (primarily telephone and air time costs) to be realized from the new VSAT units will recover the $ 9 million capital investment in this new technology over the next four years. The Company's operational plans call for the installation over the next 12 to 18 months of more than 2,000 VSAT (video and data communication) units for the OTB agencies in all of its operations, including Puerto Rico, Dominican Republic, Panama and Colombia with a communications up-link satellite control center based in Puerto Rico. Satellite Services International, Inc. (SSI), a wholly-owned subsidiary of HDA (HUB) and the Company, will be the service provider for all telecommunications and satellite usage time, and will charge each of its affiliated companies a fee for the equipment and satellite time usage for transmissions (simulcast) of races from several countries. 19 Additionally, the Company is performing due diligence reviews on market expansion for the acquisition of off-track betting agencies (distribution network) and interests in joint ventures for racetrack operations in Brazil, Uruguay and Argentina. As a result of these capital investments in high-technology and extensive high-tech distribution network, improved cash flow from better financing, and market expansion efforts, the Company plans to substantially increase consolidated wagering commissions during 2000 and future years. LONG-TERM COMMITMENTS. In addition to capital leases, long-term cash commitments of the Company (excluding foreign subsidiaries) are a $5.5 million term loan and the First Mortgage Notes. In December 1999 HDA obtained a $5.5 million term loan, considered Refinancing Indebtedness under the terms of the indenture. The loan is collaterized by the First Mortgage Notes purchased by the Company in the open market. Interest is payable monthly at a rate equivalent to one point over prime rate. Principal is payable in quarterly installments commencing on March 31, 2000 until maturity on December 15, 2001. The stated maturity dates of this term loan are as follows (in thousands): YEAR ENDING DECEMBER 31, AMOUNT -------------- ------- 2000 $2,500 2001 3,000 ------- $5,500 ====== HDA's First Mortgage Notes bear interest at 11.75%, payable semiannually on June 15 and December 15, and are secured by El Comandante assets. The First Mortgage Notes are redeemable, at the option of HDA, at redemption prices (expressed as percentages of principal amount): if redeemed during the 12-month period beginning December 15 of years 1999 at 102.75%, 2000 at 101.5%, and 2001 and thereafter at 100% of principal amount, in each case together with accrued and unpaid interest. The stated maturity dates of First Mortgage Notes, as reduced by prior redemptions made by HDA and by the Notes purchased by ECMC in the open market, are as follows (in thousands): YEAR ENDING NET AMOUNT DECEMBER 31, (FACE VALUE) ------------ ------------ 2001 $ 3,454 2002 10,200 2003 40,800 ----------- $ 54,454 =========== To the extent First Mortgage Notes are not acquired in the open market or redeemed, Management expects to refinance this obligation not later than December 2002. As of March 21, 2000, HDA has advanced to Equus approximately $1.3 million against its allowable future distributions of profits, which technically is not in conformity with the terms of the Indenture. GOVERNMENT MATTERS. El Comandante's horse racing and pari-mutuel wagering operations are subject to substantial government regulation. Pursuant to the Puerto Rico Horse Racing Industry and Sport Act (the "Racing Act"), the Racing Board and the Puerto Rico Racing Administrator (the "Racing Administrator") exercises regulatory control over El Comandante's racing and wagering 20 operations. For example, the Racing Administrator determines the monthly racing program for El Comandante and approves the number of annual race days in excess of the statutory minimum of 180. The Racing Act also apportions payments of monies wagered that would be available as commissions to ECMC. The Racing Board consists of three persons appointed to four-year terms by the Governor of Puerto Rico. The Governor also appoints the Racing Administrator for a four-year term. FORWARD-LOOKING STATEMENT Certain matters discussed and statements made within this Form 10-K are forward-looking statements within the meaning of the Private Litigation Reform Act of 1995 and as such may involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance or achievements of the Company to be different from any future results, performance or achievements expressed or implied by such forward-looking statements. Although the Company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. These risks are detailed from time to time in the Company's filing within the Securities and Exchange Commission or other public statements. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the partners of Equus Gaming Company L.P.: We have audited the accompanying consolidated balance sheets of Equus Gaming Company L.P. (a Virginia limited partnership) (the Company) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, comprehensive earnings (loss), changes in partners' deficit and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Galapagos, S.A. as of and for the year ended December 31, 1997, which reflect total assets of 4% and total revenues of 23% of the consolidated totals. These statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for this entity, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Equus Gaming Company L.P. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. As explained in Note 1 to consolidated financial statements, effective January 1, 1998, the Company changed its method of accounting for organizational and start-up costs in accordance with SOP 98-5, "Reporting of the Costs of Start-Up Activities". As a result, the Company wrote-off the unamortized balance of deferred organizational costs of approximately $550,000. Arthur Andersen LLP March 23, 2000 San Juan, Puerto Rico 22
EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------ (SEE NOTE 14) REVENUES: Commissions on wagering $66,743,923 $52,528,562 $ 4,618,720 Net revenues from lottery services 545,568 656,145 87,659 Income from business interruption - 10,832,370 - Gain from involuntary conversion - 2,024,159 - Rental income from El Comandante Race Track - - 13,720,424 Gain from sale of Television Stations - - 4,669,400 Other revenues 4,035,098 2,931,330 1,486,726 ------------ ------------ ------------ 71,324,589 68,972,566 24,582,929 ------------ ------------ ------------ EXPENSES: Payments to horseowners 32,697,409 25,996,556 2,309,360 Salaries, wages and employee benefits 11,274,027 11,910,549 1,099,607 Operating expenses 10,001,437 9,798,721 2,622,369 General and administrative 4,196,469 2,558,300 2,076,988 Marketing, television and satellite costs 4,482,285 3,349,619 660,808 Financial expenses 8,479,505 9,109,311 8,734,826 Depreciation and amortization 3,593,839 3,756,052 2,368,041 Impairment loss on El Comandante Intangible - 3,135,713 - ------------ ------------ ------------ 74,724,971 69,614,821 19,871,999 ------------ ------------ ------------ EARNINGS (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT (3,400,382) (642,255) 4,710,930 PROVISION FOR INCOME TAXES 742,153 1,109,611 1,028,145 ------------ ------------ ------------ EARNINGS (LOSS) BEFORE MINORITY INTEREST, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT (4,142,535) (1,751,866) 3,682,785 MINORITY INTEREST IN EARNINGS (LOSSES) (1,029,458) (227,720) 878,033 ------------ ------------ ------------ EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT (3,113,077) (1,524,146) 2,804,752 EXTRAORDINARY ITEM, NET- Discount (premium) on early redemption of First Mortgage Notes and write-off of related deferred financing costs and note discount 22,680 167,051 (326,013) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET - (402,927) - ------------ ------------ ------------ NET EARNINGS (LOSS) $(3,090,397) $(1,760,022) $ 2,478,739 ============ ============ ============
The accompanying notes are an integral part of these consolidated statements. (continues) 23
EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, (CONTINUED) 1999 1998 1997 ------------ ------------ ----------- ALLOCATION OF NET (LOSS) EARNINGS: General partners $ (30,904) $ (17,600) $ 24,787 Limited partners (3,059,493) (1,742,422) 2,453,952 ------------ ------------ ----------- $(3,090,397) $(1,760,022) $2,478,739 ------------ ------------ ----------- BASIC AND DILUTED PER UNIT AMOUNTS: Earnings (loss) before extraordinary item and cumulative effect of change in accounting principle, net (0.39) (0.24) 0.45 Extraordinary item, net - 0.02 (0.06) Cumulative effect of change in accounting principle, net - (0.06) - ------------ ------------ ----------- Net earnings (loss) $ (0.39) $ (0.28) $ 0.39 ------------ ------------ ----------- WEIGHTED AVERAGE UNITS OUTSTANDING 7,796,191 6,342,606 6,333,617 ============ ============ ===========
The accompanying notes are an integral part of these consolidated statements. 24
EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997 ------------ ------------ ----------- NET EARNINGS (LOSS) $(3,090,397) $(1,760,022) $2,478,739 OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments (553,146) 80,043 (56,447) ------------ ------------ ----------- COMPREHENSIVE INCOME (LOSS) $(3,643,543) $(1,679,979) $2,422,292 ------------ ------------ -----------
The accompanying notes are an integral part of these consolidated statements. 25
EQUUS GAMING COMPANY L.P. CONSOLIDATED BALANCE SHEETS ASSETS DECEMBER 31, ---------------------------- 1999 1998 ------------- ------------- CASH AND CASH EQUIVALENTS: Unrestricted $ 1,888,995 $ 6,462,992 Restricted 418,938 174,275 ------------- ------------- 2,307,933 6,637,267 ------------- ------------- PROPERTY AND EQUIPMENT: Land 7,786,980 7,128,858 Building and improvements 56,512,072 44,615,936 Equipment 13,967,887 10,924,669 ------------- ------------- 78,266,939 62,669,463 Accumulated depreciation (18,409,886) (15,199,341) ------------- ------------- 59,857,053 47,470,122 ------------- ------------- DEFERRED COSTS, NET: Financing 2,510,487 3,075,706 Costs of Panama contract 1,980,000 2,090,000 Other 501,505 209,852 ------------- ------------- 4,991,992 5,375,558 ------------- ------------- OTHER ASSETS: Accounts receivable, net 1,577,634 1,160,468 Notes receivable 1,506,599 1,708,211 Advances to Los Comuneros S. A. - 950,000 Prepayments and other assets 701,362 737,580 ------------- ------------- 3,785,595 4,556,259 ------------- ------------- $ 70,942,573 $ 64,039,206 ============= =============
The accompanying notes are an integral part of these consolidated statements. 26
EQUUS GAMING COMPANY L.P. CONSOLIDATED BALANCE SHEETS (continued) LIABILITIES AND PARTNERS' DEFICIT DECEMBER 31, ---------------------------- 1999 1998 ------------- ------------- FIRST MORTGAGE NOTES: Principal, net of note discount of $885,446 and $1,068,540 $ 53,568,554 $ 56,194,460 Accrued interest 265,900 317,069 ------------- ------------- 53,834,454 56,511,529 ------------- ------------- OTHER LIABILITIES: Accounts payable and accrued liabilities 11,660,824 8,088,343 Outstanding winning tickets and refunds 1,130,389 519,484 Notes payable 6,226,082 2,841,797 Bonds payable 4,000,000 4,000,000 Capital lease obligations 3,235,507 2,249,076 ------------- ------------- 26,252,802 17,698,700 ------------- ------------- DEFERRED INCOME TAXES 3,165,800 2,628,539 ------------- ------------- MINORITY INTEREST 2,474,810 1,266,849 ------------- ------------- COMMITMENTS AND CONTINGENCIES, SEE NOTE 4 PARTNERS' DEFICIT General Partner (781,879) (745,444) Limited Partners - 10,383,617 units authorized: 8,389,824 and 5,398,060 units issued and outstanding in 1999 and 1998, respectively (14,003,414) (13,320,967) ------------- ------------- (14,785,293) (14,066,411) ------------- ------------- $ 70,942,573 $ 64,039,206 ============= =============
The accompanying notes are an integral part of these consolidated statements. 27
EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999 GENERAL LIMITED PARTNERS PARTNERS TOTAL ---------- ------------- ------------- BALANCES, DECEMBER 31, 1996 $(752,867) $(10,436,112) $(11,188,979) Net earnings for the year 24,787 2,453,952 2,478,739 Currency translation adjustments (564) (55,883) (56,447) Cash distributions to minority partners of HDA - (544,139) (544,139) Redemption of 17% minority interest in HDA - (2,782,350) (2,782,350) ---------- ------------- ------------- BALANCES, DECEMBER 31, 1997 (728,644) (11,364,532) (12,093,176) Net loss for the year (17,600) (1,742,422) (1,760,022) Currency translation adjustments 800 79,243 80,043 Difference between carrying amount of investment in Equus-Panama and net book value after public offering - 463,130 463,130 Purchase of HDAMC Warrants - (756,386) (756,386) ---------- ------------- ------------- BALANCES, DECEMBER 31, 1998 (745,444) (13,320,967) (14,066,411) Net loss for the year (30,904) (3,059,493) (3,090,397) Currency translation adjustments (5,531) (547,615) (553,146) Cash distributions to minority partners of HDA - (20,368) (20,368) Issuance of Units, net of costs - 2,945,029 2,945,029 ---------- ------------- ------------- BALANCES, DECEMBER 31, 1999 $(781,879) $(14,003,414) $(14,785,293) ========== ============= =============
The accompanying notes are an integral part of these consolidated statements. 28
EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 1999 1998 1997 ------------- ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ (3,090,397) $ (1,760,022) $ 2,478,739 ------------- ------------- ------------ Adjustments to reconcile net earnings (loss) to net cash provided by operating activities- Gain from involuntary conversion - (2,024,159) - Gain from sale of Television Stations - - (4,669,400) Depreciation and amortization 4,296,160 4,450,031 3,085,155 Impairment loss on El Comandante intangible - 3,135,713 - Deferred income tax provision 537,261 1,145,945 893,403 Minority interest (1,029,458) (304,320) 878,033 Extraordinary item 22,680 (273,854) 459,173 Cumulative effect of change in accounting principle - 549,996 - Currency translation adjustments (28,920) 80,043 (56,447) Difference in investment in Equus-Panama after public offering - 463,130 - Decrease (increase) in assets- Accounts receivable (206,749) (141,976) - Rent receivable from ECOC - - (654,307) Prepayments and other assets 545,597 (161,735) 263,128 Increase (decrease) in liabilities- Accounts payable and accrued liabilities 1,658,363 1,883,130 (1,248,027) Outstanding winning tickets and refunds 610,905 (546,129) - ------------- ------------- ------------ Total adjustments 6,405,839 8,255,815 (1,049,289) ------------- ------------- ------------ Net cash provided by operating activities 3,315,442 6,495,793 1,429,450 ------------- ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (10,113,509) (10,218,529) (1,422,626) Property damage insurance proceeds - 11,595,850 - Cost of Panama contract - - (2,356,292) Deferred costs (389,544) (376,774) (307,527) Collections of note from ECOC - - 326,661 Decrease (increase) in notes receivable, net 201,612 (1,271,966) - Acquisition of ECOC cash accounts upon - termination of lease agreement - 1,061,239 - Sales of Television Stations, net - 6,494,643 Advances to Los Comuneros S.A. - (950,000) - ------------- ------------- ------------ Net cash (used in) provided by investing activities (10,301,441) (160,180) 2,734,859 ------------- ------------- ------------
The accompanying notes are an integral part of these consolidated statements. 29
EQUUS GAMING COMPANY L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 (continued) 1999 1998 1997 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Redemption of First Mortgage Notes $(3,048,320) $(6,500,000) $(3,487,000) Payments (to) from affiliates (200,000) 200,000 (415,883) Payment of financing costs (60,579) - - Loan proceeds from financial institutions 6,515,000 4,229,920 1,258,079 Issuance of notes payable to Supra & Company S.E. - - 260,000 Payments on notes payable and capital lease obligations (3,612,813) (3,372,946) (714,213) Contributions by minority partners 32,143 1,993,410 32,758 Issuance of Units 3,051,600 - - Issuance of bonds by Equus-Panama - 4,000,000 - Redemption of 17% minority interest in HDA - - (4,314,284) Purchase of HDAMC Warrants (see Note 6) - (756,386) - Cash distributions to minority partners of HDA (20,368) - (544,139) ------------ ------------ ------------ Net cash provided by (used in) financing activities 2,656,663 (206,002) (7,924,682) ------------ ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,329,334) 6,129,611 (3,760,373) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,637,267 507,656 4,268,029 CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,307,933 $ 6,637,267 $ 507,656 ============ ============ ============ SUPPLEMENTAL INFORMATION: Interest paid $ 8,572,220 $ 8,266,411 $ 7,992,439 Income taxes paid - - 262,500 NON-CASH TRANSACTIONS: Equipment acquired through capital leases 1,668,529 643,050 - Acquisition of ECOC's non cash accounts upon termination of lease agreement - (4,719,571) - Contribution of non-cash assets, net of liabilities by Los Comuneros S.A. (see Note 1) 2,237,000 - -
The accompanying notes are an integral part of these consolidated statements. 30 EQUUS GAMING COMPANY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: Equus Gaming Company L.P. (the "Company"), a Virginia limited partnership, is engaged in thoroughbred racing, wagering and other gaming businesses in the Caribbean, Central and South America. Through its subsidiaries, the Company operates four racetracks and manages an extensive off-track betting ("OTB") system in the various countries where the Company operates. The Company has a 99% interest in Housing Development Associates S.E. ("HDA"), the owner of El Comandante Race Track ("El Comandante"), the only licensed thoroughbred racing facility in Puerto Rico. El Comandante has operated since January 1, 1998 as a wholly owned subsidiary of HDA, El Comandante Management Company, LLC ("ECMC"). HDA has recently organized two wholly-owned subsidiaries: Satellites Services International, Inc. ("SSI") and Agency Betting Network, Inc. ("ABN"). SSI will provide up-link services, satellite time (contracted from a third party), and leasing of video and data telecommunication equipment to transmit (or simulcast) live races from and to the Company's racetracks and OTB agencies, including live races from outside the Company's operational territories to the Company's agency distribution network in order to increase the level of wagering revenues through the OTB systems. ABN is establishing and operating an OTB agency system in Colombia for Los Comuneros Race Track in Medellin, Colombia ("Los Comuneros"). The Company has a 55% interest in Galapagos, S.A. ("Galapagos"), the operator since April 1995 of the V Centenario Race Track in the Dominican Republic ("V Centenario") and a 51% interest in Equus Entertainment de Panama, S.A. ("Equus-Panama"), the operator since January 1, 1998 of the Presidente Remon Race Track in the Republic of Panama ("Presidente Remon"). Both racetracks are government-owned and operated by the Company's subsidiaries under long-term contracts. The Company also has since 1999 a controlling 50% interest in Equus Comuneros S.A. ("Equus-Comuneros"), the owner and operator of Los Comuneros for approximately $2.1 million. In 1999 Equus-Comuneros received as a capital contribution from the minority stockholder, Los Comuneros S.A., all assets and liabilities that were employed by the prior operator of Los Comuneros. The assets mainly consisted of land, buildings and equipment for approximately $4.7 million and liabilities of approximately $2.6 million. The liabilities included mainly accounts payable to vendors and horseowners and certain financial obligations with various maturities through 2004. CONSOLIDATION AND PRESENTATION The Company consolidates the entities in which it has a controlling interest. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries after eliminating all significant inter-company transactions. All of the entities included in the consolidated financial statements are hereinafter referred to collectively, when practicable, as the "Company". The Company has minority partners in HDA, Galapagos, Equus-Panama and Equus-Comuneros. Therefore, the Company recorded minority interest based on the income and (losses) of these consolidated subsidiaries that are attributable to the minority partners, as follows: 31
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------- 1999 1998 1997 ------------ ---------- ----------- SUBSIDIARY: HDA $ 650 $ 19,940 $1,063,960 Galapagos - - (185,927) Equus-Panama (114,688) (324,260) - Equus-Comuneros (915,420) - - ------------ ---------- ----------- $(1,029,458) $(304,320) $ 878,033 ------------ ---------- -----------
In general, the minority interest is calculated based on the ownership interest of the minority partners. HDA's minority partners had an 18% interest until August 20, 1997, when HDA redeemed the 17% interest owned by Supra & Company S.E. ("Supra"). Following the redemption, HDA has a minority partner owning a 1% interest. Galapagos' minority partners own a 45% interest. However, during the years ended December 31, 1999, 1998 and 1997, the Company did not recognize minority interest in Galapagos' losses amounting to $312,217, $465,879 and $308,971, respectively, because the minority partners have no legal obligation to fund such losses in excess of their investment. Equus-Panama minority partners own a 49% interest effective October 22, 1998 after the issuance of new stock pursuant to a public offering in Panama for approximately $2 million. Equus-Comuneros minority partners own a 50% interest effective January 1, 1999. OUTSTANDING UNITS The units of the Company represent an assignment of beneficial ownership of Class A limited partnership interest (the "Units"). On December 15, 1998, the Company acquired in treasury 935,557 of its Units in connection with the repurchase of Warrants issued by HDA Management Corporation ("HDAMC") (see Note 6). During 1999 the Company issued 2,991,764 Units to accredited investors (including 2,911,764 Units to The Wilson Family Limited Partnership, a major unitholder of the Company) for $3,051,600 pursuant to the terms of a private offering that commenced in December 1998 and expired in April 1999. Net income (loss) per Unit is calculated based on the weighted average of Units outstanding. PERVASIVENESS OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. COMPREHENSIVE INCOME The components of other comprehensive income are net losses from changes in exchange rates due to the translation of assets and liabilities and unsettled long term intercompany transactions of foreign subsidiaries. COMMISSIONS ON WAGERING Commissions on wagering represent income earned by the Company on bets placed on thoroughbred horse races held at El Comandante (Puerto Rico), V Centenario (Dominican Republic), Presidente Remon (Panama), and Los Comuneros (Colombia) principally through wagering facilities located at independently owned off track betting ("OTB") agencies throughout these countries. Commissions are based on percentages of wagers established by law that vary by country and are based on the different types of wagers. Commissions are presented in the accompanying consolidated financial statements net of 32 applicable taxes on wagers, amounts payable to winning bettors, commissions to OTB agencies and other miscellaneous deductions established by law. Commissions on wagering are recognized upon completion of the races. NET REVENUES FROM LOTTERY SERVICES Galapagos has a five-year contract with a private operator to provide the wagering distribution system for a government-sponsored electronic lottery, which commenced on November 1, 1997. Lottery games are sold at OTB agencies selected by Galapagos and at lottery agencies selected by the lottery operator. Galapagos' commissions are 3% of gross lottery sales. In addition, the lottery operator pays Galapagos a monthly fee for each OTB agency that sells lottery games as reimbursement for a 50% share of telephone line costs. Revenues from lottery sales are presented in the accompanying consolidated statement of operations net of fees paid to the company providing wagering services (see Note 4). INCOME AND GAIN FROM INSURANCE SETTLEMENT In connection with the settlements reached with the insurance carriers for damage to El Comandante in Puerto Rico and V Centenario in Dominican Republic inflicted by Hurricane Georges in 1998, resulting in the suspension of racing operations for over a month, the Company received total compensation of $11,595,850 for physical damage to the racetracks properties and $10,832,370 for business interruption. The Company recognized a gain from involuntary conversion of $1,813,633 and $210,526 being the net effect of the property damage insurance proceeds less the write-off of the book-value of property damaged at El Comandante and V Centenario, respectively. ADVERTISING EXPENSE During the years ended December 31, 1999, 1998 and 1997, the Company incurred advertising costs of $1,594,139, $917,532 and $262,916, respectively. CASH AND CASH EQUIVALENTS The Company considers as cash equivalents certificates of deposit with an original issuance to maturity term of three months or less. Restricted cash represents accumulated cash in the "Pool Pote" and a bonus amount that is added to the Pick 6 pool payout for predetermined race days. The Pool Pote is paid out when there is a sole pool winner. The corresponding payables are recorded as part of the liability for outstanding winning tickets and refunds. PROPERTY AND EQUIPMENT Land, buildings and improvements, and equipment are stated at cost plus a step-up of $5,650,000 of El Comandante assets on March 8, 1995 resulting from the issuance of Units to HDAMC for a 15% interest in HDA. A portion of the step-up was written off in 1998, as a result of damage caused by Hurricane Georges. Depreciation is calculated using the straight-line method over the estimated useful lives of the property: five to ten years for equipment, 35 years for buildings, and 10 to 15 years for land improvements. Major replacements and improvements are capitalized and depreciated over their estimated useful lives. Repairs and maintenance are charged to expense when incurred. DEFERRED COSTS Deferred financing costs are being amortized over the life of the corresponding debt, using the interest method. Costs of Panama contract (see Note 3) are amortized over the 20-year period of the Panama license, using the straight-line method. 33 ORGANIZATIONAL AND START-UP COSTS In April 1998, the AICPA issued Statement of Position 98-5, "Reporting of the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs associated with pre-opening and organization activities to be expensed as incurred. The Company made an early adoption of SOP 98-5 effective January 1, 1998 and, accordingly, wrote-off the unamortized balance of organizational and certain other deferred costs of $549,996. This amount is presented in the accompanying consolidated statement of income (loss) for the year ended December 31, 1998 as a cumulative effect of a change in accounting principle, net of provision for income taxes of $70,469 and minority interest of $76,600. ACCOUNTS RECEIVABLE Accounts receivable principally consists of amounts due from OTB agencies on thoroughbred races and from the operator of the electronic lottery in the Dominican Republic. As of December 31, 1999 and 1998, allowance for doubtful accounts amounted to $410,328 and $484,293, respectively. NOTES RECEIVABLE Notes receivable consist of short-term loans to horseowners to purchase horses as a means to improve the quality of racing. It also includes certain payments made to Panama horseowners to guarantee certain minimum amounts provided under the contract with Panama horseowners (see Note 4). These loans are payable when wagering in Panama reaches a certain level. CURRENCIES The Company consolidates its accounts with Galapagos and Equus-Comuneros whose functional currency are the Dominican Republic peso and the Colombian peso, respectively. The United States dollars ("US$") are also a recording currency in these countries. US$ are exchanged into these foreign currencies ("FC$") and vice versa through commercial banks and/or the central banks of the respective countries. The Company remeasures the monetary assets and liabilities of the foreign subsidiaries that were recorded in US$ into the FC$ using the exchange rates in effect at the balance sheet date (the "current rate") and all other assets and liabilities and capital accounts, at the historical rates. The Company then translates the financial statements of the foreign subsidiaries from FC$ into US$ using the current rates, for all assets and liabilities, and the average exchange rates prevailing during the year, for revenues and expenses. For the years ended December 31, 1999, 1998 and 1997, net exchange losses resulting from remeasurement of accounts, together with losses from foreign currency transactions, amounted to $25,701, $190,453 and $36,000, respectively, which amounts are included as operating expenses. Accumulated net losses from changes in exchange rates due to the translation of assets and liabilities of the foreign subsidiaries are included in partners' deficit and at December 31, 1999 and 1998 amounted to $656,501 and $103,355 (including $35,595 from unsettled intercompany transactions in 1998), respectively. The exchange rates in Dominican Republic as of December 31, 1999 and 1998 were US$1.00 to FC$16.00 and US$1.00 to FC$15.85, respectively. The average exchange rates in Dominican Republic prevailing during the years ended December 31, 1999, 1998, and 1997, were US$1.00 to FC$16.10, US$1.00 to FC$15.23 and US$1.00 to FC$14.44, respectively. The exchange rate in Colombia as of December 31, 1999 was US$1.00 to FC$1,874. The average exchange rate in Colombia prevailing during the year ended December 31, 1999 was US$1.00 to FC$1,733. The Company also consolidates its accounts with Equus-Panama whose functional currencies are the Panama balboas and the US$. Because these currencies are of equivalent value, there is no effect attributed to foreign currency transactions of Equus-Panama. 34 RECLASSIFICATIONS Certain amounts presented for 1998 and 1997 in the accompanying consolidated financial statements have been reclassified to conform to the 1999 presentation. 2. EL COMANDANTE RACE TRACK: OPERATING LICENSE El Comandante is owned by HDA. It is currently operated by HDA's wholly owned subsidiary, ECMC, pursuant to an operating license granted by the Puerto Rico Racing Board, which expires on December 14, 2004. The license provides ECMC the exclusive right to operate a racetrack in the San Juan Region, which encompasses the northern half of Puerto Rico, and to conduct all types of authorized betting, throughout the island of Puerto Rico, based on races held at El Comandante. The Company and HDA are primarily responsible to ensure that ECMC complies with all terms and provisions of the license and applicable regulations and orders of the Puerto Rico Racing Board. Upon its expiration in December 2004, there can be no assurance that a new operating license will be issued. However, ECMC and its predecessors have continuously operated the only thoroughbred racing facility in Puerto Rico since 1957. El Comandante's horse racing and pari-mutuel wagering operations are subject to substantial government regulation. Pursuant to the Puerto Rico Horse Racing Industry and Sport Act (the "Racing Act"), the Puerto Rico Racing Board and the Puerto Rico Racing Administrator (the "Racing Administrator") exercise significant regulatory control over El Comandante's racing and wagering operations. For example, the Racing Administrator determines the monthly racing program and approves the number of annual race days in excess of the statutory minimum of 180. The Racing Act also apportions payments of the wagering handle and thus the Racing Act could be amended through legislation to reduce the share of monies wagered that would be available as commissions. The Puerto Rico Racing Board consists of three persons appointed to four-year terms by the Governor of Puerto Rico. The Governor also appoints the Racing Administrator for a four-year term. EL COMANDANTE LEASE AND INTANGIBLE Until December 31, 1997 HDA leased El Comandante to El Comandante Operating Company, Inc. ("ECOC") under a lease agreement (the "El Comandante Lease") that required payments by ECOC to HDA of rent consisting of 25% of the annual commissions on wagering earned by ECOC. ECOC was required to pay all expenses of El Comandante except for real property taxes and the annual operating license fee (paid in 1997 by HDA). On January 1, 1998, upon termination of the El Comandante lease (i) ECOC transferred to ECMC, at book value, all assets employed in the racing business, (ii) ECMC assumed all agreements of ECOC and its liabilities and (iii) ECMC commenced operating El Comandante. Net liabilities assumed by ECMC amounted to $3,658,332, including $3.1 million due to HDA at December 31, 1997. Management made an internal valuation of the tangible assets acquired from ECOC and concluded that book value approximated its fair value. Due to the underlying value of the operating license granted by the Puerto Rico Racing Board, ECMC allocated the $3,658,332 to an intangible asset, to be amortized during the remaining period of the license through December 2004. 35 As a result of damage caused by Hurricane Georges to El Comandante and considering the delay in obtaining a new contract with the Puerto Rico horseowners association (contract expired in April, 1998, see Note 4), the Company assessed its investment in ECMC, following the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The Company assessed impairment of its non current assets, which included El Comandante intangible, based on a comparison of the aggregated undiscounted future cash flows from ECMC, as an individual entity, was less than net book value of ECMC's non current assets. Accordingly, the Company recognized an impairment loss of El Comandante intangible equivalent to its net book value as of December 31, 1998 of $3,135,713 in the consolidated statement of operations for the year ended December 31, 1998. 3. RACE TRACK LEASES: V CENTENARIO LEASE Galapagos leases and operates V Centenario in Santo Domingo, Dominican Republic from the Government pursuant to a 10-year agreement ending in April 2005. The contract may be renewed for additional ten-year periods by mutual agreement of the parties. The contract also provides Galapagos with the right to develop off-track betting in the Dominican Republic and the exclusive right to simulcast horse races, into the Dominican Republic. Galapagos pays rent to the Government based on a percentage of the annual wagering on races run at V Centenario ("V Centenario Wagering"), as follows: .25% of the first RD$240 million (approximately US$15 million), .5% of the next RD$240 million, .75% of the next RD$240 million and 1% over RD$720 million (approximately US$45 million). The Government agreed to invest a portion of its tax receipts on simulcasting wagering to improve horse racing in the Dominican Republic to be distributed between Galapagos and horseowners. Galapagos' share of these tax receipts, which is received as reimbursement for repairs and maintenance of the Government-owned facility at V Centenario, marketing and television costs and certain other items, is based on the following percentages: 75% effective July, 1997, 65% effective July, 1998 and 50% effective July, 1999. Horseowners are entitled to the balance as additional purses. The agreement expired in January 2000. The assistance provided by the Government is included in other revenues and for the years ended December 31, 1999, 1998 and 1997 amounted to $321,358, $339,782 and $438,169, respectively, excluding amounts paid to horseowners as additional purses. Management is currently negotiating an extension of this agreement. PRESIDENTE REMON LEASE Equus-Panama leases from the Government and operates Presidente Remon in Panama City, Republic of Panama pursuant to a 20-year agreement ending in December 2017. The contract also provides Equus-Panama the right to develop off-track betting in Panama and the exclusive right to simulcast horse races from and into Panama as well as the right to operate up to 500 slot machines at the racetrack. Upon execution of the contract, Equus-Panama paid $2.2 million to the Panama Government. Equus-Panama began simulcasting races from United States racetracks on January 2, 1998 and live racing commenced on February 14, 1998. 4. COMMITMENTS AND CONTINGENCIES: HORSEOWNERS' AGREEMENTS The Company has separate agreements with the horseowners association of each country that establishes the amount payable to horseowners as purses in exchange for the availability of thoroughbred horses for races. Payments to horseowners are, in general, based on a percentage of wagering. 36 The Panama contract expires in December 2007. It provides for minimum guaranteed payments to horseowners in 1999 and 1998 of $4.1 million and $3.8 million, respectively (including loans of $200,000 each year). The Dominican Republic contract expires in December 2005. The Colombia contract expires on December 31, 2009. It provides for certain minimum guaranteed payments to horseowners during the first three years ($1.2 million in 2000, increased in 2001 and 2002 in accordance with an inflation factor). The Puerto Rico contract expired in April 1998. However, the Puerto Rico Racing Board has extended the contract as an interim measure until the Company and the horseowners reach a new agreement. The contract is under negotiation at the present time. WAGERING SERVICES AGREEMENTS The Company has separate agreements with Autotote Systems, Inc. ("Autotote") for providing wagering services, software and equipment to each racetrack, necessary for the operation of the off-track betting system. Payments under these contracts are summarized as follows:
EL COMANDANTE V CENTENARIO REMON LOS COMUNEROS --------------- -------------- ------------- --------------- Expiration date March 2005 March 2005 January 2008 (d) Cost of services, as a percentage of wagering 0.65% 0.65% (a) 1.00% 1.20% Minimum amount per year $ 800,800 $ 200,000 (b) $ 330,000 (c) $ - (a) Galapagos also receives services for the distribution system of the electronic lottery. Fees to Autotote are 2% of gross sales at lottery agencies and 1% of gross sales at OTB agencies. (b) For year 1997, minimum annual payment was $175,000. (c) Based on a minimum monthly payment of $27,500 for 2000, increased each subsequent year, up to $36,000 in 2007. For years 1999 and 1998, the minimum annual payment was $300,000 and $318,000, respectively. (d) This contract is currently being renegotiated.
OTHER LONG-TERM AGREEMENTS The Company has also entered in other long-term contracts that are essential for the operation of its racetracks such as to guarantee television coverage in Puerto Rico. ECMC has an agreement with S&E Network, Inc. (S&E") that requires the purchase of television time for a minimum of 910 hours at the rate of $725 (effective February 1997) per hour, adjusted annually by CPI, or at the rate of $900 per hour, also subject to CPI adjustments, if television time after 7:00 PM is needed. The contract is non-cancelable by either party during the initial term, which expires on December 2006. The term is automatically extended for successive 5 years periods by request of ECMC. During this extended term, the contract can be canceled by S&E, upon payment of liquidating damages of $2 million plus CPI after January 1997. CONTRIBUTIONS In connection with the termination of the lease agreement of El Comandante, ECMC assumed certain commitments made by ECOC to make contributions to several charitable and educational institutions during a four-year period ending in 2001. These obligations are included in accounts payable and, at December 31, 1999 and 1998 amounted to $350,000 and $450,000, respectively. ECMC expects to make the remaining contributions as follows: $150,000 in 2000 and $200,000 in 2001. 5. FIRST MORTGAGE NOTES: On December 15, 1993, pursuant to a private offering, (i) El Comandante Capital Corp. ("ECCC"), a single-purpose wholly owned subsidiary of HDA, issued first mortgage notes in the aggregate principal amount of $68 million (the "First Mortgage Notes") under an indenture (the "Indenture") between ECCC, HDA and Banco Popular de Puerto Rico, as trustee (the "Trustee"), and (ii) HDAMC issued Warrants to purchase 68,000 shares of Class A Common Stock of HDAMC. In March 1995, the Warrants automatically became exercisable to purchase an aggregate of 1,205,232 units of the Company from HDAMC (see Note 6). Upon issuance of the Warrants, HDA recorded note discount of $2,040,000 equal to the fair value of the Warrants. Such note discount was being amortized using the interest method over the term of the First Mortgage Notes. The First Mortgage Notes mature on December 15, 2003 and bear interest at 11.75% payable semiannually. Payment of the First Mortgage Notes is guaranteed by HDA. The First Mortgage Notes are secured by a first mortgage on El Comandante and by certain other collateral which together encompass a lien on (i) the fee interests of HDA in the land and fixtures comprising El Comandante, (ii) all related equipment, structures, machinery and other property, including intangible property, ancillary to the operations of El Comandante, and (iii) substantially all of the other assets and property of HDA, including the capital stock of ECCC owned by HDA. During the past three years HDA has made early redemptions of First Mortgage Notes in connection with certain transactions. The Company has also purchased in the open market First Mortgage Notes which the Company intends to hold until maturity in cancellation of required partial redemptions in 2000 and 2001, as explained below. Following is a summary of these transactions:
HELD BY THE FACE (PREMIUM) COMPANY AT TYPE OF TRANSACTION DATE VALUE DISCOUNT 31-DEC-99 - ------------------------------ ------ ----------- ----------- ----------- Redemption Mar-97 $ 737,000 $ - $ - Redemption Sep-97 2,500,000 (250,000) - Purchase in open market Dec-98 7,500,000 1,000,000 7,500,000 Redemption, reduced by amount Jan-99 of notes held by the Company 2,620,000 (262,000) (a) (380,000) Purchase in open market May-99 189,000 22,680 189,000 ----------- ----------- $13,546,000 $7,309,000 ----------- ----------- (a) Recorded as an expense by the Company in 1998
In connection with these transactions, the Company wrote-off a portion of the note discount and deferred financing costs. The net effect is included in the accompanying consolidated statements of income (loss) as extraordinary items, net of provision for income taxes, as follows: 37
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 ------- ---------- ---------- Discount (premium) $22,680 $ 738,000 $(250,000) Write-offs - (464,146) (209,173) Provision for income taxes - (106,803) 133,160 ------- ---------- ---------- $22,680 $ 167,051 $(326,013) ------- ---------- ----------
ECCC is required to partially redeem First Mortgage Notes commencing on December 15, 2000. The stated maturities of the First Mortgage Notes at December 31, 1999, reduced by prior redemptions, are as follows (in thousands):
DUE DURING THE YEAR GROSS PURCHASED IN NET ENDING DECEMBER 31, AMOUNT OPEN MARKET AMOUNT - ------------------- -------- -------------- -------- 2000 $ 563 $ 563 $ - 2001 10,200 6,746 3,454 2002 10,200 - 10,200 2003 40,800 - 40,800 -------- -------------- -------- 61,763 7,309 54,454 Less - discount (943) (58) (885) -------- -------------- -------- $60,820 $ 7,251 $53,569 -------- -------------- --------
HDA may also redeem First Mortgage Notes at the following redemption prices (expressed as percentages of principal amount), in each case together with accrued and unpaid interest: DURING THE 12 MONTH PERIOD BEGINNING ON DECEMBER 15, - -------------------------- 1999 102.75% 2000 101.50% 2001 100.00% HDA is required to purchase First Mortgage Notes, at face value, to the extent that HDA has accumulated excess cash flow, asset sales with net proceeds in excess of $5 million (to the extent these proceeds are not invested in HDA's racing business within a year), or a total taking or casualty, or in the event of a change of control of HDA. The Indenture contains certain covenants, one of which restricts the amount of distributions by HDA to its partners, including the Company. Permitted distributions are limited to approximately 48% of HDA's consolidated net income. In connection with certain approval required from noteholders (see Note 10), HDA agreed to temporarily reduce these distributions by 17%. HDA is permitted to make additional cash distributions to partners and other Restricted Payments, as defined under the Indenture, equal to 44.25% of the excess of HDA's cumulative consolidated net income after December 31, 1993 over the cumulative amount of the 48% Distributions, provided that HDA meets a certain minimum debt coverage ratio. HDA has not met this debt coverage ratio. As of March 10, 2000, HDA has advanced to the Company approximately $1.3 million against its allowable future distributions of profits, which, technically, is not in conformity with the terms of the Indenture. HDA intends to cure this default with the declaration of future permitted distributions. 38 6. HDAMC WARRANTS Under the Warrant Agreement, the Company was not a "qualified public company" and therefore HDA, as guarantor of the obligation, made the offer to purchase 68,000 outstanding Warrants for cash, at a repurchase price of $15.49 per Warrant. The repurchase offer expired on December 15, 1998 when 48,127 Warrants were tendered for a total purchase price of $745,487. This payment, together with transaction costs, was charged to partners' deficit. Of the remaining Warrants, 15,216 were exercised in exchange for 269,688 Units of the Company and, 4,657 Warrants, neither tendered nor exercised, expired. Therefore, 935,557 of the Units previously held by HDAMC were distributed to the Company and are currently held in treasury. 7. BONDS AND NOTES PAYABLE AND CAPITAL LEASES: The Company's outstanding notes payable consist of the following:
BALANCE AT DECEMBER 31, MATURITY INTEREST ---------------------- BORROWER DESCRIPTION DATE RATE 1999 1998 - --------------- -------------- --------- --------- ---------- ---------- HDA/ECMC Note payable (a) 15-Dec-01 P+1.00% $5,500,000 $1,850,000 ECMC Note payable 5-Jan-00 P+1.00% - 649,100 Equus-Panama Term loan 25-Apr-00 10.75% 56,364 - Equus-Panama Line of credit (b) various 10.75% 204,955 142,697 Equus-Comuneros Term loans (c) various variable 464,763 - The Company Loan (d) - P+1.00% - 200,000 ---------- ---------- $6,226,082 $2,841,797 ---------- ---------- At December 31, 1999 and 1998, the prime rate (P) was 8.50% and 7.75%, respectively. (a) Considered Refinancing Indebtedness under the terms of the Indenture. Collaterized by the First Mortgage Notes purchased in the open market (see Note 5). Payable in quarterly installments commencing on March 31, 2000. Balance outstanding under the credit facility existing at December 31, 1998 was paid from proceeds of the Refinancing Indebtedness. (b) Maximum outstanding balance is $250,000. Available to finance loans to Panama horseowners for the acquisition of horses. Payable in equal monthly installments, principal and interest, with various maturity dates from April 25, 2000 to December 26, 2000. (c) Collaterized by a certificate of deposit for $140,000, which is included in the accompanying balance sheet as of December 31, 1999 as restricted cash. Management is in the process of renegotiating the terms of these financial obligations. Interest rates range from 7% to 14.01% over Colombia's Fixed Term Deposit (FTD) rate. FTD at December 31, 1999 was 15.75%. (d) Loan from Interstate Business Corporation ("IBC") (see Note 10).
39 HDA has a $500,000 revolving line of credit available until December 15, 2001 for its operational needs. Interest is calculated on balances outstanding at a rate equivalent to one point over prime rate. Principal is due upon maturity on December 15, 2001. In February 2000 HDA drew $500,000 under this credit facility. The Company also guarantees a $250,000 loan of the operator of the restaurant at Presidente Remon. The proceeds of this loan were used by Equus-Panama to finance improvements to the restaurant. In October 1998, Equus-Panama issued $4 million in unsecured bonds pursuant to a public offering. Interest is payable at 11% rate per annum on a quarterly basis. The bonds may be redeemed by Equus-Panama prior to June 30, 2001 at a redemption price of 102% of the principal amount and thereafter at par. There are certain restrictions that limit the capacity of Equus-Panama to incur indebtedness and pay dividends to shareholders. The following table summarizes future minimum payments on capital leases, notes payable and bonds of the Company and its consolidated subsidiaries:
DUE DURING THE YEAR CAPITAL NOTES BONDS ENDING DECEMBER 31, LEASES PAYABLE PAYABLE - ------------------- ----------- ----------- ---------- 2000 $1,444,017 $3,242,588 $ - 2001 953,016 3,117,949 600,000 2002 681,866 46,604 1,000,000 2003 517,755 40,469 1,200,000 2004 299,605 22,020 1,200,000 ----------- ----------- ---------- 3,896,259 6,469,630 4,000,000 Imputed interest (660,752) (243,548) - ----------- ----------- ---------- $3,235,507 $6,226,082 $4,000,000 ----------- ----------- ----------
8. RETIREMENT PLAN AND PENSION PLAN: RETIREMENT PLAN In 1998, the Company established a retirement plan for employees of its subsidiary, Equus Entertainment Corporation ("EEC"). Employees are eligible to participate in the retirement plan when they have completed a minimum of 1,000 hours of service. The Retirement Plan is a defined contribution plan which provides for contributions by the Company for the accounts of eligible employees in amounts equal to 4% of base salaries and wages not in excess of the U.S. Social Security taxable wage base, and 8% of salaries (limited to $160,000) that exceed that wage base. Eligible employees may also make voluntary contributions to their accounts and self direct the investment of their account balances in various investment funds offered under the plan. Contributions to the Retirement Plan amounted to $49,975 and $52,400 in 1999 and 1998, respectively. Prior to October 5, 1998, EEC's employees participated in the retirement plan of Interstate General Company L.P. ("IGC"), a former general partner of the Company. 40 PENSION PLAN ECMC has a non-contributory defined benefit pension plan covering substantially all of its nonunion employees. As a result of the transfer of ECOC assets, liabilities and commitments, HDA is now the sponsor of the nonunion employees pension plan. Benefits are based on the employee's years of service and highest average earnings over five consecutive years during the last 15 years of employment. ECMC's policy is to fund an amount not less than the ERISA minimum funding requirement or more than the maximum deductible under the Puerto Rico tax law. Pertinent information on this pension plan as of and for the years ended December 31, 1999 and 1998, is as follows:
1999 1998 ----------- ----------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $1,152,797 $ 926,531 Service cost 118,891 86,651 Interest cost 68,073 72,355 Actuarial (loss) gain (339,600) 49,540 Actuarial gain (loss) due to change in assumptions - 71,246 Benefit paid (405,279) (53,526) ----------- ----------- Benefit obligation at end of year 594,882 1,152,797 ----------- ----------- CHANGE IN PLAN ASSETS: Fair value of plan at beginning of year 623,532 419,389 Actual return on plan assets 53,692 41,660 Employer contribution 206,446 266,009 Benefits paid (405,279) (53,526) Administrative expenses (50,000) (50,000) ----------- ----------- Fair value of plan at end of year 428,391 623,532 ----------- ----------- Funded status (166,491) (529,265) Unrecognized net actuarial loss 42,584 341,127 Unrecognized transition obligation 65,319 78,383 Accrued benefit cost (58,588) (109,755) WEIGHTED-AVERAGE ASSUMPTION: Discount rate 7.90% 6.75% Expected return on plan assets 7.50% 7.50% Rate of compensation increase 4.00% 4.50% COMPONENTS OF NET PERIODIC BENEFIT COST: Service Cost 118,891 136,651 Interest cost 68,073 72,355 Expected return on plan assets (54,902) (37,808) Amortization of transition obligations 13,064 13,064 Recognized net actuarial loss 10,153 17,719 ----------- ----------- Net periodic benefit cost $ 155,279 $ 201,981 ----------- -----------
41 9. INCOME TAXES: The Company is organized as a partnership, which is not a taxable entity for United States tax purposes and incurs no federal income tax liability. As a result, each partner is required to take into account in computing its income tax liability such partner's allocable share of the Company's net taxable income. As a result of certain changes in the Company's corporate structure effective January 1, 1998, the partner's allocable share of the Company's net taxable income will be approximately equal to cash received during the year. The provision for income taxes included in the accompanying consolidated financial statements is attributable to (i) Puerto Rico income taxes on the results of operations of its Puerto Rico subsidiaries, EEC, HDA and ECMC and (ii) withholding taxes imposed by foreign countries on income earned by EEC, for which no foreign tax credit will be available in Puerto Rico, summarized as follows:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 -------- ---------- -------- Puerto Rico income taxes- Deferred $375,928 $1,145,945 $893,403 Current 204,892 - - Federal income tax, current - - 1,582 Foreign income tax, deferred 161,333 - - -------- ---------- -------- $742,153 $1,145,945 $894,985 -------- ---------- --------
The deferred income tax asset is mainly attributable to net operating losses carried-forward, for which a valuation allowance has been recorded. The deferred income tax liability as of December 31, 1999 and 1998 has the following components of deferred tax liabilities (assets), net of corresponding valuation allowance:
DECEMBER 31, ------------------------ 1999 1998 ----------- ----------- Puerto Rico income taxes- Depreciation $1,536,640 $2,859,688 Gain on involuntary conversion 1,513,569 1,057,413 Net operating losses of ECMC - (924,371) Contingency reserves - (298,560) Other (75,083) (94,971) Foreign withholding income taxes 190,674 29,340 ----------- ----------- $3,165,800 $2,628,539 ----------- -----------
10. RELATED PARTY TRANSACTIONS: LOAN FROM IBC In 1998 the Company obtained a $200,000 loan from IBC, the sole owner of Equus Management Company, ("EMC"), the managing general partner of the Company. The loan accrued interest based on the Citibank prime rate plus 1%, which at December 31, 1998 was 8.75%. The principal and accrued interest was paid in March 1999. 42 TRANSACTION WITH SUPRA On August 19, 1997, HDA redeemed for $4,075,000 the 17% interest in HDA held by Supra, thereby increasing the Company's interest in HDA to approximately 99%. The redemption price plus transaction costs of $239,284 were recorded in partners' deficit, net of the book value of Supra's minority interest in HDA of $1,531,934. The transaction required the approval from the majority in interest of outstanding First Mortgage Notes. SERVICES AMONG RELATED PARTIES The following represents a summary of amounts accrued for services rendered by or from certain related parties, namely, EMC, IBC, American Community Properties Trust ("ACPT") and Interstate General Company L.P. ("IGC") during the years ended December 31, 1999, 1998 and 1997:
FOR THE YEAR ENDED DECEMBER 31, ---------------------------- ENTITY NATURE OF SERVICE 1999 1998 1997 - ------------ --------------------------------- -------- -------- -------- RENDERED BY: ACPT Support agreement $ 40,400 $ 29,236 $ 28,607 ACPT Rent office space 42,000 42,000 - EMC Director fees 88,800 98,550 88,200 EMC Management agreement - - 278,673 EMC Expenses in excess of receipts - - 420,958 IBC Accounting services - 3,000 12,000 IGC Services of James J. Wilson 135,000 180,000 - IGC Other services on Virginia racing 18,041 - - RENDERED TO: IGC Services of Thomas B. Wilson on waste technology matters - 46,800 -
11. LEGAL PROCEEDINGS: Certain of the Company's subsidiaries are presently named as defendants in various lawsuits and might be subject to certain other claims arising out of its normal business operations. Management, based in part upon advice from legal counsel, believes that the results of such actions will not have a material adverse impact on the Company's financial position or results of operations. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS: As of December 31, 1999 and 1998 the fair value of the First Mortgage Notes was approximately $47,920,000 and $50,391,000, respectively, (as compared with its carrying value of $53,568,554 in 1999 and $56,194,460 in 1998) based on the market price quoted by a brokerage firm that trades the First Mortgage Notes. The carrying value of notes payable, capital leases and notes receivable approximates fair value because these obligations bear interest at variable rates. The carrying value of accounts receivable and accounts payable approximates fair value due to the short-term maturity thereof. 43 13. SEGMENT INFORMATION: The Company has identified four reportable segments, based on geographical considerations: Puerto Rico, Dominican Republic, Colombia and Panama. The accounting policies of the segments are the same as those described in the summary of accounting policies. The Company evaluates performance based on profit or loss before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses. The following presents the segment information for the years ended December 31, 1999, 1998 and 1997 (in thousands):
PUERTO DOMINICAN 1999: RICO REPUBLIC COLOMBIA PANAMA TOTAL -------- ---------- ---------- -------- -------- Commissions on wagering 52,076 $ 3,835 $ 1,445 $ 9,388 $66,744 Total revenues 54,681 5,316 1,646 9,682 71,325 Financial expenses 7,602 48 262 568 8,480 Depreciation and amortization 2,508 320 192 573 3,593 Loss before income taxes, minority interest and extraordinary item (641) (694) (1,831) (234) (3,400) Capital improvements 8,671 183 904 356 10,114 Total assets 54,792 1,842 5,120 9,189 70,943 1998: Commissions on wagering $41,081 $ 3,640 $ - $ 7,808 $52,529 Total revenues 55,350 5,747 - 7,876 68,973 Financial expenses 8,669 121 - 319 9,109 Depreciation and amortization 2,928 364 - 464 3,756 Earnings (loss) before income taxes, minority interest, extraordinary item and cumulative effect 1,518 (815) - (1,345) (642) Capital improvements 5,373 52 - 4,793 10,218 Total assets 52,455 2,049 950 8,585 64,039 1997: Total revenues $18,810 $ 5,773 $ - $ - $24,583 Financial expenses 8,656 79 - - 8,735 Depreciation and amortization 1,841 527 - - 2,368 Earnings (loss) before income taxes, minority interest and extraordinary item 5,811 (1,100) - 4,711 Capital improvements 649 232 - 542 1,423 Total assets 50,824 2,330 - 3,033 56,187
44 Effective January 1, 1998 EEC, which is based in Puerto Rico, provides management services to the foreign countries in connection with the operation of the racetracks and the off-track betting system. Fees for these services represent an intersegment revenue. For the years ended December 31, 1999 and 1998, Puerto Rico recognized revenue of $186,021 and $180,763, respectively, attributable to Dominican Republic and $159,575 attributable to Panama. No fees were charged to Panama in 1998 due to restrictions under its bonds. 14. UNAUDITED PROFORMA FINANCIAL STATEMENTS: In August 1997, HDA redeemed a 17% interest owned by a minority partner, thereby increasing the Company's interest in HDA to approximately 99% and effective January 1, 1998, it terminated the lease agreement with ECOC and commenced operating El Comandante through its wholly owned subsidiary, ECMC (the "Proforma Transactions"). The following unaudited proforma consolidated statement of operations for the year ended December 31,1997 is based upon the historical consolidated statement of operations of the Company and its subsidiaries, and was prepared as if the above described transactions had all occurred on January 1, 1997. Proforma adjustments include results of operations of ECOC for the year ended December 31, 1997. The unaudited proforma consolidated statement is not necessarily indicative of what the actual results of operations of the Company would have been assuming such Proforma Transactions had been completed as of January 1, 1997 and does not purport to represent the results of operations for future periods. In Management's opinion, all adjustments necessary to reflect the effects of these Proforma Transactions have been made. 45
EQUUS GAMING COMPANY L.P. PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) 1997 ------- (UNAUDITED) REVENUES: Commissions on wagering $59,512 Net revenues from lottery services 88 Gain from sale of Television Stations 4,669 Other revenues 3,949 ------- 68,218 ------- EXPENSES: Payments to horseowners 29,669 Salaries, wages and employee benefits 8,665 Operating expenses 6,969 General and administrative 4,794 Marketing, television and satellite costs 3,130 Financial expenses 9,013 Depreciation and amortization 3,303 ------- 65,543 ------- EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEM 2,675 PROVISION FOR INCOME TAXES 505 ------- EARNINGS BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM 2,170 MINORITY INTEREST IN EARNINGS 878 ------- EARNINGS BEFORE EXTRAORDINARY ITEM 1,292 EXTRAORDINARY ITEM 1,558 ------- NET EARNINGS $ 2,850 ======= ALLOCATION OF NET EARNINGS: General partners $ 28 Limited partners 2,822 ------- $ 2,850 ======= BASIC AND DILUTED PER UNIT AMOUNTS: Earnings before extraordinary item 0.20 Extraordinary item 0.25 ------- Net earnings $ 0.45 ======= WEIGHTED AVERAGE UNITS OUTSTANDING 6,334 =======
46 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND EMC MANAGING PARTNER OF THE COMPANY Equus Management Company ("EMC") is the managing general partner of the Company and, as such, has full and exclusive responsibility and authority to manage the Company, including declaring and authorizing cash distributions, making employment decisions, determining executive compensation and making investment decisions and other decisions normally made by executive officers and directors of a corporation. EMC does not engage in any activities other than managing the business of the Company. EMC is governed by its Board of Directors, which currently consists of eight persons. Directors will be elected in the future either by Interstate Business Corporation ("IBC"), as the parent company of EMC, or by the directors then holding office subject to certain limitations, including that at least two of the directors be independent of the Company, IBC and Interstate General Company L.P. ("IGC"). Thus, Unitholders do not have the power to elect EMC's directors. The officers of EMC are elected by its Board of Directors. All officers of EMC are employees of Equus Entertainment Corporation ("EEC"), a wholly owned subsidiary of the Company. At present, two of EMC's directors are directors and officers of IGC's managing general partner and two of EMC's directors are directors and officers of IBC. Also, one EMC's director is a trustee of American Community Property Trust ("ACPT"). The adult children of James J. and Barbara A. Wilson own approximately 99.4% of IBC and 100% of The Wilson Family Limited Partnership ("WFLP"). The Wilson family and companies controlled by them, including IBC and WFLP, hold approximately a 67% interest in the Company, a 54.25% interest in IGC and a 50.89% interest in ACPT. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND EMC The table below sets forth the name, age and positions with the Company and EMC of each director and executive officer of EMC and each executive officer of the Company. NAME AGE POSITIONS WITH THE COMPANY AND EMC ---- --- --------------------------------------- James J. Wilson 66 Co-Chairman and Director of EMC Thomas B. Wilson 37 Co-Chairman, President and Chief Executive Officer; Director of EMC Hernan G. Welch 50 Executive Vice President - Finance and Administration Gretchen Gronau 35 Vice President and Chief Financial Officer 47 Juan M. Rivera-Gonzalez 52 Vice Chairman and Director of EMC Donald J. Kevane 69 Director of EMC Alberto M. Paracchini 67 Director of EMC Barbara A. Wilson 63 Director and Secretary of EMC Mark Augenblick 52 Director of EMC Kevin Wilson 41 Director of EMC Charles Cuprill 56 Director of EMC RELATIONSHIPS. James J. Wilson and Barbara A. Wilson are the parents of Thomas B. Wilson and Kevin Wilson. Certain additional information concerning the above persons is set forth below. James J. Wilson was Chairman and President of EMC from its formation in 1994 - ----------------- until February 1996 when he resigned. He was reelected Chairman of the Board of Directors of EMC in October 1998. He has been Chairman of the Board and Chief Executive Officer of the general partner of IGC, since 1986. He is the founder of IGC and has been Chief Executive Officer of IGC and its predecessors since 1957. He is the founder of IBC and its predecessors. Thomas B. Wilson has been President and Chief Executive Officer of EMC and the - ------------------ Company since January 1998 and Director of EMC since February 1998. He has been a Director of IGMC since December 1995 a Director of IBC since 1994 and a Vice President of IBC since September 1994. From 1994 to December 1997 he was President of El Comandante Operating Company, Inc.("ECOC"). Hernan G. Welch has been Executive Vice President - Finance and Administration - ---------------- of EMC and the Company since July of 1999. From 1994 to July of 1999 he was in public accounting and served as an International Audit and Consulting Partner with the international firm of Ernst & Young. He was in charge of multinational engagements involving financial accounting and reporting, and financial management services for multinational companies in industries such as entertainment and high technology, energy, telecommunications and financial services. He served as an expatriate executive in Latin America for the firm from 1997 to 1999. He started his professional career with the U.S. Treasury Department in 1974 and then pursued a public accounting career from 1979 through 1999 as a CPA. Gretchen Gronau has been Vice President and Chief Financial Officer of the - ---------------- Company and EMC since August 1996. From May 1990 to August 1996 she served in various tax and financial management positions with IGC, including Vice President from August 1994 to August 1996. She has served as Assistant Treasurer of IBC since October 1996. Juan M. Rivera-Gonzalez was Executive Vice President and Chief Operating Officer - ----------------------- of EMC and the Company since January 1998 and Director of EMC since February 1998, until he resigned in September 1999 to practice law and serve as legal counsel of the Company. From January 1996 to December 1997 he was Executive Vice President of the Company. From September 1995 to December 1995 he served as Vice President of the Company and was also Vice President of IGC from 1994 to April 1996. From April 1991 to December 1993 he was President and General Manager of ECOC. 48 Donald J. Kevane has been a Director of EMC since its formation in 1994. He is - ----------------- a certified public accountant and senior partner in the Puerto Rico accounting firm of Kevane Peterson Soto & Pasarell LLP, which he founded in 1975. He is also a director since 1990 of Venture Capital Fund, Inc., a Puerto Rico-based venture capital firm and a director since 1992 of the Autoridad de Energia Electrica (the Puerto Rico Electric Power Authority), and, since 1975, a director of GM Group, Inc,, a wholly owned subsidiary of Banco Popular de Puerto Rico. Alberto M. Paracchini has been a Director of EMC since its formation in 1994. - ----------------------- He has been a director of BanPonce Corporation, now Popular Inc., and Banco Popular de Puerto Rico since January 1991, and was Chairman of the Board from January 1991 to April 1993. He is Vice Chairman of the Board of Puerto Rican Cement Company, Inc. and a director of Venture Capital Fund, Inc., a Puerto Rico-based venture capital firm. Barbara A. Wilson has been a Director of EMC since January 1996 and Secretary of - ----------------- EMC since August 1996. She served as Director of IGMC from December 1995 to 1996. She has been a Director of IBC since 1987, Chairman of the Board since March 1996, Secretary since 1990 and Treasurer since 1993. Mark Augenblick has been a Director of EMC in March, 1998. He has been a - ---------------- Director and Vice Chairman of IGMC since March 1998. Prior to joining the Company, Mr. Augenblick was a partner in the Washington, D.C. law firm, Shaw Pittman, Potts & Trowbridge. Kevin Wilson has been a Director of EMC since September 1996. He has been the - ------------- President, Director and majority owner since 1989 of Community Homes, Inc., a homebuilding company of which he was a co-founder. Charles A. Cuprill has been a Director of EMC since December 1999. Mr. Cuprill - ------------------ has been practicing civil law in Puerto Rico since 1972. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS Mr. Charles A. Cuprill filed late on March 21, 2000 a Form 5 to report annual changes in his beneficial ownership of Units of the Company for December 1999. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE. The following table sets forth the aggregate compensation with respect to the Chief Executive Officer and each of the other four most highly compensated executive officers of the Company during 1999, employed by its wholly-owned subsidiary EEC effective January 1, 1998. Prior 1998, two of these executives were employees of EMC and, accordingly, their compensation for years before 1998 is also included in the table. 49
LONG-TERM COMPENSATION ------------ AWARDS ANNUAL COMPENSATION ------------ --------------------------------- SECURITIES OTHER UNDERLYING ALL OTHER ANNUAL OPTIONS/ COMPEN- NAME AND PRINCIPAL SALARY BONUS COMPENSATION SAR'S SATION POSITION YEAR ($) ($) ($) (#) (1) ($) (2) - --------------------------- ------ ---------- ------------- ------ ------- ------- Thomas B. Wilson 1999 249,800 - - - 9,527 President and CEO 1998 240,200 (3) - - - - 1997 - - - - - Hernan G. Welch (4) 1999 89,530 - - - - Executive Vice - - - - - - President - Finance - - - - - - and Administration Gretchen Gronau 1999 130,400 - - - 7,354 VicePresident 1998 125,200 - - 10,000 7,264 and CFO 1997 100,200 - - SAR 5,400 Juan M. Rivera-Gonzalez (5) 1999 240,800 - - - - Executive Vice 1998 240,200 - - 10,000 10,064 President and COO 1997 180,000 50,000 - SAR 5,400 Angel Blanco-Bottey (6) 1999 105,270 45,500 - - - Senior Vice 1998 160,200 - - - - President 1997 - - - - - (1) Represents Unit Appreciation Rights assumed by the Company, as discussed below. (2) Reflects contributions to Retirement Plan discussed below. (3) During 1998 a subsidiary of IGC engaged in the development of solid waste treatment facilities reimbursed the Company approximately $46,800 for actual payroll costs attributed to time spent by Mr. Wilson on waste technology matters. (4) Mr. Welch was hired as an executive of the Company effective July 1999 with an annual base salary of $200,000. (5) Effective September 17, 1999 Mr. Rivera-Gonzalez resigned as an officer of the Company and was retained as a consultant and Vice Chairman of EMC. His salary for 1999 includes a payment of $58,400 for accrued and unpaid vacations. (6) This executive was an employee of the Company through July 12, 1999.
50 RETIREMENT PLAN. In 1998, the Company established its own retirement plan for employees of its subsidiary EEC. Employees are eligible to participate in the retirement plan when they have completed a minimum employment period of 1,000 hours. The Retirement Plan is a defined contribution plan which provides for contributions by the Company for the accounts of eligible employees in amounts equal to 4% of base salaries and wages not in excess of the U.S. Social Security taxable wage base, and 8% of salaries (limited to $160,000) that exceeded that wage base. Eligible employees may also make voluntary contributions to their accounts and self direct the investment of their account balances in various investment funds offered under the plan. Contributions to the Retirement Plan amounted to $49,975 in 1999. Prior to October 5, 1998, EEC's employees participated in IGC's retirement plan. DIRECTORS. Directors of EMC who are not employees of the Company or any of its subsidiaries receive directors' fees established by the Board of Directors of EMC. These Directors are compensated at a rate of $3,750 per quarter, $1,000 per meeting and out-of-pocket expenses for meetings. In 1999, the directors' fees totaled $88,800 of which $15,000 was unpaid as of December 31, 1999. Mr. James Wilson does not receive director's fees; instead, the Company pays a fee to IGC who, in turn, pays Mr. Wilson's compensation. During 1999 fees to IGC for Mr. Wilson services amounted to $135,000. The Company entered into a consulting agreement with Juan M. Rivera-Gonzalez effective October 1, 1999 whereas Mr. Rivera-Gonzalez receives annual compensation of $100,000 for his services, including his position as Vice Chairman. The agreement is cancelable by either party upon 30 days written notice. UNIT APPRECIATION RIGHTS. As of December 31, 1999, there are 10,000 Unit Appreciation Rights ("UAR") outstanding corresponding to one executive, fully vested and exercisable, which will expire on October 18, 2004. The UAR entitle the holder to receive, upon exercise, an amount payable in cash, Units of the Company, securities in another company or some combination thereof, as determined by EMC's Board of Directors. The amount received upon exercise is based on the excess of the fair market value of the UAR over a fixed base price. During 1999, there were no UAR exercised or granted and 10,000 were canceled. As of December 31, 1999, the unexercised in-the-money UAR had no value. The Company intends to adopt a Share Incentive Plan to provide for unit-based incentive compensation for officers, Key employees and Directors. 51 ITEM 12. SECURITY OWNERSHIP OF CERTAIN UNITHOLDERS AND MANAGEMENT The following table sets forth certain information regarding the Units that are beneficially owned as of March 22, 2000 (i) by each director of EMC or executive officer of EMC or the Company, (ii) by all directors of EMC and executive officers of EMC or the Company, as a group, and (iii) by each person who is known by EMC or the Company to beneficially own more than 5% of the outstanding Units of the Company. Except where noted, the address for the beneficial owner is Doral Building, 7th Floor, 650 Munoz Rivera Avenue, Hato Rey, PR 00918.
BENEFICIAL OWNERSHIP (1) ------------------- NUMBER OF NAME OF BENEFICIAL OWNERSHIP UNITS PERCENT - ---------------------------------------------------- --------- -------- MANAGEMENT AND DIRECTORS Barbara A. Wilson (2) 50 0.00% Kevin Wilson (2) 86,397 1.03% Thomas B. Wilson (2) 86,397 1.03% Donald J. Kevane 1,000 0.01% Alberto Paracchini 25,000 0.30% Charles A. Cupril 10,000 0.12% Hernan G. Welch 5,000 0.06% Gretchen Gronau 900 0.01% All executive officers of EMC and the Company and directors of EMC, as a group (8 persons) 214,744 2.56% OTHER UNITHOLDERS The Wilson Family Limited Partnership ("WFLP") (2) 222 Smallwood Village Center St. Charles, Maryland 20602 5,093,088 60.71%
- -------------------------------------------------------------------------------- (1) The beneficial ownership of Units was determined on the basis of Units directly and indirectly owned by executive officers and directors of EMC and Units to be issued under options that are exercisable within the next 60 days. (2) WFLP is owned by the adult children of James J. and Barbara A. Wilson, including Kevin Wilson and Thomas Wilson. However, because neither Kevin Wilson nor Thomas Wilson is a general partner in WFLP, the Units of the Company owned by WFLP are not considered beneficially owned by them. 52 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information responding to this item appears in Note 10 to the Company's consolidated financial statements included in Item 8 of this report. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K INDEX TO FINANCIAL STATEMENTS. (i) Financial Statements (included in Item 8) Equus Gaming Company L.P. Report of Independent Public Accountants Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 1999, 1998 and 1997 Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Changes in Partners' Deficit for each of the three years in the period ended December 31, 1999 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements EXHIBITS.
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 53 3.6 Fourth Amendment to Certificate of Exhibit 3.6 to Annual Report Limited Partnership of the Company on Form 10-K of the Company for the year ended ecember 31, 1997 ("1997 10-K") 5.1 Form of Unit Certificate Exhibit 5.1 to Form S-11 10.2 Indenture dated December 15, 1993, Exhibit 5.1 to Registration among El Comandante Capital Corp. Statement on Form S-5 ("ECCC"), as Issuer, Banco Popular yNo. 33-75285 of HDA, de Puerto Rico as Trustee ("Banco ECCC and El Comandante Popular") and HDA as Guarantor Operating Company, Inc. (the "Indenture") ("ECOC") ("Form S-5") 10.3 First Supplemental Indenture dated Exhibit 10.27 to Form S-11 December 22, 1994 to the Indenture 10.4 Second Supplemental Indenture dated Exhibit 10.28 to Form S-11 December 22, 1994 to the Indenture 10.7 Amended and Restated Management Exhibit 10.6 to Form S-4 Agreement dated December 15, 1993, between Interstate General Properties Limited Partnership S.E. ("IGP") and HDA 10.11 Stock Pledge Agreement dated Exhibit 10.12 to Form S-4 December 15, 1993, between HDA and Banco Popular 10.12 Pledge Agreement (Mortgage Notes) Exhibit 10.13 to Form S-4 dated December 15, 1993 between HDA and Banco Popular 10.13 Chattel Mortgage dated December Exhibit 10.15 to Form S-4 15, 1993, between ECOC and HDA 10.15 Assignment Agreement (General Exhibit 10.16 to Form S-4 Intangibles) dated December 15, 1993, between HDA and Banco Popular 10.16 Pledge Agreement between ECCC and Exhibit 10.17 to Form S-4 Banco Popular 10.17 Mortgage Note of $52,000,000 of HDA Exhibit 10.18 to Form S-4 54 10.18 Mortgage Note of $26,000,000 of HDA Exhibit 10.19 to Form S-4 10.19 Deed of Modification and Extension Exhibit 10.20 to Form S-4 of First Mortgage to Secure Additional Mortgage Note, No. 43, dated December 15, 1993 10.20 HDA Note in the amount of Exhibit 10.21 to Form S-4 $68,000,000 to ECCC dated December 15, 1993 10.22 Consulting Agreement dated December Exhibit 10.21 to Form S-11 15, 1993 between ECOC and IGP 10.26 Lease Agreement dated September 28, Exhibit 10.21 of the Annual 1994 between the Dominican Republic Report on Form 10-K of and Galapagos, S.A.("Galapagos") HDA for the year ended December 31, 1994 ("1994 HDA 10-K") 10.27 Founders' Agreement among Exhibit 10.22 to 1994 Galapagos, HDA and Minority HDA 10-K Stockholders 10.28 Management Agreement dated September Exhibit 10.23 to 1994 28, 1994, between Galapagos and HDA 10-K ECOC 10.34 Third Supplemental Indenture dated Exhibit 10.34 to Annual February 27, 1996 to the Indenture Report on Form 10-K of the Company for the year ended December 31, 1995 ("1995 10-K") 10.35 Fourth Supplemental Indenture dated Exhibit 10.35 to 1995 10-K February 27, 1996 to the Indenture 10.44 Assignment and Assumption of Exhibit 10.44 to 1995 Consulting Agreement dated April 10-K/A 22, 1996 10.49 Closing Agreement by and among S&E, Exhibit 10.49 to 1996 10-K Paxson, Equus and HDA dated January 21, 1997 10.50 Control Transfer Agreement by and Exhibit 10.50 to 1996 10-K among IBC, IGC, IGP, HDA, EMC and the Company dated December 31, 1996 55 10.51 Amendment to Control Transfer Exhibit 10.51 to 1996 10-K Agreement by and among IBC, IGC, IGP, HDA, EMC and the Company dated March 25, 1997 10.52 Broadcast Agreement among S&E, Exhibit 10.52 to 1996 10-K HDA and Paxson dated January 21, 1997 10.57 Fifth Supplemental Indenture dated Exhibit 10.2 on Quarterly November 14, 1997 to the Indenture Report on Form 10-Q of the Company for the Quarter ended September 30, 1997 10.58 Asset Purchase and Sale Agreement Exhibit 10.58 to 1997 by and between El Comandante 10-K Management Company LLC ("ECMC") and ECOC dated December 19, 1997 10.59 Second Amendment to Control Exhibit 10.59 to 1997 Transfer Agreement by and among 10-K IBC, IGC, IGP, HDA, EMC and the Company dated December 19, 1997 10.60 Guaranty Agreement by and between Exhibit 10.60 to 1997 EMC and IGC dated December 30, 1997 10-K 10.61 Agreement to Retire Partnership Exhibit 10.61 to 1997 Interest of Interstate General 10-K Company, L.P. in Equus Gaming Company, L.P. by and among the Company, IGC, EMC, EMTC and HDA dated December 30, 1997 10.62 Ninth Amended and Restated Exhibit 10.62 to 1997 Partnership Agreement of HDA 10-K dated December 31, 1997 10.68 First Amendment to Ninth Amended Exhibit 10.68 to Annual Report on and Restated Partnership Agreement Form 10-K of the Company for the of HDA dated October 2, 1998 year ended December 31, 1998 ("1998 10-K") 10.69 Stock Purchase Agreement dated Exhibit 10.69 to 1998 10-K as of March 1, 1999 21 Subsidiaries of the Company Filed herewith
REPORTS ON FORM 8-K. None 54 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Equus Gaming Company L.P. ---------------------------- (Registrant) By: Equus Management Company Managing General Partner March 24, 2000 /s/ Thomas B. Wilson - ---------------- ---------------------------------------- Thomas B. Wilson Co-Chairman, President, Chief Executive Officer and Director March 24, 2000 /s/ Hernan G. Welch - ---------------- ---------------------------------------- Hernan G. Welch Executive Vice President Finance and Administration March 24, 2000 /s/ Gretchen Gronau - ---------------- --------------------------------------- Gretchen Gronau Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATE TITLE SIGNATURE - ---- ----- --------- March 24, 2000 Co-Chairman /s/ James J. Wilson - ---------------- ------------------------------ James J. Wilson March 24, 2000 Co-Chairman, President, /s/ Thomas B. Wilson - ---------------- Chief Executive Officer ------------------------------ and Director Thomas B. Wilson March 24, 2000 Vice Chairman and Director /s/ Juan M. Rivera - ---------------- ------------------------------ Juan M. Rivera March 24, 2000 Director /s/ Donald J. Kevane - ---------------- ------------------------------ Donald J. Kevane March 24, 2000 Director /s/ Alberto M. Paracchini - ---------------- ------------------------------ Alberto M. Paracchini March 24, 2000 Director /s/ Charles A. Cupril - ---------------- ------------------------------ Charles A. Cupril 55 EX-21 2 EXHIBIT 21 EQUUS GAMING COMPANY L.P. LIST OF SUBSIDIARIES OF THE REGISTRANT 1- Equus Entertainment Corporation (see NOTE A) 2- Virginia Turf Club, Inc. 3- Equus Comuneros S.A. 4- Equus Entertainment de Panama, S.A. 5- Galapagos, S.A. NOTE A: Equus Entertainment Corporation has a subsidiary, Housing Development Associates, S.A., which in turn has the following subsidiaries: 1 - El Comandante Capital Corp. 2 - El Comandante Management Company LLC 3 - Agency Betting Network, Inc. 4 - Satellite Services International, Inc. EX-27 3
5 1000 YEAR DEC-31-1999 JAN-31-1999 DEC-31-1999 2308 0 3084 0 0 0 0 18410 70942 0 0 0 0 (14785) 70942 0 71325 0 0 66244 0 0 8480 (3400) 742 (3113) 0 22 0 (3090) (.39) (.39)
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