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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, 2000 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 In January 2001 the Company was delisted
beneficial assignment certificates from the Nasdaq Stock Market.
("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 31, 2001, the aggregate market value of 3,082,892 Units held by
non-affiliates of the registrant was $2,620,458.
Documents Incorporated By Reference: Not Applicable
EQUUS GAMING COMPANY L.P.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Class A Units and Related
Unitholder Matters 10
Item 6. Selected Financial and Operating Data 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 54
PART III
Item 10. Directors and Executive Officers of the Company
and EMC 54
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain Unitholders and
Management 58
Item 13. Certain Relationships and Related Transactions 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 59
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 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").
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 and in 2000 a controlling 100%
interest in Equus-Uruguay, S.A.
The company also has a controlling 100% interest in Satellite Service
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 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 is expected to operate in Bogota,
Medellin and other major cities.
At the present time, the Company is expanding and implementing a
high-technology satellite communication (video and data -VSAT system) eventually
reaching all OTB agencies in its system. The consolidation of the Company's
telecommunication needs via this system will ensure greater efficiency and
reliability, both for local distribution within each jurisdiction and for
integration of its wagering markets into a single network.
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 racetrack and at independently-owned OTB agencies that are
linked via on-line computers to El Comandante. During 2000, there were
approximately 650 OTB agencies in operation. Management expects to open an
additional 50 OTB agencies in the year 2001.
1
Since commencing the on-line wagering system, all of El Comandante's races
have been broadcast via commercial television in Puerto Rico. The contract for
production of the televised program expired in December of 2000 and as of
January of 2001 production was integrated with the racetrack's operations at a
substantial saving. The telecast permits OTB patrons to monitor odds and
handicapping information until post time and then to view the live race. Live
races are currently broadcasted through an agreement with S&E Network, Inc.
("S&E"). The Company is implementing a high technology communication system
(data and video-VSAT) with a satellite link (HUB) in Puerto Rico having the
capacity to simulcast live races to other operations and to countries in the
Caribbean and South America.
ECMC has a new contract effective July 1, 2000 with the Puerto Rico
horseowners confederation requiring that horseowners supply sufficient horses to
conduct racing operations in accordance with the racing program approved by the
Puerto Rico Racing Board, which stipulates a minimum of forty (40) races per
week. 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 and its amendment of March 16, 2001 expires on December
31, 2010.
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 racetrack 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.
ECMC could face competition if an application that has been filed with the
Racing Board for a competing race track outside the San Juan Region in the south
western part of the island is approved. Public hearings began in December,
2000. The competing application is requesting that racing days be split
between ECMC and the proposed race track. If approved, and built, the proposed
race track would compete for the already shortage of horses, OTB agencies and
wagering dollars. This would materially impact the ability for ECMC to survive.
Management is opposing the proposed race track on the basis that two (2) race
tracks cannot operate in the Puerto Rico market.
EMPLOYEES. ECMC had approximately 241 employees as of December 31, 2000.
There were 70 employees working in the mutuel, print shop, racing closed circuit
television and help desk departments covered by a collective bargaining
agreement between ECMC and El Comandante Racetrack Employees Union, which
expired August 23, 1998 and was renewed in January 15, 2001 for a three-year
period; 100 employees performing building and premises maintenance services
covered by a collective bargaining agreement between ECMC and the General
Workers Union, which began March 1, 2000, for a three year period. There were 71
employees working in administrative positions. 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 yearly renewable options, which have since been
exercised, commencing in January 2000. In an effort to evaluate its personnel
needs and requirements, ECMC implemented a computerized accounting and
management information system that has resulted in a reduction in the number of
employees from 241 to 180 as of March 15, 2001.
2
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
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. During the year 2000, the
Dominican Republic government authorized its National Racing Commission to
initiate negotiations to extend the agreement for an additional ten-year period.
At December 31, 2000 there were approximately 265 installed and 202
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. During the year 2001, the Company expects to complete
the installation of the video and data transmission system (VSAT) with a
communications center that will be more efficient, reliable and economical than
conventional telephone lines and television airtime.
Currently, live racing is conducted three days per week with a six-race
card. Full card wagering on simulcast races from El Comandante is offered five
days a week. During the year 2001 Galapagos, S.A. will participate in an
international pool bet (pick 3, 6, 9) on simulcast races from the United States
which management believes will attract local racing fans because of potentially
large pool prizes. During the first quarter of 2001, the Company presented to
the Dominican Republic government a legislative proposal to reduce taxes by
avoiding double taxation in the Dominican Republic and Puerto Rico on winning
tickets. The proposed legislation also provides for economic and investment
incentives to further improve the racing program and betting options, increase
the pool of horses and upgrade video transmission.
In 2001, Galapagos S.A. has applied to the Government for a sports book
license. If approved, this would be an added source of revenue for the Company.
LOTTERY. Galapagos has a five-year contract with a private operator
(Autotote) 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 agencies
selected by the lottery operator. Galapagos' commissions (net of fees paid to a
third party) 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 also selects the lottery agencies
to take Pick 6 pool wagers on Galapagos' live and simulcast races.
In June 2000 the operator unilaterally discontinued using the Company's
wagering distribution system and entered into a private agreement with the
service provider. At the present, this and other issues are the subject of
arbitration proceedings.
COMPETITION. Galapagos faces competition from other forms of gambling in
the Dominican Republic. The Dominican Republic Government operates a ticket
lottery and an electronic lottery throughout the country. The electronic
lottery which commenced operations in November 1997 has steadily increased its
share of the gaming market. Lottery wagering shows strong cyclical patterns
directly linked to the amount accumulated in the jackpot. The lottery which
carried jackpot prizes exceeding US$6 million on two Saturdays in 2000 decreased
3
the betting handle on the best racing day of the week. The pick-6 wager
represents roughly 40% of betting handle. There are approximately 3,000
independent sports betting agencies in the Dominican Republic. There were
approximately 153 OTB agencies at December 31, 2000. Wagering on baseball is
particularly popular. 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 139 employees at December 31, 2000. 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 racetrack 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,
the right to operate up to 500 slot machines and sport betting at the racetrack.
Upon execution of the contract, Equus-Panama paid $2.2 million to the Panama
Government. Equus-Panama began simulcasting races from the United States on
January 2, 1998 and live racing commenced on February 14, 1998, after major
improvements to the racing strip and facilities.
At December 31, 2000, there were 125 OTB agencies in Panama City.
Equus-Panama has contracted with a third party to supply slot machines and
a sport book operation at the racetrack. The third party operator has installed
125 slot machines and set-up a sports book operation. Final approval of the
license occurred in April 2001.
At the present time, live racing at Presidente Remon is transmitted via
microwave. 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 Panama, including remote
parts of the country where video and communication coverage has 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 cards,
dice games and slot machines plus 15 slot machine parlors. The Panama
Government has operated a lottery for more than 50 years.
EMPLOYEES. At December 31, 2000, 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 these operations, Los Comuneros hosted one live meet per week with an average
handle of approximately $100,000, and employed an OTB system with a limited
number of sites and technology. During 2000 Los Comuneros operated
approximately 150 OTB agencies. Wagering revenues from those agencies was
minimal due to limitations in the number of live races and a lack of simulcast
races from other countries.
In December 2000 the Racing Board approved more live races and simulcasting
from other countries. In 2000, the Company entered into a totalizator agreement
with United Tote for state-of-the-art terminals that is expected to increase
significantly OTB agency betting.
4
The OTB agency network operated by ABN, a wholly owned Puerto Rican
subsidiary of the Company, will be equipped with improved satellite video and
data communication equipment with the capacity to service major cities in
Colombia. As of December 31, 2000, approximately 85 ABN antennas were installed
in Colombia.
ABN has also applied to the Government for a Sports Betting license
(gambling machines). If granted, it could have a material positive impact on
future earnings.
COMPETITION. Equus-Comuneros faces competition from other forms of
legalized gambling in Colombia, including a lottery system.
EMPLOYEES. At December 31, 2000 Equus-Comuneros had 120 employees. On
race days there are an additional 55 employees operating the betting system.
E. URUGUAY OPERATIONS
In 2000, the Company was awarded exclusive rights by the Government of
Uruguay to operate the Maronas racetrack in Montevideo and an off-track betting
agency network together with the right to operate up to 1,500 slot machines in 5
locations.
The necessary restoration of the racetrack would, in management's opinion,
require an initial investment of $12 million. Efforts to raise the $12 million
by the due date were unsuccessful. Consequently, the concession expired in
March 31, 2001, and the Company's bid bond in the amount of $450,000 was
forfeited and thus, expensed during the fiscal year 2001.
If, as believed, the Government intends to offer the Moronas racetrack for
bid, the Company may bid again.
F. SATELLITE SERVICES INTERNATIONAL, INC. ("SSI")
SSI, a wholly owned subsidiary of Equus Gaming Company L.P., will provide
up-link services, satellite time (contracted thru a third party), and lease
video and data telecommunications equipment to transmit (or simulcast) live
races between the Company's racetracks and the OTB agencies. SSI will receive a
percentage of wagering handle on simulcast faces throughout the Equus network.
The main asset of SSI is the VSAT System consisting of a hub, satellite
channel and remote VSAT's in each jurisdiction where the Company has pari-mutuel
wagering. Upon completion, the integrated system will be more efficient and
reliable than the terrestrial telephone lines currently utilized. In September
2000, SSI retained the services of a third party network management firm to
oversee the implementation of the network and provide 24-hour maintenance.
As of December 31, 2000, the physical assets of SSI consisted of the
following:
(a) Hub Master Earth Station in San Juan, Puerto Rico
(b) Satellite Uplink Stations in San Juan, Puerto Rico
(c) VSAT and video telecommunications equipment for 930 OTB sites in
Puerto Rico, Colombia, Dominican Republic and Panama.
5
In addition to providing video and data transmission services for
pari-mutuel wagering, the VSAT System will offer data transmission services to
closed user communities that rely on interactive broadband applications
independent from terrestrial lines such as "pay at the pump" gasoline stations,
pharmacy prescription networks and lottery sales.
G. AGENCY BETTING NETWORK, INC. ("ABN")
ABN is a wholly owned subsidiary of Equus Gaming, L.P. which is currently
installing and operating an OTB agency system in Colombia, to provide satellite
and data communication system, which is contemplated to reach and penetrate all
of the major cities in Colombia.
H. VIRGINIA RACING LICENSE
During 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 not to award the Virginia
License to any of the applicants. The Company wrote-off all costs associated
with the license application in 1999.
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 in 1998. The
grandstand and clubhouse were rebuilt on a reduced scale in late 1998 and
finalized in 1999.
ECMC also owns certain race track and telecommunication equipment used in
the operation of El Comandante and the off-track betting system.
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:
6
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 for 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 that accommodates 1,100 vehicles.
Galapagos also owns certain race track and telecommunication equipment used
in the operation of V Centenario and the off-track betting system.
PRESIDENTE REMON. 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 that accommodates 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 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 that accommodates 500 vehicles.
ITEM 3. LEGAL PROCEEDINGS
Autotote Systems, Inc. ("Autotote") a provider of totalizator services, has
filed claims against Galapagos, S.A. ("Galapagos"), Equus Comuneros, S.A.
("Equus Comuneros"), Equus Gaming Panama, S.A. ("Equus- Panama") and El
Comandante Management Company ("ECMC") for unpaid service fees and against Equus
Comuneros for liquidated damages.
7
The amounts claimed as of March 14, 2001 are as follows:
a. El Comandante $186,415 plus interest
b. Galapagos $194,977 plus interest
c. Equus Panama $227,379 plus interest
d. Equus Comuneros $584,262 plus interest
e. Equus Comuneros (damages) $2,276,780
Equus Panama has agreed to pay the amount claimed; each of the other
companies has contested the claims on the grounds that Autotote breached
material contractual obligations.
El Comandante and Galapagos have also filed counterclaims against Autotote.
The arbitration hearings concluded on April 9, 2001; rulings on the various
claims and counterclaims are expected on or before May 15, 2001.
In addition, the Company has disputed various cases since 1991 related to
the volume of business tax as assessed by the Municipality of Can vanas, Puerto
Rico, in which El Comandante racetrack. The Company's basis for the dispute
relates to the fact that the local municipality of Can vanas is assessing as
volume of business, the sales commissions earned by the numerous OTB agencies,
located throughout the island of Puerto Rico, while the OTB agencies are also
reporting and paying in their local communities the volume of business conducted
in their individual agencies. The Company claims this is a case of double
taxation and that the Company should not be taxed on the agencies volume
business sales. The Appellate Court of Puerto Rico ruled in favor of the
Municipality of Canovanas and confirmed the deficiencies. The Puerto Rico
Supreme Court denied a petition for hearing the case and as result the Appellate
Court's decision became final.
The following schedule lists the deficiencies that have not been paid since 1993
and which are included within Accounts Payable and Accrued Liabilities as of
December 31, 2000.
FISCAL TAX YEAR DEFICIENCY
----------------- ----------
93-94 $ 94,887
96-97 159,526
97-98 155,166
98-99 138,783
99-00 114,374
00-01 131,326
---------
Total deficiency $ 794,062
==========
The Company and certain of its subsidiaries are presently named defendants
in various lawsuits and could be subject to other claims arising out of its
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.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
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. In January 2001 the Company was delisted from the Nasdaq Stock Market.
CASH DISTRIBUTIONS PRICE RANGE OF UNITS
------------------ --------------------
TOTAL PER UNIT HIGH LOW
----- -------- ---- -----
2000 QUARTER
Fourth - - 1.375 0.813
Third - - 1.500 0.875
Second - - 1.375 0.875
First - - 1.437 1.000
1999 QUARTER
Fourth - - 2.000 0.969
Third - - 2.000 1.250
Second - - 2.250 1.063
First - - 1.625 0.813
On April 5, 2001, the closing sale price of Units was $0.85 as reported on
Nasdaq. As of April 5, 2001, there were 14,389,824 Units outstanding and
approximately 209 Unitholders of record. On the units outstanding, 3,082,892
have not been registered under the Securities Exchange Act of 1934, and
therefore, cannot be traded.
The Company does not expect to make cash distributions to its Unitholders
in the foreseeable future. The Company's principal source of cash has been
distributions from HDA. The trust indenture related to the First Mortgage Notes
limits distributions by HDA to the Company to approximately 48% of HDA's
consolidated net income. It allows additional cash distributions only if
certain debt coverage ratios are met. To date these ratios have not been
achieved, nor is it likely they will be in 2001.
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 periods ended December 31, 2000. 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).
10
FOR THE YEARS ENDED DECEMBER 31,
HISTORICAL (1)
----------------------------------------------------- PROFORMA
2000 1999 1998 1997 1996 1997 (2)
--------- --------- --------- --------- --------- --------
EARNINGS STATEMENT DATA:
Revenues:
Commissions on wagering $ 64,387 $ 66,744 $ 52,529 $ 4,619 $ 4,513 $ 59,512
Net revenues from lottery services 168 546 656 88 - 88
Income from insurance settlement - - 12,856 - - -
Rental income (3) - - - 13,720 14,321
Gain from sale of assets 180 - - 4,669 581 4,669
Other Revenues 3,857 4,035 2,931 1,487 3,029 3,949
--------- --------- --------- --------- --------- ---------
68,592 71,325 68,972 24,583 22,444 68,218
Payments to horseowners 31,146 32,697 25,996 2,309 2,257 29,669
Other expenses 35,252 29,954 27,617 6,460 7,390 23,558
--------- --------- --------- --------- --------- ---------
2,194 8,674 15,359 15,814 12,797 14,991
Financial expenses 10,473 8,480 9,109 8,735 9,048 9,013
Depreciation and amortization 4,261 3,594 3,756 2,368 2,649 3,303
Impairment loss on El Comandante
intangible - - 3,136 - - -
--------- --------- --------- --------- --------- ---------
(12,540) (3,400) (642) 4,711 1,100 2,675
Provision for income taxes 620 742 1,110 1,028 400 505
Minority interest in (losses) earnings (4) (1,315) (1,030) 228 (878) 127 (878)
Extraordinary income (loss) (5) - 22 167 (326) - 1,558
Cumulative effect - - (403) - - -
--------- --------- --------- --------- --------- ---------
Net (loss) earnings $(11,845) $ (3,090) $ (1,760) $ 2,479 $ 827 $ 2,850
========= ========= ========= ========= ========= =========
Net (loss) earnings per unit (6) (1.39) $ (0.39) $ (0.28) $ 0.39 $ 0.13 $ 0.45
DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ----------
BALANCE SHEET DATA:
- ------------------------------------------
Cash and cash equivalents $ 7,437 $ 2,308 $ 6,637 $ 508 $ 4,268
Race tracks property and
equipment (7) 59,755 59,857 47,470 45,056 45,956
Deferred costs 4,010 4,992 5,375 6,316 4,426
Receivables from ECOC (3) - - - 3,106 2,780
Investment in S&E (8) - - - - 2,223
Total assets 80,135 70,943 64,039 56,187 60,586
First Mortgage Notes and
accrued interest 57,584 53,834 56,512 63,681 66,737
Notes, bonds payable and
capital lease obligations 10,283 13,461 9,091 1,876 1,073
Total liabilities 100,347 85,728 78,105 68,280 71,775
Partners' deficit (20,212) (14,785) (14,066) (12,093) (11,189)
11
(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.
(3) Relates to rent paid by ECOC to HDA until December 31, 1997.
(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 2000, 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 (losses) earnings allocable to the units are based on an interest of
approximately 99%. The remaining 1% is held by the Company's general
partner. The per unit amount is calculated based on weighted average of
Units outstanding since the distribution on February 6, 1995 of 8,505,398
in 2000, 7,796,191 in 1999, 6,342,606 in 1998, 6,333,617 in 1997 and 1996.
(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, 2000, 1999, 1998, 1997, and 1996 was approximately $3,669,520,
$4,234,000, $3,970,180, $5,097,000, and $5,274,000, respectively.
(8) In 1996 this amount consisted of licenses, property and equipment and other
assets of the Television Stations owned by S & E Network, Inc, a former
subsidiary of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's results of operations are principally attributable 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")
12
The Company formerly 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 2000 with the results for 1999 and (ii) the Company's consolidated
results of operations for 1999 with results for 1998. 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.
THE COMPANY'S RESULTS OF OPERATIONS
2000 COMPARED TO 1999
- ------------------------
REVENUES
Consolidated Revenues decreased by approximately $2,733,000, or 3.8%, in
2000 to $68,592 from $71,325,000 in 1999.
COMMISSIONS ON WAGERING
Commissions on wagering decreased by approximately $2,357,000 (3.5%) in
2000 to $64,387,000 as compared to $66,745,000 in 1999. The decrease in
commissions was attributable to the following operations: El Comandante
($1,105,000), Galapagos ($520,000), and Panama ($848,000), net of the increase
in commissions attributable to Colombia ($115,000).
During contract negotiations in January 2000, the Puerto Rico horseowners
cancelled their prior approval of simulcast of live races from Puerto Rico to
the Dominican Republic. In February this action was reversed by the Racing
Board. This cancellation had an adverse economic impact on commissions on
wagering in the Dominican Republic and Puerto Rico. In July 2000 the Puerto
Rico Horseowners' Association reached an agreement with El Comandante Management
Company on a new 10-year contract providing for simulcasting of races.
PUERTO RICO. Commissions on wagering at El Comandante decreased
$1,105,000(2.1%) from $52,076,000 in 1999 to $50,971,000 in 2000. Commissions
on wagering are directly related to the racetrack handle, which has been in
decline and hence a decline in the racetracks' commissions. There was a drop in
off track betting of $9,780,000. El Comandante experienced declines in betting
handle as a result of the poor racing program due to lack of proper scheduling
of races by the Government Racing Authorities.
Substantial increases in on track and simulcasting commissions did not
compensate for the decline in off track wagering.
13
PANAMA. Commissions on wagering at Presidente Remon decreased by $848,000
(9.0%) from $9,388,000 in 1999 to $8,540,000 in 2000. The decrease was
attributable to a decline in the economy.
DOMINICAN REPUBLIC. Commissions on wagering at V Centenario decreased by
$520,000 (13.6%) from $3,835,000 in 1999 to $3,315,000 in 2000. This decrease
was primarily attributable to the interruption and simulcast races in the first
quarter of the year, as well as lower numbers of agencies in operation due to
transmission and telecommunications interruptions.
COLOMBIA. Commissions on wagering at Los Comuneros increased by $115,000
(8.0%) from $1,445,000 in 1999 to $1,560,000 in 2000. This increase was
primarily due to the opening of new OTB agencies and expanded wagering from
simulcasting.
NET REVENUES FROM LOTTERY SERVICES
During 2000 net revenues from lottery services by Galapagos decreased by
approximately $377,000 compared to 1999. The decrease was due to a reduction in
the amount billed to the lottery operator as reimbursement for telephone line
costs, pursuant to an amendment to the contract.
Since June 30, 2000, Autotote has provided services directly to the Lottery
Operations [Dominican International Electronic Lottery, Inc. (LEIDSA)] and
refused to pay Galapagos service fees under its service contract. The Company
has filed suit in Federal Court in Puerto Rico against Autotote and is also
pursuing arbitration.
OTHER REVENUES
During 2000 other revenues decreased by approximately $178,000 as compared
to 1999. El Comandante card sales "impresos" decreased by $98,000, because of
the decrease in wagering. Galapagos lost lottery commissions beginning the end
of June, 2000 as noted.
GAIN ON SALE OF ASSETS
.
The gain of $180,000 is attributable to the sale of a television license in
Panama no longer needed.
EXPENSES
For reasons set forth below, total expenses during the year ended December
2000 increased by $6,407,000 (8.6%) compared to 1999. Some of these expenses
were non-recurring and are reported below under appropriate categories.
14
PAYMENTS TO HORSEOWNERS
Payment of purses to horseowners decreased $1,551,000 (4.7%) in 2000
compared to 1999 as noted below:
Increase
2000 1999 (decrease)
----------- ----------- ------------
ECMC (a) $25,529,000 $26,037,000 $ (508,000)
Panama 2,691,000 3,900,000 (1,209,000)
Dominican Republic 1,623,000 1,913,000 (290,000)
Colombia 1,302,000 846,000 456,000
----------- ----------- ------------
$31,145,000 $32,696,000 $(1,551,000)
=========== =========== ============
(a) Summary of new horseowners contract provision for ECMC:
The new Puerto Rico horseowners contract, signed in July 2000, provides for
a non-recurring cash payment of approximately $1 million. Approximately
$673,000 was accrued in 1999. The remaining $364,000 was charged to operating
expenses in 2000.
Under the contract, the horseowners are guaranteed minimum earnings of
$25,032,000 for 2000 and 2001. ECMC is obligated among other items to pay the
horseowners $90,000 annually for administrative costs and 50% of the principal
and interest owed on an outstanding horseowners loan with a principal balance
due of $526,000, plus accrued interest. ECMC must also invest $3,000,000 in
improvements to the racetrack during the 10-year term of the contract, as well
as provide $2,000,000 of financing for the purchase of horses.
Additional costs incurred in the year 2000 related to the new horseowners
contract are included in other expenses.
On March 16, 2001 an "Addendum to Contract" was executed by the Horseowners
Confederation and the Company, whereby the parties jointly agreed to:
(i) Increase the number of simulcast races each live race day from three
(3) to six (6).
(ii) Place three (3) of the simulcast races before the first live race and
place three (3) intermingled races after the fifth live race;.
(iii)Include simulcasting of nine (9) to twelve (12) races on Thursdays, a
day in which currently there are no live races.
(iv) In consideration for the above items, ECMC will pay an additional
$1,000,000 to the Horseowners Confederation if approved by the Racing
Board.
A joint petition was recently filed with the Puerto Rico Racing Board to
request approval for the additional simulcast races mentioned above.
15
FINANCIAL EXPENSES
Financial expenses increased by $1,993,000 (23.5%) compared to 1999,
primarily related to use of line of credit facilities for development of agency
operations, including additional agencies and improvements in simulcast and
transmission facilities, and a non-recurring charge off of expenses incurred in
negotiating a loan that would have provided funding for the VSAT equipment and
the purchase of the outstanding mortgage notes. In the end, the terms offered
by the lender were not acceptable to the Company.
DEPRECIATION AND AMORTIZATION
Depreciation in 2000 increased by $667,000 (18.6%) compared to 1999,
primarily due to capital improvements at El Comandante.
OTHER EXPENSES
Other expenses increased by $5,300,000 (17.7%) to $35,252,000 from
$29,954,000 in 1999, attributable to the new horseowners contract, increased
racetrack security costs and expenses relating to SSI and VSAT. Other
increases were in professional fees (increase of $304,000) in connection with
the unsuccessful financing, travel expenses incurred in connection with the
Uruguay project, and utility increases due to Friday night racing, as well as an
overall increase in electricity costs.
PROVISION FOR INCOME TAXES
The provision for income tax is primarily attributable to the Puerto Rico
operations.
MINORITY INTEREST
The Company's minority interest shown represents the pro-rata share of loss
allocable to minority partner interests in HDA, Galapagos, Equus-Panama and
Equus-Comuneros. Because accumulated losses of Galapagos allocable to minority
partners exceeded their investment during 2000 and 1999, the Company did not
recognize a minority interest in losses of Galapagos. If Galapagos generates
profits in 2001, no minority interest will be recognized by the Company in
profits up to $1,846,786.
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 total revenues of $68,973,000 in
1998, the Company received $12,857,000 (18.6%) from the insurance settlement in
connection with hurricane damage to El Comandante and V Centenario. Almost all
revenues for 1999 were derived from operations.
16
COMMISSIONS ON WAGERING
Commissions on wagering increased by $14,215,000 (27.1%) in 1999 to
$66,744,000 compared to $52,529,000 in 1998. Increased commissions came from
El Comandante, Galapagos, Panama, and start-up operations by Equus Comuneros,
which accounted for about $1,445,000 or roughly 10% of the 27.1% increase.
PUERTO RICO. Commissions on wagering at El Comandante increased
$10,996,000 (26.8%) from $41,081,000 to $52,077,000. The increase reflects a
full year of continuous operations when compared to 1998 where there was an
interruption of racing operations at El Comandante caused by Hurricane Georges.
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 to $9,388,000. The increase came from more
OTB agencies on line and more live and simulcast race days.
DOMINICAN REPUBLIC. Commissions on wagering at V Centenario increased
modestly in the face of competition from the government-licensed electronic
lottery and technical difficulties arranging live broadcasting of races.
NET REVENUES FROM LOTTERY SERVICES
During 1999, net revenues from lottery services in the Dominican Republic
decreased by $110,000, 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. OTB agencies stopped selling
lottery tickets in September 1999 due to certain disagreements over cash
payments due from the lottery operator. The disagreements were resolved in
January 2000.
INSURANCE SETTLEMENT (INCOME FROM BUSINESS INTERRUPTION)
Due to damage caused by Hurricane Georges, the Company received in 1998
insurance compensation totaling $10,832,000 for business interruption, and
$11,596,000 for physical damage. The Company recognized a gain of $2,024,000
from property damage insurance proceeds less the write-off of the book value of
property damaged.
OTHER REVENUES
During 1999 other revenues increased by $1,104,000 compared to 1998. In
addition to revenues of $201,000 earned by Equus-Comuneros, there was an
increase of $903,000 in fees earned based on the level of wagering at El
Comandante.
EXPENSES
Total expenses increased in 1999 by $5,109,000 (7.3%) compared to 1998,
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.
17
PAYMENT TO HORSEOWNERS
Payments of purses to horseowners increased $6,700,000 in 1999 compared to
1998. Most of this increase is related to net increases in gross wagering.
El Comandante's contract with the horseowners confederation expired in
April 1998. However, the Puerto Rico Racing Board extended the contract as an
interim measure until the Company and the horseowners reach a new agreement.
The Company negotiated a new contract in July, 2000 as previously noted.
FINANCIAL EXPENSES
Financial expenses decreased in 1999 by $629,000 compared to 1998.
Excluding financial expenses of Equus-Comuneros, there was a decrease of
$891,000, mostly attributable to a reduction in financing costs of the First
Mortgage Notes, resulting from the purchase in December 1998 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 $4 million in unsecured bonds issued by Equus-Panama in
October 1998.
DEPRECIATION AND AMORTIZATION
Depreciation in 1999 decreased by $162,000 compared to 1998. Excluding
depreciation and amortization of Equus-Comuneros, there was a decrease of
$354,000, reflecting a reduction in book assets at El Comandante damaged by
Hurricane Georges. Depreciation on replacement property commenced during the
fourth quarter of 1999.
IMPAIRMENT LOSS ON EL COMANDANTE INTANGIBLE
Upon termination of the lease agreement between ECOC and HDA, ECMC assumed
the net liabilities of ECOC at January 1, 1998, amounting to $3,658,332.
Management allocated the entire amount to "intangible assets," to be amortized
over the remaining period of the license, through December 2004. In accordance
with SFAS No. 121, the Company recognized an impairment loss of $3,135,713 as of
December 31, 1998, attributable to a write-down of the value of its intangible
assets.
OTHER EXPENSES
Other expenses increased by $2,336,000 to $29,953,000 in 1999 from
$27,617,000 in 1998. The net increase during 1999 was caused by a number of
factors:
(i) Decrease in salaries and payroll costs of El Comandante due to
reduction of personnel in various departments. The Company expects to
incur further labor reductions (from outsourcing security services and
other administrative functions) to reduce costs.
(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 premiums after heavy damage caused by Hurricane
Georges. The policy for 2000 was recently negotiated with new carriers
for all operations at very competitive prices.
18
(iv) Increase in legal fees due to current negotiations by El Comandante of
the contract with the horseowners confederation. A new contract with
horseowners was signed in July, 2000.
(v) Write-off of approximately $370,000 of costs incurred in applying 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 not awarding the license to any of the
applicants.
PROVISION FOR INCOME TAXES
The provision for income taxes is primarily attributable to Puerto Rico
operations.
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 exceeded their
investment, during 1999 and 1998, the Company did not recognize a minority
interest in losses of Galapagos of $312,217 and $465,879, respectively.
EXTRAORDINARY ITEM
The extraordinary items in 1999 and 1998 relate to the early redemption and
purchase of First Mortgage Notes. In June 1999, the Company recognized income
of $22,680 on the purchase of $189,000 of First Mortgage Notes. In 1998 the
Company recognized income of $1 million on $7.5 million of First Mortgage Notes
purchased in December 1998, net of a $300,000 premium paid in connection with
the redemption of $3 million of mortgage notes made on January 5, 1999. Income
in 1998 was recorded net of a corresponding write-off of a portion of the note
discount and deferred financing costs.
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 of $550,000.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company is the owner of Housing Development Associates S.E. ("HDA") and
its consolidated subsidiary, El Comandante Management Company LLC ("ECMC"), as
well as the owner of Agency Betting Network, Inc. ("ABN"), Satellites Services
International, Inc. ("SSI") and foreign subsidiaries (Equus Comuneros S.A.,
Equus Entertainment de Panama, S.A. and Galapagos, S.A.). The principal source
of cash of Equus Gaming Company L.P. (the "Company" or, when referring to the
individual entity, "Equus") is related to its ownership interest in HDA, the
owner and operator (through its wholly owned subsidiary 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 the First Mortgage
Notes.
19
The following is a discussion of the liquidity and capital resources of the
Company, including HDA and its subsidiary ECMC, as well as the Company's other
subsidiaries ABN and SSI. Net cash flow from 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 flow of the
Company in 2000 and these activities are not discussed herein.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY (AND ITS CONSOLIDATED
SUBSIDIARIES)
The Company recognizes its current inability to generate sufficient cash to
support its operations.
To overcome its financial problems, the Company must look to additional
revenue including investment or cost savings from:
(i) Contract changes with the Puerto Rico Horseowners Confederation to
allow expanded simulcasting on live and dark days. If approved by the
Racing Board, additional simulcasting is expected to generate $7-$8
million of annual revenue.
(ii) Requesting license approval for casino and sports book operations at
the racetrack in Panama.
(iii)Requesting license approval in Colombia and Dominican Republic for
casino and/or sports book operations that could generate an additional
$7 million in revenues annually.
(iv) Implementing cost reductions at all properties which could save the
Company approximately $2.0 million annually.
(v) Requesting designation of the El Comandante facility as a tourist zone
to allow the addition of slot machines and authorization for low
interest bonds or notes.
(vi) Expanding simulcasting in Panama, Colombia and Dominican Republic as
well as expanding pool races.
(vii)Obtain new bank financing or financing by the Wilson family.
There can be no assurance that any of the above will be achieved, or if
achieved, the results will be sufficient to enable the Company to continue to
operate.
Cash and cash equivalents of the Company, HDA and its consolidated
subsidiary increased by approximately $5.1 million in 2000. The Company has
historically met its liquidity needs from cash flow generated by (i) the
operations of El Comandante racetrack, (ii) short-term loans and capital leases
for acquisition of new equipment, and (iii) investment by the Wilson family.
During 2000 principal uses of cash by the Company, HDA and its consolidated
subsidiary for financing and investing activities were as follows:
(i) Capital improvements and acquisition of equipment for SSI and El
Comandante Race Track costing approximately $2.8 million.
20
(ii) Payments on capital leases for equipment at El Comandante.
(iii)Investment of $2,253,350 in Colombia through ABN for the development
of the OTB network in that country.
In addition to cash available to the Company at the beginning of the year
and cash flow from operations, the Company obtained additional funds from
financing and investing activities from the following sources:
(i) $500,000 in advances under a bank line of credit.
(ii) $6 million from the issuance by the Company of units to an accredited
investor, Wilson Securities Corporation, pursuant to a private
offering memorandum.
(iii)Capital leases for equipment for El Comandante and SSI, consisting of
an up-link earth station located in Panama.
(iv) An advance of $2.5 million by United Tote for working capital.
For 2001 projected principal uses of cash, other than for operating activities
at El Comandante, are:
(i) Principal payments on existing capital leases.
(ii) Principal payments amounting to $3 million on a $5.5 million term
loan.
(iii)Additional investments in SSI, principally for the acquisition and
installation of VSAT equipment and for payment of satellite time
contracted from a third party.
(iv) Capital expenditures, as needed and/or required for the various racing
operations.
(v) Interest and principal payments on the outstanding First Mortgage
Notes.
INVESTMENTS IN TELECOMMUNICATIONS EQUIPMENT AND MARKET EXPANSION
The Company plans to install over the next twelve (12) months 1,500 VSAT
(video and data communication) units for OTB agencies in all operations. The
communications up-link satellite control center (the "Hub") installation is
largely complete and operational. SSI will be the service provider for all
telecommunications and satellite usage by the Company's affiliates. The
estimated $12 million capital investment in the VSAT expansion for which
financing is sought is expected to be recovered over a five-year period from the
new VSAT units.
There can be no assurance that the Company will be able to obtain the
financing required to build out the proposed video and data communication
system. The failure to do so could cause the Company not to have sufficient
financial resources to continue to operate.
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, a $2.5 million unsecured note and the First Mortgage Notes.
21
In December 1999 HDA obtained a $5.5 million term loan, considered
Refinancing Indebtedness under the terms of the first Mortgage Note Indenture.
The loan is collateralized by First Mortgage Notes purchased by the Company in
the open market. Interest is payable monthly at a rate equal to one point over
prime. Principal is payable in quarterly installments commencing March 31,
2000, until maturity on December 15, 2001. The stated maturity date of the term
loan of $3,000,000 is scheduled for the year ending December 31, 2001.
In August 2000 the Company obtained a $2.5 million unsecured loan at 3%
over prime due in December 29, 2004. Principal and interest is to be paid
from .25% of the wagering handle for the first four (4) years of the service
contract with United Tote as outlined in note 4 of the consolidated financial
statements, "wagering service agreement".
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, in 2001 and thereafter at
100% of the principal amount, together with accrued and unpaid interest. The
maturity dates of First Mortgage Notes, reduced by prior redemptions and by the
Notes purchased by ECMC, are as follows (in thousands):
YEAR ENDING NET AMOUNT
DECEMBER 31, (FACE VALUE)
------------- ------------
2001 $ 3,454
2002 10,200
2003 40,800
---------
$ 54,454
=========
As of March 28, 2001, HDA had advanced to Equus approximately $3,662,000
against allowable future distributions of profits, which is not in conformity
with the terms of the Indenture.
The Company failed to pay interest on the First Mortgage Notes due on
December 15, 2000. The scheduled interest payment was paid prior to the default
date of January 14, 2001.
It is not expected that the Company will be able to meet the mandatory
maturity dates of the First Mortgage Notes set forth above without obtaining
additional financing from lending institutions or investors. Although the
Company has had discussions with possible lenders and investors, it has received
no commitments or other form of assurances that such financing will be
forthcoming. Absent such financing, the Company will not be able to meet its
long-term commitments.
Equus Comuneros, S.A. did not meet its loan payment commitments due to
financial institutions totaling $269,000 as of December 31, 2000. The
Company's management requested debt restructuring agreements with these
financial institutions. Should noncompliance continue, the lending entities
could make their guarantees effective.
GOVERNMENT MATTERS.
El Comandante's horse racing and pari-mutuel wagering operations are
subject to substantial government regulation. Pursuant to the Puerto Rico Horse
Racing Industry and Sport Act (the "Racing Act"), the Racing Board and the
Puerto Rico Racing Administrator (the "Racing Administrator") exercises
regulatory control over El Comandante's racing and wagering operations. For
example, the Racing Administrator determines the monthly racing program for El
22
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.
El Comandante is required to pay the Government of Puerto Rico various
taxes on the wagering placed on thoroughbred horse races held at or simulcasted
by El Comandante (Puerto Rico). The taxes on the wagering are required to be
remitted to the Department of the Treasury of Puerto Rico within two (2) days of
the wager being placed. El Comandante failed to remit tax payments totaling
$9,949,182 from October 16, 2000 to February 7, 2001 to the Department of the
Treasury of Puerto Rico. The Company is currently in negotiations with the
Puerto Rico tax authorities on a payment plan whereby the overdue taxes will be
paid in weekly installments of $50,000. Neither ECMC nor the Company has the
financial resources to pay currently the overdue taxes.
On April 2, 2001, the House of Representatives of the Commonwealth of
Puerto Rico passed a resolution ordering an investigation of the operations of
El Comandante (Puerto Rico) with emphasis on the mechanisms of physical and
financial administration and the debts maintained with the Department of the
Treasury of Puerto Rico and the members of the Horseowners Confederation.
As of December 31, 2000, Equus Comuneros, S.A. owed the Tax and National
Customs Administration approximately $462,000 for withholding at source tax.
Management has agreed on a payment plan which has not been finalized due to the
impossibility of satisfying the granting of a compliance policy.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
23
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, 2000 and 1999, and the related consolidated statements of
operations, comprehensive loss, changes in partners' deficit and cash flows for
each of the three years in the period ended December 31, 2000. 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 Gal pagos S.A., Equus
Comuneros S.A. and the Colombia Branch of Agency Betting Network, as of and for
the year ended December 31, 2000, which reflect total assets of approximately 7%
and total revenues of approximately 9% 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 these
entities, 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. These standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material mistatements. 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 reports 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, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has incurred recurring losses
from operations, has a partners' deficit of $20,211,757, and projects a negative
cash flow for 2001. These factors among others, raise substantial doubt about
the Company's ability to continue as a going concern and to meet its obligations
during 2001. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements as of December 31, 2000, do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
/s/ Arthur Andersen
San Juan, Puerto Rico,
March 31, 2001 (except with respect to matters discussed
in Notes 1 and 11 as to which the dates are April 2, 2001
and April 9, 2001, respectively).
Revenue Stamp No. 1701685
has been affixed to the original
copy of this report.
24
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
------------- ------------ ------------
REVENUES:
Commissions on wagering $ 64,386,568 $66,743,923 $52,528,562
Net revenues from lottery services 168,493 545,568 656,145
Income from business interruption - - 10,832,370
Gain on sale of assets 179,500 - 2,024,159
Other revenues 3,857,475 4,035,098 2,931,330
------------- ------------ ------------
68,592,036 71,324,589 68,972,566
------------- ------------ ------------
EXPENSES:
Payments to horseowners 31,145,951 32,697,409 25,996,556
Salaries, wages and employee benefits 11,106,751 11,274,027 11,910,549
Operating expenses 12,450,926 10,001,437 9,798,721
General and administrative 5,503,943 4,196,469 2,558,300
Marketing, television and satellite costs 6,190,552 4,482,285 3,349,619
Financial expenses 10,472,892 8,479,505 9,109,311
Depreciation and amortization 4,260,769 3,593,839 3,756,052
Impairment loss Intangible - - 3,135,713
------------- ------------ ------------
81,131,784 74,724,971 69,614,821
------------- ------------ ------------
LOSS BEFORE INCOME TAXES, MINORITY
INTEREST, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT (12,539,748) (3,400,382) (642,255)
PROVISION FOR INCOME TAXES 620,094 742,153 1,109,611
------------- ------------ ------------
LOSS BEFORE MINORITY INTEREST,
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT (13,159,842) (4,142,535) (1,751,866)
MINORITY INTEREST IN LOSSES 1,314,872 1,029,458 227,720
------------- ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT (11,844,970) (3,113,077) (1,524,146)
EXTRAORDINARY ITEM, NET:
Discount on early redemption of
First Mortgage Notes and write-off of related
deferred financing costs and note discount - 22,680 167,051
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET - - (402,927)
------------- ------------ ------------
NET LOSS $(11,844,970) $(3,090,397) $(1,760,022)
============= ============ ============
(continues)
25
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(CONTINUED)
2000 1999 1998
------------- ------------ ------------
ALLOCATION OF NET LOSS:
General partners $ (118,450) $ (30,904) $ (17,600)
Limited partners (11,726,520) (3,059,493) (1,742,422)
------------- ------------ ------------
$(11,844,970) $(3,090,397) $(1,760,022)
============= ============ ============
BASIC AND DILUTED PER UNIT AMOUNTS:
Loss before extraordinary item and
cumulative effect of change in accounting
principle, net $ (1.39) $ (0.39) $ (0.24)
Extraordinary item, net - - 0.02
Cumulative effect of change in accounting
principle, net - - (0.06)
Net loss $ (1.39) $ (0.39) $ (0.28)
============= ============ ============
WEIGHTED AVERAGE UNITS OUTSTANDING 8,505,398 7,796,191 6,342,606
============= ============ ============
The accompanying notes are an integral part of these consolidated statements.
26
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
------------- ------------ ------------
NET LOSS $(11,844,970) $(3,090,397) $(1,760,022)
OTHER COMPREHENSIVE LOSS:
Currency translation adjustments 418,506 (553,146) 80,043
COMPREHENSIVE LOSS $(11,426,464) $(3,643,543) $(1,679,979)
============= ============ ============
The accompanying notes are an integral part of these consolidated statements.
27
EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------
2000 1999
------------- -------------
CASH AND CASH EQUIVALENTS:
Unrestricted $ 7,019,121 $ 1,888,995
Restricted 418,180 418,938
------------- -------------
7,437,301 2,307,933
------------- -------------
PROPERTY AND EQUIPMENT:
Land 8,879,113 7,786,980
Building and improvements 55,404,357 56,512,072
Equipment 17,753,880 13,967,887
------------- -------------
82,037,350 78,266,939
Accumulated depreciation (22,282,599) (18,409,886)
------------- -------------
59,754,751 59,857,053
------------- -------------
DEFERRED COSTS, NET:
Financing 1,933,361 2,510,487
Costs of Panama contract (see Note 3) 1,870,000 1,980,000
Other 206,714 501,505
------------- -------------
4,010,075 4,991,992
------------- -------------
OTHER ASSETS:
Accounts receivable, net 4,492,311 1,577,634
Notes receivable 2,960,074 1,506,599
Prepayments and other assets 1,480,258 701,362
------------- -------------
8,932,643 3,785,595
------------- -------------
$ 80,134,770 $ 70,942,573
============= =============
(continues)
28
EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND PARTNERS' DEFICIT
DECEMBER 31,
----------------------------
2000 1999
------------- -------------
FIRST MORTGAGE NOTES:
Principal, net of note discount of
$786,261 and $885,446 $ 53,667,739 $ 53,568,554
Accrued interest 3,916,669 265,900
------------- -------------
57,584,408 53,834,454
------------- -------------
OTHER LIABILITIES:
Accounts payable and accrued liabilities 26,241,039 11,660,824
Outstanding winning tickets and refunds 1,552,128 1,130,389
Notes payable 4,049,961 6,226,082
Bonds payable 4,000,000 4,000,000
Capital lease obligations 2,232,559 3,235,507
------------- -------------
38,075,687 26,252,802
------------- -------------
DEFERRED INCOME TAXES 3,933,144 3,165,800
------------- -------------
MINORITY INTEREST 753,288 2,474,810
------------- -------------
COMMITMENTS AND CONTINGENCIES, see Note 1 and 4
PARTNERS' DEFICIT
General Partner (896,144) (781,879)
Limited Partners - 20,000,000 and 10,383,617 units
authorized in 2000 and 1999, respectively;
14,389,824 and 8,389,824 units issued and
outstanding in 2000 and 1999, respectively (19,315,613) (14,003,414)
------------- -------------
(20,211,757) (14,785,293)
------------- -------------
$ 80,134,770 $ 70,942,573
============= =============
The accompanying notes are an integral part of these consolidated statements.
29
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 2000
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
---------- ------------- -------------
BALANCES, DECEMBER 31, 1997 $(728,644) $(11,364,532) $(12,093,176)
Net loss (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
Redemption of 17% minority interest in
Housing Development Associates (HDA) - (756,386) (756,386)
---------- ------------- -------------
BALANCES, DECEMBER 31, 1998 (745,444) (13,320,967) (14,066,411)
Net loss (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)
Net loss (118,450) (11,726,520) (11,844,970)
Currency translation adjustments 4,185 414,321 418,506
Issuance of Units, net of costs - 6,000,000 6,000,000
---------- ------------- -------------
BALANCES, DECEMBER 31, 2000 $(896,144) $(19,315,613) $(20,211,757)
========== ============= =============
The accompanying notes are an integral part of this consolidated financial
statement.
30
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,844,970) $ (3,090,397) $ (1,760,022)
------------- ------------- -------------
Adjustments to reconcile net loss to
net cash provided by operating activities-
Gain on sale of assets (17,950) - (2,024,159)
Depreciation and amortization 5,015,350 4,296,160 4,450,031
Impairment loss on intangible - - 3,135,713
Deferred income tax provision 620,094 537,261 1,145,945
Minority interest in losses (1,314,872) (1,029,458) (304,320)
Extraordinary item - 22,680 (273,854)
Cumulative effect of change in accounting principle - - 549,996
Currency translation adjustments 11,855 (28,920) 80,043
Difference in investment in Equus-Panama after
public offering - - 463,130
(Increase) decrease in assets-
Accounts receivable (2,914,678) (206,749) (141,976)
Prepayments and other assets (778,897) 545,597 (161,735)
Increase (decrease) in liabilities-
Accounts payable and accrued liabilities 18,378,234 1,658,363 1,883,130
Outstanding winning tickets and refunds 421,739 610,905 (546,129)
------------- ------------- -------------
Total adjustments 19,259,325 6,405,839 8,255,815
------------- ------------- -------------
Net cash provided by operating activities 7,414,355 3,315,442 6,495,793
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,370,752) (10,113,509) (10,218,529)
Property damage insurance proceeds - - 11,595,850
Deferred costs (65,993) (389,544) (376,774)
(Increase) decrease in notes receivable, net (1,453,475) 201,612 (1,271,966)
Acquisition of El Comandante Operating
Company, Inc. (ECOC) cash accounts on
termination of lease agreement - - 1,061,239
Advances to Los Comuneros S.A. - - (950,000)
------------- ------------- -------------
Net cash used in investing activities (4,890,220) (10,301,441) (160,180)
------------- ------------- -------------
(continues)
31
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of First Mortgage Notes $ - $(3,048,320) $(6,500,000)
Payments (to) from affiliates - (200,000) 200,000
Payment of financing costs (78,268) (60,579) -
Loan proceeds from financial institutions 980,000 6,515,000 4,229,920
Proceeds from working capital loan from United Tote 2,500,000 - -
Payments on notes payable and capital
lease obligations (6,796,499) (3,612,813) (3,372,946)
Contributions by minority partners - 32,143 1,993,410
Issuance of Units 6,000,000 3,051,600 -
Issuance of bonds by Equus-Panama - - 4,000,000
Purchase of HDAMC Warrants (see Note 6) - - (756,386)
Cash distributions to minority partners of HDA - (20,366) -
------------ ------------ ------------
Net cash provided by (used in) financing activities 2,605,233 2,656,665 (206,002)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 5,129,368 (4,329,334) 6,129,611
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,307,933 6,637,267 507,656
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,437,301 $ 2,307,933 $ 6,637,267
============ ============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 5,399,672 $ 8,572,220 $ 8,266,411
============ ============ ============
NON-CASH TRANSACTIONS:
Equipment acquired through capital leases $ 137,430 $ 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 this consolidated financial
statement.
32
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"). Satellites Services International, Inc.
("SSI") and Agency Betting Network, Inc. ("ABN") are wholly owned subsidiaries
of the Company. 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
which it acquired 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. Equus
Comuneros, S.A. did not meet its loan payment commitments due to financial
institutions totaling $269,000 as of December 31, 2000. The Company's
management requested debt restructuring agreements with these financial
institutions. Should noncompliance continue, the lending entities could make
their guarantees effective.
In 2000, the Company was awarded exclusive rights by the Government of
Uruguay to operate the Maronas racetrack in Montevideo and an off-track betting
agency network together with the right to operate up to 1,500 slot machines in 5
locations.
The necessary restoration of the racetrack would, in management's opinion,
require an initial investment of $12 million. Efforts to raise the $12 million
by the due date were unsuccessful. Consequently, the concession expired in
March 31, 2001, and the Company's bid bond in the amount of $450,000 was
forfeited and thus, expensed during the fiscal year 2001.
33
If, as believed, the Government intends to offer the Moronas racetrack for
bid, the Company may bid again.
As noted in the accompanying consolidated financial statements, the Company
has incurred recurring losses from operations, has a partners' deficit of
$20,211,757 and projects a negative cash flow for 2001. These factors, among
others, raise substantial doubt about the Company's ability to continue as a
going concern and to meet its obligations during 2001. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Management's plans to overcome the Company's financial problems are as
follow:
(i) Contract changes with the Puerto Rico Horseowners Confederation to
allow expanded simulcasting on live and dark days. These changes are
subject to the Racing Board's approval.
(ii) Request license approval for casino and sports book operations at the
Company's racetrack in Panama.
(iii) Request license approval in Colombia and Dominican Republic for
casino and/or sports book operations.
(iv) Implement cost reductions at all properties.
(v) Request designation of the El Comandante facility as a tourist zone,
which would allow the addition of slot machines and authorization for
low interest bonds or notes.
(vi) Expand simulcasting in Panama, Colombia and Dominican Republic as well
as expand betting pool races.
(vii) Obtain new bank financing or financing by the Wilson family.
There can be no assurance that any of the above will be achieved, or if
achieved, the results will be sufficient to enable the Company to continue to
operate.
The Company failed to pay interest on the First Mortgage Notes (see Note 5)
due on December 15, 2000. The scheduled interest payment was made prior to the
default date of January 14, 2001. It is not expected that the Company will be
able to meet the mandatory maturity dates of the First Mortgage Notes, as
described in Note 5, without obtaining additional financing from lending
institutions or investors. Although the Company has had discussions with
possible lenders and investors, it has received no commitments or other form of
assurances that such financing will be forthcoming. Absent such financing, the
Company will not be able to meet its long-term commitments.
34
GOVERNMENT MATTERS
El Comandante is required to pay the Government of Puerto Rico various
taxes on the wagering placed on thoroughbred horse races held at or simulcasted
by El Comandante (Puerto Rico). The taxes on the wagering are required to be
remitted to the Department of the Treasury of Puerto Rico within two (2) days of
the wages being placed. El Comandante failed to remit tax payments totaling
$9,949,182 from October 16, 2000 to February 7, 2001, to the Department of the
Treasury of Puerto Rico. The Company is currently in negotiations with the
Puerto Rico tax authorities on a payment plan whereby the overdue taxes will be
paid in weekly installments of $50,000. Neither ECMC nor the Company has the
financial resources to pay currently the overdue taxes.
On April 2, 2001, the House of Representatives of the Commonwealth of
Puerto Rico presented a resolution ordering an investigation of the operations
of ECMC with emphasis on the physical and financial administration of the
Company and its debts outstanding with the Treasury Department.
As of December 31, 2000, Equus Comuneros owed the Tax and National Customs
Administration approximately $462,000 for tax withholding at source tax.
Management has agreed on a payment plan which has not been finalized due to the
impossibility of satisfying the granting of a compliance policy.
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
intercompany transactions. All of the entities included in the consolidated
financial statements are herein after 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:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
------------ ------------ ----------
SUBSIDIARY:
HDA $ (74,620) $ 650 $ 96,540
Galapagos - - -
Equus-Panama 46,572 (114,688) (324,260)
Equus-Comuneros (1,286,824) (915,420) -
------------ ------------ ----------
$(1,314,872) $(1,029,458) $(227,720)
============ ============ ==========
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, 2000, 1999, and 1998, the Company
did not recognize minority interest in Galapagos' losses amounting to $759,719,
$312,217, and $465,879, 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.
35
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
7). In December 31, 2000 the Company issued 6,000,000 units to Wilson
Securities Corporation, a major unitholder of the Company, for $6,000,000
pursuant to the terms of a Private Offering that commenced on November 2000 and
was consummated on December 28, 2000. During 1999 the Company issued 2,991,764
Units to The Wilson Family Limited Partnership for $3,051,600 pursuant to the
terms of a private offering that commenced in December 1998 and expired in April
1999. Net loss per Unit is calculated based on the weighted average of Units
outstanding.
During 2000, the Company issued new Units and Amended the Company's
Certificate of Limited Partnership to increase the number of units the Company
is authorized to issue from 10,383,617 to 20,000,000.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, if any, at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. A significant assumption is that the Company can recover the
carrying amounts of its assets through future operations.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the changes in partners' interest
(deficit) during a period from transactions and other events and circumstances
from non-owner sources. The Company recognizes as a component of comprehensive
income (losses) currency translation adjustments and changes in exchange rates
of 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
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 for 1999 and 1998 net of fees paid to the company providing wagering
services (see Note 4). This is currently in arbitration with Autotote as
discussed in Note 11.
36
ADVERTISING EXPENSE
During the years ended December 31, 2000, 1999, and 1998, the Company
incurred advertising costs of approximately $1,189,000, $1,594,000, and
$918,000, 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's assets as of 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: 5 to 10 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 effective 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.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", requires that long-lived assets and certain identifiable intangibles to be
held and used or disposed of by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Under such circumstances, SFAS No. 121 requires that
the carrying amount of an asset may not be recoverable. Under such
circumstances, SFAS No. 121 requires that such assets be reported at the lower
of their carrying amount or fair value less cost to sell. Accordingly, when
event or circumstances indicate that long-lived assets may be impaired, the
Company estimates the asset's future cash flows expected to result from the use
of the asset and its eventual disposition. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss is recognized based on the excess of the carrying amount over
the fair value of the asset. The Company determined that no impairment loss
need be recognized for applicable assets at December 31, 2000 and 1999.
37
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 operations 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, 2000 and 1999, allowance for doubtful
accounts amounted to $161,230 and $410,328, respectively.
NOTES RECEIVABLE
Notes receivable consist of short-term loans to horseowners to purchase
horses as a means to improve the quality of racing. It also includes certain
payments to be made to Panama horseowners to guarantee certain minimum amounts
provided under the contract with Panama horseowners (see Note 4). These loans
are payable when wagering in Panama reaches a certain level.
CURRENCIES
The Company consolidates its accounts with Galapagos and Equus-Comuneros
whose functional currency are the Dominican Republic peso and the Colombian
peso, respectively. The United States dollars ("US$") 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 during the year, for revenues
and expenses.
For the years ended December 31, 2000, 1999, and 1998, net exchange losses
resulting from remeasurement of accounts, together with losses from foreign
currency transactions, amounted to $58,256, $25,701, and $190,453, 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,
2000, 1999 and 1998 amounted to $237,995, $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, 2000, 1999 and
1998 were US$1.00 to FC$16.75, 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, 2000, 1999, and 1998, were US$1.00 to FC$16.53,
US$1.00 to FC$16.10, and US$1.00 to FC$15.23, respectively. The exchange rates
in Colombia as of December 31, 2000, and 1999, were US$1.00 to FC$2,229 and
US$1.00 to FC$1,874, respectively. The average exchange rates in Colombia
prevailing during the years ended December 31, 2000 and 1999 were US$1.00 to
FC$2,105 and US$1.00 to FC$1,733, respectively. The Company also consolidates
its accounts with Equus-Panama whose functional currencies are the Panama
balboas and the US$. Because these currencies are of equivalent value, there is
no effect attributed to foreign currency transactions of Equus-Panama.
38
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.
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.
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 Confederation (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's 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's 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.
39
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$43
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 and 1998, amounted to $321,358, and
$339,782, 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 confederation 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.
The Panama contract expires in December 2007. It is based on a percentage
of handle for the year 2000 and subsequent years. In 1999 and 1998, it
provided for minimum guaranteed payments to horseowners 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).
40
The Puerto Rico horseowners contract expires in July 2010. The new Puerto
Rico horseowners contract, signed in July 2000, provides for a non-recurring
cash payment of approximately $1 million. Approximately $673,000 was accrued in
1999. The remaining $364,000 was charged to operating expenses in 2000.
Under the Puerto Rico contract, the horseowners are guaranteed minimum
earnings of $25,032,000 for 2000 and 2001. ECMC is obligated among other items
to pay the horseowners $90,000 annually for administrative costs and 50% of the
principal and interest owed on an outstanding horseowners loan with a principal
balance due of $526,000, plus accrued interest. ECMC must also invest
$3,000,000 in improvements to the racetrack during the 10-year term of the
contract, as well as provide $2,000,000 of financing for the purchase of horses.
Additional costs incurred in the year 2000 related to the new horseowners
contract are included in other expenses.
On March 16, 2001, an "Addendum to Contract" was executed by the
Horseowners Confederation and the Company, whereby the parties jointly agreed
to:
(v) Increase the number of simulcast races each live race day from three
(3) to six (6).
(vi) Place three (3) of the simulcast races before the first live race and
place three (3) intermingled races after the fifth live race;.
(vii) Include simulcasting of nine (9) to twelve (12) races on Thursdays, a
day that currently holds no live races.
(viii) In consideration for the above items, ECMC will pay an additional
$1,000,000 to the Horseowners Confederation if approved by the Racing
Board.
A joint petition was recently filed with the Puerto Rico Racing Board to
request approval for the additional simulcast races mentioned above.
WAGERING SERVICES AGREEMENTS
The Company has separate agreements with Autotote Systems, Inc.
("Autotote") and United Tote Company ("United Tote") to provide 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:
41
1. Autotote
--------
PRESIDENTE
EL COMANDANTE V CENTENARIO REMON LOS COMUNEROS
--------------- -------------- -------------- ---------------
Expiration date March 2005 March 2005 January 2008 (c)
Cost of services, as a
percentage of wagering 0.65% 0.65% (a) 1.00% 1.20%
Minimum amount per year $ 800,800 $ 200,000 $ 330,000 (b) $ -
(a) Fees to Autotote are 2% of gross sales at lottery agencies and 1% of gross
sales at OTB agencies.
(b) Based on a minimum monthly payment of $27,500 for 2000, increased each
subsequent year, up to $36,000 in 2007. For years 2000, 1999 and 1998, the
minimum annual payment was $330,000, $300,000 and $318,000, respectively.
(c) On August 1, 2000, the Company terminated the contract with Autotote for
failure to comply under the terms of the contract. United Tote commenced
operations 30 days later.
2. United Tote
------------
In August 2000, the Company obtained a $2.5 million unsecured loan at 3%
over prime due in December 29, 2004. Principal and interest is to be paid
from .25% of the wagering handle for the first four (4) years of the service
contract with United Tote.
PRESIDENTE
EL COMANDANTE V CENTENARIO REMON LOS COMUNEROS
-------------- -------------- -------------- --------------
Commencement date (a) March 2004 March 2004 January 2007 August 2000
Expiration date December 2010 December 2010 December 2010 December 2010
Cost of services, as a
percentage of wagering (b) (b) (b) (b)
Minimum amount per year (c) n/a n/a n/a n/a
Additional fees (d) n/a n/a n/a n/a
(a) The services agreement with United Tote specifies that the
commencement date shall be the earlier of the date that the agreement
with Autotote expires or the date the agreement is properly
terminated. See Note 5. (1. c) above for the termination of the
Autotote agreement with Los Comuneros.
42
(b) Total Handle in a % of Total Handle received
Contract Year by United Tote
------------------------------ -----------------------------------
$ 350,000,000 0.95% in the first four (4) years and .7%
thereafter, see note (e) below.
$ 350,000,001 to $500,000,000 0.5% of Total Handle
$ 500,000,001 and over 0.4% of Total Handle
(c) Pursuant to the service contract, there are minimum annual guaranteed
wagering handles as to the twelve months from the date that
totalizator service is first initiated by United Tote at two or more
existing or new racetracks, and continues in twelve months intervals
subsequent to that date for the remaining term of the contract.
(d) The Company will also pay United Tote a weekly fee of $2,625 as a
"central hub allocation fee" until service by United Tote is furnished
to two or more existing or new racetracks.
(e) During the first four (4) years, a fee of 0.25% of handle will be
applied to principal and interest on the unsecured note of $2.5
million due on December 29, 2004.
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-year 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 (subject to
availability of funds) 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, 2000 and 1999, amounted to $350,000. No
contributions were paid in 2000. ECMC expects to make the remaining
contributions in 2001.
OTHER CONTINGENCIES
During 1999 and 2000, Equus Comuneros, received transfers from the Company
amounting to $1,307,000. According to Colombian law there are certain
limitations on transfers of foreign currency into Colombian entities. There is
the possibility that a regulatory investigation will result in fines and/or
penalties to Equus Comuneros. Equus Comuneros legal counsel is in process of
correcting any violations under Colombian law resulting from these transfers.
43
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 7). Upon
issuance of the Warrants, HDA recorded a 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 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-00
- ------------------------------ -------- ------------ ----------- ------------
Redemption Mar-1997 $ 737,000 $ - $ -
Redemption Sep-1997 2,500,000 (250,000) -
Purchase in open market Dec-1998 7,500,000 1,000,000 7,500,000
Redemption, reduced by amount
of notes held by the Company Jan-1999 2,620,000 (262,000)(a) (380,000)
Purchase in open market May-1999 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 operations as extraordinary items,
net of provision for income taxes, as follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -----------
Discount (premium) $ - $ 22,680 $ 738,000
Write-offs - - (464,146)
Provision for income taxes - - (106,803)
-------- -------- -----------
$ - $ 22,680 $ 167,051
======== ======== ===========
44
ECCC is required to partially redeem First Mortgage Notes commencing on
December 15, 2000. The stated future maturities of the First Mortgage Notes at
December 31, 2000, 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 (705) 81 (786)
-------- ------------- --------
$61,058 $ 7,390 $53,668
======== ============= ========
HDA may also redeem First Mortgage Notes at the following redemption
prices (expressed as percentages of principal amount), in each case together
with accrued and unpaid interest:
DURING THE 12-MONTH PERIOD
BEGINNING ON DECEMBER 15,
- --------------------------
2000 101.50%
2001 100.00%
HDA is required to purchase First Mortgage Notes, at face value, to the
extent that HDA has accumulated excess cash flow, asset sales with net proceeds
in excess of $5 million (to the extent these proceeds are not invested in HDA's
racing business within a year), or a total taking or casualty, or in the event
of a change of control of HDA.
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, 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. As of March 29, 2001, HDA had advanced to Equus
approximately $3,662,000 against allowable future distributions of profits which
is not in conformity with the terms of the Indenture.
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.
45
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 2000 1999
- --------------- -------------- --------- --------- ------------- ----------
HDA/ECMC Note payable (a) 15-Dec-01 P+1.00% $ 3,000,000 $5,500,000
Equus-Panama Term loan 25-Apr-00 10.75% - 56,364
Equus-Panama Line of credit (b) various 10.75% 280,349 204,955
Equus-Comuneros Term loans (c) various variable 269,612 464,763
HDA/ECMC Note payable (d) 15-Dec-01 P+1.00% 500,000 -
------------- ----------
$ 4,049,961 $6,226,082
============= ==========
At December 31, 2000, and 1999, the prime rate (P) was 9.50% and 8.50%,
respectively.
(a) Considered Refinancing Indebtedness under the terms of the Indenture.
Collateralized 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) 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) Collateralized by a certificate of deposit for $140,000, which is included
in the accompanying balance sheets as of December 31, 2000 and 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, 2000 and
1999, were 12.77% and 15.75%, respectively.
(d) 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.
46
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
- ------------------- ----------- ----------- ----------
2001 $ 994,013 $4,274,940 $ 600,000
2002 719,817 41,517 1,000,000
2003 545,307 35,319 1,200,000
2004 330,811 18,801 1,200,000
----------- ----------- ----------
2,589,948 4,370,577 4,000,000
Imputed interest (357,389) (320,616) -
----------- ----------- ----------
$2,232,559 $4,049,961 $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 $33,824, $49,975 and $52,400 in 2000, 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.
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, 2000, 1999 and 1998, is as follows:
47
2000 1999 1998
---------- ----------- -----------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 594,882 $1,152,797 $ 926,531
Service cost 128,225 118,891 86,651
Interest cost 55,616 68,073 72,355
Actuarial gain (loss) 117,436 (339,600) 49,540
Actuarial gain due to change
in assumptions - - 71,246
Benefits paid (174,409) (405,279) (53,526)
---------- ----------- -----------
Benefit obligation at end of year 721,750 594,882 1,152,797
---------- ----------- -----------
CHANGE IN PLAN ASSETS:
Fair value of plan assets beginning of year 428,391 623,532 419,389
Asset gain 6,247 - -
Actual return on plan assets (28,559) 53,692 41,660
Employer contribution 227,658 206,446 266,009
Benefits paid (174,409) (405,279) (53,526)
Administrative expenses (50,000) (50,000) (50,000)
---------- ----------- -----------
Fair value of plan assets end of year 409,328 428,391 623,532
---------- ----------- -----------
Funded status (312,422) (166,491) (529,265)
Unrecognized net actuarial loss 262,935 42,584 341,127
Unrecognized transition obligation 52,255 65,319 78,383
---------- ----------- -----------
Prepaid (accrued) benefit cost $ 2,768 $ (58,588) $ (109,755)
========== =========== ===========
WEIGHTED-AVERAGE ASSUMPTION:
Discount rate 7.50% 7.90% 6.75%
Expected return on plan assets 7.50% 7.50% 7.50%
Rate of compensation increase 4.00% 4.00% 4.50%
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 128,225 $ 118,891 $ 136,651
Interest cost 55,616 68,073 72,355
Expected return on plan assets (38,270) (54,902) (37,808)
Amortization of transition obligations 13,064 13,064 13,064
Recognized net actuarial loss 7,667 10,153 17,719
---------- ----------- -----------
Net periodic benefit cost $ 166,302 $ 155,279 $ 201,981
========== =========== ===========
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.
48
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,
-------------------------------
2000 1999 1998
-------- -------- ----------
Puerto Rico income taxes-
Deferred $570,056 $375,928 $1,145,945
Current - 204,892 -
Foreign income tax, deferred 50,038 161,333 -
-------- -------- ----------
$620,094 $742,153 $1,145,945
======== ======== ==========
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,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Puerto Rico income taxes-
Depreciation $2,333,767 $1,536,640 $2,859,688
Gain on involuntary conversion 1,421,523 1,513,569 1,057,413
Net operating losses of ECMC - - (924,371)
Contingency reserves - - (298,560)
Other (78,790) (75,083) (94,971)
Foreign withholding income taxes 256,644 190,674 29,340
----------- ----------- -----------
$3,933,144 $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.
49
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, 2000, 1999, and 1998:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
ENTITY NATURE OF SERVICE 2000 1999 1998
- ------------ --------------------------------- -------- -------- --------
RENDERED BY:
ACPT Support agreement $ 52,600 $ 40,400 $ 29,236
ACPT Rent office space 42,000 42,000 42,000
EMC Director fees 124,800 88,800 98,550
IBC Accounting services - - 3,000
IGC Services of James J. Wilson 192,703 135,000 180,000
IGC Services of Wilson Nazario 12,833 - -
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.
The Company currently has a case in arbitration at the American Arbitration
Association in defense of and against Autotote. Autotote has filed claims
against Galapagos, Equus Comuneros, Equus Panama and El Comandante for unpaid
service fees and against Equus Comuneros for liquidated damages.
The amounts claimed are as follows:
El Comandante $186,415 plus interest
Galapagos $194,977 plus interest
Equus Panama $227,379 plus interest
Equus Comuneros $584,262 plus interest
Equus Comuneros (damages) $2,276,780
Equus Panama and ECMC have agreed to pay the amount claimed and accordingly
have agreed to pay such amounts; each of the other companies has contested the
claims on the grounds that Autotote breached material contractual obligations.
Amounts accrued represent management's best estimate of amounts due to Autotote.
El Comandante and Galapagos have also filed counterclaims against Autotote.
50
The arbitration hearings concluded on April 9, 2001; rulings on the various
claims and counterclaims are expected on or before May 15, 2001.
.
In addition, the Company has disputed various cases since 1991 related to
the volume of business tax as assessed by the Municipality of Can vanas, in
which El Comandante is located in Puerto Rico. The Company's basis for the
dispute relates to the fact that the local municipality of Can vanas assessing
as volume of business, the sales commissions earned by the numerous OTB
agencies, located throughout the island of Puerto Rico. The OTB agencies are
also reporting and paying in their local communities the volume of business
conducted in their individual agencies. The Company claims this is a case of
double taxation and that the Company should not be taxed on the agencies volume
business sales. The Appellate Court of Puerto Rico ruled in favor of the
Municipality of Can vanas and confirmed the deficiencies. The Puerto Rico
Supreme Court denied a petition for hearing the case and as result the Appellate
Court's decision became final.
The following schedule lists the deficiencies that have not been paid since
1993 and which are included within Accounts Payable and Accrued Liabilities as
of December 31, 2000.
FISCAL TAX YEAR DEFICIENCY
----------------- ----------
93-94 $ 94,887
96-97 159,526
97-98 155,166
98-99 138,783
99-00 114,374
00-01 131,326
----------
Total deficiency
$794,062
==========
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
As of December 31, 2000, and 1999, the fair value of the First Mortgage
Notes was approximately $24,504,300, and $47,920,000 respectively, (as compared
with its carrying value of $53,667,739 in 2000 and $53,568,554 in 1999) 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.
13. SEGMENT INFORMATION:
The Company has identified reportable segments, based on geographical
considerations: Puerto Rico, Dominican Republic, Colombia, Panama and Uruguay.
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 (net of eliminating entries) for the years ended December 31, 2000,
1999 and 1998 (in thousands):
51
PUERTO DOMINICAN
2000: RICO REPUBLIC COLOMBIA PANAMA URUGUAY TOTAL
-------- ---------- ---------- -------- --------- ---------
Commissions on wagering $50,972 $ 3,315 $ 1,560 $ 8,540 $ - $ 64,387
Total revenues 53,403 4,265 1,839 9,081 4 68,592
Financial expenses 9,523 33 274 638 5 10,473
Depreciation and amortization 2,951 361 324 625 - 4,261
Loss before income
taxes, minority interest
and extraordinary item (8,096) (1,688) (2,540) 112 (328) (12,540)
Capital improvements 4,140 139 (1,168) 259 - 3,370
Total assets 57,768 2,036 4,009 10,217 6,104 80,135
1999:
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
Earnings (loss) before income
taxes, minority interest,
extraordinary item and
cumulative effect (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:
Commission 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
and extraordinary item 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
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 intersegment revenue. For the years ended December 31, 2000, 1999 and
1998, Puerto Rico recognized revenue of $167,964, $186,021 and $180,763,
respectively, attributable to Dominican Republic, and for the years ended
December 31, 2000, and 1999, $146,822 and $159,575, respectively, attributable
to Panama . No fees were charged to Panama in 1998 due to restrictions under
its bonds.
52
14.QUARTERLY REPORTS (UNAUDITED)
The following table reflects the unaudtied quarterly results of the Company
during the years ended December 31, 2000, 1999 and 1998.
ALLOCATION OF NET
(LOSSES) EARNINGS
-----------------------
BASIC AND
TOTAL NET (LOSS) GENERAL LIMITED DILUTED PER UNIT
QUARTER ENDED REVENUES EARNINGS PARTNERS PARTNERS (LOSS) EARNINGS
- --------------------------------------------------------------------------------------------
2000 FISCAL YEAR
March 31, 2000 $17,622,745 $ (640,304) $ (6,403) $ (633,901) $ (0.08)
June 30,2000 16,814,964 (2,205,665) (22,057) (2,183,608) (0.26)
September 30, 2000 16,448,512 (2,960,563) (29,606) (2,930,957) (0.35)
December 31, 2000 17,705,815 (6,038,438) (60,384) (5,978,054) (0.70)
----------- ------------- ---------- ------------- -----------------
$68,592,036 $(11,844,970) $(118,450) $(11,726,520) $ (1.39)
=========== ============= ========== ============= =================
1999 FISCAL YEAR
March 31, 1999 $18,985,686 $ 579,958 $ 5,800 $ 574,158 $ 0.10
June 30 1999 16,691,717 (489,878) (4,899) (484,979) (0.06)
September 30, 1999 17,258,051 (428,015) (4,280) (423,735) (0.05)
December 31, 1999 18,389,135 (2,752,462) (27,525) (2,724,937) (0.38)
----------- ------------- ---------- ------------- -----------------
$71,324,589 $ (3,090,397) $ (30,904) $ (3,059,493) $ (0.39)
=========== ============= ========== ============= =================
1998 FISCAL YEAR
March 31, 1998 $17,436,901 $ (249,866) $ (2,499) $ (247,367) $ (0.04)
June 30, 1998 16,043,767 (941,815) (9,418) (932,397) (0.15)
September 30, 1998 17,258,051 (428,015) (4,280) (423,735) (0.05)
December 31, 1998 18,233,847 (140,326) (1,403) (138,923) (0.04)
----------- ------------- ---------- ------------- -----------------
$68,972,566 $ (1,760,022) $ (17,600) $ (1,742,422) $ (0.28)
=========== ============= ========== ============= =================
53
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") and 100% of Wilson Securities Corporation ("WSC"). The Wilson family
and companies controlled by them, including IBC, WFLP and WSC hold approximately
a 77% 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 67 Co-Chairman and Director of EMC
Director of EMC
Thomas B. Wilson 38 Co-Chairman, President and Chief Executive
Officer; Director of EMC
Hernan G. Welch 51 Executive Vice President - Finance and
Administration (through February, 2001)
Juan M. Rivera-Gonzalez 53 Vice Chairman and Director of EMC
54
Donald J. Kevane 70 Director of EMC
Alberto M. Paracchini 68 Director of EMC
Barbara A. Wilson 64 Director and Secretary of EMC
Mary Pat Wilson 37 Director of EMC
Charles Cuprill 57 Director of EMC
RELATIONSHIPS. James J. Wilson and Barbara A. Wilson are the parents of Thomas
B. Wilson and Mary Pat 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 was Chief Financial Officer of EMC and the Company from April,
- -----------------
2000 to February, 2001 when he left the Company. From July, 1999 to March, 2000
he was Executive Vice President- Finance and Administration of EMC. 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.
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.
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.
55
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.
Mary Pat Wilson has been a Director of EMC since March 2000. She is the Managing
- ---------------
Director of Dresden Farm and is also on the Board of Trustees of Hill School in
Virginia and is Director of the Virginia Thoroughbred Association ("VTA").
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
two most highly compensated executive officers of the Company during 2000,
employed by its wholly owned subsidiary EEC effective January 1, 1998.
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 2000 258,727 - - - 9,752
President and CEO 1999 249,800 (3) - - - 9,527
1998 240,200 (3) - - - -
Hernan G. Welch (4) 2000 205,204 - - - -
Executive Vice 1999 89,530 - - - -
President - Finance - - - - - -
and Administration
Gretchen Gronau (5) 2000 70,237 - - - 2,912
VicePresident 1999 130,400 - - - 7,354
and CFO 1998 125,200 - - 10,000 7,264
56
(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. He left the Company on
February, 2001.
(5) Ms. Gretchen Gronau was an employee of the Company through April 30,
2000. Her salary includes payment of accrued unpaid vacations as of
April 30, 2000.
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 $33,824 in 2000. 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 2000,
the directors' fees totaled $124,800 of which $43,500 was unpaid as of December
31, 2000. 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 $192,703.
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.
57
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 0.60%
Thomas B. Wilson (2) 86,397 0.60%
Donald J. Kevane 1,000 0.01%
Alberto Paracchini 25,000 0.17%
Charles A. Cupril 10,000 0.07%
Hernan G. Welch 5,000 0.03%
All executive officers of EMC and the
Company and directors of EMC,
as a group (7 persons) 213,844 1.49%
OTHER UNITHOLDERS
The Wilson Family Limited Partnership ("WFLP") (2)
222 Smallwood Village Center
St. Charles, Maryland 20602 5,093,088 35.39%
Wilson Security Corporation ("WCS") (3)
222 Smallwood Village Center 6,000,000 41.70%
St. Charles, Maryland 20602
- --------------------------------------------------------------------------------
(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.
58
(3) WSC is owned by the Wilson Family, the members of the Board of
Directors have the power to control or vote all the shares, but each
member can not do it unilaterally, without the consent of the other
members, therefore none of the units owned by such corporation can be
attributed to a single director.
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
59
3.5 Third Amendment to Certificate of Exhibit 3.5 to Form S-11
Limited Partnership of the Company
3.6 Fourth Amendment to Certificate of Exhibit 3.6 to Annual
Report
Limited Partnership of the Company on Form 10-K of the Company
for the year ended December 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
60
10.17 Mortgage Note of $52,000,000 of HDA Exhibit 10.18 to Form S-4
10.18 Mortgage Note of $26,000,000 of HDA Exhibit 10.19 to Form S-4
10.19 Deed of Modification and Extension Exhibit 10.20 to Form S-4
of First Mortgage to Secure
Additional Mortgage Note, No. 43,
dated December 15, 1993
10.20 HDA Note in the amount of Exhibit 10.21 to Form S-4
68,000,000 to ECCC dated December
15, 1993
10.22 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
61
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
as of March 1, 1999 Exhibit 10.69 to 1998 10-K
21 Subsidiaries of the Company Filed herewith
62
REPORTS ON FORM 8-K. None
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Equus Gaming Company L.P.
----------------------------
(Registrant)
By: Equus Management Company
Managing General Partner
April 24, 2001 /s/ Thomas B. Wilson
- ---------------- -----------------------
Thomas B. Wilson
Co-Chairman, President,
Chief Executive Officer and Director and
Acting Chief Financial Officer
April 24, 2001 /s/ James J. Wilson
- ---------------- ----------------------
Co-Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE TITLE SIGNATURE
- ------------------------- -------------------------- -------------------------
April 24, 2001 Co-Chairman /s/ James J. Wilson
- ------------------------- -------------------------
James J. Wilson
April 24, 2001 Co-Chairman, President, /s/ Thomas B. Wilson
- ------------------------- Chief Executive Officer -------------------------
and Director Thomas B. Wilson
April 24, 2001 Vice Chairman and Director /s/ Juan M. Rivera
- ------------------------- -------------------------
Juan M. Rivera
April 24, 2001 Director /s/ Donald J. Kevane
- ------------------------- -------------------------
Donald J. Kevane
April 24, 2001 Director /s/ Alberto M. Paracchini
- ------------------------- -------------------------
Alberto M. Paracchini
April 24, 2001 Director /s/ Charles A. Cupril
- ------------------------- -------------------------
Charles A. Cupril
64