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, 2002 COMMISSION FILE NUMBER 000-25306
EQUUS GAMING COMPANY L.P.
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(Exact name of registrant as specified in its charter)
Virginia 54-1719877
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
El Comandante Race Track
Main Building First Floor
65th Infantry Avenue Rd. 3, Km. 15.3
Canovanas, PR 00729
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(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (787) 641-5844
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 NONE (the Company was
of beneficial ownership of the delisted from the NASDAQ Stock Market
Company's Class A limited partnership in January 2001)
interests ("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 [_] No [X]
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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Act). Yes [_] No [X]
The aggregate market value of Units held by non-affiliates of the registrant on
June 30, 2004 was approximately $5.6 million.
As of October 7, 2004, there were 3,087,892 Units outstanding.
Documents Incorporated By Reference: Not Applicable
EQUUS GAMING COMPANY L.P.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Class A Units and Related Unitholder Matters 13
Item 6. Selected Financial and Operating Data 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 27
PART III
Item 10. Directors and Executive Officers of the Company and EMC 28
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Unitholders and Management 31
Item 13. Certain Relationships and Related Transactions 32
Item 14. Controls and Procedure 32
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 33
2
PART I
ITEM 1. BUSINESS
ITEM 1.1 BANKRUPTCY OR RECEIVERSHIP
On October 15, 2004, three affiliates of Equus Gaming Company, L.P.(each an
"Affiliate", and collectively, the "Affiliates") filed separate voluntary
petitions under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware (the "Court").
The first Affiliate, El Comandante Management Company LLC, filed for
Chapter 11 protection in Case No. 04-12972-PJW. The second Affiliate, Housing
Development Associates, S.E., filed for Chapter 11 protection in Case No.
04-12973-PJW. Finally, the third Affiliate, El Comandante Capital Corporation,
filed for Chapter 11 protection in Case No. 04-12974-PJW.
The Court assumed jurisdiction over each Affiliate on October 15, 2004.
Each of the Affiliates will continue to manage over its assets and business as a
"debtor in possession" subject to the powers and supervision of the Court
pursuant to Chapter 11 of the Bankruptcy Code. No receiver, fiscal agent or
similar officer has been appointed over the assets or operations of each of the
Affiliates.
"As discussed in this Item 1 below, two of these Affiliates own and operate
El Comandante Racetrack, which is the primary asset and source of revenues of
the Company. The proposed reorganization of the business of these Affiliates is
summarized in a press release that was issued on October 18, 2004, providing
information relating, among other things, to the bankruptcy filings made by the
Affiliates on October 15, 2004.
The contents of the translation into English of the press release are
incorporated by reference into this Item 1. A copy of the translation into
English of the press release is attached as exhibit 99.1 to this Annual Report."
ITEM 1.2
The current business description of the Company is more fully disclosed in Note
1 of the "Notes to Consolidated Financial Statements" for the years ended
December 31, 2002, 2001 and 2000, which is provided as an attachment to this
filing and is incorporated by reference to this Item 1. The business description
contained in this Item 1 should be read in conjunction with the referenced
description in Note 1.
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 and South America. Through its subsidiaries, the Company operates
three 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.
Through its wholly owned subsidiary Equus Entertainment Corp.
("Entertainment") 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"). El Comandante was operated prior to
this date by El Comandante Operating Company, a non-stock corporation.
The Company has a 55% interest in Galapagos, S.A. ("Galapagos"), a company
organized under the laws of the Dominican Republic, and the operator since
April, 1995 of V Centenario Race Track in the Dominican Republic ("V
Centenario"). The racetrack is government owned and operated by the Company's
subsidiary under a long-term license contract that expires in April 2005.
On October 9, 2001, Equus Entertainment de Panama was restructured whereby
the Company surrendered its controlling interest as of September 30, 2001. See
"Notes to Consolidated Financial Statements".
The Company also had a controlling 100% interest in Equus-Uruguay, S.A.,
which 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 5,000 slot machines in 5 locations. The
necessary restoration of the racetrack required an initial investment of $12
million. Efforts to raise the $12 million by the due date were unsuccessful.
Consequently, the concession expired on March 31, 2001 and the Company's bid
bond in the amount of $500,000 was forfeited and thus expensed during the period
ended March 31, 2001. Subsequently, the concession was awarded to another
operator in the fourth quarter of the year 2001, which resulted in the Company
writing off its entire investment at December 31, 2001.
The Company also has a controlling 100% interest in Satellite Services
International, Inc. ("SSI") and Agency Betting Network, Inc. ("ABN"). SSI will
provide up-link services, satellite time (contracted from a third party), and
leasing of video and data telecommunication equipment, to transmit (or
simulcast) live races from and to the Company's racetracks and OTB agencies,
including live races from outside the Company's operational territories to the
agency distribution networks in order to increase the level of wagering revenues
through the Company's OTB systems. ABN is establishing and operating an OTB
agency system in Colombia in conjunction with Los Comuneros Race Track in Medell
n, Colombia ("Los Comuneros"), owned and operated by Equus Comuneros S.A.
("Equus-Comuneros"). Equus-Comuneros is a corporation organized under the laws
of the Republic of Colombia and is a 50% owned subsidiary of the Company. The
Colombia OTB system is expected to operate in Bogota, Medellin and other major
cities.
In 1999 the Company initiated a vertical integration process to consolidate
its telecommunications needs into a centralized hub-and-spoke system based at El
Comandante racetrack in Puerto Rico. During 2000 and 2001 the development of
this system encountered significant technical obstacles, which necessitated the
redesigning of its architecture, reallocation of the equipment and ultimately, a
strategic revision of the objectives for the system.
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The vertical integration process began with the development of a C-Band
satellite uplink facility in Panama in the fall of 1999 to fulfill the
broadcasting needs of this jurisdiction which, at the time, belonged to the
Company's international network of pari-mutuel operations. By December of that
year the consolidation process had identified VSAT technology via the Ku-Band
medium as the application necessary to address the Company's needs for video and
data transmission throughout its proprietary agency-betting network in Puerto
Rico, Panama, Colombia and the Dominican Republic.
The significant investment made by the Company during 1999-2000 in the
satellite telecommunications equipment required to implement the VSAT system
included the development of a main uplink Hub in Puerto Rico, and of supporting
Ku-Band uplinks to service the markets of Panama and Colombia. Initial steps
were also taken to establish a supporting uplink in the Dominican Republic
although the facility has not been completed at this time.
Several factors altered the course of the VSAT project, and namely, the
incompatibility of this technology with the Autotote system currently in use
throughout the Company's pari-mutuel operations hindered its deployment as the
primary means of transmission for the agency-betting network's wagering data.
Consequently, the Company is in the process of evaluating several alternate
commercial applications for this equipment both in Colombia and Puerto Rico.
Conversely, the aforementioned satellite uplink facilities continue to
provide video broadcasting services for the Company's pari-mutuel operations in
Puerto Rico, Colombia and the Dominican Republic. In addition to the alternate
commercial uses being sought for the VSAT equipment, the Company's uplink
facilities are uniquely positioned to provide satellite broadcast services to
prospective clients in Puerto Rico, Colombia, and potentially in the Dominican
Republic.
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 2002, there were
approximately 618 OTB agencies in operation. As of June, 2004 there were 639
active agencies in operation.
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 2001 production was integrated with the racetrack's operations at a
substantial savings. 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 broadcast through an agreement with S&E Network, Inc.
("S&E"). The Company is working with the development and implementation of 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 Horse
Owners Confederation requiring that horse owners 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 horse owners 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. The current Operating License expires December 14, 2004.
4
ECMC faces stiff 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. Beginning in 1995 through present day ECMC has experienced declines in
wagering each year due to the strong competition from government sponsored
lotteries, government sponsored slot machines and casinos as well as the rise in
illegal gambling operations throughout Puerto Rico in the form of illegal
"entertainment" machines.
The Governor and the Legislators of Puerto Rico recognized in 2004 the need to
provide another means of revenue to save the Horse Racing Industry in Puerto
Rico. Therefore, Act 139 has been signed into law whereby an Electronic Video
Gaming System (VGS) is authorized and to be established, through which a person
may choose among different gaming options and place wagers, solely and
exclusively at the locations where OTB Racing Agents operate.
The OTB Racing Agents are exclusive agents of the Racing License Holder of El
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Comandante Race Track and are licensed and approved by the Racing Administrator
(position is appointed by the Governor of Puerto Rico) to accept wagers on horse
races distributed by El Comandante. There are currently 662 contracted, licensed
and approved OTB Agencies in Puerto Rico with El Comandante. There are currently
no limits on the number or size of OTB Agencies.
In accordance with Act 139:
- The Holder of the Race Track License, HOUSING DEVELOPMENT ASSOCIATES,
S.E. (H.D.A.) is empowered to negotiate and execute contracts with the
providers for the design and implementation of the Electronic Video
Gaming System.
Housing Development Associates, S.E. (H.D.A.) is a 99% owned
subsidiary of Equus Entertainment Corporation (itself, a
wholly-owned subsidiary of the Company) and the sole licensed
owner / operator of a horse racetrack (EL Comandante) in Puerto
Rico.
- The prize payout to the player shall not be less than 83% of the total
of all wagers.
- There is no limit in the law on the number of VGS devices.
- The Net Revenue from Operations or "WIN" ( gross wager less prize
payout to player) shall be distributed in the following manner;
I. If the Holder of the Race Track License also owns and
operates the Electronic Video Gaming System, then:
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a) Fifteen (15) percent to the OTB Racing Agents
Commission Fund. This OTB Commission Fund would be
distributed to the OTB Racing Agents based upon
Regulations yet to be established.
b) Fifteen (15) percent to the Horse Race Purse Account.
This Horse Race Purse Account would be distributed to
the Horse Owners based upon Regulations yet to be
established.
c) Seventy (70) percent shall be retained by the Holder of
the Race Track License (H.D.A.)
II. If the Holder of the Race Track License contracts with a
third-party to operate the Electronic Video Gaming System,
then:
a) Fifteen (15) percent to the OTB Racing Agents
Commission Fund. This OTB Commission Fund would be
distributed to the OTB Racing Agents based upon
Regulations yet to be established.
b) Fifteen (15) percent to the Horse Race Purse Account.
This Horse Race Purse Account would be distributed to
the Horse Owners based upon Regulations yet to be
established.
c) Seventy (70) percent shall be retained by the Holder of
the Race Track License (H.D.A.) to be split with the
Operator of the Electronic Video Gaming System as based
upon a contract between the parties.
The Rules and Regulations are required to be completed within ninety (90)
days after signing into law of Act 139, however an extension is currently in
place.
As of the date of this filing, the Company had issued a Request for
Proposal (RFP), met and interviewed with sixteen (16) interested gaming
entities, received four (4) proposals and is currently negotiating with three
(3) of the entities that have provided proposals. Two (2) of these entities have
represented that they would be willing to guarantee for a period of ten (10)
years that the annual revenue to be received by the Company would be $15 million
or the actual amount of the annual debt service to service the existing bond
principal, interest, refinancing fees and unpaid treasury taxes due as of
December 31, 2004, whichever is less. There are no guarantees that any final
deal can be negotiated with the parties as this relies heavily on many
conditions which the government, in the very near future, must agree and
implement.
EMPLOYEES. ECMC had approximately 192 employees as of December 31, 2002
and approximately 191 employees as of June, 2004. There were 56 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; 76 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 60 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
Ranger American of Puerto Rico for a period of one year, with yearly renewable
options, which have since been exercised, commencing in January 2000.
6
As of June 30, 2004, there were 52 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 January 14, 2004 and was renewed effective
February 1, 2004 for a three-year period; 77 employees performing building and
premises maintenance services covered by a collective bargaining agreement
between ECMC and the General Workers Union, which expired February 28, 2003, and
was renewed effective November 1, 2003 for a three year period. There were 62
employees working in administrative positions as of June 30, 2004.
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.
At December 31, 2002 there were approximately 232 installed and 172
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.
In 2002 through current day operations in 2004, 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
Lottery. Galapagos had 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 were 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) were 1% of gross lottery sales at lottery agencies and 2% of gross
lottery sales at OTB agencies. In addition, the lottery operator paid 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 Autotote unilaterally discontinued using the Company's
wagering distribution system and entered into a private agreement with the
service provider. The Company then initiated arbitration proceedings against the
operator and on November 21, 2001 the American Arbitration Association rendered
its final award. See Item 3. "Legal 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 Galapagos pick-6 wager
represents roughly 40% of the betting handle and is significantly impacted
whenever the lottery jackpot is at a high level. There are approximately 3,000
independent sports betting agencies in the Dominican Republic. There were
approximately 153 OTB agencies at December 31, 2002. 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 130 employees at December 31, 2002 and 125
employees as of June, 2004. Galapagos has no agreements with unions and has not
experienced any work stoppage or material labor difficulties.
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C. 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 2002 Los Comuneros operated
approximately 150 OTB agencies. As of June, 2004 approximately 125 agencies were
operating. 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.
The OTB agency network is operated by ABN, a wholly owned Puerto Rican
subsidiary of the Company, and will be equipped with improved satellite video
and data communication equipment with the capacity to service major cities in
Colombia. As of December 31, 2002, approximately 126 ABN antennas were
installed in Colombia. As of June 30, 2004 approximately 125 antennas were in
place.
In mid 2001, ABN applied to the Government for a sports betting license,
which if granted could have a material impact on future earnings. ABN received
verbal approval from the city of Medellin. Sports betting was not implemented
due to the high level of taxation.
COMPETITION. Equus-Comuneros faces competition from other forms of
legalized gambling in Colombia, including a lottery system.
EMPLOYEES. At December 31, 2002 and June, 2004 Equus-Comuneros had 38
employees and 53 employees, respectively. On race days there are approximately
an additional 51 employees operating the betting system.
D. SATELLITE SERVICES INTERNATIONAL, INC. ("SSI")
SSI, a wholly owned subsidiary of the Company, will provide satellite
up-link services and satellite time (contracted through a third party). SSI will
also lease video and data telecommunications equipment to transmit (or
simulcast) live races between the Company's racetracks and the OTB agencies. In
addition, SSI will receive a percentage of wagering handle on races simulcast
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 being utilized.
As of December 31, 2002, the physical assets of SSI consisted of the
following:
(i) Hub Master Earth Station in San Juan, Puerto Rico
(ii) Satellite Uplink Stations in San Juan, Puerto Rico
(iii) VSAT and video telecommunications equipment for 930 OTB sites in
Puerto Rico, Colombia, the Dominican Republic and Panama.
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
8
from terrestrial lines such as "pay at the pump" gasoline stations, pharmacy
prescription networks and lottery sales.
E. AGENCY BETTING NETWORK, INC. ("ABN")
ABN is a wholly owned subsidiary of the Company which installed and
operates an OTB agency system in Colombia that provides satellite and data
communication facilities, intending to eventually reach and penetrate all of the
major cities in Colombia. ABN installed the current system from 2001 through
March 2003, at which time it had completed the installation of all equipment and
antennas on hand. No new equipment acquisitions have been made since that time.
F. SEGMENT INFORMATION
Note 14 of the Company's Certified Consolidated Financial Statements, which
are presented as a separate attachment to this filing, contains the segment
information related to the business operations.
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 people and a total capacity in excess of
25,000 people, including glass-enclosed, air-conditioned dining room
with seating capacity for over 1,400 people;
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.
ECMC also owns certain race track and telecommunication equipment used in
the operation of El Comandante and the off-track betting system. See Note 3 to
the Company's consolidated financial statements for a description of the
encumbrance on El Comandante properties.
V CENTENARIO. Galapagos leases V Centenario from the government of the
Dominican Republic. V Centenario is situated on a parcel of land, approximately
7.5 miles east of Santo Domingo, Dominican Republic. V Centenario properties
include the following:
a. A building consisting of grandstand and clubhouse with seating for
over 4,200 people and total capacity in excess of 10,000 people,
including an air-conditioned dining room with seating for 400 people;
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.
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 a grandstand and a clubhouse with total
seating capacity of 5,500 people;
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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
The Company had a case in arbitration at the American Arbitration
Association in defense of and against Autotote, involving all the racetracks in
which Equus has an ownership interest. Autotote is the company that still
currently provides totalizator (betting system) services to El Comandante.
On July 27 and November 21, 2001, the American Arbitration Association
rendered its award decisions. The following is a summary of the awards by
racetrack:
El Comandante, Puerto Rico
1. El Comandante is to pay Autotote the principal amount of $355,496
in unpaid service fees together with interest of $32,051, accrued
through April 1, 2001.
2. El Comandante shall reimburse Autotote for costs incurred of
$132,500.
3. As of December 31, 2001, the outstanding principal balance was
$761,415 and accrued interest was $501.
As of June, 2004, El comandante has made all the required payments due
under this settlement applicable to El Comandante.
Equus Entertainment de Panama, Panama
1. Equus Entertainment de Panama is to pay Autotote the principal
amount of $250,474 in unpaid service fees together with interest
of $45,233 accrued through June 30, 2001.
2. Equus Entertainment de Panama shall reimburse Autotote for costs
incurred of $25,000.
On October 9, 2001, the Company sold its common stock and purchased
3,000 shares of preferred stock and at the same time was released from
any further liability under the Autotote - Equus Entertainment de
Panama arbitration award.
Equus - Comuneros, Colombia
1. Equus-Comuneros is to pay Autotote the principal amount of
$584,262 in unpaid service fees as of April 23, 2001, together
with interest of $218,059 accrued through December 31, 2001.
2. Equus-Comuneros shall reimburse Autotote costs incurred of
$132,500.
As of June, 2004, Equus-Comuneros owed approximately $440,000
under this settlement. However, this balance includes
approximately $250,000 for the purchase of all Autotote equipment
at Equus-Comuneros.
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Galapagos, Dominican Republic
1. Galapagos owes Autotote the principal amount of $230,578 as of April
23, 2001, together with interest of $120,308 through November 21,
2001, the date of the award.
2. For breach of good faith and fair dealings, Autotote owes Galapagos
$800,000, plus interest at the rate of seven (7) percent per annum
from November 21, 2001 to the date of payment.
3. The parties have no further obligations to one another with respect to
lottery operations in the Dominican Republic.
4. The parties shall bear equally the costs of arbitration which amount
to $44,903 each. Any excess funds on deposit shall be reimbursed to
the paying parties in equal amounts.
5. Autotote shall pay Galapagos $150,000 in reimbursement fees incurred
in the proceedings.
6. Awards will be offset and the net amount owed to Galapagos of
approximately $600,000 will accrue interest at seven (7) percent until
paid.
Subsequently, Galapagos entered into an agreement with Autotote dated
July 20, 2000 for the right (license) to utilize their software and to
purchase the Autotote equipment for a total of approximately $423,000,
including simple interest at 8% per annum. The agreement called for
Galapagos to make 20 monthly payments of $21,128 each. Galapagos was
unable to make the required payments and , therefore, this agreement
was renegotiated and restructured beginning effective April 1, 2004.
Under the revised agreement, Galapagos agreed to pay Autotote $5,000
per month from April 1, 2004 through March 31, 2005 for the rights
(license) to operate the equipment and software. After March 1, 2005,
the Company has the option to continue on a month-to-month basis
paying the $5,000 per month and operating the equipment and software.
Galapagos tendered in writing the return of all the ownership of the
Autotote equipment and software to Autotote. Galapagos also gave its
express consent for Autotote to negotiate with anyone concerning early
termination of the Galapagos racetrack lease contract which currently
expires April 29, 2005.
Each entity involved in the arbitration sustains individually the
consequences of the arbiters' final award and, with the exception of one
subsequent and related agreement entered into between El Comandante, Galapagos,
and Autotote, there are no performance guarantees by any other entity including
Equus Gaming Company L.P., the parent company. In the subsequent agreement
between El Comandante, Galapagos, and Autotote, the amount owed by Autotote to
Galapagos is to be credited directly against El Comandante's outstanding trade
payables due to Autotote and, simultaneously, Galapagos is to be given credit
for this same amount against its outstanding simulcast payable balance due to El
Comandante.
Costs incurred by the Company in pursuing the Arbitration with Autotote
totalled $574,042 and have been allocated to each participating entity in the
same proportion that the arbiters awarded the costs incurred by Autotote to each
entity.
11
MUNICIPALITY OF CANOVANAS
On August 18, 2001, ECMC executed a Closing Agreement (the "Agreement")
with the Municipality of Canovanas whereby ECMC settled its longstanding dispute
over the payment of the Volume of Business Tax assessed by the municipality.
The following schedule lists the deficiencies by fiscal year with the
corresponding interest and surcharges:
FISCAL INTEREST
TAX TAX AND
YEAR DEFICIENCY SURCHARGES TOTAL
- ---- ---------- ---------- -----
93/94 $ 74,087 $ 67,913 $142,000
96/97 120,397 68,224 188,621
97/98 126,666 59,110 185,776
98/99 123,366 45,233 168,599
99/00 93,367 24,898 118,265
00/01 116,735 19,455 136,190
------- ------ -------
Totals $ 654,618 $ 284,833 $939,451
======= ======= ========
Prior to settlement, the Company had accrued as of June 30, 2001 as a liability
a total of $838,396 due for municipal taxes and other charges. On June 30,
2001, the Company recorded additional penalties and interest of $101,054.
The terms of the Agreement are as follows:
1. For period August 1, 2001 through January 31, 2003, ECMC will pay the
Municipality of Canovanas $5,000 per week.
2. At the end of this eighteen (18) month period, the Municipality can
decide whether to request full payment of the remaining balance,
$559,451, or renegotiate a final twelve (12) month payoff of said
balance.
3. Should ECMC default at any time on the agreed to payment terms, the
Municipality may declare the entire remaining balance due.
4. To guarantee timely payments of the amounts due, ECMC has provided to
the Municipality two (2) payments bonds in the amount of $503,732 and
$94,886, respectively.
ECMC fully complied with the provisions of the Agreement, accelerated its
payments, and paid the outstanding amount in full during November 2003.
PUERTO RICO TREASURY DEPARTMENT
The Company is required to pay to the Treasury Department of the Government
of Puerto Rico various taxes on wagering, as described more fully in the Puerto
Rico Internal Revenue Code, within two days of the wagers being placed. The
Company failed to remit these tax payments for the period from October 16, 2000
to February 7, 2001 and, consequently, accumulated taxes that were assessed
finally by the Treasury Department at $11,172,450. The Company and the Treasury
Department negotiated a closing agreement (payment plan) that commenced
effective June 1, 2001. The Company has remained in full compliance with the
terms and conditions of this closing agreement. See Note 7(b), "Commitments and
Contingencies", of the accompanying Consolidated Financial Statements [item 8
below] for further details with respect to this matter.
12
OTHER LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the forth quarter
of the Company's 2002 fiscal year.
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 Small Cap 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.
Subsequent to being delisted from the NASDAQ Stock Market, the Units have
been traded in the "Pink Sheets," an electronic quotation system that displays
quotes from broker-dealers for many over-the-counter securities. The following
table sets forth (1) for 2000, the high and low sales prices per Unit, as
reported by the NASDAQ Stock Market, and (2) for 2001, the high and low sale
prices for the Company's Units as quoted from the Pink Sheets. Management does
not have knowledge of the prices paid in all transactions and has not verified
the accuracy of those prices that have been reported. Because of the lack of an
established market for the Company's Units, these prices may not reflect the
prices at which the Units would trade in an active market.
Price Range of Units
--------------------
HIGH LOW
---- ---
2002 QUARTER
Fourth 0.250 0.150
Third 0.700 0.200
Second 0.080 0.010
First 0.180 0.010
2001 QUARTER
Fourth 0.220 0.110
Third 0.080 0.200
Second 1.050 0.410
First 1.000 0.530
On October 7, 2004, the closing sale price of Units was $1.65 as reported on in
the Pink Sheets. As of October 7, 2004, there were 15,325,381 Units outstanding
and approximately 185 Unitholders of record. Of the units outstanding, 3,082,892
have not been registered under the Securities Exchange Act of 1934, and
therefore, there are restrictions on whether they can be traded.
The Company did not make cash distributions to unitholders in fiscal years
2001 and 2002. The Company has not made any cash distributions subsequent to
2002 and does not expect to make cash distributions to its unitholders in the
foreseeable future. The Company's principle 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 2004.
13
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 for periods prior to 2001 are
derived from audited, consolidated financial statements of the Company,
certified by the independent audit firm Arthur Anderson LLP up to and including
the year 2000. As a result of the disruption within Arthur Andersen LLP caused
by Government indictment, the Company engaged a new independent audit firm,
Landa Umpierre PSC, in May , 2003. The years 2002 and 2001 historical income
statement and balance sheet data below have been certified by the aforementioned
independent audit firm, Landa Umpierre PSC. 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).
14
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
HISTORICAL (1, 5) - In Thousands (000)
-----------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Earnings Statemet Data
- ----------------------
Revenues
Commissions on wagering $ 50,811 $ 51,561 $ 55,846 $ 57,356 $ 52,529
Net Revenues from lottery services - - 16 546 656
Income from insurance settlement - - - - 12,856
Other Revenues 5,850 6,565 4,758 5,978 2,931
--------- --------- --------- --------- ---------
56,661 58,126 60,772 63,880 68,972
Payments to horseowners 25,341 25,997 28,393 28,797 25,996
Other Expenses 32,114 35,948 33,407 27,515 27,594
--------- --------- --------- --------- ---------
(794) (3,819) (1,028) 7,568 15,382
Financial expenses 8,034 8,257 6,913 7,911 9,109
Depreciation and amortization 5,072 4,549 4,261 3,021 3,756
Loss on exchange rates 2,127 258 187 26 23
Loss form discontinued operations - 4,601 168 10 -
Impairment loss on El Comandante
intangible - - - - 3,136
--------- --------- --------- --------- ---------
(16,027) (21,484) (12,557) (3,400) (642)
Provision for income taxes 107 239 603 742 1,110
Minority interst in (losses) earnings) (2) (53) (117) (1,315) (1,029) 228
Extraordinary income (loss) (5) - - - 23 167
Cumulative effect - - - - (403)
--------- --------- --------- --------- ---------
Net (loss) earnings $(16,081) $(21,606) $(11,845) $ (3,090) $ (1,760)
========= ========= ========= ========= =========
Net (loss) earnings per unit (6) $ (1.30) $ (2.31) $ (1.39) $ (0.39) $ (0.28)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
HISTORICAL (1, 5) - In Thousands (000)
-----------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
BALANCE SHEET SELECTED DATA:
- ----------------------------
Cash and cash equivalents $ 2,592 $ 1,411 $ 1,249 $ 2,196 $ 6,537
Race tracks property and
equipment (7) 47,012 51,309 54,825 54,672 42,428
Deferred costs 1,910 3,447 1,889 2,569 2,866
Total Assets 53,795 60,784 65,745 62,422 56,072
First Mortgage Notes 54,114 53,875 57,584 53,834 56,194
Notes, bonds payable and
capital lease obligations 4,477 4,118 5,784 8,878 4,800
Total liabilities 110,688 103,077 93,130 76,891 71,265
Partners' deficit (56,893) (42,293) (27,385) (14,469) (15,193)
15
(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) Net (loss) 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.
(3) 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, 2001, 2000, 1999, 1998, and 1997 was
approximately $3,519,190, $3,669,520, $4,234,000, $3,970,180, and
$5,097,000, respectively.
(4) In 2001, the Company surrendered its controlling interest in the
Presidente Rem n racetrack in Panama and also lost its controlling
interest in the Maronas racetrack in Montevideo, Uruguay after the
license was cancelled by the government and awarded to a different,
unrelated operating company. The Company presented the results of
these activities as discontinued operations.
(5) Certain reclassifications have been made to the prior year's (years
1997 through 2000) financial statements to conform them to the current
presentation.
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 racetracks in three 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. and (iii) Los
Comuneros in Medellin, Colombia, owned and operated since early 1999 by Equus
Comuneros, S.A. ("Equus-Comuneros"). In 2001, the Company surrendered its
controlling interest in the Presidente Rem n racetrack in Panama and also lost
its controlling interest in the Maronas racetrack in Montevideo, Uruguay after
the license was cancelled by the government and awarded to a different,
unrelated operating company. In 2001, the Company recorded the results of these
activities as discontinued operations. In addition, the results of these
activities has been "deconsolidated" in the years prior to 2001.
The following discussion compares: (i) the consolidated results of
operations of the Company for 2002 with the comparable results for 2001 and (ii)
the Company's consolidated results of operations for 2001 with the comparable
results for 2000, all net of the discontinued racetrack operations in Panama and
Uruguay.
16
THE COMPANY'S RESULTS OF OPERATIONS
2002 COMPARED TO 2001
- ---------------------
REVENUES
Consolidated Revenues decreased by approximately, $1,465,000 or (2.5%), in
2002 to $56,661,000 from $58,126,000 in 2001. Approximately $750,000 of this
decrease was due to decreased commissions on wagering resulting from a lower
level of wagering. The remaining decrease was due to a net decrease in all other
revenues, as described below.
COMMISSIONS ON WAGERING
Commissions on wagering decreased by approximately, $750,000 or (1.5%) in
2002 to $50,811,000 as compared to $51,561,000 in 2001. The decrease in
commissions was attributable to the following operations: Galapagos ($732,000)
and Colombia ($163,000), net of the increase in commissions attributable to El
Comandante of $145,000. The decrease at Galapagos was primarily attributable to
the rise in the foreign exchange rate.
PUERTO RICO. Commissions on wagering at El Comandante increased $145,000 or
0.3% from $46,371,000 in 2001 to $46,516,000 in 2002. Commissions on wagering
are directly related to the racetrack handle. The off-track live racing handle
increased by approximately $12,517,000 with a corresponding increase in
commissions of $2,517,000. The on-track betting handle increased by
-------------
approximately $485,000 with a corresponding increase in commissions of $54,000.
-----------
These increases were mostly off-set by the $13,060,000 decrease in the simulcast
handle with a corresponding decrease in commissions of $2,426,000. The Racing
Board cancelled its approval for El Comandante to receive races simulcast in
from the U.S.A. effective October 22, 2001.
DOMINICAN REPUBLIC. Commissions on wagering at V Centenario decreased by
$732,000 (21.8.0%) from $3,356,000 in 2001 to $2,624,000 in 2002. The total
handle decreased $4,069,000 and the exchange rate was unfavorable. Simulcast of
races from ECMC was discontinued effective December 2, 2002 due to Puerto Rico
Racing Board action as a result of the non-payment of an outstanding simulcast
balance owed to ECMC by Galapagos.
COLOMBIA. Commissions on wagering at Los Comuneros decreased by $163,000,
(9.0%) from $1,834,000 in 2001 to $1,671,000 in 2002. There was an increase in
total handle of approximately $727,000 due to the addition of simulcasting.
However, the wagering commissions decreased due to the unfavorable exchange
rate.
NET REVENUES FROM LOTTERY SERVICES
Since June 30, 2000, Autotote had provided services directly to the Lottery
Operations [Dominican International Electronic Lottery, Inc. (LEIDSA)] and
refused to pay Galapagos service fees under its service contract. See Item 3,
"Legal Proceedings".
OTHER REVENUES
During 2002 other revenues decreased by approximately $715,000 or (10.9%)
compared to 2001. The decrease was primarily due to a decrease of $1,631,000 in
the Dominican Republic for three non-recurring revenue items realized in 2001.
These included $966,000 due to Autotote arbitration settlement, $332,000 for
prior year (1997) tax settlement, and $333,000 for wagering royalty claims. This
non-recurring increase was largely offset by a net increase of $1,170,000 for
ECMC in the other income/expense category resulting primarily from the
combination of tax penalty and interest assessments and other non-recurring
expenses items incurred during 2001. The remaining other income decreases were
primarily experienced in the operations of Galapagos ($153,000) and ECMC
betting card sales ($164,000).
17
EXPENSES
For reasons set forth below, total operating expenses during 2002
decreased by $4,490,000 or (7.3%) as compared to 2001. This includes the net of
a decrease of $656,000 or (2.5%) in payments to horse owners, from $25,997,000
in 2001 to $25,341,000 in 2001 combined with a decrease of $3,834,000 in other
expenses, from $35,948,000 in 2001 to $32,114,000 in 2001. Some of these
expenses were non-recurring and are reported below under appropriate categories.
PAYMENTS TO HORSE OWNERS
Payment of purses to horse owners decreased $656,000 (3%) in 2002 compared
to 2001:
increase
2002 2001 (decrease)
-------------------------------------
ECMC (a) $23,259,000 $23,186,000 $ 73,000
Dominican Republic 1,312,000 1,678,000 (366,000)
Columbia 770,000 1,133,000 (363,000)
-------------------------------------
$25,341,000 $25,997,000 $ (656,000)
=====================================
(a) Summary of horse owners contract provision for ECMC:
The Puerto Rico horse owners contract was signed in July 2000. Under the
contract, ECMC is obligated among other items to pay the horse owners $90,000
annually for administrative costs and 50% of the principal and interest owed on
an outstanding horse owners 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 2001 related to the horse owners
contract are included in other expenses.
On March 16, 2001, an "Addendum to Contract" was executed by the Horse
Owners Confederation and the
Company, whereby the parties 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 races and
three (3) after the fifth live race.
(iii) Include simulcasting of nine (9) to twelve (12) races on Thursday,
currently a dark day.
(iv) In consideration of the above, ECMC would pay an additional $1,000,000
to the Horse Owners Confederation when and if the additional simulcast
is approved by the Racing Board
On June 28, 2001, the Puerto Rico Racing Board granted ECMC the right to
increase the number of simulcast races from the United States from three (3) to
six (6) per live race day. The Order allowed for a three (3) month probationary
period commencing July 1, 2001 and for ECMC to place three (3) simulcast races
before the first live race and three (3) simulcast races after the fifth live
race during that probationary time period.
The Racing Board declined the simulcast of races during the probationary
period on Thursdays, a day that currently holds no live races.
Pending final approval of the complete simulcast package by the Racing
Board, the contract provided that ECMC was obligated to pay the Horse
Owners' Confederation $1,000,000.
18
On October 16, 2001, the Racing Board suspended, effective October 22,
2001, simulcasting permitted during the probationary period but not otherwise.
Simulcast of special events such as the Breeders' Cup, Kentucky Derby and
the Preakness as well as the Caribbean Classic and the Confraternity Classic is
still permitted.
OTHER EXPENSES
Other expenses decreased by $3,834,000 or 21.4% from $35,948,000 in 2001 to
$32,114,000 in 2002. This net decrease includes an increase due to a
non-recurring impairment adjustment to SSI equipment valuation in 2002 of
$2,335,000. There also were increases of $240,000 in repairs and maintenance
costs, $64,000 in water and sewerage costs, and $595,000 in insurance expense.
Satellite costs decreased $1,020,000, primarily due to operations and vendor
adjustments for SSI while the television and other marketing expenses decreased
a net of $696,000. Payroll costs decreased $904,000, professional fees decreased
$983,000, agency communications (telephone) costs decreased $163,000, and the
travel and related expenses decreased $206,000. There was a net decrease of
$1,995,000 in the other operating expense category for Galapagos due primarily
to cumulative prior year adjustments recorded in 2001 that were non-recurring in
nature. The remaining decreases totaling a net of $1,101,000 are the result of
general decreases in all the other expense categories combined.
FINANCIAL EXPENSES
Financial expenses decreased by $223,000 or (2.7%), to a new total of
approximately $8,034,000 from the 2001 level of $8,257,000. The interest on
loans and capital leases increased $362,000 while bank charges and all other
financing expense decreased a net of $123,000. The interest on First Mortgage
Notes decreased $462,000.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by a net of approximately $523,000
or 11.5%, to $5,072,000 in 2002 from $4,549,000 in 2001. This was primarily due
to: (a) an increase in both HDA of $127,000 and SSI of $522,000 and ABN of
$160,000 due to additional acquisitions in 2001 and 2002, and (b) combined with
decreases for ECMC of $75,000, for the Dominican Republic of $62,000, and for
Colombia of $145,000, and, finally (c) a net decrease of $4,000 for Equus
Entertainment.
PROVISION FOR INCOME TAXES
The provision for income tax in 2002 totaling $107,000 consists of $48,000
for ABN and $59,000 for Galapagos. The provision for income tax in 2001 totaling
$239,000 consists of $93,000 for Equus Entertainment, $37,000 for ABN, $80,000
for Galapagos, and $29,000 for Equus-Comuneros.
MINORITY INTEREST
The Company's minority interest shown is income and loss allocable to
minority partner interests in HDA, Galapagos and Equus-Comuneros. Because
accumulated losses of Galapagos allocable to minority partners exceeded their
investment during 2002 and 2001, the Company did not recognize a minority
interest in losses of Galapagos.
19
2001 COMPARED TO 2000
- ---------------------
REVENUES
Consolidated Revenues decreased by approximately, $2,646,000 or (4.4%), in
2001 to $58,126,000 from $60,772,000 in 2000. The majority of this decrease was
due to the decreased commissions on wagering, which was partially offset by an
increase in other revenues, as described below.
COMMISSIONS ON WAGERING
Commissions on wagering decreased by approximately $4,285,000 or (7.7%) in
2001 to $51,561,000 as compared to $55,846,000 in 2000. The decrease in
commissions was attributable to the following operations: El Comandante
($4,600,000), which was offset slightly by the increased commissions
attributable to Colombia of $274,000 and Galapagos in the amount of $41,000.
PUERTO RICO. Commissions on wagering at El Comandante decreased
approximately $4,600,000 (9.0%) from $50,971,000 in 2000 to $46,371,000 in 2001.
Commissions on wagering are directly related to the racetrack handle (total
wagering/total betting), which has been in decline, and hence, has been
generating a decline in the racetracks' commissions.
El Comandante experienced significant declines in the betting handle on
Puerto Rico races as a result of the poor racing program which consisted mainly
of "short fields". Wagers placed in Puerto Rico on live races run at El
Comandante decreased $10,125,000. Substantial increases in the simulcasting
handle and commissions generated from wagers placed on races from the USA did
not compensate for the decline in handle and commissions experienced on Puerto
Rico races. Effective October 22, 2001 the Racing Board cancelled its temporary
approval for El Comandante to receive races simulcast from the USA.
During contract negotiations in January 2000, the Puerto Rico horse owners
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
Horse owners' Association reached an agreement with El Comandante Management
Company on a new 10-year contract providing for simulcasting of races.
DOMINICAN REPUBLIC. Commissions on wagering at V Centenario increased by
$41,000, or 1.2%, from a total of $3,315,000 in 2000 to a total of $3,356,000 in
2001.
COLOMBIA. Commissions on wagering at Los Comuneros increased by $274,000,
or 17.5%, from $1,560,000 in 2000 to $1,834,000 in 2001. This increase was
primarily due to the opening of new OTB agencies and expanded wagering from
simulcast races.
NET REVENUES FROM LOTTERY SERVICES
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. Net revenues
from lottery services decreased $168,000, from $168,000 in 2000 to $-0- in 2001.
See Item 3, "Legal Proceedings".
OTHER REVENUES
During 2001 other revenues increased by approximately $1,807,000, or
38.00%, as compared to 2000. The increase was primarily due to an increase of
$1,631,000 in the Dominican Republic for three non-recurring revenue items
realized in 2001. These included $966,000 due to Autotote arbitration
settlement, $332,000 for prior year (1997) tax settlement, and $333,000 for
wagering royalty claims.
20
EXPENSES
For reasons set forth below, total operating expenses during the year ended
December, 2001 increased by $145,000 or 0.2% as compared to 2000. This includes
the net of a decrease of $2,396,000 or (8.4%) in payments to horse owners, from
$28,393,000 in 2000 to $25,997,000 in 2001 combined with an increase of
$2,541,000 in other expenses, from $33,407,000 in 2000 to $35,948,000 in 2001.
Some of these expenses were non-recurring and are reported below under
appropriate categories.
PAYMENTS TO HORSE OWNERS
Payment of purses to horse owners decreased $2,396,000 or (8.4%) in 2001
compared to 2000. The majority of this decrease was due to the decline in
wagering commissions due to the decreased level of total betting at ECMC. Total
payments to horse owners by property were as follows:
increase
2001 2000 (decrease)
--------------------------------------
ECMC (a) $23,186,000 $25,467,000 $(2,281,000)
Dominican Republic 1,678,000 1,624,000 54,000
Columbia 1,133,000 1,302,000 (169,000)
--------------------------------------
$15,997,000 $28,393,000 $(2,396,000)
--------------------------------------
OTHER EXPENSES
Other expenses increased by $2,541,000 or 7.6% from $33,407,000 in 2000 to
$35,948,000 in 2001, attributable to the new horse owners contract, increased
racetrack security costs and expenses relating to SSI and VSAT. Professional
fees increased $900,000 in connection with unsuccessful financing efforts and
other continuing legal and governmental issues. Additional increases were
incurred in host track (simulcast) fees paid, utilities costs due to rate and
usage increases, insurance expense, and TV station time. These and other general
and administrative costs increased partially due to the extended length of the
operating day for ECMC during the three month probationary simulcasting period.
FINANCIAL EXPENSES
Financial expenses increased by $1,344,000 or 19.4%, to a new total of
approximately $8,257,000 from the 2000 level of $6,913,000. This increase was
primarily related to the use of a line of credit facility 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. Ultimately, the loan terms
and conditions offered by the lender were not acceptable to the Company and no
loan agreement was ever executed. As a result, the interest on loans and
capital leases increased $848,000 and the Bond interest and financing expense
increased $366,000. Bank charges and all other financing expense increased a net
of $130,000.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by a net of approximately $288,000
or 6.8%, to $4,549,000 in 2001 from $4,261,000 in 2000. This was primarily due
to: (a) an increase of $374,000 for SSI due to additional equipment acquisition,
and (c) combined with increases for ABN of $65,000, for the Dominican Republic
of $53,000, and for Equus Entertainment of $42,000, and, finally, all offset by
(c) decreases for HDA of ($131,000) and Colombia ($118,000).
21
OTHER LOSSES
In 2001, the Company incurred foreign exchange losses of $155,000 for its
operations in Galapagos and $103,000 for its operations in Colombia. In 2000,
the Company incurred foreign exchange losses of $187,000 for its operations in
Galapagos.
PROVISION FOR INCOME TAXES
The provision for income tax in 2001 totaling $239,000 consists of $93,000
for Equus Entertainment, $37,000 for ABN, $80,000 for Galapagos, and $29,000 for
Equus-Comuneros. The provision for income tax in 2000 totaling $603,000 consists
of $570,000 for Equus Entertainment and $33,000 for Equus-Comuneros.
MINORITY INTEREST
The Company's minority interest shown is income and loss allocable to
minority partner interests in HDA, Galapagos and Equus-Comuneros. Because
accumulated losses of Galapagos allocable to minority partners exceeded their
investment during 2001 and 2000, the Company did not recognize a minority
interest in losses of Galapagos. If Galapagos generates profits in 2002, no
minority interest will be recognized by the Company in profits up to $
2,835,978.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company, through its wholly owned subsidiary Equus Entertainment Corp.,
is the owner of Housing Development Associates S.E. ("HDA") and its wholly owned
subsidiary, El Comandante Management Company LLC ("ECMC"), as well as the owner
of Agency Betting Network, Inc. ("ABN"), Satellite Services International, Inc.
("SSI") and foreign subsidiaries Equus Comuneros 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.
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 Gal
pagos, S.A) did not materially affect the consolidated cash flow of the Company
in 2002 and these activities are not discussed herein.
22
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 sources including investment or cost savings from:.
(i) Implementing cost reductions at all properties.
(ii) Expanding simulcasting in Colombia and the Dominican Republic as well
as expanding race pools.
(iii) Obtaining new bank financing or financing by the Wilson family or
other potential investors.
(vi) Obtain approval for and implementation of a Video Gaming System (VGS)
at the OTB agencies and at the racetrack.
There can be no assurance that any of the above will be achieved, or if
achieved, that the results will be sufficient to enable the Company to continue
to operate.
Cash and cash equivalents of the Company, HDA and its consolidated
subsidiaries increased by approximately $1.2 million in 2002, primarily as a
result of an increase in the restricted cash balance held by ECMC for the
payment of future sole winners of the Pool Pote (Pick 6) wager. 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.
The Company received cash in the amount of $3.0 million in 1999 and an
additional $6.0 million in 2001 from the sale of common stock shares that were
purchased by the Wilson Family. The funds were primarily used in 1999 to
purchase Galapagos and Equus-Panama from HDA, thereby providing funds to HDA to
meet its debt obligations. In January, 2001, the funds were primarily used by
the Company to purchase SSI and ABN from HDA thereby, providing cash in which
HDA could use to meet its debt obligations.
On July, 13, 2001, KEMPT Corporation, a Puerto Rico , wholly owned by the
Wilson Family Securities Corporation, an entity controlled by the Wilson family,
purchased seven (7) million shares of Equus Entertainment Class A, 12%
cumulative, preferred stock at $1.00 par value. Equus Entertainment then applied
$3.8 million to offset the advances against dividends made to the company. Equus
Entertainment additionally reimbursed the El Comandante group for all advances
made by them. Equus entertainment also purchased the inter-company receivables
of the El Comandante group that were due at that time from Equus affliated
companies outside the El Comandante group. This provided $7.0 million of cash to
the company in which to operate.
As of December 31, 2002 and December 31, 2001, related party transactions
amounted to $6,378,492 and $3,877,521, respectively. These consisted primarily
of notes payable to entities owned primarily by the Wilson family. These loans
were made to Equus entities for working capital purposes. The notes bear
interest at 1% over prime rate and do not have a definite due date.
During 2002 the principal uses of cash by the Company, HDA and its
consolidated subsidiaries for financing and investing activities were payments
on capital leases for El Comandante equipment.
For 2003, projected principal uses of cash, other than for operating
activities at El Comandante, are:
(i) Principal payments on existing capital leases.
(ii) Capital expenditures, as needed and/or required for the various racing
operations.
(iii) Weekly payment of delinquent excise taxes pursuant to agreement.
23
(iv) Weekly payment of delinquent real property taxes pursuant to
agreement.
(v) Cash needed to pay Autotote settlement
INVESTMENTS IN TELECOMMUNICATIONS EQUIPMENT AND MARKET EXPANSION
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.
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 $2.5 million
unsecured note and the First Mortgage Notes.
In August, 2000, the Company obtained a $2.5 million unsecured loan at 3%
over prime due on December 29, 2004. Principal and interest was 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,
United Tote is not in operation in any of the facilities and this loan is still
outstanding as of October 2004.
Effective April 1, 2002, the Company and United Tote amended and restated
the prior promissory note dated August 11, 2000, for $2,500,000, due December
29, 2004, as follows:
1. The principal balance was revised to $3,431,956 which includes
all sums remaining due under the prior note, installation costs
incurred by United Tote and totalisator fees due from Comuneros.
2. Interest on the unpaid principal balance at the rate of "prime"
interest plus three (3) percent.
3. The note was to become due and payable on July 1, 2003. As of
October 7, 2004, this note remains outstanding.
HDA's First Mortgage Notes bear interest at 11.75%, payable semiannually on
June 15 and December 15, and are secured by the property comprising El
Comandante racetrack. 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 June 30, 2001, HDA had advanced to Equus approximately $3.8 million
against allowable future
24
distributions of profits, which is not in conformity with the terms of the
Indenture. Management repaid these advances with the proceeds of a private
placement offering of Equus Entertainment preferred stock on July 13, 2001, See
Note 10, "Preferred Stock".
On December 15, 2001, June 15, 2002 , December 15, 2002, June 15, 2003,
December 15, 2003, and June 15, 2004 the Company failed to pay interest and
principal on the first Mortgage Notes. This constitutes a default under the
Indenture. In addition, defaults have occurred in the performance or breach, of
covenants and/or warranties of HDA.
The Company was unable to meet the mandatory maturity dates of the First
Mortgage Notes set forth above. Although the Company has had discussions with
possible lenders, investors, and possible VGS joint venture partners, 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, 2001. The Company's
management subscribed debt restructuring agreements with these financial
institutions. Subsequently, in September 2003, the Company entered into a new
14-year agreement with all of its creditors collectively for a term of 14 years.
The Company owed a total of approximately $4 million ($1.5 million to non
affiliated entities plus $2.5 million to affiliated entities). Under the
agreement, the Company does not make any payments to any of the creditors for
the first 7 years. After that, beginning October 2010, the Company is required
to begin making monthly payments on this debt, with each payment being
distributed to all the creditors on a pro-rata basis. The entire debt, including
accrued interest, is to be paid in full by the end of the 14-year term of the
agreement. Interest will be accrued at variable annual rates in accordance with
the annual rate established by the Colombian Government for this type of debt
and is expected to average to an effective rate of approximately 12% annually.
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
Comandante and approves the number of annual race days in excess of the
statutory minimum of 180 racing days. The Racing Act also apportions payments
of monies wagered that would be available as commissions to ECMC. The Racing
Board consisted of three persons appointed to four-year terms by the Governor of
Puerto Rico. This has currently been changed to a five (5) member Board. 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 the racetrack. 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,
exclusive of late and interest assessments, from October 16, 2000 to February 7,
2001 to the Department of the Treasury of Puerto Rico. The Company negotiated
with the Puerto Rico tax authorities for 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 May 24, 2001, ECMC executed a "Closing Agreement" (the Agreement") with
the Secretary of the Treasury of Puerto Rico (the "Secretary") whereby ECMC will
settle its assessed debt of unpaid excise taxes and commissions for the period
October, 2000 through February, 2001 in the amount of $11,172,450 (including
interest and late charges), plus an additional assessment of $60,141 (including
interest) for unpaid commissions for the period February 2, 2001 through
February 7, 2001, as follows:
1. Upon execution of the Agreement, ECMC delivered a check to the
Secretary for $60,141 in full payment of the February, 2001
assessment.
25
2. For a six-month period commencing June 1, 2001 and ending November
30,2001, ECMC was required to pay $50,000 per week against the
October, 2000 through January, 2001 assessment. After the six month
period, the Secretary had the power to reevaluate the financial
condition of ECMC and upon reasonable grounds, continue, modify or
revoke the Agreement. The agreement has been continued and is expected
to remain in effect until the entire debt repayment is satisfied.
3. ECMC is obligated to pay on a timely basis the current excise taxes
and commissions due under Puerto Rico law.
4. ECMC is obligated to provide and maintain a bond in favor of the
Secretary in the amount of $500,000.
5. In the event ECMC defaults during the term of this Agreement, the
Secretary may accelerate the balance due plus any additional amounts
due resulting from the default, including waived penalties of
$167,000.
As of October 7, 2004, all terms and conditions of the Agreement have been
met by ECMC, including payment aggregating $8,800,000 through October 7,
2004.
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 Horse Owners Confederation. The
Company has complied with all requests for information. The investigation has
completed and the Company has no indications of any significant or detrimental
findings.
The Company was unable to remit five (5) bi-annual payments for real estate
taxes of $365,032 each for a total unpaid balance of $1,825,160. This balance is
payable to the C.R.I.M. in Carolina, P.R. and includes penalty assessments. As
of October 7, 2004, the total amount due, including interest, was approximately
$2.1 million, less $850,000 paid through October 7, 2004, or approximately $1.25
million.
Company representatives met with C.R.I.M. in their offices in the last week
of February, 2003. An agreement was reached as follows:
1. The Company will remit a minimum of $10,000 per week to the C.R.I.M.
in payment on account, effective beginning February 28, 2003.
2. If the Company is able to secure new financing in the near future and
is able to pay the principal balance outstanding in its entirety, the
C.R.I.M. agrees to use its best efforts to provide some relief to the
Company with respect to the interest and/or penalty charges.
3. When the Company finishes paying off the outstanding patente taxes due
to the Municipality, the Company will review its position and attempt
to increase the minimum amount being paid to the C.R.I.M. each week.
4. ECMC will remit future bi-annual real estate tax payments on a timely
basis.
As of October 7, 2004, the Company has fully complied with the provisions
of the agreement.
As of December 31, 2002, Equus Comuneros, S.A. owed the Colombian Tax and
National Customs Administration approximately $939,634, including interest, for
withholding at source tax. Management has recently met with the Government to
settle the amount outstanding. The plan proposed to the government is as
follows:
1. Five (5) year amortization of 10%, 15%, 20%, 25% and 30%,
respectively.
2. The Government is requesting a down payment, which has been under
negotiation from 2001 through the current date, October 14, 2004.
26
By means of Resolution 213 of October 31, 2001, of the Colombian
Superintendency of Societies, Equus Comuneros was accepted for government
supervised restructuring under the provisions of Colombian Law 550 of 1999.The
negotiations with the creditors of Comuneros were successful and ended in an
agreement more fully described in the last paragraph of the section shown above
entitled "Long Term Commitments". The delinquent withholding taxes due to the
Colombian Tax and National Customs Administration are being negotiated separate
and apart from the debt due to all other creditors.
Equus Comuneros has not considered it necessary to make any adjustments to
the financial statements with respect to it not being able to continue
operating.
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. Factors that may cause results to differ from these implied by
such forward-looking statements include the following:
- Ability of the Company affiliates to reorganize under their
Bankruptcy proceedings
- Inability to make Bond debt principal and interest payments
- Inability to secure adequate financing
- Impact of changes in Lottery and or casino laws
- Impact of foreign exchange rates
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's certified Consolidated Financial Statements for the years ended
December 31, 2002, 2001, and 2000 are presented as a separate attachment.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no such changes or disagreements
27
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. The Board of Directors of EMC also serves as the
Board of Directors of the Company. The terms of directors and officers is at the
discretion of the Board of Directors.
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 as of December 31, 2002.
NAME AGE POSITIONS WITH THE COMPANY AND EMC
- ---- --- ----------------------------------
James J. Wilson 71 Co-Chairman and Director of EMC
Thomas B. Wilson 42 Co-Chairman, President and Chief Executive
Officer; Director of EMC
Juan M. Rivera-Gonzalez 57 Vice Chairman and Director of EMC
Donald J. Kevane 72 Director of EMC
Alberto M. Paracchini 72 Director of EMC
Barbara A. Wilson 68 Director and Secretary of EMC
28
Mary Pat Wilson 40 Director of EMC
Charles Cuprill 60 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").
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. As of October 15, 2001 he was serving as President and CEO of El
Comandante Management Company LLC. On October 17, 2004 he was terminated from
employment with the Company.
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 Soto Pasarell Grant Thornton, which he founded in 1975. He is
also a director since 1990 of Venture Capital Fund, Inc., a Puerto Rico-based
venture capital firm and a director since 1992 of the Autoridad de Energia
Electrica (the Puerto Rico Electric Power Authority), and, since 1975, a
director of GM Group, Inc., a wholly owned subsidiary of Banco Popular de Puerto
Rico.
Alberto M. Paracchini has been a Director of EMC since its formation in 1994.
- -----------------------
He has been a director of BanPonce Corporation, now Popular Inc., and Banco
Popular de Puerto Rico since January 1991, and was Chairman of the Board from
January 1991 to April 1993. He is Vice Chairman of the Board of Puerto Rican
Cement Company, Inc. and a director of Venture Capital Fund, Inc., a Puerto
Rico-based venture capital firm.
Barbara A. Wilson has been a Director of EMC since January 1996 and Secretary of
- -----------------
EMC since August 1996. She served as Director of IGMC from December 1995 to
1996. She has been a Director of IBC since 1987, Chairman of the Board since
March 1996, Secretary since 1990 and Treasurer since 1993.
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.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the aggregate
compensation with respect to the Chief Executive Officer of the Company for
services during the years indicated. There was no other executive officer of the
Company with compensation in excess of $100,000 for services during 2002.
29
ANNUAL OPTIONS/ COMPEN
NAME AND PRINCIPAL SALAR BONU COMPENSATION SAR' -SATION
POSTION YEAR Y ($) S ($) ($) (#) (1) ($) (2)
- --------------------- ----- ------- ----- ------------- --------- --------
Thomas B. Wilson 2002 258,727 - - - 42,784
President and CEO 2001 258,727 - - - 10,384
2000 258,727 - - - 9,752
(1) Represents Unit Appreciation Rights assumed by the Company, as discussed
below.
(2) Reflects contributions to Retirement Plan discussed below.
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 $26,027 in 2002. 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
2001, the directors' fees totaled $124,800 of which $54,600 was unpaid as of
December 31, 2001. 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.
30
UNIT APPRECIATION RIGHTS. As of December 31, 2002, 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 2001, there were no UAR exercised or granted. As of December 31, 2002,
the unexercised in-the-money UAR had no value. On October 18, 2004 the UAR
expired without being exercised.
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 June 12, 2002 (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) and (3)
-------------------------------
NUMBER OF
NAME OF BENEFICIAL OWNERSHIP UNITS PERCENT
- ---------------------------- ----------- -----------
MANAGEMENT AND DIRECTORS
Barbara A. Wilson 50 0.00%
Thomas B. Wilson(2) 86,397 0.60%
Mary Pat Wilson 86,397 0.60%
Donald J. Kevane 1,000 0.01%
Alberto Paracchini 25,000 0.17%
Charles A. Cupril 10,000 0.07%
All executive officers of EMC and the
Company and directors of EMC
as a group (6 persons) 208,844 1.45%
OTHER UNITHOLDERS
The Wilson Family Limited Partnership ("WFLP")
22 Smallwood Village Center
St. Charles, Maryland 20602 5,093,088 35.14%
Wilson Security Corporation ("WCS")
222 Smallwood Village Center
St. Charles, Maryland 20602 6,000,000 41.71%
(1) The beneficial ownership of Units was determined on the basis directly and
indirectly owned by executive officers and directors of EMC and Units to be
issued under UAR's 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 general partner in WFLP, the Units of the
Company owned by WFLP are not considered beneficially owned by them.
(3) WSC is owned by the Wilson family, the members of the Board of Directors of
WSC have the power to control or vote all the shares, but each member
cannot 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.
31
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BONDS AND NOTES PAYABLE AND CAPITAL LEASES
The Bonds, Notes Payable, and Capital Leases of the Company are more fully
disclosed in Notes 3 through 6 of the "Notes to Consolidated Financial
Statements" for the years ended December 31, 2001, 2000, and 1999 which is
provided as a attachment.
OTHER
On July 13, 2001, Kempt Corporation, a Puerto Rico corporation wholly owned
by Wilson Securities Corporation, an entity controlled by the Wilson family,
purchased seven (7) million shares of Equus Entertainment Class A, 12%
cumulative preferred stock, $1.00 par value.
Equus Entertainment then applied $3.8 million to offset the advances
against dividends made to the Company.
Equus Entertainment reimbursed the El Comandante group (consisting of
Housing Development associates S.E., El Comandante capital Corporation, and El
Comandante Management Company LLC) for all advances made by the El Comandante
Group to affiliate companies. Equus Entertainment also purchased the
inter-company receivables of the El Comandante Group that were due from
affiliate companies.
The net proceeds of $6,882,037 were used to pay the following:
(1) The June 14, 2001 interest payment on the First Mortgage Notes of
$3,595,500 plus $32,408 of penalty interest for the period June 15,
2001 through July 13, 2001.
(2) Payoff of $2,604,747 HDA Note payable to FirstBank together with
interest accrued through July 13, 2001 of $414,370.
(3) Payoff of $500,000 HDA line of credit with FirstBank together with
interest accrued through July 13, 2001 of $2,903.
(4) Advance to consolidated affiliates of $132,108 to cover operational
expenses.
ITEM 14. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Acting Chief Financial Officer of the Company, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by
this report. Based upon that evaluation, the Chairman and Chief Executive
Officer and Acting Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting him to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There has been no significant change in our internal control over financial
reporting that occurred during the period covered by this report that has
materially affected, or that is reasonably likely to materially affect, our
internal control over financial reporting.
32
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
INDEX TO FINANCIAL STATEMENTS.
(i) Financial Statements (see attachment)
Equus Gaming Company L.P.
Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 2002, 2001 and
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Changes in Partners' Deficit for
each of the three year in the period ended December 31, 2002
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
EXHIBITS
EXHIBIT INCORPORATED BY
NUMBER EXHIBIT DESCRIPTION REFERENCE TO THE EXHIBITS INDICATED
- ------- ------------------- -----------------------------------
3.1 First Amended and Restated Limited Exhibit 3.1 to Registration Partnership
Agreement of Equus Statement on Form S-11
Gaming Company L.P. (the "Company") No. 33-90982 of the Company
("Second Form S-11")
3.2 Certificate of Limited Partnership Exhibit 3.1 to Registration
of the Company Statement on Form S-11
No. 33-82750 of the Company
("Form S-11")
3.3 First Amendment to Certificate of Exhibit 3.2 to Form S-11
Limited Partnership of the Company
3.4 Second Amendment to Certificate of Exhibit 3.3 to Form S-11
Limited Partnership of the Company
3.5 Third Amendment to Certificate of Exhibit 3.5 to Form S-11
Limited Partnership of the Company
3.6 Fourth Amendment to Certificate of Exhibit 3.6 to Annual
Report
33
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 4.1 to Registration
among El Comandante Capital Corp. Statement on Form S-4
("ECCC"), as Issuer, Banco Popular yNo. 33-75284 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-4")
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 HAD
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 HAD
10.15 Assignment Agreement (General Exhibit 10.16 to Form S-4
Intangibles) dated December 15, 1993,
between HDA and Banco Popular
10.16 Pledge Agreement between ECCC and Exhibit 10.17 to Form S-4
Banco Popular
10.17 Mortgage Note of $52,000,000 of HDA Exhibit 10.18 to Form S-4
10.18 Mortgage Note of $26,000,000 of HDA Exhibit 10.19 to Form S-4
10.19 Deed of Modification and Extension Exhibit 10.20 to Form S-4
of First Mortgage to Secure
Additional Mortgage Note, No. 43,
dated December 15, 1993
34
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
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
35
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 HAD
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
31 Certification of Principal Executive Officer Filed herewith
and Principal Financial Officer
32 Certification pursuant to to 906 of the Surbanes-Oxley Filed herewith
Act of 2002
99.1 Press Release - ECMC; HDA & ECCC File Filed herewith
Reorganization under Chapter 11 of Bankruptcy Act
REPORTS ON FORM 8-K. None
36
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
October 14, 2004 /s/ Thomas B. Wilson
- ------------------ -----------------------
Thomas B. Wilson
Co-Chairman, President,
Chief Executive Officer and Director,
Acting Chief Financial Officer
October 14, 2004 /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
- ---- ----- ---------
October 14 , 2004 Co-Chairman /s/ James J. Wilson
- ------------------- -------------------
James J. Wilson
October 14 , 2004 Co-Chairman, President, /s/ Thomas B. Wilson
- ------------------- Chief Executive Officer --------------------
and Director, Acting Thomas B. Wilson
Chief Financial Officer
October 14, 2004 Director /s/ Donald J. Kevane
- ------------------- --------------------
Donald J. Kevane
October 14 , 2004 Director /s/ Alberto M. Paracchini
- ------------------- -------------------------
Alberto M. Paracchini
October 14, 2004 Director /s/ Charles A. Cuprill
- ------------------- ----------------------
Charles A. Cuprill
37
EQUUS GAMING COMPANY L.P.
Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
To the Partners and Board of Directors of
Equus Gaming Company L.P.:
We have audited the accompanying consolidated balance sheets of Equus Gaming
Company L.P. (the Company) as of December 31, 2002 and 2001, and the related
consolidated statements of operations, changes in partner's deficit and cash
flows for each year in the two year period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Galapagos S.A., a
majority owned subsidiary of the Company, which statements reflect total assets
of approximately $900,000 (2%) and $3,700,000 (6%) as of December 31, 2002 and
2001, respectively, and total revenues of approximately $4,000,000 (7%) and
$5,700,000 (10%) for the years ended December 31, 2002 and 2001, respectively.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for
Galapagos S.A., is based solely on the report of the other auditors. The
accompanying consolidated statements of operations, changes in partner's deficit
and cash flows for the year ended December 31, 2000 were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those consolidated financial statements in their report dated March
31, 2001, including an explanatory paragraph to express those auditors'
substantial doubt about the Company's ability to continue as a going concern.
Except as discussed in the following paragraph, we conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of the other auditors
provide a reasonable basis for our opinion.
We were unable to obtain from the independent auditors of Equus Comuneros, a
majority owned subsidiary of the Company, and Agency Betting Network - Sucursal
de Colombia, a branch of the Company, response to our inquiries regarding their
independence under the requirements of the American Institute of Certified
Public Accountants and the Securities and Exchange Commission of the Government
of the United States of America, nor we were able to obtain response from such
auditors regarding their familiarity with accounting principles and auditing
standards generally accepted in the United States of America for the years ended
December 31, 2002 and 2001. These subsidiaries reflect total assets of
approximately $4,600,000 (9%) and $5,200,000 (9%) as of December 31, 2002 and
2001, respectively, and total revenues of $1,800,000 (3%) and $2,100,000 (3%)
for the years then ended, respectively.
Page 2
In our opinion, based on our audit and the report of the other auditors, except
for the effects of such adjustments, if any, as might have been determined to be
necessary had we been able to examine evidence regarding the accounts of Equus
Comuneros and Agency Betting Network - Sucursal de Columbia, the consolidated
financial statements referred to in the first paragraph present fairly, in all
material respects, the financial position of Equus Gaming Company L.P. as of
December 31, 2002 and 2001, and the results of its operations and its cash flows
for each year in the two year period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note I to the
consolidated financial statements, the Company has experienced significant
losses from operations during the last four years of operations and. as of
December 31, 2002 has an Partners' deficit amounting to approximately
$56.900,000, The Company is also in default for payments of principal and
interest on bonds guaranteed with property used in the main operations of the
Company (whose total balance amounts to approximately $65,000,000 as of December
31, 2002), and. has not been able to comply with the reporting requirements of
the Securities and Exchange Commission of the Government of the United States of
America, These factors, among others more fully described in Note 1 to the
consolidated financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1 to the consolidated financial statements.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
April 24, 2004
San Juan, Puerto Rico
Stamp No. 1958906 of the Puerto Rico society of CPAs was affixed to the record
copy of this report.
EQUUS GAMING COMPANY L.P
Consolidated Balance Sheets
December 31, 2002 and 2001
Assets
2002 2001
------------- ------------
Cash on hand and in banks $ 252,221 738,923
Restricted cash (note 2) 2,339,505 671,875
------------- ------------
Total cash 2,591,726 1,410,798
Accounts receivable (note 2) 1,205,581 4,076,631
Due from affiliates (note 6) 1,016,075 378,307
Prepaid expenses and other 1,909,997 3,447,488
Notes receivable (note 2) 59,862 162,200
Property and equipment, net (note 2 and 5) 47,011,870 51,308,607
------------- ------------
$ 53,795,111 60,784,031
============= ============
Liabilities and Partners' Deficit
Bonds payable (note 3) $ 54,114,346 53,874,751
Notes payable (note 4) 3,701,151 2,824,043
Accounts payable and accrued liabilities 31,709,359 28,288,686
Outstanding winning tickets and refunds (note 2) 3,524,268 2,948,679
Capital lease obligations (note 5) 776,177 1,293,462
Due to affiliates (note 6) 43.28,492 3,877,521
Deferred revenues 513,978 -
Deferred income taxes (note 9) 3,088,059 3,088,059
Preferred stock (note 10) 6,882,037 6,882,037
------------- ------------
Total liabilities $110,687,867 103,077,238
------------- ------------
Partners' Deficit:
Minority interest (note 2) (375,478) (284,585)
Cumulative translation adjustments (note 2) 1,198,455 (720,892)
Net capital distributions (5,706,114) (5,359,608)
Accumulated deficit (52,009,619) (35,928,122)
------------- ------------
(56,892,756) (42,293,207)
Commitments and contingencies (note 7) - -
------------- ------------
$ 53,795,111 60,784,031
============= ============
See accompanying notes to consolidated financial statements.
3
EQUUS gaming COMPANY L.P.
Consolidated Statements of Operations
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------------- ------------- ---------------
Revenues:
Commissions on wagering (note 2) $ 50,811,381 51,560,896 55,846,307
Other revenues 5,850,115 6,565,637 4,926,165
------------------- ------------- ---------------
56,661,496 58,126,533 60,772,472
------------------- ------------- ---------------
Expenses:
Purses paid to horsemen 25,340,734 25,996,921 28,393,091
Salaries, wages and employee benefits 8,205,316 9,109,549 9,134,034
Other operating costs and expenses (note 2) 23,908,715 26,837,170 24,272,866
Depreciation and amortization 5,072,238 4,549,367 4,261,472
Interest expense 8,033,760 8,257,133 6,913,066
Loss in foreign currency transactions (note 2) 2,127,549 258,355 1.86,561
Minority interest (note 2) (52,973) (116,768) (1,314,872)
------------------- ------------- ---------------
72,635,339 74,891,727 71,846,218
------------------- ------------- ---------------
Loss from continuing operations before income taxes (15,973,843) (16,765,194) (11,073,746)
Income taxes (107,655) (239,099) (603,310)
------------------- ------------- ---------------
Loss from continuing operations (16,081,498) 07,004,293) (1.1,677,056)
Loss from discontinued operations (note 12) - (4,601,301) (167,914)
------------------- ------------- ---------------
Net loss $ (16,081,498) (21,605,594) (11,844,970)
=================== ============= ===============
Weighted average units outstanding 12,325,381 9,325,381 8,505,398
=================== ============= ===============
Basic and diluted per unit amounts:
Loss from continuing operations $ (1.30) (1.82) (1.37)
Loss from discontinued operations (0.49) (0.02)
------------------- ------------- ---------------
Net loss per unit $ (1.30) (2.31) (1.39)
=================== ============= ===============
See accompanying notes to consolidated financial statements.
4
EQUUS GAMING COMPANY L.P
Consolidated Statements of Partners' Deficit
Years ended December 31, 2002, 2001 and 2000
General Limited
Partners Partners Total
-------------- ------------- ---------------
Balance as of December 31, 1999 $ (781,879) (14,003,414) (14,785,293)
-------------- ------------- ---------------
Net loss for the year (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
-------------- ------------- ---------------
Balance as of December 31, 2000 (896,144) (19,315,613) (20,211,757)
-------------- ------------- ---------------
Net loss for the year (216,056) (21,389,538) (21,605.594)
Currency translation adjustments (4,759) (471,097) (475,856)
-------------- ------------- ---------------
Balance as of December 31, 2001 (1,116,959) (41,176,248) (42,293,207)
-------------- ------------- ---------------
Net loss for the year (160,815) (15,920,683) (16,081,498)
Currency translation adjustments 19,193 1,900,154 1,919,347
Net distributions on subsidiary transactions (4,374) (433,024) (437,398)
-------------- ------------- ---------------
Balance as of December 31, 2002 $ ( 1,262,955) (55,629,80,1) (56,892,756)
============== ============= ===============
See accompanying notes to consolidated financial statements.
5
EQUUS GAMING COMPANY L.P
Consolidated Statements of Cash Flows
December 31, 2002, 2001 and 2000
2002 2001 2000
------------- ------------ ------------
Cash flows from operating activities of
continuing operations:
Net loss $(16,081,498) (21,605,594) (11,844,970)
Loss from discontinued operations - 4,601,301 167,914
------------- ------------ ------------
Net loss from continuing operations (16.081,498) (17,004,293) (11,677,056)
Adjustments to reconcile net loss from
continuing operations to net cash provided by/
(used, in) operating activities;
Depreciation and amortization 4,619,383 4,170,006 5,015,350
Deferred taxes - (605,733) 620.094
Minority interest - (753,288) (1,314,872)
Gain in sale of assets _ _ (179,500)
Loss on impairment of long lived assets 2,335,000
Foreign currency translation adjustments 1,919,347 (475,856) 1.1,855
Changes in assets and liabilities:
Decrease/increase) in accounts receivable 2,871,050 252,286 (2,914,678)
Increase in due from affiliates (637,768) (219,951) -
Decrease/increase) in prepayments and other 1,537,491 2,042,845 (946,811)
Increase in accounts payable
and accrued liabilities 3,934,651 396,664 18,378,234
Increase in outstanding tickets and refunds 575,589 1.396,551 421.739
Increase in due to affiliates 2,500,971 3,877,521 -
------------- ------------ ------------
Total adjustments 19,655,714 10,081,045 19,091,411
------------- ------------ ------------
Net cash provided by/fused in) operating activities 3,574,216 (6,923,248) 7,414,355
------------- ------------ ------------
Cash flows from investing activities:
Net receipts from notes receivable 102,338 2,797,874 -
Additions to property and equipment (2,418,051) (118,151) (3,370,752)
------------- ------------ ------------
Net cash (used in)/provided by
investing activities (2,315,713) 2,679,723 (3,370,752)
------------- ------------ ------------
Cash flows from financing activities:
Net proceed' (payments) of notes payable 877,108 (7,725,918) 3,401,732
Proceeds from issuance of preferred stock - 6,882,037 -
Proceeds from issuance of partnership units - - 6,000,000
Payments of capital lease obligations (517,285) (939,097) (6,796,499)
Capital distributions (437,398) - (1,519,468)
------------- ------------ ------------
Net cash (used in)/provided by financing activities (77,575) (1.782,978) 1,085,765
------------- ------------ ------------
Net increase/(decrease) in cash 1,180,928 (6,026,503) 5,129,368
Cash at beginning of year 1,410,798 7,437,301 2,307,933
------------- ------------ ------------
Cash at end of year $ 2,591,726 1,410,798 7,437,301
============= ============ ============
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 401,200 8,500,033 5,399,672
============= ============ ============
6
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
(1) ORGANIZATION, LIQUIDITY AND CAPITAL RESOURCES
Equus Gaming Company L.P. (the Company) is a Virginia Limited Partnership
organized on December 16, 1997 as permitted by the State of Virginia
Revised Uniform Limited Partnership Act. The Partnership's activities
encompass mainly the management of horse racetracks in the Caribbean basin
and other Latin American countries, together with their respective on-track
and off-track betting systems and related communication links. The primary
source of income of the Company is related to the management and. operation
of the El Comandante racetrack located at Canovanas, Puerto Rico. The
Company is the sole owner of Equus Entertainment Corp., a corporation
organized under the laws of the Commonwealth of Puerto Rico, which controls
operations of the racetrack through its 99% ownership of Housing
Development Associates SE (HDA). HDA is the sole owner of El Comandante
Management Company LLC (a Delaware Limited Liability Corporation and the
entity that operates the racetrack) and of the land and related racetrack
properties.
El Comandante is the only thoroughbred racetrack in Puerto Rico and
operates on a year-round schedule basis. The operation includes the
administration and management of an on-track and off-track betting system
that has approximately 600 off-track betting agencies throughout the island
of Puerto Rico. These agencies provide the betting public with live video
images of the races held at the racetrack and are connected to the betting
operating system at the racetrack to accept pari-mutuel and other wagers.
The Company also has a 55% interest in Galapagos S.A. (Galapagos), which is
the operator since 1995 of the V Centenario Racetrack in the Dominican
Republic, and a controlling 50% interest in Equus Comuneros, which is the
operator of the Los Comuneros racetrack in Colombia. The Company also
manages the agency betting operation in Colombia through the branch in that
country of Agency Betting Network (ABN), a wholly-owned corporation
organized under the laws of the Commonwealth of Puerto Rico to install and
operate betting operations.
The Company held controlling interests in entities that operate d the
Presidente Remon racetrack in Panama and the Maronas racetrack in
Montevideo, Uruguay. The Panama operation was surrendered as part of a
reorganization of the racetrack operations and the Uruguay operation was
liquidated in March, 2001 after the license was canceled by the government
and awarded to a different, unrelated operating company. The Company
recorded the results of these activities as discontinued operations in the
accompanying financial statements.
The Company also offers satellite up-link services to some of its
subsidiaries through Satellite Services International, Inc. (SSI), a
wholly-owned subsidiary organized under
7
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
the laws of the Commonwealth of Puerto Rico. SSI also provides leasing of
video and data telecommunication equipment to transmit live races from and
to the racetrack operations. As part of these services, the Company
provides simulcasting-in and simulcasting-out of the races held on the
racetracks and in some cases, from other third party operated racetracks in
the United States.
The Company also is a 100% owner of El Comandante Capital Corporation, a
special purpose corporation organized under the laws of the Commonwealth of
Puerto Rico that was created to issue bonds under a first mortgage note on
the El Comandante racetrack facilities and real estate.
Horse racing is highly regulated by the respective governments in which the
Company operates. Based on these regulations, the Company has to provide,
among other things, space to government personnel that oversee the racing
operations, reports and space to treasury department personnel, and also
reports, space and other facilities for other related personnel that
supervise all aspects of horseracing and the management of all monies
wagered and their corresponding payment to all entities involved in the
racing business.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. However, certain matters have
affected the Company's operations during the most recent past years which
create substantial doubt about the entity's ability to continue as a going
concern, as explained more fully below:
(a) PUERTO RICO
The Company has incurred significant losses from operations in Puerto
Rico during the last four years. The horse racing industry has
suffered stiff competition from other gambling games approved by the
government during the last ten years, which has caused a sharp
decrease in the amount of money bet on horse races during such period.
Management does not believe that the total amount of money bet at the
racetrack, will increase unless the government either changes the
fiscal structure of the wagering distribution or revises the
regulations in order to permit the Company to enter into other
gambling activities that could increase the amount of commissions
earned and, thus, increase the financial stability of the Company.
Due to the results of operations as discussed in the previous
paragraph, the Company has also been unable to satisfy payments of
principal and interest on bonds that are guaranteed with a first
mortgage note amounting to $68,000,000 issued by HDA and guaranteed
ultimately with the land and racetrack properties comprising El
Comandante racetrack. Payments of principal and interest on the
8
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
bonds have not been made since December, 2001, which is a default to
the bond agreement. Due to this situation, the bondholders have filed
an action for collection of monies and foreclosure of property at the
United States District Court for the District of Puerto Rico. The
final outcome of these proceedings cannot presently be determined
since they are in a preliminary stage.
The Company also did not comply with certain provisions set forth in
the Puerto Rico Internal Revenue Code during the period from October,
2000 through February, 2001. These provisions establish the
requirement to the Company of withholding and remitting to the Puerto
Rico Treasury Department certain amounts from the wagers, prizes,
winnings and betting taking place at the racetrack. The Company
reached an agreement with the Treasury Department whereas a payment
plan was established for the amounts unpaid during the period
indicated above, plus payment of all current amounts due under the
applicable sections of the Code, as described above. Non-compliance
with this agreement could adversely affect the operations of the
racetrack.
The Company has also been unable to market the services provided by
SSI to outsiders, which has created uncertainty as to the future
operations of the subsidiary. Additionally, SSI wrote-off equipment
with a book value of approximately $2,335,000 from its books during
the year ended December 31, 2002. This equipment was purchased with
the intention of providing additional up-link services such as
transmission of data and video to the racetrack and to other clients,
but the Company was unable to integrate this equipment with other
hardware in use currently at the racetrack. Since the equipment could
not be used as originally intended, this situation has created
additional concerns for the Company regarding the marketability of its
products.
(b) COLOMBIA
The Company has suffered significant losses from the Colombia
operations, which has resulted in the Superintendent of Partnerships
of Colombia requiring implementation of a restructuring process in
which the Company can either reach agreements with debtors to
restructure its debts, or reorganize its operations and its related
management. If this process is not completed in accordance with the
plan submitted, then the Superintendent will force the liquidation of
the Colombia operations.
The Colombia operations also includes a branch of Agency Betting
Network, which has also been unable to establish a successful business
plan since all operations provided by the branch in Colombia are
related to the Los Comuneros racetrack. The branch has experienced
losses from its operations since its
9
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
inception and as such, has been unable to satisfy payments to the
National Tax Authority of Colombia amounting to approximately
$242,000. This situation may force the government of Colombia to seize
assets of the branch and, therefore, significantly affect its future
operations.
(c) DOMINICAN REPUBLIC
The Company has also experienced significant losses since the
beginning of operations in the Dominican Republic (V Centenario
Racetrack), and management has not been able to increase the amounts
of wagers placed on races. This situation creates concern regarding
the operations of the Company in that country.
(d) SEC FILINGS
The abrupt and unexpected closure of Arthur Andersen's LLP offices,
the previous audit firm for the Company, has negatively impacted the
Company's ability to properly meet the SEC filing guidelines. The
Company has continued to file quarterly and annual extensions and
reports but these reports had to be filed including unaudited
information, pending engagement of a new independent audit firm. The
entire process of locating, engaging, and performing the required
audits has proved to be difficult and time consuming. The actual
audits for the two (2) years ending December 31, 2002 and 2001 were
further complicated by the Company's inability to communicate with
former Arthur Andersen personnel to start a smooth transition process
to the new accounting firm. The new independent audit firm had to
perform additional audit tests and certification work for those
balances carried forward from the year 2000.
With the completion of the audited financial statements for the fiscal
years 2002 and 2001, the Company intends to file amended quarterly and
annual SEC reports with the audited financial information. Any related
fines, penalties, and/or other remedies that the Company and/or its
management may be subject to can not be presently determined.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The racing industry has declined over the last
few years, the Company faces competition from other forms of legalized
gambling in the countries in which it has operations, and it also faces
competition from illegal gambling. The Company also needs the approval from
the corresponding governmental entities to make changes in the race cards
and the schedule of transmission of live races, both to and from other
racetracks, due to the racing regulations.
10
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
Management's planned actions in order to overcome the substantial doubt about
the Company's ability to continue as a going concern are the following:
* The Company has already requested from the Puerto Rico Government the
necessary changes in the racing regulations that would let the Company
install an Electronic Video Gaming System. It is important to note that the
Electronic Video Gaming System is not related to or connected to the Puerto
Rican Lottery in any manner. This would let the Company expand its revenue
base, provide additional resources for both the racetrack operations and
the horse owners, and thus, increase the quality of races with the new
resources available for investing in horses. Management also believes that
the increase in horses will also create additional interest in the horse
racing fans which would also translate to additional money bet at the horse
races,
* After obtaining from the government these changes in the regulations,
management and the stockholders will make either a stand-still offer
agreement to the bondholders, whereby their investment would be guaranteed
during the stand-still period, or would bring another related company that
would provide the necessary resources to refinance the debt and pay back
the old bondholders.
* Management also contemplates the approval of additional presentations of
simulcasting races from selected United States racetracks, including during
the days there are no live races. This would also increase the amount of
commissions earned by the Company, increasing its profitability and
financial position.
* Regarding Dominican Republic and Colombia operations, management is now
under plans to request from the government a restructuring of the
distribution of money wagered, including tax amounts assessed by the
government on wagers. After this restructuring process, there would be an
increase in the money distributed to horseowners. It is management's
opinion that this will increase both the amount of horses and quality of
races, which in turn, would increase the amount of money wagered at the
racetrack.
* The Company may also change its main operation in Puerto Rico and develop
the racetrack property as a real estate business. This alternative requires
the change in classification of the property by the government in order to
obtain the permits necessary to start the development phase, and also will
require approval from the government of moving the racetrack facilities to
a new property. Therefore, this scenario is a last resource given the
timeframe and approvals needed to achieve these preliminary steps.
11
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
* Management has also started a process that will lead to the complete filing
of ail required reports with the SEC and expects to complete the process
before the end of the year 2004. As part of this process, management also
will consider the possibility of converting the Company to a
privately-owned entity in order to eliminate these requirements, however,
this process is in a preliminary consideration stage and no formal decision
or management actions have taken place at this point in time.
There is no assurance that management plans can be achieved. The 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
The following is a summary of the most significant accounting policies and
practices followed in the preparation of the accompanying financial
statements:
(a) BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include all the
accounts of the Company and its subsidiaries, as described more fully
in note 1. All intercompany accounts and transactions have been
eliminated in the preparation of the accompanying consolidated
financial statements.
(b) RESTRICTED CASH
The Company has to maintain savings accounts to satisfy the payment of
the "poolpote" wager, as required by the Puerto Rico Racing Board
Regulations. These accounts must be interest bearing and their
balances including interest earned thereon are restricted to payments
of this wager. Balances are increased by: (i) accumulated cash in the
"poolpote", which is funded by 8% (4% before June 26, 2002) of the
total amount played daily in the wager less commissions and taxes, and
(ii) a bonus dividend that consists of undistributed amounts of other
wagers ("breakage") based on the prizes calculation formulas. The
balance of the account becomes payable when there is a sole Pick 6
ticket winner, as defined in the racing regulations. The total amount
accumulated is also presented as part of outstanding wanning tickets
and refunds in the accompanying balance sheets.
12
(c) ACCOUNTS RECEIVABLE
Accounts receivable as of December 31, 2002 and 2001 consist of the
following:
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
2002 2001
----------- ----------
Due from OTB agencies $1,051,917 1,512,242
Food service agreement 101,659 294,222
Due from horseowners and jockeys - 631,071
Due from Puerto Rico Government 100,000 -
Autotote Systems, Inc. 34 961,805
Due from racing industry funds - 712,363
Other 305,087 484,057
----------- ----------
1,559,097 4,595,760
Less allowance for doubtful accounts (353,516) (519,129)
----------- ----------
$1,205,581 4,076,631
=========== ==========
Amounts due from OTB agencies consist of betting balances net of
commissions and do not represent complete resources available to the
Company. The Company has to make payments to both horse owners and
fiscal agencies on all betting activity and these amounts are also
included in the balances due from the OTB agencies. Accounts
receivable from the food service agreement is related to the rental of
the restaurant and bar facilities at the El Comandante racetrack. Due
from Puerto Rico Government represents reimbursement of purse expenses
related to a special stake race (Clasico del Caribe) incurred during
2002.
Due from horseowners and jockeys represent advances made under
agreements in Dominican Republic to promote the racing activity. Due
from Autotote Systems, Inc. represents the amount pending to be
received under a settlement of litigation. The allowance for doubtful
accounts is the Company's best estimate of the amount of probable
credit losses in the Company's existing accounts receivable. The
Company provides for an estimate of bad debts and adjusts the
allowance balance at the end of each year based on the specific
identification of balances that present potential collection problems.
Account balances are charged off against the allowance after all means
of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance-sheet
credit exposure related to its customers.
13
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
The Company also has the right to request to the Puerto Rico Racing
Administrator reimbursement of past due balances from agencies in
Puerto Rico in certain cases, as established in the racing
regulations. The Administrator has been trusted with a bank account
funded with amounts assessed to agencies each racing day in order to
provide funds for this purpose. The total cash balance is available
for reimbursement to the Company up to $15,000 per agency. Total
amount in the account trusted with the Administrator as of December
31, 2002 and 2001 amounted to $452,250 and $408,880, respectively.
(d) NOTES RECEIVABLE
Notes receivable consists of unsecured short-term loans to horse
owners with fixed interest rates that range from 11% to 11.5%. These
loans provide financing to horse owners to purchase horses as a means
to improve the quality of racing. The current agreement between the
Company and the Confederacion Hipica de Puerto Rico (the
Confederacion), a horse owners association, provides that credit lines
to all members of the Confederacion, as a group, will not exceed
$2,000,000 in the aggregate and $100,000 to any single owner, nor will
it lend more than. 80% of the purchase price of any horse.
(e) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2002 and 2001 consist of the
following:
2002 2001
------------- ------------
Land and land improvements $ 17,885,686 18,096,418
Buildings and buildings improvements 41,685,767 41,819,904
Equipment and furniture 15,166,861 16,330,629
------------- ------------
74,738,314 76,246,951
Less accumulated depreciation and amortization (27,726,444) (24,938,344)
------------- ------------
$ 47,011,870 51,308,607
============= ============
Property and equipment is stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the respective
assets, which vary from 5 to 20 years, approximately. Leasehold
improvements are amortized over their estimated useful lives or the
lease term, whichever is shorter. Major replacements and improvements
are capitalized and depreciated over their estimated useful
14
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
lives. Repairs and maintenance expenditures are charged to expense
when incurred.
(f) COMMISSIONS ON WAGERING
The Company earns commissions on bets placed on the racetracks'
thoroughbred horse races through wagering facilities at both the
racetrack and wagering facilities (known as Off-track agencies)
located at independently owned premises through the countries in which
the Company does business. Commissions are based on percentages of
wagers established by law and vary for the different types of wagers
in each jurisdiction. Similar percentages have been established for
simulcasting races at corresponding racetracks. Commissions are
recorded as earned, after the end of each racing day.
(g) ADVERTISING AND MARKETING EXPENSES
During the years ended December 31, 2002, 2001 and 2000, the Company
incurred advertising costs of approximately $385,000, $318,000, and
$1,189,000, respectively.
(h) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(i) IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, such as property and equipment, are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash
flows expected to he generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of are
reported
15
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
at the lower of the carrying amount or fair value less costs to sell,
and depreciation ceases.
The Company recognized a loss in impairment amounting to approximately
$2,335,000 during the year ended December 31, 2002 related to the book
value of satellite equipment for which no specific use was identified,
as discussed more fully in note 1 to the financial statements.
(j) RECENTLY ISSUED ACCOUNTING STANDARDS
In June, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) #146, "Accounting
for Costs Associated with Exit or Disposal Activities". The Statement
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by
the Statement are lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity.
In October, 2002, the FASB issued SFAS #147, "Acquisitions of Certain
Financial Institutions", which establishes new standards of accounting
for certain acquisitions of financial institutions and establishes
standards for transactions between two or more mutual enterprises.
In December, 2002, the FASB issued SFAS #148, "Interim Financial
Reporting", which provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation, and requires more prominent and
more frequent disclosure in financial statements about the effects of
stock-based compensation.
Also, in April, 2003 the FASB issued SFAS #149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities", and
in May, 2003, SFAS #150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity". SFAS #149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. SFAS #150 improves
the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. This Statement requires
that those instruments be classified as liabilities in statements of
financial position.
The FASB has also issued Interpretations #45 (November, 2002) and #46
(January, 2003), which deal with accounting and disclosure
requirements for
16
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
guarantees, including indirect guarantees of indebtedness of others,
and with the consolidation of variable interest entities.
None of these new accounting standards, in management's opinion, will
have a material effect on the financial position or results of
operations of the Company.
(k) FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in non-U.S. dollar currencies are
translated into U.S. dollar equivalents using year-end spot foreign
exchange rates. Revenues and expenses are translated at amounts that
approximate weighted average exchange rates, with resulting gains and
losses included in income. The effects of translating operations with
a functional currency other than the U.S. dollar are included in
partners' capital. The effects of translating transactions with the
U.S. dollar as the functional currency, including those in highly
inflationary environments, are included in other income.
(l) MINORITY INTEREST
Minority interest in the accompanying balance sheets represents the
percentage of ownership held by partners in Galapagos S.A. and Equus
Comuneros S.A. Under current partnership agreements, the Company
agreed to assume all operating losses in these partnerships in excess,
of the initial investment of the minority partners. Changes in
minority interest during the last year are mainly related to the
change in value of the currencies in the countries in which the
partnerships operate.
(m) Use OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities 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.
(n) RECLASSIFICATIOM
Certain reclassifications have been made to the 2000 financial
statements to conform them to the current presentation.
17
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
(3) BONDS PAYABLE
On December 15, 1993, the Company issued through El Comandante Capital
Corp. bonds payable in the amount of $68,000,000 to finance the acquisition
costs of the racetrack. These bonds were initially due on December 31, 2003
and paid interest semi-annually at 11.75%. Due to the financial condition
of the Company, no payments of principal and interest on bonds have been
paid since June, 2001, which constitutes an event of default under the bond
indenture agreement. Additionally, the Partnership has made certain capital
distributions to partners that technically, also constitute instances of
default to the bond agreement. In December 31, 1998, El Comandante
Management Company LLC purchased in the open market units of these bonds in
the amount of $7,500,000, at a $1,000,000 discount. The unamortized portion
of this investment amounts to $6,051.495 as of December 31, 2002 and 2001,
respectively, and has been recorded in the accompanying consolidated
financial statements as a debt retirement, and the discount on bond
retirement has been netted to the discount on bonds payable for financial
statement purposes. Based on these facts, the total consolidated amount due
and payable under the bond indenture agreement as of December 31, 2002,
amounts to $54,944,412 of principal and $9,817,272 of accrued interest, for
a total amount due of $64,761,684. The bonds are secured by a first
mortgage on the racetrack premises and by certain other collateral which
together encompass a lien on (i) the fee interests of the Partnership 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 the Partnership, including the capital
stock by the Partnership.
Based on the default status of the bonds, the investors have filed a
petition for foreclosure of the property in the United States Court for the
District of Puerto Rico. The petition is still in its preliminary stage and
management is still in negotiations with the bondholders in order to reach
a tentative stand-still offer that would permit the Partnership re-finance
the bonds or to make other debt restructuring procedure. The financial
statements do not reflect any adjustments regarding these matters.
(4) NOTES PAYABLE
Notes payable as of December 31, 2002 and 2001 consist of the following:
2002 2001
----------- ---------
Note Payable to United Tote $ 3,431,956 2,500,000
Notes payable to banks 269,195 324,043
---------- ---------
$ 3,701,151 2,824,043
========== =========
18
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
The note payable to United Tote consists of an unsecured advance received
in connection with a pre-arrangement reached with United Tote to become the
totalisator sendee provider in ail the racetracks owned by the Company. The
note was scheduled to be paid with a predetermined percentage of the total
handle managed at the racetracks and accrues interest at 3% over prime
rate. The note was increased in 2002 by $931,956 to include other advances
made for working capital purposes during the year and is due on December
31, 2004. Since the Company has not been able to formally appoint United
Tote as its sole provider, no principal or interest payments have been
made. Notes payable to banks consist of unsecured loans made to Equus
Comuneros by Colombian financial institutions bearing interest at rates
that fluctuate from 7% to 10%.
(5) CAPITAL LEASE OBLIGATIONS
The Company is obligated under capital leases covering motor vehicles and
equipment that expire at various dates during the next three years, and
which are included within equipment and furniture in the accompanying
financial statements. At December 31, 2002 and 2001, the gross amount of
property and equipment and related accumulated amortization recorded under
capital leases were as follows:
2002 2001
------------ -----------
Motor vehicle $ 579,779 579,779
Equipment 1,911,353 1,911,353
------------ -----------
2,491,132 2,491,132
Less accumulated amortization (1,721,897) (1,264,255)
------------ -----------
769,235 1,226,877
=========== ============
Amortization of assets held under capital leases is included within
depreciation and amortization expense.
19
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
Future minimum capital lease payments as of December 31, 2002 are:
YEAR ENDING DECEMBER 31, AMOUNT
- ----------------------------------------- ------------
2003 $ 497,317
2004 331,841
2005 39,193
------------
Total minimum lease payments 868,351
Less amount representing interest (rates
vary from 6% to 11 %) (92,174)
------------
Obligations under capital leases $776,177
============
(6) RELATED PARTY TRANSACTIONS
Accounts payable to related parties is composed mainly of notes payable to
entities under common ownership that have provided such funds for financing
purposes. The notes bear interest at 1% over prime rate (5.75% and 5,25% as
of December 31, 2002 and 2001, respectively) and do not have a definite due
date.
(7) COMMITMENTS AND CONTINGENCIES
(a) HORSE OWNER'S AGREEMENTS
The Company maintains horseowners agreements in the jurisdictions of
the racetracks, which are based on the distributions of wagers between
the horseowners and the respective operating company based on
percentages of wagering established by the horse racing regulations
applicable in each country.
PUERTO RICO
The current agreement between the Company and the Horse Owner's
Association (the Association) covers a period from July, 2000 through
July, 2010. The agreement provides for the distribution on an equal
basis (50%) of the commissions on wagering earned by the Company,
20
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
In the event that the horse owner's share is less than the base
minimum of $25.032,256 established in the contract, the Company will
contribute to the Association the amount of $1,000,000 reduced on a
dollar for dollar basis for the excess of the horse owners' share over
the base minimum. Pursuant to the agreement, the Company was also
required, to pay 50% of the Association's long-term debt (including
interest) outstanding as of June 30, 2000, which amounted to $582,314.
Consequently, the Association is required to supply sufficient horses
to conduct racing operations at El Comandante in accordance with the
racing program approved by the Puerto Rico Racing Board, which
stipulates a minimum of thirty eight (38) races per week. The contract
obligates the Company to provide stables and related facilities and to
pay for other commitments with the industry such as funding the annual
budgets (as approved by both parties on each year) of the Association
and its veterinary clinic. In addition, the Company agreed to
contribute 50% of the Association's premiums of certain health
insurance benefits for jockeys and trainers. During the years ended
December 31, 2002, 2001 and 2000, the Company recognized as expense
approximately $804,000, $765,000 and $1,161,000, respectively, related
to the funding of these activities.
The current agreement was amended in March, 2001 to, among other,
establish the distribution of commissions earned on simulcasted races,
and to provide for penalties to the Association for non-compliance of
providing sufficient horses, as established in the amendment. The
amendment provided for a probation period of six months for the
transmission of simulcasted races and after final approval of
permanent transmission of those races, the Company would pay the
Association $1,000,000 each of the first two years after such
approval. During the probation period, the Racing Board declined to
continue the transmission of simulcasting races. The Association has
claimed to the Board that the Company must pay the additional amounts
related to the amendment, which in summary amount to $2,000,000. The
Company, with the advisory of its legal counsel, believes that no
amounts are payable due to the cancellation of the simulcasting races
before the end of the probation period.
DOMINICAN REPUBLIC
On February 27, 1995, the Company agreed with the National Association
of Horseowners to share on a 50% basis all commissions earned on
wagers placed at the racetrack, including the transmission of
simulcasted races from Puerto Rico, net of commissions paid for the
simulcasting agreement. This contract expires in March 31,2005.
21
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
(b) ClOSING AGREEMENT WITH PUERTO RICO TREASURY DEPARTMENT
The Company is required to pay to the Treasury Department of the
Government of Puerto Rico various taxes on wagering, as described more
fully in the Puerto Rico Internal Revenue Code, within two days of the
wagers being placed. The Company failed to remit these tax payments
for the period from October 16, 2000 to February 7, 2001,
Consequently, the Company accumulated taxes that were assessed finally
by the Treasury Department at $11,172,450. The Company and the
Treasury Department negotiated a closing agreement under which an
interim payment plan was established whereby the Company agreed to pay
$50,000 weekly to satisfy the assessed amount, plus a commitment to
stay current on all payments of taxes incurred during subsequent
racing days. This payment plan had an initial term of six months,
after which the Secretary of the Treasury would negotiate a different
plan or continue the interim payment agreement. The Company also has
to maintain a bond in the amount of $500.000 at all times during the
agreement, and the Secretary has the authority to revoke or to call
the total amount of the debt in case of non-compliance with any of the
provisions agreed on. The Company believes it has complied with the
agreement because it has continued to pay the weekly amount as
established, and has provided the Treasury Department with both a bond
in the amount of $250,000 and with a certificate of deposit pledged
with the Department in the same amount, which is presented within
prepaid and other assets in the accompanying balance sheets. The
Company has also continued to pay all taxes incurred related to the
wagering, activity at the racetrack. Total debt outstanding as of
December 31. 2002 and 2001 related to this agreement amounted to
$7,022,450 and $9,622,450, respectively. If the Company continues to
comply with the agreement and the Secretary continues to agree with
the weekly payment schedule, total amount payable during each of the
next two years will amount to $2,600,000, and to $1,822,450.
The Company has also been notified of additional assessments regarding
prior years' income tax returns. The Company has vigorously objected
these assessments. No adjustments have been made to the accompanying
financial statements regarding these issues.
(c) MUNICIPAL TAX PAYMENT PLAN
The Company disputed various cases since 1.992 related to the volume
of business tax as assessed by the Municipality of Canovanas, Puerto
Rico, in which the El Comandante racetrack is located. The Company's
Basis for the dispute related to the fact that the municipality
assessed as volume of business, the sales commissions earned by the
Off-track betting agencies, located throughout the
22
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
island of Puerto Rico. The Company claimed this was a case of double
taxation but the court ruled against the Company. Total amount
assessed under the case amounted to $939,451. Consequently, the
Company reached a payment agreement with the municipality whereby
weekly payments of at least $5,000 were to be remitted for an eighteen
(18) month interim period, starting on August 1, 2001, After this
period, the Company has been complying with the weekly payments and
has also submitted its municipal tax returns in time, which was an
additional requirement under the agreement. Total amount due under
this agreement as of December 31, 2002 and 2001 amounted to $665,742
and $829,451, respectively. Subsequently, the Company accelerated
payments on this agreement and paid in full the outstanding amount
during November, 2003.
The Municipality has also notified the Company of the possibility of
assessing additional municipal taxes due related to the construction
projects held at the racetrack after hurricane Georges in. 1998
totaling $683,769, including late penalties and interest. The Company
is currently reviewing the additional tax assessment with its legal
and tax advisors.
(d) WAGERING SERVICES AGREEMENTS
The Company has contracted with Autotote Systems, Inc. {Autotote) to
provide wagering totalisator services, software and equipment to the
racetracks, necessary for the operation of the off-track betting
system. In Puerto Rico, the agreement was renewed in March, 2002 for a
period of ten years. Wagering service payments are equivalent to .65%
of total wagers placed with a minimum annual fee amounting to
$800,800. During the renewal process of this agreement, Autotote
agreed to credit approximately $550,000 that the Company owed under
the previous contract. This amount has been reclassified from accrued
expenses to deferred revenue and is being amortized into income during
the ten year period of the contract.
In Dominican Republic, a similar agreement was entered into in January
1, 1995 for a period often years expiring on March 15, 2005. Under
this agreement, the Company had to pay fees based on .65% of total
wagers placed, with a minimum fee of $200,000. Management subsequently
alleged that this agreement was prepared with the intention of harming
the business operations of the Company and in December 31, 2001, the
court gave a favorable ruling to the Company which stipulated that
Autotote shall reimburse the Company for approximately $962,000. As a
result of this ruling, the contract was terminated in July 19, 2002
when the Company bought all the equipment from Autotote for the unpaid
amount as determined by the court.
23
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
Total expense under these agreements for the years ended December 31,
2002, 2001 and 2000, amounted to $1,596,771, $1,644,295 and
$1,670,361, respectively.
(e) LEASE OF PHONE LINES
The Company has an agreement with the Puerto Rico Telephone Company
for the lease of dedicated transmission lines used in the Off-track
betting agencies. These lines are used to transfer all wagering
information from the agencies to the totalisator system located at the
racetrack. The agreement provides for monthly payments based on the
total amount of capacity used by the agencies. Total expense incurred
during the years ended December 31, 2002, 2001 and 2000 related to
this agreement amounted to $1,270,901, $1,340,655 and 1,110,055,
respectively.
(f) V CENTENARIO LEASE AGREEMENT
The Company operates the V Centenario Racetrack in the Dominican
Republic under a ten years lease agreement expiring in April 2, 2005.
The agreement provides for rent payments based on the total amount
wagered at the racetrack, not to exceed 1% of total amount wagered.
The contract requires the Company to provide maintenance, security,
proper insurance coverage, among other administrative requirements, to
the racetrack facilities. Total this agreement amounted to
approximately $80,000, $86,000 and $83,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
(g) LEGAL PROCEEDINGS
The Company and certain of its affiliates 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 its legal counsel believes that the result of such actions
will not have a material adverse effect on the Company's financial
position or results of operations.
(h) SEC FILINGS
The Company has not been able to comply with the reporting
requirements of the SEC. Any related fines, penalties, and/or other
remedies that the Company and/or its management may be subject to can
not be presently determined.
24
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
(8) RETIREMENT AND PENSION PLANS
RETIREMENT PLAN
The Company has established a defined contribution retirement plan for
qualified employees of one of its subsidiaries (Equus Entertainment
Corporation) which were previously covered under the retirement plan of
Interstate General Company L.P. (a former general partner of the Company),
Employees are eligible to participate in the retirement plan when they have
completed a minimum of 1,000 hours of services and provides for
contributions by the Company 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 $200,000) 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
$23,354, $26,027 and $33,824 for the years ended December 31, 2002, 2001
and 2000, respectively.
PENSION PLAN
The Company has a non-contributory defined benefit pension plan covering
substantially all of the nonunion employees of El Comandante Management
Company, L.L.C. Benefits are based on the employee's years of service and
highest average earnings over five (5) consecutive years during the last
fifteen. (15) years of employment The Company's policy is to fund an amount
not less than the ERISA minimum funding requirement and not more than the
maximum deductible under the Puerto Rico tax law. The Company has not
recorded the minimum pension liability of $307,671, $250,655 and $138,879
as of December 31, 2002, 2001 and 2000, respectively. Management believes
that the effect of such adjustment has no material effect on the financial
position and/or results of operations of the Company. The information of
this pension plan as of and for the years ended December 31, 2002, 2001 and
2000 are as follows:
25
2002 2001 2000
---------- --------- ---------
CHANGE IN PREPAID/ (ACCRUED) BENEFIT COST
Prepaid/ (accrued) benefit cost at fiscal year
beginning $(101,089) 2,768 (58,588)
Net periodic benefit income/ (cost) for fiscal
year (215,940) (215,124) (166,302)
Immediate recognition of benefit income/ (cost)
occuring this fiscal year (168,374) (147,081) -
Employer contributions paid during fiscal year 269,926 258,348 277,658
---------- --------- ---------
Accrued benefit cost
at fiscal year end $(215,477) (101,089) 2,768
========== ========= =========
CHANGE IN PROJECTED BENEFIT OBLIGATION (PBO)
PBO at prior measurement date $ 816,630 721,750 594,882
Service cost 153,685 144,970 128,225
Interest cost 61,068 65,523 55,616
Actuarial (gain)/ loss 326,630 332,600 117,436
Benefits paid - (16,324) (174,409)
Administrative expenses expected (44,311) (50,000) -
Curtailments - (102,507) -
Settlements (318,017) (279,382) -
---------- --------- ---------
PBO at current measurement date $ 995,682 816,630 721,750
========== ========= =========
CHANGE IN PLAN ASSETS
Fair value of assets at prior measurement date $ 275,272 409,328 428,391
Actual return on assets (37,474) 33,815 (28,559)
Unrecognized transition obligation 269,926 258,348 52,255
Administrative expenses paid (44,311) (28,337) (50,000)
Settlement (239,331) (397,882) 7,241
---------- --------- ---------
Fair value of assets at current measurement date $ 224,082 275,272 409,328
========== ========= =========
26
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
Reconciliation of Funded Status 2002 2001 2000
--------------- ----------- -----------
Accumulated benefit obligation (ABO) $ (747,230) (627,016) (545,439)
=============== =========== ===========
Projected benefit obligation (PBO) $ (995,682) (816,630) (721,750)
Fair value of assets (FVA) 224,082 275,272 409,328
--------------- ----------- -----------
Funded status (771,600) (541,358) (312,422)
Unrecognized net transition obligation/( asset) 28,961 31,840 52,255
Unrecognized net loss/(gain) 527,162 408,429 262,935
--------------- ----------- -----------
Accrued benefit cost $ (215,477) (101,089) 2,768
=============== =========== ===========
Additional minimum liability $ (307,671) (250,655) (138,879)
=============== =========== ===========
Intangible assets $ 28,961 31,840 52,255
=============== =========== ===========
Accumulated other comprehensive
income adjustment $ 278,710 218,815 86,624
=============== =========== ===========
Assumptions and Dates
Discount rate 6.75% 7.50% 7.50%
Compensation increase rate 4.00% 4,00% 4.00%
Measurement date 12/31/2002 12/31/2001 12/31/2000
Census date 1/1/2001 17172001 17172000
(9) INCOME TAXES
The Company is a non-taxable entity for United States income tax purposes,
as it has been organized as a partnership. Instead, each partner takes into
account the operational result of the Company in its individual income tax
return based on its allocable share of participation. Income taxes expenses
presented in these financial statements are related to taxes imposed in the
foreign countries in which the Company has operations and are based on both
the results of operations or business volume, depending on the
jurisdiction.
The Company uses the asset and liability method to account for income
taxes, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been recognized in the financial statements or tax returns. A valuation
allowance is recognized for any deferred tax asset which, based on.
management's evaluation, it is more likely than not that some portion or
the entire deferred tax asset will not be realized. As of December 31, 2002
and 2001, a valuation allowance equivalent to the deferred tax assets has
been established since there is
27
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
substantial doubt as to their realization. The Company has available net
operating loss carryforwards of approximately $7,565,000 to offset future
taxable income in Puerto Rico, through 2007.
The components of the deferred tax liability presented in the accompanying
financial statements are related to the following:
Flexible depreciation used in prior years
for income tax purposes $2,333,767
Deferred gain on involuntary conversion 754,292
----------
$3,088,059
==========
(10) PREFERRED STOCK
During the month of July, 2001, Equus Entertainment Corp. issued seven
million shares of Class A Preferred Stock that were fully paid by a related
party, KEMBT Corporation. The shares issued are non-voting, non-convertible
and accrue dividends at an annual rate of 12%. The shares are redeemable at
any time as determined by the board of directors.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 2002 and 2001, the fair value of the first mortgage note
was approximately $31,039,000 and $38,118,000, respectively. These values
were estimated based on the market price as quoted by a brokerage firm that
trades the First Mortgage Notes, The carrying value of notes and accounts
receivable, capital leases and accounts payable approximates fair value
because of their short term nature and/or because they bear interest at a
variable rate.
(12) DISCONTINUED OPERATIONS
The Company surrendered its interest in. the Panama operation during the
year ended December 31, 2001 and recorded the transaction as of the
beginning of the year following an agreement with the minority holders. The
agreement was entered into on October 9, 2001 and required the Company to
sell its shares of the Company in exchange for shares of preferred stock.
The value of the transaction was accounted for using the net book value of
the Company as of the date of the agreement. Simultaneously, the Company
wrote-off from books the value of the preferred stock and recognized a loss
in the
28
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
transaction that has been presented as loss from discontinued operations in
the accompanying financial statements.
The Company also surrendered its participation in Equus Uruguay, which was
basically related to the right to operate the Maronas racetrack after an
investment of approximately $12,000,000 that was expected to be raised
before the expiration of the license granted by government. The efforts to
raise the financing were unsuccessful and the license was revoked. As such,
the Company liquidated the subsidiary and its operation has been also
presented as discontinued operations in the accompanying financial
statements.
Summarized financial information for discontinued operations is presented
below:
2001 2000
------------ -----------
Total revenues $ - 9,085,000
Expenses $ - (9,252,914)
------------ ------------
Loss from discontinued operations $(4,601,301) (167,914)
============ ============
Total assets $ 8,630,515
Total liabilities (6,376,441)
------------
Net assets $ 2,254,074
============
(13) SEGMENT INFORMATION
The Company is mainly an operator of racetracks and their related
operations in different countries. Therefore, management believes that
segments of the business are best monitored and evaluated based on
geographical considerations and as such, has identified three segments. The
basic monitoring measure used by management to evaluate the operating
segments is profitability from operations, excluding non-recurring gains
and losses. The following table presents information about the Company's
continuing operations by segment (in thousands of dollars):
-----------------------------------------------------------------------------------
Total Revenues Loss Before Income Tax Total Assets
-----------------------------------------------------------------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
-----------------------------------------------------------------------------------
Puerto Rico $51,681 50,703 54,668 (10,883) (12,594) (6,846) 46,065 49,694 57,769
Dominican Republic 3.961 5,659 4,265 (2,215) (1,391) (1,688) 925 3,678 2,036
Colombia 1,019 1,765 1 ,839 (2,876) (2.780) (2,540) 6,805 7,412 4,009
-----------------------------------------------------------------------------------
Total $56,661 58,127 60,772 (15,974) (16,765) (11,074) 53,795 60,784 63,814
===================================================================================
29
EQUUS GAMING COMPANY L.P
Notes to Consolidated Financial Statements
December 31 2002, 2001 and 2000
(14) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes selected financial information from
quarterly reports as submitted by management. The submitted quarterly
reports have not been reviewed by the independent auditors and do not have
all the adjustments that resulted from the audits of the financial
statements for the years ended December 31, 2002 and 2001.
-------------------------------------------------------------------------
(in 000's, except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter
-------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
-------------------------------------------------------------------------
Total Revenues $14,552 17,014 13,788 10,798 11,555 12,988 N/A 10,543
Net loss (1,969) (4,033) (1,779) (5,087) (3,265) (4,407) N/A (7,267)
Basic and Diluted Loss per Share (0.14) (0.28) (0.12) (0.35) (0.23) (0.23) N/A (0.511)
As discussed more fully in note 1, the Company has not filed reports since
the quarter ended December 31, 2002 pending the completion of the audit of
the financial statements. Management intends to complete its filings in the
near future upon completion of the audits.
30
Translation
PRICEWATERHOUSE COOPERS
REPORT OF INDEPENDENT AUDITORS
June 30, 2003
To the Council of Directors and
Stockholders of
Galapagos, S.A.
We have audited the attached general ledgers of Galapagos, S.A. as of December
31, 2002 and 2001, and the corresponding statements of loss and accrued deficit
and cash flow for the years ended on those dates. These financial statements
are the responsibility of the management of Galapagos, S.A. Our responsibility
is to give an opinion on these financial statements based on our audits.
Our audits of these statements were made in accordance to auditing standards
generally accepted in the Dominican Republic. These standards require that we
plan and conduct the audit in order to obtain reasonable guarantee that the
financial statements do not contain important errors or omissions. An audit
includes the examination, on a random basis, of the evidence supporting the
amounts and disclosures included in the financial statements, it also includes
evaluating the accounting principles used and the principal estimates made by
management, as well as an evaluation of the global presentation of the financial
statements. We consider that our audits provide a reasonable basis for our
opinion.
In our opinion, the attached financial statements audited by us, reasonably
present, in all its important aspects, the financial situation of Galapagos,
S.A., as of December 31, 2002 and 2001, and the results of its operations and
its cash flow for the years ended on those dates, in accordance with accounting
principles generally accepted in the Dominican Republic.
Translation
PRICEWATERHOUSE COOPERS
To the Council of Directors and
Stockholders of
Galapagos, S.A.
Page 2
June 30, 2003
The attached financial statements have been prepared considering that the
Company shall continue as an ongoing business. As indicated in Note 14 to the
attached financial statements, the company has experienced significant losses
from the commencement of its operations, having accrued a deficit of
RD$190,140,135 and RD$124,851,436 as of December 31, 2002 and 2001,
respectively, and a negative capital of RD$141,339,017 and RD$76,049,718 on the
mentioned dates. In addition, the Company maintains a working capital relation
of RD$.02 to RD$1.00 and of RD$0.39 to RD$100 in 2002 and 2001, respectively.
These factors create significant doubts on the company's ability to continue as
an ongoing business. Management's plans in relation to these matters are
described in Note 14 to the attached financial statements. The attached
financial statements have been prepared in accordance to accounting principles
for ongoing businesses, for which reason they do not include adjustments that
might be required in the event the company cannot comply with the projected
plans.
(Signed) PricewaterhouseCoopers
Translation
DELOITTE
& TOUCHE
REPORT OF THE FISCAL REVIEWER
To the stockholders of
SOCIETY OF EQUUS COMUNEROS, S.A. - SECSA (UNDER REORGANIZATION)
1. I have audited the general ledgers of Society Equus Comuneros S.A. (Under
Reorganization) as of December 31, 2002 and 2001 and the corresponding
statements of results, of changes in capital, of changes in the financial
situation and of cash flow for the years ended on those dates. Said
financial statements are the responsibility of the Company's Management.
Among my functions is that of auditing and giving an opinion on these
financial statements based on my audits.
2. Except for what is mentioned in number 4, I obtained the information
necessary to comply with my functions and perform my work in accordance
with auditing standards generally accepted in Colombia. Said standards
require me to plan and perform the audit in order to obtain a reasonable
guarantee on whether the financial statements are free from significant
errors. An audit of these financial statements includes examining, on a
random basis, the evidence supporting the amounts and disclosures in the
financial statements. An audit also includes, the evaluation of the
accounting principles used and the significant accounting estimates made by
Management, as well as evaluating the general appearance of the financial
statements. I consider that my audits have provided a reasonable basis to
state my opinion.
3. In my examination I have observed the following uncertainties:
a. Just as is mentioned in Note 4, as of December 31, 2002 and 2001 the
Company has an Account Receivable with its affiliated Company AGENCY
BETTING NETWORK, Colombia Branch, for $8.268 millions and $6.671
millions, respectively. Due to AGENCY BETTING NETWORK, Colombia
Branch's, difficult financial
Translation
situation, recovery of this account receivable is uncertain and
subject to the future success of this entity's operations.
b. As of December 31, 2002 withholdings at source payable and other taxes
payable in the amount of $2.961 millions (includes interests for
delay), practiced to third parties during 1999, 2000, 2001 and 2002
and in favor of the National Tax and Customs Bureau (NTCB). Management
is in the process of negotiating a payment plan. In the event the
mentioned agreement is not reached, the NTCB could embargo the
Company's goods and move forward with legal proceedings.
4. During my examination I have had the following limitations in the scope of
my work:
a. As of December 31, 2002 and 2001, the balance of appraisals in the
assets and surplus due to appraisals in capital amounts to $371
millions. Because the property, plant and equipment appraisals were
not updated to December 31, 2002 and 2001, as is required by article
number 64 of Decree 2649 of 1993, it was not possible to obtain
sufficient evidence with respect to the reasonableness of the balance
of appraisals and the surplus due to appraisals.
b. As of the date of this report the company was in the process of
conciliating the account payable to Equus Entertainment Corporation,
which, as of December 31, 2002, amounted to $1.592 millions. As a
consequence, it was not possible to obtain sufficient evidence with
respect to the reasonableness of the expense and the liability related
to this account payable.
c. In the year 2001 Equus Comuneros S.A. entered into a contract with
Agency Betting Network where it is in charge of operating the betting
system of Equus Comuneros S.A., for which Equus Comuneros S.A. agrees
to pay to Agency Betting Network as counter-payment for the operation
of the betting system, a rate equal to the greater of 5% over the
total handle of Equus Comuneros or 5% of the adjusted commission of
Equus Comuneros. During the year 2002 amendments to the agreement were
made, which we did not observe, and therefore we were not able to get
satisfaction as to the account payable of Equus Comuneros to Agency
Betting Network for
Translation
$118 millions and for other effects they might have on the company's
financial statements.
d. Just as is mentioned in note 14, as of December 31, 2002 and 2001 the
Company has registered an account payable to ETESA for $637 millions
and $290 millions related to the values liquidated for the
exploitation rights of chance games. As per confirmation received from
ETESA as of December 31, 2002 and 2001, the Company owes $1.639
millions and $1.056 millions, for the concept of exploitation rights.
Because the difference between $1.002 millions and $766 millions is
presently in the process of discussion between the Company's
Management and ETESA, it was not possible to verify the sufficiency fo
the liabilities and the expense registered for this concept as of
December 31, 2002 and 2001.
5. In the report of the fiscal reviewer, dated March 4, 2002, the opinion on
the financial statements as of December 31, 2001 contained an uncertainty,
because on August 24, 2001 the Superintendency of Societies issued a
request formulating charges against the Company for the incorrect filing of
some statements of change. On August 8, 2002, the Superintendency of
Societies issued the resolution as filed 2002-01-104478, in which it
imposed a fine on Society Equus Comuneros, S.A. (Under Reorganization) for
$5.000.000, which was registered and paid by the Company. In view of the
foregoing, my present opinion as of December 31, 2001 in relation to this
matter, as presented herein, is without reservations.
6. In my opinion, except for the effect of the adjustments I could have
determined if I had been able to apply auditing procedures to the matters
mentioned in number four, and subject to the effect of the adjustments, if
any, that might have been required if the final result of the matters
mentioned in number three had been known, the financial statements
previously mentioned, taken from the accounting books, reasonably present,
in all significant aspects, the financial situation of SOCIETY EQUUS
COMUNEROS S.A. - SECSA (under reorganization) as of December 31, 2002 and
2001, the results of its operations, the changes in its capital, the
changes in its financial situation, and its cash flow for the years ended
on those dates, in accordance with accounting principles generally accepted
in Colombia, applied over uniform bases.
Translation
7. As of December 31, 2002 and 2001, the Company presents accrued losses for
$7.045 millions and $4.601 millions, which correspond to those occurred
from the date of its establishment. As of those same dates it presents some
balances of capital of $1.470 millions and $3.680 millions, negative
working capital of $9.068 millions and $6.455 millions and net loss for the
period of twelve months ended on December 31, 2002 and 2001 of $2.445
millions and $787 millions, the previous results not taking into account
the effect of the Translation matters mentioned in number 5 and the effect,
if any, of the matters mentioned in number four of this report. By means of
Resolution 213 of October 31, 2001 of the Superintendency of Societies, the
Company was accepted for promotion of a reorganization agreement, in the
terms and with the formalities established in Law 550 of 1999. At present
it is in the process of negotiating with external and internal creditors of
the Company and as a result of this negotiation two situations could be
reached: (1) that the negotiation can be culminated with the external and
internal creditors since they consider the Company to be feasible or (2)
that they decide to end the negotiation, in which case the promoter will
notify the pertinent authority in order to transact the obligatory
liquidation or the equivalent procedure, according to the Law. The attached
financial statements have been prepared by the administration assuming that
the Company will continue as an ongoing business. According to what has
been stated by Management they are taking measures conducive to their
reorganization, as explained in note 3, wherefore the Company has not
considered it necessary to make any adjustment to the financial statements,
in relation to the possibility that the Company cannot continue operating.
8. Also, I inform that during said years the Company's accounting was made
pursuant to the legal standards and accounting techniques; the operations
registered in the accounting books and the acts of the administrators were
adjusted to the statutes and to the decisions of the Board of Partners; the
correspondence, account vouchers and books of minutes and registry of
stocks are properly kept and maintained; the management report of the
administrators keeps the proper concordance with the basic financial
statements, and contributions to the Integral Social Security System, in
all significant aspects, have been correctly made. On the date of issuance
of my report, the society is not in arrears for the concept of
contributions to the system. My evaluation of internal control, made with
the purpose of establishing the scope of my auditing tests, did not show
that the company has not followed adequate measures of internal control and
conservation
Translation
and custody over its assets and that of third parties in its possession. I
have informed my recommendations on matters of internal control in letters
addressed to the Company's management.
(Signed)
LINA MAR A VELASQUEZ ALVAREZ
Fiscal Reviewer
Professional Card No. 61321-T
March 11, 2003