10-Q 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________TO___________ Commission file number 000-25306 EQUUS GAMING COMPANY L.P. ------------------------------------------------------------ (Exact name of registrant as specified in its charter) Virginia 54-1719877 -------------------- -------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) El Comandante Race Track Main Building First Floor 65th Infantry Avenue Rd. 3 Km. 15.3 Canovanas, PR 00729 ------------------------------------------------------------ (Address of Principal Executive Offices and Zip Code) (787) 641-5844 ------------------------------------------------------------ (Registrant's telephone number, including area code) ------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (June 12, 2002). 14,389,824 Class A Units

The accompanying notes are an integral part of these consolidated statements 3

The accompanying notes are an integral part of these consolidated statements 4

The accompanying notes are an integral part of these consolidated statements 5

(continues) 6

The accompanying notes are an integral part of these consolidated statements 7

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 $14,370. 3. Payoff of $500,000 HDA line of credit with FirstBank together with interest accrued through July 13, 2001, of $2,903. 4. Advances to consolidated affiliates of $132,108 to cover operational expenses. 8

The accompanying notes are an integral part of these consolidated statements 9

The accompanying notes are an integral part of these consolidated statements 10 EQUUS GAMING COMPANY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: Equus Gaming Company L.P. (the "Company"), a Virginia limited partnership, is engaged in thoroughbred racing, wagering and other gaming businesses in the Caribbean and South America. Through its subsidiaries, the Company currently operates three racetracks and manages an extensive off-track betting ("OTB") system in the various countries where the Company operates. The Company has a 99% interest in Housing Development Associates S.E. ("HDA"), the owner of El Comandante Race Track ("El Comandante"), the only licensed thoroughbred racing facility in Puerto Rico. El Comandante has been operated since January 1, 1998 by the wholly owned subsidiary of HDA, El Comandante Management Company, LLC ("ECMC"). 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 race tracks and OTB agencies, including live races from outside the Company's operational territories to the agency distribution network in order to increase the level of wagering revenues through the Company's OTB system. ABN is establishing and operating an OTB agency system in Colombia in conjunction with Los Comuneros Race Track in Medellin, Colombia ("Los Comuneros"), owned and operated by Equus Comuneros SA. ("Equus-Comuneros"). 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 redesigning of its architecture, reallocation of the equipment and ultimately, a strategic revision of the objectives for the system. 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 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. 11 In 2000, the Company was awarded exclusive rights by the Government of Uruguay to operate the Maronas racetrack in Montevideo and an off-track betting agency network together with the right to operate up to 5,000 slot machines in 5 locations. The necessary restoration of the racetrack would , in management's opinion, have required an initial investment of $12 million. Efforts to raise the $12 million by the due date were unsuccessful. Consequently, the concession expired in March 31, 2001, and the Company's bid bond in the amount of $500,000 was forfeited and thus, expensed during the period ended June 30, 2001. Subsequently, the concession was awarded to another operator in the fourth quarter of 2001 which will result in the Company writing off its entire investment by December 31, 2001. The Company has a 55% interest in Galapagos, S.A. ("Galapagos"), the operator since April 1995 of the V Centenario Race Track in the Dominican Republic ("V Centenario") The racetrack is government-owned and operated by the Company's subsidiary under a long-term contract. The Company had a 51% interest in Equus Entertainment de Panama, S.A., the operator since January, 1998 of the Presidente Remon Race Track in the Republic of Panama. On October 9, 2001, the Company entered into the following restructuring with its minority shareholder of Equus Entertainment de Panama, Wall Street Securities Trading Group, Inc. effective September 30, 2001. 1. The Company entered into a stock purchase agreement whereby in exchange for release from all liabilities related to the operation of Equus Entertainment de Panama, the company gave to its minority partner, Wall Street Securities, its 204,000 shares of common stock which represented 51% of the total issued and outstanding shares of Equus Entertainment de Panama. This transaction resulted in a net loss of $1,149,579 to the Company. a) The Company has been released of all prior, present and future obligations, known or unknown from October 9, 2001, until the "Termination and Mutual Release" document is signed. b) The issuer has committed to using its best efforts to release the Company from any obligations the Company may have assumed under its concession from the Government of Panama in opening and managing Hipodromo Presidente Remon. Until such time as the aforementioned release is received by the Company, the purchaser has drafted an "Undertaking and Indemnity" document indemnifying the Company from any claims by the Government of Panama under the Concession Agreement. 2. The Company then acquired 3,000 shares of $1,000 par value, preferred stock in exchange for net claims due the Company. The number of shares issued will be reduced if the net claims are les than $2,859,680. The final net claims on the Company's books amount to $3,294,391 and the investment and recorded at that amount as of September 30, 2001. Terms and conditions of the preferred stock issue are as follows: a) The shares will be redeemed by the issuer upon the racetrack's concession agreement being terminated or on October 31, 2031, whichever comes first. b) The issuer has the option to redeem the shares at par at any time. c) No dividends will accumulate up to October 31, 2006; thereafter, the shares will earn an annual cumulative dividend of 12%, payable quarterly. 12 d) The shares have no voting rights except that no change in the terms can occur without the consent of the preferred shareholders. e) No other preferred shares can be issued with priority over these shares, and in liquidation these shares have the same priority as common shares now existing. f) No dividends will be paid to common shares while accumulated dividends are payable to the preferred shares. As of June 12, 2002, the Company has not received copies of the fully executed documents mentioned above, nor received the 3,000 shares of preferred stock., In addition, all attempts to obtain certified financial statements from Equus Entertainment de Panama as of September 30, 2001 have failed; therefore, Panama has been "deconsolidated" for years 2001 and 2000. The Company owns a controlling 50% interest in Equus Comuneros S.A. ("Equus-Comuneros"), the owner and operator of Los Comuneros in Colombia. Equus-Comuneros received in 1999 the assets and liabilities of the prior operator of the racetrack. The assets consisted of land, buildings and equipment valued at approximately $4.7 million and liabilities of approximately $2.6 million. The Company paid $2.1 million for its interest in Equus-Comuneros 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 $14,370. 3) Payoff of $500,000 HDA line of credit with FirstBank together with interest accrued through July 13, 2001, of $2,903. 4) Advances to consolidated affiliates of $132,108 to cover operational expenses. As noted in the accompanying consolidated financial statements, the Company has incurred recurring losses from operations, has a partners' deficit of $26,834,592 and had negative cash flows for the remainder of 2001. It also failed to make the mandatory interest and principal payments due in December 2001 as required under the First Mortgage Notes Indenture. These factors, among others, raise substantial doubts about the Company's ability to continue as a going concern. The accompanying financial statements do not include any 13 adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Management's plans to deal on its Company's financial problems are as follow: (i) Continue to implement cost reductions at the racetracks. (ii) Seek legislation designating El Comandante as a tourist zone to allow for the refinancing of the First Mortgage Notes with low interest government backed bonds and reduced utility charges. (iii) Seek legislation and approvals to operate slot machines and other gaming devices at El Comandante. As of May 31, 2002, such approvals have not been obtained. (iv) Obtain new bank financing or financing by private investors. For the nine months ended September 30, 2001, accumulated losses not allocated to minority partners were $2,125,964. Equus-Comuneros minority partners own a 50% interest. GOVERNMENT MATTERS El Comandante is required to pay the Government of Puerto Rico various taxes on wagering placed on thoroughbred horse races held at or simulcasted by El Comandante (Puerto Rico). The taxes on wagering are required to be remitted to the Department of the Treasury of Puerto Rico within two (2) days of the date wagers are placed. From October 16, 2000 to February 7, 2001, El Comandante failed to remit tax payments totaling $9,949,182 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. 2. For a six-month period commencing June 1,2001 and ending November 30, 2001, ECMC will pay $50,000 per week against the October, 2000 through January, 2001 assessment. After the six-month period, the Secretary will reevaluate the financial condition of ECMC, and may, upon reasonable grounds, continue, modify or revoke the Agreement. 3. ECMC will continue to pay on a timely basis current excise taxes and commissions. 4. ECMC will 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 the Agreement, the Secretary may accelerate the balance due plus any additional amounts owed as a result of the default. As of June 12, 2002, ECMC has fully complied with all terms and provisions of the Agreement. On April 2, 2001, the House of Representatives of the Commonwealth of Puerto Rico adopted a resolution ordering an investigation of the operations of 14 ECMC with emphasis on the fiscal and financial administration of El Comandante and its tax delinquency. As of October 22, 2001, all requested information had been submitted by ECMC. The investigation has been completed, but as of this date, the House of Representatives has not issued their report or otherwise disclosed their findings. As of September 30, 2001, Equus Comuneros owed the Colombian Tax and National Customs Administration approximately $837,373, 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%, 25% and 30%, respectively. 2. The Government is requesting a down payment, which is currently being negotiated. 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:

Prior to settlement, the Company had accrued a total of $838,396 as of June 30, 2001. On June 30, 2001, the Company recorded additional penalties and interest of $101,054. The terms of the Agreement are as follows: 1) For the 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 to request full payment of the remaining balance, $559,450, or renegotiate a final twelve (12) month payoff of the balance. 3) Should ECMC default at any time on the agreed terms, the Municipality, on demand, may declare the remaining balance due. 4) To guarantee timely payments, ECMC will provide two (2) payments bonds in the amount of $503,732 and $94,886, respectively. As of June 12, 2002, ECMC was in compliance with the provisions of the Agreement. 15 CONSOLIDATION AND PRESENTATION The consolidated financial statements as of September 30, 2001 and for the nine months ended September 30, 2001 and 2000 are unaudited but include all adjustments (consisting of normal recurring adjustments) which management considers necessary for a fair presentation of the consolidated results of operations for the interim periods. The operating results for the nine months ended September 30, 2001 are not necessarily indicative of results for the year. Net losses per unit are calculated based on weighted average number of Units outstanding. Outstanding warrants to purchase Units do not have a material dilutive effect on the calculation of earnings per Unit. The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. While management believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the financial statements and the notes of the Company included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 2000. The Company consolidates the entities in which it has a controlling interest. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries after eliminating all significant intercompany transactions. All of the entities included in the consolidated financial statements are hereinafter referred to collectively, when practicable, as the "Company". The Company has minority partners in HDA, Galapagos and Equus-Comuneros. Therefore, the Company recorded minority interest based on the earnings (losses) of these consolidated subsidiaries that are attributable to the minority partners, as follows:

In general, the minority interest is calculated based on the ownership interest of the minority partners. HDA has a minority partner owning a 1% interest. Galapagos' minority partners own a 45% interest. However, during the nine months ended September 30, 2001 and 2000 the Company did not recognize a minority interest in Galapagos' losses amounting to $279,182, and $309,058, respectively, because the minority partners have no legal obligation to fund losses in excess of their investment. As of September 30, 2001 the accumulated losses, not allocated to the minority partners, amount to $2,376,830. Equus-Comuneros minority partners own a 50% interest. 16 CURRENCIES The Company consolidates its accounts with Galapagos and Equus-Comuneros whose functional currency are the Dominican Republic peso and the Colombian peso, respectively. The United States dollars ("US$") are also a recording currency in these countries. US$ are exchanged into those foreign currencies ("FC$") and vice versa through commercial banks and/or the central banks of the respective countries. The Company remeasures the monetary assets and liabilities of the foreign subsidiaries that were recorded in US$ into the FC$ using the exchange rates in effect at the balance sheet date (the "current rate") and all other assets and liabilities and capital accounts, at the historical rates. The Company then translates the financial statements of the foreign subsidiaries from FC$ into US$ using the current rates, for all assets and liabilities, and the average exchange rates prevailing during the year, for revenues and expenses. For the nine months ended September 30, 2001 and 2000, net exchange losses resulting from re - measurement of accounts, together with losses from foreign currency transactions, amounted to $373,795 and $150,915 respectively, which amounts are included as operating expenses. Accumulated net loss from changes in exchange rates due to the translation of assets and liabilities of the foreign subsidiaries are included in partners' deficit and at September 30, 2001 and December 31, 2000 amounted to $216,176 and $237,995 respectively. The current exchange rates in Dominican Republic as of September 30, 2001 and 2000 were US$1.00 to FC$17.15 and US$1.00 to FC$16.40, respectively. The average exchange rates in Dominican Republic prevailing during the nine months ended September 30, 2001 and 2000 were US$1.00 to FC$16.99 US$1.00 to FC$16.48, respectively. The current exchange rate in Colombia as of September 30, 2001and 2000 were US$1.00 to FC$2,407 and $US1.00 to FC$2,212. The average exchange rate in Colombia prevailing during the nine months ended September 30, 2001 and 2000 were US$1.00 to FC$2,301 and US$1.00 to FC$2,060. 2. COMMITMENTS AND CONTINGENCIES: HORSE OWNERS' AGREEMENTS The Company has separate agreements with the Horse Owners' Confederation of each country. The agreements establish the amount payable to horse owners as purses. In general, payments to horse owners are based on a percentage of wagering. The Panama contract expires in December 2007. Commencing with the year 2000, and each year thereafter, there is no longer a "minimum guaranteed payment" to horse owners, as previously. However for the year 2000, $4.1 million was paid to the horse owners even though the calculated payment per the contract was $2.7 million. The payment of $1.4 million was recorded as an account receivable from the Horse Owners' Association. On October 9, 2001, the Company exchanged its common stock and various claims for 3,000 shares of preferred stock and at the same time was released from any further liability under the Panama Horse Owners Agreement. The Dominican Republic contract expires in December 2005. The Colombia contract expires on December 31, 2009. It provides for certain minimum guaranteed payments to horse owners during the first three years, $1.2 million in 2001, increased in 2002 and 2003 in accordance with an inflation factor. The Puerto Rico horse owners contract expires in July 2010. Under the contract, the horse owners are guaranteed minimum earnings of $25,032,000 for years 2002 and 2001. ECMC is obligated among other things to pay the horse owners $90,000 annually for administrative costs and 50% of the principal and interest owed on an outstanding Confederation 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 17 as provide up to $2,000,000 of financing for the purchase of horses. Additional costs incurred for the three and nine months ended September 30, 2001 related to the new 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 will pay an additional $1,000,000 to the Horse Owners Confederation when and if the additional simulcasting 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 a three (3) month probationary period commencing July 1, 2001, for ECMC to place three (3) simulcast races before the first live race and three (3) after the fifth live race. The Racing Board declined the simulcasting of races during the probationary period on Thursday's, a day that currently holds no live races. Pending final approval of the complete simulcast package by the Racing Board, ECMC is obligated to pay the Horse Owners' Confederation $1,000,000. On October 16, 2001, the Racing Board suspended, effective October 22, 2001 simulcasting permitted during the probationary period but not otherwise. Simulcasting 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. However, ECMC is doing a cost/benefit analysis to determine if the limited simulcasting is economically viable per event. WAGERING SERVICES AGREEMENTS The Company has separate agreements with Autotote Systems, Inc. ("Autotote") and United Tote Company ("United Tote") to provide wagering services, software and equipment to each racetrack, necessary for the operation of the off-track betting system. Payments under these contracts are summarized as follows: 1. AUTOTOTE -------- EL COMANDANTE V CENTENARIO LOS COMUNEROS --------------- -------------- -------------- Expiration date March 2004 March 2004 January 2006 Cost of services, as a percentage of wagering 0.65% 0.65% (a) 1.20% Minimum amount per year $ 800,800 $ 200,000 $ - (b) (a) Galapagos is also to receive services from Autotote for the distribution system of the electronic lottery. Fees to Autotote are 2% of gross sales at lottery agencies and 1% of gross sales at OTB agencies. See Note 8, "Legal Proceedings". 18 (b) Based on a minimum monthly payment of $39,795 for 2001, increased each subsequent year, up to $50,240 in 2005. For the year 2000 the minimum payment was $450,480. 2. UNITED TOTE ------------ In August, 2000 the Company obtained a $2.5 million unsecured loan at 3% over prime due in December 29, 2004. Principal and interest are to be paid from ..25% of the wagering handle for the first four (4) years of the service contract with United Tote.

(a) The services agreement with United Tote specifies that the commencement date shall be the earlier of the date that the agreement with Autotote expires or the date the agreement is properly terminated. See note 2. (1.c) above for the termination of the Autotote agreement with Los Comuneros.

(c) Pursuant to the service contract, there are minimum annual guaranteed wagering handles for the twelve months from the date that totalizator service is first initiated by United Tote at two or more existing or new racetracks, and continues in twelve months intervals subsequent to that date for the remaining term of the contract. (d) The Company will also pay United Tote a weekly fee of $2,625 as a "central hub allocation fee" until service by United Tote is furnished to two or more existing or new racetracks. (e) During the first four (4) years, a fee of 0.25% of the handle will be applied to principal and interest on the unsecured note of $2.5 million due December 29, 2004. OTHER LONG-TERM AGREEMENTS The Company has also entered in other long-term contracts that are essential for the operation of its racetracks such as to guarantee television coverage in Puerto Rico. ECMC has an agreement with S&E Network, Inc. (S&E") that requires the purchase of television time for an annual minimum of 910 hours at the rate of $725 (effective February 1997) per hour, adjusted annually by the Consumer Price Index ("CPI"), or at the rate of $900 per hour, also subject to CPI adjustments for television time after 7:00 PM. The contract is non-cancelable by either party during the initial term, which expires in 19 December 2006. The term is automatically extended for successive 5 years periods by request of ECMC. During an extended term, the contract can be canceled by S&E, upon payment of liquidated damages of $2 million plus CPI after January 1997. 3. FIRST MORTGAGE NOTES: On December 15, 1993, pursuant to a private offering, (i) El Comandante Capital Corp. ("ECCC"), a single-purpose wholly owned subsidiary of HDA, issued first mortgage notes in the aggregate principal amount of $68 million (the "First Mortgage Notes") under an indenture (the "Indenture") between ECCC, HDA and Banco Popular de Puerto Rico, as trustee (the "Trustee"), and (ii) Housing Development Associates Management Company ("HDAMC") issued Warrants to purchase 68,000 shares of Class A Common Stock of HDAMC. In March 1995, the Warrants automatically became exercisable to purchase an aggregate of 1,205,232 units of the Company from HDAMC. Upon issuance of the Warrants, HDA recorded note discount of $2,040,000 equal to the fair value of the Warrants. Such note discount is being amortized using the interest method over the term of the First Mortgage Notes. The First Mortgage Notes mature on December 15, 2003 and bear interest at 11.75% payable semiannually. Payment of the First Mortgage Notes is guaranteed by HDA. The First Mortgage Notes are secured by a first mortgage on El Comandante and by certain other collateral which together encompass a lien on (i) the fee interests of HDA in the land and fixtures comprising El Comandante, (ii) all related equipment, structures, machinery and other property, including intangible property, ancillary to the operations of El Comandante, and (iii) substantially all of the other assets and property of HDA, including the capital stock of ECCC owned by HDA. During the past several years HDA has made early redemptions of First Mortgage Notes in connection with certain transactions. The Company has also purchased in the open market First Mortgage Notes which the Company intends to hold until maturity in cancellation of required partial redemptions in 2000 and 2001, as explained below. Following is a summary of these transactions:

In connection with these transactions, the Company wrote-off a portion of the note discount and deferred financing costs. ECCC is required to partially redeem First Mortgage Notes commencing on December 15, 2000. The stated maturities of the First Mortgage Notes, reduced by prior redemptions, are as follows (in thousands): 20 DUE DURING THE TWELVE MONTHS GROSS PURCHASED IN NET ENDING DECEMBER 31, AMOUNT OPEN MARKET AMOUNT ---------------------------- -------- ------------- ---------- 2001 10,200 6,746 3,454 2002 10,200 - 10,200 2003 40,800 - 40,800 -------- ------------- ---------- 61,200 6,746 54,454 Less - discount (509) 86 (595) -------- ------------- ---------- $60,691 $ 6,832 $ 53,859 -------- ------------- ---------- 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 $14,370. 3. Payoff of $500,000 HDA line of credit with FirstBank together with interest accrued through July 13, 2001, of $2,903. 4. Advances to consolidated affiliates of $132,108 to cover operational expenses. It is not expected that the Company will be able to meet the mandatory maturity dates of the First Mortgage Notes as set forth above without obtaining additional financing from lending institutions or investors. Although the Company had had discussions with possible lenders and investors, it has received no commitments or other form of assurance that such financing will be forthcoming. Absent such financing, the Company will not be able to meet its long-term commitments. The Trustee of the First Mortgage Notes had advised the Company's legal counsel that the bondholders will demand payment in full of the First Mortgage Notes, as provided by the Indenture. 21 HDA may also redeem First Mortgage Notes at the following redemption prices (expressed as percentages of principal amount), in each case together with accrued and unpaid interest: DURING THE 12 MONTH PERIOD BEGINNING ON DECEMBER 15, -------------------------- 2000 101.50% 2001 100.00% HDA is required to purchase First Mortgage Notes, at face value, to the extent that HDA has accumulated excess cash flow, asset sales with net proceeds in excess of $5 million (to the extent these proceeds are not invested in HDA's racing business within a year), or a total taking or casualty, or in the event of a change of control of HDA. The Indenture contains certain covenants, one of which restricts the amount of distributions by HDA to its partners, including the Company. Permitted distributions are limited to approximately 48% of HDA's consolidated net earnings. In connection with certain approvals required from noteholders, HDA agreed to temporarily reduce these distributions by 17%. HDA is permitted to make additional cash distributions to partners and other Restricted Payments, as defined under the Indenture, equal to 44.25% of the excess of HDA's cumulative consolidated net income after December 31, 1993 over the cumulative amount of the 48% Distributions, provided that HDA meets a certain minimum debt coverage ratio. HDA has not met this debt coverage ratio. As of June 30, 2001, HDA has advanced to the Company approximately $3.8 million against its allowable future 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 5, "Related Party Transactions". 4. BONDS AND NOTES PAYABLE AND CAPITAL LEASES: The Company's outstanding notes payable consist of the following:

At September 30, 2001 and December 31, 2000, the prime rate (P) was 6.00% and 9.50%, respectively. a) Considered Refinancing Indebtedness under the terms of the Indenture. Collateralized by First Mortgage Notes purchased in the open market (see Note 3). Payable in quarterly installments commencing on March 31, 2000. Paid in full July 13, 2001. See Note 5 "Related Party Transactions". 22 b) Revolving line of credit available until December 15, 2001, for its operational needs. Interest is calculated on balances outstanding at a rate equivalent to one point over prime rate. Principal is due upon maturity on December 15, 2001. Paid in full July 13, 2001. See Note 5 "Related Party Transactions". c) Management is in the process of renegotiating the terms of these financial obligations. Interest rates range from 7% to 14.01% over Colombia's Fixed Term Deposit (FTD) rate. FTD at September 30, 2001 was 11.43%. d) In August 2000 the Company obtained a $2.5 million unsecured loan at 3% over prime due December 29, 2004. Principal and interest payments are 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 2 of the consolidated financial statements, "Wagering Service Agreements". e) On March 21, 2001, the Company received $100,000 from El Monte Properties, an entity controlled by the Wilson family which also owns a controlling interest in the Company under an unsecured promissory note payable on demand with interest accruing at 1% over prime. The proceeds were used to purchase El Comandante receivable from non-Puerto Rico affiliates and working capital. f) On March 21, 2001, the Company received $50,000 from Santa Maria Associates, an entity controlled by the Wilson family which also owns a controlling interest in the Company under an unsecured promissory note payable on demand with interest accruing at 1% over prime. The proceeds were used to purchase El Comandante receivable due from non-Puerto Rico affiliates and working capital. g) On April 6, 2001, the Company received $120,000 from El Monte Properties, an entity controlled by the Wilson family which also owns a controlling interest in the Company, under an unsecured promissory note payable on demand with interest accruing at 1% over prime, payable on demand by El Monte Properties, controlled by the Wilson family which also owns a controlling interest in the Company. The proceeds were used to purchase El Comandante receivables due from non-Puerto Rico affiliates and working capital. h) On April 26, 2001, the Company received $250,025 from Insular Properties, an entity controlled by the Wilson family which also owns a controlling interest in the Company, under an unsecured promissory note payable on demand with interest accruing at 1% over prime. The proceeds were used to purchase El Comandante receivables due from non-Puerto Rico affiliates and working capital. i) On April 30, 2001, the Company received $300,000 from Insular Properties, an entity controlled by the Wilson family which also owns a controlling interest in the Company, under an unsecured promissory note payable on demand with interest accruing at 1% over prime. The proceeds were used to purchase El Comandante receivables due from non-Puerto Rico affiliates and working capital. j) On May 11, 2001, the Company received $205,000 from Insular Properties, an entity controlled by the Wilson family which also owns a controlling interest in the Company under an unsecured promissory note payable on demand with interest accruing at 1% over prime. The proceeds were used to purchase El Comandante receivables due from non-Puerto Rico affiliates and working capital. 23 k) On June 14, 2001, the Company received $1,300,000 from El Monte Properties, an entity controlled by the Wilson family which also owns a controlling interest in the Company, under an unsecured promissory note payable on demand with interest accruing at 1% over prime. The proceeds were used to purchase El Comandante receivables due from non-Puerto Rico affiliates and working capital. l) The Company also guarantees a $250,000 loan by the operator of the restaurant at Presidente Remon. The proceeds of this loan were used by Equus-Panama to finance improvements to the restaurant. On October 9, 2001, the Company entered into a stock purchase agreement whereby in exchange for release from all liabilities related to the operation of Equus Entertainment de Panama, the Company gave to its minority partner, Wall Street Securities, its 204,000 shares of common stock which represented 51% of the total issued and outstanding shares of Equus Entertainment de Panama. At the same time, the Company was released from any further liability under this loan guarantee. m) In October 1998, Equus-Panama issued $4 million in unsecured bonds pursuant to a public offering. Interest is payable quarterly at the rate of 11% per annum. The bonds may be redeemed by Equus-Panama prior to June 30, 2001 at a redemption price of 102% of the principal amount and thereafter at par. Under the loan documents there are certain restrictions that limit the capacity of Equus-Panama to incur indebtedness and pay dividends to shareholders. On October 9, 2001, the Company entered into a stock purchase agreement whereby in exchange for release from all liabilities related to the operation of Equus Entertainment de Panama, the Company gave to its minority partner, Wall Street Securities, its 204,000 shares of common stock which represented 51% of the total issued and outstanding shares of Equus Entertainment de Panama. At the same time, the Company was released from any further liability under this Bond Indenture. The following table summarizes future minimum payments on capital leases and notes payable of the Company and its consolidated subsidiaries: DUE DURING THE TWELVE CAPITAL NOTES MONTHS ENDING SEPTEMBER 30, LEASES PAYABLE --------------------------- ----------- ----------- 2002 $ 828,063 $3,687,524 2003 485,799 - 2004 319,666 2,500,000 2005 9,701 - 2006 - - ----------- ----------- 1,643,229 6,187,524 Imputed interest (176,790) (238,824) ----------- ----------- $1,466,439 $5,948,700 ----------- ----------- 5. RELATED PARTY TRANSACTIONS: The following is a summary of amounts accrued for services rendered by or from certain related parties, namely, EMC, American Community Properties Trust ("ACPT") and Interstate General Company L.P. ("IGC") during the nine and three months ended September 30, 2001 and 2000: 24

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 $14,370. 3. Payoff of $500,000 HDA line of credit with FirstBank together with interest accrued through July 13, 2001 of $2,903. 4. Advances to consolidated affiliates of $132,108 to cover operational expenses. During the first six (6) months of 2001 the Company executed various unsecured promissory notes with several of its affiliates, see Note 4, "Bonds and Notes Payable and Capital Leases" 6. FAIR VALUE OF FINANCIAL INSTRUMENTS: Based on quoted market prices, the fair value of the First Mortgage Notes as of September 30, 2001 was approximately $37,846,000 (as compared with a carrying value of $53,807,458). The carrying value of notes payable, capital leases and notes receivable approximates fair value. These obligations provide for variable rate interest. The carrying value of accounts receivable and accounts payable approximates fair value due to their short maturities. 7. SEGMENT INFORMATION: The Company has identified three reportable segments, based on geographical considerations: Puerto Rico, Dominican Republic and Colombia. The accounting policies of the segments are the same as those described in the summary of accounting policies. The Company evaluates performance based on profit or loss before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses. The following presents the segment information for the nine and three months ended September 30, 2001 and 2000 (in thousands). 25

8. LEGAL PROCEEDINGS: 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 filed a claim against El Comandante for unpaid service fees of $186,415 plus interest. El Comandante agreed to pay this amount but filed a counterclaim against Autotote. On July 27, 2001 and November 21, 2001 American Arbitration Association rendered its award decision. 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 September 30, 2001, the outstanding principal balance was $587,501 and accrued interest was $18,237.68. 26 EQUUS - COMUNEROS 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 $251,386 accrued through September 30, 2001. 2. Equus-Comuneros shall reimburse Autotote costs incurred of $132,500. GALAPAGOS 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. Each entity involved in the arbitration sustains individually the consequences of the arbiters' final award and there are no performance guarantees by any other entity including Equus Gaming Company L.P., the parent company. Costs incurred by the Company in pursuing the Arbitration with Autotote to date total $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. 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, see Note 1, "Government Matters". Certain of the Company's subsidiaries are presently named as defendants in various lawsuits and might be subject to other claims arising out of the normal business operations. Management, based in part upon advice from legal counsel, believes that the results of such actions will not have a material adverse impact on the Company's financial position or results of operations. 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's operations consist principally of its interests in thoroughbred horse race tracks 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., ("Galapagos") and (iii) Los Comuneros in Medellin, Colombia, owned and operated since early 1999 by Equus Comuneros, S.A. ("Equus-Comuneros"). The following discussion compares the results of operations of the Company for three and nine months ended September 30, 2001 with the results for the three and nine months ended September 30, 2000. RESULTS OF OPERATIONS QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO QUARTER AND NINE ----------------------------------------------------------------------------- MONTHS ENDED SEPTEMBER 30, 2000 ------------------------------- REVENUES Consolidated Revenues decreased in the second quarter of 2001 by $3,796,000, or (22.6%), as compared to the same quarter in 2000. During the nine months ended September 30, 2001, revenues decreased $10,088,000, (19.8%), from the same period in 2000. This decrease was primarily attributable to the decrease in commissions at El Comandante, as explained below, and the loss of revenues from lottery services at Galapagos, as explained below. COMMISSIONS ON WAGERING Commissions on wagering decreased by $3,670,000, (23.7%) to $11,807,000 for the second quarter ended September 30, 2001 as compared to $15,477,000 in the second quarter of 2000. During the nine months ended September 30, 2001, commissions on wagering decreased $9,324,000, (19.5%), to $38,582,000 from $47,906,000 in the same period for 2000. The decrease in commissions was attributable to the following operations: El Comandante $(3,222,000) and Panama $(6,497,000). However, the Colombia and Dominican Republic operations reflect an increase of $393,000 and $3,000 respectively. 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 the Racing Board reversed this action. This cancellation had an adverse economic impact on commissions on wagering in the Dominican Republic and Puerto Rico for the three months ended March 31, 2000. PUERTO RICO. Commissions on wagering at El Comandante decreased $1,683,000, (13.6%), to $10,649,000 in the second quarter of 2001 as compared to $12,332,000 in the second quarter of 2000. During the nine months ended September 30, 2001, commissions on wagering decreased $3,222,000, (8.5%), to $34,726,000 as compared to $37,948,000 for the nine months ended September 30, 2000. The decrease in commissions was attributable to: (a) Commissions from Live Racing declined $3.1 million as a result of wagering decline from short fields, integrity of the races as reported by the media and a shift in wagering from the "Exotic" bets to the "Win/Place" bets (which have a lower commission takeout). 28 (b) Offsetting the decrease, commissions from Simulcasting -In from the United States resulted in an added $1.4 million. (c) Commission from Simulcasting out increased $65 thousand because Simulcast to Galapagos was for the entire period in 2001 whereas in 2000 it was delayed until February 11, 2000 and simulcasting to Panama commenced March, 2001. PANAMA. On October 9, 2001, the Company entered into a stock purchase agreement whereby in exchange for release from all liabilities, related to the operation of Equus Entertainment de Panama, the Company gave to its minority partner, Wall Street Securities, its 204,000 shares of common stock which represented 51% of the total issued and outstanding shares of Equus Entertainment de Panama, Therefore, no revenues are reflected in 2001. DOMINICAN REPUBLIC. Commissions on wagering at V Centenario ("Galapagos") decreased by $136,000 (16.4%) to $692,000 in the second quarter of 2001 as compared to $828,000 in the second quarter of 2000. During the nine months ended September 30, 2001, commissions on wagering increased $3,000, (.1%), to $2,448,000 as compared to $2,445,000 for the nine months ended September 30, 2000. The increase was primarily attributable to: (a) The fact that for the first 1 1/2 months of 2000 there was no simulcasting from El Comandante race track. (b) During the first six (6) months of 2000, commissions earned were shared equally with the horse owners. This practice was discontinued effective July 1, 2000. COLOMBIA. Commissions on wagering at Comuneros S.A. increased by $181,000 (63.5%) to $466,000 in the second quarter of 2001 as compared to $285,000 in the second quarter of 2000. During the nine months ended September 30, 2001, commissions on wagering increased $393,000, (38.7%), to $1,408,000 as compared to $1,015,000 for the nine months ended September 30, 2000. This increase was primarily attributable to fifty-nine (59) additional race days for the nine months ended September 30, 2001. NET REVENUES FROM LOTTERY SERVICES Net revenues from lottery services by Galapagos in the Dominican Republic for the nine months ended September 30, 2001 decreased by $170,000 (100%) as compared to the same period in 2000. Since June 30, 2000, Autotote has provided services directly to the Lottery Operations [Dominican International Electronic Lottery, Inc. (LEIDSA)] and refused to pay Galapagos service fees under its service contract. The Company has filed suit in Federal Court in Puerto Rico and has concluded arbitration. See Note 8, "Legal Proceedings". OTHER REVENUES Other revenues during the three and the nine months ended September 30, 2001 increased by $54,000 (4.8%) and by $736,000 (28.0%), respectively, as compared to the same period in 2000. EXPENSES For the reasons set forth below, total expenses during the three and nine months ended September 30, 2001 decreased by $3,459,000, (16.5%) and by $1,531,000 (2.7%), respectively, as compared to the same period in 2000. 29 PAYMENTS TO HORSE OWNERS Payments of purses to horse owners during the three and the nine months ended September 30, 2001 decreased by $2,588,000 (29.0%) and by $2,384,000 (10.3%), respectively, as compared to the same period in 2000. This was essentially due to the provisions of the respective horse owner contracts and/or Government Racing Board orders that provided additional payments to horse owners from sources other than purses. Under El Comandante contract with horse owners, the horse owners are guaranteed minimum earnings of $25,032,000 for 2000 and 2001. 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. On March 16, 2001 an "Addendum to Contract" was executed by the Horse Owners' Confederation and the Company, whereby the parties jointly agreed to: (i) Increase the number of simulcast races each live race day from three (3) to six (6). (ii) Place three (3) of the simulcast races before the first live race and place three (3) intermingled races after the fifth live race;. (iii) Include simulcasting of nine (9) to twelve (12) races on Thursdays of each week, a day that currently holds no live races. (iv) In consideration for the above items, ECMC will pay an additional $1,000,000 to the Horse owners Confederation if 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 a three (3) month probationary period commencing July 1, 2001 for ECMC to place three (3) simulcast races before the first live race and three (3) after the fifth live race. The Racing Board declined simulcasting of races during the probationary period on Thursday's, a day that currently holds no live races. Pending final approval by the Racing Board, ECMC was obligated to pay the Horse Owners' Confederation $1,000,000. On October 16, 2001 following a hearing, the Racing Board suspended effective October 22, all simulcasting temporarily allowed during the probationary period. Since no final approval was obtained from the Racing Board for the simulcasting of races, ECMC is no longer obligated to pay the additional $1,000,000 to the Horse Owners Confederation. The Racing Board will allow simulcasting of such special events as the Breeders' Cup, Kentucky Derby and the Preakness as well as the Caribbean Classic and the Confraternity Classic from the host country if these races are not held in Puerto Rico. ECMC is currently doing a cost/benefit analysis to determine if the limited simulcasting will be economically worthwhile. FINANCIAL EXPENSES Financial expenses for the three and the nine months ended September 30, 2001 decreased by $534,000 (21.3%) and by $144,000 (1.9%), respectively, as compared to the same period in 2000. This increase is primarily attributable to interest and late charges owed by ECMC on the delinquent excise taxes. See Part II, Item I, "Legal Proceedings". 30 DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses for the three and the nine months ended September 30, 2001 increased by $113,000, 12.5% and by $89,000, 3.2%, respectively, as compared to the same period in 2000, which is primarily due to additions of capital improvements at El Comandante as well as an increased monthly provision in 2001 which more accurately reflects the true expense. OTHER EXPENSES Other expenses for the three and the nine months ended September 30, 2001 decreased by $450,000 (5.2%) and increased by $908,000 (3.9%), respectively, as compared to the same period in 2000. This increase is primarily attributable to new: operations, including additional expenses relating to the SSI and the VSAT system, satellite related expenses which have yet to be recovered through revenues, severance payments and horse owners contract expenses incurred by El Comandante and additional professional fees incurred by Equus Entertainment Corporation (see tables below).

SSI AND VSAT EXPENSES The increase in operating expenses and marketing/satellite expenses for the three and nine months ended September 30, 2001, as compared to the same period in 2000, are primarily due to the additional expenses for the planning, engineering and startup expenses on the wagering system (VSAT) and leased satellite time. The Company has not been able to recover these additional operating expenses since the new equipment is not yet in service. 31 PROVISION FOR INCOME TAXES The provision for income tax relates to deferred Puerto Rico income taxes. MINORITY INTEREST The Company's minority interest is attributed to the income and losses allocable to the minority partners of HDA, Galapagos and Equus-Comuneros. Since the accumulated losses of Galapagos allocable to minority partners exceeded their investment, for the nine months ended September 30, 2001, the Company did not recognize minority interest losses of Galapagos of $279,182 and $309,058, respectively. During 2001: (i) if and while Galapagos continues incurring losses, no minority interest in Galapagos' net losses will be recognized, and (ii) if Galapagos generates profits, no minority interest in Galapagos' net income will be recognized up to $2,125,964. 32 LIQUIDITY AND CAPITAL RESOURCES OVERVIEW The Company is the owner of Housing Development Associates S.E. ("HDA") and its consolidated subsidiary, El Comandante Management Company LLC ("ECMC"), as well as the owner of Agency Betting Network, Inc. ("ABN"), Satellites Services International, Inc. ("SSI") and foreign subsidiaries (Equus Comuneros S.A., Equus Entertainment de Panama, S.A. and Galapagos, S.A.). The principal source of cash of Equus Gaming Company L.P. (the "Company" or, when referring to the individual entity, "Equus") is related to its ownership interest in HDA, the owner and operator (through its wholly owned subsidiary ECMC) of El Comandante Race Track in Puerto Rico. Due to certain restrictions under HDA's indenture for the issuance of its 11.75% First Mortgage Notes due 2003 (the "Indenture"), cash held by HDA or its consolidated subsidiaries (including ECMC) is restricted to ensure payment of interest and certain obligations on the First Mortgage Notes. 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., and Galapagos, S.A) did not materially affect the consolidated cash flow of the Company for the three and nine months ended September 30, 2001 and these activities are not discussed herein. LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY (AND ITS CONSOLIDATED SUBSIDIARIES) Cash and cash equivalents of the Company and its consolidated subsidiaries increased by approximately $147 thousand during the quarter ended September 30, 2001. The Company has historically met its liquidity requirements principally from cash flow generated by (i) the operations of El Comandante Race Track in Puerto Rico and (ii) short-term loans and capital leases for acquisition of new equipment. During the three and nine months ended September 30, 2001, the principal uses of cash by the Company and its consolidated subsidiaries for its financing and investing activities were as follows: (i) Payment January 2, 2001 of interest on First Mortgage Notes due December 14, 2000 of $3.7 million. (ii) Payments on capital leases for equipment used in the Company's operations. (iii) Capital improvements and acquisition of equipment. (iv) Payments of financial obligations. (v) Weekly payment of delinquent excise taxes pursuant to Agreement. (vi) Weekly payment of delinquent patente taxes pursuant to Agreement. For the remainder of the year 2001 projected uses of cash for the Company's activities are: (i) Interest payments of $3.6 million on the First Mortgage Notes due December 15, 2001, (remains unpaid). (ii) Additional investments in ABN for its Colombian operations. 33 (iii) Additional investments in SSI, principally for the payment of satellite time contracted from a third party. (iv) Redemption of First Mortgage Notes of $3,454,000 due December 15, 2001, (remains unpaid). (v) Weekly payment of delinquent excise taxes pursuant to Agreement, $1.3 million, from July 1, 2001 through December 31, 2001. (vi) Weekly payment of delinquent volume of business taxes pursuant to Agreement, $1.3 million from August 1, 2001 through December 31, 2001. (vii) Monthly payment of prior arrearages owed to Puerto Rico Telephone Company pursuant to Agreement, $211 thousand from August 30, 2001, through December 31, 2001. INVESTMENTS IN TELECOMMUNICATIONS EQUIPMENT AND MARKET EXPANSION The Company plans to install over the next twelve (12) months 1,000 VSAT (video and data communication) units for OTB agencies in all operations. The communications up-link satellite control center (the "Hub") installation is complete and operational. SSI will be the service provider for all telecommunications and satellite usage by the Company's affiliates. The estimated $12 million capital investment in the VSAT expansion for which financing is sought is expected to be recovered over a five-year period from the new VSAT units. There can be no assurance that the Company will be able to obtain the financing or expand the satellite time required to build out the proposed video and data communication system. The failure to do so could cause the Company not to have sufficient funds 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 in December 29, 2004. Principal and interest are 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 2 of the consolidated financial statements, "wagering service agreement". HDA's First Mortgage Notes bear interest at 11.75%, payable semiannually on June 15th and December 15th, and are secured by El Comandante assets. The First Mortgage Notes are redeemable, at the option of HDA, in 2001 and thereafter at 100% of the principal amount, together with accrued and unpaid interest. The maturity dates of First Mortgage Notes, reduced by prior redemptions and by the Notes purchased by ECMC, are as follows (in thousands): YEAR ENDING NET AMOUNT DECEMBER 31, (FACE VALUE) ------------- ------------ 2001 $ 3,454 2002 10,200 2003 40,800 ------------ $54,454 ============ To the extent First Mortgage Notes are not acquired in the open market or redeemed, Management expects to refinance this obligation not later than December 2002. 34 U.S. VIRGIN ISLANDS- The Company has been awarded the right to operate the racetrack in St. Thomas and the off-track betting agency system in St. Thomas and St. John. The Company has negotiated a contract with the Racing Board for the exclusive rights to simulcast unlimited live races from the United States to the Virgin Islands and is awaiting final approval from the Legislature and Governor, which is expected by mid June, 2002. Revenues from simulcasting are expected to begin in July, 2002. Revenues from live racing will be phased in as the racetrack and spectator facilities are refurbished. This is expected to be completed by September, 2002. The total investment in the Virgin Islands project is expected to be approximately $500,000. GOVERNMENT MATTERS. El Comandante is required to pay the Government of Puerto Rico various taxes on wagering placed on thoroughbred horse races held at or simulcasted by El Comandante (Puerto Rico). The taxes on wagering are required to be remitted to the Department of the Treasury of Puerto Rico within two (2) days of the date wagers are placed. El Comandante failed to remit tax payments totaling $9,949,182 from October 16, 2000 to February 7, 2001. 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 paid $60,141 in full payment of the February, 2001 assessment. 2. For a six-month period commencing June 1, 2001 and ending November 30, 2001, ECMC will pay $50,000 per week against the October, 2000 through January, 2001 assessment. After the six-month period, the Secretary will reevaluate the financial condition of ECMC, and may, upon reasonable grounds, continue, modify or revoke the Agreement. 3. ECMC will continue to pay on a timely basis current excise taxes and commissions. 4. ECMC will 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 the Agreement, the Secretary may accelerate the balance due plus any additional amounts due as a result of the default. As of June 12, 2002, ECMC had fully complied with the terms and provisions of the Agreement. On August 18, 2001, ECMC executed a Closing Agreement (the "Agreement") with the Municipality of Canovanas whereby ECMC settled a long-standing dispute over the payment of the Volume of Business Tax assessed by the municipality. 35 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 45,233 118,264 00/01 116,735 19,455 136,190 ----------- ----------- -------- Totals $ 654,618 $ 284,832 $939,450 =========== =========== ======== Prior to settlement, the Company had accrued a total liability of $838,396 as of June 30, 2001. 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 request full payment of the remaining balance, $559,450, or renegotiate a final twelve (12) month payoff of the balance. 3. Should ECMC default at any time on the agreed payment terms, the Municipality may declare the entire remaining balance due. 4. To guarantee the 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. As of June 12, 2002, ECMC had fully complied with all the provisions of the Agreement. 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 owed to the Department of the Treasury of Puerto Rico and to the members of the Horse Owners' Confederation. As of June 12, 2002, all requested information had been submitted by ECMC. The investigation has been completed, but as of this date, the House of Representatives has not issued their report or otherwise disclosed their findings. As of September 30, 2001, Equus Comuneros owed the Colombian Tax and National Customs Administration approximately $837,373, 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%, 25% and 30%, respectively. 2. The Government is requesting a down payment, which is currently being negotiated. 36 FORWARD-LOOKING STATEMENT Certain matters discussed and statements made within this Form 10-Q are forward-looking statements within the meaning of the Private Litigation Reform Act of 1995 and as such may involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance or achievements of the Company to be different from any future results, performance or achievements expressed or implied by such forward-looking statements. Although the Company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. These risks are detailed from time to time in the Company's filing within the Securities and Exchange Commission or other public statements. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS: 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 for unpaid excise taxes and commissions for the period October, 2000 through February, 2001, in the amount of $11,172,450 (including interest and late charge), 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 paid $60,141 in full payment of the February, 2001 assessment. 2. For a six-month period commencing June 1, 2001 and ending November 30, 2001, ECMC is obligated to pay $50,000 per week against the October, 2000 through January, 2001 assessment. After the six-month period, the Secretary will reevaluate the financial condition of ECMC and may, upon reasonable grounds, continue, modify or revoke the Agreement. 3. ECMC will continue to pay on a timely basis the current excise taxes and commissions. 4. ECMC will provide and maintain a bond to the Secretary in the amount of $500,000. 5. In the event ECMC defaults during the term of the Agreement, the Secretary may accelerate the balance due plus any additional amounts due as a result of the default. As of June 12, 2002 all terms and conditions of the Agreement had been met by ECMC. As of September 30, 2001, Equus Comuneros owed the Colombian Tax and National Customs Administration approximately $837,373, 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%, 25% and 30%, respectively. 2. The Government is requesting a down payment, which is currently being negotiated. On August 18, 2001, ECMC executed a Closing Agreement (the "Agreement") with the Municipality of Canovanas whereby ECMC settled a long-standing dispute over the payment of the Volume of Business Tax assessed by the municipality. 37 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 45,233 118,264 00/01 116,735 19,455 136,190 ----------- ----------- -------- Totals $ 654,618 $ 284,832 $939,450 =========== =========== ======== Prior to settlement, the Company had accrued total liabilities of $838,396. 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 request full payment of the remaining balance, $559,450, or renegotiate a final twelve (12) month payoff of the balance. 3. Should ECMC default at any time on the agreed payment terms, the Municipality may declare the entire remaining balance due. 4. To guarantee the 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. As of June 12, 2002, the terms and conditions of the Agreement have been met by ECMC. The Company and/or its subsidiaries 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 filed a claim against El Comandante for unpaid service fees of $186,415 plus interest. El Comandante agreed to pay this amount but filed a counterclaim against Autotote. On July 27, 2001, American Arbitration Association rendered its award. The following is a summary of the awards by racetrack: EL COMANDANTE, PUERTO RICO 1. 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. Comandante shall reimburse Autotote for costs incurred of $132,500. 3. As of September 30, 2001, the outstanding principal balance was $587,501 and accrued interest was $18,237. 38 EQUUS - PANAMA 1. Equus - 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-Panama shall reimburse Autotote for costs incurred of $25,000. EQUUS - COMUNEROS 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 June 30, 2001. 2. Equus-Comuneros shall reimburse Autotote costs incurred of $132,500. GALAPAGOS 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 cost 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. Each entity involved in the arbitration sustains individually the consequences of the arbiters' final award and there are no performance guarantees by any other entity including Equus Gaming Company L.P., the parent company. Costs incurred by the Company in pursuing the arbitration with Autotote to date total $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. 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. 39 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 45,233 118,264 00/01 116,735 19,455 136,190 ----------- ----------- -------- Totals $ 654,618 $ 284,832 $939,450 =========== =========== ======== Prior to settlement, the Company had accrued as of June 30, 2001 a total liability 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, $559,450, 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 shall provide to the Municipality two (2) payments bonds in the amount of $503,732 and $94,886, respectively. As of June 12, 2002, ECMC has fully complied with the provisions of the Agreement. Certain of the Company's subsidiaries are presently named as defendants in various lawsuits and might be subject to other claims arising out of normal business operations. Management, based in part upon advice from legal counsel, believes that the results of such actions will not have a material adverse impact on the Company's financial position or results of operations. ITEMS 2-6 NONE 40 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 June 21, 2002 /s/ Thomas B. Wilson ------------------- ----------------------------------- President, Chief Executive Officer, Director and Acting Chief Financial Officer June 21, 2002 /s/ James J. Wilson ------------------ ----------------------------------- Co-Chairman 41

EQUUS GAMING CO LP 10-Q