10-K 1 doc1.txt 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, 2001 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) 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 NASDAQ Small Cap Market System benefit ownership of Class A limited ("Nasdaq/SCMS") partnership interest and evidenced by in January 2001 the Company was delisted beneficial assignment from the NASDAQ Stock Market. certificates ("Units") Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of June 12, 2002, the aggregate market value of 3,087,892 Units held by non-affiliates of the registrant was $247,031. Documents Incorporated By Reference: Not Applicable 1

2 PART I ITEM 1. BUSINESS GENERAL Equus Gaming Company L.P. (the "Company"), a Virginia limited partnership, is engaged in thoroughbred racing, wagering and other gaming businesses in the Caribbean 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. The Company has a 99% interest in Housing Development Associates S.E. ("HDA"), the owner of El Comandante Racetrack ("El Comandante"), the only licensed thoroughbred racing facility in Puerto Rico. El Comandante has operated since January 1, 1998 as a wholly-owned subsidiary of HDA, El Comandante Management Company, LLC ("ECMC"). The Company has a 55% interest in Galapagos, S.A. ("Galapagos"), the operator since April, 1995 of 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. On October 9, 2001, Equus Entertainment de Panama was restructured whereby the Company sold its controlling interest and purchased preferred stock 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 would, in management's opinion, require an initial investment of $12 million -. Efforts to raise the $12 million by the due date were unsuccessful. Consequently, the concession expired 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 year 2001, which resulted in the Company writing off of its entire investment at December 31, 2001. The company also has a controlling 100% interest in Satellite Service International, Inc. ("SSI") and Agency Betting Network, Inc. ("ABN"). SSI will provide up-link services, satellite time (contracted from a third party), and leasing of video and data telecommunication equipment, to transmit (or simulcast) live races from and to the Company's racetracks and OTB agencies, including live races from outside the Company's operational territories to the agency distribution network in order to increase the level of wagering revenues through the Company's OTB system. ABN is establishing and operating an OTB agency system in Colombia in conjunction with Los Comuneros Race Track in Medellin, Colombia ("Los Comuneros"), owned and operated by Equus Comuneros S.A. ("Equus-Comuneros"). The Colombia OTB system is expected to operate in Bogota, Medellin and other major cities. 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 3 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. 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 2001, there were approximately 608 OTB 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 of 2001 production was integrated with the racetrack's operations at a substantial saving. The telecast permits OTB patrons to monitor odds and handicapping information until post time and then to view the live race. Live races are currently broadcasted through an agreement with S&E Network, Inc. ("S&E"). The Company is implementing a high technology communication system (data and video-VSAT) with a satellite link (HUB) in Puerto Rico having the capacity to simulcast live races to other operations and to countries in the Caribbean and South America. ECMC has a new contract effective July 1, 2000 with the Puerto Rico 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 4 Juan Region (the largest of three regions in Puerto Rico) which includes the San Juan metropolitan area and over three-fourths of the northern half of the Island; the exclusive right to conduct all types of authorized betting throughout Puerto Rico, based on races held at El Comandante; and the right to hold a minimum of 180 day or night-race days per year. Until the expiration of the Operating License, no other thoroughbred racetrack license for the San Juan Region may be issued. ECMC faces competition from other forms of legalized gambling in Puerto Rico. There are 19 licensed casinos in Puerto Rico offering card and dice games, slot machines and other games of chance. The Puerto Rico Government has operated a ticket lottery for more than 50 years and in 1991 commenced an electronic jackpot lottery. In addition, there are numerous cock fighting venues on the Island. ECMC also faces competition from illegal gambling. The Puerto Rico Government may, through legislation, legalize other forms of gambling or grant additional gaming licenses to those forms of gambling already authorized by law. EMPLOYEES. ECMC had approximately 178 employees as of December 31, 2001. There were 45 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; 75 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 58 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. B. DOMINICAN REPUBLIC OPERATIONS In 1995, Galapagos was selected by the Dominican Republic Racing Commission to operate the government-owned V Centenario racetrack in Santo Domingo pursuant to a ten-year agreement ending April 2005. The contract may be renewed for additional ten-year periods by mutual agreement of the parties. The contract also provides Galapagos with the right to develop off-track betting in the Dominican Republic and the exclusive right to simulcast live horse races from other countries into the Dominican Republic. During the year 2000 Galapagos requested negotiations with the National Racing Commission to extend their contract for an additional 10-year period. As of June 12, 2002, no negotiations have taken place. At December 31, 2001 there were approximately 232 installed and 175 operating OTB agencies in the Dominican Republic. The OTB system in the Dominican Republic has been negatively impacted by the inability to obtain dependable broadcasting of live races by commercial television with broad island-wide penetration. Currently, live racing is conducted three days per week with a six-race card. Full card wagering on simulcast races from El Comandante is offered five days a week. During the first quarter of 2001, the Company presented to the Dominican Republic government a legislative proposal to reduce taxes by avoiding double taxation in the Dominican Republic and Puerto Rico on winning tickets. The proposed legislation also provides for economic and investment incentives to further improve the racing program and betting options, increase the pool of horses and upgrade video transmission. As of June 12, 2002, this legislation has not been enacted but the Company's efforts continue. In 2001, Galapagos S.A. applied and received from the Government a sports book license. If developed, it would be an added source of revenue for the Company. 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. 5 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 as follows: 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. See Note, 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 lottery which carried jackpot prizes exceeding US$6 million on two Saturdays in 2000 decreased the betting handle on the best racing day of the week. The pick-6 wager represents roughly 40% of betting handle. There are approximately 3,000 independent sports betting agencies in the Dominican Republic. There were approximately 153 OTB agencies at December 31, 2001. 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 117 employees at December 31, 2001. Galapagos has no agreements with unions and has not experienced any work stoppage or material labor difficulties. 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 2001 Los Comuneros operated 6 approximately 150 OTB agencies. Wagering revenues from those agencies was minimal due to limitations in the number of live races and a lack of simulcast races from other countries. In December 2000 the Racing Board approved more live races and simulcasting from other countries. In 2000, the Company entered into a totalisator agreement with United Tote for state-of-the-art terminals that is expected to increase significantly OTB agency betting. During 2001, Equus-Comuneros had 135 more race days than in year 2000. The OTB agency network operated by ABN, a wholly owned Puerto Rican subsidiary of the Company, will be equipped with improved satellite video and data communication equipment with the capacity to service major cities in Colombia. As of December 31, 2001, approximately 104 ABN antennas were installed in Colombia. In mid 2001, ABN applied to the Government for a sports betting license, which if granted could have a material impact on future earnings. As of June 12, 2002 the application is still in process; however, ABN has received verbal approval from the city of Medellin. COMPETITION. Equus-Comuneros faces competition from other forms of legalized gambling in Colombia, including a lottery system. EMPLOYEES. At December 31, 2001 Equus-Comuneros had 64 employees. On race days there are an additional 51 employees operating the betting system. D. SATELLITE SERVICES INTERNATIONAL, INC. ("SSI") SSI, a wholly owned subsidiary of Equus Gaming Company L.P., will provide up-link services, satellite time (contracted through a third party), and lease video and data telecommunications equipment to transmit (or simulcast) live races between the Company's racetracks and the OTB agencies. SSI will receive a percentage of wagering handle on simulcast faces throughout the Equus network. The main asset of SSI is the VSAT System consisting of a hub, satellite channel and remote VSAT's in each jurisdiction where the Company has pari-mutuel wagering. Upon completion, the integrated system will be more efficient and reliable than the terrestrial telephone lines currently utilized. As of December 31, 2001, 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, 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 from terrestrial lines such as "pay at the pump" gasoline stations, pharmacy prescription networks and lottery sales. E. AGENCY BETTING NETWORK, INC. ("ABN") 7 ABN is a wholly owned subsidiary of Equus Gaming, L.P. which is currently installing and operating an OTB agency system in Colombia, to provide satellite and data communication system, which is contemplated to reach and penetrate all of the major cities in Colombia. H. VIRGINIA RACING LICENSE During 1999 the Company attempted to acquire a license to own and operate a horse racetrack in Prince William County, Virginia. On November 17, 1999 the Virginia Racing Commission made a final decision not to award the Virginia License to any of the applicants. The Company wrote-off all costs associated with the license application in 1999. ITEM 2. PROPERTIES EL COMANDANTE. HDA is the owner of El Comandante, situated on a 257-acre parcel of land in Canovanas, Puerto Rico, approximately 12 miles east of San Juan. El Comandante properties include the following: a. A building consisting of a six-level grandstand and clubhouse with seating for over 10,000 and a total capacity in excess of 25,000, including glass-enclosed, air-conditioned dining room with seating capacity for over 1,400; b. Racing facilities, including a one-mile oval strip with a seven-furlong chute and a 65-foot wide exercise track; c. Barn area and related facilities, including 1,595 horse stalls; d. Paved parking area that can accommodate 7,250 vehicles; e. Landscaped infield containing three lakes and a waterfall. These properties were severely damaged by Hurricane Georges in 1998. The grandstand and clubhouse were rebuilt on a reduced scale in late 1998 and finalized in 1999. ECMC also owns certain race track and telecommunication equipment used in the operation of El Comandante and the off-track betting system. See Note 5 to the Company's consolidated financial statements for a description of encumbrance on El Comandante properties. V CENTENARIO. Galapagos leases V Centenario from the Dominican Republic Government. V Centenario is situated on a parcel of land, approximately 7.5 miles east of Santo Domingo, Dominican Republic. V Centenario properties include the following: a. A building consisting of grandstand and clubhouse with seating for over 4,200 and total capacity in excess of 10,000, including an air-conditioned dining room with seating for 400; b. Racing facilities, including a one-mile oval strip with a seven-furlong chute and a 1,400 meter exercise track; 8 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 grandstand and clubhouse with total seating capacity of 5,500; b. Racing facilities, including a 1,300-meter oval strip with a six-furlong chute; c. Barn area and related facilities, including 300 horse stalls; d. Parking area that accommodates 500 vehicles. ITEM 3. LEGAL PROCEEDINGS 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 and November 21, 2001, 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. 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. 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-Panama Arbitration Award. 9 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 December 31, 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. As of June 12, 2002, the parties are negotiating a settlement within the terms of the arbitration awards. 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. The following schedule lists the deficiencies by fiscal year with the corresponding interest and surcharges: 10 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 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, $559,450, 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. 3. 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. As of June 12, 2002, ECMC has fully complied with the provisions of the Agreement. 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 Not applicable. 11 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.

On June 12, 2002, the closing sale price of Units was $0.08 as reported on NASDAQ. As of June 12, 2002, there were 14,389,824 Units outstanding and approximately 209 Unitholders of record. Of the units outstanding, 3,082,892 have not been registered under the Securities Exchange Act of 1934, and therefore, cannot be traded. The Company does not expect to make cash distributions to its Unitholders in the foreseeable future. The Company's principal source of cash has been distributions from HDA. The trust indenture related to the First Mortgage Notes limits distributions by HDA to the Company to approximately 48% of HDA's consolidated net income. It allows additional cash distributions only if certain debt coverage ratios are met. To date these ratios have not been achieved, nor is it likely they will be in 2002. 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. As a result of the disruption within Arthur Andersen LLP caused by the Government recent indictment, the Company's consolidated financial statements are unaudited for the year 2001. 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). 12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's results of operations are principally attributable to its interests in thoroughbred horse race tracks in 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") The following discussion compares: (i) the results of operations of the Company for 2001 with the results for 2000 and (ii) the Company's consolidated results of operations for 1999 with results for 1999. Effective January 1, 1998 HDA terminated the lease agreement with El Comandante Operating Company, Inc. ("ECOC") and commenced operating El Comandante through ECMC, its wholly-owned subsidiary (the "Proforma Transaction"). As a result, the Company's historical results of operations for 1998 are not readily comparable with results of operations for 1997. Accordingly, the unaudited proforma results for 1997 have also been presented as if the Proforma Transaction had occurred on January 1, 1997 and the accounts of ECOC had been included in the Company's historical results of operations, after eliminating all intercompany transactions. 14 THE COMPANY'S RESULTS OF OPERATIONS 2001 COMPARED TO 2000 ------------------------ REVENUES Consolidated Revenues decreased by approximately , $17,250,000 or (25.1%), in 2001 to $51,342,000 from $68,592,000 in 2000. The majority of this decrease was due to the sale of the Company's investment in Panama and the corresponding deconsolidation for the year 2001. COMMISSIONS ON WAGERING Commissions on wagering decreased by approximately, $12,826,000 or (19.9%) in 2000 to $51,561,000 as compared to $64,387,000 in 2000. The decrease in commissions was attributable to the following operations: El Comandante ($4,600,000) and Panama ($8,540,000), net of the increase in commissions attributable to Colombia ($274,000) and Galapagos ($41,000). 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. PUERTO RICO. Commissions on wagering at El Comandante decreased $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, which has been in decline and hence a decline in the racetracks' commissions. There was a drop in off track betting of $9,780,000. El Comandante experienced declines in betting handle as a result of the poor racing program due to lack of proper scheduling of races by the Government Racing Authorities. Substantial increases in on track and simulcasting commissions did not compensate for the decline in off track wagering. PANAMA. Commissions on wagering at Presidente Remon decreased by $8,540,000 (100.0%) from $8,540,000 in 2000 to $0 in 2001. The decrease was attributable to the sale of Panama's investment and the corresponding deconsolidation for the year 2001. DOMINICAN REPUBLIC. Commissions on wagering at V Centenario increased by $41,000 (1.2%) from $3,315,000 in 2000 to $3,356,000 in 2001. COLOMBIA. Commissions on wagering at Los Comuneros increased by $274,000, 17.6% 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 simulcasting. 15 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 2001 other revenues increased by approximately $4,585,000, 118.9% compared to 2000. The increase was primarily due to SSI recognizing as current year income, $3,800,000 of previously deferred income from the sale of betting technology to Equus-Uruguay. EXPENSES For reasons set forth below, total expenses during the year ended December, 2001 decreased by $7,975,000 (9.8%) compared to 2000. 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 $2,325,000 (7.5%) in 2001 compared to 2000. The majority of this decrease was due to the sale of the Company's investment in Panama and the corresponding deconsolidation for the year 2001: Increase 2001 2000 (decrease) -------------------------------------- ECMC(a) $26,009,000 $25,529,000 $ 480,000 Panama - 2,691,000 (2,691,000) Dominican Republic 1,678,000 1,623,000 55,000 Colombia 1,133,000 1,302,000 (169,000) -------------------------------------- $28,820,000 $31,145,000 $(2,325,000) ====================================== (a) Summary of new horse owners contract provision for ECMC: The new Puerto Rico horse owners contract, signed in July 2000, provides for a non-recurring cash payment of approximately $1 million. Approximately $600,000 was accrued in 1999. The remaining $400,000 was charged to operating expenses in 2000. Under the contract, 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. Additional costs incurred in the year 2000 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 jointly agreed to: 16 (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 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 for the above items, 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 Thursdays, a day that currently holds no live races. Pending final approval of the complete simulcast package by the Racing Board, ECMC was 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's Cup, Kentucky Derby and the Preakness as well as the Caribbean Classic and the Confraternity Classic is still permitted. However, ECMC will perform a cost/benefit analysis to determine if the limited simulcasting is economically viable per event. FINANCIAL EXPENSES Financial expenses decreased by $1,118,000 (10.7%) compared to 2000, 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. In the end, the terms offered by the lender were not acceptable to the Company. DEPRECIATION AND AMORTIZATION Depreciation in 2001 decreased by $275,000 (6.5%) compared to 2000. OTHER EXPENSES Other expenses increased by $4,256,000 (12.1%) to $30,997,000 from $35,252,000 in 2000, attributable to the new horse owners contract, increased racetrack security costs and expenses relating to SSI and VSAT. Other increases were in professional fees (increase of $304,000) in connection with the unsuccessful financing, travel expenses incurred in connection with the Uruguay project, and utility increases due to Friday night racing, as well as an overall increase in electricity costs. 17 PROVISION FOR INCOME TAXES The provision for income tax is primarily attributable to Puerto Rico operations. 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. 2000 COMPARED TO 1999 --------------------- REVENUES Consolidated Revenues decreased by approximately $2,733,000, or 3.8%, in 200 to $68,592,000 from $71,325,000 in 1999. COMMISSIONS ON WAGERING Commissions on wagering decreased by $2,357,000 (3.5%) in 2000 to $64,387,000 as compared to $66,745,000 in 1999. The decreased in commissions was attributable to the following operations: El Comandante ($1,105,000), Galapagos ($520,000), and Panama ($848,000), net of the increase in commissions attributable to Colombia ($115,000). During contract negotiations in January 2000, the Puerto Rico horseowners cancelled their prior approval of simulcast of live races from Puerto Rico to the Dominican Republic. In February this action was reversed by the Racing Board. This cancellation had an adverse economic impact on commissions on wagering in the Dominican Republic and Puerto Rico. In July 2000 the Puerto Rico Horse owners' Association reached an agreement with El Comandante Management Company on a new 10-year contract providing for simulcast of races. PUERTO RICO. Commissions on wagering at El Comandante decreased $1,105,000 (2.1%) from $52,76,000 in 1999 to $50,971,000 in 2000. Commissions on wagering are directly related to the racetrack handle, which has been in decline and hence a decline in the racetracks' commissions. There was a drop in off track betting of $9,780,000. El Comandante experienced declines in betting handle as a result of the poor racing program due to lack of proper scheduling of races by the Government Racing Authorities. Substantial increases in on track and simulcasting commissions did not compensate for the decline in off track wagering. DOMINICAN REPUBLIC. Commissions on wagering at V Centenario decreased by $520,000 (13.6%) from $3,835,000 in 1999 to $3,315,000 in 2000. This decrease was primarily attributable to the interruption and simulcast races in the first quarter of the year, as well as lower numbers of agencies in operation due to transmission and telecommunications interruptions. 18 PANAMA. Commissions on wagering at Presidente Remon decreased by $848,000 (9.0%) from $9,388,000 in 1999 to $8,540,000 in 2000. The decrease was attributable to a decline in the economy. COLOMBIA. Commissions on wagering at Los Comuneros increased by $115,000 (8.0%) from $1,445,000 in 1999 to $3,315,000 in 2000. This increase was primarily due to the opening of new OTB agencies and expanded wagering from simulcasting. NET REVENUES FROM LOTTERY SERVICES During 2000, net revenues from lottery services in the Dominican Republic decreased by aproximately $377,000 compared to 1999. The decrease was due to a reduction in the amount billed to the lottery operator as reimbursement for telephone line costs, pursuant to an amendment to the contract. Since June 30, 2000, Autotote has provided services directly to the Lottery Operations [Dominican International Electronic Lottery, Inc. (LEIDSA) and refused to pay Galapagos service fees under its service contract. The Company has filed suit in Federal Court in Puerto Rico against Autotote and is also pursuing arbitration. OTHER REVENUES During 2000 other revenues decreased by aproximately $178,000 as compared to 1999. El Comandante card sales "impresos" decreased by $98,000, because of the decrease in wagering. Galapagos lost lottery commissions beginning the end of June, 2000 as noted previously. GAIN ON SALE OF ASSETS The gain of $180,000 is attributable to the sale of a television license in Panama no longer needed. EXPENSES For reasons set forth below, total expenses during the year ended December 2000 increased by $6,407,000 (8.6%) compared to 1999. Some of these expenses were non-recurring and are reported below under appropriate categories. PAYMENT TO HORSE OWNERS Payments of purses to horseowners decreased $1,551,000 (4.7%) in 2000 compared to 1999 as noted below: 19 INCREASE 2000 1999 (DECREASE) -------------------------------------- ECMC(a) $25,529,000 $26,037,000 $ (508,000) Panama 2,691,000 3,900,000 (1,209,000) Dominican Republic 1,623,000 1,913,000 (290,000) Colombia 1,302,000 846,000 456,000 -------------------------------------- $31,145,000 $32,696,000 $(1,551,000) ====================================== (a) Summary of new horse owners contract provision for ECMC: The new Puerto Rico horse owners contract, signed in July 2000, provides for a non-recurring cash payment of approximately $1 million. Approximately $673,000 was accrued in 1999. The remaining $364,000 was charged to operating expenses in 2000. Under the contract, the 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. Additional costs incurred in the year 2000 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. 20 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. FINANCIAL EXPENSES Financial expenses increased by $1,923,000 (23.5%) compared to 1999, primarily related to use of line of credit facilities for development of agency operations, including additional agencies and improvements in simulcasting and transmission facilities, and a non-recurring charge off of expenses incurred in negotiation a loan that would have provided funding for the VSAT equipment and the purchase of the outstanding mortgage notes. In the end, the terms offered by the lender were not acceptable to the Company. DEPRECIATION AND AMORTIZATION Depreciation in 2000 increased by $667,000 (18.6%) compared to 1999, primarily due to capital improvements at El Comandante. OTHER EXPENSES Other expenses increased by $5,300,000 (17.7%) to $35,252,000 from $29,954,000 in 1999, attributable to the new horse owners contract, increased racetrack security costs and expenses relating to SSI and VSAT. Other increases were in professional fees (increase of $304,000) in connection with the unsuccessful financing, travel expenses incurred in connection with the Uruguay project, and utility increases due to Friday night racing, as well as an overall increase in electricity costs. PROVISION FOR INCOME TAXES The provision for income taxes is primarily attributable to Puerto Rico operations. MINORITY INTEREST The Company's minority interest shown represents the pro-rata share of loss allocable to minority partner interest in HAD, Galapagos, Equus-Panama and Equus-Comuneros. Because accumulated losses of Galapagos allocable to minority partners exceeded their investment during 2000 and 1999, the Company did not recognize a minority interest in losses of Galapagos. If Galapagos generates profits in 2001, no minority interest will be recognized by the Company in profits up to $1,846,786. EXTRAORDINARY ITEM The extraordinary item in 1999 relates to the early redemption and purchase of First Mortgage Notes. In June 1999, the Company recognized income of $22,680 on the purchase of $189,000 of First Mortgage Notes. 21 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., 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 Galapagos, S.A) did not materially affect the consolidated cash flow of the Company in 2001 and these activities are not discussed herein. LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY (AND ITS CONSOLIDATED SUBSIDIARIES) The Company recognizes its current inability to generate sufficient cash to support its operations. To overcome its financial problems, the Company must look to additional revenue including investment or cost savings from: (i) Requesting license approval in Colombia and Dominican Republic for casino and/or sports book operations that could generate an additional $7 million in revenues annually. (ii) Implementing cost reductions at all properties. (iii)Requesting designation of the El Comandante facility as a tourist zone to allow the addition of slot machines and authorization for low interest bonds or notes. (iv) Expanding simulcasting in Colombia and Dominican Republic as well as expanding pool races. (v) Obtain new bank financing or financing by the Wilson family. There can be no assurance that any of the above will be achieved, or if achieved, the results will be sufficient to enable the Company to continue to operate. Cash and cash equivalents of the Company, HDA and its consolidated subsidiary decreased by approximately $ 6 million in 2001. The Company has historically met its liquidity needs from cash flow generated by (i) the operations of El Comandante racetrack, (ii) short-term loans and capital leases for acquisition of new equipment, and (iii) investment by the Wilson family. During 2001 principal uses of cash by the Company, HDA and its consolidated subsidiary for financing and investing activities were payments on capital leases for equipment at El Comandante. In addition to cash available to the Company at the beginning of the year and cash flow from operations, the Company obtained additional funds from financing and investing activities from the following sources: 22 (i) Issuance of Equus Entertainment 12%, cumulative stock. (ii) Loans from affiliates. For 2002 projected principal uses of cash, other than for operating activities at El Comandante, are: (i) Principal payments on existing capital leases. (ii) Additional investments in SSI, principally for the acquisition and installation of VSAT equipment and for payment of satellite time contracted from a third party. (iii)Capital expenditures, as needed and/or required for the various racing operations. (iv) Interest and principal payments on the outstanding First Mortgage Notes. (v) Weekly payment of delinquent excise taxes pursuant to agreement. (vi) Weekly payment of delinquent volume of business taxes pursuant to agreement. 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 largely complete and operational. SSI will be the service provider for all telecommunications and satellite usage by the Company's affiliates. The estimated $12 million capital investment in the VSAT expansion for which financing is sought is expected to be recovered over a five-year period from the new VSAT units. There can be no assurance that the Company will be able to obtain the financing required to build out the proposed video and data communication system. The failure to do so could cause the Company not to have sufficient financial resources to continue to operate. LONG-TERM COMMITMENTS. In addition to capital leases, long-term cash commitments of the Company (excluding foreign subsidiaries) are a $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 is to be paid from .25% of the wagering handle for the first four (4) years of the service contract with United Tote as outlined in note 4 of the consolidated financial statements, "wagering service agreement". HDA's First Mortgage Notes bear interest at 11.75%, payable semiannually on June 15 and December 15, and are secured by El Comandante assets. The First Mortgage Notes are redeemable, at the option of HDA, in 2001 and thereafter at 100% of the principal amount, together with accrued and unpaid interest. The maturity dates of First Mortgage Notes, reduced by prior redemptions and by the Notes purchased by ECMC, are as follows (in thousands): 23 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 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, 20001, See Note 10, "Related Party Transactions". On December 15, 2001 and June 15, 2002 the Company failed to pay interest of $7.2 million and principal of $10.2 million on the first Mortgage Notes (See Note 5). This constitutes a default under the Indenture. In addition, defaults have occurred in the performance or breach, of covenants and/or warranties of HDA and/or ECC. There have been discussions with representatives of the Governmental Development Bank for Puerto Rico and other government officials to explore ways to obtain funding to bring the interest and principal current on the Notes. It is not expected that the Company will be able to meet the mandatory maturity dates of the First Mortgage Notes set forth above without obtaining additional financing from lending institutions or investors. Although the Company has had discussions with possible lenders and investors, it has received no commitments or other form of assurances that such financing will be forthcoming. Absent such financing, the Company will not be able to meet its long-term commitments. Equus Comuneros, S.A. did not meet its loan payment commitments due to financial institutions totaling $269,000 as of December 31, 2001. The Company's management subscribed debt restructuring agreements with these financial institutions. Should noncompliance continue, the lending entities could make their guarantees effective. GOVERNMENT MATTERS. El Comandante's horse racing and pari-mutuel wagering operations are subject to substantial government regulation. Pursuant to the Puerto Rico Horse Racing Industry and Sport Act (the "Racing Act"), the Racing Board and the Puerto Rico Racing Administrator (the "Racing Administrator") exercises regulatory control over El Comandante's racing and wagering operations. For example, the Racing Administrator determines the monthly racing program for El Comandante and approves the number of annual race days in excess of the statutory minimum of 180. The Racing Act also apportions payments of monies wagered that would be available as commissions to ECMC. The Racing Board consists of three persons appointed to four-year terms by the Governor of Puerto Rico. The Governor also appoints the Racing Administrator for a four-year term. El Comandante is required to pay the Government of Puerto Rico various taxes on the wagering placed on thoroughbred horse races held at or simulcasted by El Comandante (Puerto Rico). The taxes on the wagering are required to be remitted to the Department of the Treasury of Puerto Rico within two (2) days of the wages being placed. El Comandante failed to remit tax payments totaling $9,949,182 from October 16, 2000 to February 7, 2001 to the Department of the Treasury of Puerto Rico. The Company is currently in negotiations with the Puerto Rico tax authorities on a payment plan whereby the overdue taxes will be paid in weekly installments of $50,000. Neither ECMC nor the Company has the financial resources to pay currently the overdue taxes. 24 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. As of October 22, 2001, all requested information has been submitted by ECMC. The investigation has been completed, but as of this a date, the House of Representatives has not issued their report or otherwise disclosed their findings. As of December 31, 2001, 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%, 25% and 30%, respectively. 2. The Government is requesting a down payment, which is currently being negotiated. FORWARD-LOOKING STATEMENT Certain matters discussed and statements made within this Form 10-K are forward-looking statements within the meaning of the Private Litigation Reform Act of 1995 and as such may involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance or achievements of the Company to be different from any future results, performance or achievements expressed or implied by such forward-looking statements. Although the Company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. These risks are detailed from time to time in the Company's filing within the Securities and Exchange Commission or other public statements. 25

The accompanying notes are an integral part of these consolidated statements. 27

The accompanying notes are an integral part of these consolidated statements. 28

33 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 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 operated since January 1, 1998 as a wholly owned subsidiary of HDA, El Comandante Management Company, LLC ("ECMC"). Satellites Services International, Inc. ("SSI") and Agency Betting Network, Inc. ("ABN") are wholly owned subsidiaries of the Company. SSI will provide up-link services, satellite time (contracted from a third party), and leasing of video and data telecommunication equipment to transmit (or simulcast) live races from and to the Company's racetracks and OTB agencies, including live races from outside the Company's operational territories to the Company's agency distribution network in order to increase the level of wagering revenues through the OTB systems. ABN is establishing and operating an OTB agency system in Colombia in conjunction with Los Comuneros Race Track in Medellin, Colombia ("Los Comuneros"), owned and operated by Equus Comuneros S.A. ("Equus-Comuneros"). The Colombia OTB system is expected to operate in Bogota, Medellin and other major cities. 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. 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 34 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. 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 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 the Company sold its 204,000 shares of common stock, representing 51% of the total issued and outstanding shares of Equus Entertainment de Panama, for release from any obligations resulting from the Panama operation. The Company recorded a net loss of $1,149,579 on the transaction. 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 operating and managing Hipodromo Presidente Remon. Until such time as the aforementioned release is received by the Company, the purchase has drafted an "Undertaking and Indemnity" documents indemnifying the Company from any claims by the Government of Panama under the Concession Agreement. 2) The Company then purchased 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 less 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 race track's concession agreement being terminated or October 31, 2021, whichever comes first. b. The issuer has the option to redeem the shares at par at anytime. c. No dividends will accumulate up to October 2006; thereafter, the shares will earn an annual cumulative dividend of 12%, payable quarterly. 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. 35 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 year 2001. The Company also has since 1999 a controlling 50% interest in Equus Comuneros S.A. ("Equus-Comuneros"), the owner and operator of Los Comuneros which it acquired for approximately $2.1 million. In 1999 Equus-Comuneros received as a capital contribution from the minority stockholder, Los Comuneros S.A., all assets and liabilities that were employed by the prior operator of Los Comuneros. The assets mainly consisted of land, buildings and equipment for approximately $4.7 million and liabilities of approximately $2.6 million. The liabilities included mainly accounts payable to vendors and horse owners and certain financial obligations with various maturities through 2004. Equus Comuneros, S.A. did not meet its loan payment commitments due to financial institutions totaling $269,000 as of December 31, 2001. The Company's management requested debt restructuring agreements with these financial institutions. Should noncompliance continue, the lending entities could make their guarantees effective. In 2000, the Company was awarded exclusive rights by the Government of Uruguay to operate the Maronas racetrack in Montevideo and an off-track betting agency network together with the right to operate up to 1,500 slot machines in 5 locations. The necessary restoration of the racetrack would, in management's opinion, require an initial investment of $12 million. Efforts to raise the $12 million by the due date were unsuccessful. Consequently, the concession expired on March 31, 2001, and the Company's bid bond in the amount of $450,000 was forfeited and thus, expensed during the fiscal year 2001. Subsequently, the concession was awarded to another operator in the fourth quarter of 2001, which resulted in the Company writing off its entire investment as of December 31, 2001. As noted in the accompanying consolidated financial statements, the Company has incurred recurring losses from operations, has a partners' deficit of $34,301,432 and projects a negative cash flow for 2002. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern and to meet its obligations during 2002. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Management has plans to overcome the Company's problems as follows: (i) Request license approval in Colombia and Dominican Republic for casino and/or sports book operations. (ii) Continue to Implement cost reductions at all properties. (iii)Request designation of the El Comandante facility as a tourist zone, which would allow the addition of slot machines and authorization for low interest bonds or notes. As of June 12, 2002, such approvals have not been obtained. 36 (iv) Expand simulcasting in Colombia and Dominican Republic as well as expand betting pool races. (v) Obtain new bank financing or financing by the Wilson family. There can be no assurance that any of the above will be achieved, or if achieved, the results will be sufficient to enable the Company to continue to operate. On December 15, 2000 and June 15, 2002, the Company failed to pay interest of $7.2 million and principal of $10.2 million on the First Mortgage Notes (See Note 5). This constituted a default under the Indenture. In addition, defaults have occurred in the performance or breach, of covenants and/or warranties of HDA and/or ECC. There have been discussions with representatives of the Government Development Bank for Puerto Rico and other government officials to explore ways to obtain funds to bring the interest and principal current on the Notes. There can be no assurance that the Company will obtain the required funding to bring the delinquent interest and principal current, in which case the note holders have indicated they intend to exercise their remedies under the Indenture to declare the principal on the Notes to be due and immediately payable and to seek a judgment or decree for payment of all money due. 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 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. 37 As of December 31, 2001, 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%, 25% and 30%, respectively. 2. The Government is requesting a down payment, which is currently being negotiated. The Agreement is expected to be finalized by June, 2002. On August 18, 2001, ECMC executed a Closing Agreement (the "Agreement") with the Municipality of Canovanas whereby ECMC settled a 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 24,897 118,264 00/01 116,735 19,455 136,190 ----------- ----------- -------- Totals $ 654,618 $ 284,832 $939,450 ----------- ----------- -------- Prior to settlement, the Company as of June 30, 2001 had accrued 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 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 was in compliance with the provisions of the agreement. 38 On April 2, 2001, the House of Representatives of the Commonwealth of Puerto Rico presented a resolution ordering an investigation of the operations of ECMC with emphasis on the 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 December 31, 2001, Equus Comuneros owed the 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%, 25% and 30%, respectively. 2. The government is requesting a down payment which is currently being negotiated. CONSOLIDATION AND PRESENTATION The Company consolidates the entities in which it has a controlling interest. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries after eliminating all significant intercompany transactions. All of the entities included in the consolidated financial statements are hereinafter referred to collectively, when practicable, as the "Company". The Company has minority partners in HDA, Galapagos, Equus-Panama and Equus-Comuneros. Therefore, the Company recorded minority interest based on the income and (losses) of these consolidated subsidiaries that are attributable to the minority partners, as follows: FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------- 2001 2000 1999 ------------ ------------ ------------ SUBSIDIARY: HDA $ (89,180) $ (74,620) $ 650 Galapagos - - - Equus-Panama 46,572 (114,688) Equus-Comuneros (1,076,753) (1,286,824) (915,420) ------------ ------------ ------------ $(1,165,933) $(1,314,872) $(1,029,458) ============ ============ ============ In general, the minority interest is calculated based on the ownership interest of the minority partners. HDA's minority partners had an 18% interest until August 20, 1997, when HDA redeemed the 17% interest owned by Supra & Company S.E. ("Supra"). Following the redemption, HDA has a minority partner owning a 1% interest. Galapagos' minority partners own a 45% interest. However, during the years ended December 31, 2001, 2000, and 1999, the Company did not recognize minority interest in Galapagos' losses amounting to $459,149, $759,719, and $312,217, respectively, because the minority partners have no legal obligation to fund such losses in excess of their investment. On October 9, 2001, Equus Entertainment de Panama was restructured whereby the Company sold its majority interest to the minority stockholders as of September 30, 2001. See "Notes to Consolidated Financial Statements". OUTSTANDING UNITS The units of the Company represent an assignment of beneficial ownership of Class A limited partnership interest (the "Units"). On December 15, 1998, the Company acquired in treasury 935,557 of its Units in connection with the 39 repurchase of Warrants issued by HDA Management Corporation ("HDAMC") (see Note 7). In December 31, 2000 the Company issued 6,000,000 units to Wilson Securities Corporation, a major unitholder of the Company, for $6,000,000 pursuant to the terms of a Private Offering that commenced on November 2000 and was consummated on December 28, 2000. During 1999 the Company issued 2,991,764 Units to The Wilson Family Limited Partnership for $3,051,600 pursuant to the terms of a private offering that commenced in December 1998 and expired in April 1999. Net loss per Unit is calculated based on the weighted average of Units outstanding. During 2000, the Company issued new Units and Amended the Company's Certificate of Limited Partnership to increase the number of units the Company is authorized to issue from 10,383,617 to 20,000,000. PERVASIVENESS OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A significant assumption is that the Company can recover the carrying amounts of its assets through future operations. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is defined as the changes in partners' interest (deficit) during a period from transactions and other events and circumstances from non-owner sources. The Company recognizes as a component of comprehensive income (losses) currency translation adjustments and changes in exchange rates of unsettled long-term intercompany transactions of foreign subsidiaries. COMMISSIONS ON WAGERING Commissions on wagering represent income earned by the Company on bets placed on thoroughbred horse races held at El Comandante (Puerto Rico), V Centenario (Dominican Republic) and Los Comuneros (Colombia) principally through wagering facilities located at independently owned off track betting ("OTB") agencies throughout these countries. Commissions are based on percentages of wagers established by law that vary by country and are based on the different types of wagers. Commissions are presented in the accompanying consolidated financial statements net of applicable taxes on wagers, amounts payable to winning bettors, commissions to OTB agencies and other miscellaneous deductions established by law. Commissions on wagering are recognized upon completion of the races. NET REVENUES FROM LOTTERY SERVICES Galapagos had a five-year contract with a private operator to provide the wagering distribution system for a government-sponsored electronic lottery, which commenced on November 1, 1997. Lottery games are sold at OTB agencies selected by Galapagos and at lottery agencies selected by the lottery operator. Galapagos' commissions are 3% of gross lottery sales. In addition, the lottery operator paid Galapagos a monthly fee for each OTB agency that sells lottery games as reimbursement for a 50% share of telephone line costs. Revenues from lottery sales are presented in the accompanying consolidated statement of operations for 1999 and 1998 net of fees paid to the company providing wagering services (see Note 4). This was in arbitration with Autotote as discussed in Note 11. 40 ADVERTISING EXPENSE During the years ended December 31, 2001, 2000, and 1999, the Company incurred advertising costs of $235,604, $1,189,000, and $1,594,000, respectively. CASH AND CASH EQUIVALENTS The Company considers as cash equivalents certificates of deposit with an original issuance to maturity term of three months or less. Restricted cash represents accumulated cash in the "Pool Pote" and a bonus amount that is added to the Pick 6 pool payout for predetermined race days. The "Pool Pote" is paid out when there is a sole pool winner. The corresponding payables are recorded as part of the liability for outstanding winning tickets and refunds. PROPERTY AND EQUIPMENT Land, buildings and improvements, and equipment are stated at cost plus a step-up of $5,650,000 of El Comandante's assets as of March 8, 1995, resulting from the issuance of Units to HDAMC for a 15% interest in HDA. A portion of the step-up was written off in 1998, as a result of damage caused by Hurricane Georges. Depreciation is calculated using the straight-line method over the estimated useful lives of the property: 5 to 10 years for equipment, 35 years for buildings, and 10 to 15 years for land improvements. Major replacements and improvements are capitalized and depreciated over their estimated useful lives. Repairs and maintenance are charged to expense when incurred. DEFERRED COSTS Deferred financing costs are being amortized over the life of the corresponding debt, using the effective interest method. IMPAIRMENT OF LONG-LIVED ASSETS Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Under such circumstances, SFAS No. 121 requires that the carrying amount of an asset may not be recoverable. Under such circumstances, SFAS No. 121 requires that such assets be reported at the lower of their carrying amount or fair value less cost to sell. Accordingly, when event or circumstances indicate that long-lived assets may be impaired, the Company estimates the asset's future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized based on the excess of the carrying amount over the fair value of the asset. The Company determined that no impairment loss need be recognized for applicable assets at December 31, 2001 and 2000. ACCOUNTS RECEIVABLE Accounts receivable principally consists of amounts due from OTB agencies on thoroughbred races and from the operator of the electronic lottery in the Dominican Republic. As of December 31, 2001 and 2000, allowance for doubtful accounts amounted to $179,764 and $161,230, respectively. 41 NOTES RECEIVABLE Notes receivable consist of short-term loans to horse owners to purchase horses as a means to improve the quality of racing. CURRENCIES The Company consolidates its accounts with Galapagos and Equus-Comuneros whose functional currencies are the Dominican Republic peso and the Colombian peso, respectively. The United States dollars ("US$") are also a recording currency in these countries. US$ are exchanged into these foreign currencies ("FC$") and vice versa through commercial banks and/or the central banks of the respective countries. The Company remeasures the monetary assets and liabilities of the foreign subsidiaries that were recorded in US$ into the FC$ using the exchange rates in effect at the balance sheet date (the "current rate") and all other assets and liabilities and capital accounts, at the historical rates. The Company then translates the financial statements of the foreign subsidiaries from FC$ into US$ using the current rates, for all assets and liabilities, and the average exchange rates during the year, for revenues and expenses. For the years ended December 31, 2001, 2000, and 1999, net exchange losses resulting from remeasurement of accounts, together with losses from foreign currency transactions, amounted to $288,147, $58,256, and $25,701, respectively, which amounts are included as operating expenses. Accumulated net losses from changes in exchange rates due to the translation of assets and liabilities of the foreign subsidiaries are included in partners' deficit and at December 31, 2001, 2000 and 1999 amounted to $282,847, $237,995 and $656,501, respectively. The exchange rates in Dominican Republic as of December 31, 2001, 2000 and 1999 were US$1.00 to FC$16.97, US$1.00 to FC$16.75 and US$1.00 to FC$16.00, respectively. The average exchange rates in Dominican Republic prevailing during the years ended December 31, 2001, 2000, and 1999, were US$1.00 to FC$16.69, US$1.00 to FC$16.53, and US$1.00 to FC$16.10, respectively. The exchange rates in Colombia as of December 31, 2001, 2000 and 1999, were US $1.00 to FC$2,372 , US$1.00 to FC$2,229 and US$1.00 to FC$1,874, respectively. The average exchange rates in Colombia prevailing during the years ended December 31, 2001, 2000 and 1999 were US$1.00 to FC$2,324, US$1.00 to FC$2,105 and US$1.00 to FC$1,733, respectively. 2. EL COMANDANTE RACE TRACK: OPERATING LICENSE El Comandante is owned by HDA. It is currently operated by HDA's wholly owned subsidiary, ECMC, pursuant to an operating license granted by the Puerto Rico Racing Board, which expires on December 14, 2004. The license provides ECMC the exclusive right to operate a racetrack in the San Juan Region, which encompasses the northern half of Puerto Rico, and to conduct all types of authorized betting, throughout the island of Puerto Rico, based on races held at El Comandante. The Company and HDA are primarily responsible to ensure that ECMC complies with all terms and provisions of the license and applicable regulations and orders of the Puerto Rico Racing Board. Upon its expiration in December 2004, there can be no assurance that a new operating license will be issued. However, ECMC and its predecessors have continuously operated the only thoroughbred racing facility in Puerto Rico since 1957. El Comandante's horse racing and pari-mutuel wagering operations are subject to substantial government regulation. Pursuant to the Puerto Rico Horse Racing Industry and Sport Act (the "Racing Act"), the Puerto Rico Racing Board and the Puerto Rico Racing Administrator (the "Racing Administrator") exercise 42 significant regulatory control over El Comandante's racing and wagering operations. For example, the Racing Administrator determines the monthly racing program and approves the number of annual race days in excess of the statutory minimum of 180. The Racing Act also apportions payments of the wagering handle and thus the Racing Act could be amended through legislation to reduce the share of monies wagered that would be available as commissions. EL COMANDANTE LEASE AND INTANGIBLE Until December 31, 1997, HDA leased El Comandante to El Comandante Operating Company, Inc. ("ECOC") under a lease agreement (the "El Comandante Lease") that required payments by ECOC to HDA of rent consisting of 25% of the annual commissions on wagering earned by ECOC. ECOC was required to pay all expenses of El Comandante except for real property taxes and the annual operating license fee (paid in 1997 by HDA). On January 1, 1998, upon termination of the El Comandante lease (i) ECOC transferred to ECMC, at book value, all assets employed in the racing business, (ii) ECMC assumed all agreements of ECOC and its liabilities and (iii) ECMC commenced operating El Comandante. Net liabilities assumed by ECMC amounted to $3,658,332, including $3.1 million due to HDA at December 31, 1997. Management made an internal valuation of the tangible assets acquired from ECOC and concluded that book value approximated its fair value. 3. RACE TRACK LEASES: V CENTENARIO LEASE Galapagos leases and operates V Centenario in Santo Domingo, Dominican Republic, from the Government pursuant to a 10-year agreement ending in April 2005. The contract may be renewed for additional ten-year periods by mutual agreement of the parties. The contract also provides Galapagos with the right to develop off-track betting in the Dominican Republic and the exclusive right to simulcast horse races, into the Dominican Republic. Galapagos pays rent to the Government based on a percentage of the annual wagering on races run at V Centenario ("V Centenario Wagering"), as follows: .25% of the first RD$240 million (approximately US$15 million), .5% of the next RD$240 million, .75% of the next RD$240 million and 1% over RD$720 million (approximately US$43 million). The Government agreed to invest a portion of its tax receipts on simulcasting wagering to improve horse racing in the Dominican Republic to be distributed between Galapagos and horse owners. Galapagos' share of these tax receipts, which is received as reimbursement for repairs and maintenance of the Government-owned facility at V Centenario, marketing and television costs and certain other items, is based on the following percentages: 75% effective July 1997, 65% effective July 1998, and 50% effective July 1999. Horse owners are entitled to the balance as additional purses. The agreement expired in January 2000. The assistance provided by the Government is included in other revenues and for the year ended December 31, 1999 amounted to $321,358, excluding amounts paid to horse owners as additional purses. Management is currently negotiating an extension of this agreement. 4. COMMITMENTS AND CONTINGENCIES: HORSE OWNERS' AGREEMENTS The Company has separate agreements with the horse owners confederation of each country that establishes the amount payable to horse owners as purses in 43 exchange for the availability of thoroughbred horses for races. Payments to horse owners are, in general, based on a percentage of wagering. 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 2000, increased in 2001 and 2002 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 $25,0032,000 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 also must invest $3,000,000 in improvements to the racetrack during the 10-year term of the contract, as well as provide up to $2,000 of financing for 2001 related to the new horse owners' contract are included in other expenses. Additional costs incurred for the year ended December 31, 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 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 the 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 special events such 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. 44 WAGERING SERVICES AGREEMENTS The Company has separate agreements with Autotote Systems, Inc. ("Autotote") and United Tote Company ("United Tote") for providing wagering services, software and equipment to each racetrack, necessary for the operation of the off-track betting system. Payments under these contracts are summarized as follows: 1. AUTOTOTE -------- EL COMANDANTE V CENTENARIO LOS COMUNEROS --------------- ------------------- --------------- Expiration date March 2005 March 2005 (b) Cost of services, as a percentage of wagering 0.65% 0.65% (a) 1.20% Minimum amount per year $ 800,800 $ 200,000 $ - (a) Fees to Autotote are 2% of gross sales at lottery agencies and 1% of gross sales at OTB agencies. (b) On August 1, 2000 the Company discontinued using Autotote for failure to comply under the terms of the contract. United Tote commenced operations 30 days later. See "Legal Proceedings". 2. UNITED TOTE ----------- In August 2000 the Company obtained a $2.5 million unsecured loan at 3% over prime due in December 29, 2004. Principal and interest is to be paid from ..25% of the wagering handle for the first four (4) years of the service contract with United Tote. EL COMANDANTE V CENTENARIO LOS COMUNEROS -------------- -------------- -------------- Commencement date (a) March 2004 March 2004 August 2000 Expiration date December 2010 December 2010 December 2010 Cost of services, as a percentage of wagering (b) (b) (b) Minimum amount per year(c) n/a n/a n/a Additional fees (d) n/a n/a n/a a) The services agreement with United Tote specifies that the commencement date shall be the earlier of the date that the agreement with Autotote expires or the date the agreement is properly terminated. 45 (b) Total Handle in a contract year % of Total Handle received by United Tote ------------------------------------ ----------------------------------------- $ 350,000,000 0.95% in the first four (4) years and .7% thereafter, see note (e) below. $ 350,000,001 to $500,000,000 0.5% of Total Handle $ 500,000,001 and over 0.4% of Total Handle (c) Pursuant to the service contract, there are minimum annual guaranteed wagering handles as to the twelve months from the date that totalizator service is first initiated by United Tote at two or more existing or new racetracks, and continues in twelve months intervals subsequent to that date for the remaining term of the contract. (d) The Company will also pay United Tote a weekly fee of $2,625 as a "central hub allocation fee" until service by United Tote is furnished to two or more existing or new racetracks. (e) During the first four (4) years, a fee of 0.25% of handle will be applied to principal and interest on unsecured note of $2.5 million due in December 29, 2004. The service contract with United Tote has been cancelled effective July 1, 2002, or the date another totalisator service commences. 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 $3,431,955 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 shall become due and payable on July 1, 2003. 4. If the Company obtains substantial financing for video gaming activity at its racetrack in Puerto Rico, then the terms of the note will be renegotiated to include an amortization schedule mutually agreed upon by both parties. OTHER LONG-TERM AGREEMENTS The Company has also entered in other long-term contracts that are essential for the operation of its racetracks such as to guarantee television coverage in Puerto Rico. ECMC has an agreement with S&E Network, Inc. ("S&E") that requires the purchase of television time for a minimum of 910 hours at the rate of $725 (effective February 1997) per hour, adjusted annually by CPI, or at the rate of $900 per hour, also subject to CPI adjustments, if television time after 7:00 PM is needed. The contract is non-cancelable by either party during the initial term, which expires on December 2006. The term is automatically extended for successive 5 years periods by request of ECMC. During this extended term, the contract can be canceled by S&E, upon payment of liquidating damages of $2 million plus CPI after January 1997. On August 1, 2001, El Comandante entered into a five (5) year contract with Satelites Mexicanos, S.A. de C.V. ("Satmex"), to provide 18MHz of Ku Band satellite time for the broadcast of its live racing program and potential resale. The contract also provided for the payment of overtime charges of $287,364, including interest, incurred in the previous C Band contract. 46 As of June 12, 2002 El Comandante has failed to pay a total $961,739, excluding interest due under the contract. If it is deemed that El Comandante has terminated the contract, El Comandante is liable for a termination fee of $1,063,740. At this time neither El Comandante nor the Company have the resources to pay the ongoing service charges or the termination fee. CONTRIBUTIONS In connection with the termination of the lease agreement of El Comandante, ECMC assumed certain commitments made by ECOC to make contributions (subject to availability of funds) to several charitable and educational institutions during a four-year period ending in 2001. These obligations are included in accounts payable and, at December 31, 2001 and 2000 amounted to $290,000. Due to the lack of available funds no contributions were made in 2001, and there being no further obligation, the balance was written off at December 31, 2001. OTHER CONTINGENCIES During 1999 and 2000, Equus Comuneros, received transfers from the Company amounting to $1,307,000. According to Colombian law there are certain limitations on transfers of foreign currency into Colombian entities. There is the possibility that a regulatory investigation will result in fines and/or penalties to Equus Comuneros. Equus Comuneros legal counsel is in process of correcting any violations under Colombian law resulting from these transfers. 5. FIRST MORTGAGE NOTES: On December 15, 1993, pursuant to a private offering, (i) El Comandante Capital Corp. ("ECCC"), a single-purpose wholly owned subsidiary of HDA, issued first mortgage notes in the aggregate principal amount of $68 million (the "First Mortgage Notes") under an indenture (the "Indenture") between ECCC, HDA and Banco Popular de Puerto Rico, as trustee (the "Trustee"), and (ii) HDAMC issued Warrants to purchase 68,000 shares of Class A Common Stock of HDAMC. In March 1995, the Warrants automatically became exercisable to purchase an aggregate of 1,205,232 units of the Company from HDAMC (see Note 6). Upon issuance of the Warrants, HDA recorded note discount of $2,040,000 equal to the fair value of the Warrants. Such note discount was being amortized using the interest method over the term of the First Mortgage Notes. The First Mortgage Notes mature on December 15, 2003 and bear interest at 11.75% payable semiannually. Payment of the First Mortgage Notes is guaranteed by HDA. The First Mortgage Notes are secured by a first mortgage on El Comandante and by certain other collateral which together encompass a lien on (i) the fee interests of HDA in the land and fixtures comprising El Comandante, (ii) all related equipment, structures, machinery and other property, including intangible property, ancillary to the operations of El Comandante, and (iii) substantially all of the other assets and property of HDA, including the capital stock of ECCC owned by HDA. During the past 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: 47

In connection with these transactions, the Company wrote-off a portion of the note discount and deferred financing costs. The net effect is included in the accompanying consolidated statements of operations as extraordinary items, net of provision for income taxes, as follows: FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 2001 2000 1999 ---------- ---------- ---------- Discount (premium) $ - $ - $ 22,680 Write-offs - - - Provision for income taxes - - - ---------- ---------- ---------- $ - $ - $ 22,680 ========== ========== ========== ECCC is required to partially redeem First Mortgage Notes commencing on December 15, 2000. The stated future maturities of the First Mortgage Notes at December 31, 2001, reduced by prior redemptions, are as follows (in thousands): DUE DURING THE YEAR 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 (444) 94 (538) -------- ------------- --------- $60,756 $ 6,840 $ 53,916 ======== ============= ========= 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: 48 DURING THE 12 MONTH PERIOD BEGINNING ON DECEMBER 15, -------------------------- 2000 101.00% 2001 100.00% On December 15, 2001 and June 15, 2002 the Company failed to pay interest of $7.2 million and principal of $10.2 million 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 and/or ECCC. There have been discussions with representatives of the Government Bank for Puerto Rico and other government officials to explore ways to obtain funding to bring the interest and principal current on the Notes. 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 financial from lending institutions or investors. Although the Company has had discussions with possible lenders and investors, it has received no commitment 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. 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 note holders, 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 10, "Related Party Transactions". 6. HDAMC WARRANTS Under the Warrant Agreement, the Company was not a "qualified public company" and therefore HDA, as guarantor of the obligation, made the offer to purchase 68,000 outstanding Warrants for cash, at a repurchase price of $15.49 per Warrant. The repurchase offer expired on December 15, 1998 when 48,127 Warrants were tendered for a total purchase price of $745,487. This payment, together with transaction costs, was charged to partners' deficit. Of the remaining Warrants, 15,216 were exercised in exchange for 269,688 Units of the Company and, 4,657 Warrants, neither tendered nor exercised, expired. Therefore, 935,557 of the Units previously held by HDAMC were distributed to the Company and are currently held in treasury. 49 7. BONDS AND NOTES PAYABLE AND CAPITAL LEASES: The Company's outstanding notes payable consist of the followin

The following table summarizes future minimum payments on capital leases, notes payable and bonds of the Company and its consolidated subsidiaries: DUE DURING THE YEAR CAPITAL NOTES ENDING DECEMBER 31, LEASES PAYABLE ------------------- ----------- ----------- 2002 $ 700,114 $3,761,243 2003 507,171 31,288 2004 257,929 2,517,245 2005 3,147 - ----------- ----------- 1,468,361 6,309,776 Imputed interest (147,261) (209,594) ----------- ----------- $1,321,100 $6,100,182 =========== =========== 8. RETIREMENT PLAN AND PENSION PLAN: RETIREMENT PLAN In 1998, the Company established a retirement plan for employees of its subsidiary, Equus Entertainment Corporation ("EEC"). Employees are eligible to participate in the retirement plan when they have completed a minimum of 1,000 hours of service. The Retirement Plan is a defined contribution plan which provides for contributions by the Company for the accounts of eligible employees in amounts equal to 4% of base salaries and wages not in excess of the U.S. Social Security taxable wage base, and 8% of salaries (limited to $160,000) that exceed that wage base. Eligible employees may also make voluntary contributions to their accounts and self direct the investment of their account balances in various investment funds offered under the plan. Contributions to the Retirement Plan amounted to $26,027, $33,824, and $49,975 in 2001, 2000 and 1999, respectively. Prior to October 5, 1998, EEC's employees participated in the retirement plan of Interstate General Company L.P. ("IGC"), a former general partner of the Company. PENSION PLAN ECMC has a non-contributory defined benefit pension plan covering substantially all of its nonunion employees. As a result of the transfer of ECOC assets, liabilities and commitments, HDA is now the sponsor of the nonunion employees pension plan. Benefits are based on the employee's years of service and highest average earnings over five consecutive years during the last 15 years of employment. ECMC's policy is to fund an amount not less than the ERISA minimum funding requirement or more than the maximum deductible under the Puerto Rico tax law. Pertinent information on this pension plan as of and for the years ended December 31, 2001, 2000 and 1999, is as follows: 52

9. INCOME TAXES: The Company is organized as a partnership, which is not a taxable entity for United States tax purposes and incurs no federal income tax liability. As a result, each partner is required to take into account in computing its income tax liability such partner's allocable share of the Company's net taxable income. As a result of certain changes in the Company's corporate structure effective January 1, 1998, the partner's allocable share of the Company's net taxable income will be approximately equal to cash received during the year. The provision for income taxes included in the accompanying consolidated financial statements is attributable to (i) Puerto Rico income taxes on the results of operations of its Puerto Rico subsidiaries, EEC, HDA and ECMC and (ii) withholding taxes imposed by foreign countries on income earned by EEC, for which no foreign tax credit will be available in Puerto Rico, summarized as follows: 53 FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 2001 2000 1999 -------- -------- -------- Puerto Rico income taxes- Deferred $ 93,056 $570,056 $375,928 Current - - 204,892 Foreign income tax, deferred 50,541 50,038 161,333 -------- -------- -------- $143,597 $620,094 $742,153 ======== ======== ======== The deferred income tax asset is mainly attributable to net operating losses carried-forward, for which a valuation allowance has been recorded. The deferred income tax liability as of December 31, 2001, 2000 and 1999 has the following components of deferred tax liabilities (assets), net of corresponding valuation allowance: DECEMBER 31, ------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Puerto Rico income taxes- Depreciation $ - $2,333,767 $1,536,640 Gain on involuntary conversion - 1,421,523 1,513,569 Net operating losses of ECMC - - - Contingency reserves - - - Other - (78,790) (75,083) Foreign withholding income taxes - 256,644 190,674 ----------- ----------- ----------- $ - $3,933,144 $3,165,800 =========== =========== =========== 10. RELATED PARTY TRANSACTIONS: SERVICES AMONG RELATED PARTIES The following represents a summary of amounts accrued for services rendered by or from certain related parties, namely, EMC, IBC, American Community Properties Trust ("ACPT") and Interstate General Company L.P. ("IGC") during the years ended December 31, 2001, 2000, and 1999: 54 FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ENTITY NATURE OF SERVICE 2000 2000 1999 ------------ --------------------------------- -------- -------- -------- RENDERED BY: ACPT Support agreement $ 800 $ 52,600 $ 40,400 ACPT Rent office space 14,000 42,000 42,000 EMC Director fees 86,200 124,800 88,800 IBC Accounting services - - - IGC Services of James J. Wilson 452,789 192,703 135,000 IGC Services of Wilson Nazario - 12,833 - IGC Other services on Virginia racing - - 18,041 During the year 2001, the Company executed various unsecured promissory notes with several of its affiliates. See Note 7, "Bonds and Notes Payable and Capital Leases". 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. 11. LEGAL PROCEEDINGS: Certain of the Company's subsidiaries are presently named as defendants in various lawsuits and might be subject to certain other claims arising out of its normal business operations. Management, based in part upon advice from legal counsel, believes that the results of such actions will not have a material adverse impact on the Company's financial position or results of operations. 55 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 and November 21, 2001, 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. EQUUS - PANAMA 3. 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. 4. Equus-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-Panama Arbitration Award. 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. 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. 56 6. Awards will be offset and the net amount owed to Galapagos of approximately $600,000 will accrue interest at the rate of seven (7) percent until paid. As of June 12, 2002, the parties are negotiating a settlement within the terms of the arbitration awards. 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. 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 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, $559,450, 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. 57 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. As of June 12, 2002, ECMC has fully complied with the provisions of the Agreement. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS: As of December 31, 2001, and 2000, the fair value of the First Mortgage Notes was approximately $38,117,800, and $24,504,300 respectively, (as compared with its carrying value of $53,915,831 in 2001 and $53,667,739 in 2000) based on the market price quoted by a brokerage firm that trades the First Mortgage Notes. The carrying value of notes payable, capital leases and notes receivable approximates fair value because these obligations bear interest at variable rates. The carrying value of accounts receivable and accounts payable approximates fair value due to the short-term maturity thereof. 13. SEGMENT INFORMATION: The Company has identified 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 years ended December 31, 2001, 2000 and 1999 (in thousands): 58

Effective January 1, 1998 EEC, which is based in Puerto Rico, provides management services to the foreign countries in connection with the operation of the racetracks and the off-track betting system. Fees for these services represent intersegment revenue. For the years ended December 31, 2001, 2000 and 1999, Puerto Rico recognized revenue of $172,260, $167,964 and $186,021, respectively, attributable to Dominican Republic. 59 14. QUARTERLY REPORTS (UNAUDITED) The following table reflects the unaudtied quarterly results of the Company during the years ended December 31, 2001, 2000 and 1999.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND EMC MANAGING PARTNER OF THE COMPANY Equus Management Company ("EMC") is the managing general partner of the Company and, as such, has full and exclusive responsibility and authority to manage the Company, including declaring and authorizing cash distributions, 60 making employment decisions, determining executive compensation and making investment decisions and other decisions normally made by executive officers and directors of a corporation. EMC does not engage in any activities other than managing the business of the Company. EMC is governed by its Board of Directors, which currently consists of eight persons. Directors will be elected in the future either by Interstate Business Corporation ("IBC"), as the parent company of EMC, or by the directors then holding office subject to certain limitations, including that at least two of the directors be independent of the Company, IBC and Interstate General Company L.P. ("IGC"). Thus, Unitholders do not have the power to elect EMC's directors. The officers of EMC are elected by its Board of Directors. All officers of EMC are employees of Equus Entertainment Corporation ("EEC"), a wholly owned subsidiary of the Company. At present, two of EMC's directors are directors and officers of IGC's managing general partner and two of EMC's directors are directors and officers of IBC. Also, one EMC's director is a trustee of American Community Property Trust ("ACPT"). The adult children of James J. and Barbara A. Wilson own approximately 99.4% of IBC and 100% of The Wilson Family Limited Partnership ("WFLP") and 100% of Wilson Securities Corporation ("WSC"). The Wilson family and companies controlled by them, including IBC, WFLP and WSC hold approximately a 77% interest in the Company, a 54.25% interest in IGC and a 50.89% interest in ACPT. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND EMC The table below sets forth the name, age and positions with the Company and EMC of each director and executive officer of EMC and each executive officer of the Company.

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 61 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 is serving as President and CEO of El Comandante Management Company LLC. 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 and each of the other two most highly compensated executive officers of the Company during 2001, employed by its wholly owned subsidiary EEC effective January 1, 1998. 62

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 2001. 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. 63 UNIT APPRECIATION RIGHTS. As of December 31, 1999, there are 10,000 Unit Appreciation Rights ("UAR") outstanding corresponding to one executive, fully vested and exercisable, which will expire on October 18, 2004. The UAR entitle the holder to receive, upon exercise, an amount payable in cash, Units of the Company, securities in another company or some combination thereof, as determined by EMC's Board of Directors. The amount received upon exercise is based on the excess of the fair market value of the UAR over a fixed base price. During 2001, there were no UAR exercised or granted. As of December 31, 2001, the unexercised in-the-money UAR had no value. The Company intends to adopt a Share Incentive Plan to provide for unit-based incentive compensation for officers, Key employees and Directors. 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) ------------------------ NUMBER OF NAME OF BENEFICIAL OWNERSHIP UNITS PERCENT ---------------------------------------------------- --------- -------- MANAGEMENT AND DIRECTORS Barbara A. Wilson(2) 50 0.00% Kevin Wilson(2) 86,397 0.60% Thomas B. Wilson(2) 86,397 0.60% Donald J. Kevane 1,000 0.01% Alberto Paracchini 25,000 0.17% Charles A. Cupril 10,000 0.07% All executive officers of EMC and the Company and directors of EMC, as a group (7 persons) 208,844 1.45% OTHER UNITHOLDERS The Wilson Family Limited Partnership ("WFLP")(2) 222 Smallwood Village Center St. Charles, Maryland 20602 5,093,088 35.41% Wilson Security Corporation ("WCS")(3) 222 Smallwood Village Center 6,000,000 41.71% St. Charles, Maryland 20602 64 (1) The beneficial ownership of Units was determined on the basis of Units directly and indirectly owned by executive officers and directors of EMC and Units to be issued under options that are exercisable within the next 60 days. (2) WFLP is owned by the adult children of James J. and Barbara A. Wilson, including Kevin Wilson and Thomas Wilson. However, because neither Kevin Wilson nor Thomas Wilson is a general partner in WFLP, the Units of the Company owned by WFLP are not considered beneficially owned by them. (3) WSC is owned by the Wilson Family, the members of the Board of Directors have the power to control or vote all the shares, but each member can not do it unilaterally, without the consent of the other members, therefore none of the units owned by such corporation can be attributed to a single director. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information responding to this item appears in Note 10 to the Company's consolidated financial statements included in Item 8 of this report. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K INDEX TO FINANCIAL STATEMENTS. (i) Financial Statements (included in Item 8) Equus Gaming Company L.P. Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2001, 2000 and Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Changes in Partners' Deficit for each of the three years in the period ended December 31, 2001 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements EXHIBITS. EXHIBIT NUMBER EXHIBIT DESCRIPTION REFERENCE -------- ---------------------------------------- ---------------------------- 3.1 First Amended and Restated Limited Exhibit 3.1 to Registration Partnership Agreement of Equus Statement on Form S-11 Gaming Company L.P. (the "Company") No. 33-90982 of the Company ("Second Form S-11") 65 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 Limited Partnership of the Company on Form 10-K of the Company for the year ended December 1, 1997 ("1997 10-K") 5.1 Form of Unit Certificate Exhibit 5.1 to Form S-11 10.2 Indenture dated December 15, 1993, Exhibit 5.1 to Registration among El Comandante Capital Corp. Statement on Form S-5 ("ECCC"), as Issuer, Banco Popular yNo. 33-75285 of HDA, de Puerto Rico as Trustee ("Banco ECCC and El Comandante Popular") and HDA as Guarantor Operating Company, Inc. (the "Indenture") ("ECOC") ("Form S-5") 10.3 First Supplemental Indenture dated Exhibit 10.27 to Form S-11 December 22, 1994 to the Indenture 10.4 Second Supplemental Indenture dated Exhibit 10.28 to Form S-11 December 22, 1994 to the Indenture 10.7 Amended and Restated Management Exhibit 10.6 to Form S-4 Agreement dated December 15, 1993, between Interstate General Properties Limited Partnership S.E. ("IGP") and HDA 10.11 Stock Pledge Agreement dated Exhibit 10.12 to Form S-4 December 15, 1993, between HDA and Banco Popular 10.12 Pledge Agreement (Mortgage Notes) Exhibit 10.13 to Form S-4 dated December 15, 1993 between HDA and Banco Popular 66 10.13 Chattel Mortgage dated December Exhibit 10.15 to Form S-4 15, 1993, between ECOC and HDA 10.15 Assignment Agreement (General Exhibit 10.16 to Form S-4 Intangibles) dated December 15, 1993, between HDA and Banco Popular 10.16 Pledge Agreement between ECCC and Exhibit 10.17 to Form S-4 Banco Popular 10.17 Mortgage Note of $52,000,000 of HDA Exhibit 10.18 to Form S-4 10.18 Mortgage Note of $26,000,000 of HDA Exhibit 10.19 to Form S-4 10.19 Deed of Modification and Extension Exhibit 10.20 to Form S-4 of First Mortgage to Secure Additional Mortgage Note, No. 43, dated December 15, 1993 10.20 HDA Note in the amount of Exhibit 10.21 to Form S-4 68,000,000 to ECCC dated December 15, 1993 10.22 Consulting Agreement dated December Exhibit 10.21 to Form S-11 15, 1993 between ECOC and IGP 10.26 Lease Agreement dated September 28, Exhibit 10.21 of the Annual 1994 between the Dominican Republic Report on Form 10-K of and Galapagos, S.A.("Galapagos") HDA for the year ended December 31, 1994 ("1994 HDA 10-K") 10.27 Founders' Agreement among Exhibit 10.22 to 1994 Galapagos, HDA and Minority HDA 10-K Stockholders 10.28 Management Agreement dated September Exhibit 10.23 to 1994 28, 1994, between Galapagos and HDA 10-K ECOC 10.34 Third Supplemental Indenture dated Exhibit 10.34 to Annual February 27, 1996 to the Indenture Report on Form 10-K of the Company for the year ended December 31, 1995 ("1995 10-K") 10.35 Fourth Supplemental Indenture dated Exhibit 10.35 to 1995 10-K February 27, 1996 to the Indenture 67 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 November 14, 1997 to the Indenture Report on Form 10-Q of the Company for the Quarter ended September 30, 1997 10.58 Asset Purchase and Sale Agreement Exhibit 10.58 to 1997 by and between El Comandante 10-K Management Company LLC ("ECMC") and ECOC dated December 19, 1997 10.59 Second Amendment to Control Exhibit 10.59 to 1997 Transfer Agreement by and among 10-K IBC, IGC, IGP, HDA, EMC and the Company dated December 19, 1997 10.60 Guaranty Agreement by and between Exhibit 10.60 to 1997 EMC and IGC dated December 30, 1997 10-K 10.61 Agreement to Retire Partnership Exhibit 10.61 to 1997 Interest of Interstate General 10-K Company, L.P. in Equus Gaming Company, L.P. by and among the Company, IGC, EMC, EMTC and HDA dated December 30, 1997 10.62 Ninth Amended and Restated Exhibit 10.62 to 1997 Partnership Agreement of HDA 10-K dated December 31, 1997 68 10.68 First Amendment to Ninth Amended Exhibit 10.68 to Annual and Restated Partnership Agreement Report on Form 10-K of the of HDA dated October 2, 1998 Company for the year ended ("1998 10-K") December 31, 1998 10.69 Stock Purchase Agreement dated as of March 1, 1999 Exhibit 10.69 to 1998 10-K 21 Subsidiaries of the Company Filed herewith REPORTS ON FORM 8-K. None 69 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 July 12, 2002 /s/ Thomas B. Wilson ------------- ------------------------------------ Thomas B. Wilson Co-Chairman, President, Chief Executive Officer and Director July 12, 2002 /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 ------------- ----------------------- -------------------- July 12, 2002 Co-Chairman /s/ James J. Wilson ------------- -------------------- James J. Wilson July 12, 2002 Co-Chairman, President, /s/ Thomas B. Wilson ------------- Chief Executive Officer --------------------- and Director Thomas B. Wilson July 12, 2002 Vice Chairman and Director /s/ Juan M. Rivera ------------- ------------------- Juan M. Rivera July 12, 2002 Director /s/ Donald J. Kevane ------------- --------------------- Donald J. Kevane July 12, 2002 Director /s/ Alberto M. Paracchini ------------- -------------------------- Alberto M. Paracchini July 12, 2002 Director /s/ Charles A. Cuprill ------------- ----------------------- Charles A. Cuprill 70

EQUUS GAMING CO LP 10-K