Item 1. Business
General
Prudential Acquisition Fund I, L.P. (the 'Registrant'), a Delaware limited partnership, was formed on February 16, 1983 and will terminate in accordance with a vote of the limited partners as described below. The Registrant was formed to acquire and manage income-producing commercial real estate with proceeds raised from the initial sale of 70,124 limited partnership units ('Units'). The Registrant's fiscal year for book and tax purposes ends on December 31.
The Registrant had invested in and operated a real estate investment portfolio which consisted of five properties: two office buildings, a warehouse and two shopping centers. The shopping centers were acquired through a joint venture agreement with Prudential Realty Acquisition Fund II, L.P., an affiliated limited partnership ('Joint Venture'). All of the Registrant's properties have been sold as of December 31, 1996, as described below.
In January 1996, the General Partners mailed to all limited partners a Consent Solicitation Statement (the 'Statement') asking for their written consent to approve (i) a plan of sale of the remaining assets of the Registrant and (ii) the complete liquidation and dissolution of the Partnership, as more fully described in the Statement. On March 11, 1996, the limited partners holding a majority of the Units approved the plan of sale and complete liquidation and dissolution of the Registrant. Pursuant to the approval of the plan of liquidation, the general partners sold all the properties of the Partnership in the year ended December 31, 1996, as discussed below.
The two shopping centers owned by the Joint Venture were sold on March 26, 1996 for a gross sales price of $15,500,000 less costs to sell and pro-rations. On December 18, 1996, an agreement was signed by and between the Registrant and Prudential Realty Acquisition Fund II, L.P., an affiliated limited partnership, outlining the terms of the dissolution of the Joint Venture. As of December 31, 1996, all remaining assets of the Joint Venture were distributed in liquidation in accordance with this agreement.
The Norwalk Industrial warehouse facility was sold on August 6, 1996 for a gross sales price of $6,600,000 less costs to sell and pro-rations, the One Executive Center office building was sold on October 17, 1996 for a gross sales price of $7,300,000 less costs to sell and pro-rations and the Norwest Center office building was sold on October 18, 1996 for a gross sales price of $6,900,000 less costs to sell and pro-rations. See Notes C and E to the financial statements of the Registrant's Annual Report to Limited Partners for the year ended December 31, 1996 ('Registrant's Annual Report') for further information.
General partners
The general partners of the Registrant are Prudential-Bache Properties, Inc. ('PBP') and Prudential Realty Partnerships, Inc. ('PRP') (collectively, the 'General Partners').
Employees
The Registrant has no employees. Management and administrative services for the Registrant are performed by the General Partners and their affiliates pursuant to the Partnership Agreement. See Note F to the financial statements in the Registrant's Annual Report for further information.
Item 2.

Item 2. Properties
All of the Registrant's properties were sold as of December 31, 1996. See Notes C and E to the financial statements of the Registrant's Annual Report for further information.
Item 3.

Item 3. Legal Proceedings
This information is incorporated by reference to Note G of the financial statements in the Registrant's Annual Report which is filed as an exhibit hereto.
Item 4.

Item 4. Submission of Matters to a Vote of Limited Partners
None.
PART II
Item 5.

Item 5. Market for the Registrant's Units and Related Limited Partner Matters
As of March 3, 1997, there were 7,676 holders of record owning 70,124 Units. A significant secondary market for the Units has not developed, and it is not expected that one will develop in the future. There are also certain restrictions set forth in the Partnership Agreement limiting the ability of a Limited Partner to transfer Units. Consequently, holders of Units may not be able to liquidate their investments in the event of an emergency or for any other reason.
The following per Unit cash distributions were paid to Limited Partners during the quarter indicated:
As a result of the approval by the limited partners holding a majority of the Units of the plan of sale and liquidation of the Registrant, all properties of the Registrant were sold during the year ended December 31, 1996. The increase in distributions during the year ended December 31, 1996 was primarily the result of the distribution of net proceeds from the sales of the properties. See Item 1 Business for further information. The Registrant intends to make a final liquidating distribution in 1997. The distributions paid to limited partners during 1996 and 1995 primarily represent a return of capital on a generally accepted accounting principles (GAAP) basis. (The return of capital on a GAAP basis is calculated as limited partner distributions less net income allocated to limited partners.)
Item 6.

Item 6. Selected Financial Data
The following table presents selected financial data of the Registrant. This data should be read in conjunction with the financial statements of the Registrant and the notes thereto contained on pages 2 through 9 in the Registrant's Annual Report which is filed as an exhibit hereto.
- --------------- (a) Includes $1,269,000, $7,587,000 and $1,674,000 provisions for loss on impairment of assets in 1995, 1993 and 1992, respectively.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This information is incorporated by reference to pages 10 through 11 of the Registrant's Annual Report which is filed as an exhibit hereto.
Item 8.

Item 8. Financial Statements and Supplementary Data
The financial statements are incorporated by reference to pages 2 through 9 of the Registrant's Annual Report which is filed as an exhibit hereto.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant
There are no directors or executive officers of the Registrant. The Registrant is managed by the General Partners.
The Registrant, the Registrant's General Partners and their directors and executive officers, and any persons holding more than ten percent of the Registrant's Units are required to report their initial ownership of such Units and any subsequent changes in that ownership to the Securities and Exchange Commission on Forms 3, 4 and 5. Such executive officers, directors and persons who own greater than ten percent of the Registrant's Units are required by Securities and Exchange Commission regulations to furnish the Registrant with copies of all Forms 3, 4 or 5 they file. All of these filing requirements were satisfied on a timely basis. In making these disclosures, the Registrant has relied solely on written representations of the General Partners' directors and executive officers and persons who own greater than ten percent of the Registrant's Units, if any, or copies of the reports they have filed with the Securities and Exchange Commission during and with respect to its most recent fiscal year.
Prudential-Bache Properties, Inc.
The directors and executive officers of PBP and their positions with regard to managing the Registrant are as follows:
THOMAS F. LYNCH, III, age 38, is the President, Chief Executive Officer, Chairman of the Board of Directors and a Director of PBP. He is a Senior Vice President of Prudential Securities Incorporated ('PSI'), an affiliate of PBP. Mr. Lynch also serves in various capacities for other affiliated companies. Mr. Lynch joined PSI in November 1989.
BARBARA J. BROOKS, age 48, is the Vice President-Finance and Chief Financial Officer of PBP. She is a Senior Vice President of PSI. Ms. Brooks also serves in various capacities for other affiliated companies. She has held several positions within PSI since 1983. Ms. Brooks is a certified public accountant.
EUGENE D. BURAK, age 51, is a Vice President of PBP. He is a First Vice President of PSI. Prior to joining PSI in September 1995, he was a management consultant for three years and was with Equitable Capital Management Corporation from March 1990 to May 1992. Mr. Burak is a certified public accountant.
CHESTER A. PISKOROWSKI, age 53, is a Senior Vice President of PBP. He is a Senior Vice President of PSI and is the Senior Manager of the Specialty Finance Asset Management area. Mr. Piskorowski has held several positions within PSI since April 1972. Mr. Piskorowski is a member of the New York and Federal Bars.
FRANK W. GIORDANO, age 54, is a Director of PBP. He is a Senior Vice President of PSI and an Executive Vice President and General Counsel of Prudential Mutual Fund Management LLC, an affiliate of PSI. Mr. Giordano also serves in various capacities for other affiliated companies. He has been with PSI since July 1967.
NATHALIE P. MAIO, age 46, is a Director of PBP. She is a Senior Vice President and Deputy General Counsel of PSI and supervises non-litigation legal work for PSI. She joined PSI's Law Department in 1983; presently, she also serves in various capacities for other affiliated companies.
There are no family relationships among any of the foregoing directors or executive officers. All of the foregoing directors and executive officers have indefinite terms.
Prudential Realty Partnerships, Inc.
The directors and executive officers of Prudential Realty Partnerships, Inc. and their positions are as follows:
JOEL W. STOESSER, age 56, is a Managing Director of Prudential Real Estate Investors. He is head of Investment Advisory services, which includes responsibility for portfolio management and asset management of separate accounts and certain co-investment programs and commingled funds. Prior to his current assignment, Mr. Stoesser served as a Senior Vice President of the Prudential Realty Group. Prior to joining Prudential in 1988, he also served as a Senior Vice President in Real Estate Investment Management at CIGNA Corporation and held assignments with Connecticut General Life Insurance Company as head of real estate operations and as Director of strategic planning for all investment operations.
DAVID BRADFORD, age 43, is a Managing Director of Prudential Real Estate Investors. He is the portfolio manager of PRISA, a large commingled fund. Prior to joining Prudential in 1995, Mr. Bradford was a Senior Vice President in Portfolio Management at Equitable Real Estate. His 13-year tenure at Equitable included positions in pension investment marketing across all asset classes, real estate product management and portfolio operations and investment. Most recently (1991-1995), Mr. Bradford was Assistant Portfolio Manager for Equitable's Prime Property Fund.
KEVIN R. SMITH, age 39, is a Vice President of Prudential Real Estate Investors. He is a portfolio manager for three separate accounts and two commingled funds. Mr. Smith has been employed by Prudential since 1981 and has experience in asset management, development, property acquisitions and sales, and mortgage loans as a result of field office assignments in Cleveland, Houston, and Northern New Jersey.
JOSE GENER, age 46, is a Vice President, Operations and Systems, with Prudential Asset Management Group. In his present assignment, he is responsible for reporting for the institutional real estate management
arm of PAMG. Mr. Gener has been with Prudential since 1977, serving in a series of comptrollership assignments. Since 1986 he has worked primarily with the investment management units of Prudential.
C. EDWARD CHAPLIN, age 40, is Vice President and Treasurer of Prudential Insurance Company of America. He is responsible for all borrowings, cash management and securities custody activities of Prudential. Mr. Chaplin joined Prudential in the Realty Group in August 1983. In May 1992, he transferred to the Treasurer's Department as Vice President and Assistant Treasurer, with responsibility for Banking and Cash Management. In October 1993, he was promoted to Managing Director and Assistant Treasurer, with responsibility for managing Prudential's debt issuance, its relationships with the major credit rating agencies and financial counterparty credit analysis. In November 1995, Mr. Chaplin was appointed to Vice President and Treasurer.
ROGER S. PRATT, age 44, is Managing Director of Prudential Real Estate Investors. He is the portfolio manager of PRISA II, a large commingled fund. Mr. Pratt joined the Prudential Realty Group in June 1982 as an asset manager in the Atlanta regional office and subsequently has served in a variety of positions for Prudential. Prior to assuming his current position in February 1992, Mr. Pratt was Vice President in charge of the New Jersey regional office.
JOSEPH D. MARGOLIS, age 36, is Assistant General Counsel responsible for the provision and coordination of legal services to Prudential Real Estate Investors as well as other Prudential Asset Management Group entities. His assignments with Prudential have included counsel to Prudential Mortgage Capital Company, Inc. and Associate Regional Counsel in the Boston Realty Group office. Prior to joining Prudential, Mr. Margolis was employed by Nutter, McClennen & Fish in Boston, Massachusetts.
There are no family relationships among any of the foregoing directors or executive officers. All of the foregoing executive officers and directors have indefinite terms.
Item 11.

Item 11. Executive Compensation
The Registrant does not pay or accrue any fees, salaries or any other form of compensation to directors and officers of the General Partners for their services. Certain executive officers and directors of the General Partners receive compensation from affiliates of the General Partners, not from the Registrant, for services performed for various affiliated entities, which may include services performed for the Registrant; however, the General Partners believe that any compensation attributable to services performed for the Registrant is immaterial. See Item 13 Certain Relationships and Related Transactions for information regarding compensation to the General Partners.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 3, 1997, no director or executive officer of either of the General Partners owns directly or beneficially any interest in the voting securities of the General Partners.
As of March 3, 1997, no director or executive officer of either of the General Partners owns directly or beneficially any of the Units issued by the Registrant.
As of March 3, 1997, no limited partner beneficially owns more than five percent (5%) of the outstanding Units issued by the Registrant.
Item 13.

Item 13. Certain Relationships and Related Transactions
The Registrant has and will continue to have certain relationships with the General Partners and their affiliates. However, there have been no direct financial transactions between the Registrant and the directors or executive officers of the General Partners.
Reference is made to Notes A and F to the financial statements of the Registrant's Annual Report which is filed as an exhibit hereto, which identify the related parties and discuss the services provided by these parties and the amounts paid or payable for their services.
PART IV
- --------------- Incorporated by reference to Prospectus (1) dated July 1, 1983 as filed with the Commission pursuant to Rule 424(b) under the Securities Act of 1933 Incorporated by reference to Exhibits 3 (2) and 4 of Registrant's Annual Report on Form 10-K for the year ended December 31, (3) Incorporated by reference to Exhibit 10(c) of Registrant's Current Report on Form 8-K dated May 23, 1985 (4) Incorporated by reference to Exhibit 10(d) of Amendment on Form 8 to Registrant's Current Report on Form 8-K dated May 23, (5) Incorporated by reference to Exhibit 10(a) of Registrant's Current Report on Form 8-K dated January 14, 1986 (6) Incorporated by reference to Exhibit 10(a) of Registrant's Current Report on Form 8-K dated May 15, 1986 Incorporated by reference to Exhibits (7) 10(g) and 10(h) of Registrant's Current Report on Form 8-K dated March 26, 1996 Incorporated by reference to Exhibits (8) 10(i) and 10(j) of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 Incorporated by reference to Exhibits (9) 10(k), 10(l), 10(m) and 10(n) of Registrant's Current Report on Form 8-K dated October 17, 1996 Incorporated by reference to Proxy (10) Statement on Schedule 14A as filed with the Commission on January 26, 1996
Deloitte & Touche LLP -------------------------------------------------------- Two World Financial Center Telephone: (212) 436-2000 New York, New York 10281-1414 Facsimile: (212) 436-5000
INDEPENDENT AUDITORS' REPORT
To the Partners of Prudential Acquisition Fund I, L.P. New York, New York
We have audited the statement of net assets in process of liquidation of Prudential Acquisition Fund I, L.P. (a Delaware Limited Partnership) as of December 31, 1996, the statement of financial condition of Prudential Acquisition Fund I, L.P. as of December 31, 1995, and the related statements of operations, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated March 24, 1997; such financial statements and report thereon are included in your 1996 Annual Report to Limited Partners and are incorporated herein by reference. Our audits also included the financial statement schedule of Prudential Acquisition Fund I, L.P., listed in Item 14.


ITEM 1. BUSINESS
GENERAL
Sam Houston Race Park, Ltd., a Texas limited partnership (the "Partnership"), owns and operates Sam Houston Race Park, a Class 1 horse racing facility located within the greater Houston metropolitan area (the "Race Park"). The Race Park offers pari-mutuel wagering on live thoroughbred and quarter horse racing and on horse races simulcast from other race tracks. The managing general partner of the Partnership is SHRP General Partner, Inc. (the "Managing General Partner"), a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). The Partnership is also comprised of an additional general partner, SHRP Equity, Inc. (the "Additional General Partner") and limited partner interests.
The Race Park began operations on April 29, 1994 and sustained substantial operating losses during 1994 and 1995. On April 17, 1995, the Partnership and two affiliated entities, SHRP Capital Corp. ("Capital") and SHRP Acquisition, Inc. ("SHRP Acquisition"), filed voluntary petitions in the United States Bankruptcy Court (the "Bankruptcy Court"), each seeking to reorganize under the provisions of Chapter 11 of the United States Bankruptcy Code. The Partnership, Capital and SHRP Acquisition (collectively, "the Debtors") subsequently filed a sixth amended consolidated plan of reorganization (the "Plan") and disclosure statement with the Bankruptcy Court. On September 22, 1995, the Bankruptcy Court entered an order confirming the Plan. The transactions called for by the Plan, which included the reduction in the Partnership's long-term debt from $75.0 million to $37.5 million (through the issuance of the Partnership's 11% Senior Secured Extendible Notes; the "Extendible Notes") and a significant cash infusion, were completed on October 6, 1995 (the "Effective Date"). The bankruptcy case was closed by the Bankruptcy Court on December 19, 1996. See the Partnership's Consolidated Financial Statements appearing in Item 8 for further information concerning the bankruptcy proceedings.
Immediately after the Effective Date, wholly owned subsidiaries of MAXXAM held approximately 65.8% of the equity in the Partnership. During 1995, a wholly owned subsidiary of MAXXAM purchased the Extendible Notes and the corresponding shares of common stock of the Additional General Partner owned by one noteholder. Such shares of common stock represented approximately 39.0% of the shares of common stock of the Additional General Partner. After giving effect to this transaction, wholly owned subsidiaries of MAXXAM held, directly and indirectly, approximately 78.8% of the equity in the Partnership. In February 1997, MAXXAM purchased additional
SAM HOUSTON RACE PARK, LTD.
Extendible Notes and the corresponding shares of common stock of the Additional General Partner from other noteholders thereby increasing its interest to 88.5% of the equity in the Partnership.
This Annual Report on Form 10-K contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places (see Item 3. "Legal Proceedings" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources"). Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the effectiveness of management's strategies and decisions, general economic and business conditions, new or modified statutory or regulatory requirements, and changing prices and market conditions. This Report identifies other factors that could cause such differences. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements.
DESCRIPTION OF THE RACE PARK
General The Race Park is located on approximately 300 acres of land (the "Site") owned by the Partnership in the greater Houston metropolitan area. The Race Park's buildings and grounds have an aggregate capacity of approximately 18,000 patrons. The Race Park's design allows patrons to move throughout the facility during the course of a race day.
Location; Accessibility; Parking The Site is located in Harris County approximately 18 miles from downtown Houston and approximately 15 miles from Houston Intercontinental Airport. The Race Park fronts Sam Houston Parkway, a major tollway, providing ready access to residents of the greater Houston metropolitan area. Access is also available by other major thoroughfares. The parking area can accommodate approximately 10,000 cars.
Racing Ovals The Race Park has two racing ovals a one and one- quarter mile dirt track and a one and one-eighth mile turf course. Each racing oval features straightaways or "chutes" to
SAM HOUSTON RACE PARK, LTD.
accommodate varying race lengths. The surface of the tracks and the rails have been designed to lessen the risk of injuries to horses and jockeys and are generally considered to be of high quality.
Grandstand The Grandstand building at the Race Park is a modern, air-conditioned, fully-enclosed structure of approximately 196,700 square-feet with a variety of viewing and simulcasting facilities on three levels. The Grandstand has seating for 6,000 patrons and is designed to accommodate approximately 10,000 total patrons. There are numerous video monitors, an electronic message board, video walls, video replay libraries and odds information boards throughout the Grandstand to increase the flow of information to bettors. Simulcast races are shown on designated video monitors. Each patron level has numerous pari-mutuel betting windows, automated betting machines and concession areas.
The first level of the Grandstand building is the paddock level, which allows free access to the landscaped saddling paddock area, where patrons can observe the jockey mounting and pre-race walk of the horses. The design of the Grandstand does not permit patrons to view live racing from inside the paddock level of the Grandstand; viewing at this level is limited to video monitors. The next level is the clubhouse level. The clubhouse level includes a dining area which has a view of the track, a video monitor on each table and seats over 600 people. The clubhouse level also has box seats, counter seats and theater seats available at extra cost. This level also contains a terrace for viewing the saddling paddock, meeting rooms and the "members only" Jockey Club. The third level of the Grandstand consists of 19 suites available for annual lease or party use and three designated party rooms. All of the suites and party rooms overlook the track. Catering and separate pari- mutuel facilities are provided for the suite level. The press, judges and racing officials are also located on this level.
Other Viewing Areas In addition to the Grandstand, there are three additional areas from which patrons can watch the races: the standee ramp or apron between the Grandstand and the racing ovals; the 30,000 square foot enclosed, air- conditioned pavilion which is located immediately north of the Grandstand; and the infield area of the racetrack. The pavilion has a separate non- smoking room and a video arcade gallery. The pavilion is typically the only portion of the Race Park that is open to the public on days that only simulcasting is being conducted. These other areas have concession stands and pari-mutuel facilities nearby. A tunnel provides access to the infield.
Animal Facilities
SAM HOUSTON RACE PARK, LTD.
The backside contains 16 barns capable of housing a total of approximately 1,200 horses. Each barn contains stalls for onsite stabling, tack rooms, hay and feed storage areas, grooms' quarters, wash racks and four outdoor walkers. The Race Park also has a stakes barn for visiting horses, a receiving barn, a holding barn and an isolation facility. An equine veterinary facility is also located at the Race Park.
WAGERING OPERATIONS AND SCHEDULES
The Race Park offers pari-mutuel wagering on live thoroughbred or quarter horse racing during meets and simulcast racing throughout the year. The Race Park currently holds live racing three, four or five days a week during meets and simulcasting seven days a week. Simulcasting is the process by which live races held at one racing facility are broadcast simultaneously to other locations at which additional wagers may be placed on the race being broadcast.
The Texas Racing Commission (the "Racing Commission") must approve the number of live race days that may be offered at the Race Park each year. The number and scheduling of race days at the Race Park will depend upon a number of factors, including scheduling of live race days at other Texas Class 1 horse racing facilities. Under the Texas Racing Act (the "Racing Act"), Class 1 racetracks may not have overlapping live race schedules for the same breed of horse with other Class 1 racetracks unless each track with overlapping schedules consents. The Racing Commission has licensed two additional Class 1 horse racetracks. One is Retama Park ("Retama") near San Antonio, which opened on April 7, 1995. The other is Lone Star Park at Grand Prairie ("Lone Star") currently under construction near Dallas. When all of the Class 1 racetracks in Texas are open and operating, the live race schedule may be equally divided among the three tracks and each track would be allocated a maximum of 17 weeks of live racing for each breed of horse unless two or more tracks consented to an overlap of dates.
In Texas, simulcast broadcasts may only be sent to licensed racetracks as the Racing Act does not currently provide for off-track betting. Class 1 and Class 2 racetracks in Texas must take simulcast signals from Texas Class 1 tracks when such signals are made available to them, in preference to signals from other tracks. Class 1 racetracks are not required to take simulcast signals from Class 2 racetracks.
Once the Race Park accepts signals made available from other Texas Class 1 racetracks or when no such signals are available, the Race Park may simulcast out-of-state horse races with the approval of the Racing Commission. The Racing Commission must approve all simulcasting agreements. In addition, under the Race Park's agreement with the Texas
SAM HOUSTON RACE PARK, LTD.
Horsemen's Benevolent and Protective Association (the "HBPA Agreement" and the "HBPA," respectively) in effect through December 31, 1996, the Race Park was required to obtain permission from the HBPA for certain simulcasting agreements. Subsequent to December 31, 1996, under a new agreement with the Texas Horsemen's Partnership, L.L.P. (the "THP"), simulcasting agreements no longer require the specific approval of the horsemen. The Partnership has entered into revenue-sharing arrangements both with racetracks that send simulcast signals to the Race Park and with racetracks that receive simulcast signals of races held at the Race Park. Simulcasting has become an increasingly important component of the Race Park's revenues. See "--Sources of Revenue--Simulcasting" below.
The Race Park conducted 146 days of live racing during 1996, including 108 days of thoroughbred racing and 38 days of quarter horse racing. For the 1997 calendar year, the Race Park has obtained approval to conduct live racing on 134 days consisting of (i) 78 days of thoroughbred racing beginning on January 8, 1997 and concluding on May 4, 1997, (ii) 37 days of quarter horse racing beginning on July 4, 1997 and concluding on September 21, 1997 and (iii) 19 days of thoroughbred racing beginning on November 27, 1997 and concluding on December 28, 1997. The Race Park has not yet determined what race dates it will request in 1998 and years thereafter. The Race Park also expects to offer simulcast wagering virtually year round, both during live racing and on those days on which no live racing is offered. See "--Sources of Revenue--Simulcasting" below.
SOURCES OF REVENUE
General The only form of wagering permitted at horse races in Texas is pari-mutuel wagering, under which bettors wager against each other, not the racetrack. For every dollar wagered on live races, a minimum percentage specified by the Racing Act is returned to the winning bettors, and the remaining percentage, referred to as the "takeout," is withheld by the racetrack. As discussed in more detail below, a percentage of the takeout is distributed as purses to owners of horses, as fees and taxes to the state of Texas and as contributions to organizations whose purpose is the furtherance of horse breeding in Texas. The portion of the takeout remaining after these deductions is retained by the racetrack and constitutes the racetrack's primary source of revenue. The Partnership's Consolidated Financial Statements and Notes thereto appearing in Item 8 contain additional information regarding the Partnership's revenues and cost of revenues.
Wagering on Live Races The takeout percentage on live races depends on the type of wager. The total takeouts are approximately 18%, 21% and
SAM HOUSTON RACE PARK, LTD.
25% from regular wagering pools, multiple two wagering pools and multiple three or more wagering pools, respectively. Examples of regular wagers include win (a wager on a specific horse to finish first), place (a wager on a specific horse to finish first or second) and show (a wager on a specific horse to finish first, second or third). Examples of multiple two wagers include daily double (a wager in which the bettor selects the horses that will win two separate races), quinella (a wager in which the bettor selects the horses that will finish first and second, in any order) and exacta (a wager in which the bettor selects the horses that will finish first and second, in the correct order). Examples of multiple three or more wagers include trifecta (a wager in which the bettor selects the horses that will finish first, second and third, in order), superfecta (a wager in which the bettor selects the horses that will finish first, second, third and fourth, in order), and the pick three (a wager in which the bettor selects the winner of three consecutive races). The betting patterns experienced by the Race Park during its operating history have averaged approximately 40%, 35% and 25% of dollars wagered in the regular, multiple two and multiple three or more waging pools, respectively.
The Racing Act provides that a minimum of 7% of all live regular wagering pools and live multiple two wagering pools and a minimum of 8.5% of all live multiple three wagering pools be paid out as purses to winning horsemen. Furthermore, the state of Texas receives 1% of the first $100 million wagered on live racing at each racetrack each year (plus higher percentages for wagering over $100 million). Finally, 1% of live multiple wagering pools is required to be set aside for Texas horse breeding programs. After giving effect to the foregoing takeouts, the Race Park retains, on the first $100 million wagered on live horse racing each year, 10% of regular wagers, 12% of multiple wagers involving two horses and 14.5% of wagers involving three or more horses.
Simulcasting The Race Park currently offers simulcast wagering seven days a week throughout the year and intends to continue doing so. Sending and receiving tracks contractually apportion revenue from simulcasts among themselves in various negotiated proportions. The Partnership has negotiated simulcast revenue-sharing agreements with numerous tracks.
Guest simulcasting is the process whereby the Race Park receives broadcasts from other racetracks. The maximum takeout percentages on guest simulcast racing broadcasts from Texas racetracks are the same as those for live racing 18%, 21% and 25% from regular wagering pools, multiple two wagering pools and
SAM HOUSTON RACE PARK, LTD.
multiple three or more wagering pools, respectively. The takeout percentages on guest simulcast racing broadcasts from out-of- state tracks are in the same range. The HBPA Agreement in effect through December 31, 1996 provided that certain percentages of all simulcast wagering pools be paid as purses to the owners of horses in live races during the twelve month period following the simulcast date. The percentages in effect for the year ended 1996 were approximately 5% of all simulcast regular and multiple two wagering pools and approximately 6% of all simulcast multiple three or more wagering pools on all out-of-state racetracks. The percentages in effect for all in-state racetracks for the year ended December 31, 1996 were equal to the percentages used for live racing. As of January 1, 1997 the Partnership has entered into a new agreement with the Texas Thoroughbred HBPA, Inc. (the "TTHBPA") and is currently negotiating a new agreement with the Texas Quarter Horse HBPA, Inc. (the "TQHHBPA"). The TTHBPA and the TQHHBPA are the sole partners of the Texas Horsemen's Partnership, L.L.P., (the "THP"), the horsemen's organization currently recognized by the Racing Commission. Under the terms of this agreement, 30% of the takeout from all simulcast wagering pools are allocated to be paid as purses to the owners of horses in live races. Furthermore, the Racing Act requires that 1% of all simulcast wagering pools be set aside for the state of Texas, that 0.25% be set aside for the Texas Commission on Alcohol and Drug Abuse, and that 1% of all simulcast multiple wagering pools be set aside for Texas horse breeding programs. The Race Park also pays broadcasting racetracks a commission normally ranging from 2.5% to 4.5% of the amount wagered by its patrons on the broadcast races. After giving effect to the foregoing, the Race Park receives net commissions normally ranging from 6% to 10% on guest simulcast betting at the Race Park. As of March 1, 1997, the Race Park had agreements with approximately 40 racetracks pursuant to which it, at various times, receives simulcast signals.
Host simulcasting is the process whereby other racetracks receive a broadcast signal from the Race Park. The Race Park receives commissions normally ranging from 1% to 3% of the amount wagered at the receiving track on the Race Park's races. Host simulcasting is a much less significant source of revenue to the Partnership than guest simulcasting. As of March 1, 1997, the Race Park had agreements with approximately 180 racetracks and off-track wagering outlets pursuant to which the Race Park, at various times, broadcasts its races.
Simulcasting has become an increasingly important component of the Race Park's revenues. Guest simulcasting and host simulcasting accounted for approximately 63% and 13%, respectively, of the Race Park's net commission revenues during the year ended December 31, 1996.
Purses
SAM HOUSTON RACE PARK, LTD.
In accordance with industry practice, the Race Park establishes purses nearly one month in advance of a race, based on the expected wagering pool. These established purses are published in a condition book which generally covers fifteen days of racing. Horsemen then enter their horses in the proposed races based on the conditions of the race, including the purse offered. When purses paid exceed purses generated within a certain period of time, as specified in the HBPA Agreement, this excess becomes an additional expense to be paid by the Partnership. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations" appearing in Item 7 and Notes 2 and 5 to the Consolidated Financial Statements appearing in Item 8 for additional information regarding purse payments.
Food Services Food and drink sales are another major component of revenue. A broad selection of food is available to the patrons of the Race Park, from table dining at the clubhouse level to food court fare at various concession stands throughout the Race Park. The selection and quality of food provided is continuously monitored by the Race Park.
Admission; Program Sales; Parking Fees Another major component of revenue is admission, program and parking fees. An admission fee is charged for entry to the Race Park. Free parking is available at the Race Park and preferred and valet parking are available for a fee. Programs and "tip" sheets are sold separately. The Race Park often uses coupons and reduced price admissions, parking or program sales in its marketing promotions.
Club Memberships, Reserved Boxes and Luxury Suites The Jockey Club, located at the clubhouse level, has a capacity of approximately 300 people and features separate pari- mutuel windows, a bar, dining spaces and tiered box seats. The Jockey Club dining room accommodates approximately 200 people (including the balcony area) and the box seats accommodate approximately 120 members and their guests. Individual and corporate memberships are available to the Jockey Club. The clubhouse level also contains finish line boxes (accommodating 4 to 6 people) and eighteen finish line reserved tables (accommodating 4 to 6 people) available for sale. Luxury suites are also available for rental on a long-term or daily basis.
MARKETING
Management believes that the majority of the patrons for the Race Park reside within a 50-mile radius of the Race Park, which includes the greater Houston metropolitan area, and that a secondary market of occasional patrons can be developed outside the 50-mile radius but within a 100-mile radius of the
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Race Park. Management recognizes the challenge of introducing pari-mutuel wagering to customers in the greater Houston metropolitan area and has established the following marketing goals to increase attendance and the wagering handle: (i) promote the excitement of horse racing and wagering, (ii) support and expand the existing group of core bettors, (iii) attract new fans currently unfamiliar with horse racing, and (iv) pursue a program of fan education to teach these new fans how to wager. Management uses a number of marketing strategies to have potential customers consider the Race Park as an entertainment alternative. These strategies are designed to bring people out to the Race Park for specific sporting and promotional events with a view of turning infrequent visitors into occasional visitors and more frequent visitors into regulars. The marketing strategies are also designed to appeal to simulcasting customers and the more serious horseplayers.
Management utilizes a variety of marketing techniques in support of these objectives during the year and plans to enhance these programs including, among other things: (i) a public relations program to distribute news, information, features, tips and results in local and national broadcast and print media, (ii) increased advertising efforts, primarily through television and radio campaigns, increased promotional efforts in cooperation with sponsors, suppliers and vendors, (iii) group sales, to appeal to large corporate, civic and affinity groups, (iv) specialized promotions and on-going programs that are designed to attract unique demographic and/or cultural groups, (v) support for Houston area community events, (vi) improved attention to customer service and refinements to the Race Park's facilities, (vii) handicapping seminars and tournaments both to educate fans and promote the excitement of wagering, and (viii) direct mail both to introduce the track to new groups and communicate with existing customers (experienced bettors, suiteholders, Jockey Club members, etc.).
COMPETITION
Management does not believe that the Race Park will compete for patrons with other Class 1 racetracks as these race tracks will not be in the same market area as the Race Park. However, the Race Park does compete with them for live race days and, to the extent there are overlapping live race schedules, for horses.
The Racing Act does not limit the number of Class 2 racetracks that may be licensed and operated in Texas or where those racetracks may be located. As of March 1, 1997, one Class 2 racetrack was operating. The Class 2 racetrack is located over 100 miles away. Although it is possible that the Racing Commission could grant a Class 2 license for a racetrack in the greater Houston metropolitan area, management believes it is
SAM HOUSTON RACE PARK, LTD.
unlikely that the Racing Commission would do so. Furthermore, there is nothing to prevent the Racing Commission from allocating live race days to a Class 2 licensee so as to cause such Class 2 licensee to be competitive with a Class 1 licensee as to horses and live race days. The Racing Commission may also license Class 3 race tracks to operate for brief periods, primarily in connection with county fairs. No Class 3 licensees or applicants are located in or near the greater Houston metropolitan area. Management does not believe that any Class 3 track is likely to impact operations at the Race Park. The Race Park does face competition for horses from other racing facilities in states adjacent to Texas.
The Race Park competes for customers with other forms of entertainment, including casinos located approximately 125 to 150 miles from Houston, a greyhound race track located 60 miles from the Race Park and a wide range of live and televised professional, collegiate and high school sporting events that are available in the Houston area. The Race Park could, in the future, also compete with other forms of gambling in Texas, including casino gambling on Indian reservations or otherwise. Management believes that the location of the Race Park, within a one hour drive of the majority of the population of Houston, is a competitive advantage for the Race Park over the other gaming venues mentioned above. The challenge for the Race Park is to develop and educate new racing fans in a market where pari-mutuel wagering had not previously existed since the 1930's. Handicapping and wagering on horse racing can be difficult to learn for new fans, which places the Race Park at a disadvantage to other forms of gaming, such as casino games and the lottery, which are easier to learn.
Other competitive factors faced by the Race Park include the allocation of a sufficient number of live race days by the Racing Commission and the need to attract an adequate number of race horses to run at the Race Park. While the Class 1 racetracks in Texas are each entitled to 17 weeks of live racing per breed (thoroughbred and quarter horse), many factors are considered in the actual granting of race days. Input is solicited by the Racing Commission from the racetracks, racehorse owners and trainers, and horse breeding organizations. Management works closely with all of the individuals and groups involved in order to try to obtain the number of live race days that best impacts the Race Park financially. The factors associated with attracting race horses to the racetrack include location, quality of the racing surface and purses paid to the horsemen. The location of the Race Park in Texas, which is one of the leading horse breeding states in the country, is an advantage for the Race Park. The high quality of the racing surfaces have been mentioned in industry publications and are believed to be among the best in the country. The level of purses paid to horsemen is a significant factor in determining
SAM HOUSTON RACE PARK, LTD.
the quality and quantity of the race horses that run at racetracks. While the level of purses currently being paid is below the national average, management believes that it is adequate to attract a sufficient quantity of horses to fill races.
EMPLOYEES
As of March 1, 1997, the Race Park had approximately 110 year-round full-time employees, approximately 60 year-round part-time employees and, due to the seasonal nature of the business, up to approximately 400 seasonal employees. The number of seasonal employees utilized depends principally on whether or not the Race Park is conducting live racing and varies based upon attendance levels.
In addition, the Race Park utilizes various employees of MAXXAM and its wholly owned subsidiaries to perform services for the Race Park. The Race Park continuously monitors its staffing levels and the assignment of MAXXAM employees to the Race Park.
RACING REGULATIONS
Ownership and operation of horse racetracks in Texas are subject to significant regulation by the Racing Commission. The Racing Act provides, among other things, for the allocation of each wagering pool among betting participants, the state of Texas, purses, special equine programs and racetracks. The Racing Act also empowers the Racing Commission to license and regulate substantially all aspects of horse racing in the state. The Racing Commission, among other things, licenses all employees and workers at a racetrack (including jockeys, trainers and veterinarians); regulates the transfer of ownership interests; allocates live race days; approves race programs; regulates the conduct of races; oversees the administration of drugs to horses; sets specifications for the racing surfaces, animal facilities, employee quarters and public areas of racetracks; regulates the types of wagers on horse races and approves all material contracts with racetracks, including management agreements, simulcast agreements, totalisator contracts and concessionaire agreements.
The Partnership obtained its license (the "License") to operate the Race Park in August 1991. The License is perpetual, but is subject to revocation if, among other things, the Partnership or an officer or director of the Managing General Partner, Additional General Partner or a holder of a partnership interest in the Partnership violates or aids another person in violating the Racing Act or the rules thereunder, is convicted of certain crimes, fails to pay certain fees or taxes, or if the Racing Commission determines that the Partnership or any such
SAM HOUSTON RACE PARK, LTD.
person is engaged in activities or practices that are detrimental to the best interests of the public or the racing industry.
The Racing Act requires that a majority of the ownership interests of a license holder be held at all times by persons who are United States citizens and who have been continuous residents of the state of Texas for the preceding ten years. Failure to maintain this residency requirement is grounds for the revocation of the License by the Racing Commission. Additionally, it is illegal under the Racing Act for any person to own a 5% or greater interest in more than two racetrack licenses in the state of Texas (both horse tracks and greyhound tracks are grouped together for this purpose). The License is not transferable but is subject to a negative pledge (as security for the Partnership's Extendible Notes). In the event of a foreclosure by the Trustee for the Extendible Notes (the "Trustee") or the holders of Extendible Notes (the "Noteholders") following an event of default, a number of restrictions and procedural requirements apply to any proposed or subsequent transfer or use of the License. The Racing Act generally requires pre-approval by the Racing Commission of all transfers or issuances of "pecuniary interests" in the holder of a racetrack license. Interests in the Partnership constitute "pecuniary interests" and generally any transfer of an interest in the Partnership would require the prior approval of the Racing Commission.
Although the lottery, pari-mutuel horse and dog racing, and bingo are legal in Texas, other forms of gaming are not currently permitted. The various segments of the industry, including the Class 1 horse racetracks, Class 2 horse racetracks, dog tracks, the Texas Thoroughbred Breeders' Association, the Texas Quarter Horse Association, and other industry groups have tried to reach a consensus on legalizing one or more alternative forms of gaming or amendments to the Racing Act. Consensus has not been reached with all segments of the industry in regards to any single proposal. Legislation has been introduced in both the Texas House and Senate which would allow voters in each county where a greyhound or horse track is now operating to approve the conduct of "games of skill," including poker and black jack, at the pari-mutuel facility located in the county. Games of chance such as slot machines or dice games would not be allowed under the measure. Managements of each of the pari-mutuel facilities have indicated their support for the measure. Other industry groups have indicated that they may seek to have other proposals considered including pilot programs for off-track wagering and pari-mutuel wagering through home cable television.
On March 24, 1997 the Committee on Licensing and Administrative Procedure of the Texas House of Representatives
SAM HOUSTON RACE PARK, LTD.
approved a bill for consideration by the House which would amend the Texas Racing Act to, among other things, permit "cross- species" simulcasting at Texas pari-mutuel facilities. Under the bill, the greyhound track in the Partnership's market could display and accept wagers on races broadcast by horse tracks in Texas and around the country and could obtain such broadcasts from sources other than the Race Park. The Race Park would be able to display and accept wagers on broadcasts from greyhound tracks. While the impact of the bill cannot be determined with any certainty, the Partnership believes this bill, if enacted in its present form, would have a negative overall impact on the Partnership's share of pari-mutuel wagering and commissions, its largest source of revenues. The bill would require approval by the House, a Senate sub-committee, the full Senate and the Governor before it could become law. The Partnership expects to oppose the bill in its present form or seek changes to the bill before such bodies, but it is impossible to determine whether the measure will become law and, if so, its final content. It is also unclear whether any of the other initiatives mentioned above will be considered by the legislature or become law.
In addition, the Texas Racing Commission, in common with most administrative agencies, is subject to the Texas Sunset Act and will be abolished in 1997 unless the Texas legislature continues its existence or extends its Sunset review (as it did in 1995). Even if the Racing Commission is abolished, the Racing Act authorizes the holder of a racetrack license to continue to operate for up to one year after all of the license holder's long-term liabilities are satisfied. It is possible that the legislation being submitted to extend the Racing Commission will include other legislative changes affecting the Race Park.
OTHER REGULATIONS
The Race Park is required to file certain reports with the Commissioner of the Internal Revenue Service regarding certain cash transactions and certain wagering winnings by patrons. The Race Park is also subject to a variety of environmental and other laws and regulations, including laws and regulations dealing with animal waste management and wetlands. The Race Park is subject to other federal, state and local regulations and, on a periodic basis, must obtain various licenses and permits, including those required to sell alcoholic beverages.
ITEM 2.

ITEM 2. PROPERTIES
A description of the Partnership's properties is included under "Item 1. Business." Under the indenture governing the Partnership's Extendible Notes (the "Indenture"), substantially all of the Partnership's assets, including the Partnership's properties, are pledged as collateral on the
SAM HOUSTON RACE PARK, LTD.
Extendible Notes. The racing license held by the Partnership is also subject to a negative pledge for the benefit of the holders of the Extendible Notes.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
This section contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See Item 1. "Business--General" for cautionary information with respect to such forward-looking statements.
On April 17, 1995, the Debtors filed voluntary petitions in the Bankruptcy Court to reorganize under the provisions of Chapter 11 of the United States Bankruptcy Code. On September 22, 1995, the Bankruptcy Court entered an order confirming the Plan. All transactions called for by the Plan were completed on the Effective Date and the case was closed on December 19, 1996. The Plan called for, among other things, a reduction in the Partnership's long-term debt, a significant cash infusion, contribution of additional property and a reorganization of the Partnership.
Under the terms of the Plan, the Extendible Notes were issued in exchange for the Original Notes. The Original Notes had an aggregate principal amount of $75.0 million, would have matured on July 15, 1999 and bore interest at the rate of 11 % per annum. The Extendible Notes had an initial aggregate principal amount of $37.5 million, mature on September 1, 2001 and bear interest at the rate of 11% per annum. The maturity date of the Extendible Notes may be extended to September 1, 2003 (with an increase in the rate of interest to 13% per annum) if the Texas legislature passes significant gaming legislation (as defined) between January 1, 2001 and August 15, 2001. Interest on the Extendible Notes accrues in-kind and is not payable in cash until a certain level of cash flow from operations has been achieved. Once cash interest payments commence, interest payments may not thereafter be paid in-kind. The Indenture limits the Partnership's ability to incur additional indebtedness and liens, to engage in transactions with affiliates, to make investments and to make distributions, although the Indenture does allow the Partnership to become involved in certain gaming, entertainment and other ventures.
On the Effective Date, a new investor group (the "New Investor Group") made a capital contribution of cash in the aggregate amount of $5.9 million. Additionally, a wholly owned subsidiary of MAXXAM contributed an approximately 87 acre tract of adjoining land having a fair market value of $2.3 million.
SAM HOUSTON RACE PARK, LTD.
Each member of the New Investor Group also provided its pro rata share of a $1.7 million line of credit. This line of credit would be used to fund future cash flow requirements should the cash proceeds contributed be insufficient. Each member of the New Investor Group has secured such investor's portion of the line of credit with cash held in an escrow account (other than MAXXAM's wholly owned subsidiaries, whose portion of the line of credit is secured by the guaranty of MAXXAM). Borrowings on the line of credit would bear interest at 11% per annum and would be subordinate to the Extendible Notes. Also, a wholly owned subsidiary of MAXXAM provided the holders of the Extendible Notes with Instruments of Adherence ("Instruments of Adherence") having an agreed value of $0.5 million. The Instruments of Adherence were executed by MAXXAM and Mr. Charles Hurwitz, Chairman of the Board and Chief Executive Officer of MAXXAM and provide that MAXXAM and Mr. Hurwitz will not, in certain circumstances, make certain investments in specified gaming ventures in the Houston area unless certain holders of the Extendible Notes are afforded a specified opportunity to make an investment in such ventures in an amount at least equal to 19.9% (reduces pro rata as Extendible Notes are retired) of the aggregate investment made in such ventures by MAXXAM, Mr. Hurwitz and such holders.
The Plan provided for the elimination of all existing partnership interests. The Partnership has issued 33.3% of the equity in the Partnership to certain holders of allowed unsecured bankruptcy claims (the "Creditor Equity"), a majority of which relates to the unsecured deficiency claims attributable to the Original Notes. The Creditor Equity is held in the form of common stock in the Additional General Partner. On the Effective Date, the New Investor Group received 66.7% of the equity in the Partnership. The Managing General Partner was issued a 1% interest in the Partnership in exchange for contributing its pro rata share of the investment made by the New Investor Group. See Note 3 to the Partnership's Consolidated Financial Statements appearing in Item 8 for further information concerning the bankruptcy proceedings.
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
The Partnership is involved in various other claims, lawsuits and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Partnership's consolidated financial position, results of operations or liquidity.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SAM HOUSTON RACE PARK, LTD.
Not applicable.
ITEM 5.

ITEM 5. STOCKHOLDER MATTERS
There is no established public trading market for the Partnership's ownership interests. The Partnership has eight limited partners in addition to the two general partners. The Partnership interests are not transferable without the consent of the Managing General Partner. Under the Indenture, distributions are restricted except for amounts necessary to pay taxes on income of the Partnership allocated to a partner. The Partnership has not made distributions to its partners since the commencement of operations and it is doubtful that the Partnership will be able to make any distributions to its partners for at least the next two years. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data".
SAM HOUSTON RACE PARK, LTD.
PART II
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Partnership for each of the years in the five-year period ended December 31, 1996 presented below, should be read in conjunction with "Item 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Partnership's Consolidated Financial Statements and Notes thereto appearing in Item 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Partners of Sam Houston Race Park, Ltd.,
We have audited the accompanying consolidated balance sheets of Sam Houston Race Park, Ltd. (a Texas limited partnership referred to herein as the "Partnership") as of December 31, 1996 and 1995 and the related consolidated statements of operations, partners' capital (deficit) and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Partnership as of December 31, 1996 and 1995, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
February 10, 1997 Houston, Texas
SAM HOUSTON RACE PARK, LTD.
SAM HOUSTON RACE PARK, LTD.
Depreciation expense for the years ended December 31, 1996, 1995 and 1994 was $886, $2,110 and $1,770, respectively. As discussed in Note 3, the Partnership reduced the net carrying value of property and equipment by $40,390 as of the Effective Date, in accordance with the asset values described in the Plan.
5. RACING OPERATIONS
The Partnership conducted 146, 150 and 158 days of live racing during 1996, 1995 and 1994, respectively. Under the Racing Act, the Partnership's commission revenue is a designated portion of the pari-mutuel handle. During May 1994, the Race Park began operating as a satellite wagering site for thoroughbred and quarter horse meets conducted at other tracks. The Race Park receives broadcasts of live racing from other racetracks under various guest simulcasting agreements. The Race Park also provides broadcasts of live racing conducted at the Race Park to other racetracks under various host simulcasting agreements. Under these contracts, the Partnership receives pari-mutuel commissions of varying percentages of simulcast pari-mutuel handles. As described in Note 1, the Partnership was in the development stage prior to April 29, 1994 and accordingly, had no operations prior to that date.
A summary of the pari-mutuel handle, commissions and deductions for the years ended December 31, 1996, 1995 and 1994 is as follows:
Non-statutory Purse Funding In accordance with the HBPA Agreement in effect during 1994, the Partnership paid purses in excess of statutory amounts aggregating approximately $4,042. The HBPA Agreement was amended three times in order to address purse payment issues. Pursuant to these amendments, the Partnership had the ability to manage the level of purses paid so that significant purse overpayments could be avoided. The amendments also allowed the Partnership to recover a portion of the purses paid in excess of statutory amounts. During 1995, the Partnership recovered $1,042 of purses previously paid in excess of statutory amounts. On November 26, 1996, the Race Park entered into a new agreement with the Texas Thoroughbred HBPA, Inc. (the "TTHBPA"). The TTHBPA is a partner of the Texas Horsemen's Partnership, L.L.P., (the "THP") the
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official horsemen's organization currently recognized by the Racing Commission. This new agreement provides for the recovery of purse overpayments of $660 and $631 during the years ended December 31, 1999 and 2000, respectively. The Partnership will record any future recoveries only as they are earned.
6. NOTES PAYABLE
Notes payable consist of the following:
THE MANAGING GENERAL PARTNER
SAM HOUSTON RACE PARK, LTD.
James D. Noteware has served as President of the Partnership since August 1994. Mr. Noteware is also President and a Director of the Managing General Partner. Mr. Noteware previously served as interim General Manager of the Partnership from November 1994 through October 1995. Mr. Noteware has served as President and Chief Executive Officer of MAXXAM Property Company ("MPC"), a wholly owned subsidiary of MAXXAM, since January 1993. From November 1990 through December 1992, Mr. Noteware was Chairman, President and Chief Executive Officer of Phoenix Consulting, Inc., a real estate management and consulting company. Mr. Noteware served as a national director in the Real Estate Advisory Services Department of Price Waterhouse from April 1991 through January 1993. Prior to November 1990, Mr. Noteware served as National Director in the Real Estate Advisory Services Department at Laventhol & Horwath.
Robert L. Bork has served as Senior Vice President and General Manager of the Partnership since October 1995. Mr. Bork previously served four years as Vice President General Manager and Chief Operating Officer of Arlington International Racecourse, Inc. in Arlington Heights, Illinois. Prior to such time, Mr. Bork served as Vice President General Manager of Philadelphia Park in Benslem, Pennsylvania and Garden State Park in Cherry Hill, New Jersey. Mr. Bork is a director of the Thoroughbred Racing Association of America, the Thoroughbred Racing Protective Bureau and serves as Chairman of the Thoroughbred Racing Association Technology Committee.
Ann M. McGovern has served as Vice President of Operations of the Partnership since September 1994. Ms. McGovern previously served for 11 years with the Racing Division of the Edward J. De Bartolo Corporation, most recently as Director of Operations at Remington Park in Oklahoma City, Oklahoma from April 1991 to October 1994 and prior to that as the Assistant Director of Operations since 1988.
James H. Paulin, Jr. has served as Vice President of the Partnership since November 1993. Mr. Paulin has been the Secretary Treasurer of Federated Development Company ("Federated") since May 1983, and Secretary of Federated since March 1977. Federated is a New York business trust primarily engaged in the management of real estate investments and, through its position as a significant stockholder of MAXXAM, in the businesses conducted by MAXXAM.
Michael J. Vitek has served as Vice President of Accounting of the Partnership since November 1994. Mr. Vitek previously served from April 1994 to November 1994 as Vice President, Finance and Chief Financial Officer of Hysan
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Corporation, a chemical manufacturing and distribution company and a subsidiary of Wedge Group, Inc., a private investment company. Mr. Vitek previously served as Corporate Controller of Wedge Group, Inc. from October 1991 to March 1994. He previously served for six years with the public accounting firm of KPMG Peat Marwick, most recently as a Senior Manager.
Charles E. Hurwitz is a Director and the Chairman of the Board and President of the Managing General Partner. Mr. Hurwitz has served as a member of the Board of Directors and the Executive Committee of MAXXAM since August 1978 and was elected as Chairman of the Board and Chief Executive Officer of MAXXAM in March 1980. Since January 1993, Mr. Hurwitz has also served MAXXAM as President. Mr. Hurwitz has served as a director of Kaiser Aluminum Corporation ("Kaiser"), a majority-owned subsidiary of MAXXAM, since October 1988, and as a director of Kaiser Aluminum & Chemical Corporation ("KACC"), a fully integrated aluminum producer that is a subsidiary of Kaiser, since November 1988. Mr. Hurwitz is Chairman of the Board, Chief Executive Officer and President of MAXXAM Group Inc. ("MGI"), a wholly owned subsidiary of MAXXAM which is engaged in forest products operations, and MGI's parent, MAXXAM Group Holdings Inc. ("MGHI"). Mr. Hurwitz has been, since January 1974, Chairman of the Board and Chief Executive Officer of Federated.
D. Kent Anderson is a Director of the Managing General Partner per the designation of the Additional General Partner. Mr. Anderson has been the Executive Banking Officer of Compass Bank since its April 1996 merger with Post Oak Bank. From 1991 until the merger, Mr. Anderson was Chairman of the Board and Chief Executive Officer of Post Oak Bank. From 1988 through October 1991, Mr. Anderson held several executive positions, including Chairman of the Board, with First Interstate Bank of Texas, N.A. Mr. Anderson is currently a Trustee and member of the Board of Governors of Rice University. He has served on several State of Texas committees and on the Board of of the Greater Houston Partnership, the Texas Chamber of Commerce, and the Texas Research League.
J. Kent Friedman is a Director of the Managing General Partner. Mr. Friedman has been a partner of Mayor, Day, Caldwell & Keeton, L.L.P., a Houston law firm, since 1982. Prior to such time Mr. Friedman was a partner at Butler & Binion, a Houston law firm. Mr. Friedman is a member of the Executive Committee of the Board of Directors of the Houston Symphony, President of the Friends of Hermann Park and Co-President of the Foundation for Jones Hall.
Paul N. Schwartz is a Director and Vice President of the Managing General Partner. Mr. Schwartz has served as Executive Vice President and Chief Financial Officer of MAXXAM since January 1995. Prior to that he served as Senior
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Vice President-Corporate Development of MAXXAM from June 1987 to January 1995, as Vice President-Corporate Development from July 1985 to June 1987 and as Vice President since 1982. Mr. Schwartz also serves as a director and a Vice President and Chief Financial Officer of MGHI, MGI, The Pacific Lumber Company ("Pacific Lumber"), a subsidiary of MGI engaged in forest products operations, and Scotia Pacific Holding Company ("Scotia Pacific"), a subsidiary of Pacific Lumber. Mr. Schwartz is a director of SLM Funding Corporation, which is a subsidiary of the Student Loan Marketing Association. Mr.Schwartz also serves as a director and as President of United Financial Group, Inc., a Delaware public corporation.
Directors of the Managing General Partner are elected annually to serve for one year and until their successors are duly elected, qualified, and approved by the Racing Commission. Each director of the Managing General Partner is required to be approved by the Racing Commission. The current directors of the Managing General Partner have received the approval of the Racing Commission.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth compensation information, cash and non-cash, for each of the Partnership's last three completed fiscal years with respect to (a) all individuals serving as the Partnership's chief executive officer during the last fiscal year, and (b) the other most highly compensated executive officers of the Partnership (other than the current chief executive officer) who were serving as executive officers of the Partnership at the end of 1996 and who received over $100,000 in aggregate salary and bonus in respect of 1996.
THE MANAGING GENERAL PARTNER
Sam Houston Entertainment Corp., a wholly owned subsidiary of MAXXAM, owns all of the Common Stock of the Managing General Partner of which 3,000 shares are currently issued and outstanding.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the respective affiliates of the Partnership and the Managing General Partner provide legal, financial, corporate development and other services to the Partnership and the Managing General Partner from time to time. Compensation paid for the services of such affiliates are on terms as favorable to the Partnership or the Managing General Partner, as the case may be, as are available in an arms-length transaction with a non-affiliated third party. As of March 1, 1997, MAXXAM and its subsidiaries have received an aggregate of $510,931 in respect of such services performed in 1996.
J. Kent Friedman, Independent Director, is a partner of a law firm that has provided services to the Partnership. In addition, such law firm has represented MAXXAM in various matters not related to the Race Park. The Partnership has an agreement with Mr. Friedman's law firm to coordinate legislative efforts. As of March 1, 1997, Mr. Friedman's law firm has received an aggregate of $120,000 in respect of such services performed in 1996.
See also Notes 8 and 9 to the Consolidated Financial Statements appearing in Item 8.
SAM HOUSTON RACE PARK, LTD.
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) INDEX TO FINANCIAL STATEMENTS PAGE
1. FINANCIAL STATEMENTS (APPEARING IN ITEM 8): Report of Independent Auditors 17 Consolidated balance sheets at December 31, 1996 and 1995 18 Consolidated statements of operations for the three years ended December 31, 1996 19 Consolidated statements of partners' capital (deficit) for the three years ended December 31, 1996 20 Consolidated statements of cash flows for the three years ended December 31, 1996 21 Notes to consolidated financial statements 22
2. FINANCIAL STATEMENT SCHEDULES: All schedules are inapplicable or the required information is included in the financial statements or the notes thereto.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
Reference is made to the Index of Exhibits immediately preceding the exhibits hereto (beginning on page 41) which index is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SAM HOUSTON RACE PARK, LTD.
Date: March 28, 1997 By: /S/ MICHAEL J. VITEK -------------------------------- Michael J. Vitek, Vice President of Accounting
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: March 28, 1997 By: /S/ ROBERT L. BORK -------------------------------- Robert L. Bork, General Manager (Principal Executive Officer)
Date: March 28, 1997 By: /S/ MICHAEL J. VITEK -------------------------------- Michael J. Vitek, Vice President of Accounting (Principal Financial and Accounting Officer)
SAM HOUSTON RACE PARK, LTD. By: SHRP General Partner, Inc. its Managing General Partner
Date: March 28, 1997 By: /S/ CHARLES E. HURWITZ -------------------------------- Charles E. Hurwitz, Chairman of the Board
Date: March 28, 1997 By: /S/ PAUL N. SCHWARTZ -------------------------------- Paul N. Schwartz, Director
Date: March 28, 1997 By: /S/ JAMES D. NOTEWARE -------------------------------- James D. Noteware, Director
Date: March 28, 1997 By: /S/ D. KENT ANDERSON -------------------------------- D. Kent Anderson, Director
Date: March 28, 1997 By: /S/ J. KENT FRIEDMAN -------------------------------- J. Kent Friedman, Director
INDEX OF EXHIBITS Exhibit Number Description
3.1 Third Amended and Restated Limited Partnership Agreement of Sam Houston Race Park, Ltd. dated October 6, 1995 (incorporated herein by reference to Exhibit 3.1 to the Partnership's Form 10-Q dated September 30, 1995)
4.1 Amended and Restated Indenture dated October 6, 1995 by and among the Partnership, New SHRP Capital Corp., SHRP General Partner, Inc. and First Bank National Association, Trustee ("Trustee"), including the related form of Note (incorporated herein by reference to Exhibit 4.1 to the Partnership's Form 10-Q dated September 30, 1995)
4.2 Amended and Restated Deed of Trust, Assignment, Security Agreement and Financing Statement dated October 6, 1995 among the Partnership, Richard Prokosch, as Trustee, and First Bank National Association, as Mortgagee (incorporated herein by reference to Exhibit 4.2 to the Partnership's Form 10- Q dated September 30, 1995)
4.3 Deed of Trust, Assignment, Security Agreement and Financing Statement dated October 6, 1995 among the Partnership, Richard Prokosch, as Trustee, and First Bank National Association, as Mortgagee (incorporated herein by reference to Exhibit 4.3 to the Partnership's Form 10-Q dated September 30, 1995)
4.4 Amended and Restated License Negative Pledge dated October 6, 1995 executed by the Partnership in favor of Trustee (incorporated herein by reference to Exhibit 4.4 to the Partnership's Form 10-Q dated September 30, 1995)
4.5 Amended and Restated Real Estate Tax Escrow and Security Agreement dated October 6, 1995 among the Partnership, Trustee and Charter Bank-National Association ("Charter Bank") (incorporated herein by reference to Exhibit 4.5 to the Partnership's Form 10- Q dated September 30, 1995)
9 Voting Agreement dated October 6, 1995 among SHRP General Partner, Inc., Sam Houston Entertainment Corp., SHRP Equity, Inc. and MAXXAM Inc. (incorporated herein by reference to Exhibit 9 to the Partnership's Form 10-Q dated September 30, 1995)
10.1 Form of Line of Credit Agreement dated October 6, 1995 between the Partnership and certain lenders (the "Line of Credit Agreement") (incorporated herein by reference to Exhibit 10.1 to the Partnership's Form 10-Q dated September 30, 1995)
10.2 Form of Cash Escrow Agreement with respect to the Line of Credit Agreement (incorporated herein by reference to Exhibit 10.2 to the Partnership's Form 10-Q dated September 30, 1995)
10.3 Guaranty of MAXXAM Inc. dated October 6, 1995 in favor of the Partnership with respect to the obligations of SHRP General Partner, Inc. under the Line of Credit Agreement (incorporated herein by reference to Exhibit 10.3 to the Partnership's Form 10-Q dated September 30, 1995)
10.4 Registration Rights Agreement dated October 6, 1995 among the Partnership, SHRP Equity, Inc. and First Bank National Association (incorporated herein by reference to Exhibit 10.5 to the Partnership's Form 10-Q dated September 30, 1995)
10.5 Exchange Agreement dated October 6, 1995 among the Partnership, SHRP Capital Corp., New SHRP Capital Corp., SHRPAcquisition, Inc., SHRP Equity, Inc. and First Bank National Association, as Exchange Agent (incorporated herein by reference to Exhibit 10.6 to the Partnership's Form 10-Q dated September 30, 1995)
10.6 Instrument of Adherence of MAXXAM Inc. dated October 6, 1995 (incorporated herein by reference to Exhibit 10.7 to the Partnership's Form 10-Q dated September 30, 1995)
10.7 Instrument of Adherence of Charles E. Hurwitz dated October 6, 1995 (incorporated herein by reference to Exhibit 10.8 to the Partnership's Form 10-Q dated September 30, 1995)
10.8 Escrow Agreement dated October 6, 1995 among the Partnership, SHRP Acquisition, Inc., SHRP Capital Corp., SHRP Equity, Inc., SHRP General Partner, Inc. and First Bank National Association, as Escrow Agent (incorporated herein by reference to Exhibit 10.9 to the Partnership's Form 10-Q dated September 30, 1995)
10.9 Horsemen's Agreement dated April 29, 1994 between the Texas HBPA and the Partnership (incorporated herein by reference to Exhibit 10.26 to the Partnership's Form 10-Q for the quarter ended June 30, 1994)
10.10 Memorandum of Agreement, dated July 22, 1994 between the Texas HBPA and the Partnership (incorporated herein by reference to Exhibit 10.27 to the Partnership's Form 10-Q for the quarter ended June 30, 1994)
10.11 Second Amendment to Horsemen's Agreement between the Texas HBPA and the Partnership (incorporated herein by reference to Exhibit 10.29 to the Partnership's Form 10-Q for the quarter ended September 30, 1994)
10.12 Third Amendment to Horsemen's Agreement between the Texas HBPA and the Partnership (incorporated herein by reference to Exhibit 10.16 to the Partnership's Form 10-K dated December 31, 1996)
*10.13 Horsemen's Agreement dated November 26, 1996 between Texas Thoroughbred HBPA, Inc. and the Partnership
10.14 Totalisator Services Agreement dated October 8, 1992 between Autotote Systems, Inc. and the Partnership (incorporated herein by reference to Exhibit 4.2 to Amendment No 1 to the SHRP Registration Statement)
10.15 Promissory Note dated December 13, 1994 by the Partnership in favor of Harris County, Texas (incorporated herein by reference to Exhibit 10.41 to the Partnership's Form 10-K for the year ended December 31, 1994)
10.16 Satellite Transmission Agreement dated May 20, 1994 between the Partnership and Autotote Systems, Inc. (incorporated herein by reference to Exhibit 10.43 to the Partnership's Form 10-K for the year ended December 31, 1994)
10.17 Agreement dated December 3, 1993 between the Partnership and International Sound Corporation (incorporated herein by reference to Exibit 10.45 to the Partnership's Form 10-K for the year ended December 31, 1994)
10.18 Lease Agreement dated November 23, 1993 by and between the Partnership and Sports Data Systems, Inc. (incorporated herein by reference to Exibit 10.46 to the Partnership's Form 10-K for the year ended December 31, 1994)
10.19 Project Proposal dated January 6, 1994 among the Partnership, TSNS and Daily Racing Form (incorporated herein by reference to Exibit 10.47 to the Partnership's Form 10-K for the year ended December 31, 1994)
10.20 Equipment Lease dated January 21, 1994 by and between the Partnership and True Center Gate Leasing, Inc. (incorporated herein by reference to Exibit 10.48 to the Partnership's Form 10-K for the year ended December 31, 1994)
*10.21 Letter Agreement dated February 23, 1996 between Mayor Day, Caldwell & Keeton, L.L.P. and the Partnership
* 10.22 Amendment to letter agreement dated Janurary 31, 1997 between Mayor Day, Caldwell & Keeton, L.L.P. and the Partnership
*10.23 Consulting Agreement dated January 1, 1997 between Stan Schlueter and the Partnership
*10.24 Alcoholic Beverage Concession Agreement dated September 19, 1996 between 97, Inc. and the Partnership
Executive Compensation Plans and Arrangements
10.25 Employment Agreement, dated November 24, 1992 between MAXXAM Property Company and James D. Noteware (incorporated herein by reference to Exhibit 10.33 to the Partnership's Form 10-K for the year ended December 31, 1994)
10.26 Letter Agreement, dated August 19, 1994 between the Partnership and Ann M. McGovern (incorporated herein by reference to Exhibit 10.34 to the Partnership's Form 10-K for the year ended December 31, 1994)
10.27 Letter Agreement, dated November 11, 1994 between the Partnership and Michael J. Vitek (incorporated herein by reference to Exhibit 10.35 to the Partnership's Form 10-K for the year ended December 31, 1994)
10.28 Agreement between the Partnership and Robert L. Bork. (incorporated herein by reference to Exhibit 10.10 to the Partnership's Form 10-Q dated September 30, 1995)
--------------- * Included with this filing.