UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 333-18295
COLONIAL DOWNS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
- --------------------------------- 54-1826807
VIRGINIA (I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
10515 Colonial Downs Parkway
New Kent, VA 23124
(Address of principal executive offices)
Registrant's telephone number, including area code 804-966-7223
Securities registered pursuant to Section 12(b)of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class on Which Registered Name of Each Exchange
Class A Common Stock par value .01 per share NASDAQ National Market
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 reports), 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. Yes [ ] No [X]
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 26, 1998 was approximately $6,678,437.50
Number of Shares of Class A Common Stock outstanding as of March 26, 1998 -
5,000,000
Number of Shares of Class B Common Stock outstanding as of March 26, 1998-
2,250,000
Documents Incorporated by Reference
Registrant's Definitive Proxy Statement with respect to annual meeting of
Shareholders to be held on May 8, 1998.
This Annual Report contains forward-looking statements that inherently involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those discussed in this Annual Report. Statements
regarding anticipated arbitration, referenda, results of operations, liquidity,
the opening of additional Racing Centers, and certain other statements contained
in this report are forward-looking statements and, as such, involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance, or achievements, expressed or implied by
such forward-looking statements. Such potential risks, uncertainties, and
factors include, but are not limited to, acts by parties outside the control of
the Corporation, including the Maryland Jockey Club and the Virginia Racing
Commission, political trends, the effects of adverse general economic
conditions, and governmental regulation, including licensing of additional
Racing Centers. The forward-looking statements contained herein speak only as of
the date of this report. References to "Colonial Downs Holdings" or the
"Company" include Colonial Downs Holdings, Inc. and its subsidiaries, Colonial
Downs, L.P., a Virginia limited partnership (the "Partnership"), and Stansley
Racing Corporation, a Virginia corporation ("Racing").
<PAGE>
PART I
ITEM 1 BUSINESS
General
The Company, which was incorporated in 1996, owns the sole licenses in
Virginia to own and operate a horse racing facility and up to six racing centers
("Racing Centers") at which pari-mutuel wagering is permitted. The Company
currently provides pari-mutuel wagering opportunities on both live and simulcast
thoroughbred and harness horse races at one racetrack and four Racing Centers.
The Company owns and operates Colonial Downs Racetrack in New Kent,
Virginia (the "Track") and four Racing Centers located in Richmond, Chesapeake,
Brunswick, and Hampton, Virginia. The Company intends to develop two additional
Racing Centers that are authorized under Virginia law; however, each additional
Racing Center may only be developed in additional locations after a local
referendum approving a Racing Center in such locality and licenses are granted
by the Virginia Racing Commission (the "Commission").
The Company conducts pari-mutuel wagering at all of its locations on
thoroughbred and harness races run at the Track and on simulcast broadcasts of
thoroughbred and harness races from other racetracks ("Import Simulcasting").
The Company also simulcasts races conducted at the Track for wagering at other
locations throughout the United States ("Export Simulcasting").
Pari-mutuel wagering on thoroughbred or harness racing is pooled
wagering, in which a totalisator system totals the amounts wagered and adjusts
the odds on each horse to reflect the relative amounts wagered on each horse and
various possible outcomes. Under Virginia law, a portion of the pooled wagers is
retained by the wagering facility, a portion is paid to the applicable local
governments and Virginia, a portion is paid to the Virginia Breeders' Fund, and
a portion is distributed to the Track's horsemen in the form of "purses" which
encourage owners and trainers to enter their horses in races at the Track. The
balance of the pooled wagers is paid out to wagerers as winnings in accordance
with the payoffs determined by the totalisator system.
The Company derives its revenue from wagers placed at the Track and its
Racing Centers, export simulcasting of its races, admissions to these
facilities, program sales, food and beverage sales, rental of suites and group
facilities at the Track and sponsorship income and advertising at the Track. In
Virginia, racetrack ownership and operation is a precondition to Racing Center
ownership and operation.
The Company's plan is to open additional Racing Centers as attractive
opportunities arise. The Company will seek to increase the number of venues for
pari-mutuel wagering while simultaneously increasing the number of races
available for simulcast. The Company may seek legislative changes to allow more
than six Racing Centers in Virginia. In addition, the Company will actively seek
out export simulcast opportunities in other states. The Company plans to promote
attendance and wagering business at the Track and its Racing Centers by
introducing additional entertainment activities, including family fun days,
premium giveaway programs, contests and special events.
Strategy
The Company intends to be a leading participant in the wagering
industry by capitalizing upon its unique dirt and turf track capabilities for
live racing, its horse racing expertise and expanding its wagering network.
Capitalizing upon the Track's Unique Racing Surfaces
The Track's mile and a quarter dirt track is one of the largest tracks
in North America and its 180 foot wide mile turf track is the largest turf
course. These unique configurations are expected to attract quality horses to
the Track. The 1998 Breeders Crown, one of the premier North American
standardbred racing events, will be held at the Track in November 1998. The
inaugural Virginia Derby, a race for three-year old thoroughbreds, will be held
in October 1998 on the Company's turf course. The Company intends to develop the
Virginia Derby as a graded stakes race as a warm up to the Breeders' Cup. Both
the Breeders Crown and the Virginia Derby are expected to be televised on
national cable networks.
By hosting and creating marquee racing events, the Company intends to
improve its market visibility, attract additional patrons to the Track and its
Racing Centers, and enhance its ancillary revenues from corporate sponsorship,
group sales events, and food and beverage sales.
Opening Additional Racing Centers
The Company's goal is to expand its operations and increase its Racing
Center revenues by opening the two additional Racing Centers which are
authorized under the Virginia Racing Act. The Company intends to hold referenda
in localities that it perceives to be strategically located. Upon a positive
vote in a localities referenda, the Company intends to apply for licenses from
the Commission and to open two additional Racing Centers in Virginia.
Maintaining Quality Import Simulcasting and Increasing Export Simulcasting
The Company intends to maintain the quality of the Import Simulcasting
races that it makes available for wagering by customers at the Track and Racing
Centers and to increase its revenues from the volume of Export Simulcasting of
Company races for wagering at the facilities of others. The Company believes
that by Import Simulcasting high quality races from nationally known racetracks
it can increase the number of wagerers as well as the size of the average wager.
The Company also intends to try to increase Export Simulcasting as a way of
increasing overall revenue. The Company plans to conduct evening thoroughbred
racing in 1998 at times when the Company's signal will encounter little
competition from other thoroughbred races.
Live Racing
The Company ran its first thoroughbred meet from September 1, 1997
through October 12, 1997. Racing was conducted Wednesday through Sunday of each
week with an average of nine races per day. The Company will hold its first
harness racing meet beginning April 24, 1998 through July 5, 1998. The Company
will hold its next thoroughbred meeting commencing August 24, 1998 through
October 12, 1998. The Company has also been selected to host the Breeders Crown
races which will be held on the weekends of November 7 and 8 and November 13 and
14, 1998.
Revenues from live racing at the Track consist of the total amount
wagered, less the amount paid as winning wagers. Of the amount not returned to
bettors as winning wagers, a portion is paid to New Kent County, Virginia (where
the Track is located), the Commonwealth of Virginia and the Virginia Breeders'
Fund, and the balance is divided between the Company and purses for the horsemen
at the Track. The Virginia Racing Act specifies the maximum percentages of each
dollar wagered on horse races in Virginia which can be retained by the Company
(prior to required payments to the Breeders' Fund and applicable taxing
authorities). The percentages vary, based on the type of wager. For win, place
and show wagering the amount of the take out is 18% of the amounts wagered. For
all other forms of wagering (exacta, trifica and other "exotic" wagers), the
permitted take out is 22%. The average percentage is approximately 21%. The
balance of each dollar wagered must be paid out to the public as winning wagers.
The Company's revenues on each race are determined pursuant to the Virginia
Racing Act. Amounts payable for purses are determined under agreements with the
Virginia Horseman's Benevolent and Protective Association ("VaHBPA") and the
Virginia Harness Horse Association ("VHHA") (collectively, the "Associations").
See Purses; Agreements With Horsemen.
Racing Center Wagering
At the Racing Centers, as at the Track, customers place wagers on
thoroughbred and harness races simulcast from the Company's Track and on import
simulcast races from other tracks around the country. Under the Virginia Racing
Act, only licensed owners and operators, such as the Company, can operate Racing
Centers or accept customer wagers on simulcast races at a Virginia racetrack.
The Company, through its subsidiaries, is the sole holder of such licenses. The
Company currently operates four Racing Centers in Richmond, Chesapeake,
Brunswick and Hampton and under Virginia law can open two additional facilities.
The Company is in the process of identifying localities for referenda on
additional Racing Centers. The Company unsuccessfully sought approval in
referenda in Manassas Park (November 1996), Fredericksburg (November 1997),
Martinsville (November 1997) and Roanoke (November 1997). The Company intends to
continue pursuing possible locations until such time as the Company has opened
as many Racing Centers as are authorized under Virginia law.
Simulcasting
Simulcasting involves broadcasting a live race to other locations.
Wagers are then placed on the race being broadcast. The Company both imports
simulcast races from other tracks around the country as well as exports
simulcasts of its races to other venues. Generally, wagering conducted on
simulcast races is aggregated with the pool of wagers placed at the track at
which the live race is run and wherever the race is broadcast, so that track
odds are maintained. The Company has been receiving import simulcasts at its
Chesapeake Racing Center from racetracks in other states since February 1996 and
at its Richmond Racing Center since December 1996. The Company has been
receiving import simulcasts at its Brunswick and Hampton Racing Centers since
December 18, 1997 and December 23, 1997, respectively. At the Racing Centers,
the Company regularly receives import simulcasts from over 15 different
racetracks (including Belmont Park, Saratoga, Gulfstream Park, and Santa Anita)
during a day of operation.
The Company currently receives simulcast signals from these tracks
pursuant to an agreement with Penn National (the "Hubbing Agreement") under
which the Company receives the benefit of Import Simulcasting terms negotiated
by Penn National with other racetracks. The Company believes that these terms
may be more favorable than the terms it could separately negotiate with such
racetracks because of the economies of scale achieved under the Hubbing
Agreement. The original term of the Hubbing Agreement expired December 31, 1996,
and the Company and Penn National have elected to extend the agreement on a
month-to-month basis.
The Company intends to increase the number and quality of races it
imports for simulcast wagering in the future. The Company believes that by
simulcasting high-quality races from nationally known racetracks it will
increase the number of wagerers as well as the size of the average wager. The
Company's success in implementing this strategy will depend upon the terms it
negotiates individually and in conjunction with Penn National with such tracks.
The Company believes that simulcasting diminishes the negative effect
of inclement weather on wagering. Indoor facilities featuring simulcasting make
available wagering on races from racetracks regardless of local weather.
Typical simulcast arrangements usually require the receiver of a signal
to pay a fee equal to approximately 2% to 4% of the handle (the total amount
wagered at the off-track facilities) attributable to such signal. The Company
has entered into an agreement with Maryland-Virginia Racing Circuit, Inc., which
is affiliated with the owners of the Pimlico and Laurel racetracks in Maryland
(collectively, "Maryland Jockey Club"). The Company sends its live racing signal
to the Maryland tracks and the Maryland tracks send their live racing signals to
the Track and the Company's current and future Racing Center facilities at no
cost to either party. Wagers placed at the Company's Racing Centers on races run
at other racetracks are treated as part of the common pari-mutuel wagering pool
at that track. From such a pool, a fixed percentage is paid out as winning
wagers. Winning wagers paid at the Company's Racing Centers may be
disproportionate to the winning wagers to be paid from the entire pari-mutuel
pool for a particular race. Accordingly, to the extent the Company paid out more
or less than its share of winning wagers, it is obligated to pay or be paid
funds from the track at which the race originated. In contracting for the
receipt of simulcast signals, the Company agrees with the originators of the
signals for the reconciliation of winning wagers. The reconciliation occurs on a
daily basis with cash reconciliation occurring each week. Through the Hubbing
Agreement, Penn National handles the Company's weekly reconciliation with other
tracks, and the Company settles with Penn National each week. It is possible
that the Company could fail to receive reimbursement for funds to which it is
entitled under the Hubbing Agreement. Historically, the Company has not
experienced such collection problems.
Import Simulcasting of races from other tracks, especially from
nationally known tracks in other states, may compete with wagering on live races
run at the Track. The Company believes, however, that simulcasting of
out-of-state races, and making available wagering on higher quality races, will
increase the number of wagerers as well as the size of the average wager.
Marketing
The Company seeks to increase wagering by broadening its customer base
and increasing the wagering activity of its existing customers. To attract new
customers, the Company seeks to increase the racing knowledge of its customers
by providing "user friendly" automated wagering systems and comfortable
surroundings. The Company also seeks to attract new customers by offering
various types of promotions including premium give-away programs, contests and
handicapping seminars.
The Company also seeks to expand its patron base by establishing the
Track as a tourist destination. The Track is centrally located among existing
tourist attractions - Paramount's Kings Dominion to the northwest and Colonial
Williamburg and Busch Gardens to the west, each of which are within forty-five
miles by highway of the Track. The Company is working with tour and bus
companies to include the Track in their itineraries.
Automated Wagering Systems
To make wagering more "user friendly" to the novice and more efficient
for the expert, the Company leases Autotote Corporation's automated wagering
equipment for its Racing Centers. These wagering systems enable the customer to
choose a variety of ways to place a bet through touch-screen interactive
terminals and personalized portable wagering terminals, provide current odds
information and enable customers to place bets and credit winning tickets to
their accounts.
Modern Facilities
The Company provides a comfortable, upscale environment at each of its
Racing Centers, including a full bar, a range of restaurant services and an area
devoted to televised sporting events. The Company believes that its attractive
facilities appeal to its current customers and to new customers, including those
who have not previously visited a Racing Center.
At the Track, the grandstand has an occupancy capacity of approximately
4,000 patrons. The front apron accommodates an additional 4,000 people and, on
special event days, the grass picnic area east of the grandstand accommodates an
additional 3,000 non-reserved seats in bleachers and on benches. Valet and
general paved parking is available for over 1,825 vehicles. Additional unpaved
parking is available for large and capacity crowds.
The grandstand and clubhouse has five levels. A grandstand area is on
the first level where patrons enter the facility, together with two simulcast/TV
amphitheaters, two covered patio seating areas, four bars, one large concession
center court, gift shop, restrooms, and wagering locations with approximately 60
tellers. The second level houses administrative offices and a kitchen. The main
grandstand area is located on the third level together with a full-service
dining area with a seating capacity of 548 patrons, an additional 304 box seats,
two separate lounge areas and additional wagering locations with 38 tellers. Ten
suites with sky box seating and a private club are located on the fourth level.
The fifth level houses the judges' room, stewards' room, a press agents' room,
photo finish services, a video room, the announcers' room, the audio/video
control room and a VIP room.
Virginia-Maryland Thoroughbred Circuit
To provide experienced management for the Track and promote
thoroughbred racing in Virginia and Maryland, the Company has entered into an
agreement with Maryland Jockey Club, to create a Virginia-Maryland thoroughbred
racing circuit. Under this agreement (the "Management and Consulting
Agreement"), the Maryland Jockey Club will seek permission each year to cease
live racing during the Company's thoroughbred meets. While the Maryland
thoroughbred tracks are not conducting live racing, the Company expects to
attract the thoroughbred race horses that typically have run at the Maryland
racetracks at that time. The Management and Consulting Agreement further
provides that the Maryland Jockey Club will provide experienced personnel from
Laurel Park and Pimlico Race Course to assist the Company in managing its live
thoroughbred meet at the Track. The Company has agreed to pay the Maryland
Jockey Club a management fee equal to two percent of all amounts wagered at the
Company's facilities other than on live standardbred racing, which management
fee represents approximately 10% of the Company's revenues from wagering.
The Virginia-Maryland thoroughbred circuit was created in part to
address the perceived shortage of quality thoroughbred race horses available for
racing at U.S. tracks. During its inaugural meet, the Company appears to have
successfully attracted a substantial number of thoroughbred horses that have
historically raced at Laurel Park and Pimlico Race Course. During the 1997
season, only racing on the Track's dirt course was available. Turf racing is
expected to be conducted at the 1998 meet, which is expected to result in
additional Maryland horses racing at the Track. Additionally, the Company will
intensify its efforts to recruit quality thoroughbred horses from other locales
for the 1998 meet. The availability of the turf course for the 1998 season is
anticipated to enhance the Company's ability to attract such horses.
Purse Structure
The Company has taken steps to ensure competitive purses to attract
horse owners to race at the Track. The Company guaranteed purses of $150,000 per
day for not less than 30 days of racing for each of the 1997 and 1998
thoroughbred meets, and minimum purses of $50,000 per day for not less than 50
days for each of the 1998 and 1999 standardbred meets. The Company expects its
purses to be competitive with purses at tracks in the mid-Atlantic market that
conduct meets concurrently with the Company's meets, with the possible exception
of Delaware Park and Charles Town, West Virginia, each of which have recently
legalized VLTs or slot machines, which will likely increase the purses offered
at such racetracks. (Charles Town's purses are not currently competitive with
the Company's purses. Delaware Park's purses exceed the Company's purses.)
The guaranteed purse structure arises from the Company's agreements
(the "Purse Agreements") with the Associations. Pursuant to the agreements with
the VaHBPA, the Company has agreed, among other things, to contribute to its
thoroughbred purse account, a certain percentage (approximately 5.25%) of all
money wagered on thoroughbreds at its Racing Centers until such account
accumulates a total of $4.5 million. (Under the Virginia Racing Act, the Company
is also required to contribute, on average, approximately 8.5% of all money
wagered at the Track on live racing to the purse account and these funds are
credited to the $4.5 million guarantee.) If such funds are less than $4.5
million, the Company will contribute one half of the deficiency and loan the
remaining one half of the deficiency. The agreements with the VHHA reflect a
similar arrangement, and requires the Company, among other things, to contribute
to its standardbred purse account a certain percentage (approximately 5%) of all
money wagered on harness racing at its Racing Centers until such account
accumulates a total of $2.5 million.
If the total thoroughbred and standardbred purse contributions for any
year are greater than $4.5 million and $2.5 million, the Company may be required
to make a purse contribution in excess of the minimum amounts based upon a
formula which adjusts the Company's net income for items such as cost of equity
capital and certain operating expenses. For the year ended December 31, 1997,
the Company was not required to make a purse account contribution in excess of
the minimum amounts. These additional contributions, if any, to the purse
accounts are expected to enhance the Company's ability to attract quality horses
to the Track and, as a result, to sell the Company's export simulcast signal.
In addition, the Purse Agreements address, among other things, the
sharing of export simulcast net revenues, the setting of a schedule of purse
amounts, preparation of conditions for races, reconciliation of any over or
under payment of purse amounts, the number of Virginia-bred races to be run at
each meet, the availability of stalls and track facilities during and after
meets, and the sharing of revenues, if any, from television (other than
simulcasting) or radio broadcasts of races run at the Track.
Each Purse Agreement expires on December 31, 1998 (except as it relates
to the 1999 standardbred meet), and renews automatically for successive one year
terms. Contributions to the purse accounts after December 31, 1998 are to be
negotiated in good faith by the parties based upon annual budgets prepared by
the Company. These budgets will contain provisions for net after-tax return
consistent with prior years and purse contributions necessary to attract quality
horses to race at the Track.
Because the Company commenced simulcast operations prior to the
commencement of live racing, it has entered into two separate agreements--a live
racing agreement and a Simulcast Wagering agreement--with each horsemen group.
After 1998, the Company likely will enter into a single agreement with each
horsemen group. The agreements are not mandated by law; however, each contains
the horsemen group's consent to the receipt and sending of simulcast signals in
compliance with the Interstate Horse Racing Act.
Competition
The Company is subject to competition from racetracks located outside
Virginia (including several in Delaware, Maryland, New Jersey, New York,
Pennsylvania, and West Virginia) and other forms of gaming, such as land-based
casinos, including those in Atlantic City, and statewide lotteries in Virginia
and in neighboring states. The Company will also face competition from a wide
range of entertainment options, including live and televised sporting events and
other recreational activities. The possible legalization of other forms of
gaming in Virginia, such as riverboat casino gaming, also could have an adverse
effect on the Company's business. Although bills for the creation of riverboat
gaming have failed in the Virginia legislature, proponents of riverboat gaming
in Virginia may continue to seek legislative approval. It is not possible, at
this time, to determine if or when additional forms of gaming will be permitted
in Virginia or neighboring states and, if so, the impact, if any, on the
Company. If additional gaming opportunities become available in or around
Virginia, such as in Maryland, and the Company is unable to participate in such
gaming opportunities, it could have a material adverse effect on the Company and
its operations.
The Company competes and will compete for wagering dollars and
simulcast fees with live racing and races simulcast from horse racetracks in
other states, particularly racetracks in neighboring states such as Charles Town
in West Virginia, Pimlico Race Course, Laurel Park and Rosecroft Raceway in
Maryland, and Delaware Park in Delaware. In addition, patrons may be attracted
to thoroughbred races in Maryland during the Company's harness racing meet. The
Company believes that the Management and Consulting Agreement will promote
coordination of thoroughbred events between the two states. However, if the
Virginia or Maryland Racing Commissions do not approve a party's proposed racing
days, or if the Virginia-Maryland thoroughbred racing circuit is otherwise
unsuccessful, the Track may compete directly with thoroughbred racetracks in
Maryland. In addition, new racetracks could be constructed in adjacent states
that would compete with the Track, or new licenses could be granted to Company
competitors in Virginia. Based on the stated intent of the Virginia Racing
Commission, the Company does not believe that the Virginia Racing Commission is
likely to grant licenses to other entities in the foreseeable future.
The Company anticipates competition from VLTs and slot machines, in
particular. Delaware legalized slot machines at three racetracks as of January
1, 1996. Slot machines have been installed at Delaware Park, Dover Downs and
additionally, VLTs have been legalized and installed at Charles Town racetrack
in Lewistown, West Virginia. VLTs and slot machines are prohibited in Virginia.
The Company believes that the legalization of VLTs and slot machines in
neighboring states may adversely affect its business in two ways. First, VLTs
and slot machines may attract the Company's potential Racing Center and Track
customers, thereby reducing the Company's revenues. Second, racetracks with VLTs
and/or slot machines generally are required to devote a significant portion of
VLT and/or slot machine revenues to the purses for which horses race. As a
result, such racetracks may be able to offer higher purses than the Track, and,
consequently, the Company may encounter difficulty in attracting horsemen to
race at the Track if other nearby racetracks offer higher purses.
Seasonality and the Effects of Inclement Weather
Revenues (and expenses relating to the Track) may be higher during
scheduled live racing than at other times of the year. In addition, weather
conditions sometimes cause cancellation of outdoor horse races or curtail
attendance, both of which reduce wagering. Attendance and wagering at both
outdoor races and indoor Racing Centers also may be adversely affected by
certain holidays and professional and college sports seasons as well as other
recreational activities. Conversely, attendance and wagering may be favorably
affected by special racing events which stimulate interest in horse racing, such
as the Triple Crown races in May and June and the Breeders' Cup in November and
the hosting of the Breeders Crown at the Track. As a result, the Company's
revenues and net income may fluctuate from quarter to quarter. Given that a
substantial portion of the Company's Track expenses are fixed, the loss of
scheduled racing days could have a material adverse affect on the Company's
profitability. The Company believes that simulcasting diminishes the effect of
inclement weather on wagering.
Government Regulation
The Company's success is dependent upon continued government and public
acceptance of horse racing as a form of legalized gaming. Although the Company
believes that pari-mutuel wagering on horse racing will continue to be legal in
Virginia, gaming has come under increasing scrutiny nationally and locally. The
United States Congress recently passed legislation creating a national gaming
study commission (the "National Gaming Commission"). The National Gaming
Commission has the duty to conduct a comprehensive legal and factual study
of gambling in the United States and existing federal, state, and local policies
and practices with respect to the legalization or prohibition of gambling
activities, to formulate and propose changes in such policies and practices, and
to recommend legislation and administration actions for such changes. It is not
possible to predict the future impact of any such proposals on the Company and
its operations. Any such proposals could have a material adverse effect on the
Company's business. Opposition to the Virginia Racing Act has been
unsuccessfully introduced in the Virginia legislature in the past, but
additional legislative opposition may arise in the future. If the Virginia
Racing Act were repealed or materially amended, such action could have a
material adverse effect on the Company's business of pari-mutuel wagering.
Virginia Racing Act. Under the Virginia Racing Act, the Virginia Racing
Commission is vested with control over all aspects of horse racing with
pari-mutuel wagering and the power to prescribe regulations and conditions under
which such racing and wagering are conducted. The Virginia Racing Commission is
responsible for, among other things, (i) conducting an annual review of the
Company's Track and Racing Center licenses, (ii) annually approving the
Company's proposed schedule of racing days, (iii) approving new or modified
types of pari-mutuel wagering pools requested by the Company, (iv) issuing
permits to all officers, directors, racing officials, and other employees of the
Company, and (v) approving simulcast schedules at the Track and at the Racing
Centers. The Virginia Racing Commission also has the authority to promulgate
regulations pertaining to the Company's Track facilities, equipment, safety and
security measures, and controls the issuing of licenses and permits for
participants in pari-mutuel racing, including Company employees at the Track and
at the Racing Centers and the Maryland Jockey Club as manager of the Company's
thoroughbred meets pursuant to the Management and Consulting Agreement. In
addition, the Virginia Racing Commission must approve any acquisition or
continuing ownership of a 5% or greater interest in the Company. Action by the
Virginia Racing Commission that is inconsistent with the Company's business plan
could have a material adverse effect on the Company.
The licenses issued by the Virginia Racing Commission to the Company
are for a period of not less than 20 years, but are subject to annual review by
the Virginia Racing Commission. It is possible that such licenses will not be
renewed or that such licenses could be suspended or revoked by the Virginia
Racing Commission for violations of the Virginia Racing Act or Virginia Racing
Commission rules.
Other State and Local Regulation. The Company, the Track, and the
Racing Centers are also subject to a variety of other laws and regulations,
including zoning, construction, and land-use laws and the regulations of the
Virginia Alcoholic Beverage Control Board. Such laws and regulations may affect
the selection of Racing Center sites because of parking, traffic flow, and other
similar considerations. Any interruption or termination of the Company's
ability, or that of its concessionaires, to serve alcoholic beverages could have
a material adverse effect on the Company.
Federal Regulation. The Company's interstate simulcast operations are
subject to the provisions of the federal Interstate Horse Racing Act, which
regulates interstate off-track wagering. In order to conduct wagering on import
simulcasting at the Track or any Racing Center, the Interstate Horse Racing Act
requires the Company to obtain the consent of the Virginia Racing Commission,
the consent of the racing commission of the state where the horse racing meet
originates and the consent of the representative horsemen groups in the
originating state. To conduct Export Simulcasting, the Company must obtain the
consent of the VaHBPA or the VHHA, as the case maybe, and the Virginia Racing
Commission. Also, in the case of off-track wagering to be conducted at any of
the Company's Racing Centers, the Interstate Horse Racing Act requires the
Company to obtain the approval of all currently operating horse racetracks
within sixty miles of the Racing Center or, if there are no currently operating
tracks within sixty miles, the approval of the closest operating horse
racetrack, if any, in an adjoining state. Significant delay in obtaining such
consents and approvals or failure to obtain such consents or approvals could
have a material adverse effect on the Company.
Future Regulation. The Company's operations may become subject to
additional regulation from any of the foregoing or from other governmental
bodies. Such additional regulation could have a material adverse effect on the
Company.
Taxation
The Company is subject to a number of federal, state, and local taxes
and fees. These include fees to support the Virginia Breeders' Fund, taxes
payable to the Commonwealth of Virginia, taxes payable to New Kent County where
the Track is located, and taxes payable to localities in which Racing Centers
are located based upon the amount of monies wagered both at the Track and at the
Company's Racing Centers. The Company believes that the public acceptance of
pari-mutuel wagering on horse races, as well as other forms of gaming, is based,
in part, on the governmental revenues it generates from taxes and fees on such
activities. It is possible that gaming activities, including horse racing, may
become a target for additional federal, state, or local taxes and fees. A
significant increase in such taxes or fees or the creation of significant
additional taxes or fees could have a material adverse effect on the Company.
Employees And Labor Relations
At December 31, 1997, the Company had 376 permanent employees, of whom
36 were full-time and 340 part-time. Of the total employees, 52 were employed at
the Track, and 324 were employed at the Company's Racing Centers. During the
live thoroughbred meet, the Company hires 250 to 300 additional persons and
during the standardbred meet an additional 150 to 200 persons.
ITEM 2 PROPERTIES
Track
The Track site consists of approximately 345 acres of land located
approximately 25 miles east of Richmond, Virginia and approximately 25 miles
west of Williamsburg, Virginia. The Track includes a dirt race track, a unique
180 foot wide turf track, a five-level grandstand with ten luxury sky suites,
bleachers, six bars, a gift shop, two simulcast/TV amphitheaters, and over 95
wagering stations. The Track site is located in an area that Chesapeake
Corporation, its subsidiaries and possibly other developers, plan to develop
into a resort area. An 18-hole golf course adjacent to the Track site was opened
in July 1996 by The Legends Golf Group, a golf course developer based in Hilton
Head, South Carolina. Future development plans for the area include hotels,
theaters, restaurants, additional golf courses, commercial offices, and
residential development. This development is planned to occur in four phases
over the next 25 years. The first phase of development is in the areas adjacent
to the Track site and the golf course and is expected to be completed over the
next eight years. According to plans filed with New Kent County by the
developer, 460 residential units and approximately 930,000 square feet of
commercial space will be completed in the next three years. New Kent residents
have demonstrated support for this development, but the Company has no control
over the extent and timing of the development or the grant of governmental
approvals required for its completion as planned.
Racing Centers
The Company's Racing Centers provide areas for viewing import
simulcasts and televised sporting events, placing pari-mutuel wagers and dining.
The facilities also provide convenient parking.
The Company's current Racing Center properties are described in the
following chart:
Location Owned or Leased Building Size (in square feet)
Brunswick Owned Approx. 8,000
Chesapeake Leased Approx. 15,000
Hampton Owned Approx. 13,500
Richmond Owned Approx. 20,000
ITEM 3 LEGAL PROCEEDINGS
The following claims were asserted as of December 31, 1997:
Norglass, Inc. The Partnership is engaged in a contract dispute under
the Construction Agreement, dated February 10, 1997 (the "Construction
Contract") between the Partnership and Norglass, Inc. ("Norglass"). Pursuant to
the terms of the Construction Contract, the Partnership is proceeding before the
American Arbitration Association ("AAA") against Norglass, the general
contractor engaged to manage the construction of Colonial Downs' racetrack. In
the proceeding, the Partnership challenges the validity of Norglass' mechanic's
liens for approximately $11.8 million (subsequently reduced to $6.5 million) and
asserts a damage claim against Norglass in an amount not less than $4.4 million.
The Partnership is vigorously pursuing its claims against Norglass and is
vigorously defending against claims for payment by Norglass under the
Construction Contract. If the Partnership does not prevail in its claims and
assuming it receives credit against Norglass' claims for the amount the
Partnership has paid directly to the subcontractors, its potential liability,
included in accounts payable at December 31, 1997, is approximately $1.9 million
in construction costs, plus interest, from a date to be established and legal
fees. Additionally, it will be unable to recover approximately $3.8 million it
has paid to subcontractors of Norglass.
Subcontractor Liens. In connection with the dispute with Norglass,
subcontractors of Norglass and parties claiming direct contracts with the
Partnership and the Corporation filed mechanic's liens against the property in
the aggregate amount of approximately $4 million. As of the date hereof, all but
$501,000.00 of such mechanic's liens have been released. Colonial Downs is
negotiating with these subcontractors and contractors for the release of the
balance of such liens.
Maryland-Virginia Racing Circuit, Inc. On January 8, 1998, Colonial
Downs filed a demand for arbitration against the Maryland-Virginia Racing
Circuit, Inc. ("MVRC") before the Virginia Racing Commission (the "Commission").
In its arbitration demand, Colonial Downs challenged the management fee claimed
to be due by MVRC pursuant to a Management and Consulting Agreement dated as of
April 22, 1996 (the "Consulting Agreement") between Colonial Downs and MVRC. The
arbitration is based upon the fact that the demanded compensation under the
Consulting Agreement has failed to consider certain changed circumstances as
well as the original intent of the parties. Specifically, the compensation
demanded by MVRC has been based upon the assumptions that MVRC was to manage a
102-day thoroughbred racing season at Colonial Downs' racetrack and during that
102-day season the Maryland tracks owned and operated by MVRC would be closed.
In reality, however, the number of thoroughbred race days has been (and will be
for the foreseeable future) much less and MVRC has failed to close its Maryland
tracks as contemplated. As a result, Colonial Downs has requested that the
Commission (as provided in the Agreement) arbitrate this dispute and reform the
Consulting Agreement accordingly, thereby reducing the compensation to MVRC to
reflect the fewer number of race days during which MVRC is actually managing
Colonial Downs' thoroughbred season. In the alternative, Colonial Downs has
requested the Commission to declare the Consulting Agreement null and void and
to direct the parties to enter into a new agreement. The Commission declined
Colonial Downs' request that it arbitrate the dispute on January 21, 1998; hence
a third-party arbitrator must be named. As of December 31, 1997, Colonial Downs
had withheld payment of $487,648.00 of the management fee purported due MVRC.
Richmond Racing Center. The Partnership intervened as a defendant in
Robin J. Pearsall and Monument Avenue Park Association v. The Virginia Racing
Commission (Case No. HH777-3) then pending in the Circuit Court of the City of
Richmond. The plaintiffs challenged the award of licenses to the Partnership and
Racing for the ownership and operation of a Racing Center in Richmond, Virginia.
The plaintiffs asserted that the requisite referendum held in Richmond was void
and that the Commission exceeded its statutory authority in considering the
Partnership's amendment to its application for the licenses and granting the
licenses. Accordingly, the plaintiffs asserted that the licenses were void.
Pursuant to an order and opinion dated February 20, 1997, the Circuit Court
ruled that the plaintiffs had no standing to bring suit and dismissed the case.
The plaintiffs appealed to the Virginia Court of Appeals. The Virginia Court of
Appeals affirmed the Circuit Court's decision by order and opinion dated January
20, 1998. The time for the appeal of the Court of Appeal's decision has expired.
Vendor Dispute. One of the Company's vendors that provides marketing
services has asserted a claim for an additional $30,000 to $150,000 against the
Company. McGrath/Crossen Associates claims that it provided services in addition
to those for which it was previously paid and has demanded additional payment.
Although a claim has been threatened, no suit has been filed. The Company
disputes that any amounts are due.
The Company has a number of other outstanding claims that arise in the
ordinary course of business and that individually and in the aggregate are
immaterial.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on The NASDAQ National Market
under the symbol "CDWN". The following table sets forth for the periods
indicated the high and low closing sales prices per share of the Company's
Common Stock as reported on The NASDAQ National Market since the date on which
the Class A Common Stock commenced trading.
HIGH LOW
1997
First Quarter 9.500 7.375
Second Quarter 7.875 6.500
Third Quarter 9.375 6.438
Fourth Quarter 7.250 3.500
The closing price as of March 26, 1998 was $4.375 per share of Class A
Common Stock. There are approximately 3,100 holders of record of Class A Common
Stock. The Company's stock began trading on March 18, 1997.
There is no established market for the Class B Common Stock. There are
five holders of record of Class B Common Stock.
Dividend Policy
The Company has not paid any dividends to date and does not anticipate
paying any dividends on any class of its Common Stock in the foreseeable future
and intends to retain earnings to finance the development and expansion of its
operations. The payment of any future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, future
earnings, operations, capital requirements, the financial condition of the
Company and general business conditions.
Recent Sales of Unregistered Securities
None.
<PAGE>
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for
the years ended December 31, 1997, 1996, 1995, 1994 and 1993, except for Other
Data, are derived from financial statements that have been audited by BDO
Seidman, LLP independent certified public accountants, adjusted as described in
the notes below. The selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements, and Notes related
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial information included herein.
<TABLE>
<CAPTION>
Year Ended December 31, (1)
1997 1996 1995 1994 1993(2)
---- ---- ---- ---- -------
(in thousands)
<S> <C>
Income Statement Data:
Total Revenues $ 23,647 $ 8,527 $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
Loss from operations (467) (469) (318) (19) (17)
----------- ----------- ----------- ----------- -----------
Net earnings (loss) before income taxes 92 (645) (320) (19) (17)
Taxes on income 84 -- -- -- --
----------- ----------- ----------- ----------- -------------
Net earnings (loss) $ 8 $ (645) $ (320) $ (19) $ (17)
=========== =========== =========== ============ =============
Basic and diluted net earnings (loss) per share $ 0.01 $ (0.22) $ (0.11) $ (0.01) $ (0.01)
Weighted average number of shares
outstanding(3) 6,318,000 3,000,000 3,000,000 3,000,000 3,000,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
<S> <C>
Balance Sheet Data:
Current assets $ 6,013 $ 1,765 $ 330 $ 2 $ --
Total assets 67,875 12,176 3,142 667 227
Working capital (9,467) (5,925) (1,589) (669) (213)
Short-term debt, including
current portion of long-term
debt 1,373 1,685 632 671 213
Long-term debt, excluding
current portion 15,390 3,491 1,548 -- --
Total liabilities 30,954 11,182 3,467 671 213
Shareholders' equity (deficit) 36,921 995 (325) (4) 14
At December 31,
1997 1996 1995
Other Data (in thousands): ---- ---- ----
EBITDA (4) $ 188 $ (184) $ (315)
Net cash provided (absorbed) by:
Operating activities $ 3,053 $ 327 $ (160)
Investing activities $ (48,851) $ (3,999) $ (920)
Financing activities $ 47,767 $ 4,722 $ 1,408
<PAGE>
Brunswick Chesapeake Hampton Richmond Track
--------- ---------- ------- -------- -----
Operating Data:
Days of operation 14 363 7 363 64
Total pari-mutuel wagering (in
thousands) $ 226 $ 35,139 $ 328 $ 51,302 $ 7,891
Average daily wagering (in thousands) $ 16 $ 97 $ 47 $ 141 $ 123
Total attendance 1,522 148,290 1,454 205,491 111,626
Average daily attendance 109 409 208 566 1,744
Average daily per capita wager $ 148 $ 237 $ 226 $ 250 $ 71
</TABLE>
(1) The consolidated financial statements of the Company include entities
which prior to the Reorganization (see Note 1 to consolidated financial
statements) were affiliated through common ownership and control.
(2) From inception on September 30, 1993 to December 31, 1993.
(3) Based on 3,000,000 shares of Common Stock outstanding before the initial
public offering ("IPO") and 7,250,000 shares of Common Stock outstanding
after the IPO.
(4) EBITDA consists of the sum of the Company's net earnings (loss), net
interest expense and depreciation and amortization. EBITDA data is
unaudited and is presented because such data is used by certain investors
to determine the Company's ability to meet debt service requirements. The
Company considers EBITDA to be an indicative measure of the Company's
ability to service debt and fund capital expenditures. However, such
information should not be considered as an alternative to net earnings
(loss), operating loss, cash flows from operations, or any other
operating or liquidity performance measure prescribed by generally
accepted accounting principles. EBITDA is not a measurement under
generally accepted accounting principles and may not be comparable to
other similarly titled measures presented by other companies. Cash
expenditures for various long-term assets and interest expense have been,
and will be, incurred which are not reflected in the EBITDA presentation.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company was organized to pursue opportunities for horse racing and
pari-mutuel wagering and holds the only licenses to own and operate a racetrack
and racing centers in Virginia. The Company currently operates Racing Centers in
Chesapeake, Richmond, Hampton, and Brunswick, and may apply for licenses for up
to two additional Racing Centers if suitable opportunities are identified. In
September and October 1997, the Company completed its inaugural thirty day
thoroughbred live meet at the Track in New Kent County, Virginia. Both
thoroughbred and standardbred live meets are planned for 1998.
The Company's revenues are comprised of (i) pari-mutuel commissions
from wagering on races broadcast from out-of-state racetracks to the Company's
Racing Centers and the Track using Import Simulcasting; (ii) wagering at the
Track and the Company's Racing Centers on its live races; (iii) admissions fees,
program, racing form and tip sheet sales, and certain other ancillary
activities; (iv) rent from food and beverage sales and concessions; and (v) fees
from wagering at out-of-state locations on races run at the Track using Export
Simulcasting.
The amount of revenue the Company earns from each wager depends on
where the race is run and where the wagering takes place. Revenues from Import
Simulcasting of out-of-state races and from wagering at the Track and at the
Racing Centers on races run at the Track consist of the total amount wagered at
the Company's facilities, less the amount paid as winning wagers. The percentage
of each dollar wagered on horse races that must be returned to the public as
winning wagers (typically approximately 79%) is legislated by the state in which
a race takes place. Revenues from Export Simulcasting will consist of amounts
payable to the Company by the out-of-state racetracks and the racing centers
with respect to wagering on races run at the Track.
The Company's revenues are heavily dependent on the operations of its
Racing Centers. Revenues from the Racing Centers help support live racing at the
Track. Until the Company opens its fifth and sixth Racing Centers or acquires
other sources of revenues, the Company expects to achieve results similar to
those in 1997. Although revenues from the first months of operations of the
Hampton and Brunswick Racing Centers have been lower than anticipated,
management expects additional marketing efforts will improve those centers'
performance.
The Company's operating expenses include (i) purses payable to the
horsemen for races run at the Track; (ii) amounts payable to host racetracks for
import simulcast races (approximately 3% of amounts wagered on such races at the
Company's Racing Centers and Track); (iii) a management fee of 2% of amounts
wagered (other than on standardbred races run at the Track) payable to the
Maryland Jockey Club, which represents approximately 10% of the Company's
revenues; (iv) pari-mutuel taxes payable to the Commonwealth of Virginia, New
Kent County, and the locality of each Racing Center, which represents about 2.5%
of all amounts wagered and 12.5% of the Company's revenues; (v) 1% of all
amounts wagered payable to the Virginia Breeders Fund (about 4.9% of revenues);
(vi) totalisator, video and audio expenses at the Company's Racing Centers and
the Track; (vii) direct salaries, payroll, and benefit expenses; and (viii)
other direct and indirect operating expenses.
For further information on the Company's business environment and
strategies, refer to the discussion in Item 1 - Business.
Results Of Operations
The following table presents the major components from the Company's
consolidated statements of earnings as a percent of total revenues:
Year Ended December 31
----------------------
1997 1996
---- ----
Revenues:
Pari-mutuel and simulcasting commissions.. 88.3% 92.0%
Other .................................... 11.7 8.0
----- -----
Total revenues ...................... 100.0 100.0
Direct operating expenses:
Purses, fees, and pari-mutuel taxes ...... 43.0 47.0
Simulcast and other direct expenses ...... 37.8 35.0
----- -----
Total direct operating expenses ..... 80.8 82.0
Selling, general, and administrative expenses.. 21.2 23.5
----- -----
Loss from operations .......................... (2.0) (5.5)
Interest income (expense) ..................... 2.4 (2.1)
----- -----
Earnings (loss) before taxes .................. .4% (7.6)%
===== =====
Comparison of Fiscal 1997 to Fiscal 1996
Total revenues in fiscal 1997 were $23.6 million, an increase of $15.1
million (177%) over fiscal 1996 revenue of $8.5 million. The increase primarily
reflects the operation of the Richmond Racing Center for a full year in 1997
versus only 21 days in 1996 ($11.1 million), and the operation of the thirty day
inaugural live thoroughbred meet held September-October 1997 ($3.5 million).
Operating expenses in 1997 of $24.1 million increased $15.1 million
(168%) from $9.0 million in 1996. The overall increase was primarily
attributable to higher expenses ($8.6 million) resulting from a full year of
operations in the Richmond Racing Center versus only twenty-one days in 1996,
and the costs associated with conducting the inaugural thirty day live
thoroughbred meet in 1997 ($6.1 million). Also affecting the 1997 increase over
1996 operating expenses were referenda campaign costs incurred ($.59 million) in
the Company's attempt to win voter approval for additional Racing Centers in
targeted Virginia localities, start-up marketing expenses of approximately
$900,000 to familiarize Virginians with pari-mutuel wagering and an increase in
depreciation expense as a result of the completion of the Track. The Company
also incurred expenses of approximately $300,000 in connection with its
day-to-day operations of the thoroughbred meet that it does not expect to incur
in 1998.
The loss from operations of $466,692 remained substantially
unchanged from 1996 due to the factors discussed above.
Other income increased to $559,000 in 1997 compared to other expense of
$177,000 in 1996, primarily reflecting the interest income earned on the
proceeds from the Company's initial public offering in March 1997.
Net income increased by approximately $653,000 from a loss of $645,000
in 1996 to earnings of $7,863 for the year ended December 31, 1997, reflecting
the factors described above.
Prior Fiscal Years
The Company had no meaningful operations prior to the opening of the
Chesapeake facility in February 1996. The Company had four employees before
staffing the Chesapeake Racing Center; after its opening, the Company had
approximately 160 employees. As a result, the Company reported no revenue from
its inception on September 30, 1993 until February 1996. The Company incurred
costs since its inception in obtaining the licenses and developing the Track and
Racing Centers. The majority of costs specific to the acquisition and
development of the Chesapeake Racing Center were incurred in fiscal 1995,
whereas those relating to the Richmond Racing Center generally were not incurred
until 1996.
Liquidity And Capital Resources
The Company's primary sources of liquidity and capital resources have
been proceeds from the initial public offering of the Company's stock, long-term
debt, and stockholders loans. The Company believes that its cash on hand, cash
generated from operations, its existing unused line of credit, and access to
other capital and financial resources will be sufficient to cover its
anticipated operating expenses and other cash requirements for 1998.
Net cash provided by operating activities grew to $3.1 million in 1997,
an increase of about $2.7 million from $327,000 in 1996. The increase was
primarily attributable to a $653,000 increase in earnings and a $3.1 million
increase in accounts payable, partially offset by increases in accounts
receivable and other assets.
Net cash used in investing activities totaled $48.9 million for fiscal
1997 and primarily included $47.1 million in capital expenditures for the
continued construction and completion of both the Track and the Company's new
Racing Centers in Hampton and Brunswick. The Company anticipates that its
capital spending in fiscal 1998 will approximate $800,000.
Net cash provided by financing activities was $47.8 million in fiscal
1997 compared to $4.7 million in the same period of the prior year. The increase
was primarily the result of the March 1997 initial public offering of 4,250,000
shares of common stock, which provided net proceeds of approximately $36.3
million, and a net increase in borrowing of $11.6 million. These proceeds were
primarily used to complete the construction of the Track, Hampton and Brunswick
Racing Centers.
The Company is currently assessing the impact of the year 2000 on the
processing of date-sensitive information by the Company's computerized
information systems and products purchased by the Company. The Company believes
that its internal information systems are either year 2000 compliant or will be
so prior to the year 2000 without incurring material costs. There can be not
assurance, however, that the Company will not experience unexpected costs and
delays in achieving year 2000 compliance for its internal information systems
and current products, which could result in a material adverse effect on the
Company's future results of operations.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C>
Assets
Current assets
Cash and cash equivalents $ 3,348,110 $ 1,379,884
Horsemen's deposits 1,656,529 337,738
Accounts receivable 293,101 38,519
Prepaid expenses and other 497,143 9,335
Refundable income taxes 217,956 -
- --------------------------------------------------------------------------------------------
Total current assets 6,012,839 1,765,476
- --------------------------------------------------------------------------------------------
Property and equipment 61,500,165 9,364,587
Less accumulated depreciation and amortization 659,957 126,167
- --------------------------------------------------------------------------------------------
Net property and equipment 60,840,208 9,238,420
- --------------------------------------------------------------------------------------------
Other
Licensing and organization costs, net of accumulated
amortization of $207,063 and $160,867 841,029 789,205
Miscellaneous 180,653 383,389
- --------------------------------------------------------------------------------------------
Total other 1,021,682 1,172,594
- --------------------------------------------------------------------------------------------
Total assets $67,874,729 $12,176,490
============================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C>
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $11,678,242 $ 3,567,388
Accrued expenses 637,063 480,356
Current maturities of long-term debt
and capital lease obligations 1,373,059 47,678
Notes payable - related parties - 1,637,619
Deferred revenue 194,625 -
Purses due horsemen 1,597,075 1,957,683
- ---------------------------------------------------------------------------------------------
Total current liabilities 15,480,064 7,690,724
- ---------------------------------------------------------------------------------------------
Long-term liabilities
Long-term debt and capital lease obligations,
net of current maturities 9,889,592 42,159
Notes payable - related parties 5,500,000 3,448,782
Deferred income taxes 84,000 -
- ---------------------------------------------------------------------------------------------
Total long-term liabilities 15,473,592 3,490,941
- ---------------------------------------------------------------------------------------------
Total liabilities 30,953,656 11,181,665
- ---------------------------------------------------------------------------------------------
Stockholders' equity
Common stock
Class A, $.01 par value, 12,000,000 shares
authorized; 5,000,000 and 750,000 shares outstanding 50,000 7,500
Class B, $.01 par value, 3,000,000 shares
authorized; 2,250,000 shares outstanding 22,500 22,500
Additional paid-in capital 37,842,054 1,966,169
Retained earnings (deficit) (993,481) (1,001,344)
- ---------------------------------------------------------------------------------------------
Total stockholders' equity 36,921,073 994,825
- ---------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $67,874,729 $12,176,490
=============================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Revenues
Pari-mutuel and simulcasting commissions $20,876,330 $7,847,822 $ -
Other 2,770,953 679,488 -
- ----------------------------------------------------------------------------------------------------------------
Total revenues 23,647,283 8,527,310 -
- ----------------------------------------------------------------------------------------------------------------
Operating expenses
Direct operating expenses
Purses, fees and pari-mutuel taxes 10,164,135 4,001,805 -
Simulcast and other direct expenses 8,936,255 2,986,438 -
- ----------------------------------------------------------------------------------------------------------------
Total direct operating expenses 19,100,390 6,988,243 -
Selling, general and administrative expenses 5,013,585 2,007,584 318,235
- ----------------------------------------------------------------------------------------------------------------
Total operating expenses 24,113,975 8,995,827 318,235
- ----------------------------------------------------------------------------------------------------------------
Loss from operations (466,692) (468,517) (318,235)
- ----------------------------------------------------------------------------------------------------------------
Other income (expense)
Interest expense (278,667) (183,118) (2,252)
- ----------------------------------------------------------------------------------------------------------------
Interest income 837,222 6,220 -
- ----------------------------------------------------------------------------------------------------------------
Total other income (expense) 558,555 (176,898) (2,252)
- ----------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 91,863 (645,415) (320,487)
Income taxes 84,000 - -
- ----------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 7,863 $ (645,415) $ (320,487)
- ----------------------------------------------------------------------------------------------------------------
Earnings per share data:
Basic and diluted earnings per share $ .01 $ (0.22) $ (0.11)
- ----------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 6,318,493 3,000,000 3,000,000
================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Common Stock
-----------------------
Class A Class B Additional Retained
----------- ------------- Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit) Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance, December 31,
1994 750,000 $ 7,500 2,250,000 $22,500 $ 1,100 $ (35,442) $ (4,342)
Net loss - - - - - (320,487) (320,487)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31,
1995 750,000 7,500 2,250,000 22,500 1,100 (355,929) (324,829)
Conversion of shareholder
debt to equity - - - - 1,965,069 - 1,965,069
Net loss - - - - - (645,415) (645,415)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31,
1996 750,000 7,500 2,250,000 22,500 1,966,169 (1,001,344) 994,825
Sale of common stock 4,250,000 42,500 - - 35,875,885 - 35,918,385
Net earnings - - - - - 7,863 7,863
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31,
1997 5,000,000 $50,000 2,250,000 $22,500 $37,842,054 $(993,481) $36,921,073
=============================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Year Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Operating activities
Net earnings (loss) $ 7,863 $ (645,415) $(320,487)
Adjustments to net earnings (loss)
Depreciation and amortization 654,778 283,974 3,060
Increase in accounts receivable
and other assets (1,094,224) (47,854) -
Increase in accounts payable - trade 3,108,604 638,867 112,922
Increase in accrued expenses and other 435,333 435,595 44,761
Increase in horsemen's deposits and purses (59,400) (337,738) -
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities 3,052,954 327,429 (159,744)
- -----------------------------------------------------------------------------------------------------------------------------
Investing activities
Purchases of property and equipment (47,133,328) (5,770,738) (436,570)
(Decrease) increase in purse notes payable due horsemen (1,620,000) 1,957,683 -
Investment in other assets (98,020) (186,332) (483,649)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash absorbed by investing activities (48,851,348) (3,999,387) (920,219)
- -----------------------------------------------------------------------------------------------------------------------------
Financing activities
Increase in financing costs (70,215) (200,793) (100,000)
Proceeds from long-term debt and capital leases 11,388,503 45,796 15,489
Payments on long-term debt and capital leases (215,689) (10,931) -
Proceeds from notes payable 4,612,381 4,987,704 1,492,117
Payments on notes payable (4,198,782) (100,000) -
Proceeds from sale of common stock, net 36,250,422 - -
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 47,766,620 4,721,776 1,407,606
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,968,226 1,049,818 327,643
Cash and cash equivalents, beginning of year 1,379,884 330,066 2,423
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 3,348,110 $ 1,379,884 $ 330,066
=============================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
Notes to Consolidated Financial Statements
1. Significant
Accounting
Policies
Principles of Consolidation
The consolidated financial statements include the following entities of Colonial
Downs Holdings, Inc. (collectively, the "Company"), which prior to the
reorganization, were affiliated through common ownership and control:
Colonial Downs, L.P. ("Partnership")
Stansley Racing Corp. ("SRC")
Colonial Downs Holdings, Inc. ("CD Holdings")
The consolidated financial statements have been prepared as if the entities had
operated as a single consolidated group and assuming that the reorganization had
taken place as of December 31, 1993. All significant intercompany accounts and
transactions have been eliminated.
Reorganization
The Company's licenses to own and operate the racetrack and its racing centers
("Racing Centers") are held by the Partnership and SRC. Prior to the
Reorganization (defined below), Stansley Management Corp. ("SMC") and CD
Entertainment Ltd. each owned 50% of the Partnership. The ownership and
operating licenses held by the Partnership and SRC are non-transferable under
the Virginia Racing Act. In order to bring the licenses under the control of one
entity while avoiding transfer of the licenses, CD Holdings became a holding
company for the Partnership and SRC pursuant to an Agreement and Plan of
Reorganization ("Reorganization"). Pursuant to the Reorganization, CD Holdings
acquired, in exchange for 3,000,000 shares of its common stock, a 99% limited
partner interest in the Partnership and 100% of the outstanding stock of SRC.
Also, in conjunction with the Reorganization, SRC acquired a 1% general partner
interest in the Partnership. The Reorganization became effective on March 12,
1997.
F-7
<PAGE>
Notes to Consolidated Financial Statements
(continued)
1. Significant
Accounting
Policies
(continued)
As a result of the Reorganization, the Company owns, directly, or through its
wholly-owned subsidiaries, the operating licenses for the racetrack and the
Chesapeake, Richmond, Hampton, and Brunswick Racing Centers; the property for
the Richmond, Hampton and Brunswick Racing Centers; the rights to apply for
licenses to own and operate up to two additional Racing Centers in Virginia; the
345 acres on which the racetrack exists; and the racetrack facilities and
certain related infrastructure.
Description of Business
The Company, which was organized in 1993, currently owns and operates the
Colonial Downs racetrack (the "Track") on approximately 345 acres between
Interstate Highway 64 and State Route 155 in New Kent County. The facility
accommodates thoroughbred and standardbred racing as well as simulcast wagering.
The Company also operates four Racing Centers. The first Racing Center began
operations in Chesapeake, Virginia during February 1996. The second facility
opened in Richmond, Virginia in December 1996. The third and fourth Racing
Centers began operations in Hampton, Virginia and Brunswick County, Virginia in
December 1997. The Company plans to work towards obtaining licenses for the
remaining two Racing Centers authorized by the Commission.
Cash and Cash Equivalents
For the purposes of preparing the Company's statement of cash flows, investments
with maturities of less than three months are considered to be cash equivalents.
Notes to Consolidated Financial Statements
(continued)
1. Significant
Accounting
Policies
(continued)
Interest Expense
Interest expense of approximately $1,068,000 and $72,000 was capitalized during
1997 and 1996, respectively, in connection with the construction of the
racetrack and development of the Racing Centers.
Property, Equipment, Depreciation and Amortization
Property and equipment is stated at cost. Expenditures for ordinary maintenance
and repairs are charged to income as incurred. Costs of betterments, renewals,
and major replacements are capitalized. At the time properties are retired or
otherwise disposed of, the related cost and allowance for depreciation and
amortization are eliminated from the accounts and any gain or loss on
disposition is reflected in income.
Depreciation and amortization is computed using the straight-line method over
the following estimated useful lives:
Years
------------------------------------------------------------
Land improvements 20-40
Building and improvements 5-40
Leasehold improvements 7-40
Equipment, furnishings and fixtures 3-15
Licensing Costs and Amortization
Licensing costs, which are being amortized over a period of twenty years,
consist primarily of professional fees associated with the application for the
racetrack licenses and related licensing fees for the Racing Centers, which are
20 year licenses.
F-8
<PAGE>
Notes to Consolidated Financial Statements
(continued)
1. Significant
Accounting
Policies
(continued)
Revenue Recognition
The Company primarily derives revenue from import simulcasting, which is the
Company's share of wagering at its Racing Centers on races simulcast from other
racetracks. Revenue also is derived from live racing at the Company's track as
well as export simulcasting of its live racing to other racetracks.
Horsemen's Purses and Awards
Amounts due under agreements with the Virginia Horsemen's Benevolent and
Protective Association, Inc. and the Virginia Harness Horse Association (Note 9)
are accrued based on the terms of the agreements. Funds not yet remitted to the
associations to satisfy the liability are held in a restricted cash account. As
of December 31, 1997 and 1996 approximately $1,656,500 and $337,800,
respectively, were held in the restricted cash accounts.
Income Taxes
The Company and its subsidiaries file a consolidated income tax return.
However, prior to the reorganization on March 12, 1997, the Partnership and SRC
(an "S" Corporation for income tax purposes) filed income tax returns as
separate entities. Colonial Downs Holdings, Inc. was incorporated in November
1996 but had no activities until the Reorganization and IPO, and therefore had
no activity for tax purposes for the periods prior to the reorganization.
Deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
F-9
<PAGE>
Notes to Consolidated Financial Statements
(continued)
1. Significant
Accounting
Policies
(continued)
Earnings Per Share
For the year ended December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997. SFAS 128 provides for the calculation of basic and diluted earnings per
share. Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilutive
effect of securities that could share in earnings of an entity. At December 31,
1997, there were no securities which had a dilutive effect.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in prior years' financial statements to
conform to the December 31, 1997 presentation.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist of cash equivalents, including horsemen's deposits, and accounts
receivable.
The Company's policy is to limit the amount of credit exposure to any one
financial institution and place funds with financial institutions evaluated as
being creditworthy. At December 31, 1997 and 1996, the Company had cash deposits
which exceeded federally insured limits by approximately $3,477,000 and
$899,000, respectively.
F-10
<PAGE>
Notes to Consolidated Financial Statements
(continued)
1. Significant
Accounting
Policies
(continued)
Long-Lived Assets
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and For Long-Lived Assets to Be Disposed Of." SFAS 121 requires that
long-lived assets and certain intangibles to be held and used by an entity be
reviewed for impairment when events or changes in circumstances indicate that
the carrying amount may not be recoverable. In addition, SFAS 121 requires
long-lived assets and certain intangibles to be disposed of to be reported at
the lower of carrying amount of fair value less costs to sell. The Company
reviews the carrying values of its long-lived and identifiable intangible assets
for possible impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable based on undiscounted
estimated future operating cash flows. As of December 31, 1997, the Company has
determined no impairment has occurred.
Stock Based Compensation
Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." SFAS
No. 123 allows companies to continue to account for their stock option plans in
accordance with APB Opinion 25 but encourages the adoption of a new accounting
method based on the estimated fair value of employee stock options. Companies
electing not to follow the new fair value based method are required to provide
expanded footnote disclosures, including pro forma net income and earnings per
share, determined as if the company had applied the new method. The application
of this pronouncement did not have a material effect on the financial statements
of the Company.
Fair Value of Financial Instruments
The following methods and assumptions are used to estimate the fair value of
each class of financial instruments for which it is practical to estimate.
Cash and Cash Equivalents - The carrying amount approximates the fair value due
to the short maturity of the cash equivalents.
Long-Term Debt and Capital Lease Obligations - The fair value of the Company's
long-term debt and capital lease obligations is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The carrying amount
approximates fair value since the Company's interest rates approximate current
interest rates.
F-11
<PAGE>
Notes to Consolidated Financial Statements
(continued)
1. Significant
Accounting
Policies
(continued)
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 129 (SFAS 129), "Disclosure of
Information about Capital Structure," effective for periods ending after
December 15, 1997, establishes standards for disclosing information about an
entity's capital structure. SFAS 129 requires disclosure of the pertinent rights
and privileges of various securities outstanding (stock, options, warrants,
preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 129 had no
effect on the Company because it currently discloses the information specified.
Statement of Financial Accounting No. 130 (SFAS 130), "Reporting Comprehensive
Income," effective for periods beginning after December 15, 1997, establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
2. Property and Equipment
- -----------------------------------------------------------------------
December 31, 1997 1996
Land and improvements $ 8,243,180 $ 800,000
Buildings and improvements 49,240,717 1,788,343
Leasehold improvements 1,114,629 807,643
Equipment, furnishings and fixtures 2,901,639 888,503
Construction in progress - 5,080,098
---------------------------------
Total $61,500,165 $9,364,587
---------------------------------
3. Management and
Consulting Agreement
with Maryland -
Virginia Racing
Circuit
The Company entered into an agreement with the Maryland - Virginia Racing
Circuit, Inc. ("Circuit") an affiliate of the Maryland Jockey Club ("MJC").
Pursuant to the agreement, MJC will suspend live racing at the Pimlico and
Laurel, Maryland racetracks, which it controls, during the Company's live
thoroughbred racing period in order to manage the thoroughbred racing at the
Company's racing facility.
F-12
<PAGE>
Notes to Consolidated Financial Statements
(continued)
3. Management and
Consulting Agreement
with Maryland -
Virginia Racing
Circuit
(continued)
The agreement provides that the Company pay the Circuit a fee of two percent of
gross amounts wagered on all racing, except for live harness racing at the
Company's racetrack. This fee represents approximately 10% of pari-mutuel
revenues. Additionally, the Company will pay a pro-rata share of the salaries
of the MJC employees that participate in the management of the Company's live
thoroughbred racing. The Company will bear all other expenses associated with
the management and operation of the thoroughbred meet. Under the agreement,
approximately $2,713,000 and $739,000 of costs were incurred for the years ended
December 31, 1997 and 1996, respectively. (See Note 12)
The Management and Consulting Agreement will remain in effect for so long as the
Company owns, controls or operates the Track, not to exceed a term of 50 years.
At the Company's option, the Company may terminate the agreement any time after
25 years upon payment of a fee equal to 17 times the average management fee paid
during the three years immediately preceding such termination.
4. Land Conveyance
and Land
Development
Delmarva Properties, Inc. and Chesapeake Forest Products Company (collectively
"Delmarva") and the Company entered into an agreement in which Delmarva, at no
cost to the Company, conveyed the land required to build the racetrack and
facilities in New Kent county. The land is subject to reversion to Delmarva if
the Company fails to complete, open and operate for three years a racetrack
licensed by the Commission on the land. Conveyance occurred upon completion of
the IPO, at which time the land, which the Company estimates the fair value to
be approximately $5,000,000, was recorded as a refundable advance with an offset
to a liability account in the same amount. For financial statement purposes, the
liability has been recorded as a contra-asset against the refundable advance,
and will remain so until the likelihood for reversion is remote.
F-16
<PAGE>
Notes to Consolidated Financial Statements
(continued)
5. Notes Payable,
Notes Payable-
Related Parties,
and Capital
Lease
Obligations
- -------------------------------------------------------------------------
Notes payable, notes payable-related parties, and capital lease obligations
consist of the following:
December 31, 1997 1996
Note payable to a Bank maturing June 2000,
with two one year extensions,
bearing interest at a variable rate
(8.69% at December 31, 1997), with a $1,000,000
principal payment due in December 1998 and
quarterly principal payments of $500,000
commencing in March 1999,
collateralized by substantially all assets of
the Company and guaranteed by
certain shareholders and related parties $10,000,000 $ -
Convertible subordinated note payable to
CD Entertainment, Ltd., maturing March
2000, with interest payable quarterly
at a rate of 7.25%; collateralized by a
second deed of trust on the racetrack
facility 5,500,000 -
Note payable to a Bank, maturing August 1999,
bearing interest at prime (8.5% at
December 31, 1997) plus 1%, with monthly
principal payments of $15,000, collateralized
by certain fixed assets 840,000 -
Note payable to an Insurance Company,
maturing October 1999, bearing interest at
6.83%, with monthly payments of $8,622
including interest 170,186 -
Installment notes and capitalized leases
collateralized by certain vehicles,
machinery and equipment, maturing at
various dates through September 2000, at
interest rates ranging from 3% to 9% 252,465 69,737
F-13
<PAGE>
Notes to Consolidated Financial Statements
(continued)
5. Notes Payable,
Notes Payable-
Related Parties,
and Capital
Lease
Obligations
(continued)
December 31, 1997 1996
Note payable to CD Entertainment, Ltd.,
maturing January 1998 bearing interest
at LIBOR (5.625% at December 31, 1996)
plus 2%; collateralized by land
and building $ - $3,000,000
Note payable to CD Entertainment, Ltd.,
bearing interest at LIBOR (5.625% at
December 31, 1996) plus 2% with maximum
borrowings of $5,000,000, unsecured - 1,387,619
Notes payable to Arnold Stansley,
maturing January 1997 and March 1998,
non-interest bearing, unsecured - 386,788
Notes payable to Norglass, Inc.,
maturing January 1997 and March 1998,
non-interest bearing, unsecured - 311,994
Demand note payable to a
Bank, with interest payable at
prime plus 2%; unsecured - 20,100
---------- ---------
16,762,651 5,176,238
Less current maturities 1,373,059 1,685,297
---------- ---------
Long-term debt $15,389,592 $3,490,941
========== =========
The notes payable to Arnold Stansley and Norglass, Inc. were repaid with
proceeds from the IPO in 1997. A portion of outstanding debt to CD
Entertainment, Ltd. at December 31, 1996 was repaid with proceeds from the IPO
and the remainder was refinanced in 1997.
Capital lease obligations as of December 31, 1997 and 1996 were approximately
$207,600 and $29,300, respectively. The amount of leased fixed assets
capitalized at December 31, 1997 and 1996 was approximately $233,200 and
$39,500, respectively.
F-14
<PAGE>
Notes to Consolidated Financial Statements
(continued)
5. Notes Payable,
Notes Payable-
Related Parties
and Capital
Lease Obligations
(continued)
Arnold Stansley, Norglass, Inc. and CD Entertainment, Ltd. are related to the
Company either directly or indirectly (See Notes 1 and 7).
The aggregate amounts of notes payable and capital lease obligations at December
31, 1997 mature as follows:
Through December 31, Amount
-----------------------------------------------------------
1998 $ 1,373,059
1999 2,831,339
2000 12,558,253
-----------------------------------------------------------
$16,762,651
===========================================================
6. Income Taxes
Income tax expense for the year ended December 31, 1997 consists of the
following:
Federal State Total
--------------------------------------------------------
Current $ -- $ -- $ --
Deferred expense 57,000 27,000 84,000
--------- -------- ---------
$ 57,000 $ 27,000 $ 84,000
========= ======== =========
Deferred income tax assets (liabilities) at December 31, 1997 consist of the
following:
Noncurrent
Assets
Net operating loss $ 276,000
Liabilities
Depreciation and
amortization (360,000)
----------
Net deferred tax liability $ (84,000)
==========
F-15
<PAGE>
Notes to Consolidated Financial Statements
(continued)
6. Income Taxes
(continued)
Income tax expense as reported differs from the amounts computed by applying the
statutory federal income tax rate to pre-tax income as follows:
Year ended December 31, 1997 Amount
Income taxes at statutory
rate $ 31,000
Increases (decreases)
resulting from
State taxes, net of federal
income tax benefit (10,000)
Campaign costs 211,000
Income allocable to entities
prior to reorganization (158,000)
Other 10,000
---------
$ 84,000
=========
7. Related Party
Transactions
The Company had a management agreement to pay directly and indirectly to SRC and
CD Entertainment Ltd. a monthly management fee of $10,000 and $5,000,
respectively, per month. The Company incurred management fees of $180,000 and
$30,000 under this agreement during the years ended December 31, 1996 and
December 31, 1995, respectively. Upon consummation of the IPO, these agreements
were terminated and the Company entered into a new five year consulting
agreement with Arnold Stansley. Under the agreement, Mr. Stansley receives
$75,000 annually. Total expense under the agreement was $59,375 for the year
ended December 31, 1997.
F-16
<PAGE>
Notes to Consolidated Financial Statements
(continued)
7. Related Party
Transactions
(continued)
Virginia Concessions, L.L.C., an affiliate of a shareholder, has an agreement
with the Company to manage the food and beverage concessions at the initial six
Racing Centers. Under the agreement, Virginia Concessions, L.L.C. pays
commissions to the Company based upon a percentage of gross sales at each Racing
Center. The Company had approximately $146,500 and $89,000 of rental income
generated from the Company's Racing Centers for the years ended December 31,
1997 and 1996, respectively.
Norglass, Inc. ("Norglass"), an affiliate of shareholder James M. Leadbetter,
was engaged as the general contractor to construct the race track and related
facilities in New Kent County, Virginia. The original contract value with
Norglass, Inc. for the facilities (which does not include approximately $8.1
million for certain equipment, furniture, fixtures and improvements) was
estimated at approximately $29.5 million. The Company is currently engaged in a
contract dispute under the construction agreement, dated February 10, 1997
between the Company and Norglass, See Note 8.
The Company paid and capitalized a $125,000 development fee to Premier
Development Co. ("Premier"), an affiliate of a shareholder, pursuant to
a 1996 agreement. On October 1, 1997, the Company entered into a new
agreement with Premier to pay annual consulting fees in the amount of $226,000
through September 30, 1999. The Company paid $50,000 under the new agreement,
of which $35,000 was capitalized and included in property and equipment at
December 31, 1997.
8. Commitments and Contingencies
In 1995, the Company entered into an agreement with a totalisator company which
provides wagering services and designs, programs, and manufactures totalisator
systems for use in wagering applications. The basic terms of the agreement state
that the totalisator company shall provide totalisator services to the Company
for all wagering held at the Company's facilities during the first six years of
operations. As a part of the agreement, the Company agreed to pay the
totalisator company certain percentages of the gross amounts wagered at the
facilities, as well as a minimum of $37,500, payable annually for equipment
installed at the racetrack for live race meets. In addition, the Company agreed
to use certain equipment provided by the totalisator company.
F-17
<PAGE>
Notes to Consolidated Financial Statements
(continued)
8. Commitments and
Contingencies
(continued)
In 1996, the Company entered into agreements with a company which provides
closed circuit television service and equipment. The basic terms of the
agreement state that the company shall provide closed circuit television at the
track and the Company's Racing Centers. As a part of the agreement, the Company
agreed to pay the company certain amounts per simulcast day. Total expense
incurred for totalisator and TVs (excluding host fees) was approximately
$493,000 and $190,000 for the years ended December 31, 1997 and 1996,
respectively.
The Company is liable under several operating leases for automobiles, equipment
and buildings expiring at various dates. Total rental expense under these
non-cancelable leases was approximately $393,000 and $144,000 for the years
ended December 31, 1997 and 1996, respectively.
The following are the future estimated minimum commitments relating to
non-cancelable operating agreements and leases.
TVs and
Year Ending December 31, Totalisator Other Total
1998 $1,626,300 $116,000 $1,742,300
1999 1,371,000 108,500 1,479,500
2000 1,246,000 48,800 1,294,800
2001 1,246,000 1,700 1,247,700
2002 1,246,000 500 1,246,500
---------- -------- ----------
$6,735,300 $275,500 $7,010,800
========== ======== ==========
The Company has a $200,000 letter of credit that secures the Company's
obligations under certain erosion control bonds related to construction of the
racetrack.
F-18
<PAGE>
Notes to Consolidated Financial Statements
(continued)
8. Commitments and
Contingencies
(continued)
At December 31, 1997, the Company had a $5,000,000 line of credit with a
commercial bank at various interest rates, which expires in June 2000. The line
of credit is secured by substantially all assets of the Company and assignment
of certain rights and revenues of the Company. The line of credit is also
guaranteed by certain shareholders and related parties of the Company. The
credit facility contains various covenants in conjunction with the $10,000,000
note payable with the same commercial bank which include tangible net worth,
profitability, and debt coverage ratios. No amounts were outstanding under this
line of credit facility at December 31, 1997.
Pursuant to an agreement to provide credit support to the Company, Diversified
Opportunities Group Ltd. ("Diversified"), an affiliate of a shareholder, will
receive an annual fee equal to 3% of the amount of any letters of credit or
guarantees provided to the Company (subject, in the case of a letter of credit,
to a minimum annual fee of $50,000). Costs incurred under this agreement were
$165,124 in 1997.
To assist in the development and improvement in certain public roads adjacent to
the racetrack facility, the Company entered into an agreement in July 1996 with
New Kent County and the Capital Area Training Consortium for a Community
Development Block Grant of $700,000. In addition to the grant, an additional
amount of approximately $700,000 was allocated by the Virginia Department of
Transportation to complete a project which widened State Route 155 from I-64 to
the entrance of the racetrack grounds.
Under the above agreements, the Company must take affirmative steps to employ a
minimum number of low and moderate income persons based on HUD Section 8 Income
Limits. In the event that the Company fails to honor its commitment to take such
affirmative steps, the Company must repay any local or grant funds already
expended in full to the locality and the Virginia Department of Housing and
Community Development. The Company is in compliance with the requirements.
F-19
<PAGE>
Notes to Consolidated Financial Statements
(continued)
8. Commitments and
Contingencies
(continued)
Pursuant to the terms of the Construction Contract with Norglass, the Company is
proceeding before the American Arbitration Association ("AAA") against Norglass,
the general contractor engaged to manage the construction of the Company's
racetrack. In the proceeding, the Company challenges the validity of Norglass'
mechanic's liens for approximately $11.8 million at December 31, 1997
(subsequently reduced to $6.5 million) and asserts a damage claim against
Norglass in an amount not less than $4.4 million. The Company is vigorously
pursuing its claims against Norglass and is vigorously defending against claims
for payment by Norglass under the Construction Contract. If the Company does not
prevail in its claims, and assuming the Company receives a credit against
Norglass' claim for amounts the Company has paid directly to subcontractors, its
potential liability, included in accounts payable at December 31, 1997, is
approximately $1.9 million in construction costs, plus interest, from a date to
be established and legal fees. Additionally, it will be unable to recover
approximately $3.8 million it has paid to subcontractors of Norglass as of
December 31, 1997.
In connection with the dispute with Norglass, subcontractors of Norglass and
parties claiming direct contracts with the Company filed mechanic's liens
against the property in the aggregate amount of approximately $4 million. As of
the date hereof, all but $501,000 of such mechanic's liens have been released.
The Company is negotiating with these subcontractors and contractors for the
release of the balance of such liens.
9. Horsemen's Agreement
The Company entered into an agreement effective February 17, 1996 with the
Virginia Horsemen's Benevolent and Protective Association, Inc. ("VAHBPA")
applicable to revenue generated from pari-mutuel wagering on simulcast
thoroughbred races at all facilities owned and operated by the Company in
Virginia, and simulcasting of live thoroughbred races at the racetrack. In
accordance with the agreement, the Company maintains a separate joint bank
account (the "Thoroughbred Partner Account") into which the Company deposits an
amount equal to 5.25%, which is approximately 26.25% of thoroughbred pari-
mutuel revenues, of the thoroughbred handle at each Racing Center. Also, 5% of
net revenue derived from export simulcasting of live thoroughbred races at the
racetrack is due to the Virginia Breeders Fund. The initial period of the
agreement runs through December 31, 1998, and renews automatically for
successive one year terms.
If the sum of 5.25% of the Racing Centers' thoroughbred handle plus the total
amount of handle generated by live thoroughbred racing at the racetrack for each
period is less than a guaranteed $4.5 million, then the Company shall pay the
difference into the Thoroughbred Partner Account, used to pay purses, with half
of such amount being considered a loan by the Company to the VAHBPA. The Company
met the $4.5 milion guarantee during the year ended December 31, 1997.
F-20
<PAGE>
Notes to Consolidated Financial Statements
(continued)
9. Horsemen's
Agreements
(continued)
The Company entered into another agreement effective February 17, 1996 with the
Virginia Harness Horse Association ("VHHA") applicable to revenue generated from
pari-mutuel wagering on simulcast standardbred races at all facilities owned and
operated by the Company in Virginia, and simulcasting of live races held at the
racetrack. In accordance with the agreement, the Company maintains a separate
joint bank account (the "Standardbred Partner Account") into which the Company
deposits an amount equal to 5%, which is approximately 25% of standardbred
pari-mutuel revenue, of the Racing Center standardbred handle. Under the
agreement, 5% of the revenue derived from export simulcasting of live
standardbred races at the racetrack is due to the Virginia Breeders Fund, 47.5%
is shared between VHHA and the breeders, and the remaining 47.5% retained by the
Company. The initial period of the agreement runs through completion of the 1999
standardbred race meet, and renews automatically for successive one year terms.
If the sum of 5% of the standardbred handle plus the total amount of handle
generated by live standardbred racing at the racetrack for the initial period is
less than a guaranteed $2.5 million, then the Company shall pay the difference
into the Standardbred Partner Account, used to pay purses, with half of such
amount being considered a loan by the Company to the VHHA.
Under the VAHBPA and VHHA agreements, the Company may be required to make purse
contributions in excess of the minimum amounts based upon a formula which
adjusts the Company's net income. For the year ended December 31, 1997, the
Company was not required to make any additional purse account contributions.
Under the Virginia Racing Act, the Company is required to contribute
approximately 8.5% of all money wagered at the racetrack on live racing to the
purse accounts and these funds will count towards the required minimum $4.5
million and $2.5 million for thoroughbred and standardbred purses, respectively.
10. Stockholders' Equity
In March 1997, the Company completed its initial public offering. The proceeds,
net of expenses, amounted to $35,918,385 for 4,250,000 shares of common stock
issued. The offering price per share was $9.50.
F-21
<PAGE>
Notes to Consolidated Financial Statements
(continued)
10. Stockholders Equity
(continued)
In conjunction with the Reorganization and IPO, the Company implemented a stock
option plan. Options granted under the plan may be either Incentive Stock
Options or Non-qualified Stock Options, based on the discretion of the Board of
Directors. The maximum aggregate number of shares which may be optioned and sold
under the plan is 300,000 shares of Class A Common Stock. The exercise price per
share for Incentive Stock Options will be no less than the fair value of the
stock at the grant date. The exercise of Non-qualified Options is determined by
the Board of Directors on the grant date. The term of the plan is ten years.
Weighted
Average
Exercise Available Options Vested and
Price for Grant Outstanding Exercisable
Balance at March 21,
1997 (plan inception) $ - 300,000 - -
Granted 9.86 (242,000) 242,000 -
Vested - - - -
Exercised - - -
Forefeited - 50,000 (50,000) -
------ ------- ------- -------
Balance at December 31,
1997 $ 9.86 108,000 192,000 -
====== ======= ======= =======
The Company applies APB Opinion 25 and related interpretations in accounting for
its plan. Accordingly, no compensation cost has been recognized. The weighted
average fair value of options granted at December 31, 1997 is $3.22. The
proforma effect of options issued and outstanding under the provisions of SFAS
123 for the year ended December 31, 1997 are is follows:
Net earnings:
As reported $ 7,863
Proforma (125,637)
Basic and diluted earnings per share:
As reported $ 0.01
Proforma (0.02)
For the purposes of computing the pro forma amounts indicated above, the fair
value of each option on the date of grant is estimated using the Black-Scholes
option pricing model with the following assumptions: no dividend yield, expected
volatility of 25%, risk-free interest rate of 6.74% and an expected life of 5
years. Substantially all options become vested and exerciseable evenly over a
five year period.
11. Supplemental
Disclosures of
Cash Flow
Year ended December 31, 1997 1996 1995
Cash paid for interest $1,094,380 $ 94,674 $ 2,400
Conversion of debt to equity $ - $ 1,965,069 $ -
Capital lease obligation incurred $ 229,353 $ 39,483 $ -
Income taxes paid $ 217,956 $ - $ -
F-22
<PAGE>
Notes to Consolidated Financial Statements
(continued)
11. Supplemental
Disclosures of
Cash Flows
(continued)
At December 31, 1997 and 1996, $7,964,354, and $2,815,599, respectively, were
due vendors for property and equipment purchases.
During the year ended December 31, 1996, $1,965,069 of debt due to CD
Entertainment, Ltd. was converted to equity and treated as capital
contributions. No shares of common or preferred stock were issued in connection
with the conversion.
12. Subsequent
Events
On January 8, 1998, the Company filed a demand for arbitration against
Maryland-Virginia Racing Circuit, Inc. ("MVRC") before the Virginia Racing
Commission (the "Commission"). In its arbitration demand, the Company challenged
a management fee claimed to be due to MVRC pursuant to a Management and
Consulting Agreement (see Note 3), dated as of April 22, 1996 (the "Consulting
Agreement") between the Company and MVRC. The arbitration is based upon the fact
that the demanded compensation under the Consulting Agreement has failed to
consider certain changed circumstances as well as the original intent of the
parties. Specifically, the compensation demanded by MVRC has been based upon the
assumptions that MVRC was to manage a 102-day thoroughbred racing season at
Colonial Downs' racetrack and during that 102-day season the Maryland tracks
owned and operated by MVRC would be closed. In reality, however, the number of
thoroughbred race days has been (and will be for the foreseeable future) much
less and MVRC has failed to close its Maryland tracks as contemplated. As a
result, the Company has requested that the Commission (as provided in the
Agreement) arbitrate this dispute and reform the Consulting Agreement
accordingly, thereby reducing the compensation to MVRC to reflect the fewer
number of race days during which MVRC is actually managing the Company's
thoroughbred season. In the alternative, the Company has requested the
Commission to declare the Consulting Agreement null and void and to direct the
parties to enter into a new agreement. The Commission declined Colonial Downs'
request that it arbitrate the dispute on January 21, 1998; hence a third-party
arbitrator must be named.
F-23
<PAGE>
Report of Independent Certified Public Accountants
Colonial Downs Holdings,Inc.
New Kent, Virginia
We have audited the accompanying consolidated balance sheets of Colonial Downs
Holdings, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We 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 Colonial Downs
Holdings, Inc. and subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Richmond, Virginia
March 25, 1998
<PAGE>
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from
the Company's definitive proxy statement with respect to the Company's Annual
Meeting of Shareholders to be held on May 8, 1998. Such proxy statement shall be
filed pursuant to Regulation 14A promulgated under the Securities Exchange Act
of 1934, as amended, within 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K.
<PAGE>
ITEM 11 EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from
the Company's definitive proxy statement with respect to the Company's Annual
Meeting of Shareholders to be held on May 8, 1998. Such proxy statement shall be
filed pursuant to Regulation 14A promulgated under the Securities Exchange Act
of 1934, as amended, within 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from
the Company's definitive proxy statement with respect to the Company's Annual
Meeting of Shareholders to be held on May 8, 1998. Such proxy statement shall be
filed pursuant to Regulation 14A promulgated under the Securities Exchange Act
of 1934, as amended, within 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from
the Company's definitive proxy statement with respect to the Company's Annual
Meeting of Shareholders to be held on May 8, 1998. Such proxy statement shall be
filed pursuant to Regulation 14A promulgated under the Securities Exchange Act
of 1934, as amended, within 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K.
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) The Financial Statements included in the Index to Part II,
Item 8, are filed as part of this Report.
(B) Reports of Form 8-K
The Company filed the following Form 8-K during the fourth quarter of
1997:
1. On November 14, 1997 the Company filed Form 8-K which reflected the
intention of the Company to seek, through arbitration, a reduction in the fees
it pays to the Maryland Jockey Club. Further, the Form 8-K reflected an
announcement of Jeffrey P. Jacobs interest in proposing a combination of the
Company with Black Hawk Gaming & Development Co., Inc., in which Mr. Jacobs
holds a substantial interest. Additionally, the Form 8-K announced that the
Company may consider seeking referenda in other Virginia cities and counties in
connection with spring 1998 elections for city councils and the November 1998
Congressional elections.
2. On December 10, 1997, the Company filed Form 8-K which reflected the
retirement of O.J. Peterson, III from the positions of President and Chief
Operating Officer of the Company effective January 1, 1998. It further announced
that Mr. Jacobs would take over as President and Ian Stewart was promoted to
Chief Operating Officer.
(C) Exhibits
See Exhibit Index
(D) All financial statements and schedules except those items listed under items
14(a)1 and (a)2 above are omitted because they are not applicable, or not
required, or because the required information is included in the financial
statements or notes thereto.
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.
COLONIAL DOWNS HOLDINGS, INC.
/s/ Jeffrey P. Jacobs
-----------------------------------------------
Jeffrey P. Jacobs, Chief Executive Officer and
President, Chairman of the Board and Director
March 30, 1998
/s/ Ian M. Stewart
-----------------------------------------------
Ian M. Stewart, Chief Operating Officer and
Chief Financial Officer
March 30, 1998
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.
/s/ Jeffrey P. Jacobs
-----------------------------------------------
Jeffrey P. Jacobs, Chairman of the Board, Director
March 30, 1998
/s/ Arnold W. Stansley
-----------------------------------------------
Arnold W. Stansley, Director
March 30, 1998
/s/ William J. Koslo
-----------------------------------------------
William J. Koslo, Jr., Director
March 30, 1998
/s/ Stephen Peskoff
-----------------------------------------------
Stephen Peskoff, Director
March 30, 1998
/s/ Robert H. Hughes
-----------------------------------------------
Robert H. Hughes, Director
March 30, 1998
/s/ David C. Grunenwald
-----------------------------------------------
David C. Grunenwald, Director
March 30, 1998
/s/ Patrick J. McKinley
-----------------------------------------------
Patrick J. McKinley, Director
March 30, 1998
<PAGE>
EXHIBIT INDEX
EXHIBIT NOS. DESCRIPTION OF EXHIBIT
2.1 Agreement and Plan of Reorganization (Incorporated by reference to
the Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
3.1 Amended and Restated Articles of Incorporation of Colonial Downs
Holdings, Inc. (Incorporated by reference to the Company's
registration statement on Form S-1, File # 333-18295, dated March
14, 1997)
3.2 Amended and Restated By-laws of Colonial Downs Holdings, Inc.
(Incorporated by reference to the Company's registration statement
on Form S-1, File # 333-18295, dated March 14, 1997)
4.1 Stock Certificate representing Colonial Downs Holdings, Inc. Common
Stock (Incorporated by reference to the Company's registration
statement on Form S-1, File # 333-18295, dated March 14, 1997)
10.1 Management and Consulting Agreement (Incorporated by reference to
the Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
10.2 Amended and Restated Performance Guarantee Agreement (Incorporated
by reference to the Company's registration statement on Form S-1,
File # 333-18295, dated March 14, 1997)
10.3 Form of Deed for Track site (Incorporated by reference to the
Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
10.4 Construction Agreement (Incorporated by reference to the Company's
registration statement on Form S-1, File # 333-18295, dated March
14, 1997)
10.5 Development Agreement (Incorporated by reference to the Company's
registration statement on Form S-1, File # 333-18295, dated March
14, 1997)
10.6 Hubbing Agreement (Incorporated by reference to the Company's
registration statement on Form S-1, File # 333-18295, dated March
14, 1997)
10.7 VHHA Simulcast Wagering Agreement (Incorporated by reference to the
Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
10.8 VaHBPA Simulcast Wagering Agreement (Incorporated by reference to
the Company's registration statement on Form S-1, File #
333-18295, dated March 14, 1997)
10.9 Form of Convertible Subordinated Note (Incorporated by reference to
the Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
10.10 Forms of Employment Agreements (Incorporated by reference to the
Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
10.11 Form of Stansley Racing Agreement (Incorporated by reference to the
Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
10.12 Amended and Restated Promissory Note to CD Entertainment Ltd.
(Incorporated by reference to the Company's registration statement
on Form S-1, File # 333-18295, dated March 14, 1997)
10.13 Agreement for Interim Financing (Incorporated by reference to the
Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
10.14 Registration Rights Agreement (Incorporated by reference to the
Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
10.16 Form of 1997 Stock Option Plan (Incorporated by reference to the
Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
10.17 Agreement for Provision of Credit (Incorporated by reference to the
Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
10.18 Management Agreement between Colonial Downs, L.P. and Virginia
Concessions, L.L.C. (Incorporated by reference to the Company's
10-Q, File # 333-18295, dated August 14, 1997)
10.19 Construction Loan Agreement between Colonial Downs, L.P. and PNC
Bank, National Association (Incorporated by reference to the
Company's 10-Q, File # 333-18295, dated August 14, 1997)
10.20 Revolving Line of Credit Agreement (Incorporated by reference to the
Company's 10-Q, File # 333-18295, dated August 14, 1997)
10.21 Deed of Trust Note (Incorporated by reference to the Company's 10-Q,
File # 333-18295, dated August 14, 1997)
10.22 Revolving Line of Credit Note (Incorporated by reference to the
Company's 10-Q, File # 333-18295, dated August 14, 1997)
10.23 Deed of Trust and Security Agreement (Incorporated by reference to
the Company's 10-Q, File # 333-18295, dated August 14, 1997)
10.24 Assignment of Leases and Rents (Incorporated by reference to the
Company's 10-Q, File # 333-18295, dated August 14, 1997)
10.25 Agreement of Guaranty and Suretyship (Completion) between Stansley
Racing Corp. and PNC Bank, National Association (Incorporated by
reference to the Company's 10-Q, File # 333-18295, dated August 14,
1997)
10.26 Agreement of Guaranty and Suretyship (Completion) between Colonial
Downs Holdings, Inc. and PNC Bank, National Association
(Incorporated by reference to the Company's 10-Q, File # 333-18295,
dated August 14, 1997)
10.27 Agreement of Guaranty and Suretyship (Payment), between Stansley
Racing Corp. and PNC Bank, National Association (Incorporated by
reference to the Company's 10-Q, File # 333-18295, dated August 14,
1997)
10.28 Agreement of Guaranty and Suretyship (Payment) between Stansley
Racing Corp. and PNC Bank, National Association (Incorporated by
reference to the Company's 10-Q, File # 333-18295, dated August 14,
1997)
10.29 Promissory Note payable to Citizens and Farmers Bank (Incorporated
by reference to the Company's 10-Q, File # 333-18295, dated
September 14, 1997)
10.30 Business Loan Agreement between the Company, the Partnership and
Citizens and Farmers Bank (Incorporated by reference to the
Company's 10-Q, File # 333-18295, dated September 14, 1997)
10.31 Commercial Security Agreement among the Company, the Partnership and
Citizens and Farmers Bank (Incorporated by reference to the
Company's 10-Q, File # 333-18295, dated September 14, 1997)
10.32 Subordination Agreement (Lighting) among the Company, CD
Entertainment, the Partnership and David F. Belkowitz and James W.
Theobold (Incorporated by reference to the Company's 10-Q, File #
333-18295, dated September 14, 1997)
10.33 Employment Agreement dated June 23, 1997 between the Company and Ian
M. Stewart
10.34 Souvenir and Gift Concessions Agreement dated August 1, 1997, by and
between the Partnership, and Stansley Racing Corp, and Colonial
Gifts and Sportswear, Inc.
21.1 Subsidiaries of the Registrant (Incorporated by reference to the
Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
23.1 Consent of Hogan & Hartson L.L.P. (Incorporated by reference to the
Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
23.2 Consent of BDO Seidman, LLP (Incorporated by reference to the
Company's registration statement on Form S-1, File # 333-18295,
dated March 14, 1997)
24.1 Power of Attorney (Incorporated by reference to the Company's
registration statement on Form S-1, File # 333-18295, dated March
14, 1997)
27.1 Financial Data Schedule
Exhibit 10.33
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, is made as of June 23, 1997, by and between
COLONIAL DOWNS HOLDINGS, INC., a Virginia corporation (the "Company"), and IAN
M. STEWART ("Executive") and recites and provides as follows:
WHEREAS, the Company is engaged in the business of seeking
opportunities for horse racing and pari-mutuel wagering in Virginia, and its
subsidiaries are currently the holders of the only unlimited licenses to own and
operate a horse racetrack with pari-mutuel wagering in Virginia (the "Track")
and the only entities authorized to apply for licenses to own and operate
satellite wagering facilities ("SWF") in Virginia;
WHEREAS, the Company desires to employ Executive as Chief Financial
Officer of the Company; and WHEREAS, Executive desires to be so employed by
Company on the terms and conditions hereinafter set forth;
WHEREAS, through his relationship with the Company, the Executive will
become acquainted with certain confidential or proprietary aspects of the
Company's business, including without limitation, operating methods, marketing
strategy, sponsorship and advertising agreements, design and layout of the Track
facilities and potential sites for additional SWFs, and other confidential and
proprietary information that constitute valuable assets of the Company and which
the Company desires to protect.
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Employment. The Company hereby employs the Executive, and the
Executive hereby accepts employment with the Company as Vice President and Chief
Financial Officer.
2. Duties of the Executive. As the Chief Financial Officer of the
Company, the Executive shall faithfully serve the Company and shall at all times
devote his full time, best efforts, skills, attention, and energies to the
development, organization, management, and expansion of the Company's business
to the utmost of the Executive's ability, and shall do and perform all such
services, acts, and things connected therewith as are reasonably required and as
the Company shall from time to time direct. The Executive shall not become
engaged or involved in any activities or matters which may adversely affect or
reflect discredit on the Company or its business, or conflict with his services
to the Company. This Agreement shall not prohibit the Executive from investing
personal assets in other businesses or entities that do not compete with the
Company (as described in Section 11 of this Agreement).
3. Term. Subject to the provisions of Section 8 regarding termination,
this Agreement shall remain in effect for a term of two (2) years beginning on
the date hereof. This Agreement may be renewed and extended on terms and
conditions mutually agreeable to the parties hereto.
4. Compensation. For all services rendered by the Executive pursuant to
this Agreement, the Company shall pay the Executive a base salary of $90,000 per
annum, payable in equal semi-monthly installments, or at such other times as may
be mutually agreed upon by the parties.
5. Deductions. The Company is authorized to deduct from the actual
compensation of the Executive such sums as may be required to be deducted or
withheld under the provisions of any federal, state, or local law or regulation
now in effect or hereafter put into effect during the term of this Agreement,
including without limitation, social security, unemployment, and income
withholding taxes.
6. Benefits.
(a) The Executive shall be entitled to a paid vacation each
year of two (2) weeks, the timing of which shall be subject to mutual agreement
between the Company and the Executive. The Executive's attendance at trade
shows, training, educational, and professional programs and meetings shall not
be charged against Executive's vacation allowance. The Executive shall also be
entitled to paid sick leave of five (5) days each year.
(b) The Executive shall be entitled to the use of an
automobile, the make and model of which shall be mutually agreeable to the
Company and Executive, leased by the Company at its expense.
(c) The Company shall reimburse the Executive for all expenses
reasonably and necessarily incurred by him in the performance of his duties
hereunder. To be reimbursed, the Executive must submit written evidence of such
expenses to the Company within thirty (30) days after incurring such expense.
(d) The Executive shall receive such other benefits, if any,
as the Company generally provides to all other Executives involved in the
operations of the Company, whether now in effect or hereafter adopted, including
group hospital and accidental insurance benefits and group disability insurance
coverage.
7. Stock Options. In connection with Executive's employment hereunder,
the Company will grant to the Executive stock options for an aggregate of 10,000
shares of Class A Common Stock (the "Stock") at an exercise price equal to the
initial public offering price of the shares of Stock. Such options shall vest
for 2,000 shares per year on each anniversary of the date hereof for five years.
8. Termination of Employment.
(a) Upon the occurrence of any of the following events and the
expiration of any required notice, this Agreement and the Executive's employment
hereunder automatically shall terminate:
(1) The death or bankruptcy of the Executive;
(2) The Board of Director's termination of
the Executive's employment at any time, "for cause"
or not "for cause" (as defined below). This Agreement
and the Executive's employment hereunder shall
terminate upon the expiration of a period of thirty
(30) days after delivery by the Company of written
notice to the Executive of his termination. The
phrase "for cause" shall include termination because
of the Executive's personal dishonesty, incompetence,
willful misconduct, censure or reprimand by any
regulatory body (including the Virginia Racing
Commission), breach of fiduciary duty involving
personal profit, intentional failure to perform
stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar
offenses), failure to perform assigned duties in a
reasonably satisfactory manner, or material breach of
any provision of this Agreement;
(3) The expiration of a period of thirty
(30) days after delivery by the Executive of written
notice to the Company of his resignation as an
Executive of the Company; or
(4) The disability of the Executive.
"Disability" shall mean a physical or mental
disability that prevents the substantial performance
by the Executive of his duties hereunder lasting for
a continuous period of six (6) months or longer. The
reasoned and good faith judgment of the Company's
Board of Directors as to the Executive's disability
shall be final and shall be based on such competent
medical evidence as shall be presented to the
Company's Board of Directors by the Executive or by
any physician or group of physicians or other
competent medical experts on behalf of the Executive
and on behalf of the Company.
(b) In the event the Executive voluntarily terminates his
employment or has his employment terminated "for cause" under this Agreement, he
shall be entitled to receive from the Company only the base salary and benefits
as set forth herein that have accrued to the date of termination in full
settlement of all of the Company's obligations hereunder.
(c) In the event the Company terminates the employment of
Executive by reason of his disability, the Executive shall be entitled to
receive from the Company only the base salary and benefits set forth herein that
have accrued to the date of disability in full settlement of all of the
Company's obligations hereunder.
(d) In the event the Company terminates the employment of the
Executive not "for cause", the Executive shall be entitled to three (3) months
base salary as set forth herein and the benefits as set forth herein that have
accrued to the date of termination in full settlement of all of the Company's
obligations hereunder.
9. Fiduciary Relationship.
(a) The Executive as a Fiduciary. It is understood and agreed
that the Executive will serve in a fiduciary capacity to the Company and, as
such, will comply with the standards applicable to fiduciaries and other
Executives of the Company.
(b) Confidential Information and Trade Secrets. All
information relating to or used in the business and operations of the Company
(including, but not limited to, marketing plans, business procedures, trade
secrets, patents, sources of supplies and materials, reports, memoranda, plans,
documents, and the like), whether conceived, prepared, originated, developed or
compiled by the Executive or by the Company prior to or during the term of this
Agreement and the employment of the Executive (hereinafter "Confidential
Information and Trade Secrets"), are and shall be confidential information and
trade secrets which are the exclusive property of the Company, provided such
information is not generally known in the horse racing industry.
(c) Property of the Company. All Confidential Information and
Trade Secrets as defined in this Section 9(b) are and shall be the exclusive
property of the Company.
(d) Nondisclosure of Confidential Information and Trade
Secrets. Except in the regular course of his employment by the Company hereunder
or as the Company may expressly authorize or direct in writing, the Executive
shall not, during or after the termination or expiration of this Agreement,
copy, reproduce, disclose or divulge to others, use or permit others to use any
Confidential Information and Trade Secrets, or any records or materials relating
to any such Confidential Information or Trade Secrets. The Executive further
covenants and agrees that during the term of this Agreement he shall not remove
from the custody and control of the Company any records of or materials relating
to such Confidential Information and Trade Secrets and that upon the termination
or expiration of his employment he shall deliver the same to the Company.
10. Covenant Not to Compete.
(a) In consideration of the fees and benefits that he receives
pursuant to this Agreement, during the term of this Agreement and for one (1)
year thereafter, the Executive hereby covenants and agrees that he will not,
without the prior written consent of the Company, either alone or in partnership
with or in conjunction with any other person, firm, or corporation, whether as
principal, agent, or shareholder (other than an entity in which Executive holds
less than a five percent (5%) equity interest), directly or indirectly,
participate, carry on, conduct, or be engaged in, or advise, any person, firm,
corporation, or other legal entity carrying on or engaging in the horse racing
business in Virginia, Maryland, West Virginia or North Carolina that competes
with the business conducted by the Company on the date hereof. In addition, the
Executive shall not seek to induce any of the Company' employees to leave the
Company' employment to work for any entity with which he is affiliated. In
addition, the Executive shall not solicit any sponsors or advertisers of the
Company for the purpose of inducing, directly or indirectly, the termination of
any sponsorship or advertising agreements.
(b) The Executive recognizes that the Company's remedies at law may be
inadequate to protect itself against a breach of this provision, and therefore
agrees that injunctive or other equitable relief shall be an appropriate remedy
for breach of this covenant not to compete, and shall be a remedy in addition to
any and all other remedies available to the Company.
(c) The parties agree that if the restrictions of this Section 10 are
determined by any court of competent jurisdiction, at the time of enforcement,
to be unreasonable as to the duration, scope or area of restriction, then such
restrictions should be applied only to such activities and territory and only
for such period of time as the court determines to be reasonable in light of all
circumstances then existing.
11. Remedies. The Executive hereby represents that the services to be
performed by the Executive under the terms of this Agreement are of a special,
unique, extraordinary, and intellectual character, which gives them a particular
value, the breach of which cannot be reasonably or adequately compensated in
damages in an action at law. The Executive expressly acknowledges and agrees
that the Company shall be entitled to obtain, in addition to any other rights or
remedies the Company may possess, injunctive or other equitable relief to
prevent a prospective or continuing breach of any provision of this Agreement by
the Executive.
12. Notices. All notices or other communications required or permitted
by and among the parties shall be in writing and shall be deemed to have been
given, delivered or made when delivered by hand or mailed by certified or
registered mail, postage prepaid, return receipt requested, and addressed either
as follows or in such other manner as a party may subsequently designate to the
other party in writing:
If to the Company, at:
Colonial Downs Holdings, Inc..
Post Office Box 456
Providence Forge, Virginia 23140
If to the Executive, at:
The Executive's address as shown on the personnel records of
the Company.
13. Severability. In the event any one or more of the provisions
contained in this Agreement shall for any reason be held invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal, or unenforceable provision had never been
contained herein.
14. Entire Agreement. This Agreement supersedes any other agreement,
whether written or oral, that may have been made or entered into by the
Executive and the Company relating to the matters contemplated hereby. This
Agreement constitutes the entire agreement concerning the transaction
contemplated herein and there are no agreements or commitments in relation to
the subject matter hereof except as set forth herein.
15. Amendments. This Agreement may be amended or supplemented at any
time only in writing as may mutually be determined by the parties to be
necessary, desirable, or expedient to further the purposes of this Agreement, or
to clarify the intention of the parties.
16. Applicable Law. This Agreement and the legal relations among the
parties hereto shall be governed by and construed in accordance with the
substantive laws of the Commonwealth of Virginia, without giving effect to
conflict of law provisions and principles thereof.
17. Interpretation. When the context in which words are used in this
Agreement indicates that such is the intent, words in the singular number shall
include the plural, and vice versa, and words in the masculine gender shall
include the feminine and neuter genders, and vice versa.
18. Titles and Headings. Titles and headings to sections and paragraphs
herein are inserted for convenience of reference only, and are not intended to
be a part of or to affect the meaning or interpretation of this Agreement.
19. Binding Effect. This Agreement shall be binding upon and
enforceable against the Company and its successors and assigns. 20. No
Attachment. Except as required by law, no right to receive payments
under this Agreement shall be subject to anticipation, alienation,
sale, assignment, encumbrance, charge, pledge, or hypothecation, or to
execution, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary to affect any such action shall
be null, void and of no effect.
21. Survival of Certain Provisions. The obligations of the parties
pursuant to Sections 9, 10, and 22 of this Agreement shall survive the
termination of this Agreement.
22. Consent to Service and Jurisdiction. Executive consents and agrees
that the Circuit Court of the City of Richmond, Virginia and the United States
District Court for the Eastern District of Virginia, or at the option of the
Company, any other court located in the Commonwealth of Virginia in which it
shall initiate legal or equitable proceedings and which shall have subject
matter jurisdiction over the matter in controversy, shall have exclusive
jurisdiction to hear and determine any claims or disputes between the Company
and the Executive pertaining directly or indirectly to this Agreement or to any
matter arising therefrom. The Executive expressly submits and consents in
advance to such jurisdiction in any action or proceeding commenced in any such
court, hereby waiving personal service or process or other papers issued therein
and agreeing that service of such process or other papers may be made by
registered or certified mail to the Executive.
23. Acknowledgments. Executive acknowledges that he has read this
Agreement in its entirety and understands each of the provisions contained in
this Agreement. Executive acknowledges that the provisions of this Agreement are
reasonable and represents that he will be able to engage in other activities for
the purpose of earning a livelihood should the provisions of the Agreement be
enforced.
IN WITNESS WHEREOF the parties hereto have executed this Agreement on
the date first above written.
COMPANY: COLONIAL DOWNS HOLDINGS, INC.,
a Virginia corporation
By: /s/ O. James Peterson, III
O. James Peterson, III, President
EXECUTIVE: /s/ Ian M. Stewart
Ian M. Stewart
Exhibit 10.34
SOUVENIR AND GIFT CONCESSIONS AGREEMENT
THIS SOUVENIR AND GIFT CONCESSIONS AGREEMENT ("Agreement") made as of
August 1, 1997, by and between COLONIAL DOWNS, L.P., a Virginia limited
partnership, and STANSLEY RACING CORP., a Virginia corporation (collectively,
"Licensor"), and COLONIAL GIFTS AND SPORTSWEAR, INC., a Virginia corporation
with its principal place of business in Providence Forge, Virginia ("Licensee").
WITNESSETH:
WHEREAS, Colonial Downs, L.P. holds a license from the Virginia Racing
Commission (the "Commission") to own a pari-mutuel horse racing facility in New
Kent County, Virginia (the "Racetrack"); and,
WHEREAS, Stansley Racing Corp. holds a license from the Commission to
operate the Racetrack; and,
WHEREAS, Colonial Downs, L.P. and Stansley Racing Corp. hold licenses
to own and operate, respectively, satellite pari-mutuel wagering facilities
("SWFs") in Chesapeake and Richmond, Virginia; and,
WHEREAS, Colonial Downs, L.P. and Stansley Racing Corp. intend to
apply to the Commission for licenses to own and operate, respectively,
throughout Virginia the maximum number of SWFs permitted by law;
WHEREAS, Licensor presently has the exclusive right and use of all
service marks, trademarks, and tradenames used and developed for its business
subject to the terms and conditions of a Coexistence Agreement, dated as of July
3, 1997, between Chesapeake Corporation and Colonial Downs, L.P.("Colonial
Marks");
WHEREAS, Licensee is in the business of supplying and selling insignia
souvenirs, sportswear, gifts and other novelty items, including, but not limited
to, those items listed on Exhibit A attached hereto and made a part hereof (the
"Souvenir Items");
WHEREAS, Licensor desires to grant to Licensee certain rights to supply
and sell the Souvenir Items, with or without the Colonial Marks, at the
Racetrack and at any and all of the SWFs, whether existing now or in the future
(the "Premises"), on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, prior to the date hereof Licensee has been selling Souvenir
Items at SWFs located in Chesapeake and Richmond, Virginia.
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties, intending to be legally bound, do hereby agree as
follows:
I. PURPOSES
1.1 The purposes of this Agreement are (a) to grant Licensee the exclusive
right to use the Colonial Marks on the Souvenir Items for sale at the
Premises and all non-Premises sales locations, by whatever method of
sales, as may be selected by Licensee; and, (b) to memorialize and
establish the respective rights and obligations of Licensor and
Licensee in the sale of the Souvenir Items at the Premises, and such
other non-Premises sales locations as may be selected by Licensee from
time to time and not objected to by Licensor.
II. TERM
2.1 This Agreement shall be effective as of the date hereof and shall
continue thereafter in effect for five (5) years from such date, unless
this Agreement is terminated earlier pursuant to the provisions of
Article X hereof. Licensor shall have the right commencing ninety (90)
days prior to the expiration of the term and ending sixty (60) days
thereafter to acquire all of Licensee's right, title, and interest
hereunder together with any good will and intellectual property
developed by the Licensee for a termination fee equal to the sum of (i)
Licensee's inventory and equipment on hand valued at Licensee's costs
less depreciation and (ii) good will as calculated by the mutual
agreement of the parties (such sum, the "Termination Fee"). Such fee
shall be payable in cash within sixty (60) days of the expiration of
this Agreement. In the event Licensor elects not to exercise the
foregoing option, Licensee shall have the right, but not the
obligation, to continue this Agreement in full force and effect for two
(2) additional years after the expiration of the original term. If the
Agreement is so extended, commencing sixty (60) days prior to the
expiration of the extended term and until the expiration of this
Agreement, Licensor shall again have the option to acquire Licensee's
business for the Termination Fee.
2.2 Upon the termination or expiration of this Agreement, Licensee shall
immediately vacate the Premises in as good order and condition as the
same shall, or should have been put by Licensee, in compliance with the
terms and provisions hereof, reasonable use and natural wear and tear
or unavoidable casualty excepted. Upon such termination or expiration,
if Licensee requests, Licensor shall purchase from Licensee all of the
inventory of Souvenir Items customarily maintained and owned by
Licensee, at Licensee's cost therefor based upon evidence of such cost
satisfactory to Licensor.
III. USE OF TRADENAMES, TRADEMARKS AND SERVICE MARKS
3.1 In exchange for the consideration set forth herein, Licensor grants to
Licensee an exclusive license to use any and all Colonial Marks for the
purpose of the sale and distribution of the Souvenir Items, whether
existing now or in the future, which Licensor has developed or will
develop for use in connection with the operation of its business at the
Premises. Such license shall continue for the term of this Agreement.
IV. RESPONSIBILITIES AND OBLIGATIONS OF LICENSOR
4.1 Licensor shall provide to Licensee a designated area at the Premises,
reasonable in size and location to Licensee, for the purpose of selling
Souvenir Items, and only Souvenir Items, to the public. Licensee
acknowledges that the area provided as of the date hereof at the
Chesapeake and Richmond SWFs are reasonable in size and location. When
live racing is not conducted at the Racetrack and Licensee elects not
to open the gift shop at the Racetrack, Licensor shall provide
alternative space similar to that provided at the SWFs for the sale of
the Souvenir Items and such alternative space shall be treated as
Premises located at a SWF for purposes of this Agreement.
4.2 Licensor shall be responsible for all expenses related to providing
space for the sale of Souvenir Items at the Premises and certain other
matters set forth in this Section 4.2. Licensor shall also provide, at
its expense, the following:
a. Licensor shall provide general advertising of the
Racetrack and SWFs;
b. Licensor shall provide janitorial services for the
Premises;
c. Licensor shall equip and supply the Premises with
shelving, counterspace, display cases and such other
equipment reasonably sufficient to satisfy Licensee's
needs; (Licensee acknowledges that the equipment
provided as of the date hereof at the Chesapeake and
Richmond SWFs is reasonably sufficient);
d. Licensor shall provide gas, electricity, water,
sewerage, and other utilities for the Premises;
e. Licensor shall provide an adequate staff of
employees to maintain the operations of the Premises
for the sale of Souvenir Items at the SWFs only;
Licensor shall be responsible for and shall control
the conduct, demeanor and appearance of its employees
and agents, and upon objection from Licensee
concerning the conduct, demeanor or appearance of any
such person, shall immediately take all reasonable
steps necessary to remove the cause of objection;
Licensee acknowledges that such staff shall be
engaged simultaneously in other tasks and duties for
the Licensor in addition to the provision of services
hereunder; and Licensee acknowledges that the
staffing provided as of the date hereof at the
Chesapeake and Richmond SWFs is sufficient to meet
the reasonable demands of patrons for the Souvenir
Items;
f. Licensor shall make available storage space at the
Premises for reasonable quantities of the Souvenir
Items but shall have no liability whatsoever for such
Souvenir Items;
g. Licensor shall continuously operate and staff (at
SWFs) the Premises during all hours which the
Premises are open for business in accord with the
laws of the Commonwealth of Virginia;
h. Licensor shall operate the Premises in a careful,
safe and proper manner;
i. Licensor shall provide liability and workers'
compensation insurance for its employees operating
the Premises as required by Virginia Law; and
j. Licensor shall be responsible for any costs or
expenses relating to the repair or replacement of any
equipment and Souvenir Items required solely due to
the negligence of Licensor or its employees or
agents.
V. RESPONSIBILITIES OF LICENSEE
5.1 Commencing on the effective date hereof, Licensee shall be responsible
for the selection and supplying of the Souvenir Items to the Premises
for public sale. Licensee shall also be responsible for setting the
prices at which the Souvenir Items shall be sold at the Premises.
Licensee acknowledges that the prices for and quality of the Souvenir
Items are important to the preservation of the goodwill of the patrons
of the Racetrack and SWFs. Licensee shall make available for sale on
the Premises Souvenir Items of the type and quality as are normally
offered for sale in other racetracks or sporting facilities in the
United States. The prices for such Souvenir Items shall be established
by Licensee to be competitive with similar items offered for sale by
other racetracks and sporting facilities, taking into consideration the
quality of such Souvenir Items and cost to Licensee therefor. If
Licensor objects to the type, quality or price of any Souvenir Item,
Licensee shall provide Licensor examples of comparable Souvenir Items
sold at comparable racetracks or sporting facilities and the prices
therefore in order to demonstrate Licensee's compliance with this
Section 5.1. Licensor may from time to time request Licensee to stock
and offer for sale at the Premises Souvenir Items of a type and quality
requested by Licensor. To the extent economically feasible and
commercially practical, Licensee shall use its best efforts to comply
with any such request of Licensor.
5.2 Licensee shall be responsible for any costs or expenses relating to the
repair or replacement of any equipment or repair to the Premises
required due to the negligence of Licensee or its agents.
5.3 Licensee shall provide Licensor with a monthly accounting of all sales
of Souvenir Items at the Racetrack gift shop and all non-Premises
locations.
5.4 Licensee shall comply with all of the terms and conditions of the
Coexistence Agreement, dated July 3, 1997, between Chesapeake
Corporation and Colonial Downs, L.P., a copy of which is attached as
Exhibit B, with respect to the Colonial Marks.
5.5 Licensee shall provide an adequate staff of employees to maintain the
operations of the Premises for the sale of Souvenir Items at the
Racetrack during live race meets and at all other times when the gift
store at the Racetrack is open for the business. Licensee shall be
responsible for and shall control the conduct, demeanor and appearance
of its employees and agents, and upon objection from Licensor
concerning the conduct, demeanor or appearance of any such person,
shall immediately take call reasonable steps necessary to remove the
cause of objection.
5.6 Licensee shall continuously operate and staff the gift shop at the
Racetrack during all hours during which the Racetrack is open for live
racing in accord with the laws of the Commonwealth of Virginia;
5.7 Licensee shall operate the Premises at the Racetrack in a careful, safe
and proper manner;
5.8 Licensee shall provide liability and workers' compensation
insurance for its employees operating the Premises at the Racetrack
as required by Virginia law;
5.9. Licensee shall retain and pay to the proper taxing authority all
amounts due from the sale of the Souvenir Items, provided that such
sums attributable sales at the SWFs are paid to it by Licensor pursuant
to Section 6.3 hereof.
5.10 Licensee shall permit Licensor to inspect the Premises at the Racetrack
at any time.
VI. ROYALTIES
6.1 From and after the effective date hereof, in consideration of the
license granted in Section III hereof and for Licensor's
responsibilities as set forth in Section IV hereof, Licensee shall pay
to Licensor a royalty on a monthly basis. The amount of royalty to be
paid by Licensee shall be based on a percentage of Licensee's Gross
Sales at the Premises and all other sites and locations as selected by
Licensee as follows:
a. ten percent (10%) of Gross Sales derived from sales of
Souvenir Items on the Premises; and
b. five percent (5%) of Gross Sales derived from sales of
Souvenir Items at all other sites and locations as may
selected by Licensee.
6.2 "Gross Sales" shall include all monies received by License from the
sale of any and all Souvenir Items upon the Premises and elsewhere,
less the deduction of State and Federal sales and similar excise taxes,
and excluding any returns, refunds or similar credits against
Licensee's sales proceeds.
6.3 Since Licensor will be operating the sales of Souvenir Items on the
Premises at SWFs and collecting all monies from such sales, Licensor
shall retain the royalty set forth in Section 6.1(a) hereof with
respect to sales at the SWFs and shall remit the remaining ninety
percent (90%) of the Gross Sales to Licensee monthly on or before the
tenth (10th) day of each month based on the Gross Sales generated for
the immediately preceding month together with all amounts due for State
and Federal sales and similar excise taxes. Within twenty (20) days
following the end of each calendar quarter, Licensor shall calculate
the Gross Sales at the Premises at SWFs for such calendar quarter and,
if appropriate, make an adjusting payment to Licensee to the extent
required to ensure that the amounts remitted to Licensee are in
accordance with this Section 6.3. Licensee and its authorized agents
shall have the right to inspect Licensor's records with respect to
sales of Souvenir Items to verify the accuracy of payments to Licensee,
such inspection to be made at reasonable hours and at reasonable times.
6.4 Licensee shall pay the royalty set forth in Section 6.1(a) with respect
to the gift shop at the Racetrack and Section 6.1(b) hereof to Licensor
monthly on or before the tenth (10th) day of each month based on the
Gross Sales generated for the immediately preceding month. Within
twenty (20) days following the end of each calendar quarter, Licensee
shall calculate the Gross Sales at the Racetrack and at all
non-Premises sales locations for such calendar quarter and, if
appropriate, make an adjusting payment to Licensor to the extent
required to ensure that the royalties payable to the Licensor are in
accordance with Section 6.1(b) hereof.
VII. BOOKS AND RECORDS
7.1 Licensee shall keep and maintain complete and accurate books and
records of all of sales and other income from sales of Souvenir Items
at the Racetrack and non-Premises sales locations, and shall keep and
maintain complete and accurate books and records of all of sales and
other income from sales of Souvenir Items at the Premises at SWFs based
upon information provided by Licensor, and shall make said books and
records available for inspection by Licensor and its authorized agents,
and the Commission and its authorized agents at all reasonable hours
and at all reasonable times.
7.2 Licensor may, but is not obligated to, cause an audit of Licensee's
books and records as necessary to verify the correctness of the amount
paid by Licensee to Licensor. Such audit may be conducted not more
frequently than annually and shall be at the expense of Licensor.
Provided, however, if the audit shows an underpayment to the Licensor
of five percent (5%) or more of the amount actually paid, Licensee
shall reimburse Licensor for all costs and expenses incidental to such
audit, unless such underpayment results from information provided by
Licensor.
VIII. GENERAL COVENANTS OF LICENSOR AND LICENSEE
8.1 Licensor shall obtain and at all times maintain in full force and
effect, at its sole cost and expense, liability insurance covering all
aspects of Licensor's operation of the Premises with limits of not less
than $1,000,000 for bodily injury for one person, $2,000,000 for any
one accident and $300,000 for property damage. Licensee shall be named
as an additional insured on such coverage. Licensee shall obtain and at
all time maintain in full force and effect similar insurance coverage
for the operation of the gift shop at the Racetrack and shall name
Licensor as an additional insured on such insurance policies. Upon
request, Licensee shall provide Licensor with certificates of insurance
evidencing the required coverages and providing for Licensor to be sent
all notices of cancellation.
8.2 Licensee shall indemnify and save harmless Licensor and its directors,
officers, employees and agents from all third-party demands, claims,
causes of action and judgments, and all expenses in connection
therewith, resulting from any act or neglect of Licensee, or its
employees, agents and contractors on or about the Premises. This
indemnity shall continue notwithstanding the termination of this
Agreement with respect to any act or occurrence preceding such
termination.
8.3 Licensor shall indemnify and save harmless Licensee and its directors,
officers, employees and agents from all third-party demands, claims,
causes of action and judgments, and all expenses in connection
therewith, resulting from any negligence or willful misconduct of
Licensor, or its employees, agents and contractors on or about the
Premises. This indemnity shall continue notwithstanding the termination
of this Agreement with respect to any act or occurrence preceding such
termination.
IX. INVENTORY
9.1 Licensee acknowledges that it is responsible for the safekeeping and
maintenance of all the Souvenir Items which are displayed or otherwise
stored at the Premises for public sale. Each calendar quarter or at
such other times as selected by Licensee, Licensee may perform, or have
performed on its behalf, a physical inventory and accounting of all
Souvenir Items at the Premises. In the event that the results of the
physical inventory and accounting indicate that the number of Souvenir
Items that were delivered to the Premises for sale do not equal the
amount of Souvenir Items which remain on the Premises for sale, or
which are otherwise accounted for, Licensee shall so notify Licensor,.
and Licensor shall take all reasonable steps necessary to improve the
safekeeping and maintenance of the Souvenir Items. In no event,
however, shall Licensor be liable to Licensee for the cost of such
missing inventory.
X. DEFAULT AND TERMINATION
10.1 This Agreement may be terminated prior to the expiration of the term
upon the occurrence of any of the following events:
a. By the written agreement of the parties hereto;
b. By Licensor, if Licensee fails to pay any amounts to
Licensor within five (5) days following notice from
Licensor that such amounts are due; provided,
however, that if Licensee fails to pay amounts to
Licensor within five (5) days of when due more than
twice during any twelve (12) month period, Licensor
may terminate this Agreement without further
opportunity of Licensee to cure or correct such
failure.
c. By Licensee, if Licensor fails to pay any amounts to
Licensee within five (5) days following notice from
Licensee that such amounts are due; provided,
however, that if Licensor fails to pay amounts to
Licensee within five (5) days of when due more than
twice during any twelve (12) month period, Licensee
may terminate this Agreement without further
opportunity of Licensor to cure or correct such
failure.
d. By either party, if the other party (1) files or has
filed on its behalf or against it a petition under
any section or chapter of the Federal Bankruptcy Act,
which is not vacated within sixty (60) days, (2)
shall become insolvent or unable to pay its debts or
meet its obligations, (3) has a receiver or trustee
appointed for all or any portion of its assets, which
appointment is not vacated within sixty (60) days,
or, (4) makes an assignment to or for the benefit of
creditors of all or any portion of its assets.
e. By either party, if the other party fails to comply
with or perform any of the terms, conditions or
covenants under this Agreement to be complied with or
performed by such party for more than thirty (30)
days after written notice of such failure shall have
been given to such party, or within such further
period as is reasonably required to fully comply with
or perform such term, condition or covenant.
f. By Licensee, if Colonial Downs, L.P. loses its
license from the Commission to own the Racetrack, or,
if Stansley Racing Corp. loses its license from the
Commission to operate the Racetrack.
g. By Licensee, upon ninety (90) days advance written
notice to Licensor.
Written notice of any termination of this Agreement by either party
shall be given to the other party in the manner set forth herein, shall
be effective on and as of the date notice is given (or such later date
as may be set forth therein), and shall specify the reason for such
termination. Upon any termination of this Agreement, Licensee and
Licensor shall have all rights and obligations as set forth in Section
2.4 hereof.
XI. MISCELLANEOUS
11.1 Any notices by either party to the other shall be in writing and shall
be delivered personally; sent by facsimile, acknowledgment of receipt
requested; sent by overnight courier service, return receipt requested;
or, deposited in U.S. Mail certified mail, return receipt requested,
and addressed as follows:
To Licensor: Colonial Downs, L.P
P. O. Box 228
New Kent, Virginia 23124
Facsimile: 804-966-2063
Telephone: 804-966-2477
with a copy to: James L. Weinberg, Esq.
Hirschler, Fleischer, Weinberg, Cox & Allen
The Federal Reserve Bank Building
701 East Byrd Street
Richmond, Virginia 23219
Facsimile: 804-644-0957
Telephone: 804-771-9527
To Licensee: Colonial Gifts and Sportswear, Inc.
c/o Arnold W. Stansley
5700 Telegraph Rd.
Toledo, OH 43612
Facsimile: 419-476-7979
Telephone: 419-476-7751
with a copy to: Ronald J. Tice, Esq.
Eastman & Smith Ltd.
P.O. Box 10032
Toledo, OH 43699-0032
Facsimile: 419-241-1777
Telephone: 419-241-6000
Any party may at any time change the address for notices to it by
delivering, as aforesaid, a notice to the other party stating the
change and setting forth the changed address. The effective date of any
notice shall be the date it is personally delivered, received by
telefax or courier, or three (3) days after it is deposited in the U.S.
Mail in accordance with the provisions of this Section 11.1.
11.2 Nothing contained in this Agreement shall constitute or be construed to
be or create a partnership or joint venture between Licensor and
Licensee and, except as specifically set forth herein or otherwise
agreed in writing, neither shall have the power or authority to bind or
obligate the other.
11.3 This Agreement may not be changed or modified except by another
agreement in writing signed by the parties hereto.
11.4 The Section numbers and headings contained herein are for convenience
of reference only and are not intended to define, limit or describe
the scope or intent of any provision of this Agreement.
11.5 This Agreement shall be binding upon and inure to the benefit of each
party hereto, and its respective successors and assigns. This Agreement
may not be assigned by any party without the prior written consent of
the other party hereto, which consent shall not be unreasonably
withheld. Provided, however, that, subject to the approval of the
assignee by the Commission, Licensee may assign its rights and
obligations to any affiliated entity controlling, controlled by or
under common control with Licensee which is formed for the purposes of
providing the services contemplated herein with notice to, but not the
consent of, Licensor.
11.6 This Agreement shall be deemed to have been made and shall be construed
and interpreted in accordance with the laws of the Commonwealth of
Virginia.
11.7 The parties acknowledge that Stansley Racing Corp. has been made a
party to this Agreement solely because it holds the operator's license
for the SWFs located in Chesapeake, Richmond, Hampton, and Brunswick,
Virginia, and is expected to apply for SWF licenses for future SWF
locations. The parties agree that all obligations of Licensor set forth
in this Agreement shall be solely the obligations of Colonial Downs,
L.P., except as may specifically relate to the operator's license(s)
held by Stansley Racing Corp.
11.8 This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all
prior oral and written discussions and understandings. Acceptance of,
or acquiescence in, a course of performance rendered under this
Agreement shall not be relevant or admissible to determine the meaning
of this Agreement even though the accepting or acquiescing party has
knowledge of the nature of the performance and an opportunity to make
objection. No representations, understandings or agreements have been
made or relied upon in making of this Agreement other than those
specifically set forth herein.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into this
Agreement, by and through their respective duly authorized representatives, on
the day and year first above written.
COLONIAL DOWNS, L.P.
By: STANSLEY RACING CORP.,
its general partner
By: /s/ Jeffrey P. Jacobs
-------------------------------
Jeffrey P. Jacobs, CEO
STANSLEY RACING CORP.
By: /s/ Jeffrey P. Jacobs
-------------------------------
Jeffrey P. Jacobs, CEO
COLONIAL GIFTS AND SPORTSWEAR, INC.
By: /s/ Georgia Jean Stansley
--------------------------------
Georgia Jean Stansley, Vice President
<PAGE>
EXHIBIT A
Souvenir Items
Clothing
Hats
Pennants
Office Supplies (pens, pencils, paper, paperweights, etc.)
Post Cards
Photobooks
Picture Frames
Jewelry
Watches
Golf Items (tees, balls, club covers, etc.)
Drinking Containers (mugs, glasses, plastic bottles, etc.)
Coolers
Drink Holders
Coasters
Bottle Openers
Corkscrews
Key Chains
Stickers
Magnets
Towels
Napkins
Vases
Calendars
And any and all memorabilia, souvenirs, or goods which may maintain the image of
the Colonial Marks.
<PAGE>
EXHIBIT B
Coexistence Agreement
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,348,110
<SECURITIES> 0
<RECEIVABLES> 293,101
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,012,839
<PP&E> 61,500,165
<DEPRECIATION> 659,957
<TOTAL-ASSETS> 67,874,729
<CURRENT-LIABILITIES> 15,480,064
<BONDS> 0
0
0
<COMMON> 72,500
<OTHER-SE> 36,848,573
<TOTAL-LIABILITY-AND-EQUITY> 67,874,729
<SALES> 0
<TOTAL-REVENUES> 23,647,283
<CGS> 0
<TOTAL-COSTS> 24,113,975
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<EPS-PRIMARY> .01
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</TABLE>
