<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period ended June 30, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 333-18295
COLONIAL DOWNS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
VIRGINIA 54-1826807
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
10515 Colonial Downs Parkway
New Kent, VA 23124
(Address of Principal Executive Offices)
(804) 966-7223
(Registrant's telephone number, including area code)
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 [ ]
Number of Shares of Class A Common Stock outstanding
as of August 13, 1999 - 5,017,742
Number of Shares of Class B Common Stock outstanding
as of August 13, 1999 - 2,242,500
<PAGE> 2
COLONIAL DOWNS HOLDINGS, INC.
INDEX
Page
PART I. FINANCIAL STATEMENTS AND NOTES Number
------
Item 1. Financial Statements and Notes 3
Item 2. Management's Dicussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
<PAGE> 3
COLONIAL DOWNS HOLDINGS, INC.
BALANCE SHEETS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,331 $ 1,155
Horsemen's deposits 1,217 600
Accounts receivable 224 296
Prepaid expenses and other assets 418 227
--------- ---------
Total current assets 3,190 2,278
Property, plant and equipment
Land and improvements 15,449 15,581
Buildings and improvements 48,566 47,363
Equipment, furnishings, and fixtures 2,746 3,444
Leasehold improvements 1,122 1,122
--------- ---------
67,883 67,510
Less accumulated depreciation 2,975 2,186
--------- ---------
Property, plant and equipment, net 64,908 65,324
Licensing and organization costs, net of accumulated
amortization of $288 and $266, respectively 754 772
Other assets 295 207
--------- ---------
Total assets $ 69,147 $ 68,581
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,380 $ 6,417
Purses due horsemen 1,793 608
Accrued liabilities and other 1,820 730
Current maturities of long-term debt
and capital lease obligations 15,666 9,184
--------- ---------
Total current liabilities 24,659 16,939
Long-term debt and capital lease obligations 1,839 8,508
Notes payable - related parties 6,500 6,500
--------- ---------
Total liabilities 32,998 31,947
Commitments and contingencies
Stockholders' equity
Class A, common stock, $0.01 par value; 12,000,000 shares
authorized; 5,017,742 shares issued and outstanding 50 50
Class B, common stock, $0.01 par value; 3,000,000 shares
authorized; 2,242,500 shares issued and outstanding 23 23
Additional paid-in capital 42,842 42,842
Accumulated deficit (6,797) (6,281)
--------- ---------
Total stockholders' equity 36,149 36,634
--------- ---------
Total liabilities and stockholders' equity $ 69,147 $ 68,581
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 4
COLONIAL DOWNS HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Revenues
Pari-mutuel and simulcasting commissions $ 6,700 $ 6,833 $ 13,321 $ 13,277
Other 533 935 935 1,263
-------- -------- -------- --------
Total revenues 7,233 7,768 14,256 14,540
Operating expenses
Direct operating expenses
Purses, fees, and pari-mutuel taxes 2,639 3,323 4,651 6,374
Simulcast and other direct expenses 2,882 4,105 5,213 7,402
-------- -------- -------- --------
Total direct operating expenses 5,521 7,428 9,864 13,776
Selling, general and administrative
expenses 1,377 1,340 2,493 1,829
Depreciation and amortization 409 401 814 815
-------- -------- -------- --------
Total operating expenses 7,307 9,169 13,171 16,420
Earnings (loss) from operations (74) (1,401) 1,085 (1,880)
Interest expense, net (957) (526) (1,601) (999)
-------- -------- -------- --------
Loss before income taxes (1,031) (1,927) (516) (2,879)
Provision for (benefit from) income taxes - - - -
-------- -------- -------- --------
Net loss $ (1,031) $ (1,927) $ (516) $ (2,879)
======== ======== ======== ========
Earnings (loss) per share data:
Basic and diluted loss per share $ (0.14) $ (0.27) $ (0.07) $ (0.40)
Weighted average number of
shares outstanding 7,260 7,250 7,260 7,250
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 5
COLONIAL DOWNS HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30, June 30,
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (516) $ (2,879)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 814 815
Other 31 -
Changes in operating assets and liabilities:
Increase in accounts receivable and other assets (214) (106)
Increase (decrease) in trade accounts payable (169) 605
Increase in horsemen's deposits (617) (218)
Increase in amounts due horsemen and accrued liabilities 2,167 482
----------- -----------
Net cash provided by (used in) operating activities 1,496 (1,301)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (373) (1,025)
Decrease in construction payables (759) (4,316)
----------- -----------
Net cash used in investing activities (1,132) (5,341)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from long-term debt, capital leases, and other 96 5,287
Payments on long-term debt and capital leases (284) (364)
----------- -----------
Net cash provided by (used in) financing activities (188) 4,923
----------- -----------
Net change in cash and cash equivalents 176 (1,719)
Cash and cash equivalents, beginning of period 1,155 3,348
----------- -----------
Cash and cash equivalents, end of period $ 1,331 $ 1,629
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 6
COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted. These financial
statements should be read in conjunction with the annual financial statements
for the year ended December 31, 1998 of Colonial Downs Holdings, Inc. (the
"Company") included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 31, 1999.
In the opinion of management, the financial statements include all
adjustments (consisting only of normal recurring adjustments) considered
necessary to present fairly the financial position of the Company as of June
30, 1999 and the results of its operations and its cash flows for the
respective six month periods ended June 30, 1999 and 1998. Interim results for
the six months ended June 30, 1999 are not necessarily indicative of results
that may be expected for the fiscal year ending December 31, 1999.
Basic earnings (loss) per share is computed by dividing earnings 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 (which can consist of stock options and warrants)
that could share in earnings of an entity.
Certain reclassifications have been made in the prior years' financial
statements in order to conform to the June 30, 1999 presentation.
4. LONG-TERM DEBT, NOTES PAYABLE-RELATED PARTIES, AND CAPITAL LEASES
Long-Term Debt, Notes Payable-Related Parties, and Capital Leases,
consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -------------
<S> <C> <C>
Note payable to a bank maturing June 2000, bearing interest
at a variable rate (8.69% at June 30, 1999), quarterly
principal payments of $500,000 commencing in March 1999,
collateralized by substantially all assets, except the
Racing Centers, of the Company and guaranteed by certain
shareholders and related parties $ 10,000,000 $ 10,000,000
Convertible subordinated note payable to CD Entertainment,
Ltd., maturing September 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 5,500,000
</TABLE>
<PAGE> 7
COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Unaudited)
2. LONG-TERM DEBT, NOTES PAYABLE-RELATED PARTIES, AND CAPITAL LEASES -
(CONTINUED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -------------
<S> <C> <C>
Note payable to a bank, maturing August 2001, bearing
interest at prime plus 1.0% (8.75% at June 30, 1999),
with monthly principal payments of $15,000, collateralized
by certain fixed assets 555,000 645,000
Note payable to an insurance company, maturing October 1999,
bearing interest at 6.83%, with monthly payments of $8,622
including interest 33,975 83,557
Installment loans 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% 106,366 153,974
Note payable to Maryland Jockey Club, maturing December 2005,
bearing interest at a rate of 7.75% payable quarterly for
the first two years and equal installments of interest and
principal to be paid over the remaining five year term of
the note 1,450,000 1,450,000
Note payable under the revolving credit facility with a bank,
bearing interest at a variable rate (8.65% at June
30, 1999), due June 30, 2000, collateralized by substantially
all assets, except the Racing Centers, of the Company and
guaranteed by certain shareholders and related parties 5,000,000 5,000,000
Convertible subordinated note payable to CD Entertainment,
Ltd., maturing August 2000, with an interest rate of 8.5% 1,000,000 1,000,000
Note payable from the thoroughbred purse account, due
August 1999, with interest rate of 5.48%, collateralized
by the Hampton Racing Center 360,000 360,000
----------- ------------
24,005,341 24,192,531
Less current maturities 15,666,391 9,184,378
----------- ------------
7,338,950 15,008,153
Less long-term debt - related party 6,500,000 6,500,000
----------- ------------
Long-term debt, including capital lease obligations $ 1,838,950 $ 8,508,153
=========== ===========
</TABLE>
<PAGE> 8
COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Unaudited)
3. SUBSEQUENT EVENTS
In July 1999, the Company signed a letter of intent to enter into a
purchase option agreement to acquire 85 acres of land for the development of a
new racetrack and simulcast wagering racing center in Dumfries, Virginia. The
Company intends to apply for a license from the Virginia Racing Commission to
operate a racetrack (including live and simulcast wagering) on this property.
Pursuant to the terms of the contract between Colonial Downs, L.P. and
Norglass, Inc., the general contractor engaged to manage the construction of
the Track, the Company filed an arbitration claim against Norglass in which
Norglass counterclaimed. In the proceeding, Colonial Downs, L.P. challenged
the validity of Norglass' mechanic's liens for approximately $11.8 million
(subsequently reduced to $6.5 million) and asserted a damage claim against
Norglass for approximately $7.7 million. Norglass filed a counterclaim against
Colonial Downs, L..P. for $5.8 million. In August 1999, the American
Arbitration Association rendered a decision favorable to Norglass. Colonial
Downs L..P. was ordered to pay Norglass $1,965,000 in the arbitration. In
addition, Colonial Downs L..P. was ordered to pay interest of approximately
$285,000 and arbitration costs of approximately $98,000.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
The Company, through its subsidiaries, holds the only licenses to own and
operate a racetrack (the "Track") and Racing Centers in Virginia. The Company
currently operates Racing Centers in Chesapeake, Richmond, Hampton, and
Alberta (Brunswick County), Virginia, and may open two additional Racing
Centers if suitable opportunities are identified and referenda are passed.
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) admission fees,
program, racing form and tip sheet sales, and certain other ancillary
activities; (iv) commissions 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.
PROFIT CENTER ANALYSIS
For the three months and six months ended June 30, 1999, net loss
decreased $0.9 million and $2.4 million, respectively, compared to the
corresponding periods of the prior year. Net income at the Racing Centers
improved compared to the corresponding prior periods by $1.0 million and $2.5
million for the three months and six months ended June 30, 1999, respectively.
Net income at the Track improved by $0.6 million and $1.1 million for the three
months and six months ended June 30, 1999, respectively. Corporate overhead
increased by $0.3 million and $0.6 million for the three months and six months
ended June 30, 1999, respectively, and net interest expense increased by $0.4
million and $0.6 million for the three months and six months ended June 30,
1999, respectively.
Racing Centers. Revenues at the Racing Centers increased $0.4 million and
$0.7 million for the three months and six months ended June 30, 1999,
respectively, compared to the corresponding periods of the prior year. These
increases are believed to be the result of effective target marketing and an
increasing effort to reach new patrons through promotions and out-door
billboard advertising. Purse expenses decreased $0.3 million and $1.1 million
for the three months and six months ended June 30, 1999, respectively compared
to the corresponding period of the prior year as a result of the new
thoroughbred and amended harness horsemen's contracts. The changes reflected
in the Amended and Restated Management and Consulting Agreement between the
Company and Maryland-Virginia Racing Circuit, Inc., a wholly-owned subsidiary
of the Maryland Jockey Club (the "MJC Agreement"), resulted in a reduction of
expenses by $ 0.2 million and $0.4 million for the three months and six months
ended June 30, 1999, respectively, compared to the corresponding periods of the
prior year. Efficiencies in personnel costs, printing, and other expenses
reduced costs by an additional $0.1 million and $0.3 million for the three
months and six months ended June 30, 1999, respectively, compared to the
corresponding periods of the prior year. As a result, net income at the Racing
Centers increased $1.0 million and $2.5 million for the three months and six
months ended June 30, 1999, respectively.
Track. Revenues at the Track decreased $0.9 million and $1.0 million for
the three months and six months ended June 30, 1999, respectively, compared to
the corresponding periods of the prior year as there were only 15 race days in
these periods in 1999 versus 38 race days in 1998. Expenses decreased $1.5
million and $2.1 million for the three months and six months ended June 30,
1999, respectively, compared to the corresponding periods of the prior year due
to the same reason. In an effort to minimize losses during the 1999 live
harness season, the Company put an emphasis on signal sales by running a Monday
through Wednesday schedule. Despite such efforts, the live harness season has
lost approximately $450,000 through June 30, 1999.
<PAGE> 10
Corporate. For the three months and six months ended June 30, 1999,
respectively, corporate overhead increased $0.3 million and $0.6 million over
the corresponding periods of the prior year. The increase in corporate
overhead was primarily attributed to an increase in professional fees of $0.4
million and $0.7 million for the three months and six months ended June 30,
1999, respectively, relating to the Norglass arbitration offset by cost savings
of $0.1 million for the three months and six months ended June 30, 1999.
Interest Expense, Net. Interest expense, net of interest income,
increased $0.4 million and $0.6 million for the three months and six months
ended June 30, 1999, respectively, from the corresponding periods of the prior
year. The increase in interest expense was primarily a result of an increase
in debt from $21.9 million at June 30, 1998 to $24.0 million at June 30, 1999
and the provision for interest of $285,000 relating to the Norglass arbitration
award. (The increase in debt is largely attributable to the issuance of $1.45
million note to Maryland-Virginia Racing Circuit, Inc. in settlement of
disputed management fees for 1997 and 1998.
The following table sets forth certain operating results as a percentage
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
(Percentage of Net Revenues)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Pari-mutuel and simulcasting commissions 92.6% 88.0% 93.4% 91.3%
Other 7.4% 12.0% 6.6% 8.7%
------- -------- -------- --------
Total revenues 100.0% 100.0% 100.0% 100.0%
Direct operating expenses:
Purses, fees, and pari-mutuel taxes 36.5% 42.8% 32.6% 43.8%
Simulcast and other direct expenses 39.8% 52.8% 36.6% 50.9%
------- -------- -------- --------
Total direct operating expenses 76.3% 95.6% 69.2% 94.7%
Selling, general, and administrative expenses 19.0% 17.3% 17.5% 12.6%
Depreciation and amortization 5.7% 5.2% 5.7% 5.6%
------- -------- -------- --------
Earnings (loss) from operations (1.0)% (18.1)% 7.6% (12.9)%
Interest income (expense), net (13.2)% (6.7)% (11.2)% (6.9)%
------- -------- -------- --------
Loss before taxes (14.2)% (24.8)% (3.6)% (19.8)%
</TABLE>
Total Revenues. Total revenues for the three months and six months ended
June 30, 1999 decreased $0.5 million (6.9%) and $0.3 million (2.0%),
respectively, from the corresponding periods of the prior year. The decrease
in total revenues primarily reflects a reduction of $0.9 million and $1.0
million in live harness revenues due to an earlier Harness season in 1998. The
earlier harness season is also primarily responsible for the decrease in other
revenue. The Company's inaugural live Harness season was from April 24 to July
5, 1998 (38 race days as of June 30) as compared to the 1999 season which was
from May 31 to August 4, 1999 (15 race days as of June 30). Excluding the
impact of the change in Harness season from the corresponding prior period, the
Company's Racing Centers generated an increase of $0.4 million (6.9%) and $0.7
million (5.3%) for the three months and six months ended June 30, 1999,
respectively, from the corresponding periods of the prior year. Management
believes that through effective advertising campaigns, the Company was able to
increase revenue at the Racing Centers even though Alberta was only opened five
days per week in 1999. From January until late April 1998, Alberta was opened
seven days per week.
<PAGE> 11
Direct Operating Expenses. As a percentage of revenues, direct operating
expenses decreased 19.3% and 25.5% for the three months and six months ended
June 30, 1999, respectively, from the corresponding periods of the prior year.
The decrease in operating expenses was principally attributed to decreases in
purse expense, fees, and simulcast and other direct expenses. The Company
incurred purse expense of $6.1 million in 1998. In 1999, the Company will
contribute a total of $4.6 million for thoroughbred and harness purses, of
which $3.6 million will be expensed in 1999. The remaining $1.0 million of
1999 purse contribution is expected to be paid from funds on deposit at
December 31, 1998 and the repayment of a loan from the thoroughbred purse
account. As a result of a new thoroughbred contract and an amended harness
horsemen's contract, purse expense for the three months and six months ended
June 30, 1999 was approximately $0.4 million and $1.3 million less than the
corresponding periods in 1998, which accounted for 23.2% and 33.3% of the
decrease in direct operating expenses, respectively, from the corresponding
periods in 1998. The decrease in fees and pari-mutuel taxes was primarily a
result of the Company's success in negotiating an amendment to the MJC
Agreement. Savings as a result of this amendment accounted for approximately
$0.2 million and $0.4 million or 9.4% and 9.7% of the decrease in direct
operating expenses for the three months and six months ended June 30, 1999,
respectively. The decrease in simulcast and other direct expenses was
primarily a result of the changes in Track operations (approximately $0.9
million and $1.1 million or 45.9% and 28.9% of the decrease in direct operating
expenses for the three months and six months ended June 30, 1999, respectively)
discussed in Total Revenues above and the implementation of cost saving
measures, personnel reduction, and improvements in operating efficiencies
(approximately $0.4 million and $1.1 million or 10.5% and 28.2% of the decrease
in direct operating expenses for the three months and six months ended June 30,
1999, respectively).
Selling, General and Administrative Expenses (SG&A). As a percentage of
revenues, SG&A increased 1.7% and 4.9% for the three months and six months
ended June 30, 1999, respectively, from the corresponding periods of the prior
year. The increase in SG&A as a percentage of sales was primarily due to an
increase in professional fees of approximately $0.4 million and $0.7 million
for the three months and six months ended June 30, 1999, respectively, relating
to the Norglass arbitration (see footnote 3 to the Financial Statements and
Legal Proceedings in Part II) offset by implementation of cost saving measures.
Interest Expense, Net. See Profit Center Analysis above.
Net Loss. Net loss for the three months and six months ended June 30,
1999 was $1.0 million and $0.5 million, respectively, compared to net loss of
$1.9 million and $2.9 million for the corresponding periods of the prior year.
The decrease in net loss was a result of the factors discussed above.
<PAGE> 12
LIQUIDITY AND SOURCES OF CAPITAL
Cash Flows. For the six months ended June 30, 1999, operating activities
provided approximately $1.5 million of cash. The net loss adjusted for non-
cash items such as depreciation and amortization provided $0.3 million.
Accruals for increases in amounts due horsemen and other accrued liabilities
also provided $2.2 million of cash. The increase in accounts receivable and
the other assets and reduction of accounts payable utilized $0.4 million of
cash. Funding of horsemen's deposits utilized an additional $0.6 million of
cash. Investing activities utilized approximately $1.1 million of cash,
resulting from the reduction of construction payables and capital expenditures.
Financing activities utilized $0.2 million of cash, primarily from principal
payments on long-term debt.
The Company received commitments from an affiliate of a shareholder and
the Maryland Jockey Club to lend the Company $900,000 and $600,000,
respectively to be used for purses during the 1999 thoroughbred meet. These
loans are expected to close and be funded by August 31, 1999. The loans will
bear interest at the prime rate and will be repaid in the amount of $750,000
per year from amounts that would otherwise be contributed to the thoroughbred
purse account.
In June 1999, the Company entered into a three year contract with the
Virginia Horsemen's Benevolent and Protective Association to provide for
thoroughbred purses. Under the contract, $3,125,000 is guaranteed to be
available for purses for the 1999 thoroughbred meet. Of this amount,
$1,500,000 is considered to be an advance of purse money due in years 2000 and
2001. In years 2000 and 2001, the Company is required to pay 5 1/4% of the
handle generated from simulcast thoroughbred racing at the Company's Racing
Centers and the Track to the thoroughbred purse account. The advance will be
repaid in an annual amount of $750,000 plus interest at the prime rate from the
5 1/4% that would otherwise be contributed to the purse account.
EBITDA is a widely accepted financial indicator of a company's ability to
service and incur debt. The Company's EBITDA for the first six months of 1999
and 1998 was $2.0 million and $(1.1) million, respectively. The increase in
EBITDA is primarily due to higher income before interest and income taxes due
to the changes in revenues, operating expenses and selling, general and
administrative expenses discussed in "Results of Operations" above. EBITDA
should not be considered in isolation from or as a substitute for net income or
cash flow measures prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity. EBITDA
is defined as the sum of income before interest, income taxes, and depreciation
and amortization.
On January 11, 1999, the Company negotiated an agreement with PNC Bank,
N.A. ("PNC"), which restructured the principal payment of the Credit Agreement
dated June 26, 1997. Under the agreement, in lieu of making principal payments
on the due dates, the guarantors are required to deliver to PNC, letters of
credit in the face amount of future principal payments. The letters of credit
shall have an expiration date of July 31, 2000. A guarantor posted letters of
credit in the amounts of $1.0 million, $500,000, and $500,000 in lieu of the
Company making the principal payment due December 31, 1998, March 31, 1999 and
June 30, 1999, respectively. The Company anticipates that the guarantors will
continue to post letters of credit for the principal payments due during 1999.
<PAGE> 13
The Company expects that cash flows from operations and the availability
of other capital and financial resources will provide sufficient liquidity to
meet its normal operating requirements, capital expenditure plans, and existing
debt service over the 1999 fiscal year. Additionally, the Company is assessing
means by which it can pay the arbitration award to Norglass of approximately
$2.3 million (including interest and arbitration fees). The Company has a
strong balance sheet with several unencumbered assets and other means to secure
the funds necessary to pay such award.
SEASONALITY AND THE EFFECT 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. 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.
IMPACT OF YEAR 2000
The result of computer programs being written using two digits rather than
four to define the applicable year is known as the "Year 2000" issue. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This computer
mistake could result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions, or engage in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company is currently in
the process of replacing certain hardware and software in order to be year 2000
compliant. The project is scheduled to be completed during the third quarter
of 1999 without material costs. The Company relies significantly on the
totalisator system used in pari-mutuel wagering, which is provided and
supported by an outside vendor and the year 2000 is a concern. The Company has
received notification from this vendor certifying that the system which
supports Colonial Downs is Year 2000 compliant. If the software changes and
modifications (both internal and external) of existing software are not made,
or are not completed timely, the Year 2000 issue could have a material impact
on the operations of the Company.
FORWARD LOOKING INFORMATION
The statements contained in this report which are not historical facts,
including, but not limited to, statements found under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
above, are forward looking statements that involve a number of risks and
uncertainties. The actual results of the future events described in such
forward looking statements in this report could differ materially from those
contemplated by such forward looking statements. Among the factors that could
cause actual results to differ materially are the risks and uncertainties
discussed in the report, including without limitations the portions of such
statements under the caption referenced above, and the uncertainties set forth
from time to time in the Company's other public reports and filings and public
statements. Such risks include but are not limited to acts by parties outside
the control of the Company, including the Maryland Jockey Club, horsemen
associations, and the Virginia Racing Commission, political trends, the effects
of adverse general economic conditions, and governmental regulation.
<PAGE> 14
PART II - OTHER INFORMAION
Item 1. LEGAL PROCEEDINGS
The Virginia Racing Commission (the "Commission") ordered Colonial Downs
to enter into an agreement with the thoroughbred horsemen representative group,
the Virginia Horsemen's Benevolent and Protective Association, Inc. (the
"VaHBPA"), by April 28, 1999. Colonial Downs was unsuccessful in reaching an
agreement with the VaHBPA by April 28, and the Commission conducted an informal
fact finding conference on May 14, 1999 on the matter. The fact finding
conference hearing officer recommended to the Commission that the Company's
license to operate Racing Centers be suspended for five days. The Commission
has deferred acting on the hearing officer's recommendation. Colonial Downs is
vigorously contesting the matter and an appeal of the Commission's order has
been filed in the Richmond Circuit Court. The appeal is currently pending.
The information set forth in Note 3 in the Notes to the Financial
Statements in Part I of this report is also incorporated by reference thereto.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 10.42 Thoroughbred Horsemen's Agreement
Exhibit 27 Financial Data Schedule
B Reports on Form 8-K The Company filed a Current Report on Form 8-K
during the three months ended June 30, 1999
relating to a change in NASDAQ market listing.
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLONIAL DOWNS HOLDINGS, INC.
By: /s/ Ian M. Stewart
---------------------------------
Ian M. Stewart, President
and Chief Financial Officer
August 16, 1999
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<CURRENT-ASSETS> 3,190
<PP&E> 67,883
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<PAGE> 1
THOROUGHBRED HORSEMEN'S AGREEMENT
THIS AGREEMENT is entered into this 16th day of June, 1999, effective as
of January 1, 1999, by and between COLONIAL DOWNS, L.P., a limited partnership
("Colonial Downs"), and the VIRGINIA HORSEMEN'S BENEVOLENT AND PROTECTIVE
Association., a Virginia not-for-profit corporation (the "VaHBPA")
WHEREAS, Colonial Downs owns and operates (through its affiliate Stansley
Racing Corp.) in New Kent County, Commonwealth of Virginia, the facility
known as the Colonial Downs racetrack (the "Racetrack") and four satellite
wagering facilities located in Brunswick, Chesapeake, Hampton and Richmond,
Virginia (the "SWFs");
WHEREAS, the VaHBPA is a trade organization composed of owners, trainers,
owner-trainers, and owner-breeders (the "Members") of thoroughbred race
horses;
WHEREAS, the VaHBPA provides benevolence programs and other services for
its Members and their employees who are and will be engaged in live racing at
the Racetrack; and
WHEREAS, the parties hereto desire to bring about a close and
understanding relationship among owners and trainers of thoroughbred race
horses (the "Horsemen"), including the Members, the VaHBPA, Colonial Downs,
and the public;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties desiring to be legally bound agree as follows:
1. Term of Agreement.
A. Effective Date. This Agreement shall become effective as
12:01 a.m. January 1, 1999 and shall remain in effect through midnight,
December 31, 2001 (the "Initial Term"), unless otherwise terminated as
provided herein.
<PAGE> 2
B. Renewal. This Agreement shall continue in full force and
effect on January 1, 2002 for an additional period of three years (the
"Renewal Term" and together with the Initial Term, the "Term") upon either
party hereto delivering written notice of renewal to the other party no later
than 60 days in advance of scheduled expiration (November 1, 2001); provided
that in event of renewal by either party, Colonial Downs shall continue to
contribute to the Thoroughbred Partners' Account (as defined herein) at least
5.25% of SWF Thoroughbred Handle (as defined herein) for the Renewal Term.
Upon such election this Agreement shall continue to be in full force and
effect for the Renewal Term. This provision will become inoperative in the
event of bankruptcy by Colonial Downs.
2. Scope of Agreement. Except as specifically set forth herein,
this Agreement shall only apply to the live thoroughbred race meetings ("Race
Meetings") and pari-mutuel wagering conducted on thoroughbred horse racing at
the Racetrack and the SWFs during the Term.
3. Exclusive Representation. During the Term, the VaHBPA shall be
the exclusive representative of its Members with respect to the matters set
forth herein. VaHBPA hereby warrants and represents that it is the majority
Horsemen's group for Horsemen that have and are expected to race at the
Racetrack, and Colonial Downs hereby recognizes it as such.
4. Accounts.
A. Thoroughbred Partners' Account. Colonial Downs maintains
Accounts 455823207609 and 45823207601 maintained at Wachovia Bank, Account
102071401 maintained at Citizens and Farmers Bank and an account at Virginia
National Bank, Charlottesville branch (collectively, the "Thoroughbred
Partners' Account").
<PAGE> 3
The parties agree to promptly consolidate these accounts
into a single account at Virginia National Bank, Charlottesville branch, and
that the financial institutions at which the Thoroughbred Partners' Account
are maintained may be changed at any time by agreement of the parties.
Colonial Downs and VaHBPA agree that all funds maintained in the Thoroughbred
Partners' Account are funds that are to be maintained in trust on behalf of
and for the benefit of recipients of the thoroughbred purse account funds
distributed, according to the regulations promulgated by the Virginia Racing
Commission from time to time and by agreement between the parties hereto, to
participants engaging in thoroughbred horse racing at the Racetrack. In
furtherance of such purpose, the parties hereto have executed a trust
agreement substantially in the form of Exhibit A attached hereto and shall
take such further action as may be necessary to have the Thoroughbred
Partners' Account designated a trust account by the financial institution at
which the Thoroughbred Partners' Account is maintained. In addition, either
party may elect upon written notice to the other party to have a third-party
trustee, acceptable to both parties, appointed as trustee of each Account.
All interest or earnings whatsoever on the amounts paid to the Thoroughbred
Partners' Account shall accrue solely to the benefit of the Thoroughbred
Partners' Account. All funds deposited to the Thoroughbred Partners' Account
shall be invested in an interest-bearing account which provides market rates
of return, or government or bank securities, and Colonial Downs shall provide
all reasonable assurances of the security of the investments made.
B. Horsemen's Account. Monies payable to Horsemen as purses
under this Agreement as purses shall be deposited into such account not less
often than weekly. The appropriate portions of purse money shall be made
available to the earners thereof within seventy-two (72) hours (dark days and
Sundays excluded) after the result of the race in which such money was earned
<PAGE> 4
has been declared official; provided, that in the event of any dispute as to
the result of a race due to a drug test or other regulatory inquiry, the purse
money shall not be made available until final resolution thereof by the
stewards, the Virginia Racing Commission or the courts, as the case may be.
No portion of such money payable as purses to any earner thereof (other than
jockey and gate fees) shall be deducted by Colonial Downs unless requested in
writing by the person to whom such monies are payable or his duly authorized
representative or as required by order of the stewards. The Thoroughbred
Partners' Account and the Horsemen's Account and the investment or deposit
schedules of Colonial Downs with respect to such account during any Race
Meeting shall be subject to examination at any reasonable time by the
President of VaHBPA or his nominee. Interest earned on the Thoroughbred
Partners' Account and Horsemen's Account shall be distributed fifty percent
(50%) thereof to each of (a) Colonial Downs, to help defray the costs of
maintaining such account, including, but not limited to, the Horsemen's
bookkeeper and any third-party trustee fees; and (b) the Backstretch Life
Improvement Fund (as defined in Section 16 hereof).
Purse Amounts.
A. On-Track Wagering. Colonial Downs shall pay to the Horsemen
whose horses race at Colonial Downs as purses the amount specified for purses
in Section 59.1-392 of the Code of Virginia (the "Purse Monies"). Nomination,
sustaining, starting, and entry fees paid by Horsemen, funds provided by the
Virginia Breeders Fund or by race sponsors and SWF Thoroughbred Handle (as
defined in Paragraph 5.C) shall not be considered purses paid by Colonial
Downs for purpose of determining the applicable amounts for Purse Monies.
<PAGE> 5
B. 1999 Amount. For 1999, Colonial Downs shall pay or guarantee
payment of $3,125,000 to the Thoroughbred Partners' Account established by the
Trust Agreement between these parties dated August 31, 1998, for use as purses
and other permitted uses as set forth below, which amount is (i) premised upon
25 days of live racing and average daily purses of no less than $125,000 per
day for each day of live racing at the Racetrack, exclusive of payments from
the Virginia Breeders' Fund and (ii) includes all funds due such Account
in repayment of a Promissory Note, dated November 1, 1998. Colonial Downs
agrees that the amount of purses to be paid with respect to the Virginia Derby
shall be fixed with the consent of the VaHBPA, which consent shall not be
unreasonably withheld, delayed or conditioned, and, subject to the approval of
the Maryland Jockey Club, any funds generated by sponsorship(s) or promotional
fees paid to Colonial Downs, from whatever source derived, with respect to the
Virginia Derby, shall be paid in their entirety to the Thoroughbred Partners'
Account for use as purses in addition to $3,125,000.00 specified above.
Colonial Downs will endeavor in good faith to secure the Maryland Jockey
Club's consent to the foregoing.
(ii) Deposits. Colonial Downs shall commence to deposit funds to
the Thoroughbred Partners' Account immediately, which deposits shall not be
less than $100,000.00 per month. On or before August 31, 1999, Colonial Downs
shall have deposited funds into the Thoroughbred Partners' Account such that
the Account balance shall not be less than $2,000,000.00. One half of the
interest income from all funds so deposited shall be applied to the
Backstretch Life Improvement Fund and used in a manner consistent with Section
16 of this Agreement.
<PAGE> 6
(iii) NTRA Dues. The VaHBPA may, at its discretion, designate a
portion of total purse monies to be paid, as the VaHBPA dues payable to the
NTRA. If so designated, those dues to be paid from the total purse monies
available shall be paid within the second quarter of each calendar year of the
Agreement including any renewal.
(iv) Advances. Of the total $3,125,000 in payments guaranteed to
be paid to the Thoroughbred Partners' Account for purses, $1,500,000.00 shall
consist of an advance to the Thoroughbred Partners' Account from purse monies
to be made available in the year 2000 and 2001. CD Entertainment Ltd., an
affiliate of Jeffrey Jacobs ("CD Entertainment"), shall arrange for $900,000
of the $1,500,000 to be advanced, and Maryland-Virginia Racing Circuit, Inc.,
a subsidiary of the Maryland Jockey Club ("MVRC"), shall arrange for $600,000
of the $1,500,000 to be advanced. Such advance from MVRC or its affiliate
shall bear interest at the Prime Rate as published in the Eastern edition of
the Wall Street Journal from time to time. Such advance from CD Entertainment
or its affiliate shall bear interest at the lesser of (i) its or its
affiliate's cost of funds based upon evidence reasonably satisfactory to the
VaHBPA or (ii) the Prime Rate as published in the Eastern addition of the Wall
Street Journal from time to time. Those sums shall be advanced for purses in
1999, and shall be repaid to CD Entertainment Ltd. and MVRC in equal
installments from sums due the Thoroughbred Partners' Account for purses
during the years 2000 and 2001, on a "first dollar in, first dollar out"
basis.
<PAGE> 7
C. 2000-2001.
(i) Amount. Effective January 1, 2000 and continuing each
year throughout the term of this Agreement and any continuation of this
Agreement as may occur, Colonial Downs shall contribute to the Thoroughbred
Partners' Account maintained for purse monies, 5.25% of all revenue generated
from pari-mutuel wagering on simulcast thoroughbred races (other than
simulcast broadcasts of races held at the Racetrack) at the SWFs (the "SWF
Thoroughbred Handle").
(ii) Purses. Purses for thoroughbred racing in the year 2000
and beyond shall paid based upon amounts available in the Thoroughbred
Partners' Account after repayment of one-half of the advance on purses in the
amount of $1,500,000 referenced above and all accrued interest thereon, and
after payment of administrative fees and NTRA dues as may be designated by
the VaHBPA, and shall include amounts received from live handle generated at
the Racetrack as required by statute.
(iii) Other Revenues. Colonial Downs, Jeffrey P. Jacobs, or
any affiliated legal entity shall pay 25% of annual net income (calculated
according to generally accepted accounting principles consistently applied)
from wagers placed on thoroughbred races through any national account wagering
system operated by Colonial Downs, Jeffrey Jacobs, or any affiliated entity,
but not in excess of 3% of gross income from such wagers, to the Thoroughbred
Partners' Account for purse monies each year this Agreement is in effect.
Estimated payments shall be made quarterly and reconciled annually, and
sufficient financial data supporting the payments and reconciliation shall be
provided the VaHBPA to allow verification of the amounts paid as accurate.
<PAGE> 8
(iv) Other Contributions to Thoroughbred Partners' Account.
Colonial Downs shall be considered to have satisfied its contribution of 5.25%
of SWF Handle by contribution of any amounts received from the Maryland Jockey
Club or any affiliate thereof as contributions to the Thoroughbred Partners'
Account for purse monies, and contribution of any amounts realized by a
reduction of the pari-mutuel taxes currently in effect to the Thoroughbred
Partners' Account during each year this Agreement remains in effect. The
primary obligation to fund the Thoroughbred Partners' Account for purse monies
with 5.25% of all SWF Thoroughbred Handle shall remain at all times with
Colonial Downs; nothing in this Agreement shall be considered or construed to
relieve Colonial Downs of that obligation.
(v) Sliding Scale. Colonial Downs may, upon written notice
to the VaHBPA given no less than 60 days prior to January 1 of each year of
this Agreement, elect to adopt a sliding scale funding mechanism as set forth
in Exhibit B to this Agreement. Notice shall be provided separately for each
year that the sliding scale is utilized. The sliding scale set forth in
Exhibit B is for illustration purposes only; actual amounts may vary according
to actual receipts for each period. Under no circumstances may the gross
percentage paid to the Thoroughbred Partners' Account for purse monies for
each year fall below 5.25%. In the event Colonial Downs elects to adopt the
sliding scale mechanism set forth in Exhibit B to this Agreement, all amounts
due shall be paid to the Thoroughbred Partners' Account no later than 24 hours
after receipt by Colonial Downs. Should any payment(s) not be made on a
timely basis, all amounts as would be due the Thoroughbred Partners' Account
for purse monies under a strict 5.25% formula shall become due and payable
immediately.
D. Stakes Race Purses. The percentage of the purse monies under
Subsections 5.A, B, and C above to be paid to Horsemen participating in stakes
races held at the Racetrack shall be limited to twenty-five percent (25%) of
the total purses paid unless a higher percentage is agreed between the parties
in good faith negotiations. Agreement on this matter will not be unreasonably
withheld by either party.
<PAGE> 9
E. Administrative Fee. The administrative fee paid to the
VaHBPA for services rendered to horsemen as the majority horsemen's group
shall be 2% of total purses paid with respect to live racing at the Racetrack,
exclusive of Virginia Breeders' Fund payments. For the years 2000 and 2001,
that amount shall include all monies paid into the Thoroughbred Partners'
Account without consideration of amounts repaid as advances made to the 1999
purses. The parties will agree on advance payments of the administrative fee
prior to live racing at the Racetrack in recognition of the VaHBPA's year
round service to horsemen, obligations with respect to horsemen's interests
before the Virginia Racing Commission, and the VaHBPA efforts at assistance to
Colonial Downs on legislative issues.
F. Other Legalized Wagering. Except as otherwise specifically
provided herein, in the event that wagers other than on thoroughbred horse
racing (including but not limited to the sale of lottery tickets and/or
participation in other wagering enterprises on Colonial Downs' premises) are
authorized by legislative action and a portion of the proceeds is provided for
thoroughbred racing, the parties shall be bound by the allocations in such
legislation. In the event the allocation of revenues is not addressed by
legislative action, the parties shall negotiate in good faith a written
agreement as to the allocation of the revenue to be received therefrom by
Colonial Downs and the Horsemen.
<PAGE> 10
6. Purse Mechanics.
A. Purses Schedules and Condition Books. Colonial Downs shall
use its reasonable judgment to estimate attendance, pari-mutuel handle and
breakage. Using that information and after consultation with a designated
representative of VaHBPA, Colonial Downs shall establish a tentative average
daily overnight purse schedule and a tentative stakes purse schedule for each
Race Meeting in accordance with the terms hereof. Colonial Downs shall
exercise reasonable care to try to avoid significant underpayments or
overpayments of purses at all Race Meetings. Colonial Downs will send to the
VaHBPA before each Race Meeting its first condition book and proposed purse
schedules.
B. Overpayment of Purses. Colonial Downs and the VaHBPA will
cooperate to the fullest extent possible to avoid overpayment of purses to
Horsemen as of the end of any year during the Term. If Colonial Downs makes
an overpayment in excess of the amount computed under Section 5, the
overpayment may be offset against any underpayment in any succeeding or
preceding Race Meeting.
C. Underpayment of Purses. During any Race Meeting, Colonial
Downs will increase purses as appropriate to minimize underpayment. If, at
the end of any Race Meeting, during the Term there exists an underpayment of
purses, the underpayment shall be distributed as additional purse distribution
in the next succeeding race meet. Colonial Downs shall use its reasonable best
efforts to help assure that there are no underpayments or overpayments of
purses at any Race Meeting.
D. Purse Notices. The pari-mutuel handle, pari-mutuel handle
commission, and purse distribution figures, as well as the percentage figures
which represent the relationship between purses and the total of pari-mutuel
income and breakage shall be posted on the bulletin board in the Racing
Secretary's office each day of a Race Meeting.
<PAGE> 11
7. Virginia-Bred Races. Colonial Downs shall include in its
conditions book a minimum of one ( 1) race per day devoted to Virginia-breds,
for each day of racing conducted at the Racetrack unless sufficient horses are
not available therefor. Races devoted to Virginia-breds shall be run if no
less than six (6) betting interests have been entered therein.
8. Stalls and Track Facilities.
A. Stalls and Track Facilities, During and After Race Meetings.
Colonial Downs shall make available at least one thousand (1,000) stalls to
Horsemen during each Race Meeting. Access to the racing strip, barns, track
kitchen facilities, dormitories, and related backside facilities at the
Racetrack (collectively, the "Backside Facilities") necessary for training
purposes shall be made available by Colonial Downs without charge to Horsemen
who have horses training for the immediately upcoming live Race Meeting for at
least ten (10) days prior to the opening of each Race Meeting. The Backside
Facilities shall also be made available by Colonial Downs without charge to
Horsemen who had raced at the Racetrack, for at least ten (10) days following
the last day of each Race Meeting. Notwithstanding the foregoing, such
periods may be shortened if the Backside Facilities are then needed for a live
standardbred racing meet, and Colonial Downs will provide advance notice to
the Horsemen in any such event. During the aforesaid periods, Colonial Downs
will, at its own expense, make water and electricity available to each barn in
use and keep the racing surfaces properly harrowed and watered.
<PAGE> 12
B. Off-Season Stabling. During the Term of this
Agreement,Colonial Downs and the VaHBPA, on or before March 1 of each year,
shall meet and discuss the terms under which the Horsemen may be permitted to
rent stalls at Colonial Downs for those periods not referred to in Section 8.A
above when such facilities are not needed for standardbred racing meets
(the"Off-Season"). Colonial Downs will notify Horsemen by March 1 of each year
of its decision and the criteria for occupation of stalls during the Off
Season for the coming year.
C. Vendors. Colonial Downs will not impose upon Horsemen any
exclusive arrangement concerning farriers, feedmen, tack supplies, or any
other suppliers or providers of service customarily used by owners and
trainers; provided, that if Colonial Downs permits the use of bedding material
other than straw it may require the use of an exclusive supplier in order to
facilitate removal of such used material. Notwithstanding the foregoing
Colonial Downs reserves the right to impose reasonable non-discriminatory
requirements for security, safety and environmental reasons. Colonial Downs
will use its reasonable best efforts to keep unlicensed persons in the above
categories off its premises.
D. Stall Applications. Prior to each Race Meeting, Colonial
Downs shall establish a cut-off date for the submission of stall applications.
Colonial Downs shall, in the exercise of its sole business judgment, determine
the terms for and approve or disapprove applications for stalls. Colonial
Downs may consider, among other things, the following criteria in allocating
stalls to Horsemen for use during Race Meetings:
(1) The overall quality of the horses listed on the stall
application;
(2) The quality of the racetrack(s) where the horses listed on
the stall applications have previously raced;
(3) The number of starts a trainer listed on the application
has made at past Colonial Downs Race Meetings (where applicable);
<PAGE> 13
(4) The financial and professional integrity of the trainer
listed on the stall application;
(5) The total number of stalls requested by a trainer in
relation to the number of available stalls; and
(6) The best interests of Colonial Downs and thoroughbred
racing. Each Horsemen accepting a stall at the Racetrack shall be required to
use his or her best efforts to run his or her horses at the Racetrack during the
Race Meeting consistent with the horses' physical condition, fitness and race
conditions.
9. Racing Committee. Colonial Downs and the VaHBPA shall organize
and maintain a joint committee to be known as the "Racing Committee." The
VaHBPA and Colonial Downs shall each appoint not more than four (4)
representatives to the Racing Committee. The Racing Committee shall meet at
least once not more than thirty (30) days, nor less than fourteen (14) days,
prior to each of Race Meeting, and at least once within seven (7) days after
the conclusion of each Race Meeting and otherwise at the written request of
any two members of the Racing Committee. The Racing Committee shall at its
meetings discuss such things as: design and construction of stable area,
barns, tack rooms, dormitories, promotion, publicity, track conditions (bad
weather closing), racing-related programs, reserved seats and passes for
Horsemen, maintenance of stable areas, number of races, purse schedules, track
kitchen, other matters which related to attendance, pari-mutuel handle or the
quality of racing, and health benefit programs, death benefits, drug and
alcohol abuse programs, and any other program which will aid and assist the
racing industry in Virginia to hire, retain and care for its personnel at the
highest possible level.
<PAGE> 14
10. Representations and Warranties.
A. VaHBPA. In addition to the representations and warranties
contained elsewhere in this Agreement, the VaHBPA warrants, represents to and
covenants with Colonial Downs that during the Term:
(1) This Agreement has been approved by the Board of Directors
of the VaHBPA;
(2) This Agreement is valid and enforceable against it
according to its terms;
(3) The VaHBPA and its officials shall not participate in,
delay, interrupt, dispute, or bring about temporary or permanent cessation or
suspension of racing at Colonial Downs during any Race Meeting;
(4) Each VaHBPA official shall utilize all of his or her powers
of persuasion and all legal means at their disposal to ensure that all VaHBPA
Members and other backside personnel comply with the terms of this Agreement;
(5) The VaHBPA and its officials shall respond to requests for
consents and other approvals by Colonial Downs in a timely and business-like
manner, giving due consideration for the need of Colonial Downs to move
quickly and decisively;
(6) This Agreement will be made available for review by Members
of the VaHBPA and all other licensed owners, trainers, employees and backside
personnel at the VaHBPA office; and
(7) The VaHBPA shall use its best efforts to ensure that the
backside area of the Racetrack is maintained in a safe, clean, and orderly
condition.
<PAGE> 15
B. Colonial Downs. In addition to the representations and
warranties contained in this Agreement, Colonial Downs warrants, represents to
and covenants with the VaHBPA that during the Term:
(1) This Agreement has been approved by its General Partners;
(2) This Agreement is valid and enforceable against it
according to its terms;
(3) Colonial Downs shall use its reasonable best efforts to
keep the Backside Facilities in a safe, clean and orderly condition when in
use: and
(4) Colonial Downs shall use its reasonable best efforts
to assist the VaHBPA in developing health and welfare programs for backstretch
personnel; provided, this section imposes no obligation on either party to
fund any such program.
11. VaHBPA Office. Colonial Downs will provide the VaHBPA, without
charge, a suitable office located on the grounds of the Racetrack. Colonial
Downs will furnish said office with appropriate office furniture and one or
more telephones. VaHBPA will pay the applicable long-distance charges for
usage of such telephones.
12. Racing Officials. Colonial Downs will mail to the President of
the VaHBPA a written list of the persons appointed by Colonial Downs to serve
as racing of officials during any Race Meeting at the same time as it submits
said list to the Virginia Racing Commission in accordance with the provisions
of Regulations.
13. Governmental Approval. Nothing contained in this Agreement
shall be construed as requiring either party to perform any term when such
performance is contrary to law or requires prior governmental approval;
provided, however, both parties shall use their best efforts to obtain
governmental approval if such is required and shall submit a copy of
this Agreement to the Virginia Racing Commission.
<PAGE> 16
14. Out-of-State Simulcasting. During the term of this Agreement,
the VaHBPA as authorized representative of the Horsemen for interstate
simulcasting purposes, consents and authorizes Colonial Downs to negotiate and
contract with simulcast and receiving facilities, including off-track wagering
facilities, for the conduct of off-track wagering on live thoroughbred races
emanating from the Racetrack, pursuant to the Interstate Horse Racing Act of
1978, P.L. 95-515. Colonial Downs will consider the best interests of live
racing when simulcasting. To the extent required by law, out-of-state
simulcasting for all of Colonial Downs' races shall be subject to the consent
of the VaHBPA, which consent shall not be unreasonably withheld, delayed or
conditioned. In the event consent is withheld, the VaHBPA shall set forth its
reasons for withholding the consent within a reasonable time in advance of the
intended simulcast.
15. Copies of Documents; Database. Colonial Downs will send a copy
of its stall application blank, stakes purse program and condition book for
each race meeting to the VaHBPA, on or before the first day they are
distributed to Horsemen. Additionally, Colonial Downs shall provide the
VaHBPA copies of all filings it makes with the U. S. Securities and Exchange
Commission promptly after such filings are made. Colonial Downs shall share
with and coordinate all information and data on horsemen racing at the track
with the VaHBPA. The parties will work jointly to develop and maintain an
effective database of horsemen racing in Virginia.
<PAGE> 17
16. Backstretch Improvement Fund.
A. Establishment of Fund. Colonial Downs shall establish a
Backstretch Life Improvement Fund (the "Fund") into which shall be deposited
(a) interest income as provided in Section 4 above, (b) funds representing
unclaimed Horsemen's accounts with Colonial Downs and (c) such additional
amounts as may be contributed by Colonial Downs, any Horseman or any other
person. Monies in the Fund shall be invested in interest bearing accounts and
certificates of deposit in federally insured commercial institutions.
B. Use of Funds. Fifty percent (50%) of the Fund shall be
allocated to services and programs for Horsemen, including but not limited to
a drug/alcohol rehabilitation program, a GED program, a recreational program,
employment education services, and the chaplaincy program. The remaining
fifty percent (50%) shall be allocated to capital improvements in the amount
of $30,000 for 1999, and for each prior year in which such funds have not been
expended, for construction and provision of the following facilities on the
backside: additional bathrooms; creation of a recreation center and/or an
outside recreation facility; and other projects as may be mutually agreed upon
by the Racing Committee. Colonial Downs shall match the $30,000 for 1999 and
for any year for which the term of this Agreement is extended. Colonial Downs
shall provide an annual accounting of all such expenditures to the VaHBPA
within a reasonable time after the close of the meet during each year of this
Agreement.
C. Gap. Colonial Downs shall design and determine the price
and feasibility of moving the "gap" in the railing on the track, or of
creating an additional gap located in a position more convenient to actual use
of the track by horsemen.
<PAGE> 18
17. Right to Terminate. Either party may terminate this Agreement
upon the other party's failure to substantially perform as required under
this Agreement and such failure continues for thirty (30) days following the
date written notice of default is mailed in accordance with Section 22. Such
termination shall not constitute an election of remedy, nor shall it
constitute a waiver of a party's other remedies at law or equity.
Additionally, Colonial Downs may terminate this Agreement upon written notice
to the VaHBPA if the Racetrack and all SWFs are closed for ninety (90)
continuous days.
18. Indemnification. The VaHBPA shall indemnify and save harmless
Colonial Downs, its agents, representatives, employees, officers, directors
and stockholders, their respective successors and assigns, and all persons
acting by, through, under, or in concert with any of them, from and against
any and all demands, liabilities, loss, costs, damages, or expenses of
whatever nature or kind, including fees of attorneys and all other expenses,
arising out of or in any way related to or occasioned by Colonial Downs'
performance under Section 5.C. (Administrative Fee).
19. Mediation; Arbitration. In the event of any disputes or
differences arising out of this Agreement, which the parties have been unable
to resolve after reasonable efforts to do so, either party may refer the
dispute or difference to a mediator mutually acceptable to the parties. In
the event such mediation is unsuccessful, or the parties are unable to agree
on a mediator, either party may refer the dispute or difference for final
settlement to arbitration in accordance with the following procedures:
A. By the Commission. The party so desiring to refer the
matter shall request the Commission to arbitrate the dispute or difference by
a panel comprised of either one (1) or three (3) of its members, as its
Chairman shall designate, in accordance with such rules as the Chairman of the
Commission determines, including, but not limited to, the Commercial
Arbitration Rules of the American Arbitration Association (the "AAA") in
effect on the date of this Agreement.
<PAGE> 19
B. By Another Arbitrator. If the Commission declines to
arbitrate the dispute or difference, the arbitration shall be conducted by a
single arbitrator designated by the Chairman of the Commission; and if the
chairman declines to designate an arbitrator, the arbitration shall be
conducted by a single arbitrator selected by Colonial Downs and the VaHBPA in
accordance with the rules of the AAA.
C. General. The arbitration shall take place in Richmond,
Virginia, unless the parties otherwise mutually agree, and shall be governed
by the substantive contract law of the Commonwealth of Virginia and the
arbitration rules as determined pursuant to Section 19.A. The arbitration
award shall be final, binding and conclusive on the parties, and not subject
to any appeal. No party nor the arbitrator may disclose the existence or
results of any arbitration hereunder except as may be necessary in litigation
to enforce the award or as may be required by the Commission. Judgment upon
the award rendered may be entered in any court having jurisdiction, or
application may be made to such court for judicial recognition of the award or
any order of enforcement thereof, as the case may be. This Section 19.C shall
not be construed to limit the right of either party to apply to a court of
competent jurisdiction for other equitable relief to preserve the status quo
or prevent irreparable harm. The costs of the arbitration incurred the parties
for hearing reporting fees, rental of a hearing room and all AAA fees, costs
and services charges and of the arbitrator shall be paid by Colonial Downs,
except that hearing postponement or cancellation fees charges by AAA or the
arbitrator shall be borne exclusively by the canceling or postponing party.
Conversely, with respect to all other matters, unless the arbitrator otherwise
so determines and provides in the arbitration award, each party shall bear its
own costs and expenses incurred by that party in connection with arbitration,
including without limitation each party's own travel expenses, hearing witness
expenses and attorney's fees.
<PAGE> 20
20. Further Assurances. The VaHBPA and Colonial Downs shall
execute such instruments and documents, and shall give such further
assurances, as may be necessary to accomplish the purpose and intent of this
Agreement. Additionally, upon execution of this Agreement, the VaHBPA
immediately shall notify its national affiliate and affiliates in other states
that it has entered into this Agreement.
21. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
22. Notices. All notices, requests, demands or other
communications as may be required by this Agreement shall be in writing and,
if mailed, shall be by certified mail, return receipt requested, and shall be
deemed to have been given when received by personal delivery or otherwise. A
courtesy copy of such communication shall also be sent via telefax to the last
known telefax number of the other parties. The current addresses of persons
to whom communications are to be sent are as follows:
Colonial Downs: Jeffrey P. Jacobs, CEO
Colonial Downs Holdings, Inc.
425 Lakeside Avenue
Cleveland, OH 44113
Ian M. Stewart, President
Colonial Downs Holdings, Inc.
10501 Horsemen's Drive
Providence Forge, VA 23124
Copy to: James L. Weinberg, Esq.
Hirschler, Fleischer, Weinberg, Cox & Allen
The Federal Reserve Bank Building
701 E. Byrd Street, 15th floor
Richmond, VA 23219
Martin Jacobs, Esq.
General Counsel
The Maryland Jockey Club
P. O. Box 130
Laurel, MD 20725
<PAGE> 21
VaHBPA: C. B. Woodberry Payne, President
Virginia Horsemen's Benevolent and
Protective Association, Inc.
36 Garrett Street
Warrenton, VA 22186
Copy to: David M. Cook, Esq.
Manley, Burke, Lipton & Cook
225 W. Court Street
Cincinnati, OH 45202
23. Waivers. No waiver or any breach of this Agreement or any term
hereof shall be effective unless such waiver is claimed. No waiver or any
breach shall be deemed to be a waiver of any other or any subsequent breach.
24. Applicable Law This agreement is being executed and delivered
in the Commonwealth of Virginia and shall be construed and enforced in
accordance with the laws of that state.
25. Severability. If any provision of this Agreement is declared
invalid by any tribunal, or becomes invalid or inoperative by operation of
law, the remaining provisions of this Agreement shall not be affected thereby
and shall remain in full force and effect.
<PAGE> 22
26. Entire Agreement: Modification. This Agreement contains the
entire Agreement between the parties and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof; provided. No modification, variation or amendment of
this Agreement shall be effective unless such modification, variation or
amendment is in writing and has been signed by the parties. Colonial Downs
shall be bound by this Agreement if and only if the VaHBPA enters into a
Letter Agreement, dated as of the date hereof, with Colonial Downs. In the
event the VaHBPA does not enter into such side letter, this Agreement shall be
null and void.
<PAGE> 23
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first stated above.
VIRGINIA HORSEMEN'S COLONIAL DOWNS, L.P.
BENEVOLENT AND PROTECTIVE
ASSOCIATION, INC. By: Stansley Racing Corp., its
general partner
By: ________________________________ By:_________________________
C. B. Woodberry Payne, President Ian M. Stewart, President
For purposes of Section 5.B(iv) only and for no other provision:
MARYLAND-VIRGINIA RACING CIRCUIT CD ENTERTAINMENT LTD.
__________________________________________ _____________________________
Joseph A. DeFrancis, President Jeffrey P. Jacobs, Manager
<PAGE> 1
EXHIBIT A
FORM OF
TRUST AGREEMENT
THIS TRUST AGREEMENT is entered into this ___ day of __________, 1999, by
and between COLONIAL DOWNS, L.P., a Virginia limited partnership (the
"Trustee"), and VIRGINIA HORSEMEN'S BENEVOLENT AND PROTECTIVE ASSOCIATION,
INC., a not-for-profit corporation ("VaHBPA"), on behalf of the thoroughbred
horsemen engaging in thoroughbred racing at Colonial Downs' racetrack (the
"Track") (collectively, the "Beneficiaries").
W I T N E S S E T H:
WHEREAS, pursuant to prior agreements that have expired and an Agreement,
dated as of June __, 1999 ("Horsemen Agreement"), relating to live
thoroughbred racing at Colonial Downs, among other matters, the Trustee has
and will make deposits into an account of Virginia National Bank,
Charlottesville branch (the "Thoroughbred Partners' Account") which will be
used to fund purses and related payments to the Beneficiaries participating in
racing at the Track during the 1999 thoroughbred racing season and other years
governed by the Horsemen Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. The Account. The Trustee shall maintain the Thoroughbred Horsemens'
Account at a financial institution which is insured by an agency of the United
States government.
2. Deposits. The Trustee shall deposit all funds required by the
Horsemen Agreement into the Thoroughbred Horsemens' Account. The funds so
deposited into the Thoroughbred Horsemens' Account, exclusive of interest
earned thereon, are hereinafter referred to as the "Trust Account Funds." No
other funds shall be deposited into the Thoroughbred Horsemens' Account, and
the Trustee shall not commingle any other funds with the Trust Account Funds.
3. Withdrawals. The VaHBPA, on behalf of the Beneficiaries, grants
the Trustee the authority to withdraw funds from the Horsemen's Accounts to
make payments required to be made pursuant to the terms and provisions of the
Horsemen Agreements, including, without limitation, to provide for the payment
of purses and related awards to the Beneficiaries.
4. Title to Funds in the Account. The Trustee shall hold only legal
title to the Trust Account Funds and shall not have any equitable or
beneficial interest in such Funds. Accordingly, the Trust Account Funds are
excluded from the Trustee's estate for purposes of 11 U.S.C. Section 541(d),
as amended.
<PAGE> 2
5. Interest. The Trustee understands and accepts that interest, if
any, earned on the Funds will be reported under its employer identification
number, that such reporting is done as a matter of convenience for the
administration of the Thoroughbred Partners' Account and that the receipt of
such interest does not affect the beneficial and equitable title that the
parties have to such interest and is not in derogation of the rights and
entitlements of the parties as set forth herein and in the Horsemen Agreement.
6. Trustee's Duties. The duties of the Trustee under this Agreement
shall be limited to the safekeeping and disbursement of the Trust Account
Funds and documents under the terms and conditions of this Agreement. The
Trustee shall be entitled to rely on and may assume the genuineness and
authenticity of any signatures purported to be made by the parties hereto,
their lawful representatives, and successors or assigns. Upon election of
either party hereto, an independent third party may be appointed trustee of
the Thoroughbred Horsemens' Account and the Trustee hereunder may be relieved
of its duties as trustee but shall be bound by the other provisions of this
Agreement.
7. Limitation on Liability. The Trustee shall not be liable for any
claims, damages, liabilities, losses, costs, or expenses arising from the
Trustee's acts or omissions with respect to the Trust Account Funds or its
performance hereunder, unless such actions or omissions result from the
Trustee's negligence or willful misconduct.
8. Reimbursement of Expenses. The Trustee shall be reimbursed in the
form of one-half of the interest accruing on the Trust Account Funds for all
costs and expenses reasonably incurred by it in connection with the
administration of the Account. including payment of any trustee fees to a
third party trustee.
9. Termination. This Agreement shall terminate on the date on which
all payments under the Horsemen Agreement have been made and the Horsemen
Agreement is no longer in effect. The parties hereto acknowledge and agree
that upon such termination, the balance of the Thoroughbred Partners' Account
should be zero.
10. Notices. All notices, approvals, and other communications
authorized or required to be given between the parties hereto shall be validly
given or made if in writing and sent in accordance with the terms and
conditions of the Horsemen Agreement.
11. Governing Law. This Agreement shall be governed, construed, and
enforced in accordance with the laws of the Commonwealth of Virginia, without
regard to any conflicts of law provisions thereof.
<PAGE> 3
12. Miscellaneous. Any action, suit, or proceeding in respect of or
arising out of this Agreement may be prosecuted as to any party hereto in
Richmond, Virginia. Each party hereto consents to the exercise of
jurisdiction over its person by any court situated in Richmond, Virginia and
having jurisdiction over the subject matter of any such action, suit, or
proceeding. The invalidity or unenforceability of any provision of this
Agreement in any particular respect shall no affect the validity and
enforceability of any other provision of this Agreement or of the same
provision in any other respect. This Agreement and the Horsemen Agreement set
forth the entire understanding of the parties to this Agreement with respect
to the operation of the trust for the Thoroughbred Partners' Account and may
not be amended except by a written instrument executed by all parties hereto.
Other than the Horsemen Agreement, any previous agreements or understandings
among the parties hereto regarding the subject matter hereof are merged into
and superseded by this Agreement. All of the covenants, stipulations, terms,
and conditions of this Agreement shall extend to and be binding upon the
respective successors and assigns of the parties hereto, but this Agreement
shall not be assigned by the Trustee without the prior written consent of the
Beneficiaries.
This Agreement or any amendment hereto may be executed in two or more
counterparts, each of which shall constitute an original, and all of which
together shall constitute one and the same Agreement.
VIRGINIA HORSEMEN'S COLONIAL DOWNS, L.P.
BENEVOLENT AND PROTECTIVE
ASSOCIATION, INC. By: Stansley Racing Corp., its
General Partner
By: _________________________________ By: _______________________
C. B. "Woodberry" Payne, President Ian M. Stewart, President
<PAGE> 1
EXHIBIT B
SLIDING SCALE
Assuming:
$120,000,000 Total handle
$ 92,400,000 Thoroughbred handle (77%)
Monthly handle based roughly on 1998 actual figures.
Up to $23,000,000 (months 1-3) 2 1/2% = $ 575,000
$23,000,001-38,000,000 (months 4-5) 3 1/2% = 525,000
$38,000.001-46,000,000 (month 6) 4 1/2% = 360,000
$46,000,000-54,000,000 (month 7) 5 1/2% = 440,000
$54,000,000-69,000,000 (months 8-9) 7 1/2% = 1,125,000
Over 69,000,000 (months 10-12) 8% = 1,826,000
____________________________________ _______ ___________
Thoroughbred handle $92,400,000 X 5 1/4% = $ 4,851,000
Assuming:
$120,000,000 Total handle
$ 92,400,000 Thoroughbred handle (77%)
$ 7,700,000 Average monthly handle
Up to $ 23,100,000 (months 1-3) 2 1/2% = $ 577,500
$23,100,001-38,500,000 (months 4-5) 3 1/2% = 539,000
($15,400,000)
$38,500,001-46,200,000 (month 6) 4 1/2% = 346,000
($ 7,700,000)
$46,200,001-53,900,000 (month 7) 5 1/2% = 423,500
($ 7,700,000)
$53,900.001-69,300,000 (months 8-9) 7 1/4% = 1,116,500
($15,400,000)
Over $69,300,000 (months 10-12) 8% = 1,848,000
($23,100,000)
_____________________________________ _______ __________
Thoroughbred handle $92,400,000 X 5 1/4% = $ 4,851,000
#173984 v.4 16919.00204
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