<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 September 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 November 12, 1999 - 5,025,242
Number of Shares of Class B Common Stock outstanding
as of November 12, 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 17
Item 6. Exhibits and Reports on Form 8-K 18
<PAGE> 3
COLONIAL DOWNS HOLDINGS, INC.
BALANCE SHEETS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,364 $ 1,155
Horsemen's deposits 2,363 600
Accounts receivable 641 296
Prepaid expenses and other assets 364 227
--------- ---------
Total current assets 4,732 2,278
Property, plant and equipment
Land and improvements 15,449 15,581
Buildings and improvements 48,685 47,363
Equipment, furnishings, and fixtures 2,754 3,444
Leasehold improvements 1,122 1,122
--------- ---------
68,010 67,510
Less accumulated depreciation 3,379 2,186
--------- ---------
Property, plant and equipment, net 64,631 65,324
Licensing and organization costs, net of accumulated
amortization of $300 and $266, respectively 742 772
Other assets 211 207
--------- ---------
Total assets $ 70,316 $ 68,581
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,527 $ 6,417
Purses due horsemen 1,523 608
Accrued liabilities and other 1,989 730
Current maturities of long-term debt
and capital lease obligations 16,420 9,184
Current maturities of long-term debt - related parties 8,825
--------- ---------
Total current liabilities 32,284 16,939
Long-term debt and capital lease obligations 2,530 8,508
Notes payable - related parties - 6,500
--------- ---------
Total liabilities 34,814 31,947
Commitments and contingencies
Stockholders' equity
Class A, common stock, $0.01 par value; 12,000 shares
authorized; 5,025 shares issued and outstanding 50 50
Class B, common stock, $0.01 par value; 3,000 shares
authorized; 2,242 shares issued and outstanding 23 23
Additional paid-in capital 42,873 42,842
Accumulated deficit (7,444) (6,281)
--------- ---------
Total stockholders' equity 35,502 36,634
--------- ---------
Total liabilities and stockholders' equity $ 70,316 $ 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>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Revenues
Pari-mutuel and simulcasting commissions $ 7,107 $ 6,941 $ 20,428 $ 20,218
Other 674 806 1,609 2,069
-------- -------- -------- --------
Total revenues 7,781 7,747 22,037 22,287
Operating expenses
Direct operating expenses
Purses, fees, and pari-mutuel taxes 2,397 3,331 7,048 9,704
Simulcast and other direct expenses 3,532 3,714 8,745 10,389
-------- -------- -------- --------
Total direct operating expenses 5,929 7,045 15,793 20,093
Selling, general and administrative
expenses 1,496 1,348 3,989 3,998
Depreciation and amortization 416 359 1,230 1,062
-------- -------- -------- --------
Total operating expenses 7,841 8,752 21,012 25,153
Earnings (loss) from operations (60) (1,005) 1,025 (2,866)
Interest expense, net (587) (536) (2,188) (1,554)
-------- -------- -------- --------
Loss before income taxes (647) (1,541) (1,163) (4,420)
Provision for (benefit from) income taxes - - - -
-------- -------- -------- --------
Net loss $ (647) $ (1,541) $ (1,163) $ (4,420)
======== ======== ======== ========
Earnings (loss) per share data:
Basic and diluted loss per share $ (0.09) $ (0.21) $ (0.16) $ (0.61)
Weighted average number of
shares outstanding 7,268 7,268 7,268 7,268
</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)
Nine Months Ended
September 30, September30,
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,163) $ (4,420)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,230 1,062
Other 31 -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable and other assets (494) 57
Increase in trade accounts payable 343 951
Increase in accrued liabilities and other 1,259 539
Increase in horsemen's deposits and purses, net (848) (238)
----------- -----------
Net cash provided by (used in) operating activities 358 (2,049)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (500) (1,279)
Decrease in construction payables (907) (4,512)
----------- -----------
Net cash used in investing activities (1,407) (5,791)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from long-term debt, capital leases, and other 1,996 6,325
Payments on long-term debt and capital leases (738) (538)
----------- -----------
Net cash provided by (used in) financing activities 1,258 5,787
----------- -----------
Net change in cash and cash equivalents 209 (2,053)
Cash and cash equivalents, beginning of period 1,155 3,348
----------- -----------
Cash and cash equivalents, end of period $ 1,364 $ 1,295
=========== ===========
Supplemental Cashflow Information:
Reclassification of Norglass liability from accounts
payable to note payable - related party $ 2,325 $ -
</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
September 30, 1999 and the results of its operations and its cash flows for the
respective nine month periods ended September 30, 1999 and 1998. Interim
results for the nine months ended September 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 year's financial
statements in order to conform to the September 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>
September 30, December 31,
1999 1998
----------- -------------
<S> <C> <C>
Note payable to a bank maturing June 30, 2000, bearing interest
at a variable rate (8.5% at September 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>
September 30, December 31,
1999 1998
----------- -------------
<S> <C> <C>
Note payable to a bank, maturing August 2001, bearing
interest at prime plus 1.0%, with monthly principal payments
of $15,000, collateralized by certain fixed assets 510,000 645,000
Note payable to an insurance company, maturing October 1999,
bearing interest at 6.83%, with monthly payments of $8,622
including interest 8,544 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% 81,936 153,974
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 a revolving credit facility with a bank,
bearing interest at a variable rate (8.5% at September
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 to Norglass, maturing September 24, 2000, monthly
interest payment at a rate of 6% until maturity 1,850,000 -
Note payable to Maryland Jockey Club, bearing interest at the
prime rate, payable in two equal installments during the
years 2000 and 2001 600,000 -
Note payable to CD Entertainment, Ltd., bearing interest at the
prime rate, payable in two equal installments during the
years 2000 and 2001 900,000 -
Note payable to CD Entertainment, Ltd., maturing August 2001,
with monthly interest payment at the Lender's cost of funds
plus one-half percent (approximately 8.5% at September 30, 1999) 400,000 -
Note payable to CD Entertainment, Ltd., maturing September 2001,
with monthly interest payment at the Lender's cost of funds
plus one-half percent (approximately 8.5% at September 30, 1999) 475,000 -
Note payable from the thoroughbred purse account, due
August 1999, with interest rate of 5.48%, collateralized
by the Hampton Racing Center - 360,000
----------- ------------
27,775,480 24,192,531
Less current maturities 16,420,479 9,184,378
current maturities - related parties 8,825,000 -
----------- ------------
2,530,001 15,008,153
Less notes payable - related parties - 6,500,000
----------- ------------
Long-term debt, including capital lease obligations $ 2,530,001 $ 8,508,153
=========== ===========
</TABLE>
<PAGE> 8
COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Unaudited)
3. Norglass Settlement
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.
The Company settled with Norglass in September 1999 for a total of
$2,325,000, of which $475,000 was paid in October 1999 and the remaining
balance was accepted by Norglass as a note payable maturing September 24, 2000,
with monthly interest due at a rate of 6%. The note is secured by a letter of
credit which was provided by a shareholder of the Company. The Company has
agreed to reimburse the shareholder for the cost of the letter of credit.
4. Reclassification
In order to conform with the June 30, 1999 financial statements, the June
30, 1998 financial statements, as reported on the Company's Form 10-Q filed
with the Security and Exchange Commission on August 16, 1999, were
reclassified. Simulcast and other direct expenses as reported for the three
months and six months ended June 30, 1998 were $4,105,000 and $7,402,000,
respectively. Simulcast and other direct expenses as reclassified for the
three months and six months ended June 30, 1998 were $3,860,000 and $6,675,000,
respectively. Selling, general and administrative expenses as reported for the
three months and six months ended June 30, 1998 were $1,340,000 and $1,829,000,
respectively. Selling, general and administrative expenses as reclassified for
the three months and six months ended June 30, 1998 were $1,585,000 and
$2,556,000, respectively.
<PAGE> 9
COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Unaudited)
5. Subsequent Event
In September 1999, the Company filed an application with the Virginia
Racing Commission (the "Commission") for licenses to own and operate a
racetrack in Dumfries, Virginia. In November 1999, the Dumfries Town Council
rejected the Company's application for rezoning and a conditional use permit
for the proposed racetrack. As of September 30, 1999, the Company has expensed
approximately $100,000 of development costs related to the Dumfries racetrack.
Although the Company's application with the Commission is still pending, it is
unlikely that the Commission will award licenses to the Company in the absence
of zoning approval by the Town of Dumfries.
Additionally, the Virginia Turf Club, Inc. filed an application for
licenses to own and operate a racetrack in Prince William County that would
compete directly with the Company's track. The site for the proposed track is
subject to zoning approval by the Prince William County Board of Supervisors.
As set forth in the application, if granted licenses for a racetrack, Virginia
Turf Club anticipates seeking licenses for the two remaining satellite wagering
facilities. If such licenses were granted to the Virginia Turf Club and the
track and satellite wagering facilities were constructed and operated, such
operation would likely have a material adverse effect on the Company's
financial condition.
The Commission is anticipated to rule on the Company's and the Virginia
Turf Club's applications prior to the expiration of the Prince William County
racetrack referendum on November 30, 1999.
<PAGE> 10
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 satellite wagering facilities ("Racing
Centers") in Virginia. The Company currently operates Racing Centers in
Chesapeake, Richmond, Hampton, and Alberta, 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 nine months ended September 30, 1999, net loss
decreased $0.9 million and $3.3 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 $3.5
million for the three months and nine months ended September 30, 1999,
respectively. Net loss at the Track decreased by $0.1 million and $1.0 million
for the three months and nine months ended September 30, 1999, respectively.
Corporate overhead increased by $0.1 million and $0.6 million, for the three
months and nine months ended September 30, 1999, respectively, and net interest
expense increased by $0.1 million and $0.6 million for the three months and
nine months ended September 30, 1999, respectively. An analysis of these
changes is set forth below in reviews of the operations at the Racing Centers
and the Track, respectively.
Racing Centers. Revenues at the Racing Centers increased $0.1 million and
$0.9 million for the three months and nine months ended September 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 during the first and second quarter. In the third
quarter, the Company's primary marketing effort was directed toward the live
thoroughbred meet and less emphasis was placed on Racing Center marketing.
Purse expenses decreased $0.7 million and $1.7 million for the three months and
nine months ended September 30, 1999, respectively compared to the
corresponding periods 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 $0.6 million for the three months and nine months ended September
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 $0.3 million for the nine months ended September 30,
1999, compared to the corresponding period of the prior year. As a result, net
income at the Racing Centers increased $1.0 million and $3.5 million for the
three months and nine months ended September 30, 1999.
<PAGE> 11
Track. In an effort to minimize losses from live racing, the Company's
1999 Harness and Thoroughbred meets were scheduled to optimize revenue from
export simulcasting. As the majority of the costs associated with live racing
are fixed, the Company attempted to maximize export simulcasting revenue and
minimize the variable costs by having a mid-afternoon post time resulting in
less competition from other racetracks' signals in the export simulcast market.
As a result of such efforts coupled with a reduction in the number of harness
race days (30 days in 1999 as compared to 43 days in 1998), the loss for the
1999 Harness meet was approximately $0.7 million as compared to $1.0 million in
1998. The 1999 Thoroughbred meet has lost approximately $0.3 million through
September 30, 1999, which is $0.3 million less than the 1998 Thoroughbred meet
as of September 30, 1998. The improvement of the 1999 Thoroughbred meet was
primarily a result of savings achieved under the amended MJC Agreement in which
Maryland-Virginia Racing Circuit, Inc. is no longer reimbursed for expenses
incurred while acting as managers of the thoroughbred meet as well as cost
saving measures taken as discussed above.
Corporate. For the three months and nine months ended September 30, 1999,
respectively, corporate overhead increased $0.1 million and $0.6 million over
the corresponding periods of the prior year. For the nine months ended
September 30, 1999, the overall increase in corporate overhead was primarily
attributed to an increase in professional fees of $0.5 million relating to the
Norglass arbitration. Cost associated with the development of the Dumfries
facility of approximately $0.1 million also contributed to the increase in
corporate overhead for the three months as well as the nine months ended
September 30, 1999.
Interest Expense, Net. Interest expense, net of interest income,
increased $0.1 million and $0.6 million for the three months and nine months
ended September 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 $22.5 million at September 30, 1998 to $27.8 million at
September 30, 1999 and the provision for interest of $0.3 million relating to
the Norglass arbitration award. The increase in debt is largely attributable
to the issuance of $1.5 million note to Maryland-Virginia Racing Circuit, Inc.
in settlement of disputed management fees for 1997 and 1998, the issuance of
$1.8 million note to Norglass in settlement of an award ordered by the American
Arbitration Association and the issuance of notes payable of $0.9 million and
$0.6 million for 1999 purses to an affiliate of a shareholder and the Maryland
Jockey Club,respectively. The Company also received loans aggregating $0.9
million from an affiliate of a shareholder to meet the 1999 Thoroughbred meet
expenses, and pay a portion of the Norglass settlement. Principal payments of
long-term debt, net of other borrowings amounted to $0.4 million.
<PAGE> 12
The following table sets forth certain operating results as a percentage
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
(Percentage of Total Revenues)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Pari-mutuel and simulcasting commissions 91.3% 89.6% 92.7% 90.7%
Other 8.7% 10.4% 7.3% 9.3%
------- -------- -------- --------
Total revenues 100.0% 100.0% 100.0% 100.0%
Direct operating expenses:
Purses, fees, and pari-mutuel taxes 30.8% 43.0% 32.0% 43.5%
Simulcast and other direct expenses 45.4% 48.0% 39.7% 46.6%
------- -------- -------- --------
Total direct operating expenses 76.2% 91.0% 71.7% 90.1%
Selling, general, and administrative expenses 19.2% 17.4% 18.1% 17.9%
Depreciation and amortization 5.4% 4.6% 5.6% 4.8%
------- -------- -------- --------
Earnings (loss) from operations (0.8)% (13.0)% 4.6% (12.8)%
Interest income (expense), net (7.5)% (6.9)% (9.9)% (7.0)%
------- -------- -------- --------
Loss before taxes (8.3)% (19.9)% (5.3)% (19.8)%
</TABLE>
Total Revenues. Total revenues for the three months ended September 30,
1999 increased slightly as compared to the same period of the prior year.
Total revenues for the nine months ended September 30, 1999 decreased $0.25
million (1.1%) from the corresponding period of the prior year. The decrease
in total revenues for the nine months primarily reflects decreases of $0.89
million in live harness meet revenue and $0.22 million in live thoroughbred
meet revenue, offset by an increase of $0.86 million at the Racing Centers.
The decrease in live harness meet revenues was primarily due to the reduction
in the number of race days (30 days in 1999 as compared to 43 days in 1998).
The decrease in live thoroughbred meet revenue was impacted by a decrease in
attendance. In an effort to maximize export simulcasting revenue, the Company
scheduled the thoroughbred meet with a mid afternoon post time of 3:00. In
doing so, attendance was negatively affected. Through effective advertising
campaigns, the Company was able to increase revenue at the Racing Centers
eventhough the Brunswick Racing Center was only opened five days per week in
1999. From January until late April 1998, Brunswick Racing Center was opened
seven days per week.
Direct Operating Expenses. As a percentage of revenues, direct operating
expenses decreased 14.8% and 18.4% for the three months and nine months ended
September 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. Due to the new thoroughbred and amended harness horsemen's contracts,
purse expense for the three months and nine months ended September 30, 1999 was
approximately $0.7 million and $2.0 million less than the corresponding periods
of 1998 or 63.6% and 46.5% of the decrease in direct operating expenses,
<PAGE> 13
respectively. 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 with
Maryland-Virginia Racing Circuit, Inc., a subsidiary of the Maryland Jockey
Club. Savings as a result of this amendment accounted for approximately $0.2
million and $0.6 million or 18.2% and 14.0% of the decrease in direct operating
expenses for the three months and nine months ended September 30, 1999,
respectively. The decrease in simulcast and other direct expenses was
primarily a result of the changes in Track operations (approximately $0.2
million and $1.3 million or 18.2% and 30.2% of the decrease in direct operating
expenses for the nine months ended September 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 or 9.3% of the decrease in direct operating expenses for the nine
months ended September 30, 1999).
Selling, General and Administrative Expenses (SG&A). As a percentage of
revenues, SG&A increased 1.8% and 0.2% for the three months and nine months
ended September 30, 1999, respectively, from the corresponding periods of the
prior year. For the nine months ended September 30, 1999, the increase in SG&A
as a percentage of revenues was primarily attributed to non-recurring legal and
consulting fees relating to the Norglass arbitration of approximately $0.5
million (see footnote 3 to the Financial Statements). Development costs
relating to the Dumfries project of $0.1 million also contributed to the
increase in SG&A as a percentage of revenues for both the three months and nine
months ended September 30, 1999. Continual efforts in reducing personnel,
printing, and other expenses resulted in cost savings of $0.6 million for the
nine months ended September 30, 1999.
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 applied for licenses from the Commission to own and operate a racetrack
(including live and simulcast wagering) on this property. On November 9, 1999,
the Dumfries Town Council rejected the Company's proposal, making the
Commission's grant of licenses unlikely, and thus all costs related to the
development of the Dumfries facility as of September 30, 1999 were charged off.
Interest Expense, Net. Interest expense, net of interest income,
increased $0.1 million and $0.6 million for the three months and nine months
ended September 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 $22.5 million at September 30, 1998 to $27.8 million at
September 30, 1999 and the provision for interest of $0.3 million relating to
the Norglass arbitration award. The increase in debt is largely attributable
to the issuance of $1.5 million note to Maryland-Virginia Racing Circuit, Inc.
in settlement of disputed management fees for 1997 and 1998, the issuance of
$1.8 million note to Norglass in settlement of an award ordered by the American
Arbitration Association and the issuance of notes payable of $0.9 million and
$0.6 million for 1999 purses to an affiliate of a shareholder and the Maryland
Jockey Club, respectively. The Company also received loans aggregating $0.9
million from an affiliate of a shareholder to meet the 1999 Thoroughbred meet
expenses, and pay a portion of the Norglass settlement. Principal payments of
long-term debt, net of other borrowings amounted to $0.4 million.
<PAGE> 14
Net Loss. Net loss for the three months and nine months ended September
30, 1999 was $0.6 million and $1.2 million, respectively, compared to net loss
of $1.5 million and $4.4 million for the corresponding periods of the prior
year. The decrease in net loss was a result of the factors discussed above.
Effect of Hurricane Floyd. The Company's operations were suspended for
two days in September 1999 due to treacherous weather condition caused by
Hurricane Floyd. The loss of revenues is estimated to be $181,000. As a good
portion of the Company's costs are fixed, the loss of revenues' impact on net
income was severe. The Company estimates the loss impact to net income to be
$126,000. The Company filed an insurance claim for loss of business income in
the amount of $75,000.
LIQUIDITY AND SOURCES OF CAPITAL
Cash Flows. For the nine months ended September 30, 1999, operating
activities provided approximately $0.4 million of cash. The net loss adjusted
for non-cash items such as depreciation and amortization provided $0.1 million.
Accounts payable and other accrued liabilities provided $1.6 million of cash.
The increase in accounts receivable and the other assets utilized $0.5 million
of cash. Net payment of purses utilized an additional $0.8 million of cash.
Investing activities utilized approximately $1.4 million of cash, resulting from
the reduction of construction payables and capital expenditures. Financing
activities provided $1.3 million of cash, primarily from loans for 1999 purses
by an affiliate of a shareholder and the Maryland Jockey Club of $0.9 million
and $0.6 million, respectively. The Company also received a loan of $0.4
million from an affiliate of a shareholder to meet operating expenses relating
to the 1999 Thoroughbred meet. Loans from other sources amounted to $0.1
million and principal payments of long-term debt utilized $0.7 million.
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 on simulcast thoroughbred racing 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 in years 2000 and 2001.
EBITDA is a widely accepted financial indicator of a company's ability to
service and incur debt. The Company's EBITDA for the first nine months of 1999
and 1998 was $2.3 million and $(1.8) 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 payments 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, $500,000, and $500,000 in
lieu of the Company making the principal payment due December 31, 1998, March
31, 1999, June 30, 1999, and September 30, 1999, respectively. The Company
anticipates that the guarantors will continue to post letters of credit for the
principal payments due during 1999 and 2000.
<PAGE> 15
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 and capital expenditure plans over the
next twelve months. However, the Company has $25.2 million of debt coming due
within the next twelve months. The Company will be required to refinance this
debt on terms acceptable to the lenders, obtain debt financing from new sources
or raise additional equity. There is no assurance that the Company will be
successful in these efforts, or if successful, that the terms of such
additional capital will
be favorable to the Company.
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, as demonstrated by recent closures resulting
from Hurricane Floyd. The Company believes that simulcasting diminishes, but
does not eliminate 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 by the end 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 issue 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.
<PAGE> 16
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, governmental regulation, or the award
of licenses to a third party to own and operate a racetrack elsewhere in
Virginia.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most of the Company's debt obligations at September 30, 1999 were either
fixed rate obligations or variable rate obligations which provide the Company
various options in determining the rate of interest. Management therefore does
not believe that the Company has any material market risk from its debt
obligations.
<PAGE> 17
PART II - OTHER INFORMAION
Item 1. LEGAL PROCEEDINGS
In March 1999, the Circuit Court of the Richmond ruled that the Commission
lacked the authority to require the Company to continue making contributions to
a purse account for thoroughbred horsemen in the absence of a contract to such
effect but did have the authority to require the Company to post a $3.25
million bond. The Commission required the posting of such bond within three
days after the court's ruling. The Company posted such bond five days after the
deadline established by the Commission. In July, 1999, the Commission imposed
a $10,000 fine for filing the bond late. The Company elected to pay the fine
rather than pursue appeals of the Commission's decision.
In April 1999, 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 (but did enter into such agreement as of June 15, 1999), and
the Commission conducted an informal fact finding conference on May 14, 1999 on
the matter. In September, 1999, the Commission imposed a $10,000 fine for the
Company's failure to meet the deadline established by the Commission. The
Company has paid the fine and dismissed its appeals relating to the
Commission's order.
In connection with the Norglass arbitration decision, in August 1999,
Lawyers' Title Insurance Company filed suit in New Kent County Circuit Court
(Case No. CL 99-27) against Colonial Downs, L.P., Colonial Downs Holdings,
Inc., Jeffrey P. Jacobs and Richard Jacobs for collection of approximately $6.7
million (the aggregate amount of recorded mechanics' liens as of the date of
the filing) under certain indemnification guarantees covering mechanics' liens
against the real estate on which the Track is located. No further action has
been taken in such matter. Norglass' mechanics' lien for $6.5 million was
released. The Company is seeking to resolve remaining mechanics' liens pending
against the Track property, which if resolved, would moot claims under the
guarantees.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on July 6, 1999 in New
Kent County, Virginia. At the meeting, Messrs. Arnold W. Stansley and William
J. Koslo, Jr. were re-elected to the Company's Board of Directors to serve
three year terms. The results of the election of directors are as follows:
Director Votes in Favor Votes Witheld
- --------------------- -------------- -------------
Arnold W. Stansley 14,591,009 46,313
William M. Koslo, Jr. 14,591,009 46,213
In addition, Mr. Samuel D. Berman was nominated for consideration as a
director by motion of a shareholder. He received 70,316 votes and was not
elected. Messrs. Jeffrey P. Jacobs, Patrick McKinley, Stephen Peskoff, Robert
H. Hughes, William J. Koslo, Jr., and David C. Grunenwald continue to serve as
directors of the Company.
In addition to the election of directors, shareholders approved an
amendment to the Company's 1997 Stock Option Plan to permit the granting of
options for up to an additional 95,000 shares of Class A Common Stock under the
plan. The results of the voting for the amendment are as follows:
Votes in Favor Votes Against
- -------------- -------------
13,929,981 245,382
Finally, the shareholders ratified the selection of BDO Seidman, LLP as
the Company's independent certified public accountants for 1999. The results
of voting for the ratification of auditors are as follows:
Votes in Favor Votes Against
- -------------- -------------
14,591,009 114,801
<PAGE> 18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 10.43 Promissory note payable to Norglass, Inc., dated
September 24, 1999
Exhibit 10.44 Promissory note payable to CD Entertainment, Ltd., dated
September 30, 1999
Exhibit 10.45 Promissory note payable to CD Entertainment, Ltd., dated
August 31, 1999
Exhibit 10.46 Promissory note payable to CD Entertainment, Ltd., dated
August 15, 1999
Exhibit 27 Financial Data Schedule
B Reports on Form 8-K None
<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
November 15, 1999
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,364
<SECURITIES> 0
<RECEIVABLES> 641
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,732
<PP&E> 68,010
<DEPRECIATION> 3,379
<TOTAL-ASSETS> 70,316
<CURRENT-LIABILITIES> 32,284
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 35,429
<TOTAL-LIABILITY-AND-EQUITY> 70,316
<SALES> 0
<TOTAL-REVENUES> 22,037
<CGS> 0
<TOTAL-COSTS> 21,012
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,188
<INCOME-PRETAX> (1,163)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,163)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
PROMISSORY NOTE
$1,850,000.00 County of New Kent, Virginia
September 24, 1999
For value received, Colonial Downs, L.P. (referred to as "MAKER") hereby
acknowledges itself and its heirs, successors, and assigns to be justly
indebted and hereby promises to pay to the order of Norglass, Inc.
(hereinafter "PAYEE"), and its heirs, successors and assigns the sum of ONE
MILLION EIGHT HUNDRED FIFTY THOUSAND DOLLARS AND NO CENTS ($1,850,000.00) in
accordance with the terms and conditions stated herein. Interest shall accrue
on the outstanding balance at 6% per annum. Payment is to be made via first
class mail postage prepaid to PAYEE's address: James M. Leadbetter, President,
Norglass, Inc., 110 Arco Drive, Toledo, Ohio 43607, or such other place as
PAYEE may designate in writing. The principal and interest owed under this
Note shall be due and payable in accordance with the following payment
schedule:
a. Payment in full of the principal and accrued interest shall be made
on or before September 24, 2000. For each month in advance of the payment due
date that payment in full is not made, accrued interest on the outstanding
balance shall be payable on or before the 24th day of each month.
b. Partial payments of the principal amount may be made at any time
prior to the payment due date. Payments received by the PAYEE shall be
applied first to accrued interest and then to the principal amount of the
note.
Regardless of whether interim payments are made, payment in full must
occur no later than September 24, 2000. If payment in full is not made by
that date, interest will accrue on all unpaid amounts at the rate of prime
plus 2% per annum beginning September 25, 2000. For purposes of this
provision, the "unpaid amount" will consist of the original principal amount
claimed of $1,850,000, plus interest from the date of making of this note
through September 24, 2000 at 6%, plus reasonable attorney's fees and costs
incurred in collection less any payments of principal or accrued interest
actually made.
Each of the above-mentioned payments shall be made by postage prepaid
mail, postmarked no later than the due date established by this Note. Payment
not received by PAYEE within three (3) days from midnight of the payment date
shall be considered late, thereby subjecting MAKER to the default provisions
of this Note.
In the event of any default in the payment of principal or interest, the
full original principal balance of $1,850,000.00 and any and all accrued
interest, shall become immediately due and payable at the option of PAYEE by
providing to MAKER within seventy-two (72) hours, written notice of PAYEE's
intent to exercise such option, provided that MAKER has the absolute right to
cure its default within the aforementioned 72 hour time period by hand
delivering or delivering via overnight courier to PAYEE's office all
principal, if any due, and interest due on such prior payment date. PAYEE
shall not be required to give such written notice if PAYEE has previously
provided MAKER with one (1) written notice of intent to exercise its option
herein.
MAKER and all subsequent parties hereto, whether endorsers, sureties, or
guarantors, hereby expressly waive demand, presentment for payment, notice of
non-payment, notice of dishonor, protest, notice of protest, and all other
notices or demands in connection with the delivery, acceptance, performance,
or the endorsement of this Note.
MAKER further agrees that if this Note or any judgment thereon is
referred to any attorney or other person for collection, MAKER shall be liable
for the cost of collection, whether or not an action is actually brought,
including, but not limited to, all attorney's fees, whatever fees and costs
the Clerk may lawfully tax as the cost of entering said judgment, and other
reasonable fees charged by the person making collection.
Payment of the principal and all accrued interest pursuant to the
provisions of this Note shall constitute full satisfaction of this Note.
Should any term, condition and/or provision contained in this Note be
determined to be invalid, such invalidity shall in no manner affect the
validity of the remaining terms, conditions and/or provisions of the Note
which shall be given their full force and effect. The terms and effect of
this Note shall be construed in accordance with the laws of the Commonwealth
of Virginia.
COLONIAL DOWNS, L.P.
By: Stansley Racing Corp., its general partner
By: /s/ Ian M. Stewart
----------------------
Name: Ian M. Stewart
Title: President
PROMISSORY NOTE
$475,000 September 30, 1999
New Kent, Virginia
FOR VALUE RECEIVED, the undersigned, Colonial Downs, L.P., a Virginia
limited partnership ("Maker"), promises to pay, without offset, to the order
of CD Entertainment Ltd. (d/b/a in Virginia as CD Entertainment Ltd., LLC), an
Ohio limited liability company, its successors, assigns, or other holder
("Noteholder"), at 1231 Main Avenue, Cleveland, Ohio 44113, or such place as
Noteholder may designate in writing, the principal sum of FOUR HUNDRED
SEVENTY-FIVE THOUSAND DOLLARS ($475,000), together with interest on the
indebtedness evidenced by this promissory note ("Note") as hereinafter
provided.
1. Payment.
(a) The outstanding principal indebtedness as evidenced by the
Note shall accrue interest from the date hereof until paid in full at a rate
per annum equal to the Noteholders' cost of funds, as adjusted from time to
time, plus one-half percent. Noteholder shall provide written evidence
reasonably satisfactory to the Maker of the Noteholders' cost of funds. Any
amount not paid within five (5) days of when due under this Note shall bear
interest until paid in full at a rate per annum equal to the prime rate as
listed in THE WALL STREET JOURNAL plus four percent (4%).
(b) Interest shall be due and payable on or before the fifth (5th) day
of the month following the end of each calendar quarter, beginning on January
5, 2000, for the quarter ending December 31, 1999. The principal balance of
the Note and any accrued but unpaid interest shall be due and payable in full
on or before September 30, 2001. Payments hereunder (including any
prepayments) shall be applied first to costs and expenses of collection, then
to accrued interest hereunder and then to the reduction of principal.
2. Prepayment; Events of Default.
(a) Maker shall have the right to prepay the outstanding balance, in
whole or in part, without premium or penalty.
(b) Any of the following shall constitute an "Event of Default"
hereunder: (i) failure to pay any amount due under this Note which is not
cured in full within ten (10) days after its due date, (ii) any failure or
breach of any of the other covenants, agreements or conditions of this Note,
which is not cured within ten (10) days of written notice of such failure or
breach to Maker, (iii) Maker's admission in writing that it is unable to pay
its debts as they become due, (iv) any assignment by Maker for the benefit of
its creditors, (v) Maker's filing a voluntary petition in bankruptcy or under
any other insolvency laws, or (vi) Maker's having filed against it an
involuntary petition in bankruptcy or under any other insolvency laws not
dismissed within ninety (90) days after filing. Upon the occurrence of an
Event of Default, the entire outstanding principal balance hereof and all
interest accrued thereon shall become due and payable immediately at the
election of Noteholder, without notice.
3. Miscellaneous.
(a) No delay or omission by the Noteholder in exercising any right
or power hereunder shall impair such right or power or be a waiver of any
default or an acquiescence therein. Any single or partial exercise of any
such right or power shall not preclude any other or further exercise thereof
or the exercise of any other right or power. No waiver shall be valid unless
in writing, signed by the Noteholder, and then only to the extent specifically
set forth in such writing. All remedies hereunder or by law afforded shall be
cumulative and shall be available to the Noteholder until the indebtedness
evidenced hereby shall be paid in full.
(b) Presentation, demand, protest, notices of dishonor and of
protest, the benefits of the homestead exemption and all defenses and pleas on
the ground of any extension or extensions of the time for payment or the due
dates of this Note, in whole or in part, before or after maturity, with or
without notice, are waived by Maker and are jointly and severally waived by
any and all endorsers, sureties, guarantors and assumers hereof.
(c) The Maker shall be liable for any and all costs and expenses of
collection of the interest and principal and any other amounts required to be
paid hereunder, including, without limitation, reasonable attorneys' fees and
costs, arising by virtue of an Event of Default.
(d) This Note shall be governed by and construed under the laws
of the Commonwealth of Virginia, without regard to its conflict of laws
provisions.
Maker: COLONIAL DOWNS, L.P., a Virginia limited partnership
By: Stansley Racing Corp., General Partner [SEAL]
By: /s/ Ian M. Stewart
-------------------------
Ian M. Stewart, President
PROMISSORY NOTE
$900,000 August 31, 1999
New Kent, Virginia
FOR VALUE RECEIVED, the undersigned, Colonial Downs, L.P., a Virginia
limited partnership ("Maker"), promises to pay, without offset, to the order
of CD Entertainment Ltd. (d/b/a in Virginia as CD Entertainment Ltd., LLC), an
Ohio limited liability company, its successors, assigns, or other holder
("Noteholder"), at 1231 Main Avenue, Cleveland, Ohio 44113, or such place as
Noteholder may designate in writing, the principal sum of NINE HUNDRED
THOUSAND DOLLARS ($900,000), together with interest on the indebtedness
evidenced by this promissory note ("Note") as hereinafter provided.
1. Payment.
(a) The outstanding principal indebtedness as evidenced by the Note
shall accrue interest from the date hereof until paid in full at a rate per
annum equal to the prime rate as listed in THE WALL STREET JOURNAL. Any
amount not paid within five (5) days of when due under this Note shall bear
interest until paid in full at a rate per annum equal to the prime rate as
listed in THE WALL STREET JOURNAL plus four percent (4%).
(b) Interest shall be due and payable on or before the fifth (5th) day
of the month following the end of each calendar quarter, beginning on January
5, 2000, for the quarter ending December 31, 1999. The principal balance of
the Note and any accrued but unpaid interest shall be due and payable in full
on or before August 31, 2001. Payments hereunder (including any prepayments)
shall be applied first to costs and expenses of collection, then to accrued
interest hereunder and then to the reduction of principal.
2. Prepayment; Events of Default.
(a) Maker shall have the right to prepay the outstanding balance, in
whole or in part, without premium or penalty.
(b) Any of the following shall constitute an "Event of Default"
hereunder: (i) failure to pay any amount due under this Note which is not
cured in full within ten (10) days after its due date, (ii) any failure or
breach of any of the other covenants, agreements or conditions of this Note,
which is not cured within ten (10) days of written notice of such failure or
breach to Maker, (iii) Maker's admission in writing that it is unable to pay
its debts as they become due, (iv) any assignment by Maker for the benefit of
its creditors, (v) Maker's filing a voluntary petition in bankruptcy or under
any other insolvency laws, or (vi) Maker's having filed against it an
involuntary petition in bankruptcy or under any other insolvency laws not
dismissed within ninety (90) days after filing. Upon the occurrence of an
Event of Default, the entire outstanding principal balance hereof and all
interest accrued thereon shall become due and payable immediately at the
election of Noteholder, without notice.
3. Miscellaneous.
(a) No delay or omission by the Noteholder in exercising any right or
power hereunder shall impair such right or power or be a waiver of any default
or an acquiescence therein. Any single or partial exercise of any such right
or power shall not preclude any other or further exercise thereof or the
exercise of any other right or power. No waiver shall be valid unless in
writing, signed by the Noteholder, and then only to the extent specifically
set forth in such writing. All remedies hereunder or by law afforded shall be
cumulative and shall be available to the Noteholder until the indebtedness
evidenced hereby shall be paid in full.
(b) Presentation, demand, protest, notices of dishonor and of protest,
the benefits of the homestead exemption and all defenses and pleas on the
ground of any extension or extensions of the time for payment or the due dates
of this Note, in whole or in part, before or after maturity, with or without
notice, are waived by Maker and are jointly and severally waived by any and
all endorsers, sureties, guarantors and assumers hereof.
(c) The Maker shall be liable for any and all costs and expenses of
collection of the interest and principal and any other amounts required to be
paid hereunder, including, without limitation, reasonable attorneys' fees and
costs, arising by virtue of an Event of Default.
(d) This Note shall be governed by and construed under the laws of the
Commonwealth of Virginia, without regard to its conflict of laws provisions.
Maker: COLONIAL DOWNS, L.P., a Virginia limited partnership
By: Stansley Racing Corp., General Partner [SEAL]
By: /s/ Ian M. Stewart
-------------------------
Ian M. Stewart, President
PROMISSORY NOTE
$400,000 August 15, 1999
New Kent, Virginia
FOR VALUE RECEIVED, the undersigned, Colonial Downs, L.P., a Virginia
limited partnership ("Maker"), promises to pay, without offset, to the order
of CD Entertainment Ltd. (d/b/a in Virginia as CD Entertainment Ltd., LLC), an
Ohio limited liability company, its successors, assigns, or other holder
("Noteholder"), at 1231 Main Avenue, Cleveland, Ohio 44113, or such place as
Noteholder may designate in writing, the principal sum of FOUR HUNDRED
THOUSAND DOLLARS ($400,000), together with interest on the indebtedness
evidenced by this promissory note ("Note") as hereinafter provided.
1. Payment.
(a) The outstanding principal indebtedness as evidenced by the Note
shall accrue interest from the date hereof until paid in full at a rate per
annum equal to the Noteholders' cost of funds, as adjusted from time to time,
plus one-half percent. Noteholder shall provide written evidence reasonably
satisfactory to the Maker of the Noteholders' cost of funds. Any amount not
paid within five (5) days of when due under this Note shall bear interest
until paid in full at a rate per annum equal to the prime rate as listed in
THE WALL STREET JOURNAL plus four percent (4%).
(b) Interest shall be due and payable on or before the fifth (5th) day of
the month following the end of each calendar quarter, beginning on January 5,
2000, for the quarter ending December 31, 1999. The principal balance of the
Note and any accrued but unpaid interest shall be due and payable in full on or
before August 14, 2001. Payments hereunder (including any prepayments) shall
be applied first to costs and expenses of collection, then to accrued interest
hereunder and then to the reduction of principal.
2. Prepayment; Events of Default.
(a) Maker shall have the right to prepay the outstanding balance, in
whole or in part, without premium or penalty.
(b) Any of the following shall constitute an "Event of Default"
hereunder: (i) failure to pay any amount due under this Note which is not
cured in full within ten (10) days after its due date, (ii) any failure or
breach of any of the other covenants, agreements or conditions of this Note,
which is not cured within ten (10) days of written notice of such failure or
breach to Maker, (iii) Maker's admission in writing that it is unable to pay
its debts as they become due, (iv) any assignment by Maker for the benefit of
its creditors, (v) Maker's filing a voluntary petition in bankruptcy or under
any other insolvency laws, or (vi) Maker's having filed against it an
involuntary petition in bankruptcy or under any other insolvency laws not
dismissed within ninety (90) days after filing. Upon the occurrence of an
Event of Default, the entire outstanding principal balance hereof and all
interest accrued thereon shall become due and payable immediately at the
election of Noteholder, without notice.
3. Miscellaneous.
(a) No delay or omission by the Noteholder in exercising any right
or power hereunder shall impair such right or power or be a waiver of any
default or an acquiescence therein. Any single or partial exercise of any
such right or power shall not preclude any other or further exercise thereof
or the exercise of any other right or power. No waiver shall be valid unless
in writing, signed by the Noteholder, and then only to the extent specifically
set forth in such writing. All remedies hereunder or by law afforded shall be
cumulative and shall be available to the Noteholder until the indebtedness
evidenced hereby shall be paid in full.
(b) Presentation, demand, protest, notices of dishonor and of
protest, the benefits of the homestead exemption and all defenses and pleas on
the ground of any extension or extensions of the time for payment or the due
dates of this Note, in whole or in part, before or after maturity, with or
without notice, are waived by Maker and are jointly and severally waived by
any and all endorsers, sureties, guarantors and assumers hereof.
(c) The Maker shall be liable for any and all costs and expenses of
collection of the interest and principal and any other amounts required to be
paid hereunder, including, without limitation, reasonable attorneys' fees and
costs, arising by virtue of an Event of Default.
(d) This Note shall be governed by and construed under the laws
of the Commonwealth of Virginia, without regard to its conflict of laws
provisions.
Maker: COLONIAL DOWNS, L.P., a Virginia limited partnership
By: Stansley Racing Corp., General Partner [SEAL]
By: /s/ Ian M. Stewart
-------------------------
Ian M. Stewart, President
