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, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 333-18295
COLONIAL 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 10, 2000 -
5,025,239
Number of Shares of Class B Common Stock outstanding as of November 10, 2000 -
2,242,500
<PAGE>
COLONIAL HOLDINGS, INC.
INDEX
PART I. FINANCIAL STATEMENTS AND NOTES Number
------
Item 1. Financial Statements and Notes 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
<PAGE>
COLONIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 2000 1999
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,834 $ 1,313
Horsemen's deposits 2,907 659
Accounts receivable 490 253
Prepaid expenses and other assets 358 114
Total current assets 5,589 2,339
Property, plant and equipment
Land and improvements 15,585 15,554
Buildings and improvements 48,630 48,472
Equipment, furnishings, and fixtures 2,864 2,853
Leasehold improvements 1,124 1,124
68,203 68,003
Less accumulated depreciation 5,002 3,817
Property, plant and equipment, net 63,201 64,186
Licensing and organization costs, net of accumulated
amortization of $337 and $311, respectively 702 729
Other assets 101 151
Total assets $ 69,593 $67,405
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,706 $ 2,764
Purses due horsemen 3,193 182
Accrued liabilities and other 2,328 1,184
Current maturities of long-term debt
and capital lease obligations 876 15,974
Current maturities of long-term debt - related parties - 8,800
Total current liabilities 9,103 28,904
Long-term debt and capital lease obligations 1,273 1,750
Notes payable - related parties 25,038 1,225
Total liabilities 35,414 31,879
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 42,873
Accumulated deficit (8,767) (7,420)
Total stockholders' equity 34,179 35,526
Total liabilities and stockholders' equity $ 69,593 $67,405
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
COLONIAL 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,
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Pari-mutuel and simulcasting commissions $7,083 $7,107 $20,216 $20,428
Other 573 674 1,313 1,609
------- ------- -------- --------
Total revenues 7,656 7,781 21,529 22,037
Operating expenses
Direct operating expenses
Purses, fees, and pari-mutuel taxes 3,006 2,397 8,688 7,048
Simulcast and other direct expenses 3,225 3,532 8,131 8,745
------- ------- -------- --------
Total direct operating expenses 6,231 5,929 16,819 15,793
Selling, general and administrative expenses 1,138 1,496 2,744 3,989
Depreciation and amortization 415 416 1,265 1,230
------- ------- -------- --------
Total operating expenses 7,784 7,841 20,828 21,012
------- ------- -------- --------
Earnings (loss) from operations (128) (60) 701 1,025
Interest expense, net (704) (587) (2,049) (2,188)
------- ------- -------- --------
Loss before income taxes (832) (647) (1,348) (1,163)
Provision for (benefit from) income taxes - - - -
-------- --------
Net loss $ (832) $ (647) $(1,348) $(1,163)
======= ======= ======== ========
Earnings (loss) per share data:
Basic and diluted loss per share $(0.11) $(0.09) $ (0.19) $ (0.16)
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>
COLONIAL HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
2000 1999
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,348) $(1,163)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,265 1,230
Other - 31
Changes in operating assets and liabilities:
Increase in accounts receivable and other assets (432) (494)
Net increase in trade accounts payable and accrued liabilities 1,085 1,602
(Increase) decrease in horsemen's deposits net of purses due
horsemen 764 (848)
Net cash provided by operating activities 1,334 358
--------- --------
INVESTING ACTIVITIES:
Capital expenditures, net of disposals (251) (500)
Decrease in construction payables (1,850) (907)
--------- --------
Net cash used in investing activities (2,101) (1,407)
--------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt, capital leases, and other 25,397 1,996
Payments on long-term debt and capital leases (24,109) (738)
--------
Net cash provided by financing activities 1,288 1,258
--------- --------
Net change in cash and cash equivalents 521 209
Cash and cash equivalents, beginning of period 1,313 1,155
Cash and cash equivalents, end of period $ 1,834 $ 1,364
========= ========
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>
COLONIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Effective August 7, 2000, Colonial Downs Holdings, Inc. changed its name to
Colonial Holdings, Inc. (the "Company") in order to reflect the Company's
objective of diversifying its sources of revenue outside of pari-mutuel wagering
in Virginia.
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 Company's annual financial statements for
the year ended December 31, 1999 included in the Company's Form 10-K filed with
the Securities and Exchange Commission on April 3, 2000.
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, 2000 and the results of its operations and its cash flows for the
respective three and nine month periods ended September 30, 2000 and 1999.
Interim results for the nine months ended September 30, 2000 are not necessarily
indicative of results that may be expected for the fiscal year ending December
31, 2000.
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 period's financial
statements in order to conform to the September 30, 2000 presentation.
2. 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,
2000 1999
<S> <C> <C>
Credit facility payable to CD Entertainment, Ltd., maturing June
2005, with monthly interest payment at the LIBOR plus three
percent (approximately 9.96% at September 30) and principal
payments of $1 million each due June 30, 2002, 2003 and 2004
Collateralized by substantially all assets of the Company $25,037,937 $ -
</TABLE>
<PAGE>
COLONIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. LONG-TERM DEBT, NOTES PAYABLE-RELATED PARTIES, AND CAPITAL LEASES -
(CONTINUED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
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 quarterly over the remaining five year
term of the note, beginning in the first quarter of 2001 1,450,000 1,450,000
Note payable to Maryland Jockey Club, bearing interest at
the prime rate (9.5% at September 30, 2000), payable in two
equal installments during the years 2000 and 2001 300,308 600,000
Note payable to a bank, maturing October 2001, bearing
interest at prime plus 1.0% (10.5% at September 30, 2000),
with monthly principal payment of $15,000, collateralized
by certain fixed assets 345,000 480,000
Notes payable to an insurance company, maturing January 2001,
and April 2001, bearing interest at 8.70% and 7.52%,
respectively 54,176 -
Note payable to a bank maturing June 2000, bearing
interest at a variable rate, collateralized by
substantially all assets, except the Racing Centers,
of the Company and guaranteed by certain
shareholders and related parties - 10,000,000
Note payable under the revolving credit facility with a bank,
bearing interest at a variable rate, 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
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
Convertible subordinated note payable to CD Entertainment,
Ltd., maturing August 2000, with an interest rate of 8.5%,
collateralized by the Hampton Racing Center - 1,000,000
</TABLE>
<PAGE>
COLONIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. LONG-TERM DEBT, NOTES PAYABLE-RELATED PARTIES, AND CAPITAL LEASES -
(CONTINUED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
Note payable to Norglass, Inc. maturing September 24, 2000,
monthly interest payment at a rate of 6% until maturity - 1,850,000
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 - 300,000
Note payable to CD Entertainment, Ltd., maturing September
2001, with monthly interest payment at the Lender's cost of
funds plus one-half percent - 475,000
Installment loans and capitalized leases collateralized by
certain vehicles, machinery and equipment, maturing at
various dates through September 2000, at interest rates
ranging from 8.125% to 10.5% - 51,543
Note payable to Ryan Incorporated Central, bearing monthly
interest at 10%, payable in six equal monthly payments
commencing January 1, 2000 - 142,735
27,187,421 27,749,278
Less current maturities 876,484 15,974,278
Current maturities - related parties - 8,800,000
26,310,937 2,975,000
Less long-term debt - related parties 25,037,937 1,225,000
Long-term debt, including capital lease obligations $ 1,273,000 $ 1,750,000
</TABLE>
In August 2000 the Company entered into an agreement with CD Entertainment
Ltd. ("CD Entertainment"), an affiliate of the Chairman and CEO of the Company,
to refinance the $15 million in loans from PNC Bank that came due on June 30,
2000. The refinanced former PNC debt and the Company's existing debt to related
parties was consolidated into a $25.7 million credit facility with a term of
five years and an interest rate of LIBOR on the date funds are drawn, plus 3%.
The Company drew on the credit facility's available balance to payoff the $1.85
million Norglass, Inc. debt. At September 30, 2000 the credit facility's
remaining available balance was approximately $0.7 million which was drawn in
<PAGE>
October 2000 to meet short-term working capital obligations. Under the terms of
the Credit facility, principal payments of $1 million each are due on June 30,
2002, 2003 and 2004 with the balance due on June 30, 2005. In addition, the
Company has agreed to make an additional annual principal payment commencing in
2002 contingent upon the Company's annual cash flow. The Company's racetrack
property and the racing center located in Hampton serve as collateral for the
loan. Additionally, the Company has pledged its limited partnership interest in
Colonial Downs, L.P. and its shares of Stansley Racing Corp., both of which are
subsidiaries of the Company, to CD Entertainment. This collateral package is
identical to that provided to PNC for the PNC Credit Facility with the
additional deeds of trust on the racing centers. The maturities of long-term
debt reflect the terms of the new refinancing agreement with CD Entertainment.
<PAGE>
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,
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
and racing form 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, 2000, net loss
increased $0.2 million compared to the corresponding periods of the prior year.
Net income at the Racing Centers decreased compared to the corresponding prior
periods by $0.7 million and $1.9 million for the three months and nine months
ended September 30, 2000, respectively. Net loss at the Track from live racing
operations decreased by $0.4 million and $0.6 million for the three months and
nine months ended September 30, 2000, respectively. Corporate overhead
decreased by $0.2 million and $1.0 million, for the three months and nine months
ended September 30, 2000, respectively, and net interest expense increased by
$0.1 million for the three months ended September 30, 2000. Interest for the
nine months ended September 30, 2000 was $0.1 million less than for the
corresponding period of the prior year. 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 decreased $0.1 million for
the three months and nine months ended September 30, 2000, compared to the
corresponding periods of the prior year. 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 increased $0.6
million and $1.6 million for the three months and nine months ended September
30, 2000, respectively compared to the corresponding periods of the prior year
as a result of the new thoroughbred and amended harness horsemen's contracts.
Other expenses were approximately the same for the three months ended September
30, 2000 as they were for the corresponding period of the prior year and
increased $0.2 million for the nine months ended September 30, 2000 compared to
the corresponding period of the prior year. As a result, net income at the
Racing Centers decreased $0.7 million and $1.9 million for the three months and
nine months ended September 30, 2000.
Track. Net loss at the Track decreased by $0.4 million and $0.6 million for the
three and nine months ended September 30, 2000, respectively, compared to the
corresponding periods of the prior year. This difference in results of
operations is primarily attributable to differences in the commencement date of
the harness meet. In 1999 the harness meet was completed in August 1999, and in
2000 the harness meet did not begin until October 27, 2000. Net losses
resulting from the 1999 Harness meet for the three and nine months ended
<PAGE>
September 30, 1999 were $0.5 million and $0.7 million, respectively. The 2000
Thoroughbred meet has lost approximately $40,000 less through September 30, 2000
than the 1999 Thoroughbred meet lost through the corresponding period of the
prior year. Overhead costs associated with maintaining the Track facility have
increased $0.1 million for the three and nine months ended September 30, 2000,
compared to the corresponding periods of the prior year.
Corporate. For the three months and nine months ended September 30, 2000,
respectively, corporate overhead decreased $0.2 million and $1.0 million in
comparison to the corresponding periods of the prior year. For the nine months
ended September 30, 2000, the overall decrease in corporate overhead was
primarily attributed to a decrease in professional fees. The Company incurred
substantial professional fees in 1999 relating to the Norglass arbitration and
the development of the proposed Dumfries facility.
Interest Expense, Net. Interest expense, net of interest income, increased
$117,000 for the three months ended September 30, 2000 and decreased $138,000
for the nine months ended September 30, 2000 from the corresponding periods of
the prior year. The increase in interest expense for the three months ended
September 30, 2000 compared to the corresponding period of the prior year is
attributable to increases in the prime rate on which the interest rate of a
significant portion of the Company's debt was based. The decrease in interest
expense for the nine months ended September 30, 2000 compared to the
corresponding period of the prior year is due to the nonrecurring $230,000 net
interest provision related to the Norglass arbitration award recorded in June
1999, cessation of guarantee fees in August 2000, a slight reduction of debt
level and an increase in interest income net of the impact of the increase in
interest rates mentioned above.
<PAGE>
REVENUE AND EXPENSE ANALYSIS
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 Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
-------- ------ ------- ------
<S> <C> <C> <C> <C>
Revenues:
Pari-mutuel and simulcasting commissions 92.5% 91.3% 93.9% 92.7%
Other 7.5% 8.7% 6.1% 7.3%
-------- ------ ------- ------
Total revenues 100.0% 100.0% 100.0% 100.0%
Direct operating expenses:
Purses, fees, and pari-mutuel taxes 39.3% 30.8% 40.4% 32.0%
Simulcast and other direct expenses 42.1% 45.4% 37.8% 39.7%
-------- ------ ------- ------
Total direct operating expenses 81.4% 76.2% 78.2% 71.7%
Selling, general, and administrative expenses 14.9% 19.2% 12.7% 18.1%
Depreciation and amortization 5.4% 5.4% 5.9% 5.6%
-------- ------ ------- ------
Earnings (loss) from operations (1.7) % (0.8)% 3.2% 4.6%
Interest income (expense), net (9.2) % (7.5)% (9.5) % (9.9)%
-------- ------ ------- ------
Net loss (10.9) % (8.3)% (6.3) % (5.3)%
</TABLE>
Net Earnings (Loss). Net loss for the three and nine months ended
September 30, 2000 was $832,000 and $1,348,000, respectively, compared to net
loss of $647,000 and $1,163,000 for the corresponding periods of the prior year.
Total Revenues. Total revenues for the three and nine months ended
September 30, 2000 decreased $125,000 (1.6%) and $508,000 (2.3%), respectively,
from the corresponding periods of the prior year. Revenues declined because the
Company conducted 15 days and 30 days of live standardbred racing which
generated $260,000 and $605,000 in revenues during three and nine months ended
September 30, 1999, respectively, and did not conduct live standardbred racing
in the three and nine month periods ended September 30, 2000. Revenues from the
2000 Thoroughbred meet increased $252,000 through September 30, 2000 compared to
the corresponding period of the prior year. Revenues from the Racing Centers
declined $86,000 and $140,000 for the three and nine months ended September 30,
2000, respectively, compared to the corresponding periods of the prior year.
Miscellaneous Corporate revenues decreased approximately $31,000 and $15,000 for
the three and nine months ended September 30, 2000, respectively, compared to
the corresponding periods of the prior year. Current year revenues have been
adversely affected by passage of legislation sponsored by the Virginia Racing
Commission in April 2000 requiring the Company to remit 30% of breakage revenue
to horseman's benevolent associations. Piror to enactment of this law, the
Company was entitled to retain all breakage. Breakage revenue lost for the nine
months ended September 30, 2000 was approximately $78,000.
Direct Operating Expenses. As a percentage of revenues, direct operating
expenses increased 5.2% and 6.5% for the three and nine months ended September
30, 2000, respectively, from the corresponding periods of the prior year. The
increase in operating expenses is primarily due to an increase in purse expense
resulting from the new agreements with the Virginia Horsemen's Benevolent and
Protective Association, Inc. (the "VaHBPA") and the Virginia Harness Horse
Association (the "VHHA"). Purse expenses were approximately $609,000 and
<PAGE>
$1,640,000 higher and other direct expenses were $307,000 and $614,000 lower for
the three and nine months ended September 30, 2000, respectively, than for the
corresponding periods of the prior year. The decrease in other direct expenses
is due to no live standardbred racing being conducted during the three and nine
months ended September 30, 2000 versus 15 days and 30 days of live standardbred
racing during the corresponding periods of the prior year.
Selling, General and Administrative Expenses (SG&A). As a percentage of
revenues, SG&A decreased 4.3% and 5.4% from 19.2% and 18.1% to 14.9% and 12.7%
for the three and nine months ended September 30, 2000, respectively, from the
corresponding periods of the prior year. The decrease in SG&A as a percentage
of revenues for the three and nine months ended September 30, 2000 was due
primarily to reductions in professional, consulting and legal fees of
approximately $205,000 and $879,000, respectively, and a reduction in live
racing related expenses of approximately $119,000 and $216,000, respectively,
from the corresponding periods of the prior year. Other racing center and
corporate SG&A costs decreased $34,000 and $150,000 for the three and nine month
period ended September 30, 2000, respectively, compared to the corresponding
periods of the prior year.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's consolidated financial statements are presented on the going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.
In August 2000, the Company entered into an agreement with CD Entertainment
Ltd., an affiliate of the Chairman and CEO of the Company, to refinance the $15
million in loans from PNC that came due on June 30, 2000. The refinanced former
PNC debt and the Company's existing debt to related parties was consolidated
into a $25.7 million credit facility with a term of five years and an interest
rate of LIBOR plus 3%. The Company drew on the credit facility's available
balance to payoff the $1.85 million Norglass debt. The Company has the ability
to draw on the credit facility's remaining available balance to provide
supplemental short-term working capital. In October 2000, the Company borrowed
an additional $0.7 million under the credit facility to meet short-term working
capital obligations. Under the terms of the credit facility, principal payments
of $1 million each are due on June 30, 2002, 2003 and 2004 with the balance due
on June 30, 2005. In addition, the Company has agreed to make an additional
annual principal payment commencing in 2002 contingent upon the Company's annual
cash flow.
Through September 2000, the Company incurred aggregate net losses of
approximately $8.8 million and has a working capital deficit of approximately
$3.5 million at September 30, 2000. The Company's continued existence is
dependent upon its ability to refinance or renew maturing debt and obtain
adequate working capital to support its operations until they become profitable.
The Company has been and continues to be largely dependent on the financial
support of its principal stockholder, as evidenced by the previously discussed
refinancing agreement.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the possible inability
of the Company to continue as a going concern. The Report of Independent
Certified Public Accountants ("Accountants' Report") included in the annual
financial statements in the Company's form 10-K for the year ended December 31,
1999 contains a qualification that raises substantial doubt about the Company's
<PAGE>
ability to continue as a going concern primarily due to significant debt coming
due in 2000. The Company has refinanced the debt referred to in the
Accountants' Report as noted above.
Cash Flows. After adjusting the net loss of $1,348,000 for the nine months
ended September 30, 2000 for non-cash items such as depreciation and
amortization, $83,000 in cash was used before changes in operating assets and
liabilities. The increase in trade accounts payable, accrued liabilities,
horsemen's deposits and purses due horsemen provided $1,849,000 of cash. This
was offset by increases of $432,000 in accounts receivable and other assets
resulting in cash provided by operating activities of $1,334,000. Investing
activities consisting of capital expenditures and the repayment of a note
related to the construction of the track utilized $2,101,000 of cash. Financing
activities consisting of borrowings, net of principal payments on long-term
debt, provided $1,288,000 of cash.
In June 1999, the Company entered into a three-year contract (which is
renewable for an additional three year term) with the Virginia Horsemen's
Benevolent and Protective Association (the "VaHBPA") to provide for thoroughbred
purses. Under the contract, $3,125,000 was 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 by the VaHBPA in an annual amount of $750,000 plus interest at
approximately the prime rate from the 5 1/4% that is contributed to the purse
account in years 2000 and 2001.
In August 2000, the Company entered into an agreement with the Virginia
Harness Horse Association (the "VHHA") to provide for standardbred purses.
Under the contract, which expires December 31, 2001, the Company is required to
pay 5% of the handle generated on simulcast standardbred to the standardbred
purse account. The purse contribution increases to 6% of simulcast standardbred
handle in excess of $75 million and 7% in excess of $150 million.
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
fiscal year 2000 and 1999 was approximately $1.9 million and $2.2 million,
respectively. The decrease in EBITDA is primarily due to lower 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.
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
such as those from the snow storm in the Northeast in January 2000, 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
<PAGE>
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
Currently, the Company has experienced no negative effects as a result of
the Year 2000 conversion. However, there can be no assurance that during the
fiscal year ending December 31, 2001 that no such disturbances will occur.
<PAGE>
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, the Virginia
Racing Commission, political trends, the effects of adverse general economic
conditions, the approval of future Racing Centers by referenda and/or the
Commission and governmental regulation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most of the Company's debt obligations at September 30, 2000 were either
fixed rate obligations or variable rate obligations which provide the Company
various options in determining the rate of interest. Management does not
believe that the Company has any material market risk from its debt obligations.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Mechanic Lien Litigation. In Baker Roofing Company v. Colonial Downs
-------------------------- ----------------------------------------
Holdings, Inc., et al. (New Kent County Circuit Court Case No. CH98-76), a
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roofing subcontractor seeks payment of $137,790.10 and its subcontractor in turn
seeks payment of $40,541.32 in NCI Building Components v. Baker Roofing Company,
-------------------------------------------------
et al. (New Kent County Circuit Court Case No. CH98-78). The Company is
------
contesting these matters and is seeking a final resolution to all pending
claims.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on August 2, 2000 in
New Kent County, Virginia. At the meeting, Messrs. Jacobs, Grunenwald, and
Hughes 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:
<TABLE>
<CAPTION>
Director Votes in Favor Votes Witheld
------------------- -------------- -------------
<S> <C> <C> <C> <C>
Jeffrey P. Jacobs 14,025,994 103,248
David C. Grunenwald 14,025,594 103,648
Robert H. Hughes 14,025,594 103,648
</TABLE>
Messrs. Arnold W. Stansley, Patrick McKinley, and William J. Koslo, Jr.,
continue to serve as directors of the Company.
Also at the meeting, shareholders voted 6,047,462 (for) and 38,379
(against) an amendment to the Company's Articles of Incorporate to reflect the
change in the name of the Company to Colonial Holdings, Inc.
Finally, the shareholders ratified the selection of BDO Seidman, LLP
as the Company's independent certified public accountants for 2000. The
results of voting for the ratification of auditors are as follows:
Votes in Favor Votes Against
---------------- --------------
14,090,670 30,367
ITEM 5. OTHER INFORMATION
None
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K - The Company filed Current Reports on Form 8-K
during the three months ended
September 30, 2000 relating to the
Resignation of a member from the
Board of Directors and announcing
a proposed management contract with
an affiliate of the Chairman and CEO
C. Refinancing Documents
10.48 Assignment
10.49 Amended and Restated Loan Agreement
10.50 Amended and Restated Convertible Term Note
10.51 Credit Line Convertible Note
10.52 Amendment to Second Deed of Trust
<PAGE>
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 HOLDINGS, INC.
By: /s/ Ian M. Stewart
----------------------------------------
Ian M. Stewart, President
and Chief Financial Officer
November 14, 2000
