COLONIAL DOWNS HOLDINGS INC, 10-K, 2000-04-04

COLONIAL DOWNS HOLDINGS INC
10-K, 2000-04-04
RACING, INCLUDING TRACK OPERATION

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year ended December 31, 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)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class on Which Registered Name of Each Exchange
Class A Common Stock, par value $0.01 per share NASDAQ Small Cap Market

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes[ ] No[X]

Number of Shares of Class A Common Stock outstanding as of March 27, 2000 -
5,025,239 Number of Shares of Class B Common Stock outstanding as of March 27,
2000 - 2,242,500

DOCUMENTS INCORPORATED BY REFERENCE - None
<PAGE> 2
PART I

ITEM 1. BUSINESS

GENERAL

Colonial Downs Holdings, Inc., (the "Company"), a Virginia Corporation, was
incorporated in 1996. The Company owns and operates, through its wholly- owned
subsidiaries, Colonial Downs Racetrack (the "Track") in New Kent, Virginia,
which primarily conducts pari-mutuel wagering on thoroughbred and standardbred
horse racing. The Company also owns and operates four satellite wagering
facilities ("Racing Centers"), which provide simulcast pari-mutuel wagering on
thoroughbred and standardbred horse racing from selected racetracks through out
the United States.

The Company sends its race signal from the Track to out-of-state satellite
wagering facilities and receives race signals from out-of-state racetracks.
Depending upon the format permitted at each facility, patrons may participate in
a commingled pool or a separate pool. In commingled pool wagering, patrons at a
satellite wagering facility participate in the same pari-mutuel pool payouts as
those patrons at the host facility where the race is held. In separate pool
wagering, patrons at a satellite wagering facility participate in the pool
generated by wagers at that facility. Under Virginia law, a majority portion of
the pooled wagers is paid out as winnings, a portion is paid to the applicable
local governments and the Commonwealth of Virginia, a portion is paid to the
Virginia Breeders' Fund, a portion is distributed to the Track's horsemen in the
form of "purses", and the remainder is retained by the wagering facility.

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.

STRATEGY

The Company intends to be a leading participant in the industry by
capitalizing upon its unique dirt and turf track capabilities for live racing,
expansion of its Racing Center network, and its alliance with Maryland Jockey
Club to provide experienced management for the Track and Racing Centers.

Track - The Track's one and a quarter mile dirt track is one of the largest
tracks in the United States and its 180 foot wide mile turf track is the largest
turf track in North America. These unique configurations have and are expected
to attract quality horses to the Track. The Track was host to the 1998 Breeders
Crown, one of the premier North American standardbred racing events, in November
1988. The Virginia Derby, a race for three-year old thoroughbreds, was held in
October 1998 and 1999 on the Company's turf track. The Company intends to
develop the Virginia Derby as a graded stakes race as a warm up to the Breeders'
Cup. The Company believes that by hosting and creating marquee racing events,
the Company will be able to improve its market visibility, attract additional
patrons to the Track and its Racing Centers, and
<PAGE> 3

enhance its ancillary revenues from export simulcasting, corporate sponsorships,
group sales events, and food and beverage sales.

The track facility was designed to provide patrons with a pleasant
atmosphere to enjoy quality horse racing. The outside grandstand area located on
the first floor of the track facility has an occupancy capacity of approximately
4,000 patrons. Also located on the first floor of the track facility are two
simulcast/TV amphitheaters, two covered patio-seating areas, four bars, a large
concession food court, gift shop, and wagering locations with approximately
sixty tellers. The Jockey Club, which is in the main grandstand area located on
the third floor of the track facility, includes a full-service dining area with
a seating capacity of 548 patrons, two separate lounge areas, and additional
wagering locations with 38 tellers. The Turf Club, a private club, as well as 10
luxury suites with skybox seating, are located on the fourth floor of the track
facility.

Racing Centers - By state law, the Company can operate up to six Racing
Centers in Virginia. The Company currently operates four Racing Centers located
in Richmond, Chesapeake, Hampton, and Alberta, Virginia. These Racing Centers
employ state-of-the-art audio/visual technology for maintaining quality import
simulcast thoroughbred and standardbred races from nationally known racetracks.
The Racing Centers are structured to accommodate the needs of various patrons
from the seasoned handicapper to the novice wagerer. The Racing Centers provide
patrons with a comfortable upscale environment including a full bar and a range
of restaurant services. In addition, automated wagering equipment is available
to patrons in order to make wagering more user-friendly to the novice and more
efficient for the expert. This automated wagering equipment, touch-screen
interactive terminals and personalized portable wagering terminals, provide
patrons with current odds information and enable them to place wagers and credit
winning tickets to their accounts without waiting in line. Under current law,
before the Company can open its last two Racing Centers, it is required to win
approval through a local referendum process in the municipality in which the
facility will be located. The Company intends to open the additional Racing
Centers by no later than 2003.

Strategic Alliance - The Company entered into a Management and Consulting
Agreement (the "Agreement") with Maryland-Virginia Racing Circuit, Inc. an
affiliate of the Maryland Jockey Club ("MJC"), to provide experienced management
for the Track and Racing Centers and to create a Virginia-Maryland thoroughbred
racing circuit. Under the Agreement, Maryland Jockey Club agreed to suspend live
racing at their racetracks, Laurel Park and Pimlico Race Course, during the
Company's live thoroughbred meets. Parties to the Agreement also agreed to
exchange simulcast signals for their live meets at no cost to either party. An
amendment to the Agreement (the "Amended Agreement") was signed by both parties
on January 15, 1999, which restructured among other terms, MJC's
responsibilities as manager and the management fee paid to MJC. On July 1, 1999,
MJC assumed operating responsibilities for the Company's Racing Centers as well
as the live standardbred and thoroughbred meets. Prior to the Amended Agreement,
MJC agreed to manage the Company's thoroughbred meet, and the Company agreed to
reimburse MJC for the personnel it provided to manage such meet. Under the
amended agreement, MJC is no longer reimbursed for expenses incurred while
acting as manager of these operations. Also, under the Amended Agreement, the
management fees were reduced from 2% of amounts wagered at the Company's
facilities (other than on live standardbred meets conducted at the Track) to
1.0% of the first $75 million of the aggregate gross amounts
<PAGE> 4

wagered in any calendar year in the Commonwealth of Virginia excluding certain
conditions ("Handle") specified in the Amended Agreement and 2.0% of all Handle
in excess of $75 million per calendar year. Management fees relating to the
Company's new Racing Centers, if any, will be either 2% or 3.25% of Handle
depending upon their location and the amount of handle.

PURSE STRUCTURE

The Company has previously taken steps to ensure competitive purses to
attract quality horses at the Track by way of a guaranteed purse structure. The
Company generally contributes to the thoroughbred and standardbred purse
accounts, respectively, a certain percentage of all thoroughbred and
standardbred wagers at its Racing Centers. The purse structure is negotiated
with the respective horsemen's groups, the Virginia Horsemen's Benevolent and
Protective Association ("VaHBPA") for thoroughbred horsemen and the Virginia
Harness Horse Association ("VHHA") for standardbred horsemen. The agreement with
the VaHBPA expires December 31, 2001. There is not a current agreement with the
VHHA; however, a new agreement is anticipated under legislation that is expected
to become effective in April 2000.

The Company's purses have been competitive with purses at racetracks in the
mid-Atlantic market that conduct meets concurrently with the Company's meets,
with the possible exception of Delaware Park, which has video lottery terminals
("VLTs") or slot machines. Revenues from VLTs have enabled Delaware Park to
increase the purses offered. The racetrack in Charlestown, West Virginia has
acquired slot machines and the purses it offers are expected to increase to
become more competitive with those offered by the Company.

COMPETITION

The Company competes with racetracks located outside Virginia (including
several in Delaware, Maryland, New Jersey, New York, Pennsylvania, and West
Virginia) and other forms of gaming, such as land-based casinos, including those
in Atlantic City, and statewide lotteries in Virginia and neighboring states.
The Company also faces competition from a wide range of entertainment options,
including live and televised sporting events and other recreational activities
such as theme parks (Kings Dominion to the northwest and Busch Gardens to the
southeast) and more recently internet based pari-mutuel wagering.

The possible legalization of other forms of gaming in Virginia, such as
riverboat casinos could have an adverse effect on the Company's performance.
Although bills for the creation of riverboat casinos have failed in the Virginia
legislature, proponents of riverboat gaming in Virginia may continue to seek
legislative approval. It is not possible, at this time, to determine if or when
additional forms of gaming will be permitted in Virginia or neighboring states
and, if so, the impact, if any, on the Company.

The Company competes and will compete for wagering dollars and simulcast
fees with live racing and races simulcast from racetracks in other states,
particularly racetracks in neighboring states such as Charles Town in West
Virginia, Pimlico Race Course, Laurel Park, and Rosecroft Raceway in Maryland,
and Delaware Park in Delaware. The Company believes that the Management
Agreement with MJC will continue to promote coordination of thoroughbred events
between Maryland and Virginia. However, if the Virginia or Maryland Racing
<PAGE> 5

Commissions do not approve the party's proposed racing days, or if the
Virginia-Maryland thoroughbred racing circuit is otherwise unsuccessful, the
Track may compete directly with Pimlico Race Course and Laurel Park in Maryland.

The Company anticipates that it will experience adverse effects from the
continued legalization of VLT and slot machines in neighboring states such as
Delaware and West Virginia. Racetracks with VLTs and/or slot machines generally
are required to devote a significant portion of VLT and/or slot machine revenues
to the purses for which horses race. As a result, such racetracks may be able to
offer higher purses which can make it difficult for the Company to attract
horsemen to race at the Track.

REGULATION

The Company's success is dependent upon continued government and public
acceptance of horse racing as a form of legalized gaming. Although the Company
believes that pari-mutuel wagering on horse racing will continue to be legal in
Virginia, gaming has come under increasing scrutiny nationally and locally. The
National Gaming Commission (the "NGC") conducted a comprehensive legal and
factual study of gambling in the United States and existing federal, state, and
local policies and practices with respect to the legalization or prohibition of
gambling activities. The NGC published its findings and recommendations in It is
not possible to predict the future impact of any of these recommendations on the
Company and its operations; however, adoption of these recommendations could
have a material adverse effect on the Company's business. Opposition to the
Virginia Racing Act has been unsuccessfully introduced in the Virginia
legislature in the past, but additional legislative opposition may arise in the
future. If the Virginia Racing Act was repealed or materially amended, such
action could have a material adverse effect on the Company's business of pari-
mutuel wagering.

Virginia Racing Act - Under the Virginia Racing Act, the Virginia Racing
Commission is vested with control over all aspects of horse racing with pari-
mutuel wagering and the power to prescribe regulations and conditions under
which such racing and wagering are conducted. The Virginia Racing Commission is
responsible for, among other things, (i) conducting a review annually of the
Company's Track and Racing Center licenses, (ii) annually approving the
Company's proposed schedule of racing days, (iii) approving new or modified
types of pari-mutuel wagering pools requested by the Company, (iv) issuing
permits to all officers, directors, racing officials, and other employees of the
Company, and (v) approving simulcast schedules at the Track and at the Racing
Centers. The Virginia Racing Commission also has the authority to Promulgate
regulations pertaining to the Company's Track facilities, equipment, safety and
security measures, and controls the issuing of licenses and permits for
participants in pari-mutuel racing, including Company employees at the Track and
at the Racing Centers. In addition, the Virginia Racing Commission must approve
any acquisition or continuing ownership of a 5% or greater interest in the
Company. Action by the Virginia Racing Commission that is inconsistent with the
Company's business plan could have a material adverse effect on the Company.

During the 2000 session of the Virginia General Assembly, an amendment to
the Racing Act was passed that is likely to be effective April 2000 that will
require the Company to enter into contracts with each representative horsemen
<PAGE> 6

group that provides for the Company to contribute a minimum of 5% of the first
$75 million of simulcast handle, 6% of the next $75 million and 7% of all handle
over $150 million to the purse account of the respective breed. An existing
contract with the VaHBPA will not be affected by the change. The amendment also
provides for the breakage generated by pari-mutuel wagering to be allocated 70%
to capital expenditures and 30% to backstretch benevolent activities. Currently,
the Company receives all breakage. Finally, the amendment empowers the
Commission to summarily suspend the Company's licenses if it believes the Racing
Act or the regulations have been violated.

The licenses issued by the Virginia Racing Commission to the Company are
for a period of not less than 20 years, but are subject to annual review by the
Virginia Racing Commission. It is possible that such licenses will not be
renewed or that such licenses could be suspended or revoked by the Virginia
Racing Commission for violations of the Virginia Racing Act or Virginia Racing
Commission rules.

Other State and Local Regulation - The Company, the Track, and the Racing
Centers are also subject to a variety of other laws and regulations, including
zoning, construction, and land-use laws and the regulations of the Virginia
Alcoholic Beverage Control Board. Such laws and regulations may affect the
selection of Racing Center sites because of parking, traffic flow, and other
similar considerations. Any interruption or termination of the Company's
ability, or that of its concessionaires, to serve alcoholic beverages could have
a material adverse effect on the Company.

Federal Regulation - The Company's interstate simulcast operations are
subject to the provisions of the federal Interstate Horse Racing Act, which
regulates interstate off-track wagering. In order to conduct wagering on import
simulcasting at the Track or any Racing Center, the Interstate Horse Racing Act
requires the Company to obtain the consent of the Virginia Racing Commission,
the consent of the racing commission of the state where the horse racing meet
originates and the consent of the representative horsemen groups in the
origination state. To conduct export simulcasting, the Company must obtain the
consent of the Virginia Horseman's Benevolent and Protective Association or the
Virginia Harness Horse Association, and the Virginia Racing Commission. Also, in
the case of off-track wagering to be conducted at any of the Company's Racing
Centers, the Interstate Horse Racing Act requires the Company to obtain the
approval of all currently operating horse racetracks within sixty miles of the
Racing Centers or if there are no currently operating tracks within sixty miles,
the approval of the closest operating horse racetrack, if any, in an adjoining
state. Significant delay in obtaining such consents and approvals or failure to
obtain such consents or approvals could have a material adverse effect on the
Company.

Future Regulation - The Company's operations may become subject to
additional regulation from any of the foregoing or from other governmental
bodies. Such additional regulation could have a material adverse effect on the
Company.

TAXATION

The Company is subject to a number of federal, state, and local taxes and
fees. These include fees to support the Virginia Breeders' Fund, taxes payable
to the Commonwealth of Virginia, taxes payable to New Kent County where the
<PAGE> 7

Track is located, and taxes payable to localities in which Racing Centers are
located based upon the amount of monies wagered both at the Track and at the
Company's Racing Centers. The Company believes that the public acceptance of
pari-mutuel wagering on horse races, as well as other forms of gaming, is based,
in part, on the governmental revenues it generates from taxes and fees on such
activities. It is possible that gaming activities, including horse racing, may
become a target for additional federal, state, or local taxes and fees. A
significant increase in such taxes or fees or the creation of significant
additional taxes or fees could have a material adverse effect on the Company.

EMPLOYEES

As of December 31, 1999, the Company had approximately 116 full-time and
160 part-time employees. During the live meets, the Company employs up to 150
temporary employees. The Company considers its relations with its employees to
be good.

ITEM 2. PROPERTIES

Information regarding the Company's facilities as of December 31, 1999 is
As follows:
<TABLE>
<CAPTION>
Size
Location Use Leased/Owned (Sq. Ft.)
-------- --- ------------ ----------
<S> <S> <S> <C>
Colonial Downs Racetrack
- ------------------------
New Kent, VA(1) Race Track and Owned 152,000
Administrative Offices
Racing Centers
- --------------
Richmond, VA Satellite Wagering Owned 20,000
Chesapeake, VA Satellite Wagering Leased 15,000
Hampton, VA Satellite Wagering Owned 13,500
Alberta, VA Satellite Wagering Owned 8,000

</TABLE>
(1) Colonial Downs Racetrack is located on approximately 345 acres of land with
paved parking to accommodate over 1,825 vehicles. Additional unpaved parking
is available for large and capacity crowds.

<PAGE> 8

ITEM 3. LEGAL PROCEEDINGS

Mechanic Lien Litigation. In connection with the dispute with Norglass,
------------------------
that two subcontractors of Norglass filed mechanic's liens against the
property. In Baker Roofing Company v. Colonial Downs Holdings, Inc., et al.
-------------------------------------------------------------
(New Kent County Circuit Court Case No. CH98-76), a 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.

Virginia Racing Commission's December 1999 Rulings. Certain rulings of
--------------------------------------------------
the Commission made at its December 15, 1999 Meeting and its written Order
pertaining thereto issued on December 20, 1999 (the "December Order") gave rise
to certain litigation initiated by Colonial Downs, L.P. (the "Partnership),
Stansley Racing Corp. ("Racing") and others during the first quarter of 2000.
The Commission rulings included: its order that the Partnership continue to set
aside and to deposit into the Standardbred Purse Account 5% of handle wagered on
standardbred simulcast races at the Partnership's Racing Centers (the "Purse
Requirement") based upon the Commission's finding that certain agreements (the
"VHHA Agreements") between the Partnership, Racing and the Virginia Harness
Horse Association (the "VHHA") had renewed and were in force; its order that the
Partnership make all payments necessary to have no accounts payable aged over 90
days by February 29, 2000 (the "Payables Requirement"); its order that the
Partnership not make certain credit enhancement, development and consulting fee
payments to Diversified Opportunities Group, Ltd., Premier Development Co. and
Arnold W. Stansley (all related parties) (hereinafter, the "Related Parties");
its order that the Partnership and Racing conduct 40 days of live standardbred
racing in 2000; and its direction to the Commission's Executive Secretary that
he withhold approval of the Partnership's and Racing's monthly simulcast
schedules unless he was satisfied that they were making progress toward meeting
the terms of the December Order. In January 2000, Partnership, Racing and the
Related Parties appealed certain of the Commission's December rulings, and
Partnership and Racing filed a related declaratory judgment action (the
"Declaratory Judgment Action") against the VHHA seeking a judicial declaration
that the VHHA Agreements, which the Commission found to have renewed, had
expired as of August 4, 1999.

In connection with the appeal of the Commission's December Order,
(Colonial Downs, L.P., et al v. Virginia Racing Commission, Circuit Court of
- ----------------------------------------------------------
the City of Richmond, Case No. HN-256), the Partnership and Racing argued that
the Commission violated Virginia's Administrative Process Act and Freedom of
Information Act and exceeded its authority under the Virginia Horse Racing and
Pari-Mutuel Wagering Act (the "Racing Act"). In particular, they challenged the
Commission's procedures in finding that the VHHA Agreements were currently in
force since it purported to conduct a fact-finding hearing on the matter without
notice to the Partnership or Racing pursuant to Virginia Code Section
<PAGE> 9

9.6-14:11. It was further argued that because the VHHA Agreements were not in
force, the Commission had no authority to order the Partnership to deposit five
percent (5%) of the simulcast standardbred handle into the Standardbred Purse
Account. It was also asserted that the Commission violated the Administrative
Process Act and Freedom of Information Act with respect to the Payables
Requirement and the requirement that Related Party fees be waived as a condition
of live racing. Further, it was argued that the Commission procedurally and
substantively improperly delegated authority to its Executive Secretary by
empowering him to withhold approval of the Partnership's and Racing's monthly
simulcast schedules unless he was satisfied that they were making progress
towards complying with the Commission's December Order. Finally, in light of the
other procedural and substantive errors reflected in the December Order, it was
alleged that the Commission committed reversible error and ignored the
substantial evidence presented to it by arbitrarily requiring 40 days of live
standardbred racing in 2000.

By order entered on January 27, 2000, the Richmond Circuit Court entered a
stay of the Commission's rulings with respect to the Purse Requirement and the
Payables Requirement. The Court did not address the Commission's delegation of
authority to its Executive Secretary to withhold approval of the monthly
simulcast schedules in light of its other rulings. Colonial Downs, L.P. and
------------------------
Stansley Racing Corp. v. Virginia Racing Commission, Case No. HN-59 (January
- ---------------------------------------------------
27, 2000)(Markow, J.). The Commission appealed the issuance of the stay, and by
order entered February 22, 2000, the portion of the stay pertaining to the Purse
Requirement was reversed by the Virginia Court of Appeals.

In the Declaratory Judgment Action, Partnership and Racing argued that the
VHHA Agreements terminated on August 4, 1999 based upon the terms of a Second
Amendment, dated as of March 16, 1999, between the parties, written notices
provided to the VHHA and a continuing course of conduct by the parties
reflecting that the Agreements had terminated. The VHHA argued that written
notice had not been properly provided under the terms of the VHHA Agreements and
that the VHHA's course of conduct was inadequate to constitute a waiver of its
alleged rights under the VHHA Agreements to assert the position that the
Agreements had automatically renewed and did not terminate. A settlement of that
case has been reached. The terms of the settlement include an acknowledgement by
the parties that the VHHA Agreements are not in force, Partnership's agreement
to continue, nevertheless, to make purse contributions of 5% of standardbred
simulcast handle into the Standardbred Purse Account through the execution of a
new contract, and the payment to Partnership of the sum of $315,000 from the
Standardbred Purse Account. The settlement is contingent upon the Commission
taking no steps to modify the terms of the settlement. If the Commission seeks
to do so, the settlement will be of no force or effect and the matter will be
submitted for adjudication by the Circuit Court. The Commission has expressed
its approval of the settlement in concept.

The effect of the settlement was to moot certain of the Commission's
December rulings. By order entered on March 15, 2000, the Circuit Court found
that the Commission violated Virginia's Freedom of Information Act and committed
other procedural errors with regard to the issues raised on appeal.
Notwithstanding these conclusions, however, the Court found that, with the
exception of the ruling pertaining to the Related Party fees, the Commission's
<PAGE> 10

actions should not be reversed. The appeal period for any appeal of the Circuit
Court's rulings expires on April 14, 2000.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is quoted on The NASDAQ Small Cap Market under
the symbol "CDWN". The Company's stock began trading on March 18, 1997. The
following table sets forth for the periods indicated the high and low closing
prices per share of the Company's Common Stock as reported on The NASDAQ Small
Cap Market.

1999 - By Quarter 1998 - By Quarter
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
------------------------------ ------------------------------
High Bid $ 1.69 $ 2.56 $ 2.63 $ 1.50 $ 4.63 $ 4.38 $ 2.56 $ 1.50
Low Bid $ 0.63 $ 1.38 $ 1.00 $ 0.81 $ 3.75 $ 2.31 $ 0.88 $ 0.38

The closing price as of March 27, 2000 was $1.00 per share of Class A
Common Stock. There are approximately 706 holders of record of Class A Common
Stock on March 27, 2000.

There is no established market for the Class B Common Stock. There are
three holders of record of Class B Common Stock.

Dividend Policy - The Company has not paid any dividends to date and does
not anticipate paying any dividends on any class of its Common Stock in the
foreseeable future and intends to retain earnings to finance the development and
expansion of its operations. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, operations, capital requirements, the financial
condition of the Company and general business conditions. Current debt covenants
with a lender preclude the Company from declaring and paying dividends.

On November 18, 1998, the Company received notification from The NASDAQ
National Market that the Company had failed to meet certain market
capitalization criteria. As a result, the Company's stock was reclassified as a
small capitalization issue.

<PAGE> 11

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical financial data derived
from the Company's financial statements and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements and Notes thereto, included elsewhere
herein.
<TABLE>
<CAPTION>
(In thousands)
Years Ended December 31,
1999 1998 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income Statement Data:
Total revenues $ 29,351 $ 29,447 $ 23,647 $ 8,527
Income (loss) from operations 1,701 (3,597) (467) (468)
Net earnings (loss) before
income taxes (1,139) (5,372) 92 (645)
Net earnings (loss) (1,139) (5,288) 8 (645)

Basic and diluted net
earnings (loss) per share $ (0.16) $ (0.73) $ 0.01 $ (0.22)

Balance Sheet Data (at period end):
Working capital (deficiency) $ (26,565) $ (14,661) $ (9,466) $ (5,925)
Total assets 67,405 68,581 67,875 12,176
Current maturities of
long-term debt 24,774 9,184 1,373 1,685
Long-term debt excluding
current maturities 2,975 15,008 15,390 3,491
Stockholders' equity 35,526 36,634 36,922 995

Cash Flow Data:
Net cash provided by (used in)
operating activities $ 632 $ (2,289) $ 3,053 $ 327
Net cash used in investing
activities (1,546) (5,884) (48,851) (3,999)
Net cash provided by
financing activities 1,072 5,980 47,766 4,722

EBITDA (1) $ 3,540 $ (1,995) $ 188 $ (184)
</TABLE>

(1) EBITDA is defined as the sum of the Company's net earnings (loss), net
interest expense, income taxes, depreciation, and amortization. EBITDA is
presented because it is a widely accepted financial indicator of a
company's ability to service and incur debt. 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.

<PAGE> 12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following is an analysis of the financial condition and results of
operations of the Company. This analysis should be read in conjunction with the
Company's Financial Statements and Notes thereto, appearing elsewhere herein.

GENERAL

The Company, through its subsidiaries, holds the only licenses to own and
operate a racetrack and Racing Centers in Virginia. The Company currently
operates Racing Centers in Chesapeake, Richmond, Hampton, and Alberta, Virginia,
and may open two additional Racing Centers if suitable opportunities are
identified.

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) net income
from food and beverage sales and concessions; and (v) fees from wagering at
out-of-state locations on races run at the Track using export simulcasting

The amount of revenue the Company earns from each wager depends on where
the race is run and where the wagering takes place. Revenues from import
simulcasting of out-of-state races and from wagering at the Track and at the
Racing Centers on races run at the Track consist of the total amount wagered at
the Company's facilities, less the amount paid as winning wagers. The percentage
of each dollar wagered on horse races that must be returned to the public as
winning wagers (typically about 79%) is legislated by the state in which a race
takes place. Revenues from export simulcasting consists of amounts payable to
the Company by the out-of-state racetracks and the racing centers with respect
to wagering on races run at the Track.

The Company's revenues are heavily dependent on the operations of its
Racing Centers. Revenues from the Racing Centers help support live racing at the
Track. The Company plans to open two additional Racing Centers by no later than
2003, which if opened, will improve the Company's earnings.

The most immediate challenge facing the Company is its liquidity. 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 $24.5 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.

<PAGE> 13

The following table sets forth certain operating results as a percentage of
total revenues for the periods indicated:

<TABLE>
<CAPTION>
(Percentage of Net Revenues)
Years Ended December 31,
----------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Revenues:
Pari-mutuel and simulcasting commissions 93.0% 90.8% 88.1%
Other 7.0% 9.2% 11.9%
------ ------ ------
Total revenues 100.0% 100.0% 100.0%

Direct operating expenses:
Purses, fees, and pari-mutuel taxes 32.6% 39.1% 43.0%
Simulcast and other direct expenses 38.9% 46.8% 38.7%
------ ------ ------
Total direct operating expenses 71.5% 85.9% 81.7%
Selling, general, and administrative expenses 16.4% 20.9% 17.5%
Depreciation and amortization 6.3% 5.4% 2.8%
------ ------ ------
Income (loss) from operations 5.8% (12.2)% (2.0)%
Interest income (expense), net (9.7)% (6.0%) 2.4%
------ ------ ------
Earnings (loss) before taxes (3.9)% (18.2)% 0.4%
====== ====== ======

</TABLE>

COMPARISON OF FISCAL YEARS 1999 AND 1998

Total revenues. Total revenues in 1999 were $29.3 million, a decrease of
$.1 million from 1998 revenues of $29.4 million. Total revenue reflects a
decrease of $1.2 million in live harness meet revenue and a $.3 million decrease
in live thoroughbred meet revenue, offset by an increase of $1.4 million at the
Racing Centers. The decrease in live harness meet revenues was primarily due to
the reduction in the number of race days (from 46 in 1998 to 30 in 1999). 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 even though 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 14.4%, or $4.3 million from the prior year. The decrease in
operating expenses was principally attributed to decreases in purse expense,
fees, and simulcast and other direct expenses. Purse expense decreased to $3.5
million for 1999 from $6.1 million for 1998 due to the new thoroughbred and

<PAGE> 14

amended harness horsemen's contracts. This purse expense reduction was offset by
an increase in the fees due to MJC of $.6 million. The decrease in simulcast and
other direct expenses was primarily a result of the changes in Track operations
(approximately $2.0 million of the decrease in direct operating expenses) due to
the reduction in live race days, a reduction in the thoroughbred meet management
costs due to the revised and amended MJC agreement and the implementation of
cost saving measures, and improvements in operating efficiencies. Signal fees
and pari-mutuel taxes increased $.4 million at the Racing Centers due to the
increase in revenue. Cost saving measures in the Racing Centers reduced other
direct operating expenses by $.7 million.

Selling, General and Administrative Expenses (SG&A). As a percentage of
revenues, SG&A decreased 4.5% from 1998. The decrease in SG&A as a percentage of
revenues was primarily attributed to efforts to reduce personnel and other
expenses and resulted in net cost savings of $1.3 million from 1998. These
savings were achieved in spite of non-recurring legal and consulting fees
relating to the Norglass arbitration of approximately $0.7 million and costs
relating to the Dumfries project, an unsuccessful effort to develop a new
racetrack and simulcast wagering center in Dumfries, Virginia, of $0.3 million.

Interest expense, Net. Interest expense, net of interest income, increased
$1.1 million from 1998 to $2.8 million for 1999. The increase in interest
expense was primarily a result of an increase in debt from $24.2 million at
December 31, 1998 to $27.7 million at December 31, 1999, the provision for
interest of $0.3 million relating to the Norglass arbitration award and $.4
million loan guarantee fee to a shareholder which had been waived in 1998. The
increase in debt is largely attributable to 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 thoroughbred 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 and converted $.2 million of accounts
payable to a note.

Net Loss. Net loss decreased to $1.1 million in 1999 from $5.3 million in
1998. 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 on net income net of insurance
recoveries to be approximately $100,000.

COMPARISON OF FISCAL YEARS 1998 AND 1997

Total Revenues. Total revenues in 1998 were $29.4 million, an increase of
$5.8 million (24.5%) over 1997 total revenues of $23.6 million. The increase
primarily reflects a full twelve months of operations of the Hampton and
Brunswick Racing Centers and an increase from thirty live racing days in 1997 to
seventy-one days in 1998 at the Track (an increase of approximately $7.6
million) net of a decrease of revenues at the Company's other Racing Centers (a
decrease of approximately $1.8 million).

<PAGE> 15

Operating Expenses. As a percentage of revenues, operating expenses
increased 10.2%, from 102% in 1997 to 112.2% in 1998. The increase in operating
expenses was principally attributed to the increase in simulcast and other
direct expenses resulting from an increase from thirty live racing days in 1997
to seventy-one days in 1998 (approximately $2.5 million or 8.5% of 1998
revenues) and an increase in purse expense (approximately $2.0 million or 6.8%
of 1998 revenues), net of a decrease in the Maryland Jockey Club management fee
(from $2.7 million in 1997 to $1.1 million in 1998).

Interest Income (Expense). Interest expense increased $1.5 million from
$0.3 million in 1997 to $1.8 million in 1998. The increase in interest expense
was primarily due to the increase in short-term and long-term debt from
approximately $16.8 million in 1997 to $24.2 million in 1998. Also contributing
to the increase in interest expense was capitalized interest of approximately
$1.1 million in 1997 during construction of the Track as compared to capitalized
interest of approximately $146,000 in 1998. Interest income decreased $0.8
million in 1998 as compared to 1997. Interest income earned in 1997 primarily
relates to interest earned on the proceeds from the Company's initial public
offering, which were used to complete construction of the Track.

Net Loss. The net loss incurred in 1998 was $5.3 million as compared to
net earnings of $7,863 in 1997, reflecting the factors described above.

LIQUIDITY AND CAPITAL RESOURCES

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.

During 1999 and 1998, the Company incurred aggregate net losses of
approximately $6,400,000 and has a working capital deficit of $26,565,000 at
December 31, 1999. In addition, approximately $24,800,000 of the Company's debt
is due in 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,
who has personally guaranteed $16,850,000 of the maturing debt and whose
affiliate is the holder of $8,800,000 of additional debt. The Company is seeking
continued financial support from this stockholder.

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 contains a qualification that raises
substantial doubt about the Company's ability to continue as a going concern.

Cash Flows. After adjusting the net loss of $1.1 million for non-cash items
such as depreciation and amortization, $.7 million in cash was provided. The
increase in accounts payable and other operating liabilities and the decreases
in accounts receivable and other assets and horsemen's deposits and purses used
$.1 million of cash resulting in net cash provided by operating
<PAGE> 16

activities of $.6 million. Investing activities utilized approximately $1.5
million of cash, with $1 million consisting of payments on prior year
construction related liabilities and $.5 million of capital expenditures.
Financing activities provided approximately $1.1 million of cash, primarily from
the loans for purses as the Norglass liability had been previously recorded as
accounts payable.

In June 1999, the Company entered into a three-year contract 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
would otherwise be contributed to the purse account in year 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 1999 and 1998 was approximately
$3.5 million and $(2.0) 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 were required to deliver to PNC letters of
credit in the face amount of future principal payments. The letters of credit
have an expiration date of July 31, 2000. Guarantors of the debt posted letters
of credit totaling $2.5 million, in lieu of the Company making the principal
payments due December 31, 1998 through December 31, 1999. The Company
anticipates that the guarantors will continue to post letters of credit for the
principal payments due during 2000.

EFFECT OF INFLATION

The impact of inflation on the Company's operations has not been
significant in recent years. There can be no assurance, however, that a high
rate of inflation in the future will not have an adverse effect on the Company's
operating results.

<PAGE> 17

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 Hurricane Floyd, sometimes cause cancellation of outdoor
horse races or curtail attendance, both of which reduce wagering. Attendance and
wagering at both outdoor races and indoor Racing Centers also may be adversely
affected by certain holidays and professional and college sports seasons as well
as other recreational activities. Conversely, attendance and wagering may be
favorably affected by special racing events which stimulate interest in horse
racing, such as the Triple Crown races in May and June and the Breeders' Cup in
November. As a result, the Company's revenues and net income may fluctuate from
quarter to quarter. Given that a substantial portion of the Company's Track
expenses are fixed, the loss of scheduled racing days could have a material
adverse affect on the Company's profitability. The Company believes that
simulcasting diminishes the effect of inclement weather on wagering.

IMPACT OF YEAR 2000

The result of computer programs being written using two digits rather than
four to define the applicable year is known as the "Year 2000" issue. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This 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.

As part of its Year 2000 readiness, the Company reviewed its internal
systems and made upgrades where necessary and to the extent possible,
ascertained the level of Year 2000 readiness of third party data processors
utilized by the Company. As most of the Company's data processing for its
operations in handled by a third party, the cost of internal system upgrades was
not significant.

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, 2000 that no such disturbances will occur.

NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS133"). SFAS 133, amended, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
133 requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair market value. Presently, the
Company does not use derivative instruments either in hedging activities or as
investments. Accordingly, the Company's adoption of SFAS 133 is not expected to
have a material impact on its financial position or results of operations.

<PAGE> 18

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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Most of the Company's debt obligations at December 31, 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> 19

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

Page
----

Report of Independent Certified Public Accountants 20

Balance Sheets at year end 1999 and 1998 21

Consolidated Statements of Operations for years 1999, 1998 and 1997 22

Consolidated Statements of Changes in Stockholders' Equity for years
1999, 1998 and 1997 23

Consolidated Statements of Cash Flows for years 1999, 1998 and 1997 24

Notes to Financial Statements 25-39

<PAGE> 20

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Colonial Downs Holdings, Inc.

We have audited the accompanying consolidated balance sheets of Colonial Downs
Holdings, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Colonial Downs
Holdings, Inc. and subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company incurred net losses during 1999
and 1998 aggregating $6.4 million and has a working capital deficiency of
approximately $26.6 million at December 31, 1999, which results in part from
$15.5 million of bank debt maturing June 2000. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ BDO Seidman, LLP

Richmond, Virginia
March 24, 2000

<PAGE> 21

COLONIAL DOWNS HOLDINGS, INC.
BALANCE SHEETS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,313 $ 1,155
Horsemen's deposits 659 600
Accounts receivable 253 296
Prepaid expenses and other assets 114 227
--------- ---------
Total current assets 2,339 2,278
Property, plant and equipment
Land and improvements 15,554 15,581
Buildings and improvements 48,472 48,042
Equipment, furnishings, and fixtures 2,853 2,765
Leasehold improvements 1,124 1,122
--------- ---------
68,003 67,510
Less accumulated depreciation and amortization 3,817 1,122
--------- ---------
Property, plant and equipment, net 64,186 65,324
Licensing costs, net of accumulated amortization of $311
and $266, respectively 729 772
Other assets 151 207
--------- ---------
Total assets $ 67,405 $ 68,581
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,764 $ 6,417
Purses due horsemen 182 608
Accrued liabilities and other 1,184 730
Current maturities of long-term debt,
and capital lease obligations 15,974 9,184
Current maturities of long-term debt - related parties 8,800 -
--------- ---------
Total current liabilities 28,904 16,939
Long-term debt and capital lease obligations 1,750 8,508
Notes payable - related parties 1,225 6,500
--------- ---------
Total liabilities 31,879 31,947

Commitments and contingencies

Stockholders' equity
Class A, common stock, $0.01 par value; 12,000 shares
authorized; 5,025 and 5,008 shares issued and
outstanding, respectively 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 (7,420) (6,281)
--------- ---------
Total stockholders' equity 35,526 36,634
--------- ---------
Total liabilities and stockholders' equity $ 67,405 $ 68,581
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

<PAGE> 22

COLONIAL DOWNS HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Pari-mutuel and simulcasting commissions $ 27,285 $ 26,737 $ 20,824
Other 2,066 2,710 2,823
---------- ---------- ----------
Total revenues 29,351 29,447 23,647

Operating expenses
Direct operating expenses
Purses, fees, and pari-mutuel taxes 9,564 11,509 10,164
Simulcast and other direct expenses 11,418 13,791 9,165
---------- ---------- ----------
Total direct operating expenses 20,982 25,300 19,329

Selling, general, and administrative expenses 4,829 6,142 4,130
Depreciation and amortization 1,839 1,602 655
---------- ---------- ----------
Total operating expenses 27,650 33,044 24,114
---------- ---------- ----------

Income (loss) from operations 1,701 (3,597) (467)
Interest expense (2,905) (1,825) (278)
Interest income 65 50 837
---------- ---------- ----------
Earnings (loss) before income taxes (1,139) (5,372) 92
Provision for (benefit from) income taxes - (84) 84
---------- ---------- ----------
Net earnings (loss) $(1,139) $ (5,288) $ 8
========= ========== ==========

Earnings (loss) per share data:
Basic and diluted earnings (loss) per share $ (0.16) $ (0.73) $ 0.01
Weighted average number of shares outstanding 7,260 7,250 6,318

</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

<PAGE> 23

COLONIAL DOWNS HOLDINGS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>

Common Stock Additional Total
Class A Class B Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
------ ------ ------ ------ ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996 750 $ 8 2,250 $ 23 $ 1,966 $(1,001) $ 996
Sale of common stock 4,250 42 - - 35,876 - 35,918
Net earnings - - - - - 8 8
------ ------ ------ ------ ------- --------- ----------
Balance at December 31,
1997 5,000 50 2,250 23 37,842 (993) 36,922
Conversion of Class B 8 - (8) - - - -
Land contribution - - - - 5,000 - 5,000
Net loss - - - - - (5,288) (5,288)
------ ------ ------ ------ ------- --------- ---------
Balance at December 31,
1998 5,008 50 2,242 23 42,842 (6,281) 36,634
Stock in lieu of
Directors' fees 17 - - - 31 - 31
Net loss - - - - - (1,139) (1,139)
------ ------ ------ ------ -------- --------- ---------
Balance at December 31,
1999 5,025 $ 50 2,242 $ 23 $42,873 $ (7,420) $ 35,526
====== ====== ====== ====== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

<PAGE> 24
COLONIAL DOWNS HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>

Years Ended
-----------------------------------------
December 31, December 31, December 31,
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (1,139) $ (5,288) $ 8
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,839 1,602 655
Deferred income taxes and other 31 (78) 84
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable
and other assets 44 470 (1,094)
Increase (decrease) in trade accounts payable and
accrued liabilities 342 (51) 3,459
Decrease (increase) in horsemen's deposits
and purses (485) 1,056 (59)
----------- ----------- ------------
Net cash provided by (used in) operating activities $ 632 $ (2,289) $ 3,053
----------- ----------- ------------
Investing activities:
Capital expenditures (1,546) (5,884) (47,133)
Increase (decrease) in purse notes payable
due horsemen - - (1,620)
Other - - (98)
----------- ----------- -----------
Net cash used in investing activities (1,546) (5,884) (48,851)
----------- ----------- -----------
Financing activities:
Proceeds from long-term debt and capital leases 2,375 6,398 11,389
Payments on long-term debt and capital leases (1,303) (418) (216)
Proceeds from notes payable - - 4,612
Payment on notes payable - - (4,199)
Increase in financing costs - - (70)
Proceeds from issuance of common stock, net - - 36,250
----------- ----------- -----------
Net cash provided by financing activities 1,072 5,980 47,766
----------- ----------- -----------
Net change in cash and cash equivalents 158 (2,193) 1,968
Cash and cash equivalents, beginning of year 1,155 3,348 1,380
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,313 $ 1,155 $ 3,348
=========== =========== ==========

Supplemental Cash Flow Information:
Supplemental disclosure of noncash investing
and financing activities
Land contribution $ - $ 5,000 $ -
Capital lease obligation incurred - - 229
Cash paid for interest 2,083 1,915 1,094
Conversion of accounts payable to long-term debt 2,485 1,450 -
Cash paid for income taxes - - 218

</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

<PAGE> 25

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Colonial Downs Holdings, Inc., ("Colonial"), a Virginia Corporation, was
incorporated in 1996. Colonial owns and operates, through its wholly-owned
subsidiaries, Colonial Downs Racetrack (the "Track") in New Kent, Virginia,
which primarily conducts pari-mutuel wagering on thoroughbred and standardbred
horse racing. Colonial also owns and operates four Racing Centers which provide
simulcast pari-mutuel wagering on thoroughbred and standardbred horse racing
from selected racetracks throughout the United States.

The Company owns, directly, or through its wholly-owned subsidiaries, the
operating licenses for the racetrack and the Chesapeake, Richmond, Hampton, and
Brunswick Racing Centers; the property for the Richmond, Hampton, and Brunswick
Racing Centers; the rights to apply for licenses to own and operate up to two
additional Racing Centers in Virginia; the 345 acres on which the racetrack
exists; and the racetrack facilities and certain related infrastructure.

Principles of Consolidation

The consolidated financial statements include the following entities of
Colonial and its subsidiaries (collectively, the "Company"), Colonial Downs,
L.P. ("Partnership"), Stansley Racing Corp. ("SRC") and Colonial Downs
Holdings, Inc. ("CD Holdings"). All significant intercompany accounts and
transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all demand deposits and time deposits with original
maturities of three months or less to be cash equivalents.

<PAGE> 26

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

Capitalized Interest

Interest in the amount of $146,000 and $1,068,000 was capitalized during
1998 and 1997, respectively, in connection with the construction of the Track
and development of the Racing Centers. No interest was capitalized during 1999.

Property, Plant and Equipment

Property, plant and equipment are stated at historical cost. Depreciation
is computed using the straight-line method based on the estimated useful lives
of the related assets. Estimated useful lives used are as follows:

Land improvements 20 to 40 years
Building and improvements 5 to 40 years
Equipment, furnishings, and fixtures 2 to 20 years
Leasehold improvements 7 to 40 years

Depreciation expense was $1,631,000, $1,541,000 and $534,000 for fiscal
years 1999, 1998 and 1997, respectively.

Costs of betterment, renewals, and major replacements are capitalized.
Maintenance, repairs and minor replacements are expensed as incurred. Gains and
losses from dispositions are included in the results from operations.

Licensing Costs and Amortization

Licensing costs, which are being amortized over the twenty-year license
period, consist primarily of professional fees associated with the application
for the racetrack licenses and related licensing fees for the Racing Centers.

Revenue

The Company primarily derives revenue from import simulcasting, which is
the Company's share of wagering at its Racing Centers on races simulcasted from
other racetracks. Revenue also is derived from live racing at the Track as well
as export simulcasting of its live racing to other racetracks.

Horsemen's Purse and Awards

Amounts due under agreements with the Virginia Horsemen's Benevolent and
Protective Association, Inc. and the Virginia Harness Horse Association (Note
10) are accrued based on the terms of the agreements. Funds for purses for
future live race meets are held in restricted cash accounts. As of December 31,
1999 and 1998 approximately $659,000 and $600,000, respectively, were held in
the restricted cash accounts.

<PAGE> 27

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

Long-Lived Assets

The carrying values of long-lived assets, principally identifiable
intangibles, property, plant and equipment, are reviewed for potential
impairment when events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable, as determined based on the
undiscounted cash flows over the remaining amortization periods. In such a case,
the carrying value of the related assets would be reduced by the estimated
shortfall of discounted cash flows.

Fair Value of Financial Instruments

The following methods and assumptions are used to estimate the fair value
of each class of financial instruments for which it is practical to estimate.

Cash and Cash Equivalents - The carrying amount approximates the fair value
due to the short maturity of the cash equivalents.

Long-Term Debt and Capital Lease Obligations - The fair value of the
Company's long-term debt and capital lease obligations is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The carrying
amount approximates fair value since the Company's interest rates approximate
current interest rates.

Reclassifications

Certain reclassifications have been made in the prior years' financial
statements in order to conform to the December 31, 1999 presentation.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to credit risk
consist of cash equivalents, including horsemen's deposits, and accounts
receivable. The Company's policy is to limit the amount of credit exposure to
any one financial institution and place funds with financial institutions
evaluated as being creditworthy. At December 31, 1999 the Company had cash
deposits which exceeded federally insured limits by approximately $1,008,000.

<PAGE> 28
COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS133"). SFAS 133, amended, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
133 requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair market value. Presently, the
Company does not use derivative instruments either in hedging activities or as
investments. Accordingly, the adoption of SFAS 133 is not expected to have an
impact on the Company's financial position or results of operations.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilutive
effect of securities (which can consist of stock options and warrants) that
could share in earnings of an entity. The Company had no securities which had a
dilutive effect on earnings per share for years ended December 31, 1999, 1998
and 1997.

2. MANAGEMENT'S PLANS

3. MANAGEMENT AND CONSULTING AGREEMENT

The Company entered into a Management and Consulting Agreement (the
"Agreement") with Maryland-Virginia Racing Circuit, Inc., an affiliate of the
Maryland Jockey Club ("MJC"), to provide experienced management for the Track
and Racing Centers and to create a Virginia-Maryland thoroughbred racing
circuit. Under the Agreement, Maryland Jockey Club agreed to suspend live

<PAGE> 29

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

3. MANAGEMENT AND CONSULTING AGREEMENT- (CONTINUED)

racing at their racetracks, Laurel Park and Pimlico Race Course, during the
Company's live thoroughbred meets. Parties to the Agreement also agreed to
exchange simulcast signals for their live meets at no cost to either party. An
amendment to the Agreement (the "Amended Agreement") was signed by both parties
on January 15, 1999, which restructured among other terms MJC's responsibilities
as manager and the management fee paid to MJC. Effective July 1, 1999, MJC
became responsible for the Company's Racing Centers as well as the live
standardbred and thoroughbred meets. MJC no longer is reimbursed for expenses
incurred while acting as manager of these operations. Under the Amended
Agreement, the management fees were reduced from 2% of amounts wagered at the
Company's facilities (other than on live standardbred meets conducted at the
Track), to 1.0% of the first $75 million of the aggregate gross amounts wagered
in any calendar year in the Commonwealth of Virginia excluding certain
conditions ("Handle") specified in the Amended Agreement and 2.0% of all amounts
wagered in excess of $75 million per calendar year. Management fees relating to
the Company's new Racing Centers will be either 2% or 3.25% of Handle depending
upon their location and the amount of handle.

The Agreement will remain in effect for as long as the Company owns,
controls or operates the Track, not to exceed a term of 50 years. At the
Company's option, the Company may terminate the agreement any time after 25
years upon payment of a fee equal to 17 times the average management fee paid
during the three years immediately preceding such termination.

Management fees incurred in 1999, 1998, and 1997 were $1.7 million, $1.1
million and $2.7 million, respectively.

4. LAND CONVEYANCE

Delmarva Properties, Inc. and Chesapeake Forest Products Company
(collectively "Delmarva") and the Company entered into an agreement in which
Delmarva, at no cost to the Company, conveyed the land required to build the
racetrack and facilities in New Kent County. The original agreement contained
certain land use restrictions and a reconveyance provision. On January 14, 1999,
Delmarva and the Company entered into an agreement pursuant to which Delmarva
agreed to relinquish their rights to require reconveyance of the property and to
execute a deed of release to such effect. Delmarva also agreed to the following
additional potential uses for the land and facilities: i) performing arts
center; ii) athletic training facility; or iii) hotel conference center.
Additional uses for the facilities are allowed upon approval by all parties. As
of December 31, 1998, the $5.0 million estimated value of the land was recorded
by the Company as a contribution to equity.

<PAGE> 30

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

5. 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>
December 31,
---------------------------
1999 1998
----------- ------------
<S> <C> <C>
Note payable to a bank maturing June 2000, bearing
interest at a variable rate (9.06% at December 31, 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

Note payable to a bank, maturing October 2000, bearing
interest at prime plus 1.0% (9.50% at December 31, 1999),
with monthly principal payment of $15,000, collateralized
by certain fixed assets 480,000 645,000

Installment loans and capitalized leases collateralized by
certain vehicles, machinery and equipment, maturing at
various dates through September 2000, at interest rates
ranging from 3% to 9% 51,543 153,974

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 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 under the revolving credit facility with a
bank, bearing interest at a variable rate (9.06% at
December 31, 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%,
Collateralized by the Hampton Racing Center 1,000,000 1,000,000
</TABLE>

<PAGE> 31

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

5. LONG-TERM DEBT, NOTES PAYABLE-RELATED PARTIES, AND CAPITAL LEASES -
(CONTINUED)

<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
----------- ------------
<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 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 December 31, 1999). 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 (approximately 8.5% at
December 31, 1999). 475,000 -

Note payable to Ryan Incorporated Central, bearing monthly
interest at 10%, payable in six equal monthly payments
commencing January 1, 2000. 142,735 -

Note payable from the thoroughbred purse account, due
August 1999, with interest rate of 5.48%, collateralized
by the Hampton Racing Center. - 360,000

Note payable to an insurance company, maturing October
1999, bearing interest at 6.83%, with monthly payments of
$8,622 including interest. - 83,557
----------- -----------
27,749,278 24,192,531
Less current maturities. 15,974,278 9,184,378
Current maturities - related parties. 8,800,000 -
----------- -----------
2,975,000 15,008,153
Less long-term debt - related parties. 1,225,000 6,500,000
----------- -----------
Long-term debt, including capital lease obligations. $ 1,750,000 $ 8,508,153
=========== ===========
</TABLE>

<PAGE> 32

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

5. LONG-TERM DEBT, NOTES PAYABLE-RELATED PARTIES, AND CAPITAL LEASES -
(CONTINUED)

The terms of the $10 million bank note and revolving credit loan with the
bank contain, among other provisions, affirmative and negative covenants. As of
December 31, 1998, the Company was in violation of certain covenants set forth
in the loan agreement and as such, on January 11, 1999, the Company entered into
a forebearance agreement with PNC Bank, N.A. ("PNC"). Under the agreement, in
lieu of making principal payments on the due dates, the Guarantors are required
to deliver to PNC a letter of credit in the face amount of the principal
payment. Guarantors have posted $2.5 million in letters of credit in lieu of the
Company making principal payments which had become due as of December 31, 1999.
The letters of credit shall have an expiration of July 31, 2000.

Scheduled maturities of notes payable and capital lease obligations are as
follows:

2000 $ 24,774,278
2001 1,815,000
2002 290,000
2003 290,000
2004 290,000
Thereafter 290,000
-------------
$ 27,749,278
=============

6. INCOME TAXES

Significant components of the provision for (benefit from) income taxes are
as follows:

(In Thousands)
Years Ended December 31,
1999 1998 1997
------------ ------------ ------------
Current:
Federal $ - $ - -
State - - -
------------ ------------ ------------
- - -

Deferred:
Federal - (57) 57
State - (27) 27
------------ ------------ ------------
- (84) 84
------------ ------------ ------------
Total $ - $ (84) $ 84
============ ============ ============

<PAGE> 33

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

6. INCOME TAXES - (CONTINUED)

Deferred income tax assets (liabilities) consist of the following:

(In Thousands)
December 31,
1999 1998 1997
---------- ---------- ----------
Assets
Net operating loss $ 3,795 $ 2,828 $ 276
Liabilities
Depreciation and amortization (848) (276) (360)
----------- ---------- ----------
Net deferred tax asset (liability) 2,947 2,552 (84)
Valuation allowance (2,947) (2,552) -
---------- ---------- ----------
Deferred tax liability $ - $ - $ (84)
========== ========== ==========

Income tax expense (benefit) as reported differs from the amounts computed
by applying the statutory federal income tax rate to pre-tax income as follows:

Year Ended December 31,
1999 1998 1997
---------- ---------- ----------
Income taxes at statutory rate $ (386) $ (1,798) $ 31
Increases (decreases) resulting
from state taxes, net of federal
income tax benefit (45) (209) (10)
Valuation allowance 395 1,923 -
Campaign costs - - 211
Income allocable to entities prior
to reorganization - - (158)
Other 36 - 10
---------- ---------- ---------
$ - $ (84) $ 84
========== ========== =========

At December 31, 1999, the Company has net operating loss carryforwards of
approximately $10 million for income tax purposes that expire in years 2012
through 2019. A valuation allowance has been recognized to reduce the deferred
tax assets to amounts expected to be realized.

7. EMPLOYEE BENEFIT PLANS

In June 1998, the Company implemented a 401(k) Plan in which all full time
and part time employees are eligible to participate after six months of
employment. Employees may elect to make pre-tax contributions up to 15% of their
annual salary or the applicable statutory maximum limits to the 401(k) Plan. The
Company makes discretionary matching contributions (subject to

<PAGE> 34

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

7. EMPLOYEE BENEFIT PLANS - (CONTINUED)

statutory limits) in an amount equal to 20% of the first 6% of the employee's
contribution. Company contributions are fully vested after three years of
employment.

The Company's contributions to the 401(k) Plan were approximately $10,400
and $2,400 for 1999 and 1998.

8. RELATED PARTY TRANSACTIONS

Upon consummation of the Initial Public Offering, ("IPO"), in 1997, the
Company entered into a five year consulting agreement at $75,000 per year with
the Vice Chairman of the Board of Directors. Total expense under the agreement
was $75,000, $75,000 and $59,375 for the years ended December 31, 1999, 1998 and
1997, respectively.

Virginia Concessions, L.L.C., ("VAC"), an affiliate of a shareholder, has
an agreement with the Company to manage the food and beverage concessions at the
Company's Racing Centers. Prior to 1998, under the agreement, VAC was to pay
commissions of approximately $46,000 to the Company based upon a percentage of
gross sales at each Racing Center. The agreement was amended in 1998 to state
that the Company receives 100% of VAC's net income or loss. VAC had net income
of approximately $141,000 (unaudited) and incurred a loss of approximately
$7,000 (unaudited) in 1999 and 1998, respectively. Accounts receivable from VAC
related to these agreements amounted to approximately $245,000 and $181,000 at
December 31, 1999 and 1998, respectively.

The Company filed an arbitration claim against Norglass, the general
contractor engaged to manage the construction of the Track and an affiliate of
a shareholder, in which Norglass counterclaimed. 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.

On October 1, 1997, the Company entered into an agreement with Premier
Development Co. ("Premier"), an affiliate of a shareholder, to pay annual
consulting fees in the amount of $226,000 through September 30, 1999. The
Company paid $225,000, $226,000 and $50,000 under the agreement for the years
ended December 31, 1999, 1998 and 1997, respectively. The provisions under the
agreement have continued subsequent to September 30, 1999 on a month- to-month
basis.

<PAGE> 35

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

8. RELATED PARTY TRANSACTIONS - (CONTINUED)

Pursuant to an agreement to provide credit support to the Company,
Diversified Opportunities Group Ltd. ("Diversified"), an affiliate of a
shareholder, will receive an annual fee equal to 3% of the amount of any letters
of credit or guarantees provided to the Company (subject, in the case of a
letter of credit, to a minimum annual fee of $50,000). The 1998 fee of $450,000
is not payable until such time that the Company has successfully opened two
satellite wagering facilities in Northern Virginia. If such events do not occur
by January 1, 2007, the fee will be waived in its entirety. Costs incurred under
this agreement were $165,124 in 1997 and $450,000 in 1999.

9. COMMITMENTS AND CONTINGENCIES

The Company has entered into an agreement with a totalisator company which
provides wagering services and designs, programs, and manufactures totalisator
systems for use in wagering applications. The basic terms of the agreement state
that the totalisator company shall provide totalisator services to the Company
for all wagering held at the Company's facilities for 1999, 2000 and 2001. In
addition, the Company agreed to use certain equipment provided by the
totalisator company.

The Company has entered into agreements with a company which provides
broadcasting and simulcasting equipment and services. These agreements expire at
various times through 2002. Total expense incurred for totalisator, and
broadcasting and simulcasting equipment was approximately $1,462,000, $1,662,000
and $796,000 for the years ended December 31, 1999, 1998, and 1997,
respectively.

The Company leases automobiles, building space, and certain equipment under
operating leases expiring at various dates. Total rental expense under these
non-cancelable leases was approximately $230,000, $207,000 and $393,000 for the
years ended December 31, 1999, 1998, and 1997, respectively.

The following are the future estimated minimum commitment relating to non-
cancelable operating agreements and leases:

Broadcasting
Simulcasting
and
Year ended December 31, Totalisator Other Total
- ----------------------- --------------- ----------- --------------
2000 $ 1,340,000 $ 97,000 $ 1,437,000
2001 1,240,000 6,800 1,246,800
2002 689,000 2,900 691,900
--------------- ----------- --------------
$ 3,269,000 $ 106,700 $ 3,375,700
=============== =========== ==============

Under the terms of a $700,000 Community Development Block Grant received in
1996 from New Kent County, the Company must take affirmative steps to employ

<PAGE> 36

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

9. COMMITMENTS AND CONTINGENCIES - (CONTINUED)

a minimum number of low and moderate income persons based on HUD Section 8
Income Limits. If a good faith effort has not been made to honor its commitment
to take such affirmative steps, the Company may repay all or a portion of any
local or grant funds already expended to the locality. The Company has until
December 31, 2000 to comply.

In connection with the Norglass dispute, two subcontractors of Norglass
have filed mechanics liens against the Track seeking payments aggregating
approximately $178,000. The Company is contesting these claims. At December 31,
1999, approximately $60,000 has been accrued related to these claims.

10. HORSEMEN'S AGREEMENT

Purse structures are negotiated with the respective horsemen's groups, the
Virginia Horsemen's Benevolent and Protective Association ("VaHBPA") for
thoroughbred and the Virginia Harness Horse Association ("VHHA") for
standardbred.

The Company entered into a three year agreement with the VaHBPA, effective
January 1, 1999, that set a minimum payment of $3.125 million for 1999 purses,
with 25 days of live racing with average daily purses of no less than $125,000.
Of the total $3.125 million guaranteed payments, $1.5 million was funded by
advances from MJC and CD Entertainment as evidenced by the notes payable of
$900,000 and $600,000 described in Note 5, respectively.

In years 2000 and 2001, the Company is required to deposit 5.25% of the
handle generated on import thoroughbred racing to a separate joint bank account
(the "Thoroughbred Partner Account"), which is classified as Horsemen's Deposits
in the accompanying balance sheet. In addition, in accordance with the Virginia
Racing Act, the Company must continue to deposit approximately 8.5% of the
handle generated by live thoroughbred racing conducted at the Track. The $1.5
million advance will be repaid in an annual amount of $750,000 plus interest at
the prime rate out of the 5.25% contributed to the purse account in years 2000
and 2001. Thoroughbred purse expense for 1999, 1998 and 1997 was approximately
$2.6 million, $4.6 million, and $3.2 million, respectively. Prior to 1999, the
Company contributed to the thoroughbred purse accounts a certain percentage of
all thoroughbred wagers at its Racing Centers.

Prior to 1999, the Company entered into agreements with the VHHA regarding
revenue generated from pari-mutuel wagering on simulcast standardbred races at
all facilities owned and operated by the Company in Virginia, and simulcasting
of live races held at the racetrack. In accordance with the agreements, the
Company maintains a separate joint bank account which is classified as
Horsemen's Deposits (the "Standardbred Partner Account"). In accordance with the
Virginia Racing Act, the Company deposited approximately 8.5% of the handle
generated by live standardbred racing conducted at the Track. The contract
between the Company and the VHHA was amended in March 1999 to provide that the
maximum standardbred purses to be paid in 1999 was $1.5 million. The
standardbred purse expense for 1999, 1998, and 1997 was approximately $950,000,
$1.5 million and $1.0 million, respectively.
<PAGE> 37

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

10. HORSEMEN'S AGREEMENT - (CONTINUED)

In March 2000, the Company and the VHHA reached a settlement of pending
litigation in which both parties agreed that all previous contracts between them
had expired. The Company has agreed to deposit 5% of standardbred's simulcast
handle and the VHHA agreed to return to the Company $315,000 which had been
previously deposited in the purse account.

During the 2000 session of the Virginia General Assembly, a law was passed
that effective April 2000 will require the Company to enter into contracts with
each representative horsemen group that provides for the Company to contribute a
minimum of 5% of the first $75 million of simulcast handle, 6% of the next $75
million and 7% of all handle over $150 million to the purse account of the
respective breed.

11. STOCK OPTIONS

In conjunction with the IPO, the Company implemented a stock option plan on
March 31, 1997. Options granted under the plan may be either Incentive Stock
Options or Non-qualified Stock Options, based on the discretion of the Board of
Directors. The maximum aggregate number of shares which may be optioned and sold
under the plan is 395,000 shares of Class A Common Stock. The exercise price per
share for Incentive Options will be no less than the fair value of the stock at
the grant date. The exercise of Non-qualified Options is determined by the Board
of Directors on the grant date. The term of the plan is ten years. On June 14,
1999, 20,000 granted and outstanding options were repriced from $10.45 to
$1.7875 per share. On December 15, 1998, 96,000 granted and outstanding options
were repriced from $9.50 per share to $1.00 per share. The following tables
summarize activity of the Stock Option Plan and the stock options outstanding at
December 31, 1999:

<PAGE> 38

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

11. STOCK OPTIONS - (CONTINUED)

<TABLE>
<CAPTION>
Weighted
Average
Exercise Available Options
Price For Grant Outstanding
----------- ----------- -------------
<S> <C> <C> <C>
Balance at March 31, 1997 $ - 300,000 -
Granted 9.86 (242,000) 242,000
Forfeited - 50,000 (50,000)
----------- ----------- -------------
Balance at December 31, 1997 9.86 108,000 192,000
Granted 1.00 (79,000) 79,000
Forfeited 1.00 26,000 (26,000)
----------- ----------- -------------
Balance at December 31, 1998 $ 3.69 55,000 245,000
Granted 1.50 (15,000) 15,000
Forfeited 1.00 21,200 (21,200)
Shares added to plan - 95,000 -
----------- ----------- -------------
Balance at December 31, 1999 $ 3.07 156,200 238,800
=========== =========== =============
</TABLE>

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------ --------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Number Contractual Price Per Number Price Per
Range of Exercise Prices of Shares Life (years) Share of Shares Share
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00 - 1.79 186,800 7.92 $ 1.12 71,600 $ 1.09
$9.50 - 10.45 52,000 7.26 10.05 40,000 10.21
-------- ----- ------- ------- -------
238,800 7.84 $ 3.07 111,600 $ 4.36
</TABLE>

<PAGE> 39

COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)

11. STOCK OPTIONS - (CONTINUED)

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123 establishes alternative methods of accounting
and disclosure for employee stock-based compensation arrangements. The Company
has elected to use the intrinsic value method of accounting as prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations, for stock options granted to the
Company's employees. This method does not result in the recognition of
compensation expense when employee stock options are granted if the exercise
price of the option equals or exceeds the fair market value of the stock at the
date of grant.

If the accounting provisions of SFAS 123 had been adopted, the effect on
1999, 1998 and 1997 earnings (loss) would have been as follows (In Thousands,
Except Per Share Data):

<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings (loss):
Reported $ (1,139) $ (5,288) $ 8
Proforma (1,148) (5,299) (126)
Basic and diluted earnings (loss) per share:
Reported $ (0.16) $ (0.73) $ 0.01
Proforma (0.16) (0.73) (0.02)
</TABLE>

For purposes of computing the proforma amounts indicated above, the fair
value of each option on the date of grant is estimated using the Black-Scholes
option pricing model with the following assumptions: no dividend yield, expected
volatility of 50%, risk-free interest rate of 6.08% and expected lives of two to
ten years. Substantially all options become vested and exercisable evenly over a
five-year period. The weighted average fair value of options granted during
December 31, 1999 is $1.38.

<PAGE> 40

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name of Director Age Position with the Company
---------------- --- -------------------------
<S> <C> <S>
Arnold W. Stansley 67 Mr. Stansley is an owner and has been
an executive officer of Raceway Park, a
standardbred racetrack in Toledo, Ohio,
for the last ten years. From 1993 to
1997, he served as President of
Stansley Management Corp., Colonial
Downs, L.P.'s managing general partner
prior to the reorganization of the
Company in connection with its initial
public offering of stock. He also
served as President of Stansley Racing
prior to the reorganization, from 1994
to 1997. Mr. Stansley has been a
director of the Company since March
1997. Mr. Stansley's term as a director
of the Company expires in 2002.

William J. Koslo, Jr. 40 Mr. Koslo joined CIBC Oppenheimer Corp.,
an investment banking subsidiary of the
Canadian Imperial Bank of Commerce, as a
director in September 1996. From 1993
to 1996, Mr. Koslo was an associate
director of the investment bank Rodman &
Renshaw, Inc. In 1992 and 1993, he was
a vice president with Creditanstalt-
Bankverein, a commercial bank then
affiliated with Rodman & Renshaw, Inc.
Mr. Koslo has been a director of the
Company since March 1997. Mr. Koslo's
term as a director of the Company
expires in 2002.
</TABLE>

<PAGE> 41

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - (CONTINUED)
<TABLE>
<CAPTION>
Name of Director Age Position with the Company
---------------- --- -------------------------
<S> <C> <S>
Stephen Peskoff 57 Mr. Peskoff has acted as a consultant to
Friedman, Billings, Ramsey & Co. for the
last five years and served as President
of Underhill Investment Corp. since
1976. Mr. Peskoff was active in the
thoroughbred horse industry from 1978 to
1992 during which time he won two
Eclipse Awards (1983 and 1991) and was
the breeder of the 1991 horse of the
year (Black Tie Affair). Mr. Peskoff
has been a director of the Company since
March 1997. Mr. Peskoff's term as a
director of the Company expires in 2001.

Patrick J. McKinley 45 Mr. McKinley has served as Executive
Vice President of Jacobs Investment,
Inc. for more than twenty years and is
responsible for that company's day-to-
day operations. Mr. McKinley has over
twenty years' experience in restaurant
operations and real estate development
and management. Mr. McKinley has been a
director of the Company since March
1997. Mr. McKinley's term as a director
of the Company expires in 2001.

Jeffrey P. Jacobs 46 Mr. Jacobs serves as Chairman of the
Board and Chief Executive Officer of the
Company. From 1995 to the present, he
has served as Chairman and Chief
Executive Officer of Jacobs
Entertainment Ltd., a company based in
Cleveland, Ohio that has investments in
other gaming companies and ventures,
including Black Hawk Gaming &
Development Company, Inc. based in Black
Hawk, Colorado. From 1975 to present he
also has served as President and CEO of
Jacobs Investments, Inc., a company
engaged in the development, construction
and operation of residential and
commercial real estate and entertainment
projects in Ohio. Mr. Jacobs also
served in the Ohio House of
Representatives from 1982 until 1986.
Mr. Jacobs' term as a director of the
Company expires in 2000.

</TABLE>

<PAGE>42

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - (CONTINUED)
<TABLE>
<CAPTION>
Name of Director Age Position with the Company
---------------- --- -------------------------
<S> <C> <S>
Robert H. Hughes 59 Mr. Hughes served as Chief Financial
Officer of Jacobs Investments, Inc. from
1993 until May 1999. Mr. Hughes is a
director of Black Hawk Gaming and
Development Co., Inc. Mr. Hughes was
partner in charge of the audit
department of the Cleveland office of
the accounting firm of Deloitte & Touche
LLP until his retirement in 1991. Mr.
Hughes is a certified public accountant.
Mr. Hughes' term as a director of the
Company expires in 2000.

David C. Grunenwald 46 Mr. Grunenwald has served as Vice
President of Development and Leasing for
Jacobs Investments, Inc. since 1988 and
directs such company's development,
construction, and leasing operations.
Prior to joining Jacobs Investments,
Inc., Mr. Grunenwald worked for Weston,
Inc. (1987-88) in syndication and
property management and Touche Ross &
Company from 1981 to 1987 as a tax
consultant. Mr. Grunenwald's term as a
director of the Company expires in 2000.
</TABLE>

<PAGE> 43

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - (CONTINUED)

The executive officers, in addition to Mr. Jacobs, of the Company are as
follows:

<TABLE>
<CAPTION>
Name of Director Age Position with the Company
---------------- --- -------------------------
<S> <C> <S>
Ian M. Stewart 45 Mr. Stewart has served as President
since November 1998 and Chief Financial
Officer since June 1997. From January
1998 through November 1998, Mr. Stewart
served as Chief Operating Officer of the
Company. Prior to that time, Mr.
Stewart was CFO for Barber Martin &
Associates from March 1997 to June 1997.
From October 1994 to March 1997, Mr.
Stewart served as a consultant and a
temporary CFO for several Virginia based
businesses. From December 1989 to
September 1994, Mr. Stewart was Vice
President and CFO of Hat Brands, Inc.
Mr. Stewart is a certified public
accountant.

Jerry M. Monahan 60 Mr. Monahan has served as Vice President
- Racing Operations since June 1997.
Prior to that time, Mr. Monahan was Vice
President and General Manager of the
Lexington Trots Breeder Association.
Prior to that, Mr. Monahan was Vice
President and General Manager of Buffalo
Raceway.
</TABLE>

There are no family relationships between any of the directors and
executive officers. No director or executive officer has been subject to any
material legal proceedings in the past five years.

<PAGE> 44

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - (CONTINUED)

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act requires the Company's
executive officers and directors and persons who own more than ten percent of
the Company's Common Stock file reports of ownership and changes in ownership of
the Company's Common Stock and any other equity securities of the Company with
the Securities and Exchange Commission (SEC) and the NASDAQ Small Cap Market.
Executive officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.

Based solely on its review of the copies of Forms 3, 4 and 5 furnished to
the Company, or written representations from certain reporting persons that no
such forms were required to be filed by such persons, the Company believes that
all its executive officers, directors and greater than 10% shareholders complied
with all filing requirements applicable to them during 1999.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth a summary of all compensation paid or
accrued by the Company for services rendered for the last three fiscal years to
the Company's Chief Executive Officer and each executive officer whose aggregate
cash compensation in 1999 exceeded $100,000:

<PAGE> 45

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-----------------------------------------------------------------------
Awards Payouts
--------------------------
Restricted Options/ LTIP All
Name and Other Stock SARs Payouts Other
Principal Position Year Salary Bonus Compensation Awards (#)(3) ($) Compensation
- ------------------ ---- ------ ----- ------------ ------ ------ --- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jeffrey P. Jacobs 1999 $120,000 (1) (2) (1) (1) (1) (1)
Chief Executive 1998 120,000 (1) (2) (1) (1) (1) (1)
Officer 1997 120,000 (1) (2) (1) 20,000 (1) (1)

Ian M. Stewart 1999 $135,584 (1) (2) (1) 10,000 (1) (1)
President 1998 120,000 (1) (2) (1) 10,000 (1) (1)
1997 46,420 (1) (2) (1) 10,000 (1) (1)
</TABLE>
(1) No compensation of this type received.
(2)..Other Annual Compensation for executive officers is not reported as it is
less than the required reporting threshold of the Securities and Exchange
Commission.
(3) Number of shares of Common Stock issuable upon exercise of options granted
during 1997, 1998 and 1999. The Company did not grant any Stock
Appreciation Rights during 1997, 1998 and 1999.

EMPLOYEE GRANTS OF STOCK OPTIONS IN 1999
<TABLE>
<CAPTION>

Number of % of Total Potential Realizable Value
Securities Options At Assumed Annual Rates
Underlying Granted to Exercise Of Stock Price Appreciation
Option Employees in Prices Per Expiration For Option Term (1)
Granted Fiscal Year Share Date 5% 10%
------ ----------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Ian M. Stewart 10,000 66.66% $1.75 12/15/2008 $11,000 $27,900
All other 5,000 33.34% $1.00 12/15/2008 $ - $ 3,100

</TABLE>

(1) In accordance with Securities and Exchange Commission rules, these columns
show gains that might exist for the respective options, assuming that the
market price of Colonial Downs' Common Stock appreciates from the date of
grant over a period of 10 years at the annualized rates of 5% and 10%,
respectively. If the stock price does not increase above the exercise price
at the time of exercise, realized value to the individual employee from
these options will be zero.

<PAGE> 46

NON-EMPLOYEE GRANTS OF STOCK OPTIONS IN 1999

None

Exercise of Stock Options in 1999

There were no stock options exercised in 1999. There are no outstanding
stock appreciation rights.

Other Matters

The Company entered into a two-year employment agreement with Mr. Ian
Stewart in June 1999. This agreement contains customary terms and conditions and
provides minimum base salary of $150,000 each year.

<PAGE> 47

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 10, 2000, by (i)
each person known to the Company to own beneficially more than five percent of
the Company's outstanding Common Stock, (ii) each director, (iii) the chief
executive officer and each of the four other most highly compensated executive
officers of the Company whose salaries and bonuses were in excess of $100,000,
and (iv) all of the executive officers and directors of the Company as a group.

AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP OF COMMON STOCK
<TABLE>
<CAPTION>
Voting Power
Percent of Common Outstanding as Percent of
Common Stock
Name of Beneficial Owner Class A Class B Class A Class B All Outstanding(1)
- ------------------------ ------- ------- ------- ------- --- --------------
<S> <C> <C> <C> <C> <C> <C>
CD Entertainment Ltd.(2)
1231 Main Avenue
Cleveland, OH 44113 1,839,739(3) 2,767,500(4) 33.1% 92.3% 53.8% 76.3%

Jeffrey P. Jacobs(5) 1,859,739 2,767,500(4) 33.4% 92.3% 54.1% 76.3%

Arnold W. Stansley(6) 478,879 --- 8.6% --- 5.6% 2.3%

James M. Leadbetter(7)
110 Arco Drive
Toledo, Ohio 43607 216,581 225,000 3.9% 7.5% 5.2% 6.5%

Stephen Peskoff(8) 117,518 --- 2.1% --- 1.4% *

Ian M. Stewart(9) 30,000 --- * --- * *

David C. Grunenwald(9) 13,088 --- * --- * *

Robert H. Hughes(9) 13,088 --- * --- * *

Patrick J. McKinley(9) 13,150 --- * --- * *

William J. Koslo, Jr.(9) 12,935 --- * --- * *

All executive officers
and directors as a group
(9 persons)(10) 2,414,978 2,767,500 43.4% 92.3% 60.5% 79.0%
* Represents less than 1%
</TABLE>

<PAGE> 48

(1) Except for votes on (i) a merger, (ii) a sale of substantially all of the
assets of the Company, (iii) an amendment to the Articles of Incorporation or
Bylaws of the Company, in which case the voting power of the Company's officers
and directors will be equal to their total respective percentage ownership of
Common Stock outstanding, as set forth herein.

(2) CD Entertainment Ltd. is beneficially owned by Jeffrey P. Jacobs, and Gary
L. Bryenton and Jeffrey P. Jacobs as Trustees under the Opportunities Trust
Agreement dated February 1, 1996.

(3) Includes 300,000 shares of Class A Common Stock which may be acquired upon
the exercise of options issued by Messrs. Arnold W. Stansley and James M.
Leadbetter to CD Entertainment Ltd. and 384,739 shares of Class A Common Stock
issuable upon the conversion of a Convertible Subordinated Promissory Note held
by CD Entertainment.

(4) Includes 757,500 shares of Class B Common Stock issuable upon conversion of
two Convertible Subordinated Notes held by CD Entertainment.

(5) Represents the shares owned by CD Entertainment Ltd. and options for
20,000 shares held pursuant to the Stock Option Plan.

(6) Includes 210,000 shares that are subject to an option in favor of CD
Entertainment Ltd. from Mr. Arnold W. Stansley and 25,000 shares that are
subject to an option in favor of Stephen Peskoff.

(7) Includes 90,000 shares that are subject to an option in favor of CD
Entertainment Ltd. from Mr. James M. Leadbetter and 25,000 shares that are
subject to an option in favor of Stephen Peskoff.

(8) Represents 2,518 shares owned, 15,000 shares owned by Underhill Investment
Corp., an affiliate of Mr. Peskoff, options for 50,000 shares granted under the
Stock Option Plan, options for 25,000 shares from Mr. Arnold W. Stansley,
options for 25,000 shares from Mr. Leadbetter.

(9) Includes stock options granted.

(10) Includes (i) all shares owned directly or indirectly, (ii) all options
held, except those to purchase shares issued to another officer or director. The
address of all directors and employees is c/o Colonial Downs, 10515 Colonial
Downs Parkway, New Kent, Virginia 23124.

<PAGE> 49

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Premier One Development Company. At the September 2, 1997 Board of
Directors meeting, the independent directors of the Board were asked to review
and approve a transaction involving Premier One Development Company ("Premier").
Mr. Jacobs, Mr. Hughes and Mr. Grunenwald are affiliated with Premier. Premier
audits, researches, pre-develops, and assists in the acquisition of new
opportunities for the Company. The Company's independent members of the Board of
Directors approved the entering of a two-year agreement with Premier which
commenced on October 1, 1997 and extends through September 30, 1999 pursuant to
which Premier receives a fee of $226,000 per year for services provided. The
provisions of the agreement have continued subsequent to September 30, 1999 on a
month to month basis.

Colonial Gifts & Sportswear. The Company has entered into an agreement with
Colonial Gifts & Sportswear, Inc., a Virginia corporation ("Sportswear"), for
the sale of gifts and apparel. Pursuant to the agreement, the Company provides
space at the racetrack and racing centers to Sportswear in exchange for a
royalty based on Sportswear's gross sales. Although the Company received less
than $10,000 in 1999 under the agreement, the expected value of the contract may
be in excess of $60,000. Sportswear is wholly owned by the wife and daughter of
Mr. Arnold Stansley, a director.

Virginia Concessions, L.L.C. Virginia Concessions, L.L.C. has an
agreement with the Company to provide food and beverage concessions at the
Company's Racing Centers. Under the Agreement, the Company is responsible for
the management and administration of Virginia Concessions in exchange for all
earnings (or losses) from food and beverage sales. Virginia Concessions,
L.L.C. is beneficially wholly owned by Mr. Jeffrey P. Jacobs.

Friedman, Billings, Ramsey and Company. Mr. Peskoff is a director of the
Company. Friedman, Billings, Ramsey and Company is the beneficial shareholder
of more than 5% of the Company's stock. Mr. Peskoff is also a consultant for
Friedman, Billings, Ramsey and Company. Friedman, Billings, Ramsey and Company
were the lead underwriters for the Company in its initial public offering in
March 1997.

CD Entertainment Convertible Subordinated Promissory Notes. The Company is
maker of two convertible subordinated promissory notes, in the original
principal amounts of $5.5 million and $1 million, respectively, held by CD
Entertainment, Ltd., an entity that is an affiliate of Mr. Jeffrey P. Jacobs.
The $5.5 million note bears interest at a rate of 7.25% per annum, payable
quarterly. The $1 million note bears interest at a rate of 8.5 % annually,
payable at maturity. The $5.5 million note matures September 30, 2000, and the
$1 million note matures August 26, 2000. The outstanding principal balance and
accrued interest thereon is convertible into shares of Class A and Class B
Common Stock at $11.59 per share for the $5.5 million note, and $1.65 per share
for the $1 million note. Additionally, there are three notes due CD
Entertainment, Ltd. in the original principal amounts of $900,000, $300,000 and
$475,000, respectively, bearing interest at the prime rate, 8.75% and 8.75% per
year, respectively, that mature in the first quarter of 2001, August 2001, and
September 2001, respectively.

<PAGE> 50

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - (CONTINUED)

Diversified Opportunities Group Ltd. Pursuant to an agreement to provide
credit support to the Company, Diversified Opportunities Group Ltd.
("Diversified"), an affiliate of Mr. Jeffrey P. Jacobs, receives an annual fee
equal to 3% of the amount of any letters of credit or guarantees provided to the
Company (subject, in the case of a letter of credit, to a minimum annual fee of
$50,000). Diversified waived the guaranteed fees for 1998 unless certain
conditions are met. Costs incurred under the agreement were $450,000 for 1999
and are recorded as an accrued liability at December 31, 1999.

No director, executive officer or any family member of the foregoing has
been indebted to the Company in an amount in excess of $60,000 during the past
fiscal year.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. Financial Statements
Included in Part II of this report:

Report of Independent Auditors

Balance Sheets at year end 1999 and 1998

Statements of Operations for years 1999, 1998 and 1997

Statements of Changes in Stockholder's Equity for years
1999, 1998 and 1997

Statements of Cash Flows for years 1999, 1998 and 1997

Notes to Financial Statements

2. Financial Statement Schedule
Included in Part IV of this report:

All required schedules are omitted because of the absence of
conditions under which they are required or because the required
information is given in the financial statements or notes thereto.

3. Exhibits
2.1 Agreement and Plan of Reorganization (1)
3.1 Amended and Restated Articles of Incorporation of Colonial
Downs Holdings, Inc. (1)
3.2 Amended and Restated By-laws of Colonial Downs Holdings, Inc.
(1)
4.1 Stock Certificate representing Colonial Downs Holdings, Inc.
Common Stock (1)

<PAGE> 51
10.1 Management and Consulting Agreement (1)
10.2 Amended and Restated Performance Guarantee Agreement (1)
10.3 Form of Deed for Track site (1)
10.4 Construction Agreement (1)
10.5 Development Agreement (1)
10.6 Hubbing Agreement (1)
10.7 VHHA Simulcast Wagering Agreement (1)
10.8 VaHBPA Simulcast Wagering Agreement (1)
10.9 Form of Convertible Subordinated Note (1)
10.10 Forms of Employment Agreements (1)
10.11 Form of Stansley Racing Agreement (1)
10.12 Amended and Restated Promissory Note to CD Entertainment Ltd.
(1)
10.13 Agreement for Interim Financing (1)
10.14 Registration Rights Agreement (1)
10.15 Not used (1)
10.16 Form of 1997 Stock Option Plan (1)
10.17 Agreement for Provision of Credit (1)
10.18 Management Agreement between Colonial Downs, L.P. and Virginia
Concessions, L.L.C. (2) 10.19 Construction Loan Agreement
between Colonial Downs, L.P. and PNC Bank, N.A. (2)
10.20 Revolving Line of Credit Agreement (2)
10.21 Deed of Trust Note (2)
10.22 Revolving Line of Credit Note (2)
10.23 Deed of Trust and Security Agreement (2)
10.24 Assignment of Leases and Rents (2)
10.25 Agreement of Guaranty and Suretyship (Completion) between
Stansley Racing Corp. and PNC Bank, N.A. (2)
10.26 Agreement of Guaranty and Suretyship (Completion) between
Colonial Downs, Holdings, Inc. and PNC Bank, N.A.
10.27 Agreement of Guaranty and Suretyship (Payment), between
Stansley Racing Corp. and PNC Bank, N.A. (2)
10.28 Agreement of Guaranty and Suretyship (Payment), between
Colonial Downs Holdings, Inc. and PNC Bank, N.A. (2)
10.29 Promissory Note payable to Citizens and Farmers Bank (3)
10.30 Business Loan Agreement between the Company, the Partnership,
and Citizens and Farmers Bank (3)
10.31 Commercial Security Agreement among the Company, the
Partnership, and Citizens and Farmers Bank (3)
10.32 Subordinated Agreement (Lighting) among the Company, CD
Entertainment, the Partnership, and David F. Belkowitz and
James W. Theobold (3)
10.33 Employment Agreement dated June 23, 1997 between the Company
and Ian M. Stewart (3)
10.34 Souvenir and Gift Concessions Agreement dated August 1, 1997,
by and between the Partnership, and Stansley Racing Corp., and
Colonial Gifts and Sportswear, Inc. (4)
10.35 First Amendment to Deed of Trust Note and Construction Loan
Agreement dated as of February 27, 1998, between Colonial
Downs, L.P., and PNC Bank, N.A. (5)
10.36 Convertible Subordinated Note, dated August 26, 1998 in the
principal amount of $1.0 million issued to CD Entertainment
Ltd. (6)

<PAGE> 52
10.37 Deed of Trust, Assignment of Rents and Leases, and Security
Agreement and Assignment thereto to CD Entertainment Ltd. (6)
10.38 Amended and Restated Management and Consulting Agreement and
Addendum between the Company and Maryland-Virginia Racing
Circuit, Inc., dated January 15, 1999
10.39 Agreement between Delmarva Properties, Inc. and the Company
dated January 15, 1999
10.40 Forbearance Agreement dated January 11, 1999 between the
Company and PNC Bank, N.A.
10.41 Second Amendment to Standardbred Horsemen's Agreement (1)
10.42 Thoroughbred Horsemen's Agreement (8)
10.43 Promissory note payable to Norglass, Inc. dated September 24,
1999 (9)
10.44 Promissory note payable to CD Entertainment, Ltd., dated
September 30, 1999 (9)
10.45 Promissory note payable to CD Entertainment, Ltd., dated
August 31, 1999 (9)
10.46 Promissory note payable to CD Entertainment, Ltd., dated
August 15, 1999 (9)
10.47 Employment Agreement, dated as of June 23, 1999, between Ian
M. Stewart and the Company.
21.1 Subsidiaries of the Registrant (1)
24.1 Power of Attorney (1)
27 Financial Data Schedule

(1) Incorporated by reference to the Exhibits filed with Colonial Downs
Holdings, Inc.'s Registration Statement on Form S-1 (Registration
No. 333-18295).
(2) Incorporated by reference to the Exhibits filed with Colonial Downs
Holdings, Inc.'s 10-Q, dated August 14, 1997.
(3) Incorporated by reference to the Exhibits filed with Colonial Downs
Holdings, Inc.'s 10-Q, dated September 14, 1997.
(4) Incorporated by reference to the Exhibits filed with Colonial Downs
Holdings, Inc.'s 10-K, dated March 30, 1998.
(5) Incorporated by reference to the Exhibits filed with Colonial Downs
Holdings, Inc.'s 10-Q, dated May 15, 1998.
(6) Incorporated by reference to the Exhibits filed with Colonial Downs
Holdings, Inc.'s 10-Q, dated November 16, 1997.
(7) Incorporated by reference to the Exhibits filed with Colonial Downs
Holdings, Inc.'s 10-Q, dated May 4, 1999.
(8) Incorporated by reference to the Exhibits filed with Colonial Downs
Holdings, Inc.'s 10-Q, dated August 16, 1999.
(9) Incorporated by reference to the Exhibits filed with Colonial Downs
Holdings, Inc.'s 10-Q, dated November 15, 1999.

(b) Reports on Form 8-K

<PAGE> 53

SIGNATURES

Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

COLONIAL DOWNS HOLDINGS, INC.

By: /s/ Ian M. Stewart
---------------------------------
Ian M. Stewart, President
and Chief Financial Officer
March 31, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

/s/ Jeffrey P. Jacobs /s/ Robert H. Hughes
- ------------------------- ------------------------
Jeffrey P. Jacobs, Chief Executive Officer, Robert H. Hughes,
Chairman of the Board, Director Director
March 31, 2000 March 31, 2000

/s/ Arnold W. Stansley /s/ David Grunenwald
- -------------------------- ------------------------
Arnold W. Stansley, David Grunenwald,
Director Director
March 31, 2000 March 31, 2000

/s/ William J. Koslo /s/ Patrick J. McKinley
- ------------------------ ---------------------------
William J. Koslo, Jr., Patrick J. McKinley,
Director Director
March 31, 2000 March 31, 2000

/s/ Stephen D. Peskoff
- --------------------------
Stephen D. Peskoff,
Director
March 31, 2000

EMPLOYMENT AGREEMENT
--------------------

THIS EMPLOYMENT AGREEMENT, is made as of June 23, 1999, by and between
COLONIAL DOWNS HOLDINGS, INC., a Virginia corporation (the "Company"), and IAN
M. STEWART ("Executive") and recites and provides as follows:

WHEREAS, the Company is engaged in the business of seeking opportunities or
horse racing and pari-mutuel wagering in Virginia, and its subsidiaries are
currently the holders of the only unlimited licenses to own and operate a horse
racetrack with pari-mutuel wagering in Virginia (the "Track") and the only
entities authorized to apply for licenses to own and operate satellite wagering
facilities ("SWF") in Virginia;

WHEREAS, the Company desires to employ Executive as President and Chief
Financial Officer of the Company; and

WHEREAS, Executive desires to be so employed by Company on the terms and
conditions hereinafter set forth;

WHEREAS, through his relationship with the Company, the Executive will
become acquainted with certain confidential or proprietary aspects of the
Company's business, including without limitation, operating methods, marketing
strategy, sponsorship and advertising agreements, design and layout of the Track
facilities, potential new business opportunities, and potential sites for
additional SWFs, and other confidential and proprietary information that
constitute valuable assets of the Company and which the Company desires to
protect.

NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

1. EMPLOYMENT. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company as President and Chief
Financial Officer.

2. DUTIES OF THE EXECUTIVE. As the President and Chief Financial
-----------------------
Officer of the Company, the Executive shall faithfully serve the Company and
shall at all times devote his full time, best efforts, skills, attention, and
energies to the development, organization, management, and expansion of the
Company's business to the utmost of the Executive's ability, and shall do and
perform all such services, acts, and things connected therewith as are
reasonably required and as the Company shall from time to time direct. The
Executive shall not become engaged or involved in any activities or matters
which may adversely affect or reflect discredit on the Company or its business,
or conflict with his services to the Company. This Agreement shall not prohibit
the Executive from investing personal assets in other businesses or entities
that do not compete with the Company (as described in Section 9 of this
Agreement).

<PAGE> 2

3. TERM. Subject to the provisions of Section 8 regarding
----
termination, this Agreement shall remain in effect for a term of two (2) years
beginning on the date hereof. This Agreement may be renewed and extended on
terms and conditions mutually agreeable to the parties hereto.

4. COMPENSATION. For all services rendered by the Executive pursuant
------------
to this Agreement, the Company shall pay the Executive a base salary of $150,000
per annum, payable in equal semi-monthly installments, or at such other times as
may be mutually agreed upon by the parties.

5. DEDUCTIONS. The Company is authorized to deduct from the actual
----------
compensation of the Executive such sums as may be required to be deducted or
withheld under the provisions of any federal, state, or local law or regulation
now in effect or hereafter put into effect during the term of this Agreement,
including without limitation, social security, unemployment, and income
withholding taxes.

6. BENEFITS.
--------
(a) The Executive shall be entitled to a paid vacation each year of
three (3) weeks, the timing of which shall be subject to mutual agreement
between the Company and the Executive. The Executive's attendance at trade
shows, training, educational, and professional programs and meetings shall not
be charged against Executive's vacation allowance. The Executive shall also be
entitled to paid sick leave of five (5) days each year.
(b) The Executive shall be entitled to the use of an automobile, the
make and model of which shall be mutually agreeable to the Company and
Executive, leased by the Company at its expense.
(c) The Company shall reimburse the Executive for all expenses
reasonably and necessarily incurred by him in the performance of his duties
hereunder. To be reimbursed, the Executive must submit written evidence of such
expenses to the Company within thirty (30) days after incurring such expense.
(d) The Executive shall receive such other benefits, if any, as the
Company generally provides to all other Executives involved in the operations of
the Company, whether now in effect or hereafter adopted, including group
hospital and accidental insurance benefits and group disability insurance
coverage.

7. STOCK OPTIONS. Subject to approval by the Board of Directors, the
-------------
Company shall grant Executive an option for 10,000 shares of Class A Common
Stock of the Company at an exercise price equal to the reported closing price of
the stock on the NASDAQ Small Cap Market as of the date this Agreement is
executed by all parties. Such option shall vest pro rata on each of June 23,
2000 and June 23, 2001, subject to the terms of the Company's 1997 Stock Option
Plan.

<PAGE> 3

8. TERMINATION OF EMPLOYMENT.
-------------------------
(a) Upon the occurrence of any of the following events and the
expiration of any required notice, this Agreement and the Executive's employment
hereunder automatically shall terminate:
(1) The death or bankruptcy of the Executive;
(2) The Board of Director's termination of the Executive's
employment at any time, "for cause" or not "for cause" (as
defined below). This Agreement and the Executive's
employment hereunder shall terminate upon the expiration
of a period of thirty (30) days after delivery by the
Company of written notice to the Executive of his
termination. The phrase "for cause" shall include
termination because of the Executive's personal
dishonesty, incompetence, willful misconduct, censure or
reprimand by any regulatory body (including the Virginia
Racing Commission), breach of fiduciary duty involving
personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation
(other than traffic violations or similar offenses),
failure to perform assigned duties in a reasonably
satisfactory manner, or material breach of any provision
of this Agreement;
(3) The expiration of a period of thirty (30) days after
delivery by the Executive of written notice to the Company
of his resignation as an Executive of the Company; or
(4) The disability of the Executive. "Disability" shall mean a
physical or mental disability that prevents the
substantial performance by the Executive of his duties
hereunder lasting for a continuous period of six (6)
months or longer. The reasoned and good faith judgment of
the Company's Board of Directors as to the Executive's
disability shall be final and shall be based on such
competent medical evidence as shall be presented to the
Company's Board of Directors by the Executive or by any
physician or group of physicians or other competent
medical experts on behalf of the Executive engaged by the
Company.
(b) In the event the Executive voluntarily terminates his employment
or has his employment terminated "for cause" under this Agreement, he shall be
entitled to receive from the Company only the base salary and benefits as set
forth herein that have accrued to the date of termination in full settlement of
all of the Company's obligations hereunder.
(c) In the event the Company terminates the employment of Executive
by reason of his disability, the Executive shall be entitled to receive from the
Company only the base salary and benefits set forth herein that have accrued to
the date of disability in full settlement of all of the Company's obligations
hereunder.
(d) In the event the Company terminates the employment of the
Executive not "for cause", the Executive shall be entitled to six (6) months
base salary as set forth herein and the benefits as set forth herein that have
accrued to the date of termination in full settlement of all of the Company's
obligations hereunder.

<PAGE> 4

9. FIDUCIARY RELATIONSHIP.
----------------------
(a) The Executive as a Fiduciary. It is understood and agreed
----------------------------
that the Executive will serve in a fiduciary capacity to the Company and, as
such, will comply with the standards applicable to fiduciaries and other
Executives of the Company.
(b) Confidential Information and Trade Secrets. All information
------------------------------------------
relating to or used in the business and operations of the Company (including,
but not limited to, marketing plans, business procedures, trade secrets,
patents, sources of supplies and materials, reports, memoranda, plans,
documents, and the like), whether conceived, prepared, originated, developed or
compiled by the Executive or by the Company prior to or during the term of this
Agreement and the employment of the Executive (hereinafter "Confidential
Information and Trade Secrets"), are and shall be confidential information and
trade secrets which are the exclusive property of the Company, provided such
information is not generally known in the horse racing industry.
(c) Property of the Company. All Confidential Information and
-----------------------
Trade Secrets as defined in Section 8(b) are and shall be the exclusive property
of the Company.
(d) Nondisclosure of Confidential Information and Trade Secrets.
-----------------------------------------------------------
Except in the regular course of his employment by the Company hereunder or as
the Company may expressly authorize or direct in writing, the Executive shall
not, during or after the termination or expiration of this Agreement, copy,
reproduce, disclose or divulge to others, use or permit others to use any
Confidential Information and Trade Secrets, or any records or materials relating
to any such Confidential Information or Trade Secrets. The Executive further
covenants and agrees that during the term of this Agreement he shall not remove
from the custody and control of the Company any records of or materials relating
to such Confidential Information and Trade Secrets and that upon the termination
or expiration of his employment he shall deliver the same to the Company.

10. COVENANT NOT TO COMPETE; NON-SOLICITATION.
-----------------------------------------
(a) In consideration of the fees and benefits that he receives
pursuant to this Agreement, during the term of this Agreement and for one (1)
year thereafter, the Executive hereby covenants and agrees that he will not,
without the prior written consent of the Company, either alone or in partnership
with or in conjunction with any other person, firm, or corporation, whether as
principal, agent, or shareholder (other than an entity in which Executive holds
less than a five percent (5%) equity interest), directly or indirectly,
participate, carry on, conduct, or be engaged in, or advise, any person, firm,
corporation, or other legal entity carrying on or engaging in the horse racing
business in Virginia, Maryland, West Virginia or North Carolina that competes
with the business conducted by the Company on the date hereof.
(b) In addition, for one (1) year after the Executive ceases to be
employed by the Company, the Executive shall not seek to induce any of the
Company's employees to leave the Company' employment to work for any entity with
which he is affiliated. In addition, during such one (1) year period, the

<PAGE> 5

Executive shall not solicit any sponsors or advertisers of the Company for the
purpose of inducing, directly or indirectly, the termination of any sponsorship
or advertising agreements.
(c) The Executive recognizes that the Company's remedies at law may
be inadequate to protect itself against a breach of this provision, and
therefore agrees that injunctive or other equitable relief shall be an
appropriate remedy for breach of this covenant not to compete, and shall be a
remedy in addition to any and all other remedies available to the Company.
(d) The parties agree that if the restrictions of this Section 9 are
determined by any court of competent jurisdiction, at the time of enforcement,
to be unreasonable as to the duration, scope or area of restriction, then such
restrictions should be applied only to such activities and territory and only
for such period of time as the court determines to be reasonable in light of all
circumstances then existing.

11. REMEDIES. The Executive hereby represents that the services to be
--------
performed by the Executive under the terms of this Agreement are of a special,
unique, extraordinary, and intellectual character, which gives them a particular
value, the breach of which cannot be reasonably or adequately compensated in
damages in an action at law. The Executive expressly acknowledges and agrees
that the Company shall be entitled to obtain, in addition to any other rights or
remedies the Company may possess, injunctive or other equitable relief to
prevent a prospective or continuing breach of any provision of this Agreement by
the Executive.

12. NOTICES. All notices or other communications required or
-------
permitted by and among the parties shall be in writing and shall be deemed to
have been given, delivered or made when delivered by hand or mailed by certified
or registered mail, postage prepaid, return receipt requested, and addressed
either as follows or in such other manner as a party may subsequently designate
to the other party in writing:

If to the Company, at:
---------------------
Colonial Downs Holdings, Inc.
10515 Colonial Downs Parkway
New Kent, Virginia 23124

If to the Executive, at:
-----------------------
The Executive's address as shown on the personnel records of the
Company.

13. SEVERABILITY. In the event any one or more of the provisions
------------
contained in this Agreement shall for any reason be held invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal, or unenforceable provision had never been
contained herein.

<PAGE> 6

14. ENTIRE AGREEMENT. This Agreement supersedes any other agreement,
----------------
whether written or oral, that may have been made or entered into by the
Executive and the Company relating to the matters contemplated hereby. This
Agreement constitutes the entire agreement concerning the transaction
contemplated herein and there are no agreements or commitments in relation to
the subject matter hereof except as set forth herein.

15. AMENDMENTS. This Agreement may be amended or supplemented at any
----------
time only in writing as agreed by the parties.

16. APPLICABLE LAW. This Agreement and the legal relations among the
--------------
parties hereto shall be governed by and construed in accordance with the
substantive laws of the Commonwealth of Virginia, without giving effect to
conflict of law provisions and principles thereof.

17. INTERPRETATION. When the context in which words are used in this
--------------
Agreement indicates that such is the intent, words in the singular number shall
include the plural, and vice versa, and words in the masculine gender shall
include the feminine and neuter genders, and vice versa.

18. TITLES AND HEADINGS. Titles and headings to sections and
-------------------
paragraphs herein are inserted for convenience of reference only, and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.

19. BINDING EFFECT. This Agreement shall be binding upon and
--------------
enforceable against the Company and its successors and assigns.

20. NO ATTACHMENT. Except as required by law, no right to receive
-------------
payments under this Agreement shall be subject to anticipation, alienation,
sale, assignment, encumbrance, charge, pledge, or hypothecation, or to
execution, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary to affect any such action shall
be null, void and of no effect.

21. SURVIVAL OF CERTAIN PROVISIONS. The obligations of the parties
------------------------------
pursuant to Sections 9, 10, and 22 of this Agreement shall survive the
termination of this Agreement.

22. CONSENT TO SERVICE AND JURISDICTION. Executive consents and
-----------------------------------
agrees that the Circuit Court of the City of Richmond, Virginia and the United
States District Court for the Eastern District of Virginia, or at the option of
the Company, any other court located in the Commonwealth of Virginia in which it
shall initiate legal or equitable proceedings and which shall have subject
matter jurisdiction over the matter in controversy, shall have exclusive
jurisdiction to hear and determine any claims or disputes between the Company
<PAGE> 7

and the Executive pertaining directly or indirectly to this Agreement or to any
matter arising therefrom. The Executive expressly submits and consents in
advance to such jurisdiction in any action or proceeding commenced in any such
court, hereby waiving personal service or process or other papers issued therein
and agreeing that service of such process or other papers may be made by
registered or certified mail to the Executive.

23. ACKNOWLEDGMENTS. Executive acknowledges that he has read this
---------------
Agreement in its entirety and understands each of the provisions contained in
this Agreement. Executive acknowledges that the provisions of this Agreement are
reasonable and represents that he will be able to engage in other activities for
the purpose of earning a livelihood should the provisions of the Agreement be
enforced.

IN WITNESS WHEREOF the parties hereto have executed this Agreement on the
date first above written.

COMPANY: COLONIAL DOWNS HOLDINGS, INC.,
-------
a Virginia corporation

By: /s/ Jeffrey P. Jacobs
----------------------------
Jeffrey P. Jacobs, CEO

EXECUTIVE: /s/ Ian M. Stewart
--------- ----------------------------
Ian M. Stewart

<ARTICLE> 5

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