AMENDMENT NO. 1 TO
SCHEDULE 14A
(RULE 14(a)-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Colonial Holdings, Inc
----------------------
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Class A Common Stock, par value $0.01 per share, and Class B Common
Stock, par value $0.01 per share.
(2) Aggregate number of securities to which transaction applies:
3,895,222 shares of Class A Common Stock
175,850 options to purchase shares of Class A Common Stock
232,500 shares of Class B Common Stock
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
The transaction applies to an aggregate of 4,071,072 shares of Class A
Common Stock (including 175,850 options to purchase Class A Common
Stock), $0.01 par value and 232,500 shares of Class B Common Stock (the
"Common Stock"), of Colonial Holdings, Inc., calculated as follows:
5,840,223 shares of Class A Common Stock issued and outstanding less
1,945,000 shares of Class A Common Stock then owned by Gameco, Inc.
("Gameco") or any affiliate of Gameco and 1,452,500 shares of Class B
Common Stock issued and outstanding less 1,220,000 shares of Class B
Common Stock then owned by Gameco or any affiliate of Gameco. The
proposed maximum aggregate value of the transaction is $4,733,929
calculated as follows: the product of (a) 4,303,572 shares of Common
Stock and (b) $1.10. In accordance with Rule 0-11 under the Act, the
filing fee is determined by multiplying the transaction valuation by
one-fiftieth of one percent.
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid: (Transaction Value) times (one fiftieth of one
percent)
[X] Fee paid previously with preliminary materials:
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
COLONIAL HOLDINGS, INC.
10515 Colonial Downs Parkway
New Kent, VA 23124
September ___, 2001
Dear Shareholder:
You are invited to attend a special meeting of shareholders of
Colonial Holdings, Inc. to be held at 1:00 p.m., on Wednesday, November 7, 2001,
at Colonial Downs Racetrack, 10515 Colonial Downs Parkway, New Kent, Virginia.
At the special meeting you will be asked to approve an Agreement and Plan of
Merger, dated June 11, 2001, among Colonial, Gameco, Inc., a Delaware
corporation, Gameco Acquisition, Inc., a Virginia Corporation and wholly owned
subsidiary of Gameco, and Jeffrey P. Jacobs, the Chairman of the Board of
Directors, Chief Executive Officer and principal shareholder of Colonial. The
merger agreement provides for the merger of Gameco Acquisition with and into
Colonial as a result of which Colonial will become a privately held, wholly
owned subsidiary of Gameco, and each outstanding share of Colonial's common
stock (other than treasury stock and shares owned by any subsidiary of Colonial,
Gameco, Gameco Acquisition or CD Entertainment, Ltd., an affiliate), will be
canceled and converted into the right to receive cash in the amount of $1.10 per
share. The $1.10 per share price is $3.30 less than the per share book value of
$4.40 of Colonial as of June 30, 2001.
A Special Committee of our Board of Directors consisting of two
independent directors has unanimously approved the merger agreement and
recommended to Colonial's Board of Directors that the merger consideration is
fair to the unaffiliated shareholders from a financial point of view and that
the merger agreement be approved and adopted by the Board and recommended to the
shareholders for approval. This approval and recommendation by the Special
Committee was based, in part, upon a report by the Special Committee's financial
advisor, BB&T Capital Markets, that the $1.10 per share price is fair to the
unaffiliated shareholders from a financial point of view. Consequently, based
upon the report, approval and recommendation of the Special Committee, and in
consideration of other matters presented to it, the Board of Directors has
determined that the terms of the merger are fair to, and in the best interests
of, Colonial's unaffiliated shareholders, has approved the merger agreement, and
recommends that the shareholders approve the merger agreement. BB&T Capital
Markets' report will be updated to confirm, if accurate, that as of the date of
the consummation of the merger, the $1.10 per share price remains fair to the
unaffiliated shareholders from a financial point of view.
Approval of the merger agreement at the special meeting will require
the affirmative vote of the holders of more than two-thirds of the outstanding
shares of Colonial's class A common stock and more than two-thirds of the
outstanding shares of Colonial's class B common stock entitled to vote at the
special meeting, each voting as a separate class. Mr. Jeffrey P. Jacobs has
indicated his intention to vote all of the 1,945,000 class A Shares beneficially
owned by him, or 33.3% of the outstanding class A Common Stock in favor of the
merger proposal. Mr. Arnold Stansley, a director and member of the Special
Committee, has indicated to Colonial that he intends to vote his 484,721 class A
Shares, or 8.3% of the outstanding class A Shares, in favor of the merger
proposal. Similarly, the remaining directors -- Messrs. Stephen D. Peskoff,
David C. Grunenwald, Robert H. Hughes, and Patrick J. McKinley -- have indicated
that they intend to vote, in aggregate, their 46,266 class A shares, or 0.8% of
the outstanding class A shares, in favor of the merger proposal. Therefore,
holders of 42.4% of the outstanding shares of class A stock have indicated their
intention to approve the merger agreement. The affirmative vote of more than
two-thirds (or approximately 66.7%) of the outstanding shares of Colonial's
class A stock is necessary for approval of the merger agreement. Mr. Jacobs has
informed Colonial that he also intends to vote all of the shares of Colonial
class B stock beneficially owned by him in favor of approval of the
merger agreement. Mr. Jacobs owns a sufficient number of shares of Colonial
class B stock to assure approval of the merger agreement by the holders of the
class B stock voting as a separate class.
Enclosed with this letter is a notice of special meeting, proxy statement,
proxy card, instructions for exchanging Colonial share certificates after
consummation of the proposed merger, a letter of transmittal, and postage
prepaid envelope. Please read the enclosed material carefully.
To make certain your shares are represented at the special meeting,
whether or not you plan to attend in person, we urge you to promptly sign, date
and mail the enclosed proxy card in the accompanying postage prepaid envelope.
If you attend the special meeting, you may vote your shares in person even
though you have previously signed and returned your proxy. The proxy can be
revoked at any time prior to the vote at the special meeting.
The proposed merger is an important decision for Colonial and its
shareholders. The proposed merger cannot occur unless, among other things, the
merger agreement is approved by the affirmative vote of the holders of more than
two-thirds of the outstanding shares of each of the class A and class B common
stock of Colonial, each voting as a separate class. Failure to return an
executed proxy card will constitute, in effect, a vote against approval of the
merger agreement and the transactions contemplated thereby.
Your Board of Directors urges you to consider the enclosed materials
carefully and, based on the recommendation of the Special Committee, recommends
that you vote "FOR" approval of the merger agreement.
Sincerely,
/s/ Stephen Peskoff
Stephen Peskoff
Chairman of the Special Committee of the Board of
Directors
COLONIAL HOLDINGS, INC.
10515 Colonial Downs Parkway
New Kent, VA 23124
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 7, 2001
---------------------------
To the shareholders of Colonial Holdings, Inc.:
A special meeting of shareholders of Colonial Holdings, Inc. will be
held at 1:00 p.m. on Wednesday, November 7, 2001, at Colonial Downs Racetrack,
10515 Colonial Downs Parkway, New Kent, Virginia, for the following
purposes:
1. To consider and vote upon a proposal to approve an Agreement and Plan of
Merger, dated June 11, 2001, among Colonial, Gameco, Inc., a Delaware
corporation, Gameco Acquisition, Inc., a Virginia corporation and wholly
owned subsidiary of Gameco, and Jeffrey P. Jacobs, the Chairman of the
Board of Directors, Chief Executive Officer and principal shareholder of
Colonial;
2. In the event it becomes necessary, to consider and vote upon a motion to
adjourn the Special Meeting to another time and/or place for the purpose
of soliciting additional proxies or allowing additional time for the
satisfaction of conditions to the Agreement and Plan of Merger.
3. To transact such other business as may properly come before the special
meeting or any adjournment thereof.
Only shareholders of record at the close of business on September 14, 2001
are entitled to notice of, and to vote at, the special meeting. During the ten
day period prior to the special meeting, any shareholder may examine a list of
Colonial's shareholders of record, for any purpose related to the special
meeting, during ordinary business hours at the offices of Colonial located at
10515 Colonial Downs Parkway, New Kent, Virginia 23124.
The merger is described in the accompanying proxy statement, which you are
urged to read carefully. A copy of the merger agreement is attached as
Attachment I to the proxy statement.
Whether or not you plan to attend the special meeting, please mark, date
and sign the accompanying proxy and promptly return it in the enclosed envelope.
If you attend the special meeting, you may vote your shares in person even
though you have previously signed and returned your proxy.
For the Board of Directors,
David C. Grunenwald
Secretary
September __, 2001
COLONIAL HOLDINGS, INC.
10515 Colonial Downs Parkway
New Kent, VA 23124
(804) 966-7223
PROXY STATEMENT
---------------
This proxy statement is being mailed to shareholders of Colonial Holdings,
Inc., a Virginia corporation, on or about September __, 2001, in connection with
the solicitation of proxies by the Board of Directors of Colonial for use at the
special meeting of shareholders of Colonial to be held at 1:00 p.m., on
Wednesday, November 7, 2001, at Colonial Downs Racetrack, 10515 Colonial Downs
Parkway, New Kent, Virginia.
At the special meeting you will be asked to approve an Agreement and Plan
of Merger, dated June 11, 2001, among Colonial, Gameco, Inc., a Delaware
corporation, Gameco Acquisition, Inc., a Virginia corporation and wholly owned
subsidiary of Gameco, and Jeffrey P. Jacobs, the Chairman of the Board of
Directors, Chief Executive Officer and a principal shareholder of Colonial.
Gameco and Gameco Acquisition are controlled by, and are affiliates of, Mr.
Jacobs and his father, Richard E. Jacobs.
If the merger is consummated, Gameco Acquisition will be merged into
Colonial; Colonial will become a privately held, wholly owned subsidiary of
Gameco; each share of Colonial's treasury stock and each share of Colonial class
A stock and class B stock owned by any subsidiary of Colonial, Gameco, Gameco
Acquisition or CD Entertainment Ltd., an affiliate, will be canceled and retired
and shall cease to exist; and each share of Colonial class A stock and class B
stock other than shares held by any subsidiary of Colonial, Gameco, Gameco
Acquisition or CD Entertainment will be canceled and converted into the right to
receive cash in the amount of $1.10 per share. THE BOARD OF DIRECTORS, BASED
UPON THE UNANIMOUS APPROVAL AND RECOMMENDATION OF A SPECIAL COMMITTEE OF
INDEPENDENT DIRECTORS AND OTHER CONSIDERATIONS, HAS ADOPTED, APPROVED AND
RECOMMENDED THAT THE SHAREHOLDERS APPROVE THE MERGER AGREEMENT. A copy of the
merger agreement is attached to this proxy statement as Attachment I.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of common stock of each class of common stock which are
entitled to vote is necessary to constitute a quorum at the special meeting for
such class. If a quorum is not present or represented at the special meeting
with respect to a class, the shareholders of that class entitled to vote,
whether present in person or represented by proxy, have the power to adjourn the
special meeting from time to time, without notice other than announcement at the
special meeting, until a quorum is present or represented. At any such adjourned
special meeting at which a quorum is present or represented, any business may be
transacted that might have been transacted at the special meeting as originally
noticed. On all matters submitted to a vote of the shareholders at the special
meeting or any adjournment thereof, each holder of Colonial class A stock and
class B stock is entitled to one vote per share.
If sufficient proxies are not returned in response to this solicitation,
supplementary solicitations may be made by mail or by telephone or personal
interview by directors, officers, and regular employees of Colonial, none of
whom will receive additional compensation for these services. In the event any
party to the merger agreement retains an outside proxy solicitation firm, the
associated costs of solicitation of proxies will be borne by the party retaining
such firm. Colonial will reimburse custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred in forwarding proxy materials to the
beneficial owners of stock. Colonial reserves the right to retain an outside
proxy solicitation firm.
No persons have been authorized to give any information or to make any
representations other than those contained in this proxy statement in connection
with the solicitation of proxies and, if given or made, such information or
representation must not be relied upon as having been authorized by Colonial or
any other person.
This transaction has not been approved or disapproved by the Securities and
Exchange Commission nor has the Commission passed upon the fairness or merits of
such transaction nor upon the accuracy or adequacy of the information contained
in this document. Any representation to the contrary is unlawful.
TABLE OF CONTENTS
Page
----
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS.................................................................... 1
QUESTIONS AND ANSWERS ABOUT THE MERGER....................................................................... 1
SUMMARY TERM SHEET........................................................................................... 5
The Merger.................................................................................................. 5
The Parties to the Merger................................................................................... 5
The Payment You Will Receive in the Merger For Your Shares of Colonial Common Stock......................... 5
The Merger Agreement........................................................................................ 6
Conditions to Consummating the Merger....................................................................... 6
Termination of the Merger Agreement......................................................................... 6
Shareholder Approval........................................................................................ 7
Special Factors............................................................................................. 7
Government and Regulatory Approvals......................................................................... 7
Our Recommendation to You................................................................................... 7
Opinion of Financial Advisor................................................................................ 8
Interests of Certain Shareholders and Directors in the Merger............................................... 8
Source of Funds for the Merger.............................................................................. 9
Summary of Federal Income Tax Consequences.................................................................. 10
Price Range of Common Stock................................................................................. 10
Selected Consolidated Financial Data of Colonial............................................................ 11
THE PARTIES.................................................................................................. 13
Colonial Holdings, Inc...................................................................................... 13
Gameco, Inc., Gameco Acquisition, Inc., and Diversified Opportunities Group Ltd............................. 13
Black Hawk.................................................................................................. 15
Jalou and Jalou II.......................................................................................... 15
Jeffrey P. Jacobs........................................................................................... 16
SPECIAL FACTORS.............................................................................................. 17
Approval of the Merger Agreement............................................................................ 17
Background of the Merger.................................................................................... 17
Historical Involvement..................................................................................... 17
Stock Price................................................................................................ 18
Northern Virginia Efforts.................................................................................. 19
Sales Efforts.............................................................................................. 19
Other Developments......................................................................................... 19
Colonial Holdings Management, Inc.......................................................................... 19
Buy-Out Proposal........................................................................................... 20
Negotiation of Agreement................................................................................... 20
Reasons for the Merger and Recommendation of the Board of Directors......................................... 23
Special Committee.......................................................................................... 23
The Board of Directors..................................................................................... 26
Position of Gameco, Gameco Acquisition, and Jeffrey P. Jacobs as to Fairness of the Merger.................. 27
Benefits and Detriments of the Merger....................................................................... 29
To Colonial's Unaffiliated Shareholders.................................................................... 29
i
To Gameco and Colonial....................................................................................... 29
Opinion of Financial Advisor................................................................................ 30
Comparable Public Companies Analysis....................................................................... 32
Comparable Transactions Analysis........................................................................... 34
Premiums Paid Analysis..................................................................................... 36
Discounted Cash Flow Analysis.............................................................................. 36
Other Information.......................................................................................... 37
Interests of Certain Shareholders and Directors in the Merger............................................... 39
Cash Out of Stock Options................................................................................... 40
Plans for Colonial if the Merger is Not Completed........................................................... 40
Plans for Colonial after the Merger......................................................................... 40
Directors and Management of Surviving Corporation........................................................... 41
Directors and Officers Indemnification and Insurance........................................................ 41
Financing of the Merger..................................................................................... 41
Material Federal Income Tax Consequences.................................................................... 43
Sales Treatment for Holders of Common Stock................................................................ 44
Treatment of Holders of Stock Options...................................................................... 44
Backup Withholding......................................................................................... 44
Gameco and Colonial Tax Consequences....................................................................... 44
Tax Consequences for Jeffrey P. Jacobs, the Trust, Richard E. Jacobs and Entities Under Their Sole
Control.................................................................................................... 45
Accounting Treatment........................................................................................ 45
No Dissenters' Rights....................................................................................... 45
Fees and Expenses........................................................................................... 45
INFORMATION CONCERNING THE SPECIAL MEETING................................................................... 46
Time, Place, and Date....................................................................................... 46
Purpose of the Special Meeting.............................................................................. 46
Record Date; Voting at the Meeting; Quorum.................................................................. 46
Required Vote............................................................................................... 46
Voting and Revocation of Proxies............................................................................ 47
Action to be Taken at the Special Meeting................................................................... 47
Proxy Solicitation.......................................................................................... 47
THE MERGER AGREEMENT......................................................................................... 48
The Parties................................................................................................. 48
Effective Time.............................................................................................. 48
The Merger.................................................................................................. 49
Merger Consideration........................................................................................ 49
The Exchange Fund; Payment for the Shares of Common Stock After the Merger.................................. 49
Conditions And Covenants.................................................................................... 50
Government and Regulatory Approvals......................................................................... 50
Termination, and Termination Fees........................................................................... 50
Representations and Warranties of Colonial.................................................................. 51
Representations and Warranties of Gameco and Gameco Acquisition............................................. 52
Conduct of Business Pending the Merger...................................................................... 52
Amendment/Waiver............................................................................................ 53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................... 53
PRICE RANGE OF COMMON STOCK AND DIVIDENDS.................................................................... 54
ii
DIRECTORS AND MANAGEMENT..................................................................................... 56
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................... 59
OTHER BUSINESS............................................................................................... 60
SHAREHOLDER MEETINGS......................................................................................... 60
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.................................................... 60
CERTAIN LITIGATION........................................................................................... 61
INDEPENDENT AUDITORS......................................................................................... 61
WHERE YOU CAN FIND MORE INFORMATION.......................................................................... 61
AVAILABLE INFORMATION........................................................................................ 62
PRO FORMA FINANCIAL INFORMATION.............................................................................. F-1
ATTACHMENTS
Attachment I: Agreement and Plan of Merger dated June 11, 2001 by and among
Gameco Inc., Gameco Acquisition, Inc., Colonial Holdings, Inc.
and Jeffrey P. Jacobs
Attachment II: Opinion of BB&T Capital Markets, Inc.
iii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What is the proposed transaction?
A: Gameco will acquire Colonial by merging Gameco Acquisition, a wholly owned
subsidiary of Gameco, into Colonial. As a result of the merger, Colonial
will become a privately held, wholly owned subsidiary of Gameco.
Q: Who is soliciting my proxy?
A: Colonial's Board of Directors.
Q: What am I being asked to vote on?
A: You are being asked to vote to approve the merger agreement so Gameco
Acquisition can be merged into Colonial making Colonial a privately held,
wholly owned subsidiary of Gameco.
Q: What is Gameco, Inc.?
A: Gameco is a Delaware corporation. Jeffrey P. Jacobs, who is the Chairman of
the Board, Chief Executive Officer and a principal shareholder of Colonial,
is a director, President, Secretary, Treasurer, and owner of 50.0% of the
stock of Gameco. The Richard E. Jacobs Revocable Trust, a trust controlled
by Richard E. Jacobs, father of Jeffrey P. Jacobs, is the owner of the other
50.0% of the stock of Gameco. Richard Jacobs is also a director of Gameco.
Q: What will I receive in the merger for each of my shares?
A: You will receive $1.10 in cash for each share of Colonial class A stock and
for each share of Colonial class B stock held by you. If you own stock
options, you will be entitled to receive, for each stock option, the
difference between $1.10 and the exercise price of such stock option. No
interest will be paid on these amounts.
Q: What will be the consequences of the merger?
A: If the merger is completed:
. You will receive $1.10 in cash for each of your Colonial shares;
. Gameco Acquisition will be merged with and into Colonial, and Colonial
will be the surviving corporation in the merger;
. Colonial will become a privately held, wholly owned subsidiary of Gameco
and no longer will be a public company required to file reports under
the Securities Exchange Act of 1934;
. The Colonial class A stock will no longer be quoted on the OTC Bulletin
Board;
. You no longer will have any interest in any of Colonial's future
earnings or growth; and
. The Board of Directors of Colonial will be changed such that Messrs.
Jeffrey P. Jacobs and Richard E. Jacobs will be the only directors. It
is expected that the executive officers and operations of Colonial will
remain unchanged after the merger.
Q: Where does Gameco intend to obtain the funds which are necessary to pay
$1.10 per share in cash to Colonial's shareholders?
A: Gameco intends to obtain the funds from a private offering of its debt
securities arranged by CIBC World Markets Corp. and U.S. Bancorp Libra and
capital contributions from affiliates of Gameco. Gameco has delivered to
Colonial a letter dated June 28, 2001 from U.S. Bancorp Libra stating that
based on market conditions existing at that time and subject to various
conditions set forth therein U.S. Bancorp Libra is highly confident that the
necessary financing arrangements
1
can be made. In addition, Gameco is evaluating carefully the impact of the
September 11, 2001 terrorist attacks in New York City and Washington, D.C.
on the capital markets and the proposed high-yield debt offering Gameco's
obligation to close, however, is not contingent upon the success of this or
any other financing transaction.
Q: What do I need to do to vote my shares?
A: Please sign, date and complete your proxy card and promptly return it in the
enclosed self-addressed, postage prepaid envelope so that your shares of
Colonial class A stock and class B stock can be represented and voted at the
special meeting.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares for you ONLY if you instruct your broker
how to vote for you. Your broker should mail information to you that will
explain how to give these instructions.
Q: Can I change my vote after I have mailed my signed proxy card?
A: Yes. Just mail to Colonial's transfer agent or Colonial's Secretary a
written revocation or a later-dated, completed and signed proxy card so that
it is received before the special meeting or simply attend the special
meeting and vote in person. You may not change your vote by facsimile or
telephone.
Q: What if I don't send back a proxy card or vote my shares in person at the
meeting?
A: If you don't return your proxy card or vote your shares in person at the
special meeting, each share will be treated as a vote AGAINST approval of
the merger agreement.
Q: Should I send in my certificates now?
A: No, you should not send in your stock certificates until we send you written
notice of the fact that the merger has been consummated. At that time, you
will exchange your share certificates for cash in accordance with the
transmittal letter and written instructions that you should have received
with this proxy statement.
Q: What vote is required to approve the merger agreement?
A: A vote by the holders of more than two-thirds (66.7%) of the outstanding
shares of Colonial class A stock and more than two-thirds (66.7%) of the
outstanding shares of Colonial class B stock, each voting as a separate
class, is required to approve the merger agreement.
Q: When do you expect the merger to be completed?
A: We expect the merger to be completed by December 31, 2001, subject to the
receipt of the necessary regulatory approvals.
Q: What happens if the merger is not completed by December 31, 2001?
A: The merger agreement can be terminated by either party, in which case the
merger will not occur.
Q: When will I receive $1.10 in cash for each share of my Colonial common
stock?
A: If the merger is consummated you will receive $1.10 in cash for each share
of Colonial class A stock and for each share of class B stock you own
promptly after we receive from you a properly completed letter of
transmittal, together with your stock certificates or, if you do not own any
physical stock certificates, promptly after we receive your properly
completed letter of transmittal and electronic transfer of your shares.
Q: How will I know the merger has occurred?
2
A: If the merger occurs, Colonial and Gameco will make a public announcement
and will mail to you notice of consummation of the merger.
Q: Are there any significant risks in the merger of which I should be aware?
A: Yes. There are significant risks involved with the merger. These risks
include that if the merger is consummated you will cease to participate in
any possible future earnings or growth of Colonial and to benefit from any
possible increase in Colonial's value. Before making any decision on how to
vote on the merger agreement or whether to vote, we encourage you to read
carefully and in its entirety the "Special Factors - Interests of Certain
Shareholders and Directors in the Merger" section of this proxy statement
beginning on page ___.
Q: Why is the Board of Directors recommending that I vote for the merger at
this time?
A: In the opinion of the Board of Directors, based upon the unanimous approval
and recommendation of the Special Committee and other factors described in
this proxy statement, the terms and provisions of the merger agreement and
the proposed merger are fair to and in the best interests of Colonial's
unaffiliated shareholders at this time, and the Board of Directors has
accordingly adopted and approved the merger agreement and determined the
merger to be advisable at this time. Factors considered by the Special
Committee and the Board of Directors include (i) the Special Committee's
determination that the proposed merger would provide shareholders with a
premium for their shares over recent market prices; (ii) the proposed merger
offer appears to be more attractive than the shareholders' current and
future opportunities to maximize value; (iii) management's view that
continuing present operations will result in additional losses that would
have to be funded with additional debt that may not be available on
acceptable terms; and (iv) the Special Committee's understanding that
Colonial's debt and other liabilities exceed the proceeds that could
realistically be realized from a liquidation of all of Colonial's assets.
The Board of Directors approval was unanimous with the exception of Jeffrey
P. Jacobs who abstained in light of his personal interest in the proposed
transaction. To review the background and reasons for the merger in greater
detail, see pages __ to __.
Q: Since certain members of the Board of Directors are also shareholders or
future shareholders of Gameco, what conflicts of interest does the Board of
Directors have in recommending approval of the merger agreement?
A. Several of the six members of the Board of Directors have a conflict of
interest in recommending approval of the merger agreement for various
reasons. Jeffrey P. Jacobs has a conflict of interest because he is a
principal shareholder, director, and officer of Gameco. If the merger
occurs, he will beneficially own 50.0% of Colonial following the merger and
a trust controlled by his father, Richard E. Jacobs, will control the
remaining 50.0% of Colonial's common stock. As a result, Mr. Jacobs and his
family will receive the benefit of any future earnings, growth, or increased
value of Colonial, while you will no longer receive any such benefit.
Another Director of Colonial, Mr. Hughes, worked for Mr. Jacobs until
approximately three years ago; he was nominated to Colonial's Board of
Directors by Mr. Jacobs. A third Director, Mr. McKinley, has served for more
than twenty years as Executive Vice President of Jacobs Investment
Management Co., Inc., an affiliate of Mr. Jacobs; he was also nominated to
Colonial's Board by Mr. Jacobs. A fourth member of the Board of Directors,
Mr. Grunenwald works for Mr. Jacobs as well, through
3
Jacobs Investment Management Co., Inc.; he was also nominated to Colonial's
Board of Directors by Mr. Jacobs. To counteract this conflict of interest,
the Board of Directors' recommendation is based in part on the unanimous
recommendation of the Special Committee which consists of independent
directors of Colonial. To review the factors considered by the Special
Committee and the Board of Directors in approving and adopting the merger
agreement, see pages ___ to ___.
Q: What did the Board of Directors do to make sure the price per share I will
receive in the proposed merger is fair to me?
A: The Board of Directors formed the Special Committee consisting of two
independent directors to evaluate Colonial's alternatives and ultimately to
negotiate the terms of the merger agreement with Jeffrey P. Jacobs, on
behalf of Gameco. The Special Committee independently selected and retained
legal and financial advisors to assist in this process and received an
opinion from BB&T Capital Markets, its financial advisor, on which the
Special Committee relied, that as of the date of the merger agreement, the
$1.10 per share you will receive in the proposed merger is fair to you from
a financial point of view.
Q: What are the U.S. Federal Income tax consequences of the merger to me?
A: The cash you receive for your shares generally will be taxable for U.S.
federal income tax purposes if you recognize any gain as a result of the
proposed transaction. To review the federal income tax consequences to
shareholders in greater detail, see page __.
Q: May I exercise dissenters' rights if I oppose the merger?
A: Because Virginia law does not grant dissenter's rights to shareholders in
this transaction, you will not be able to exercise dissenters' rights.
Virginia law does not permit dissenters' rights where a company's stock is
held by more than 2,000 holders. Colonial has more than 2,000 shareholders
Q: What other matters will be voted on at the special meeting?
A: We do not expect that any other matter will be voted on at the special
meeting.
Q: Who can help answer my questions?
A: If you have more questions about the merger or would like additional copies
of this proxy statement, you should contact Ian M. Stewart, President and
Chief Financial Officer of Colonial at (804) 966-7223.
4
SUMMARY TERM SHEET
The following summary highlights the material aspects of the proposed merger and
other selected information contained elsewhere in this proxy statement. This
summary may not contain all of the information that is important to you, and is
qualified in its entirety by the more detailed information contained elsewhere
in this proxy statement, including the attachments to it, and in the documents
incorporated by reference. To understand the proposed merger fully and for a
more complete description of the terms of the proposed merger, you should
carefully read this entire proxy statement, including the attachments to it, and
the documents incorporated by reference.
The Merger (See page __)
If the merger agreement is approved and all other conditions are satisfied in
accordance with the merger agreement, the following will occur:
. Gameco Acquisition will be merged into Colonial.
. Colonial will become a privately held, wholly owned subsidiary of
Gameco.
. Each outstanding share of Colonial class A stock and class B stock held
by Colonial as treasury stock or owned by any subsidiary of Colonial,
Gameco, Gameco Acquisition or CD Entertainment will be canceled and
retired and will cease to exist.
. Each outstanding share of Colonial class A stock and class B stock other
than treasury shares and shares held by any subsidiary of Colonial,
Gameco, Gameco Acquisition, or CD Entertainment will be canceled and
converted into the right to receive cash in the amount of $1.10 per
share, payable to the shareholder, without interest, upon proper
surrender of the certificate representing such shares.
. Neither Jeffrey P. Jacobs, nor any entity he controls (including CD
Entertainment), will receive cash for their shares.
The Parties to the Merger (See page __)
The parties to the merger agreement are Colonial, Gameco, Gameco Acquisition and
Jeffrey P. Jacobs.
. Colonial Holdings, Inc.
10515 Colonial Downs Parkway
New Kent, VA 23124
Tel: (804) 966-7223
. Gameco, Inc.
c/o Jacobs Investment Management Co., Inc.
1001 North U.S. Highway One, #710
Jupiter, FL 33477
Tel: (216) 861-4080
. Gameco Acquisition, Inc.
c/o Jacobs Investment Management Co., Inc.
1001 North U.S. Highway One, #710
Jupiter, FL 33477
Tel: (561) 575-4006
. Jeffrey P. Jacobs
c/o Jacobs Investment Management Co., Inc.
1001 North U.S. Highway One, #710
Jupiter, FL 33477
Tel: (561) 575-4006
The Payment You Will Receive in the Merger For Your Shares of Colonial Common
Stock (See page __)
. After the merger occurs you will receive $1.10 in cash for each share of
Colonial class A stock and class B stock you own. No interest will be
paid on that amount. Under certain circumstances, this amount could be
reduced by stock transfer and withholding taxes applicable to you.
. After the merger occurs, all outstanding unexercised options to purchase
shares of either Colonial class A stock or class B
5
stock, whether vested or not, will receive a cash payment equal to the
product of the number of shares the options represent and the excess (if
any) of $1.10 over the option exercise price per share.
The Merger Agreement (See page __)
. A copy of the merger agreement is attached to this proxy statement as
Attachment I. We encourage you to read the merger agreement in its
entirety because it is the legal document that governs the terms and
conditions of the merger.
Conditions to Consummating the Merger (See page __)
The consummation of the merger is conditioned upon the satisfaction of certain
conditions. These conditions include:
. The approval of the merger agreement by Colonial's shareholders at the
special meeting in accordance with applicable law;
. The absence of any order or injunction of any governmental authority of
competent jurisdiction that prohibits the consummation of the merger;
. Delivery of an updated fairness opinion by BB&T Capital Markets to the
Special Committee;
. The truth and correctness of all parties' representations and warranties
in the merger agreement;
. Receipt of all statutory approvals and all consents required as
conditions to consummate the merger; and
. The deposit by Gameco of the merger consideration to the exchange agent.
Termination of the Merger Agreement (See page __)
The merger agreement can be terminated:
. By mutual written consent of Colonial and Gameco;
. By either Colonial or Gameco if the merger has not occurred by December
31, 2001;
. By either Colonial or Gameco, if any government agency or authority
restrains or prohibits the merger;
. By either Colonial or Gameco for the other party's material breach of
any representation, warranty, covenant or agreement which is not curable
or is not cured within thirty (30) days of written notice of breach;
. By Colonial, if it receives a better offer for the acquisition of
Colonia before shareholder approval of the merger agreement;
. By Gameco if Colonial's Board of Directors withdraws its recommendation
for the merger or recommends another proposal; or
. By either Gameco or Colonial if the shareholders of Colonial fail to
approve the merger.
Gameco will be required to pay Colonial a break-up fee of $400,000 if
Gameco fails to consummate the merger on or before December 31, 2001, the
conditions to the merger have been satisfied (other than such conditions
not satisfied because of a breach of a representation, warranty or covenant
of Gameco, Gameco Acquisition or Jeffrey P. Jacobs under the merger
agreement), and Colonial has otherwise complied with its obligations under
the merger agreement.
Colonial would be required to pay Gameco a break-up fee of $250,000, if it
accepts another offer within 12 months of the termination of the merger
agreement, which offer was initiated prior to the time of the special
meeting.
Shareholder Approval (See "Information Concerning the Special Meeting,"
page __)
. The affirmative vote of more than two-thirds of the issued and
outstanding shares of Colonial class A stock and more than two-thirds of
the issued and outstanding
6
shares of Colonial class B stock entitled to vote and voting as separate
classes, either present at the special meeting or represented by proxy, is
required to approve the merger agreement. To have a quorum for the meeting,
a majority of each class of stock must be present or represented by proxy.
. Each holder of Colonial class A stock and class B stock is entitled to one
vote per share. A failure to vote or an abstention will have the same legal
effect as a vote against adoption of the merger agreement. In addition,
brokers who hold shares of Colonial class A stock and class B stock as
nominees will not have discretionary authority to vote such shares in the
absence of instructions from the beneficial owners. A broker non-vote will
have the same effect as a vote against the adoption of the merger
agreement.
Special Factors (See page __)
There are a number of factors that you should consider in connection with
deciding how to vote your shares. They include:
. the background of the merger;
. the factors considered by the Special Committee and the Board of Directors;
. the opinion of the financial advisor to the Special Committee;
. the recommendations of the Special Committee and the Board of Directors;
. the purpose and effect of the merger;
. the interests of certain persons in the merger; and
. the need for regulatory approval.
These factors, in addition to several other factors to be considered in
connection with the merger, are described in this proxy statement. For a
detailed discussion of each of these factors, see pages __ to __.
Governmental and Regulatory Approvals (See page __)
Colonial is not aware of any material governmental or regulatory approvals
required in connection with the merger other than the approval of the Virginia
Racing Commission of Gameco's acquisition of indirect interests in Colonial's
subsidiaries, Colonial Downs, L.P. and Stansley Racing Corp.
Our Recommendation to You (See page __)
. Because Mr. Jacobs will have a continuing financial interest in Colonial if
the merger is consummated, the Board of Directors appointed the Special
Committee consisting of two independent directors to consider Colonial's
alternatives and review and evaluate the terms of the merger.
. Based upon a review of, among other things, the financial prospects of
Colonial and on the opinion of BB&T Capital Markets, financial advisor to
the Special Committee, that the merger consideration is fair to you from a
financial point of view, the Special Committee unanimously approved the
merger agreement and recommended that the Board of Directors adopt and
approve the merger agreement and recommend its approval to the
shareholders.
. Following the unanimous approval and recommendation of the Special
Committee, the Board of Directors, with Mr. Jacobs abstaining, authorized
Colonial to enter into the merger agreement. In accordance with Virginia
law, the merger agreement has been approved by a majority of the Directors
of Colonial who have no direct or indirect interest in the merger and who
will receive no extra or special benefit from the merger not shared on a
pro rata basis with all other shareholders.
The Board of Directors of Colonial, based upon the approval and unanimous
recommendation of the Special Committee and other considerations, has approved
and adopted the merger agreement as being in
7
your best interests and the best interests of Colonial and recommends a vote
"FOR" approval of the merger agreement and the transactions contemplated
therein.
Opinion of Financial Advisor (See page __)
. The Special Committee has been advised by BB&T Capital Markets that, in its
opinion, the merger consideration to be received by the Colonial
shareholders is fair from a financial point of view. A copy of BB&T Capital
Markets' fairness opinion is attached to this proxy statement as Attachment
II.
Interests of Certain Shareholders and Directors in the Merger (See page ___)
. In considering the recommendation of the Board of Directors with respect to
the merger, you should be aware that Jeffrey P. Jacobs, the Chairman of the
Board of Directors, Chief Executive Officer and a principal shareholder of
Colonial, is a director and the President, Secretary, Treasurer, and
beneficial owner of 50.0% of the stock of Gameco. The remaining 50.0% of
the stock of Gameco is held by a trust controlled by his father, Richard E.
Jacobs, who is the only other director of Gameco. Because of Jeffrey
Jacobs' ownership interest in Gameco, Mr. Jacobs has interests in
connection with the merger that are in addition to and conflict with the
interests of Colonial and its unaffiliated shareholders.
. Mr. Jacobs and CD Entertainment, an affiliate of Mr. Jacobs, hold an
aggregate of 1,945,000 shares of Colonial class A stock, representing 33.3%
of the outstanding shares of that class and 1,220,000 shares of Colonial
class B stock, representing approximately 84.0% of the outstanding shares
of that class. CD Entertainment is also the lender under Colonial's Senior
Credit Facility, which is convertible into 24,951,456 shares of Colonial
class A stock at the lender's option. The class B stock is convertible into
Colonial class A stock in a one to one ratio upon demand of the
shareholder. Following the signing of the merger agreement, on September
14, 2001, CD Entertainment converted 790,000 shares of class B stock into
class A stock, increasing its percentage ownership of the outstanding
shares of the class A stock of Colonial from 22.9% to 33.3% and decreasing
its percentage ownership of the outstanding shares of class B Stock of
Colonial from 89.6% to 84.0%. The conversion was made to increase the
probability of approval of the merger agreement by more than two-thirds of
the outstanding shares of class A stock. Mr. Jacobs has informed Colonial
that he intends to vote all of the shares of Colonial class A stock and
class B stock beneficially owned by him in favor of approval of the merger
agreement. The directors of Colonial, including Mr. Arnold Stansley, have
indicated they intend to vote their aggregate total 539,484 class A shares
(or approximately 9.1% of the outstanding class A shares) in favor of the
approval of the merger agreement. Mr. Jacobs owns a sufficient number of
shares of Colonial class B stock to ensure approval of the merger agreement
by the holders of the class B stock voting as a separate class.
. If the merger is consummated, Colonial will become a privately held, wholly
owned subsidiary of Gameco. Gameco will have complete control over the
management and conduct of Colonial's business and will benefit from any
future increase in Colonial's value.
. Directors of Colonial, other than Mr. Jacobs, will receive an aggregate
total of $584,086 for their shares.
. Colonial's executive officers and directors have options to purchase class
A common stock. These options become fully vested at the time of the
merger. The executive officers and directors, other than Mr. Jacobs, will
be entitled to receive for
8
each share covered by their options, an amount in cash equal to the
difference between the $1.10 per share merger consideration and the price
per share exercise price of the related option. The aggregate amount to be
paid in the merger for these options is $11,000.
. Mr. Peskoff received $50,000 as additional compensation for his service on
the Special Committee in consideration of the substantial time and effort
necessary to devote to the Special Committee's work. Mr. Stansley received
no additional compensation for his service since it was included as part of
his duties under a five-year consulting agreement between him and Colonial.
Mr. Stansley receives $75,000 per year pursuant to a five-year consulting
agreement that terminates on March 21, 2002. The Board believes that the
compensation paid Messrs. Peskoff and Stansley had no effect on their
independence nor does such compensation disqualify Messrs. Peskoff and
Stansley as independent directors under Virginia law. Mr. Stansley would
have received the same compensation absent his service on the Special
Committee and independent of the Special Committee's recommendation.
Similarly, Mr. Peskoff was compensated to reflect the devotion of time
necessary to complete the work of the Special Committee and independent of
the Committee's recommendation. Other members of the Board of Directors
received $500 per meeting, which has been customary compensation for their
services as directors. (Prior to December 31, 2001, the $500 director fees
were paid in shares of Colonial's class A stock.)
. Indemnification obligations pursuant to Colonial's Articles of
Incorporation and bylaws and directors' and officers' liability insurance
for Colonial's present and former directors and officers will be continued
by Colonial after the merger.
Source of Funds for the Merger (See page __)
. Gameco is also proposing a going private transaction with Black Hawk Gaming
& Development Company, Inc. ("Black Hawk"), another public company
controlled by Jeffrey P. Jacobs, Colonial's Chief Executive Officer. Black
Hawk is the owner, developer and operator of two gaming properties in Black
Hawk, Colorado and the owner and operator of one gaming property in Reno,
Nevada. Although Gameco's proposed acquisitions of Colonial and Black Hawk
are similar in structure and purpose, they are not mutually dependent and
one or the other or both or neither may ultimately occur. Gameco intends to
obtain financing for both acquisitions through a private offering of debt
securities arranged by U.S. Bancorp Libra and CIBC World Markets Corp. and
capital contributions by affiliates of Gameco. Since Gameco is a newly-
formed company that has not conducted operations, it will be using the
assets of Colonial and Black Hawk as collateral in order to finance the
purchase of the common stock from unaffiliated Colonial and Black Hawk
shareholders.
Summary of Federal Income Tax Consequences (See page __)
. If the merger is consummated, the exchange of your shares for cash pursuant
to the merger will result in the recognition of gain or loss to you for
federal income tax purposes.
. The gain or loss will be equal to the difference, if any, between the
amount of cash received and your tax basis in your shares. Such gain or
loss will be capital gain or loss if you hold your shares as capital
assets.
. Because tax consequences may vary depending on your particular
circumstances, Colonial recommends that you consult with your own tax
advisor
9
concerning the federal, state, local and foreign income tax effects of the
merger.
Price Range of Common Stock (See page __)
. Colonial's class A stock is traded over-the-counter on the OTC Bulletin
Board under the symbol "CHLD." On February 28, 2001, the day preceding the
public announcement of Mr. Jacobs' initial merger proposal, both the high
and low sale prices for Colonial class A stock were $0.2344.
The above matters and other matters relating to the merger are described in much
greater detail in the remainder of this proxy statement. You are strongly urged
to read and consider carefully this proxy statement and the attachments hereto.
10
Selected Consolidated Financial Data of Colonial
The following table sets forth selected consolidated financial data for
Colonial and its subsidiaries as of and for each of the four years (since
formation) ended December 31, 2000, 1999, 1998 and 1997 and as of and for the
six months ended June 30, 2000 and June 30, 2001. No pro forma data for Colonial
giving effect to the proposed merger is provided because Colonial does not
believe such information is material to shareholders in evaluating the proposed
merger since (1) the proposed merger consideration is all cash and (2) if the
proposed merger is completed, the common stock of Colonial would cease to be
publicly traded and the unaffiliated Shareholders will have no interest in
Colonial. Pro forma data for Gameco giving effect to the proposed merger is
provided elsewhere in this proxy statement. See page F-1.
The financial information for Colonial as of and for each of the four years
ended December 31, 2000, 1999, 1998, and 1997 has been derived from the
consolidated financial statements of Colonial which have been audited by BDO
Seidman, LLP. The financial information for Colonial as of and for the six
months ended June 30, 2000 and June 30, 2001 has been derived from the unaudited
consolidated financial statements of Colonial which, in the opinion of
Colonial's management, include all adjustments necessary for a fair presentation
of Colonial's financial position and results of operations. All such adjustments
are of a normal recurring nature. The results of operations for the six months
ended June 30, 2001 are not necessarily indicative of the results that may be
achieved for the full year, and cannot be used to indicate financial performance
for the entire year. The following financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and the Consolidated Financial Statements of Colonial
and the notes thereto included in Colonial's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000 and Quarterly Report on Form 10-Q for the
period ended June 30, 2001, which are available upon request from Colonial and
incorporated by reference. See "Where You Can Find More Information." Also
please refer to "Additional Information."
11
(In thousands) As of and for the Six
As of and for the Years Ended December 31, Months Ended June 30,
2000 1999 1998 1997 2001 2000
------- -------- -------- -------- ------- -------
Income Statement Data:
Total revenues $29,202 $ 29,351 $ 29,447 $ 23,647 $14,637 $13,873
Income (loss) from operations (166) 1,701 (3,597) (467) 660 831
Net earnings (loss) before income taxes (2,869) (1,139) (5,372) 92 (687) (515)
Net earnings (loss) (2,869) (1,139) (5,288) 8 (687) (515)
Basic and diluted net earnings (loss)
per share $ (0.39) $ (0.16) $ (0.73) $ 0.01 $ (0.09) $ (0.07)
Balance Sheet Data (at period end):
Working capital (deficiency) $(4,129) $(26,565) $(14,661) $ (9,466) $(5,497) $(2,725)
Total assets 65,853 67,405 68,581 67,875 68,419 68,896
Current maturities of long-term debt 936 24,774 9,184 1,373 2,069 790
Long-term debt excluding current
maturities 26,898 2,975 15,008 15,390 25,753 26,540
Shareholders' equity 32,657 35,526 36,634 36,922 31,970 35,011
Cash Flow Data:
Net cash provided by (used in)
operating activities $ 121 $ 632 $ (2,289) $ 3,053 $ 716 $ 1,279
Net cash used in investing activities (2,249) (1,546) (5,884) (48,851) (372) (232)
Net cash provided by (used in) financing activities 1,934 1,072 5,980 47,766 (12) (277)
EBITDA(1) $ 1,530 $ 3,540 $ (1,995) $ 188 $ 1,450 $ 1,680
Other Data:
Book Value Per Share 4.49 N/A N/A N/A 4.40 4.82
Ratio of Earnings to Fixed Charges 0.01 0.62 (1.78) 0.28 0.52 0.65
(1) EBITDA is the sum of Colonial's net earnings (loss), net interest expense,
income taxes, depreciation, and amortization. EBITDA 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.
12
THE PARTIES
Colonial Holdings, Inc.
Colonial, formerly Colonial Downs Holdings, Inc., owns and operates
Colonial Downs Racetrack in New Kent, Virginia, which primarily conducts pari-
mutuel wagering on thoroughbred and standardbred horse racing. Colonial also
owns (or leases) and operates satellite wagering facilities in Chesapeake,
Richmond, Hampton and Brunswick, Virginia, which provide simulcast pari-mutuel
wagering on thoroughbred and standardbred horse racing from selected racetracks
throughout the United States. Colonial sends its live race signal from the
racetrack to out-of-state satellite wagering facilities and receives race
signals from out-of-state racetracks. In February 2001, Colonial, through its
wholly owned subsidiary, Colonial Holdings Management, Inc., began managing
certain truck stops in Louisiana that conduct video poker operations that were
acquired by affiliates of Mr. Jacobs and Gameco.
Colonial's revenues consist of:
. pari-mutuel commissions from wagering on races broadcast from out-of-
state racetracks to Colonial's satellite facilities and the racetrack
using import simulcasting;
. wagering at the racetrack and the satellite facilities on the
racetrack's live races;
. admission fees, program and racing form sales, and certain other
ancillary activities;
. commissions from food and beverage sales and concessions;
. fees from wagering at out-of-state locations on races run at the
racetrack using export simulcasting; and
. management fees from the Louisiana truck stops.
Colonial is currently subject to the information requirements of the
Exchange Act and in accordance therewith files periodic reports, proxy
statements and other information with the SEC relating to its business,
financial and other matters. Additional information regarding Colonial can be
obtained as described under "Available Information." More complete information
concerning Colonial can be found in its Annual Report on Form 10-K for the year
ended December 31, 2000, a copy of which is available upon request from Colonial
and incorporated by reference. The principal executive offices of Colonial are
located at 10515 Colonial Downs Parkway, New Kent, Virginia 23124 and its
telephone number is (804) 966-7223.
Gameco, Inc., Gameco Acquisition, Inc., Diversified Opportunities Group Ltd.,
and CD Entertainment, Ltd.
Gameco is a Delaware corporation organized by Jeffrey P. Jacobs. Each of
Mr. Jacobs and Richard E. Jacobs, Trustee under the Richard E. Jacobs Revocable
Living Trust Agreement dated April 23, 1987 (the "Trust") owns 50.0% of Gameco's
common stock. Richard E. Jacobs is Jeffrey P. Jacobs' father. Gameco was formed
to own and conduct, among other matters, the business of Colonial, which will be
a wholly owned subsidiary of Gameco following the merger. Gameco also intends to
acquire other gaming interests currently owned by Jeffrey P. Jacobs, the Trust,
and Richard E. Jacobs, as described below. Gameco Acquisition is a Virginia
corporation and a wholly owned subsidiary of Gameco. Gameco Acquisition was
organized for the purpose of effecting the merger and its separate corporate
existence will cease by operation of law immediately following the merger.
Gameco also owns all of the common shares of BH Acquisition, Inc., a
Colorado corporation organized for the purpose of effecting Gameco's anticipated
acquisition of Black Hawk Gaming & Development Company, Inc, a Colorado
corporation. Black Hawk is the owner, developer and operator
13
two gaming properties in Black Hawk, Colorado and the owner and operator of one
gaming property in Reno, Nevada, ("Black Hawk"). Gameco, BH Acquisition and
Black Hawk have entered into an Agreement and Plan of Merger dated as of April
25, 2001 with respect to that acquisition and which, if consummated, will result
in Black Hawk becoming a wholly owned subsidiary of Gameco.
None of Gameco, BH Acquisition or Gameco Acquisition has any material
assets, owns any shares of Black Hawk or Colonial, or has conducted any activity
except that incident to its formation and in connection with the merger, the
Black Hawk acquisition, and the related transactions described below. The
principal business of the Trust is the investment and management of the Trust's
assets for the benefit of the Trust's beneficiaries. The business address of the
Trust and Richard E. Jacobs is 25425 Center Ridge Road, Cleveland, Ohio 44145;
telephone (440) 871-4800. The principal business address of Gameco and Gameco
Acquisition is 1001 North U.S. Highway One, #710, Jupiter, FL 33477; telephone
(561) 575-4006.
Immediately prior to the merger, Jeffrey P. Jacobs, the Trust, Richard E.
Jacobs, and entities under their control will transfer to Gameco selected assets
of Diversified Opportunities Group Ltd., an Ohio limited liability company, and
certain other affiliates. The business address and telephone number of
Diversified is the same as Gameco's. Diversified owns 1,333,333 shares, or
32.3%, of Black Hawk's outstanding common stock, and together with those
affiliates, owns BH Entertainment Ltd., an Ohio limited liability company. BH
Entertainment owns a 25.0% interest in The Lodge Casino and shares equally with
Black Hawk the management fee payable by The Lodge Casino.
Diversified and those entities also own CD Entertainment Ltd., an Ohio
limited liability company that owns 33.3% of the class A stock and 84.0% of the
class B stock of Colonial. The business address and telephone number of CD
Entertainment is the same as Gameco's. In addition, Diversified owns Jalou
L.L.C., a Louisiana limited liability company that operates one truck plaza and
a restaurant in Louisiana that feature video gaming devices. It also shares in
the gaming revenue of another truck plaza in Louisiana. Simultaneously with the
transfers described above, the Messrs. Jacobs will transfer to Gameco their
respective 50.0% interests in Jalou II, Inc., a Louisiana corporation that also
operates a Louisiana truck plaza featuring video gaming devices. Gameco also
expects to acquire immediately prior to the merger, through the exercise of a
purchase option currently held by Jalou L.L.C., four additional Louisiana truck
stop plazas that conduct video gaming operations.
As a result of these transfers and acquisitions and the consummation of the
merger, Jeffrey P. Jacobs and the Trust will retain their respective 50.0%
ownership interests in Gameco. Colonial, Diversified and Jalou II will become
wholly owned subsidiaries of Gameco, and Jalou L.L.C. will become an indirect
wholly owned subsidiary of Gameco. While it is expected that Gameco will acquire
Black Hawk and the Louisiana operations simultaneously with the consummation of
the merger, these acquisitions are not a condition to consummation of the
merger. Black Hawk will also become a wholly owned subsidiary of Gameco if and
when that acquisition is effected.
In light of the anticipated transfers described above and Gameco's and
Diversified's anticipated interests in Black Hawk, Jalou L.L.C. and Jalou II
following consummation of the merger, certain additional information concerning
the operations of Black Hawk, Jalou L.L.C. and Jalou II is set forth below. For
financial information relating to Gameco, see the information under "Unaudited
Pro Forma Consolidated Statements of Gameco, Inc." at page F-1 in this proxy
statement.
Black Hawk
Black Hawk is the owner, developer and operator of two gaming properties in
Black Hawk, Colorado and an owner and operator of one gaming property in Reno,
Nevada. Black Hawk owns the
14
Gilpin Hotel Casino in Black Hawk, Colorado, which it developed and has operated
since 1992. Along with its strategic partner, Jacobs Entertainment Ltd.,
("Jacobs Entertainment")an affiliate of Gameco, Black Hawk developed and co-
manages The Lodge Casino at Black Hawk, a hotel/casino/parking complex completed
in 1998. Black Hawk owns, through a limited liability company, a 75.0% interest
in The Lodge Casino and affiliates of Jacobs Entertainment own the remaining
25.0% interest. On January 4, 2001, Black Hawk purchased the Gold Dust West
Casino in Reno, Nevada, which Black Hawk now operates through a wholly owned
Nevada subsidiary. The principal office and business address of Black Hawk is
Post Office Box 21, 240 Main Street, Black Hawk, Colorado 80422. The business
telephone number of Black Hawk is (303) 582-1117.
Black Hawk is currently subject to the information requirements of the
Exchange Act and, in accordance therewith, files periodic reports, proxy
statements and other information with the SEC, which can be obtained as
described under "Available Information."
Jalou L.L.C. and Jalou II
Jalou L.L.C. owns and operates the Houma Truck Plaza and Pelican Palace
Casino in Houma Louisiana and the Cajun Haven Restaurant in Lake Charles,
Louisiana. It also is party to an agreement that entitles it to a portion of the
gaming revenues from Cash's Truck Plaza and Casino in Lobdell, Louisiana. Jalou
II owns and operates Winner's Choice Casino in Sulphur, Louisiana. Houma,
Winner's Choice and Cash's each feature a convenience store, fueling operations,
a restaurant, and 50 video gaming devices. Cajun Haven is a restaurant serving
breakfast and lunch on weekdays and features three video gaming devices. These
properties produced for Jalou L.L.C. and Jalou II aggregate revenues of
approximately $6,160,959 for the period February 8, 2001 (the acquisition date)
through June 30, 2001.
The Jalou L.L.C. and Jalou II operations primarily serve a local clientele
that management of Jalou L.L.C. and Jalou II believes prefers the convenience,
small crowds and unique settings of these facilities to the experience and
atmosphere presented by large-scale casinos.
The four properties subject to Jalou L.L.C.'s purchase option include
Colonel's Truck Plaza in Thibodaux, Louisiana, the Lucky Magnolia Truck Stop &
Casino in St. Helena Parish, Louisiana, Bayou Vista in the Bayou Vista Truck
Plaza & Casino, Louisiana, and Raceland Truck Plaza & Casino in Raceland,
Louisiana. Like the current Jalou L.L.C. and Jalou II truck stop plazas, each
features a convenience store, fueling operations, a restaurant and 50 video
gaming devices (with the exception of Lucky Magnolia which has 40 gaming
devices), and serves a local clientele.
The video gaming operations of Jalou L.L.C. and Jalou II, like those of
Black Hawk and Colonial, are subject to substantial competition from other
gaming operations of various kinds. Similarly, these operations, like those of
Black Hawk and Colonial, are subject to extensive regulation and substantial
taxes on their gaming revenue, including a 32.5% state tax on all gaming
revenues.
For a discussion of the competitive, regulatory and tax considerations
applicable to Colonial, see the discussion under the headings "Business of
Colonial - General," "- Competition," "- Regulation," and "- Taxation" in
Colonial's Annual Report on Form 10-K for the year ended December 31, 2000,
which is incorporated by reference.
Jeffrey P. Jacobs
Jeffrey P. Jacobs, an individual, is a party to the merger agreement only
with respect to Section 5.14 under which Mr. Jacobs has agreed to provide
Colonial up to $1.0 million in working capital through December 31, 2001, a
minimum of $600,000 of which must be in cash, and the balance of which
15
may be in the form of forgiveness of fees and expenses payable to Mr. Jacobs and
his affiliates. Mr. Jacobs has agreed not to terminate or cause to be terminated
the management agreement between Colonial and Jalou L.L.C. without cause until
the merger closes or the merger agreement is terminated.
Mr. Jacobs serves as Chairman of the Board and Chief Executive Officer of
Colonial. From 1995 to the present, he has served as Chairman and Chief
Executive Officer of Jacobs Entertainment, a company based in Cleveland, Ohio
that has investments in other gaming companies and ventures, including Colonial
and Black Hawk. Since 1975, he also has served as President and CEO of Jacobs
Investment Management Co., Inc., a company engaged in the development,
construction and operation of residential and commercial real estate and
entertainment projects in Ohio. Mr. Jacobs is a citizen of the United
States.
16
SPECIAL FACTORS
Approval of the Merger Agreement
The Board of Directors has adopted the merger agreement based upon the
recommendation of the Special Committee and other factors set forth in this
proxy statement. The merger agreement has been unanimously approved by the
Special Committee, which consists of independent directors who are not employees
of Colonial and have no direct or indirect interest in the transaction (other
than as shareholders) and who will receive no extra or special benefit from the
merger not shared on a pro rata basis with all other shareholders. (Mr.
Peskoff, a member of the Special Committee, received $50,000 for time and effort
devoted to the Special Committee.) A copy of the merger agreement is attached
to this proxy statement as Attachment I. The shareholders are urged to read the
merger agreement in its entirety. The Board of Directors, with Mr. Jacobs
abstaining, based upon the report and recommendation of the Special Committee,
believes that the merger is in the best interests of the shareholders, and the
Board of Directors recommends that the shareholders vote to approve the merger
agreement.
It is the intention of the persons named as proxies to vote the shares to
which the proxy relates "FOR" approval of the merger agreement, unless
instructed to the contrary. The affirmative vote of more than two-thirds of all
issued and outstanding shares of Colonial class A stock and of more than two-
thirds of all issued and outstanding shares of Colonial class B stock entitled
to vote at the special meeting and voting as a separate class is required to
approve the merger agreement. A failure to vote or an abstention will have the
same legal effect as a vote cast against approval. Brokers and, in many cases,
nominees will not have discretionary power to vote the shares which they hold at
the special meeting. Accordingly, beneficial owners of shares should instruct
their brokers or nominees how to vote. A broker non-vote will have the same
effect as a vote against the approval of the merger agreement. You should note
that the approval of a majority of the unaffiliated shareholders is not required
for the approval of the merger. Mr. Jacobs owns beneficially 33.3% of the
outstanding shares of class A stock. Mr. Jacobs has informed Colonial that he
intends to vote all of the shares of Colonial class A stock owned by him in
favor of approval of the merger agreement. Although the holders of a majority
of the remaining outstanding shares of class A stock must vote in favor of the
approval of the merger agreement for it to be approved, the directors of
Colonial, including Mr. Arnold W. Stansley, who hold an aggregate of
approximately 9.1% of the outstanding shares of class A stock, have indicated
their intention to vote their shares of class A stock in favor of the merger
proposal. Therefore, holders of 42.4% of the outstanding shares of class A
stock have indicated their intention to approve the merger agreement. The
affirmative vote of more than two-thirds (or approximately 66.7%) of the
outstanding shares of Colonial's class A stock is necessary for approval of the
merger agreement. Mr. Jacobs has informed Colonial that he also intends to vote
all of the shares of Colonial's class B stock beneficially owned by him in favor
of approval of the merger agreement. Mr. Jacobs owns a sufficient number of
shares of Colonial class B stock to ensure approval of the merger agreement by
the holders of the class B stock voting as a separate class.
A vote by a shareholder of Colonial in favor of the merger agreement will
constitute a vote in favor of all transactions contemplated thereby.
Background of the Merger
Historical Involvement
Colonial is a holding company for Colonial Downs, L.P. and Stansley Racing
Corporation. Colonial Downs, L.P. and Stansley were awarded licenses to own and
operate, respectively, the racetrack by the Virginia Racing Commission in
October 1994. Colonial Downs, L.P. and Stansley were formed and owned by Arnold
Stansley and James Leadbetter. CD Entertainment acquired a 50.0% interest in
17
Colonial Downs in July 1996. Thereafter, Colonial was formed as a holding
company, and the ownership of Colonial Downs, L.P. and Stansley was reorganized
in anticipation of an initial public offering of Colonial's stock. Pursuant to
the reorganization, Colonial became the 99.0% limited partner of Colonial Downs,
L.P. and Stansley became a wholly owned subsidiary of Colonial, as well as the
1.0% general partner of Colonial Downs, L.P. As a result of the reorganization,
Colonial owned, directly or through its wholly owned subsidiaries, the ownership
and operating licenses for the racetrack and satellite wagering facilities known
as racing centers, the real property on which the racetrack and certain racing
centers are located, and the racetrack facilities.
Colonial Downs, L.P. and Stansley opened the first racing center in
Chesapeake, Virginia in February 1996 and opened their second racing center in
Richmond, Virginia in December 1996. The racetrack commenced its inaugural meet
on September 1, 1997, and Colonial Downs, L.P. and Stansley opened the Hampton
and Brunswick racing centers in December 1997.
In connection with Colonial's initial public offering in March 1997,
Jeffrey P. Jacobs, Colonial's Chairman of the Board and Chief Executive Officer,
acquired effective voting control of Colonial by virtue of his ownership of
1,500,000 shares of Colonial class B stock (which has five votes per share
except for certain transactions such as a merger) which represents approximately
46.2% of the total voting power of Colonial's common stock. In addition, since
Colonial's initial public offering, Mr. Jacobs, through CD Entertainment, has
acquired 1,155,000 shares of Colonial class A stock and an additional 510,000
shares of Colonial class B stock. CD Entertainment converted 790,000 shares of
class B stock to 790,000 shares of class A stock on August 31, 2001 pursuant to
the terms of the class B stock. The conversion was made to increase the
probability of approval of the merger agreement by two-thirds of the outstanding
shares of class A stock. Accordingly, as of the date of this proxy statement,
Mr. Jacobs beneficially owned 33.3% of the outstanding shares of class A stock
and 84.0% of the class B stock.
The foregoing voting percentages do not include stock that Mr. Jacobs can
acquire through conversion of additional shares of class B stock to class A
stock or conversion of Colonial's indebtedness to class A stock. Currently,
Colonial has approximately $25.7 million in outstanding convertible senior
indebtedness to CD Entertainment. The debt bears interest at 9.9% per annum,
payable monthly. Principal payments of $1 million each are due June 30, 2002,
2003 and 2004, with all unpaid principal and interest due June 30, 2005. The
indebtedness is collateralized by substantially all of the assets of Colonial.
This debt can be converted to Colonial class A stock at a conversion rate of
$1.03 per share, subject to the authorization by Colonial of additional shares
to accommodate such conversion.
Stock Price
Colonial's stock price began declining soon after the initial public
offering and declined dramatically in November 1997 when Colonial was
unsuccessful in local referenda seeking approval of locating a racing center in
each of Fredericksburg, Martinsville and Roanoke, Virginia. These failed
referenda precluded Colonial from expanding its racing center network into
potentially profitable markets. As a result of the inability to expand the
racing center network into Northern Virginia and other impediments outlined in
this proxy statement, after the fiscal year ended December 31, 1997, Colonial
lost money each year. These losses contributed to a depressed stock value. When
Colonial class A stock failed to satisfy the conditions for continued listing on
the Nasdaq National Market, Colonial class A stock was moved to the Nasdaq Small
Cap Market. As the stock price declined further, the Colonial class A stock was
eventually delisted from the Nasdaq Small Cap Market and currently is quoted on
the OTC Bulletin Board.
18
Northern Virginia Efforts
Notwithstanding the setbacks from the failed referenda efforts, Colonial
has long recognized the need to expand its operations into densely populated
Northern Virginia. Efforts to win referenda approval for a racing center have
either been defeated or the prospect of success so slight that efforts have not
been undertaken. However, in the late summer and early fall of 1999, Colonial
sought to secure a license to build a new steeplechase racetrack in Dumfries,
Virginia, in Prince William County. If approved, the racetrack would have
conducted live racing and year round wagering on simulcast broadcasts of horse
races. Another promoter filed a competing application to build a racetrack in a
different part of Prince William County. In connection with the competition for
the license, the competing applicant made an offer to acquire Colonial in
exchange for newly issued limited partnership interests of Equus Gaming Corp.
and to combine the applications pending before the Racing Commission. The Board
of Directors rejected Equus' offer because the proposed site for Equus' track,
which was a key component of the offer, was unlikely to receive the necessary
infrastructure improvements and governmental approvals for development; no cash
was offered to Colonial's shareholders but only illiquid limited partnership
interests having a limited value; and the Equus proposal amounted to having
Colonial merge into an enterprise that was substantially weaker financially than
Colonial.
Neither Colonial nor Equus was successful in securing a license for a
racetrack in Prince William County and the referendum authorizing the racetrack
expired in November 1999.
Sales Efforts
In the fall of 1999, the Board of Directors determined to solicit offers
from potential purchasers of Colonial Downs, L.P. Management of Colonial
contacted 17 potential purchasers and delivered a confidential information
memorandum to eight potential purchasers who requested further information.
After four months, only one bid, dated May 3, 2000, was received. That bid was
to acquire all of the assets of Colonial Downs, L.P. for $23 million, which was
less than the amount of Colonial's outstanding indebtedness at the time of the
offer. Since the offer would not provide any proceeds or benefits to Colonial's
shareholders, the offer was rejected. Colonial has received from time to time
unsolicited expressions of interest from parties interested in purchasing the
racetrack (but not the racing centers) for uses other than pari-mutuel racing.
However, Colonial has not received any offers from such parties.
Other Developments
The local press has reported that the promoters of the Virginia State Fair
have had discussions with New Kent County officials about moving the State Fair
and related activities to New Kent County and near Colonial's racetrack. The
promoters are reported to have had similar discussions with officials of
Caroline and Stafford Counties. The promoters of the State Fair have leased
Colonial's racetrack for the last two years to host a popular one-day
steeplechase race. There can be no assurance that New Kent County will continue
to be considered for relocation of the State Fair or that the State Fair will
move there. The State Fair can remain at its current location for the next five
years, according to press reports.
Colonial Holdings Management, Inc.
In an effort to improve Colonial's cash flow, in February 2001, affiliates
of Mr. Jacobs, Jalou L.L.C. and Jalou II, which own several casino truck stops
in Louisiana, engaged the services of Colonial Holdings Management, Inc., a
subsidiary of Colonial, to manage certain truck stops that Jalou L.L.C. and
Jalou II had recently acquired in Louisiana and to manage the rights to a
portion of the gaming revenues from another truck stop. Under this management
contract, Colonial oversees all aspects of the operations of the truck stops
acquired by Jalou L.L.C. and Jalou II. The management agreement calls for
Colonial to
19
provide these services in return for a fee of 3.0% of the truck stops' revenue
and 5.0% of the truck stops' EBITDA. Each truck stop offers fueling, convenience
store, restaurant facilities and 50 video poker gaming devices.
Buy-Out Proposal
On February 20, 2001, Jeffrey P. Jacobs, Chairman of the Board, Chief
Executive Officer, and Colonial's principal shareholder, requested an
opportunity to address the Board of Directors regarding a possible offer to
acquire all of the outstanding stock of Colonial. The Board of Directors
convened a meeting on February 28, 2001, at which Mr. Jacobs presented a term
sheet and a draft merger agreement and offered to acquire all of the outstanding
stock of Colonial that he did not currently beneficially own for a price of
$1.00 per share. At the meeting, Mr. Jacobs stated that he had engaged U.S.
Bancorp Libra, an investment banking and advisory firm, to assist him in
connection with the offer and the financing of the proposed transaction.
Although the Board of Directors learned of Mr. Jacobs' current desire to take
Colonial private in connection with convening the February 28, 2001 meeting, no
terms of such a possible transaction were presented until the February 28, 2001
meeting.
After listening to Mr. Jacobs' proposal and briefly reviewing the term
sheet provided, the Board (other than Mr. Jacobs) determined that Mr. Jacobs'
offer appeared to be viable and was worth pursuing. It further determined that
in view of the conflicts of interest attendant to any buy-out proposal from an
affiliate, it was advisable to form a special committee of independent members
of the Board. The Special Committee was formed and consisted of Stephen Peskoff
and Arnold Stansley. William Koslo was initially a member of the Special
Committee but resigned from the Board of Directors and the Special Committee in
light of other commitments. The Special Committee was authorized by the Board of
Directors to entertain, analyze, negotiate and recommend (or recommend against)
Mr. Jacobs' offer and to consider other alternatives with a view to maximizing
Colonial's shareholder value. The Special Committee also was authorized to
engage a financial advisory or investment banking firm and legal counsel to
advise and assist it. Colonial issued a press release on March 1, 2001
announcing Mr. Jacobs' offer of $1.00 per share.
The Special Committee interviewed several Richmond, Virginia and
Washington, D.C. law firms, and selected Ruben & Aronson, LLP to represent it.
It also began interviewing financial advisory and investment banking firms, and
by letter dated April 20, 2001, after interviewing several such firms, the
Special Committee engaged BB&T Capital Markets, a subsidiary of Scott &
Stringfellow, Inc., to advise it in connection with Mr. Jacobs' proposal and to
otherwise assist the Special Committee in its activities.
Negotiation of Agreement
The term sheet and draft merger agreement presented by Mr. Jacobs at the
February 28, 2001 meeting provided the starting point for negotiations. Although
the term sheet contained terms that are reflected in the merger agreement, the
terms were thoroughly negotiated by the Special Committee with Gameco.
Additional terms, such as an increase in the merger consideration to $1.10 and a
$400,000 liquidated damages provision, among others, were negotiated by the
Special Committee. A description of these negotiations is set forth in this
section.
From April 19, 2001 to May 7, 2001, at the Special Committee's request, the
Special Committee's financial advisors, BB&T Capital Markets, and legal
advisors, Ruben & Aronson, LLP, conducted preliminary due diligence, including
visiting the properties owned by Colonial in New Kent, Virginia and Richmond,
Virginia, meeting with Colonial's management in order to better familiarize
themselves with Colonial's business and prospects, and reviewing documents
pertinent to Colonial's business.
20
On April 19, 2001, at the Special Committee's request, the Special
Committee met with BB&T Capital Markets and Ruben & Aronson, LLP to review the
status of the negotiations with Gameco and to establish the ongoing
responsibilities of the persons participating in the meeting. Ian Stewart, the
President and Chief Financial Officer of Colonial, also attended the meeting. At
the meeting, discussions were held concerning the possible linkage between the
Colonial and Black Hawk transactions. The Special Committee indicated its
understanding that neither transaction would be conditioned on the consummation
of the other and instructed that the merger agreement should not include any
such condition. Gameco's ability and plans to raise the required financing to
complete the merger were also discussed. It was generally agreed that Colonial
would seek some form of written assurance, possibly a letter from Gameco's
investment banker, that they were highly confident that the financing for the
Colonial merger would be raised.
On April 23, 2001, BB&T Capital Markets and Ruben & Aronson, LLP visited
the racetrack and met with Colonial's management to discuss its operations and
history.
On May 7, 2001, the Special Committee received an oral report from BB&T
Capital Markets. In its report, BB&T Capital Markets, based on its due diligence
as of May 7, 2001, informally provided the Special Committee with its views on
the valuation of Colonial and the merger consideration of $1.00. BB&T Capital
Markets' views as presented to the Special Committee were substantially the same
as described on pages ___ to ___ in "Special Factors - Opinion of Financial
Advisor." The Special Committee discussed negotiating an increase in the merger
consideration as an effort to get the best possible price per share for
Colonial's shareholders from Gameco. While the $1.00 offer submitted by Gameco
was deemed to be fair to shareholders by BB&T Capital Markets, the Special
Committee determined it would nonetheless be in the shareholders' best interest
to probe the willingness of Gameco to increase its offering price.
On May 7, 2001 and May 10, 2001, the Special Committee, at its request,
met with its legal and financial advisors to discuss the status of negotiations
with Gameco regarding the merger agreement and to review BB&T Capital Markets'
views on and analysis of the fairness of the offer from a financial point of
view.
On May 10, 2001, BB&T Capital Markets delivered to the Special Committee
its draft written opinion stating that as of that date and based on the
assumptions made, matters considered and the limitations on the review
undertaken as described in the draft written opinion and related analysis, the
$1.00 per share merger consideration was fair from a financial point of view to
the unaffiliated shareholders of Colonial. BB&T Capital Markets' views as
presented to the Special Committee were substantially the same as described on
pages ___ to ___ in "Special Factors - Opinion of Financial Advisor." During
these meetings, the Special Committee determined that it would seek to negotiate
an increase in the price per share to be paid by Gameco (in an attempt to secure
the best possible price for shareholders) and would seek to include in the
agreement assurances of Mr. Jacobs to continue his funding of Colonial's
operations at a mutually-acceptable level pending any sales transaction. The
Special Committee also considered the value of Colonial's land and noted that
the approximate current value of Colonial's land that could be obtained in a
market transaction would most likely be substantially less than the $5,000,000
value attributed to the land when it was contributed to Colonial. The Committee
acknowledged, however, that even the greater land value of $5,000,000 would not
be sufficient to repay Colonial's debt, and that in any event, a steep discount
would have to be attributed to prepare the property for any alternative use
because the existing grandstand, barns, and racetracks would have to be removed
or substantially modified.
21
On May 18, 2001, the Special Committee conducted negotiations in a
telephonic conference with Mr. Jacobs regarding the terms of the merger
agreement. At the Committee's request, the issue of an increase in the offering
price was discussed in response to which Mr. Jacobs indicated that the purchase
price Gameco would be willing to pay would not be in excess of $1.10 per share.
In addition, the Special Committee insisted, and Mr. Jacobs agreed, that the
consummation of the merger not be conditioned upon Gameco's raising the debt
financing for the transaction and that Mr. Jacobs would continue to fund the
operations of Colonial in a mutually-acceptable manner (as was ultimately
provided for in the merger agreement pursuant to which Mr. Jacobs agreed to
provide Colonial with up to $1,000,000 in working capital through December 31,
2001).
On May 18, 2001, the Board of Directors also conducted a telephonic meeting
at which the Special Committee advised the Board of Directors of its activities
prior to that date. The Special Committee reviewed the status of negotiations
with Gameco regarding the merger agreement and reported that it had received a
draft fairness opinion from BB&T Capital Markets, although it did not disclose
the content of such opinion.
On May 21, 2000, following earlier discussions with the Special Committee,
Gameco offered to increase the merger consideration to $1.10 per share.
On June 5, 2001, BB&T Capital Markets circulated to the Board of Directors
and Colonial's counsel a revised analysis of a range of valuations for Colonial
and a revised draft of its opinion regarding the fairness, from a financial
point of view, of the offer reflected in the draft merger agreement, including
the increased merger consideration.
On June 6, 2001, BB&T Capital Markets delivered its written opinion and the
Special Committee met on June 7, 2001, to further consider the opportunities and
alternatives available to Colonial, including the possibility of:
. considering a sale at a future date,
. soliciting competing proposals,
. pursuing other restructuring alternatives,
. continuing the status quo,
. liquidating Colonial's assets; and
. accepting Gameco's proposal.
The Special Committee questioned BB&T Capital Markets and Colonial's
management with respect to alternative transactions in an effort to ascertain
whether any new developments or circumstances had recently arisen that could
provide Colonial's shareholders with a more favorable alternative than the offer
made by Gameco.
After considering BB&T Capital Markets' report and discussing the current
status and prospects of Colonial's business, for the reasons set forth below in
"Reasons for the Merger and Recommendation of the Board of Directors - Special
Committee," the Special Committee determined that Gameco's proposal was the best
alternative available to Colonial and its unaffiliated shareholders and that the
merger consideration of $1.10 per share is fair to Colonial's unaffiliated
shareholders. The Special Committee unanimously approved the merger agreement.
The Special Committee recommended that the Board of Directors determine that the
merger is advisable and in the best interests of Colonial and its unaffiliated
shareholders and that the merger consideration is fair to its unaffiliated
shareholders. The Special Committee also recommended that the Board of Directors
adopt and approve the merger
22
agreement, determine to submit the merger agreement to Colonial's shareholders
and recommend that the shareholders vote to approve the merger agreement.
Colonial's Board of Directors met on June 8, 2001. At that meeting, the
Special Committee discussed the report of BB&T Capital Markets and the draft
merger agreement and reviewed its deliberations and considerations prior to that
meeting regarding the proposed merger. These deliberations included, among other
matters, review of the prior financial results of Colonial, review of loan
documents and other key agreements, and the prior sales process conducted by
Colonial, and consideration of alternative uses for the racetrack property. The
Special Committee and its counsel addressed several inquiries from the Board of
Directors concerning aspects of the negotiations and the merger agreement,
including provisions regarding the financing of the merger, termination of the
merger agreement by any party, the scope and applicability of liquidated damages
that would have to be paid in the event of breach, and a covenant regarding a
limitation on the amount of indebtedness that Colonial could incur prior to the
consummation of the merger. Directors inquired about alternative uses of the
racetrack property. The Special Committee reported that its review suggested any
such alternative uses would not produce proceeds sufficient to repay Colonial's
debt. BB&T Capital Markets reviewed its written analysis and opinion with the
Board of Directors and reviewed prices paid in similar transactions. The Board
of Directors also asked BB&T Capital Markets a number of questions regarding its
opinion. Specifically, the Board questioned whether there were any alternative
means of valuing Colonial, whether possible alternative uses of the racetrack
had been adequately considered, and whether any other circumstances had recently
arisen that would relate to the fairness of the consideration being offered. In
particular, the Board of Directors inquired about book value as a means of
valuing Colonial. Colonial's book value as of March 31, 2001, was $4.48 per
share. BB&T Capital Markets noted that Colonial's stock traded at a substantial
discount from book value per share and that accordingly the market had appeared
to discount book value as a relevant means for valuing Colonial. BB&T Capital
Markets also noted that the value of the assets for purposes of calculating book
value represented the historical costs of such assets and not their liquidation
value. Because of the unique purposes for which the assets are used and the
costs of preparing Colonial's property for any alternative revenue-producing
use, BB&T Capital Markets expressed its view that book value was not a
meaningful valuation analysis in this instance. BB&T Capital Markets also noted
that nothing had occurred since BB&T Capital Markets' May 10, 2001 presentation
to cause it to change its view. Considering, among other things, the
recommendation of the Special Committee as more fully discussed below, the Board
of Directors of Colonial, with Mr. Jacobs abstaining in light of his personal
interest in the proposed transaction, determined that the merger and merger
agreement were advisable, fair to and in the best interests of Colonial's
shareholders.
Reasons for the Merger and Recommendation of the Board of Directors
Special Committee
The terms of the merger agreement were reached as the result of arm's-
length negotiations between Colonial, acting through the Special Committee and
its legal counsel and financial advisors, and Gameco and its legal counsel and
financial advisors. In determining that the terms of the merger agreement are
fair to Colonial's shareholders, the Special Committee considered the written
opinion and analysis of BB&T Capital Markets regarding the fairness of the
merger consideration from a financial point of view, recent market prices of
Colonial class A stock, the historical and prospective business of Colonial
including competitive conditions in Colonial's industry, market prices and
financial data of companies engaged in the same or similar businesses, the
benefits expected from the merger, the risks of nonconsummation of the merger,
and the likelihood of alternatives that might be financially more favorable to
Colonial's shareholders. In support of its conclusion to recommend the proposed
transaction, the Special Committee believes that Colonial's current financial
condition may substantially limit and diminish Colonial's future prospects
absent the merger.
23
In further support of its recommendation, the Special Committee believes
that the proposed merger provides an opportunity for the shareholders of
Colonial to receive a substantial premium for their shares over the prices at
which the Colonial class A stock has traded in the recent past. On February 28,
2001, the day preceding the public announcement of Mr. Jacobs' offer, the high
and low per share sales prices for Colonial class A stock were the same,
$0.2344. Prior to February 28, 2001, Colonial class A stock had traded at even
lower values. The Special Committee took into consideration that the
unaffiliated shareholders will not have the opportunity to participate in any
future growth of Colonial following consummation of the merger and that the loss
of such an opportunity would detract from the Committee's determination to
recommend the transaction and conclude that it is fair. The Special Committee
noted in support of its determination, however, that because the merger
consideration is to be paid in cash, following consummation of the merger, the
unaffiliated shareholders will no longer be exposed to the risk that Colonial's
shares may decline in value. The Special Committee also considered and
determined that the potential benefits to be received by Gameco as a result of
the merger did not adversely affect the fairness of the merger to the
unaffiliated shareholders, given the risks associated with a continuing equity
ownership in Colonial.
In approving and recommending the merger, the Special Committee relied on
the opinion of BB&T Capital Markets that the merger consideration is fair to the
unaffiliated shareholders of Colonial from a financial point of view. The
Special Committee considered the analyses presented to it by BB&T Capital
Markets, which are described below in "Opinion of Financial Advisor" in support
of the Committee's determination to recommend the transaction and conclude that
it is fair. The Special Committee adopted as its own the analysis of BB&T
Capital Markets, as reflected in its report, as part of its recommendation of
the transaction.
In assessing the alternative of maintaining the status quo and continuing
current business operations, the Special Committee considered that continuing
Colonial's present operations will result in additional losses that will have to
be funded by incurring additional debt, assuming that Colonial could borrow
additional funds on acceptable terms. Although Colonial had positive operational
cash flow for the last ten quarters before accounting for interest expenses,
depreciation, and amortization, Colonial has experienced losses for 1998, 1999,
2000, and likely 2001 once these matters are accounted for. The Special
Committee also considered that Colonial's only profitable business arrangement
is the management agreement with Jalou L.L.C. and Jalou II to manage truck stops
and related gaming operations in Louisiana. The Special Committee considered
that Colonial could not rely on income from this agreement because Jalou L.L.C.
and Jalou II can terminate the agreement on thirty days' notice. Additionally,
because of Colonial's current cost structure, which is defined by unfavorable
long-term contracts and a static statutory framework for purse contributions and
taxes, the pari-mutuel wagering business of Colonial has historically not
generated sufficient net operating income to cover interest and debt service
payments. Additionally, Colonial has been unable to open racing centers in
densely populated Northern Virginia. Revenues from the four existing racing
centers, all of which are outside of Northern Virginia, are insufficient to
cover all cash and non-cash expenses, taxes, purse contributions, and other
expenditures imposed by Virginia law. The Special Committee considered that the
payments required by these long-term contracts, operational expenses, and taxes
imposed by Virginia law are not likely to change in the foreseeable future. In
support of its recommendation to approve the merger, the Committee determined
that maintaining the status quo was not a viable alternative to be pursued by
Colonial.
In light of Colonial's current financial condition and the analyses of BB&T
Capital Markets, and as further support for its recommendation to approve the
merger, the Special Committee determined that it was highly unlikely that any
potential competing proposals or future sales transactions would be adequate to
satisfy Colonial's existing liabilities and provide any benefit to the
shareholders or a basis for
24
the future viability of Colonial. In making this determination, the Special
Committee considered that in the fall of 1999, Colonial contacted 17 potential
purchasers and delivered a confidential information memorandum to eight
potential purchasers which expressed an interest. Of those solicited, only one
potential buyer made an offer. This offer of $23 million would not have retired
then-existing debt held by Mr. Jacobs and left no proceeds for the shareholders.
The Special Committee also noted that news of the initial offer by Mr. Jacobs
was made public on March 1, 2001, and since that date no other potential buyer
had made an offer or expressed interest in entering into a transaction with
Colonial.
In considering other restructuring alternatives, and as further support for
its recommendation to approve the merger, the Special Committee found that
Colonial's ability to restructure its operations is confined by the costs
associated with long-term contracts to which Colonial is a party and the
parameters of the Virginia Racing Act. Colonial has limited ability to
renegotiate more favorable contract terms with its significant vendors. Also, it
is unlikely that Colonial will be able to direct or control legislative changes
to readjust the current cost structure reflected in current Virginia law or to
remove statutory impediments to expanding the racing center network.
The Special Committee recognized that if the merger agreement is approved,
the Black Hawk merger is approved, and financing for the transactions arranged,
Mr. Jacobs and the Trust, through CD Entertainment, will be repaid $25.7 million
in debt by Colonial that Colonial is otherwise unlikely to be able to repay as
the debt becomes due. The Special Committee concluded that this consideration
did not bear favorably or unfavorably on whether to recommend the merger
proposal.
In considering a liquidation of Colonial's assets and as additional support
for its recommendation to approve the merger, the Special Committee found that
Colonial's outstanding debt exceeded the highest possible amount that could
realistically be realized from all of Colonial's assets. As Colonial's
outstanding indebtedness to Mr. Jacobs and his affiliates would need to be
repaid in full prior to Colonial's shareholders receiving any consideration were
a third party to acquire Colonial, a third party offer (assuming the third party
did not own Colonial class A common stock beforehand) would require
approximately $34.8 million in cash for it to be comparable (from the
perspective of an unaffiliated Colonial shareholder) with the current offer from
Mr. Jacobs and Gameco, Inc. Based upon the due diligence BB&T Capital Markets
conducted in arriving at its opinion, BB&T Capital Markets noted the low
likelihood of a third party offer of approximately $34.8 million for Colonial.
The Special Committee also noted that since news of the initial offer by Mr.
Jacobs was made public on March 1, 2001, no other potential buyer had made an
offer or expressed interest in making an offer.
BB&T Capital Markets presented the Special Committee with several valuation
analyses which estimated the present value of Colonial class A stock. The
comparable public company analysis and comparable transactions analysis
favorably affected the Special Committee's fairness determination, based on BB&T
Capital Markets' determination that the implied equity per share was negative
based on Colonial's negative EBIT, operating loss for the most recent trailing
12-month period, and large amount of debt. The premiums paid analysis indicated
that the premium price of the offer was approximately three times the average
premium received in 65 other acquisitions of public companies with enterprise
values less than $50 million within the past 12 months. These separate analyses
(and others discussed under Opinion of the Financial Advisor to the Special
Committee) considered as a whole demonstrated to the Special Committee the
fairness and attractiveness of the merger consideration and provided additional
support for the Committee's recommendation of the merger.
In light of the risks associated with continuing the status quo and the
unavailability of feasible alternatives, the Special Committee concluded that
Mr. Jacobs' proposal represented the best available alternative for Colonial's
shareholders. The Special Committee believes that the procedure that was
followed in establishing the merger consideration to be paid to the shareholders
of Colonial was fair to the
25
unaffiliated shareholders. With the assistance of BB&T Capital Markets and legal
counsel, the Special Committee evaluated Gameco's proposal and determined that
it was fair to the shareholders. The Special Committee believes that the
procedure that was followed in determining the merger consideration is fair to
the unaffiliated shareholders. The relevant analyses, including the related
assumptions, considered by the Special Committee are described below in "Opinion
of Financial Advisor."
The foregoing discussion of the information and factors discussed by the
Special Committee is not meant to be exhaustive, but included the material
factors considered by the Special Committee to support its decision to recommend
the approval of the merger agreement and to determine that the transactions
contemplated thereby are in the best interests of Colonial and fair to
Colonial's unaffiliated shareholders. The Special Committee did not assign
relative weights or other quantifiable values to the above factors; rather, the
Special Committee viewed its position and recommendations as being based on the
totality of the information presented to and considered by the members, and that
on balance, the positive factors considered by the Special Committee outweighed
the negative factors that it considered.
The Special Committee also believes the process it followed in approving
the merger was procedurally fair because:
. the Special Committee consists entirely of directors who are not Colonial's
officers or controlling shareholders or their family members;
. the members of Special Committee will not personally benefit from the
consummation of the merger, other than in their capacity as holders of
Colonial common stock;
. the Special Committee retained independent legal and financial advisors to
assist it in its evaluation of the options available to Colonial; and
. the Special Committee negotiated with Gameco on an arm's-length basis and
with the assistance of its advisors.
The Board of Directors
The Board of Directors considered the factors considered by the Special
Committee as described above and considered the Special Committee's process and
actions in arriving at its recommendation to the Board of Directors. In reaching
its determination, the Board of Directors considered all material factors
favorable to supporting the merger proposal and those unfavorable to supporting
the proposal. Such favorable factors included the Special Committee's
conclusions, recommendations, unanimous approval of the merger agreement, and
BB&T Capital Markets' analysis and opinion to the Special Committee that, as of
the date of such opinion, based upon and subject to various considerations,
assumptions and limitations stated therein, the $1.10 per share to be received
by Colonial's unaffiliated shareholders in the merger is fair to the
unaffiliated shareholders from a financial point of view. Such unfavorable
factors included the difference between the book value per share of $4.48 as of
March 31, 2001 compared to the $1.10 office price. See "Opinion of Financial
Advisor to the Special Committee."
The Board of Directors also noted the Special Committee's analysis of the
book value per share ($4.48 per share as of March 31, 2001) compared to the
offer price of $1.10 per share. The Board concurred in the Committee's
determination that the offer price was superior to the liquidation value of
Colonial's assets. Although the book value per share of Colonial's stock
exceeded the offer price, the Board concurred with BB&T Capital Markets' and the
Special Committee's assessment that the book value of the assets was highly
unlikely to be realized in any sale of the assets. The Directors noted the May
2000 offer of $23 million for the assets and the steep discount at which the
stock trades compared to book value. Further, the Board noted that in any event
a steep discount would have to be attributed to the property for any alternative
use because the existing grandstand, barns, and racetrack would have to be
removed or substantially modified. The Board agreed that the book value of the
assets more accurately
26
reflected historical costs rather than amounts to be realized in liquidation. In
making its recommendation of approval of the merger agreement, the Board of
Directors adopted as its own the analysis presented by the Special Committee
and, in turn, the analysis of BB&T Capital Markets as reflected in its report.
The Board of Directors believes that sufficient procedural safeguards to
ensure the fairness of the transaction and to permit the Special Committee to
effectively represent the interests of Colonial's unaffiliated shareholders were
present, and therefore there was no need to retain any additional unaffiliated
representative to act on behalf of the Colonial unaffiliated shareholders or to
require the approval of at least more than two-thirds of the unaffiliated
shareholders. The Board of Directors appointed Arnold W. Stansley, one of
Colonial's directors and second largest shareholder, to the Special Committee.
Mr. Stansley has held his investment in Colonial for a number of years and his
Colonial investment is only a part of his various business holdings. The Board
of Directors believes that Mr. Stansley's interests are similar, if not
identical, to unaffiliated Colonial shareholders and that his services on the
Special Committee are important to those shareholders. The Board of Directors
reached the conclusion that procedural safeguards existed in view of:
. the independent status of the members of the Special Committee, whose
sole purpose was to represent the interests of Colonial's unaffiliated
shareholders,
. retention by the Special Committee of independent financial advisors and
legal counsel,
. the actions taken by the Special Committee in evaluating Colonial's
other alternatives and in negotiating the price and terms of the
proposed merger with Mr. Jacobs and his representatives,
. that the Special Committee is a mechanism well recognized under
corporate law and practice to provide for fairness in transactions of
this type, and
. that the holders of more than one-half (50%) of the shares of class A
stock not beneficially owned by Mr. Jacobs must vote in favor of the
merger proposal in order for it to be approved.
Neither Colonial nor Gameco have made any provision to grant unaffiliated
shareholders access to their corporate files or to obtain counsel or appraisal
services at their expenses.
Position of Gameco, Gameco Acquisition, CD Entertainment Ltd., Jeffrey P.
Jacobs, Richard E. Jacobs, and the Trust as to Fairness of the Merger
The SEC's rules require each of Gameco, Gameco Acquisition, CD
Entertainment Ltd., Jeffrey P. Jacobs, Richard E. Jacobs, and the Trust to state
whether it or he believes the proposed merger is fair or unfair to Colonial's
unaffiliated shareholders, to indicate the extent, if any, to which that belief
is based on various factors enumerated in the rules, and to specify, to the
extent practicable, the weight assigned to each such factor.
Each of Gameco, Gameco Acquisition, CD Entertainment Ltd., Jeffrey P.
Jacobs, Richard E. Jacobs, and the Trust believes that the proposed merger is
fair to Colonial's unaffiliated shareholders based on the factors set forth
below, without having quantified or otherwise assigned relative weights to those
factors:
. The $1.10 per share merger consideration represents a premium of:
. 369% over the closing price of Colonial's common stock on the day
before the public announcement of Gameco's proposal to acquire the
entire equity interest in Colonial;
. 92.9% over the average closing price of Colonial's common stock on
the OTC Bulletin Board during the 12 months ending on the date of
that announcement;
27
. BB&T Capital Markets, which is skilled and experienced in rendering
fairness opinions, has rendered its opinion that, based on the analyses
of that firm as described in this proxy statement and subject to the
assumptions and limitations of its conclusions and analyses as set forth
in its opinion, the $1.10 per share merger consideration is fair, from a
financial point of view, to Colonial's unaffiliated shareholders;
. Colonial's Board of Directors took effective steps to ensure the
procedural fairness of the merger, including the formation of an
independent Special Committee to consider Colonial's alternatives and
negotiate solely on behalf of Colonial's unaffiliated shareholders the
price and terms of any transaction, the Special Committee's retention of
independent legal and financial advisors, and the Special Committee's
and its advisors' negotiations with Gameco and its advisors of the price
and terms of the merger; and
. The Special Committee and the Board of Directors have unanimously
determined the merger to be advisable and in the best interests of
Colonial and fair to its unaffiliated shareholders (with abstention from
the Board's action only by Jeffrey P. Jacobs, in light of his personal
interests in the matter).
None of Gameco, Gameco Acquisition, CD Entertainment, Jeffrey P. Jacobs,
Richard E. Jacobs, and the Trust considered Colonial's liquidation value as a
factor material to its or his evaluation of the fairness of the merger proposal
to Colonial's unaffiliated shareholders because none of them believed that the
sale of Colonial's assets in liquidation would produce net proceeds as high as
Colonial's going-concern value.
Gameco, Gameco Acquisition, CD Entertainment Ltd., Jeffrey P. Jacobs,
Richard E. Jacobs, and the Trust make no recommendation as to how Colonial's
unaffiliated shareholders should vote on the merger. Because of Jeffrey P.
Jacobs' ownership interest in Gameco, Mr. Jacobs has interests in connection
with the merger that are in addition to and conflict with the interests of
Colonial and its unaffiliated shareholders. For example, as 50.0% owner of
Gameco, Mr. Jacobs has an interest in obtaining the lowest possible purchase
price per share for the Colonial class A stock and class B stock, while
Colonial's unaffiliated shareholders are interested in receiving the highest
price. See, "Special Factors -- Interests of Certain Shareholders and Directors
in the Merger."
Gameco's purpose in undertaking the merger is to obtain the benefits to
Gameco and Colonial described under "Benefits and Detriments of the Merger -- To
Gameco and Colonial." In addition, Gameco and its affiliates believe that
consolidating all of the Black Hawk, Colonial, and Jalou L.L.C. operations in
Gameco will create a diversity and financial base of gaming holdings that should
facilitate financing for the competitive improvement and continued expansion of
all of Gameco's gaming operations. Gameco chose the merger structure because it
was the most efficient means to acquire the entire equity interest in Colonial
and provide cash to Colonial's shareholders. Gameco and its affiliates chose to
undertake the merger at the time they proposed it to Colonial's Board of
Directors because of the availability of debt financing for the transaction at
the time of the merger proposal.
Mr. Jacobs also considered a tender offer by Colonial for its own common
stock and a purchase of large blocks of Colonial class A stock held by other
shareholders, but rejected those alternatives in part because of the
difficulties attendant to obtaining financing for those transactions and in part
because neither of those alternatives would accomplish the purposes of giving
Mr. Jacobs and the Trust beneficial ownership of Colonial.
Mr. Jacobs chose to undertake the merger at this time because of his desire
to take advantage of the benefits referred to above, his belief that Colonial's
assets and trading price were undervalued prior to the announcement of the
merger proposal, his knowledge of the gaming industry and of Colonial's
competitive needs and opportunities, and the availability of debt financing at
the time of the merger proposal. Additionally, Mr. Jacobs
28
believes that Colonial is unable to attract an outside unrelated buyer to
purchase Colonial at any price comparable to the $1.10 per share offer price.
This belief is based on the fact that, approximately 18 months ago, Colonial
tried to attract an outside unrelated buyer and was unsuccessful. Further, the
proposed merger was announced publicly on March 1, 2001 and no other prospective
purchaser has made an offer to acquire Colonial. Mr. Jacobs, therefore, believes
that the likelihood is small that such a buyer will express interest in
purchasing Colonial at any time in the near future. Mr. Jacobs also believes
that Colonial's ability to generate revenues has plateaued, and that without
changes in the capital structure of Colonial, it will continue to lose between
$1 million and $2 million a year for the foreseeable future. In light of these
circumstances, Colonial is unable to attract capital to expand its operations or
implement actions necessary to become profitable. Additionally, Colonial's
publicly traded stock has traded as low as $0.11 and had an average closing
price of approximately $.57 per share for the last 12 months prior to the
announcement of the proposed merger. The depressed share price has exacerbated
Colonial's inability to attract capital. Finally, the timing of the proposed
merger allows Mr. Jacobs the opportunity to consolidate his various gaming
assets, including a minority interest in Black Hawk and the Jalou, L.L.C. and
Jalou II Louisiana gaming assets.
Benefits and Detriments of the Merger
To Colonial's Unaffiliated Shareholders
Colonial and Gameco believe that the primary benefit of the merger to
Colonial's unaffiliated shareholders is the realization of the value of their
investment in Colonial in cash at a price that represents a substantial premium
over prevailing market prices for the Colonial class A common stock prior to the
announcement of Mr. Jacobs' offer. In addition, the merger will eliminate the
risk to those shareholders of a possible future decline in the market value of
Colonial's class A common stock.
The primary detriment of the merger to Colonial's unaffiliated shareholders
is that they will cease to participate in any possible future earnings growth of
Colonial and will not benefit from any possible increase in Colonial's value. In
addition, each of Colonial's unaffiliated shareholders will recognize a taxable
gain on consummation of the merger if and to the extent that the amount of cash
received in the merger exceeds the shareholder's tax basis in the shareholder's
Colonial common stock.
If the merger does not occur, Colonial will be obligated to pay various
fees and expenses associated with the merger. The $400,000 break-up fee, if
payable to Colonial, may not fully compensate Colonial for such expenses and the
diversion of management time expended in the merger effort.
To Gameco and Colonial
The primary benefit to Gameco of the merger is that it will participate in
all of any future earnings growth of Colonial and will benefit from all of any
increase in Colonial's value. Mr. Jacobs and Gameco believe that Colonial will
benefit from the merger by gaining more operating flexibility because it will no
longer need to focus on the public trading market's expectations and will reduce
its operating and administrative costs as a result of the elimination of its
public reporting obligations.
Mr. Jacobs and the Trust also may benefit from the possible repayment of
Colonial's debt to CD Entertainment, an affiliate of Mr. Jacobs and the Trust,
if the merger agreement is approved, the Black Hawk merger agreement is approved
and Gameco is successful with its debt financing arrangements. As part of those
financing arrangements, Gameco will borrow funds from a third party and
Colonial's indebtedness to CD Entertainment will be repaid. CD Entertainment is
beneficially owned by Jeffrey P. Jacobs and the Trust. In effect, Mr. Jacobs and
the Trust will be repaid Colonial's indebtedness that
29
Colonial is unlikely to be able to pay when it matures June 30, 2005 if the
merger proposal is not approved.
The primary detriments of the merger to Gameco and Colonial are the cash
outlay to pay the merger consideration and diminution of Colonial's possible
future ability to use Colonial common stock as currency for acquisitions,
substantial capital-raising efforts and incentive option purposes.
Other Effects of the Merger
Colonial's class A common stock is currently registered under the Exchange
Act, and is traded on the OTC Bulletin Board. As a result of the merger, the
registration of the class A common stock under the Exchange Act will be
terminated, and the class A common stock will be delisted from the OTC Bulletin
Board. Colonial will thereafter be relieved of its obligation to comply with the
proxy rules of Regulation 14A, under Section 14 of the Exchange Act, and its
officers, directors and beneficial owners of more than 10% of the common stock
will be relieved of the reporting requirements and "short swing" trading
provisions under Section 16 of the Exchange Act. Further, Colonial will no
longer be subject to periodic reporting requirements under Section 13 of the
Exchange Act and will cease filing information with the SEC.
Opinion of Financial Advisor
On May 10, 2001, BB&T Capital Markets delivered its draft written opinion
to the Special Committee. On June 6, 2001, BB&T Capital Markets delivered its
written opinion. As of such dates, and based upon the procedures and subject to
the assumptions and qualifications described to the Special Committee and
included in the written opinion of BB&T Capital Markets, BB&T Capital Markets
concluded that the merger consideration is fair from a financial point of view
to Colonial's shareholders.
The full text of BB&T Capital Markets' written opinion dated as of June 6,
2001, sets forth, among other things, the assumptions made, matters considered,
and scope and limitations on the review undertaken (and is attached as
Attachment II hereto and is incorporated herein by reference). Shareholders are
urged to read BB&T Capital Markets' opinion carefully and in its entirety. This
section discusses the material aspects of the financial analyses set forth in
the BB&T Capital markets' opinion.
BB&T Capital Markets' opinion was prepared for the use of the Special
Committee in connection with its consideration of the merger and does not
constitute a recommendation to the shareholders as to how they should vote at
the special meeting. In addition, BB&T Capital Markets' opinion addresses only
the financial fairness of the merger consideration and does not address the
relative merits of the merger or any alternatives, the underlying decision of
the Special Committee and the Board of Directors to adopt and recommend the
merger or any other aspect of the merger. The summary of the material aspects of
BB&T Capital Markets' opinion set forth below should be read together with the
full text of the opinion.
In arriving at its opinion, BB&T Capital Markets:
. reviewed publicly available financial statements and other information
of Colonial;
. reviewed historical internal financial statements and other financial
and operating data concerning Colonial prepared by the management of
Colonial;
. analyzed and discussed with senior management financial projections
prepared by the senior management of Colonial;
. discussed with senior management the past and current operations and
financial condition and the prospects of Colonial;
30
. reviewed the historical prices and trading activity for the Colonial
class A stock;
. compared the financial performance of Colonial and the prices and
trading activity of the Colonial class A stock with that of other
comparable publicly-traded companies and their securities ;
. reviewed the financial terms, to the extent publicly available, of
comparable acquisitions;
. considered and compared the premium to be paid in the merger to the
premiums paid in similar sized transactions;
. considered the capitalization, liquidity, and financial condition of
Colonial;
. prepared a discounted cash flow analysis based on senior management's
financial projections;
. reviewed the merger agreement and related documents; and
. performed such other analyses and considered such other factors as
BB&T Capital Markets deemed appropriate.
In particular, BB&T Capital Markets discussed with senior management
Colonial's dependence on loans and guarantees made by its principal shareholder,
Mr. Jacobs. It noted that Colonial had no other practical source of working
capital. BB&T Capital Markets noted that, as of March 31, 2001, Colonial's
outstanding indebtedness to Mr. Jacobs and his affiliates was approximately
$25.7 million. As Colonial's outstanding indebtedness to Mr. Jacobs and his
affiliates would need to be repaid in full prior to Colonial's shareholders
receiving any consideration were a third party to acquire Colonial, a third
party offer (assuming the third party did not own Colonial class A common stock
beforehand) would require approximately $34.8 million in cash for it to be
comparable (from the perspective of an unaffiliated Colonial shareholder) with
the current offer from Mr. Jacobs and Gameco, Inc. Based upon the due diligence
BB&T Capital Markets conducted in arriving at its opinion, BB&T Capital Markets
noted the low likelihood of a third party offer of approximately $34.8 million
for Colonial.
In rendering its opinion, BB&T Capital Markets assumed and relied upon,
without independent verification, the accuracy and completeness of all
information reviewed by it for the purpose of rendering its opinion. BB&T
Capital Markets assumed that the financial projections were reasonably prepared
on bases reflecting the best currently available estimates and judgments of the
future financial performance of Colonial and that such forecasts would be
realized in the amounts and at the times contemplated. In addition, BB&T Capital
Markets assumed that the merger would be consummated on the terms set forth in
the merger agreement and that, in the course of obtaining regulatory and third
party consents for the merger, no restriction would be imposed that would have a
material adverse effect on the future results of operations or financial
condition of Colonial. BB&T Capital Markets did not make any independent
valuation or appraisal of the assets or liabilities of Colonial, nor was BB&T
Capital Markets furnished with any such appraisals. BB&T Capital Markets'
opinion was necessarily based on economic, market and other conditions as in
effect on, and the information made available to BB&T Capital Markets as of the
date of BB&T Capital Markets' opinion.
In arriving at its opinion, BB&T Capital Markets was not authorized to
solicit, and did not solicit, indications of interest from any party, nor did it
have discussions with any party other than Colonial with respect to the
acquisition of Colonial or any of its assets. Furthermore, BB&T Capital Markets
was not authorized to negotiate the terms of the transaction and has based its
opinion solely on the terms of the merger agreement as negotiated by the parties
thereto. BB&T Capital Markets did not determine or recommend the type or amount
of the consideration to be paid to the Colonial shareholders.
Below is a summary of the material analyses performed by BB&T Capital
Markets and reviewed with the Special Committee on May 10, 2001 and updated on
June 7, 2001 in connection with the preparation of BB&T Capital Markets' opinion
and with its presentation to the Special Committee on those dates.
31
Comparable Public Companies Analysis
As part of its analysis, BB&T Capital Markets compared financial
information of Colonial with corresponding publicly available information for a
group of five publicly-traded horseracing and gaming companies that BB&T Capital
Markets considered most comparable to Colonial (which were Canterbury Park
Holding Corp., Churchill Downs Inc., Magna Entertainment Corp., MTR Gaming Group
Inc., and Penn National Gaming Inc.). These companies are referred to below as
the comparable companies.
BB&T Capital Markets analyzed the relative performance of Colonial by
comparing market trading statistics for Colonial with those of the comparable
companies. The market trading information used in ratios provided below is as of
June 1, 2001. The market trading information used in the valuation analysis was:
. market value (market capitalization) to trailing 12 months net income;
. market value (market capitalization) to current book value;
. enterprise value to trailing 12 months revenue, or the ratio of
enterprise value, which is stock market equity value plus debt and
preferred stock minus cash and marketable securities, to revenues for
the latest 12 months. Equity based ratios such as the market value/net
income ratio can be affected by the amount of a company's leverage or
borrowings. This enterprise value to revenue ratio is a measurement of
performance before the effects of leverage and shows the enterprise
value for each dollar generated in revenues;
. enterprise value to trailing 12 months EBITDA, which is a ratio that
represents a multiple of the cash flow generated by a company. EBITDA
means earnings before interest, taxes, depreciation, and amortization.
The magnitude of this ratio reflects a variety of company-specific
factors, including historical and projected growth rates,
predictability of earnings, size, trading liquidity, and research
sponsorship; and
. enterprise value to trailing 12 months EBIT, which is a ratio that
represents a multiple of the operating income generated by a company.
The difference between EBITDA and EBIT is that EBIT does not reflect
an add-back for depreciation and amortization.
An analysis of the multiples for the comparable companies yielded:
Comparable Companies Analysis
-----------------------------
Colonial
Median Value Range of Values Transaction
------------ --------------- -----------
Net Income....................... 18.9x 16.0x to 48.7x ---
Book Value....................... 2.5x 1.0x to 5.2x 0.3x
Revenue.......................... 1.5x 0.6x to 2.3x 1.2x
EBITDA........................... 9.1x 6.7x to 13.3x 22.8x
EBIT............................. 13.0x 9.4x to 26.8x ---
BB&T Capital Markets applied a 10.0% discount to the implied equity
per share values for Colonial derived from the comparable companies analysis to
adjust for the fact that the market for the stock of Colonial class A stock is
not as liquid as the market for the stock of the comparable companies. In
addition, BB&T Capital Markets applied a 35.0% control premium to the implied
equity per share values for Colonial derived from the comparable companies
analysis to account for the fact that the derived trading multiples for the
comparable companies represent a minority interest while the derived
32
multiples for the Colonial transaction represent a 100.0% interest. These
adjustments should be viewed only as approximations reflecting BB&T Capital
Markets' qualitative judgment and experience as to the significance of these
variances between Colonial and the comparable companies and not as definitive
indications of relative value. Furthermore, BB&T Capital Markets noted that the
comparable companies were larger in many respects and generally in better
financial condition and more profitable than Colonial. For example, the median
revenue for the latest 12-month period of the comparable companies was
approximately 10 times larger than the revenue of Colonial for the latest 12-
month period while the median EBITDA for the latest 12-month period of the
comparable companies was approximately 25 times larger than the EBITDA of
Colonial for the latest 12-month period. In addition, the median compound annual
growth rate in revenue for the past two years for the comparable companies was
approximately 50%, whereas Colonial's revenue decreased at a compound annual
growth rate of -0.4% over the same time period. With regard to financial
condition, the comparable companies had a median net debt to latest 12-month
EBITDA ratio of approximately 1.6 times, whereas Colonial had a net debt to
latest 12-month EBITDA ratio of approximately 17.5 times. As a result, BB&T
Capital Markets placed relatively less emphasis on the quantitative results of
this analysis.
As it pertains to the comparable companies analysis, BB&T Capital Markets
determined that the implied equity per share values for Colonial were as
follows:
. as a result of Colonial's net loss for the trailing 12-month period
ended March 31, 2001, applying these multiples to Colonial's results
indicates that the merger consideration exceeds the implied equity per
share value under this valuation measurement;
. by applying these multiples to Colonial's book value as of March 31,
2001, Colonial's equity value ranged from $5.11 per share to $27.53
per share with a median equity value of $13.23 per share;
. by applying these multiples to Colonial's trailing 12 months revenue
as of March 31, 2001 and subtracting net debt, Colonial's equity value
ranged from ($0.79) per share to $6.72 per share, with a median equity
value of $2.94 per share;
. by applying these multiples to Colonial's trailing 12 months EBITDA as
of March 31, 2001 and subtracting net debt, Colonial's equity value
ranged from ($1.58) per share to ($0.61) per share with a median
equity value of ($1.23);
. as a result of Colonial's negative EBIT for the trailing 12 months as
of March 31, 2001, applying these multiples to Colonial's results
indicates that the merger consideration exceeds the implied equity per
share value under this valuation measurement.
When the multiples of the current transaction are compared to the
comparable companies analysis, the revenue and book value multiples are below
that of the comparables, while the EBITDA multiple exceeds that of the
comparables. As Colonial's trailing 12 months net income and EBIT are negative,
they did not provide precise valuation measurements that could be compared to
the comparable companies analysis; however, they indicate that the merger
consideration exceeds the implied equity per share values under these valuation
measurements. Accordingly, the results of the comparable companies analysis
supports BB&T Capital Markets' conclusion that the merger consideration is fair
from a financial point of view to Colonial's shareholders.
Comparable Transactions Analysis
Using publicly available information, BB&T Capital Markets analyzed
transactions involving horseracing and gaming companies since 1996.
The selected transactions used in this analysis were (acquiror/acquiree):
33
Magna Entertainment Corp./Ladbroke Racing Corp.,
Magna Entertainment Corp./Bay Meadows Operating Co.,
Churchill Downs, Inc./Arlington International Racecourse,
Magna Entertainment Corp./Ladbroke Land Holdings and Pacific Racing
Association,
Magna Entertainment Corp./Thistledown Inc.,
Magna Entertainment Corp./Remington Park Inc.,
Churchill Downs Inc./Hollywood Park Racetrack & Casino,
Magna Entertainment Corp./Gulfstream Park Racetrack,
Churchill Downs Inc./Tropical Park Inc. and Calder Race Course,
Penn National Gaming and Greenwood/Garden State Racetrack and Freehold
Raceway,
Magna Entertainment Corp./Santa Anita Park and Los Angeles Turf Club,
Churchill Downs Inc./Racing Corporation of America,
Penn National Gaming Inc./ Charles Town Racetrack, and
Penn National Gaming/ Pocono Downs Racetrack.
BB&T Capital Markets compared the relative performance of Colonial to
certain transaction multiples implied in the comparable transactions. In each
comparable transaction BB&T Capital Markets calculated for the target company:
. market value as a multiple of trailing 12 months net income;
. market value as a multiple of current book value;
. enterprise value as a multiple of trailing 12 months revenue;
. enterprise value as a multiple of trailing 12 months EBITDA; and
. enterprise value as a multiple of trailing 12 months EBIT.
This analysis yielded:
Comparable Transactions Analysis
--------------------------------
Colonial
Median Value Range of Values Transaction
------------ --------------- -----------
Net Income.................. 20.2x 2.3x to 72.5x ---
Book Value.................. 1.6x 0.8x to 18.9x 0.3x
Revenue..................... 1.2x 0.7x to 3.8x 1.2x
EBITDA...................... 6.8x 3.3x to 16.4x 22.8x
EBIT........................ 10.8x 3.9x to 34.8x ---
As it pertains to the comparable transactions analysis, BB&T Capital
Markets noted that the market conditions, rationales for and circumstances
surrounding each transaction were unique and that the comparable target
companies were generally in better financial condition and more profitable than
Colonial. For example, the median EBITDA for the latest 12-month period of the
comparable target companies was approximately four times larger than the EBITDA
of Colonial for the latest 12-month period. As a result, BB&T Capital Markets
placed relatively less emphasis on the quantitative results of this analysis
than the premiums paid analysis and discounted cash flow analysis described in
this proxy statement.
As it pertains to the comparable transaction analysis, BB&T Capital
Markets determined the implied median equity per share valuations were as
follows:
34
. as a result of Colonial's net loss for the trailing 12 months ended
March 31, 2001, applying these multiples to Colonial's results indicates
that the merger consideration exceeds the implied equity per share value
under this valuation measurement;
. by applying these multiples to Colonial's book value as of March 31,
2001, Colonial's equity value ranged from $3.60 per share to $82.85 per
share with a median equity value of $6.87 per share;
. by applying these multiples to Colonial's revenue for the 12 months
ended March 31, 2001 and subtracting net debt, Colonial's equity value
ranged from ($0.74) per share to $11.63 per share, with a median equity
value of $1.33 per share;
. by applying these multiples to Colonial's EBITDA for the 12 months ended
March 31, 2001 and subtracting net debt, Colonial's equity value ranged
from ($2.91) per share to ($0.22) per share with a median equity value
of ($2.19);
. as a result of Colonial's negative EBIT for the trailing 12 months ended
March 31, 2001, applying these multiples to Colonial's results indicates
that the merger consideration exceeds the implied equity per share value
under this valuation measurement.
When the multiples of the current transaction are compared to the
comparable transactions analysis, the book value multiple is below that of the
comparable companies, the revenue multiple is similar to that of the comparable
companies, and the EBITDA multiple exceeds that of the comparable companies. As
Colonial's trailing 12 months net income and EBIT are negative, they did not
provide precise valuation measurements that could be compared to the comparable
companies analysis; however, they indicate the merger consideration exceeds the
implied equity per share values under these valuation measurements. Accordingly,
the results of the comparable transactions analysis supports BB&T Capital
Markets' conclusion that the merger consideration is fair from a financial point
of view to Colonial's shareholders.
Premiums Paid Analysis
BB&T Capital Markets reviewed purchase price premiums paid for the stock of
publicly traded companies in transactions valued at $50.0 million and less for
the 12 months ended May 10, 2001. In this analysis, BB&T Capital Markets
measured the median purchase price premiums paid by acquirors over the
prevailing stock market prices of acquirees one day, five days, and thirty days
prior to the announcement of the transactions. These premiums were applied to
the prices of Colonial class A shares for the same periods, resulting in an
implied value for Colonial class A shares.
The premiums analysis resulted in:
Premiums Paid Analysis
----------------------
Median Value
------------
One day prior............................................ 37.7%
Five days prior.......................................... 45.9%
Thirty days prior........................................ 59.3%
. one day prior to the announcement of an offer, the median premium was
37.7%; applying this premium to Colonial resulted in an implied equity
value of $0.32 per share;
. five days prior to the announcement of an offer, the median premium was
45.9%; applying this premium to Colonial resulted in an implied equity
value of $0.34 per share; and
35
. 30 days prior to the announcement of an offer, the median premium was
59.3%; applying this premium to Colonial resulted in an implied equity
value of $0.37 per share.
The premium of the offer of $1.10 per share to Colonial shareholders was:
. 369% one day prior to the announcement of the initial offer;
. 369% five days prior to the announcement of the initial offer; and
. 369% 30 days prior to the announcement of the initial offer.
The results of the premiums paid analysis supports BB&T Capital Markets'
conclusion that the merger consideration is fair from a financial point of view
to Colonial's shareholders.
No company or transaction used in the comparable company analysis, the
comparable transactions analysis, or the premiums paid analysis as a comparison
is identical to Colonial or the merger. Accordingly, an analysis of the results
of the foregoing is not mathematical; rather, it involves complex considerations
and judgments concerning differences in financial and operating characteristics
of the companies and other factors that could affect the public trading value of
the companies and transactions to which Colonial and the merger are being
compared.
Discounted Cash Flow Analysis
BB&T Capital Markets performed a discounted cash flow analysis based on
financial projections provided to BB&T Capital Markets by Colonial senior
management.
The discounted cash flow analysis is based on the projected future
unlevered free cash flows of Colonial, after taking into consideration capital
expenditures and working capital requirements. These cash flows are discounted
back to a present value at an appropriate rate and are added to a terminal
value, which is determined by applying an earnings multiplier to Colonial's
projected EBITDA in the fifth year and discounting that value back to the
present. The discounted cash flow analysis yielded an equity value range of
$0.14 per share to $0.76 per share with a median equity value of $0.44 per share
utilizing a range of discount rates and an equity value range of ($0.15) per
share to $1.02 per share with a median equity value of $0.44 per share utilizing
a range of terminal multiples. Accordingly, the results of the discounted cash
flow analysis supports BB&T Capital Markets' conclusion that the merger
consideration is fair from a financial point of view to Colonial's
shareholders.
Other Information
BB&T Capital Markets reviewed Colonial's book value per share of $4.48 as
of March 31, 2001 and noted that the components of book value include historical
costs of assets but do not necessarily reflect actual values. The trading
prices of Colonial class A stock indicate that the public markets may have
significantly discounted the book value per share of the class A stock.
Further, based on BB&T Capital Markets' assessment of all factors and Colonial's
prior sales efforts, BB&T Capital Markets concluded that book value was not an
accurate reflection of the actual value of Colonial's assets.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Each
analysis was performed to provide a different perspective of the transaction and
to contribute to the total mix of information available. In arriving at its
opinion, BB&T Capital Markets considered the results of all its analyses as a
whole and did not attribute any particular weight to any analysis or factor
considered by it, except that BB&T Capital Markets placed relatively less
emphasis on the quantitative results of the comparable companies and comparable
36
transactions analyses as described above as compared to the premiums paid
analysis and discounted cash flow analysis. BB&T Capital Markets believes that
selecting any portion of BB&T Capital Markets' analysis, without considering all
analyses, would create an incomplete view of the process underlying its opinion.
In addition, BB&T Capital Markets may have deemed various assumptions more or
less probable than other assumptions, so that the ranges of valuations resulting
from any particular analysis described above should not be taken to be BB&T
Capital Markets' view of the actual value of Colonial.
In performing its analyses, BB&T Capital Markets made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of Colonial.
The analyses performed by BB&T Capital Markets are not necessarily indicative of
actual value, which may be significantly more or less favorable than suggested
by such analyses. Such analyses were performed solely as part of BB&T Capital
Markets' analysis of whether the consideration to be received by Colonial
shareholders pursuant to the merger agreement is fair from a financial point of
view to such shareholders, and were conducted in connection with the delivery of
BB&T Capital Markets' opinion. The analyses do not purport to be appraisals or
to reflect the prices at which Colonial or its assets might actually be sold.
Accordingly, the results of these analyses are subject to substantial
uncertainty.
As described above, BB&T Capital Markets' opinion provided to the Special
Committee was one of a number of factors taken into consideration by the Special
Committee in making its determination to recommend adoption of the merger
agreement and the transactions resulting from it. Consequently, BB&T Capital
Markets' analyses described above should not be viewed as determinative of the
opinion of the Special Committee or the Board of Directors' view of Colonial's
management with respect to the value of Colonial. The consideration to be
received by the Colonial shareholders pursuant to the merger agreement was
determined through negotiations between Colonial and Gameco and was approved by
the Special Committee as well as the entire Board of Directors with Mr. Jacobs
abstaining.
BB&T Capital Markets was selected by the Special Committee to render a
fairness opinion in connection with the merger because of BB&T Capital Markets'
reputation and expertise as an investment banking firm. BB&T Capital Markets, as
part of its investment banking business, is regularly engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
underwritings of equities, private placements and valuations for estate,
corporate and other purposes. In the ordinary course of its business, BB&T
Capital Markets may actively trade the equity securities of Colonial for its own
account and for the accounts of customers and, accordingly, may at any time hold
a long or short term position in such securities.
In accordance with its engagement letter, the opinion of BB&T Capital
Markets is addressed solely to the Special Committee for its use in connection
with its review and evaluation of the merger and does not constitute a
recommendation to Colonial shareholders as to how they should vote at the
special meeting in connection with the merger. The opinion may not be used for
any other purpose without BB&T Capital Markets' prior written consent; however,
BB&T Capital Markets has consented to the inclusion of its opinion as an
attachment to this proxy statement. Accordingly, under the terms of the
engagement letter and the opinion letter prepared pursuant to the engagement
letter, no Colonial shareholder may rely or allege any reliance on BB&T Capital
Markets' opinion or analysis in connection with the shareholder's consideration
of the merits of the merger or otherwise but should look to the analysis engaged
in by the Special Committee and Board of Directors. It is BB&T Capital Markets'
position that its duties in connection with its fairness opinion are solely to
the Special Committee, and that it has no legal responsibility to any other
persons, including Colonial shareholders, under the laws of the Commonwealth of
Virginia, the governing law of the engagement letter. BB&T Capital Markets would
likely assert the substance of this disclaimer as a defense to claims, if any,
that might be brought against it by Colonial shareholders with respect to its
fairness opinion. However, since no Virginia court has definitively ruled on the
availability to a financial
37
advisor of this defense to shareholder liability with respect to a fairness
opinion, this issue necessarily would have to be resolved by a court of
competent jurisdiction. Furthermore, there can be no assurance that a court of
competent jurisdiction would apply Virginia law to the resolution of this issue
if it were ever to be presented. In any event, the availability or non-
availability of this defense will have no effect on BB&T Capital Markets' rights
and responsibilities under the federal securities laws, or the rights and
responsibilities of the directors of Colonial under the governing state law or
under the federal securities laws.
Pursuant to an engagement letter between Colonial and BB&T Capital Markets,
dated April 20, 2001, Colonial agreed to pay BB&T Capital Markets:
. $25,000 payable upon the signing of the engagement letter;
. $50,000 payable upon delivery of the fairness opinion to the Special
Committee; and
. $100,000 payable upon closing of the transaction.
In addition to any fees for professional services, BB&T Capital Markets
will also be reimbursed for expenses incurred in connection with BB&T Capital
Markets' engagement. Colonial has also agreed to indemnify BB&T Capital Markets
against specified liabilities, including liabilities under the federal
securities laws, related to, arising out of or in connection with the engagement
of BB&T Capital Markets by Colonial.
Projections of Colonial
Colonial does not as a matter of course make public forecasts as to future
operations, but Colonial did prepare certain projections of earnings before
interest, taxes, depreciation and amortization ("EBITDA") which it provided to
BB&T Capital Markets in connection with its analysis of the Gameco proposal and
the financial evaluation of Colonial. The EBITDA projections make certain
assumptions, including the continuation of the management agreement with Jalou
(which is terminable on 30 day's notice) and the acquisition by Jalou of
additional truck stops, which may not occur. The EBITDA projections set forth
below are included in this proxy statement solely because such information was
available to Gameco, that substantially similar information was provided by
Colonial to BB&T Capital Markets in April, 2001 and that substantially similar
information was used in connection with BB&T Capital Markets' June 6, 2001
fairness opinion and related presentation to the Special Committee. See
"Special Factors--Background of the Merger" and "Special Factors--Opinion of
Financial Advisor to the Special Committee."
The EBITDA projections set forth below were not prepared by Colonial with a
view to public disclosure or compliance with published guidelines of the SEC or
the American Institute of Certified Public Accountants regarding prospective
financial information, nor was the information prepared with the assistance of
or reviewed, complied or examined by, independent accountants. The projections
reflect numerous assumptions, all made by management of Colonial, with respect
to competition, gaming industry performance, general business, economic, gaming
tax rates, market and financial conditions, acquisitions, and other matters, all
of which are difficult to predict and many of which are beyond Colonial's
control. Accordingly, there can be no assurance that any assumption made in
preparing the projections will prove accurate, and actual results may be
materially greater or less than those projected below. The inclusion of these
projections in this proxy statement should not be regarded as an indication that
Colonial or Gameco or any of their respective financial advisors or other
representatives, or their respective officers and directors, consider such
information to be an accurate prediction of future events or necessarily
achievable. In light of the uncertainties inherent in forward looking
information of any kind, Colonial cautions against reliance on such information.
Colonial does not intend to update, revise or correct such
38
projections if they become inaccurate (even in the short term) except as
required under the federal securities laws.
Colonial Holdings, Inc.
Projected EBITDA
Years Ending December 31,
--------------------------------------------------
2001 2002 2003 2004 2005
(in thousands, except per share information)
--------------------------------------------------
Projected EBITDA $2,644 $3,454 $4,057 $4,057 $4,057
Interests of Certain Shareholders and Directors in the Merger
In considering the recommendations of the Board of Directors with respect
to the merger, shareholders should be aware that Jeffrey P. Jacobs is President,
Secretary, Treasurer and beneficial owner of 50.0% of the common stock of
Gameco, and that The Richard E. Jacobs Trust, controlled by his father, owns the
remaining 50.0% of the common stock of Gameco. Mr. Jacobs and CD Entertainment,
Ltd., an entity under his control, hold an aggregate of 1,945,000 shares of
Colonial class A stock, representing 33.3% of the outstanding shares of that
class and 1,220,000 shares of class B stock representing approximately 84.0% of
the outstanding shares of that class. The class B stock is convertible into
class A stock on a one to one ratio at the election of the shareholder. In
September 2001, CD Entertainment converted (on a one-to-one basis) 790,000
shares of class B stock to class A stock increasing the percentage of
outstanding shares of class A stock owned by it from 22.9% to 33.3% and
decreasing the percentage of outstanding shares of class B stock owned by it
from 89.6% to 84.0%. The conversion was made to increase the probability of
approval of the merger agreement by more than two-thirds of the outstanding
shares of class A stock. CD Entertainment is also Colonial's senior credit
facility holder, which facility is convertible into 24,951,456 shares of class A
stock at $1.03 per share at the option of CD Entertainment. Mr. Jacobs intends
to vote the shares in his control in favor of the merger. Mr. Jacobs owns a
sufficient number of class B shares to ensure approval of the merger agreement
by the class B shares voting as a separate class. If the merger is consummated,
Gameco will own all of the outstanding shares of Colonial class A stock and
class B stock. Gameco will have complete control over the management and conduct
of Colonial's business as well as holding substantially all of Colonial's
indebtedness and will benefit from any future increase in Colonial's value.
To avoid any potential conflicts of interest, the Board of Directors of
Colonial appointed the Special Committee consisting of two independent directors
who are not otherwise affiliated with Gameco or Gameco Acquisition, are not
employees of Colonial, have no direct or indirect interest (other than as
shareholders) in the merger and who will receive no extra or special benefit not
shared on a pro rata basis with all other shareholders, to consider the merger
on behalf of the unaffiliated shareholders. The members of the Special Committee
received compensation for their services. Mr. Peskoff received $50,000 for
serving on the Special Committee in recognition of the time required to complete
the work of the Special Committee. Mr. Stansley received no additional
compensation for his service but continued to receive his annual compensation of
$75,000 pursuant to the terms of a consulting agreement entered into in
connection with Colonial's initial public offering of stock and which terminates
March 21, 2002. Mr. Stansley also will be the seller of the greatest number of
shares of class A stock if the merger is consummated.
39
Cash Out of Stock Options
After the consummation of the merger, holders of unexercised and
outstanding options to purchase Colonial class A stock and class B stock,
whether such options are vested or not, will be entitled to receive a cash
payment equal to the product of the number of shares their options represent and
the excess (if any) of the merger consideration paid per share over the option
purchase price per share. Certain officers and directors of Colonial currently
hold options. See "Security Ownership of Certain Beneficial Owners and
Management."
Plans for Colonial if the Merger is Not Completed
If the merger is not consummated, the Board of Directors expects to seek to
retain Colonial's current management team and to continue its business as
presently operated. There are no plans in such circumstances to operate
Colonial's business in a manner substantially different than the manner in which
it is presently operated. However, the Board of Directors will continue to
review Colonial's strategic financial alternatives to maximize the value of the
common stock and reevaluate Colonial's status on a regular basis.
Plans for Colonial after the Merger
Gameco expects that, except as described in this proxy statement, the
business and operations of Colonial will be continued substantially as they are
currently being conducted. However, Gameco expects that it may, from time to
time, evaluate and review Colonial's business, operations and properties and
make such changes as it considers appropriate. It also intends to pursue
additional gaming and other acquisition opportunities, and Jeffrey P. Jacobs and
the Trust may pursue gaming and other acquisition opportunities independently of
Gameco
Except as described in this proxy statement, none of Jeffrey Jacobs,
Richard Jacobs, Gameco, Gameco Acquisition or Colonial has any present plans or
proposals involving Colonial or its subsidiaries which relate to or would result
in an extraordinary corporate transaction such as a merger, reorganization,
liquidation, sale or transfer of a material amount of assets, or any material
change in the present dividend policy, or capitalization, or any other material
change in Colonial's corporate structure or business. After the merger, Gameco
will review proposals for, and may propose the acquisition or disposition of
assets or other changes in Colonial's business, corporate structure,
capitalization, management or dividend policy which it considers to be in its
best interests.
If the merger occurs you will have no interest in Colonial's future
results. Gameco will be the sole shareholder of Colonial.
Directors and Management of Surviving Corporation
After consummation of the merger, Jeffrey P. Jacobs and Richard E. Jacobs
will serve as the only directors of Colonial. Jeffrey P. Jacobs will also serve
as Chairman of the Board of Directors and Chief Executive Officer of Colonial.
Ian M. Stewart will remain the President and Chief Financial Officer of Colonial
after consummation of the merger.
Directors and Officers Indemnification and Insurance
Gameco and Colonial have agreed to provide, or cause to be provided,
indemnification to each director, officer, employee and agent of Colonial
against any costs, expenses, losses, claims and damages arising out of or
relating to their activities on behalf of Colonial prior to or in connection
with the merger.
40
Gameco and Colonial have agreed not to amend, repeal or otherwise modify the
indemnification provisions of Colonial's articles of incorporation or bylaws for
a period of six years from completion of the merger. In addition, Gameco and
Colonial have agreed to maintain in effect Colonial's current directors' and
officers' liability insurance policies for a period of six years after
completion of the merger.
Financing of the Merger
It is estimated that approximately $5.4 million will be required to
complete the merger and pay related fees and expenses. See "-- Fees and
Expenses."
Financing for the merger, additional activities of Gameco and the working
capital requirements of Gameco and its subsidiaries after the merger will be
provided by the proceeds of an offering by Gameco of up to $135 million of high-
yield senior debt securities and $14 million of capital contributions by
affiliates of Gameco.
Gameco expects that the proceeds of the financing will be used to:
. finance the merger consideration payable to Colonial's shareholders and
optionholders;
. finance the merger consideration payable to Black Hawk shareholders and
to optionholders;
. finance the acquisition of up to six Louisiana-based truck stop video
gaming operations and a revenue interest in an additional video gaming
operation; and
. refinance approximately $86 million of the outstanding indebtedness of
Black Hawk and Colonial.
Gameco has engaged CIBC World Markets and U.S. Bancorp Libra to act as co-
underwriters, co-placement agents or co-initial purchasers for the high-yield
notes. Gameco expects that the high-yield notes will be issued in a transaction
which is not a public offering but which anticipates resales under Rule 144A of
the Securities Act to qualified institutional buyers and possibly non-U. S.
persons under Regulation S. Accordingly, the notes will not be registered under
the Securities Act upon their original issuance, but they will have registration
rights.
Gameco has received from U.S. Bancorp Libra a letter dated June 28, 2001,
indicating that, based upon market conditions existing at the time of delivery
of the letter, the structure and documentation for the merger and the
acquisition of Black Hawk, and subject to certain other terms and conditions,
U.S. Bancorp Libra is "highly confident" of its ability to sell or place senior
debt securities of Gameco in the aggregate principal amount of up to $130
million. The letter from U.S. Bancorp Libra is filed as an exhibit to the
Schedule 13E-3 filed with the SEC in connection with this transaction and is
available at the principal executive offices of Colonial for inspection and
copying by any Colonial shareholder or representative of any shareholder who has
been so designated in writing. U.S. Bancorp Libra's "highly confident" letter
was premised on Gameco's expectation that it would finance the merger and other
activities referred to above with $130 million of high-yield debt securities and
a $25 million revolving letter of credit. Gameco subsequently determined,
following discussions with U.S. Bancorp Libra and CIBC World Markets, to proceed
with financing consisting of approximately $135 million of high-yield senior
debt and $14 million of capital contributions by affiliates of Gameco.
The interest rate on the notes, and the other terms of the notes, will
depend upon interest rate and market conditions at the time the notes are
placed. Interest rates on similar notes range from 10.0% to 12.0% as of the
date of this proxy statement. However, it is anticipated that the notes will:
41
. have a maturity of seven years from the issue date;
. be secured by a lien on substantially all of the assets of Gameco and
its subsidiaries;
. be senior in right of payment to all subordinated indebtedness of Gameco
and its subsidiaries;
. be guaranteed on a senior basis by all of Gameco's subsidiaries;
. be non-callable for four years, and thereafter callable at a redemption
premium to be determined; and
. be subject to a mandatory offer by Gameco to purchase the outstanding
notes at 101.0% of their face amount, plus accrued interest, in the
event of certain changes in control.
The high-yield notes indenture is expected to contain customary covenants
that will restrict, among other things, the ability of Gameco and its
subsidiaries to:
. incur additional debt;
. pay dividends or make some other restricted payments;
. incur liens;
. apply net proceeds from some asset sales;
. merge or consolidate with any other person, or sell, assign, transfer,
lease, convey or otherwise dispose of substantially all of the assets of
Gameco; and
. enter into various transactions with affiliates.
The high-yield notes indenture also is expected to contain events of
default that are customary in transactions of this type. The letter from U.S.
Bancorp Libra states that the purchase of the notes will be subject to certain
customary conditions to closing.
Gameco, CIBC and U.S. Bancorp Libra are evaluating carefully the impact of
the September 11, 2001 terrorist attacks in New York City and Washington, D.C.
on the capital markets and the proposed high-yield debt offering. Those, and the
ensuing events, could have a materially negative impact on Gameco's ability to
obtain financing for the merger. Gameco has considered and will continue to
consider alternative financing arrangements if the primary financing plans fall
through but no alternative arrangements have been finalized. While high-yield
debt or other alternative financing terms less favorable to Gameco than the
terms described below could adversely affect the interests of Gameco, they would
not affect the consideration to be received by Colonial shareholders or the
other terms and conditions of the merger. Moreover, the closing of the proposed
transaction is not contingent upon the success of this or any other financing
transaction.
Gameco expects to repay the debt incurred in connection with the merger
primarily from dividends from its subsidiaries, including Black Hawk, Jalou
L.L.C., and Colonial. In addition, Gameco may repay this debt with proceeds
from new debt or equity financings.
Material Federal Income Tax Consequences
The following discussion is a summary of the material federal income tax
consequences expected to result to shareholders whose shares of common stock are
converted to cash in the merger. This summary does not purport to be a complete
analysis of all potential tax effects of the merger. For example, the summary
does not consider the effect of any applicable state, local or foreign tax laws.
In addition, the summary does not address all aspects of federal income taxation
that may affect particular shareholders in light of their particular
circumstances and is not intended for shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
shareholders who hold their common stock as part of a hedge, straddle or
conversion transaction, and shareholders who are not citizens or residents of
the United States or that are foreign corporations, foreign partnerships or
foreign estates or trusts as to the United States) that may be subject to
special federal income tax rules not
42
discussed below. The following summary assumes that shareholders have held their
common stock as "capital assets" (generally, property held for investment) under
the Internal Revenue Code of 1986, as amended (the "Code").
State and local tax laws may also impose income or other taxes upon
shareholders whose shares of common stock are converted to cash in the merger.
State and local income tax laws vary from state to state and this discussion
does not address state or local tax issues.
EACH SHAREHOLDER SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISOR WITH
RESPECT TO THE PARTICULAR TAX CONSEQUENCES OF THE TRANSACTIONS DESCRIBED HEREIN,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS,
AND OF CHANGES IN APPLICABLE TAX LAWS.
Sales Treatment for Holders of Common Stock
Except as provided below, the conversion of common stock in the merger will
be fully taxable to shareholders as a sale or exchange of such stock.
Accordingly, a shareholder who, pursuant to the merger, converts such holder's
common stock into cash will recognize gain or loss equal to the difference
between (1) the amount of cash received in the merger and (2) such shareholder's
tax basis in the common stock. Generally, a shareholder's tax basis in common
stock will be equal to such shareholder's cost. In the case of a shareholder
who is an individual, such gain, if any, will be taxable at a maximum capital
gains rate of 20.0% if the holder held the common stock for more than one year
at the time of consummation of the merger. If the holder held the common stock
for less than one year at the time of consummation of the merger, in general any
such capital gain would be taxed at ordinary income tax rates. In the case of a
shareholder who is an individual, any loss recognized from such a conversion
will be considered a capital loss. Generally, a limitation on the deduction of
capital losses allows an individual taxpayer to deduct a capital loss only
against capital gains and against $3,000 per year of ordinary income. Any
capital loss that is not deductible because of such limitation may be carried
forward indefinitely and deducted in the next succeeding year subject to the
same limitations. Gain or loss must be determined separately for each block of
common stock acquired at the same cost in a single transaction.
Treatment of Holders of Stock Options
The payments received by holders of stock options granted pursuant to
Colonial's stock option plans will be taxed as compensation income or ordinary
income at ordinary income tax rates. Such income may be subject to withholding
for holders of stock options that are employees of Colonial.
Backup Withholding
A shareholder whose common stock is converted to cash pursuant to the
merger may be subject to backup withholding at the rate of 31.0% with respect to
the gross proceeds from the conversion of such common stock unless such
shareholder (1) is a corporation or other exempt recipient and, when required,
establishes this exemption or (2) provides its correct taxpayer identification
number, certifies that it is not currently subject to backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
A shareholder who does not provide Colonial with its correct taxpayer
identification number may be subject to penalties imposed by the IRS. Any
amount withheld under these rules will be credited against the shareholder's
federal income tax liability.
Colonial will report to shareholders and to the IRS the amount of any
payments made to, or withholding from shareholders with respect to the merger
consideration.
43
Gameco and Colonial Tax Consequences
For federal income tax purposes, none of Gameco, Gameco Acquisition, or
Colonial will recognize gain or loss as a consequence of the merger. It is
possible, however, that Colonial will be subject to certain limitations and
special rules (e.g., sections 382 and 383 of the Internal Revenue Code) as a
consequence of the changes in ownership structure triggered by the merger.
Gameco is currently taxed as an S corporation pursuant to Subchapter S of
the Code. In general, subject to certain exceptions, an S corporation does not
pay income tax on its earnings, but instead its taxable income is taxed at the
shareholder level. Following the merger, Gameco intends elect Qualified
Subchapter S Subsidiary status for Colonial. It is intended that pursuant to the
Regulations under Section 1361 of the Code, the Qualified Subchapter S
Subsidiary election should cause Colonial to be treated as if it had liquidated
into Gameco in a tax-free liquidation under Section 332 of the Internal Revenue
Code.
Tax Consequences for Jeffrey P. Jacobs, the Trust, Richard E. Jacobs and
Entities Under Their Sole Control
Jeffrey P. Jacobs, the Trust, Richard E. Jacobs and entities under their
sole control will transfer to Gameco all of the entity interests in Diversified
Opportunities Group Ltd. and CD Entertainment Ltd. (the "Gameco Formation
Transaction"). As a result of the Gameco Formation Transaction, Gameco,
indirectly through its ownership of 100% of the equity interests in Diversified
Opportunities Group Ltd. and CD Entertainment, will own 1,945,000 shares of
Colonial's outstanding class A common stock and 1,220,000 shares of Colonial's
outstanding class B common stock. It is intended that the Gameco formation
transaction will qualify as a transfer to a controlled corporation in which gain
or loss is not recognized under Section 351 of the Code.
Accounting Treatment
The merger will be accounted for in accordance with the purchase method of
accounting under U.S. generally accepted accounting principles.
No Dissenters' Rights'
The shareholders of Colonial, whether or not they vote at the special
meeting, are not entitled to dissenters' rights under Virginia law and will be
bound by the terms of the merger agreement.
Fees and Expenses
Whether or not the merger is consummated and except as otherwise described
herein, all fees and expenses incurred in connection with the merger will be
paid by the party incurring such fees and expenses, except that Colonial and
Gameco will share costs and expenses relating to the printing and mailing of
this proxy statement and certain filing fees.
44
Estimated fees and expenses (rounded to the nearest thousand) to be
incurred by Colonial in connection with the merger and related transactions are
as follows:
Special Committee's financial advisor's fees and expenses... $200,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 50,000
Printing and solicitation fees and expenses................. 70,000
Special Committee fees...................................... 50,000
SEC filing fees............................................. 1,000
Other expenses.............................................. 25,000
--------
Total..................................................... $696,000
========
45
INFORMATION CONCERNING THE SPECIAL MEETING
Time, Place, and Date
This proxy statement is furnished in connection with the solicitation by
the Board of Directors of proxies from the holders of Colonial class A stock and
class B stock for use at a special meeting of shareholders to be held at 10:00
a.m., Eastern Daylight Time, on Tuesday, October 30, 2001, at Colonial Downs
Racetrack, 10515 Colonial Downs Parkway, New Kent, Virginia, or at any
adjournment or postponement thereof, pursuant to the enclosed Notice of Special
Meeting of Shareholders.
Purpose of the Special Meeting
At the special meeting, the shareholders of Colonial will be asked to
consider and vote upon the approval of the merger agreement. A copy of the
merger agreement is attached to this proxy statement as Attachment I. Pursuant
to the merger agreement, each outstanding share of Colonial class A stock and
class B stock (other than shares held by Gameco, Gameco Acquisition or CD
Entertainment) will be converted into $1.10 per share, without interest.
Based on the factors described above under "Special Factors--Recommendation
of the Special Committee and Board of Directors" and on the unanimous
recommendation of its Special Committee, the Board of Directors recommends that
shareholders vote "FOR" approval of the merger agreement.
Record Date; Voting at the Meeting; Quorum
The Board of Directors has fixed the close of business on September 14,
2001 as the record date for the special meeting. Only shareholders of record as
of the close of business on the record date will be entitled to notice of and to
vote at the special meeting.
As of the close of business on the record date, Colonial had 5,840,223
shares of Colonial class A stock, and 1,452,500 shares of Colonial class B
stock, issued and outstanding. As of the record date, the Colonial class A
stock was held of record by approximately 755 registered holders, although
Colonial believes it has approximately 3,629 beneficial owners of its class A
stock. As of the record date, the class B stock was held of record by three
registered holders. Holders of the class A stock and class B stock are entitled
to one vote per share. If a share is represented for any purpose at the meeting
it is deemed to be present for quorum purposes and for all other matters as
well. Abstentions and shares held of record by a broker or its nominee that are
voted on any matter are included in determining the number of votes present or
represented at the meeting. Broker non-votes and shares present or represented
but as to which a shareholder abstains from voting will be included in
determining whether there is a quorum at the special meeting.
Required Vote
Under Virginia law, a quorum must be established for each class of voting
stock in order for that class to validly vote at a special meeting. The meeting
may be adjourned to another time and place if a quorum is not present and if a
majority of the shares present vote in favor of adjournment. The presence in
person or by proxy of the holders of not less than one-half of the voting power
of each of the outstanding Colonial class A and class B stock entitled to vote
at the special meeting constitutes a quorum for each class. Under Virginia law,
the merger agreement must be approved by the affirmative vote of the holders of
greater than two-thirds of the voting power of the outstanding shares of
Colonial class A and
46
class B stock voting as separate classes. The affirmative vote of 3,895,428
shares of Colonial class A stock, and 968,818 shares of Colonial class B stock
will be necessary to approve the merger agreement. Mr. Jacobs and an entity
under his control, CD Entertainment, Ltd., hold an aggregate of 1,945,000 shares
of Colonial's outstanding class A stock, representing approximately 33.3% of the
outstanding shares of that class and 1,220,000 shares of Colonial's outstanding
class B stock representing approximately 84.0% of the outstanding shares of that
class. Mr. Jacobs, who has informed Colonial he will cause all shares of
Colonial stock beneficially owned by him to be voted for approval of the merger
agreement, benefically owns a sufficient number of shares of class B stock to
ensure the merger agreement will be approved by the class B shareholders voting
separately as a class.
Because Virginia law requires the merger agreement to be approved by a vote
of greater than two-thirds of the outstanding shares of each class of the common
stock, failure to return an executed proxy card or to vote in person at the
special meeting or abstaining from the vote will constitute, in effect, a vote
against approval of the merger agreement and the transactions contemplated
thereby. Broker non-votes will have the same effect as a vote against approval
of the merger agreement and the transactions contemplated thereby.
Voting and Revocation of Proxies
The enclosed proxy card is solicited on behalf of the Board of Directors.
The giving of a proxy does not preclude the right to vote in person should any
shareholder giving a proxy so desire. Shareholders have an unconditional right
to revoke their proxy at any time prior to its exercise, either by filing with
Colonial's Secretary at Colonial's principal executive offices or transfer agent
a written revocation or a duly executed proxy bearing a later date or by voting
in person at the special meeting. Attendance at the special meeting without
casting a ballot will not, by itself, constitute revocation of a proxy. Any
written revocation of a proxy should be sent to Colonial's transfer agent,
American Stock Transfer & Trust Company, at 6201 15th Avenue, Brooklyn, New
York, 11219.
Action to be Taken at the Special Meeting
All shares of common stock represented at the special meeting by properly
executed proxies received prior to, or at, the special meeting, unless
previously revoked, will be voted at the special meeting in accordance with the
instructions on the proxies. Unless contrary instructions are indicated, proxies
will be voted "FOR" the approval of the merger agreement, and "FOR"
consideration of a motion to adjourn such meeting to another time and/or place
for the purpose of soliciting additional proxies or allowing additional time for
the satisfaction of conditions to the merger.
Colonial does not know of any matters, other than as described in the
Notice of Special Meeting of Shareholders, which are to come before the special
meeting. If any other procedural matters are properly presented at the special
meeting for action, the persons named in the enclosed proxy card and acting
thereunder generally will have discretion to vote on such matters in accordance
with their best judgment. The merger is also subject to a number of additional
conditions. See "The Merger Agreement-Conditions and Covenants."
Proxy Solicitation
The cost of preparing this proxy statement will be borne by Colonial, and
Colonial and Gameco will share the cost of its printing and filing. Colonial is
requesting that banks, brokers and other custodians, nominees and fiduciaries
forward copies of the proxy material to their principals and request authority
for the execution of proxies. Colonial may reimburse such persons for their
expenses in so doing. In addition to the solicitation of proxies by mail, the
directors, officers and employees of Colonial
47
and its subsidiaries may, without receiving any additional compensation, solicit
proxies by telephone, telefax, telegram or in person.
If sufficient proxies are not returned in response to this solicitation,
supplementary solicitations may be made by mail or by telephone or personal
interview by directors, officers, and regular employees of Colonial, none of
whom will receive additional compensation for these services. In the event any
party to the merger agreement retains an outside proxy solicitation firm, the
associated costs of solicitation of proxies will be borne by the party retaining
such firm. Colonial will reimburse custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred in forwarding proxy materials to the
beneficial owners of stock. Colonial reserves the right to retain an outside
proxy solicitation firm.
No person is authorized to give any information or make any representation
not contained in this proxy statement, and if given or made, such information or
representation should not be relied upon as having been authorized.
Colonial shareholders should not send any certificates representing shares
of common stock with their proxy card. All Colonial shareholders will receive
written notice if the merger is consummated. At that time, each shareholder
will exchange share certificates for cash in accordance with the transmittal
letter and written instructions that have been sent with this proxy statement.
See "The Merger Agreement--Payment for Shares of Common Stock After the Merger."
THE MERGER AGREEMENT
Attached to this proxy statement as Attachment I is a copy of the merger
agreement among Colonial, Gameco, Gameco Acquisition, and Jeffrey P. Jacobs.
Although Colonial believes the information contained in this proxy statement
provides an accurate summary of the merger agreement, you are urged to read the
merger agreement in its entirety.
The Parties
The parties to the merger agreement are Colonial, Gameco, Gameco
Acquisition, and Jeffrey P. Jacobs. They may be reached at the addresses below.
Colonial Holdings, Inc.
10515 Colonial Downs Parkway
New Kent, VA 23124
(804) 966-7223
Gameco, Inc., Gameco Acquisition, and Jeffrey P. Jacobs
c/o Jacobs Investment Management Co., Inc.
1001 North U.S. Highway One, #710
Jupiter, FL 33477
Tel: (561) 575-4006
Effective Time
If the merger agreement is approved, it is expected that the merger will be
consummated as soon as possible after the special meeting and after all
governmental and regulatory approvals required for the merger are received and
all other conditions are satisfied. The merger will become effective upon the
filing of articles of merger with the Virginia State Corporation Commission or
at such later time and date as may be set forth in such Articles of Merger. It
is currently anticipated that the merger will be
48
consummated in November or December 2001, however, there can be no assurance as
to the timing of the consummation of the merger or that the merger will be
consummated.
The Merger
Pursuant to the terms of the merger agreement, at the time the merger is
consummated: (1) Gameco Acquisition will be merged with and into Colonial, (2)
Colonial will become a wholly owned subsidiary of Gameco, (3) each outstanding
share of Colonial class A stock and class B stock held by Colonial as treasury
stock and each issued and outstanding share owned by any subsidiary of Colonial,
Gameco, Gameco Acquisition or CD Entertainment will be cancelled and retired and
shall cease to exist, and (iv) each outstanding share of Colonial class A stock
and class B stock other than treasury shares and shares owned by any subsidiary
of Colonial, Gameco, Gameco Acquisition or CD Entertainment will be canceled and
converted into the right to receive cash in the amount of $1.10 per share,
payable to the holder thereof, without interest, upon surrender of the
certificate representing such shares.
Merger Consideration
In accordance with the terms of the merger agreement, each share of
Colonial class A stock and class B stock issued and outstanding immediately
prior to the effective time of the merger other than treasury shares and shares
owned by any subsidiary of Colonial, Gameco, Gameco Acquisition or CD
Entertainment will, by virtue of the merger and without any action on the part
of the holder thereof, become only the right to receive cash in the amount of
$1.10 per share, without interest.
After the consummation of the merger, unaffiliated shareholders will have
no rights with respect to their shares of class A stock and class B stock except
the right to exchange the certificates representing those shares for the merger
consideration. As a result of the merger, Gameco will become the owner of all of
the issued and outstanding shares of capital stock of Colonial.
The Exchange Fund; Payment for the Shares of Common Stock After the Merger
Each shareholder of record of Colonial class A stock and class B stock as
of the record date received with this proxy statement instructions describing
the procedure and requirements for surrendering stock certificates in exchange
for the cash to which such shareholder is entitled and a form letter of
transmittal. Each shareholder will receive payment for shares as soon as
practicable after the stock certificates and letters of transmittal have been
duly delivered to Colonial in accordance with the written instructions and the
merger has been consummated. Upon consummation of the merger, all holders of
stock certificates will be required to surrender their certificates to receive
the cash to which they are entitled. Any shareholder who has lost his, her or
its stock certificates should promptly make arrangements (which may include the
posting of a bond or other satisfactory indemnification) with Colonial's
transfer agent for replacement.
If payment is to be made to a person other than the one in whose name the
stock certificate is issued, it will be a condition to such payment that (1) the
certificate surrendered be properly endorsed (with such signature guarantees as
may be required) and be otherwise in proper form for transfer, and (2) the
person requesting such payment (a) pay any transfer or other taxes required by
reason of the payment to a person other than the record holder or (b) establish
to the satisfaction of Colonial that such tax has been paid or is not
applicable.
Payment will be made through an exchange agent selected by Gameco. Gameco
will be required to deliver sufficient funds to the exchange agent prior to the
merger to pay the aggregate merger consideration. Any portion of the funds made
available by Gameco to the exchange agent that remains
49
unclaimed by shareholders 12 months after the effective time of the merger will
be returned to Gameco. Any shareholder who has not exchanged his, her or its
shares at the time the funds are returned to Gameco must look solely to Gameco
for payment thereafter.
Conditions And Covenants
The respective obligations of Gameco, Gameco Acquisition and Colonial under
the merger agreement to consummate the merger are subject to the satisfaction of
certain conditions. These conditions include:
. approval of the merger agreement by Colonial's shareholders;
. the absence of any order or injunction of any governmental authority
prohibiting consummation of the merger;
. delivery of an update of the fairness opinion by BB&T Capital Markets
to the Special Committee;
. the truth and correctness of both parties representations and
warranties in the merger agreement;
. all statutory approvals and all consents required to complete the
merger; and
. the delivery by Gameco of the merger consideration to the exchange
agent.
Other conditions, including compliance with representations, warranties,
and covenants, must be satisfied by Colonial or waived by Gameco and Gameco
Acquisition before either Gameco or Gameco Acquisition is obligated to complete
the merger. Similarly, compliance with additional representations, warranties,
and covenants must be satisfied by Gameco and Gameco Acquisition or waived by
Colonial before Colonial is obligated to complete the merger. No party
anticipates waiving any condition to the merger. Proxies would not be
resolicited from shareholders upon the waiver of any of representation,
warranty, or covenant unless the waiver would be material to the voting decision
of shareholders.
Governmental and Regulatory Approvals
Gameco will be required to gain the approval of the Virginia Racing
Commission to its acquisition of an indirect ownership in Colonial Downs, L.P.
and Stansley Racing Corp. in order for the merger to become effective. Other
than the approval of the Virginia Racing Commission, Colonial is aware of no
other material governmental or regulatory approvals required for the closing of
the merger. Gameco has applied to the Virginia Racing Commission for such
approval.
Termination, and Termination Fees
The merger agreement may be terminated:
. By mutual written consent of Colonial and Gameco;
. By either Colonial or Gameco if the merger is not consummated by
December 31, 2001, provided that this right to terminate is not
available to any party whose failure to fulfill its obligations was
the cause of, or resulted in, the failure of the merger to occur;
. By either Colonial or Gameco, if any governmental authority restrains
or prohibits the merger and such order or decree is final and
nonappealable and was not requested by the terminating party;
. By either Colonial or Gameco, following the other party's material
breach of any representation, warranty, covenant or agreement which is
not curable or is not cured within thirty (30) days of written notice
of breach;
50
. By Colonial, if before shareholder approval of the merger agreement it
receives an offer which is more favorable to the shareholders and is
reasonably likely to be consummated;
. By Gameco if the Board of Directors withdraws its recommendation or
recommends another proposal, or recommends that the shareholders
tender their shares in another offer by a party not an affiliate of
Gameco; or
. By either Gameco or Colonial if the shareholders of Colonial fail to
approve the merger.
Gameco would be required to pay Colonial a break-up fee of $400,000 if
Gameco fails to consummate the merger on or before 12:00 noon, Eastern Time,
December 31, 2001 and Colonial is otherwise in compliance with the merger
agreement and the conditions to the merger have been satisfied other than
conditions which remain unsatisfied as the result of the breach of a
representation, warranty or covenant by Gameco or Gameco Acquisition.
Colonial would be required to pay Gameco a break-up fee of $250,000, if:
. Colonial, prior to receiving shareholder approval, receives and
accepts a superior proposal;
. Colonial's Board of Directors withdraws its recommendation of the
merger or recommends a transaction with another party; or
. the merger agreement is terminated at any time at which Gameco is not
in material breach of the merger agreement and is otherwise entitled
to terminate the merger agreement because the shareholders fail to
approve the transaction or because Colonial is in material breach of
the merger agreement.
In any of the foregoing events, however, the breakup fee would be payable
only if Colonial enters into another agreement or letter of intent for sale of
Colonial or substantially all of its assets with a different party within 12
months of the termination of the merger agreement.
Representations and Warranties of Colonial
Colonial has made certain representations and warranties in connection with
the merger agreement, including representations and warranties relating to such
matters as:
. organization and authority to enter into the merger agreement;
. capitalization;
. non-contravention of the proposed merger with existing law or
agreement;
. the absence of required filings, consents or approvals in connection
with the merger;
. the absence of misstatements in its filings with the SEC, including
this proxy statement;
. the absence of any undisclosed liabilities;
. the absence of any undisclosed litigation;
. compliance with applicable laws;
. taxes, labor matters and employee benefit plans;
. the absence of undisclosed noncompliance with environmental laws;
. title to assets; and
. satisfaction of all of the representations and warranties in the
merger agreement.
Representations and Warranties of Gameco and Gameco Acquisition
Each of Gameco and Gameco Acquisition have made certain representations
and warranties in the merger agreement, including representations and warranties
relating to such matters as:
51
. their respective organization and authority to enter into the merger
agreement;
. non-contravention of the proposed merger with existing law or
agreements;
. the absence of required filings, consents or approvals in connection
with the merger;
. the absence of misstatements in its filings with the SEC, including
the proxy statement;
. compliance with applicable laws;
. absence of litigation which would affect the merger; and
. the accuracy of all of its representations and warranties in the
merger agreement.
Conduct of Business Pending the Merger
Pursuant to the merger agreement, Colonial has agreed to operate and
conduct its business only in the ordinary course in accordance with prior
practices, and Colonial and its subsidiaries have specifically agreed to not:
. amend or propose to amend their articles of incorporation or bylaws;
. split, combine or reclassify their capital stock;
. declare, set aside or pay any dividend or distribution payable in
cash, stock, property or otherwise, except for the payment of
dividends or distributions to Colonial or a wholly owned subsidiary of
Colonial by a direct or indirect wholly owned subsidiary of Colonial;
. issue, sell, pledge or dispose of, or agree to issue, sell, pledge or
dispose of, any additional shares of, or any options, warrants or
rights of any kind to acquire any shares of, their capital stock of
any class or any debt or equity securities convertible into, or
exchangeable for, any such capital stock, except that Colonial may
issue shares upon the exercise of options outstanding on the date
hereof;
. incur or become contingently liable with respect to any indebtedness
for borrowed money other than (A) borrowings in the ordinary course of
business or borrowings under the existing credit facilities of
Colonial or of any of its subsidiaries up to the existing borrowing
limit on the date of the merger agreement, and (B) borrowings to
refinance existing indebtedness on terms which are reasonably
acceptable to Gameco; provided that in no event shall aggregate
indebtedness of Colonial and its subsidiaries, net of all cash and
cash equivalents, exceed $29.0 million;
. generally sell or transfer its assets except in the ordinary course of
business;
. generally enter into, amend, modify or renew any employment,
consulting, severance or similar agreement with, or grant any salary,
wage or other increase in compensation or increase in any employee
benefit to, any director or officer of Colonial or of any of its
subsidiaries, subject to certain exceptions;
. redeem or offer to redeem their capital stock; or
. acquire any assets other than in the ordinary course of business.
Amendment/Waiver
Before or after approval of the merger agreement by the shareholders, the
merger agreement may be amended by the written agreement of the parties thereto
at any time prior to the effective time of the merger if such amendment is
approved by their respective boards of directors.
At any time prior to the effective time, Colonial, Gameco and Gameco
Acquisition may extend the time for performance of any of the obligations or
other acts of the other parties to the merger agreement, waive any inaccuracies
in the representations and warranties contained in the merger agreement or in
any document delivered pursuant to the merger agreement, or waive compliance
with any
52
agreements or conditions contained in the merger agreement. Any extension or
waiver will be valid only if set forth in writing and signed by the party making
such extension or waiver.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jalou Agreement. Colonial's subsidiary, Colonial Holdings Management, has
signed a management contract with Jalou L.L.C. and Jalou II, affiliates of Mr.
Jacobs, to manage two truck stops that were recently acquired in Louisiana and
to manage assets relating to a portion of the gaming revenues from another truck
stop. Under the management contract, Colonial Holdings Management oversees all
aspects of the operations of the truck stops and the restaurant. The management
agreement calls for Colonial Holdings Management to provide these services in
return for a fee of 3.0% of the truck stops' revenue and 5.0% of the truck
stops' EBITDA. Each truck stop offers fueling, convenience store and restaurant
facilities as well as 50 video poker gaming devices.
Colonial Gifts & Sportswear. Colonial entered into an agreement with
Colonial Gifts & Sportswear, Inc., a Virginia corporation, in 1997 for the sale
of gifts and apparel. Pursuant to the agreement, Colonial provides space at the
racetrack and racing centers to Sportswear in exchange for a royalty based on
Sportswear's gross sales. Sportswear is wholly owned by the wife and daughter of
Mr. Arnold Stansley, a director of Colonial.
Virginia Concessions, L.L.C. Virginia Concessions, L.L.C. has an agreement
with Colonial to provide food and beverage concessions at Colonial's racing
centers. Under the agreement, Colonial is responsible for the management and
administration of Virginia Concessions in exchange for all earnings (or losses)
from food and beverage sales. Virginia Concessions is beneficially owned by Mr.
Jacobs.
CD Entertainment Ltd. In August 2000, Colonial entered into an agreement
with CD Entertainment, an affiliate of Jeffrey P. Jacobs, the Chairman and Chief
Executive Officer of Colonial, to refinance the $15.0 million in loans from PNC
Bank that came due on June 30, 2000. The PNC debt and Colonial's existing debt
to related parties was consolidated into a $25.7 million credit facility with a
term of five (5) years and an interest rate of LIBOR on the date funds are
drawn, plus 3.0%. Under the terms of the credit facility, principal payments of
$1.0 million each are due on June 30, 2002, 2003, and 2004, with the balance due
on June 30, 2005. In addition, Colonial has agreed to make an additional annual
principal payment commencing in 2002 contingent upon Colonial's annual cash
flow. The track and the racing center located in Hampton serve as collateral for
the loan. Additionally, Colonial has pledged its limited partnership interest in
Colonial Downs, L.P. and its shares of Stansley Racing Corp., both of which are
subsidiaries of Colonial, to CD Entertainment. This collateral package is
identical to that provided to PNC for the PNC Credit Facility with the
additional deeds of trust on the racing center in Hampton.
Jacobs' Obligation to Fund Colonial Under the Agreement and Plan of Merger.
Under the Agreement and Plan of Merger with Gameco, Jeffrey P. Jacobs has agreed
to provide Colonial up to $1,000,000 in working capital through December 31,
2001. The capital commitment will be available to Colonial at its request. The
Agreement and Plan of Merger requires that a maximum of $600,000 will be
available in cash and the remaining $400,000 will be in the form of forgiveness
of fees and expenses payable to Mr. Jacobs and/or his affiliates as Mr. Jacobs
shall determine in his sole discretion. The working capital will be provided to
Colonial in a combination of equity or debt as determined by Mr. Jacobs in his
sole discretion, and if provided as debt, will be on the terms incurred by Mr.
Jacobs, if applicable, or on terms comparable to other loans by Mr. Jacobs or
his affiliates to Colonial.
Consulting Agreement with Arnold W. Stansley. Colonial entered into a
Consulting Agreement, dated as of March 21, 1997, with Arnold W. Stansley, a
director and member of the Special Committee of Colonial. Under the terms of the
Consulting Agreement, Mr. Stansley is obligated to advise and assist
53
Colonial in the conduct of its business. In exchange for his services, Mr.
Stansley is compensated by Colonial in an amount of $75,000 per year. The
Consulting Agreement expires on March 21, 2002.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Colonial's class A stock is quoted on the OTC Bulletin Board under the
symbol "CHLD". Colonial'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 Colonial class A stock as reported on the NASDAQ National Market (from
March 1997 to May 1999), the NASDAQ Small Cap Market (from May 1999 to November
2000) and the OTC Bulletin Board (from November 2000 to July 2001).
1999 High Low
---- ---- ---
First Quarter $ 1.69 $ 0.63
Second Quarter 2.56 1.38
Third Quarter 2.63 1.00
Fourth Quarter 1.50 0.81
2000 High Low
---- ---- ---
First Quarter $ 1.56 $ 0.75
Second Quarter 1.22 0.75
Third Quarter 0.97 0.38
Fourth Quarter 0.53 0.16
2001 High Low
---- ---- ---
First Quarter $0.7969 $0.1562
Second Quarter 0.960 0.610
Third Quarter (through [--] [--]
September __, 2001)
On February 28, 2001, the last day Colonial's stock traded prior to the
announcement of the merger transaction described in this proxy statement, the
closing sales price of its class A stock on the OTC Bulletin Board was $0.2344.
On June 8, 2001, the last full day prior to the day on which the execution of
the merger agreement was publicly announced, the closing sales price for the
class A stock on the OTC Bulletin Board was $0.64. On September __, 2001, the
closing sales price for the class A common stock on the OTC Bulletin Board was
$_____. The market price for Colonial class A stock is subject to fluctuation
and shareholders are urged to obtain current market quotations.
There is no established market for the Colonial class B stock. There are
three holders of record of Colonial class B stock.
Colonial has not paid any dividends to date, does not anticipate paying any
dividends on either class of its common stock in the foreseeable future and
intends to retain any earnings to finance the development and expansion of its
operations. The payment of any future dividends will be at the discretion of the
Board of Directors and will depend upon, among other things, future earnings,
operations, capital requirements, the financial condition of Colonial and
general business conditions. Current debt covenants with a lender, CD
Entertainment, Ltd. (an affiliate of Jeffrey P. Jacobs), preclude Colonial from
declaring and paying dividends.
54
DIRECTORS AND MANAGEMENT
Set forth below are the name and business address of each director and
executive officer of Colonial, and his present position with Colonial. Also set
forth below are the material occupations, positions, offices and employment of
each such person and the name of any corporation or other organization in which
any material occupation, position, office or employment of each such person was
held during the last five years. All directors and officers are citizens of the
United States.
Name of Director Age Position
---------------- --- --------
Arnold W. Stansley 68 Mr. Stansley has been a director of Colonial since March
Raceway Park 1997. Mr. Stansley's term as a director of Colonial
5700 Telegraph Road expires in 2002. From 1993 to 1997, Mr. Stansley served
Toledo, OH 43612 as President of Stansley Management Corp., Colonial
Downs, L.P.'s managing general partner prior to the
reorganization of Colonial 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 is an
owner and has been an executive officer of Raceway Park,
a standardbred racetrack in Toledo, Ohio, for the last
ten years.
Stephen D. Peskoff 58 Mr. Peskoff was a director of Colonial from March 1997
Friedman, Billings, Ramsey & until his resignation on September 18, 2000. He was
Co., Inc. reappointed to the Board in March 2001. His term as
Potomac Towers director expires in 2002. Mr. Peskoff has acted as a
1001 Nineteenth St. North consultant to Friedman, Billings, Ramsey & Co., an
Arlington, VA 22209 investment banking firm, 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).
Patrick J. McKinley 46 Mr. McKinley has been a director of Colonial since March
Jacobs Entertainment 1997. Mr. McKinley's term as a director expires in 2001.
1231 Main Avenue Mr. McKinley has served as Executive Vice President of
Cleveland, OH 44113 Jacobs Investment Management Co., Inc. for more than 20
years and is responsible for its day-to-day operations.
Mr. McKinley has over 20 years experience in restaurant
operations and real estate development and management.
Jeffrey P. Jacobs 47 Mr. Jacobs serves as Chairman of the Board of Directors
Jacobs Investments and Chief Executive Officer of Colonial. Mr. Jacobs'
1001 North U.S. Highway 2 term as a director expires in 2003. From 1995 to the
Suite 710 present, he has served as Chairman and Chief Executive
Jupiter, FL 33477 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,
55
Name of Director Age Position
---------------- --- --------
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.
Robert H. Hughes 60 Mr. Hughes has been a director of Colonial since March
27459 Hemlock Drive 1997. Mr. Hughes' term as a director expires in 2003.
Westlake, OH 44145 Mr. Hughes served as Chief Financial Officer of Jacobs
Investments, Inc. from 1993 until his retirement in May
1999. Mr. Hughes is a director of Black Hawk Gaming &
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.
David C. Grunenwald 47 Mr. Grunenwald has been a director of Colonial since
Jacobs Entertainment March 1997. Mr. Grunenwald's term as a director expires
1231 Main Avenue in 2003. Mr. Grunenwald has served as Vice President of
Cleveland, OH 44113 Development and Leasing for Jacobs Investments, Inc.
since 1988 and directs that 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.
The executive officers of Colonial, in addition to Mr. Jacobs, are:
Name of Officer Age Position
--------------- --- --------
Ian M. Stewart 46 Mr. Stewart has served as President of Colonial since
10515 Colonial Downs Parkway November 1998 and Chief Financial Officer since June
New Kent, Virginia 23124 1997. From January 1998 through November 1998, Mr.
Stewart served as Chief Operating Officer of Colonial.
From October 1994 to June 1997, Mr. Stewart served as a
consultant and a temporary Chief Financial Officer 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.
56
Name of Officer Age Position
--------------- --- --------
Jerry M. Monahan 61 Mr. Monahan has served as Vice President - Racing
10515 Colonial Downs Parkway Operations since June 1997. Prior to that time, Mr.
New Kent, Virginia 23124 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.
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.
Gameco and Gameco Acquisition
Richard E. Jacobs and Jeffrey P. Jacobs comprise the Board of Directors of
Gameco and Gameco Acquisition. Jeffrey P. Jacobs serves as President, Vice
President, Secretary and Treasurer for both companies. After the merger,
Richard E. Jacobs and Jeffrey P. Jacobs will comprise the Board of Directors of
Colonial. Jeffrey P. Jacobs will continue to serve as Colonial's Chairman and
Chief Executive Officer and Ian M. Stewart will continue to serve as President
and Chief Financial Officer. The resumes of Jeffrey P. Jacobs and Mr. Stewart
are set forth above.
Richard E. Jacobs was Chairman of the Board, President and Chief Executive
Officer of Cleveland Indians Baseball Company, Inc. from its inception in 1998
to February 2000. From 1986 to 1998, Mr. Jacobs was Chairman of the Board,
President and Chief Executive Officer of Cleveland Baseball Corporation, which
previously served as the general partner of the partnership that now owns the
Cleveland Indians Baseball team. For many years Mr. Jacobs has been Chairman of
the Board and Chief Executive Officer of The Richard E. Jacobs Group Inc., a
real estate management and development company. The business address of the
Trust and Richard E. Jacobs is 25425 Center Ridge Road, Cleveland, Ohio
44145.
57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Colonial's common stock as of June 30, 2001 for: (a) each of its
directors and executive officers; (b) all of the directors and executive
officers as a group; and (c) each person known by Colonial to be a beneficial
owner of more than 5.0% of its common stock. All information with respect to
beneficial ownership by Colonial's directors, executive officers or beneficial
owners has been furnished by the respective director, officer or beneficial
owner, as the case may be. Unless indicated otherwise, each of the shareholders
has sole voting and investment power with respect to the shares of common stock
beneficially owned.
Beneficially Owned
------------------
Name/Beneficial Owner Class A Class B Class A Class B Outstanding
------- ------- ------- ------- -----------
CD Entertainment Ltd./(1)/
26,896,456/(2)/ 1,220,000 87.3% 84.0% 87.2%
Jeffrey P. Jacobs/(3)/ 26,916,456 1,220,000 87.4% 84.0% 87.2%
Arnold W. Stansley 484,721 --- 1.5% --- 1.5%
James M. Leadbetter
110 Arco Drive
Toledo, OH 43607 216,581 225,000 * 15.4% 1.3%
Stephen Peskoff/(4)/ 72,615 --- * --- *
Ian M. Stewart/(5)/ 30,000 --- * --- *
David C. Grunenwald/(5/) 16,009 --- * --- *
Robert H. Hughes/(5)/ 18,650 --- * --- *
Patrick J. McKinley(5) 16,071 --- * --- *
All executive officers 27,771,103 1,220,000 90.1% 83.9% 89.9%
and directors as a group
(8 persons)/(6)/
/(1)/ CD Entertainment Ltd. is beneficially owned by Jeffrey P. Jacobs, and the
Richard E. Jacobs Revocable Trust.
/(2)/ Includes 24,951,456 shares of Colonial class A stock issuable upon the
conversion of an Amended and Restated Convertible Term Note and Credit Line
Convertible Note held by CD Entertainment. The percentage calculation assumes
that the issued and outstanding Colonial class A stock of Colonial is
29,976,695. However, the aggregate number of shares of Colonial class A stock
which Colonial currently has authority to issue is 12,000,000. Colonial has
agreed to make efforts to authorize additional shares for such conversion
rights.
/(3)/ Represents the shares owned by CD Entertainment Ltd. and options for
20,000 shares held pursuant to the Colonial Holdings, Inc. 1997 Stock Option
Plan.
/(4)/ Represents 2,518 shares owned, 15,000 shares owned by Underhill
Investment Corp., an affiliate of Mr. Peskoff, and options for 50,000 shares
granted under the Stock Option Plan.
/(5)/ Includes stock options granted under the Stock Option Plan
/(6)/ Includes (1) all shares owned directly or indirectly, and (2) all options
held under the Stock Option Plan. The address of all directors and employees is
c/o Colonial Downs, 10515 Colonial Downs Parkway, New Kent, Virginia 23124.
* Represents less than 1%
58
OTHER BUSINESS
Colonial knows of no matters or business to be presented for consideration
at the special meeting other than the consideration of the merger agreement and
merger. If, however, any other matter properly comes before the special meeting
or any adjournment thereof, it is the intention of the persons named in the
enclosed proxy to vote such proxy in accordance with their best judgment on such
matter.
SHAREHOLDER MEETINGS
Colonial has decided not to hold its 2001 annual meeting of shareholders,
which is generally held in the summer, because of the merger proposal described
in this proxy statement and the related special meeting. If the merger is
consummated, there will no longer be any unaffiliated shareholders of Colonial
and no public participation in any future meetings of shareholders. However, if
the merger is not consummated on or before December 31, 2001, Colonial expects
that it will hold an Annual Meeting of Shareholders in the second quarter of
2002.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement contains or incorporates by reference certain forward-
looking statements and information relating to Colonial that are based on the
beliefs of management as well as assumptions made by and information currently
available to Colonial. Forward-looking statements include statements concerning
plans, objectives, goals, strategies, future events or performance, and
underlying assumptions and other statements which are other than statements of
historical fact, including statements regarding the consummation of the merger.
When used in this document, the words "anticipate," "believe," "estimate,"
"expect," "plan," "intend," "project," "predict," "may," and "should" and
similar expressions, are intended to identify forward-looking statements. Such
statements reflect the current view of Colonial with respect to future events,
including the consummation of the merger, and are subject to numerous risks,
uncertainties and assumptions. Many factors could cause the actual results,
performance or achievements of Colonial to be materially different from any
future results, performance or achievements that may be expressed or implied by
such forward-looking statements, including, among others:
. delays in receiving required gaming, regulatory and other approvals;
. the failure of shareholders to approve the merger agreement;
. intensity of competition;
. Colonial's ability to meet debt obligations;
. regulatory compliance in Virginia;
. general economic or market conditions;
. taxation levels;
. effects of national and regional economic and market conditions, labor
and marketing costs; and
. various other factors, otherwise referenced in this proxy statement and
the appendices attached hereto.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected, planned or
intended. Colonial does not intend, or assume any obligation, to update these
forward-looking statements to reflect actual results, changes in assumptions or
changes in the factors affecting such forward-looking statements.
59
CERTAIN LITIGATION
Contract Dispute with AT&T. Colonial was served on March 30, 2001 with a
suit by AT&T Corp. alleging a breach of a contract and a tariff violation. AT&T
seeks recovery of $131,343.81, plus interest and costs of suit. The matter is
pending in the Federal District Court for the Eastern District of Virginia
(Richmond Division, Case No. 3:01CV187). Colonial is vigorously contesting the
claim.
Gregory. Colonial was served on June 6, 2001 as a party to a lawsuit by a
trainer, George E. Gregory, Jr., who was injured during the Colonial Downs 2000
thoroughbred meet while being assisted by an outrider. Mr. Gregory seeks
$250,000, costs, expenses and attorney fees. The matter is pending in Circuit
Court of the County of New Kent (Case No. 127CL00000051). Colonial's insurance
carrier is vigorously contesting the claim.
INDEPENDENT AUDITORS
The firm of BDO Seidman LLP has served as Colonial's independent auditors
since 1997. The consolidated financial statements of Colonial for each of the
years in the three year period ended December 31, 2000 included in Colonial's
Annual Report on Form 10-K for the year ended December 31, 2000, have been
audited by BDO Seidman, LLP as stated in their reports appearing therein. It is
expected that representatives of BDO Seidman, LLP will be present at the special
meeting, both to respond to appropriate questions of shareholders of Colonial
and to make a statement if they so desire.
WHERE YOU CAN FIND MORE INFORMATION
The SEC allows Colonial to "incorporate by reference" information into this
proxy statement, which means that Colonial can disclose important information by
referring you to another document filed separately with the SEC. The following
documents previously filed by Colonial with the SEC are incorporated by
reference in this Proxy Statement and are deemed to be a part hereof:
(1) Colonial's Annual Report on Form 10-K for the year ended December 31,
2000;
(2) Colonial's Current Reports on Form 8-K dated March 21 and June 11,
2001; and
(3) Colonial's Quarterly Report on Form 10-Q for the quarter ended March
31, 2001.
(4) Colonial's Quarterly Report on Form 10-Q for the quarter ended June
30, 2001.
Colonial cannot rely on the statutory safe harbor of Section 21E of the
Securities Act of 1934 in connection with the forward-looking statements
contained in the incorporated documents. Any statement contained in a document
incorporated by reference herein shall be deemed to be modified or superseded
for all purposes to the extent that a statement contained in this proxy
statement modifies or replaces such statement.
Colonial undertakes to provide by first class mail, without charge and
within one business day of receipt of any written or oral request, to any person
to whom a copy of this proxy statement has been delivered, a copy of any or all
of the documents referred to above which have been incorporated by reference in
this proxy statement, other than exhibits to such documents (unless such
exhibits are specifically incorporated by reference herein). Requests for such
copies should be directed to Corporate Secretary, Colonial Holdings, Inc. 10515
Colonial Downs Parkway, New Kent, VA 23124 (Telephone -- 804-966-7223 (extension
1110).
60
AVAILABLE INFORMATION
No person is authorized to give any information or to make any
representations, other than as contained in this proxy statement, in connection
with the merger agreement or the merger, and, if given or made, such information
or representations may not be relied upon as having been authorized by Colonial,
Gameco or Gameco Acquisition. The delivery of this proxy statement shall not,
under any circumstances, create any implication that there has been no change in
the information set forth herein or in the affairs of Colonial since the date
hereof.
Because the merger is a "going private" transaction, Gameco, Gameco
Acquisition, Jeffrey P. Jacobs, the Richard E. Jacobs Revocable Trust, CD
Entertainment, Ltd. and Colonial have filed with the SEC a Rule 13E-3
Transaction Statement on Schedule 13E-3 under the Exchange Act with respect to
the merger. This proxy statement does not contain all of the information set
forth in the Schedule 13E-3 and the exhibits thereto. Copies of the Schedule
13E-3 and the exhibits thereto are available for inspection and copying at the
principal executive offices of Colonial during regular business hours by any
interested shareholder of Colonial, or a representative who has been so
designated in writing, and may be inspected and copied, or obtained by mail, by
written request directed to Corporate Secretary, Colonial Holdings, Inc., 10515
Colonial Downs Parkway, New Kent, Virginia 23124.
Colonial is currently subject to the information requirements of the
Exchange Act and in accordance therewith files periodic reports, proxy
statements and other information with the SEC relating to its business,
financial and other matters. Copies of such reports, proxy statements and other
information, as well as the Schedule 13E-3 and the exhibits thereto, may be
copied (at prescribed rates) at the public reference facilities maintained by
the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549 and at the Regional Office of the SEC at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661.
61
For further information concerning the SEC's public reference rooms, you
may call the SEC at 1-800-SEC-0330. Some of this information may also be
accessed on the World Wide Web through the SEC's Internet address at
"http://www.sec.gov. " Colonial's common stock is listed on the OTC Bulletin
-------------------
Board (ticker symbol: CHLD.OB).
62
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF
GAMECO, INC.
Unaudited Pro Forma Consolidated Financial Statements of Gameco, Inc.
The unaudited pro forma consolidated financial statements are presented to show
the Gameco, Inc. financial statements after the impact of the transactions
described below. Unaffiliated shareholders of Colonial will not have an
interest in Gameco or any of the companies included in the pro forma information
regardless of whether they vote for or against the merger. The pro forma
information may be helpful to unaffiliated Colonial shareholders in assessing
the benefits to Gameco, CD Entertainment, Inc., and Mr. Jacobs and their ability
to obtain financing for the merger.
The following unaudited pro forma consolidated statements of income for the
year ended December 31, 2000 and for the six months ended June 30, 2001 and the
unaudited pro forma consolidated balance sheet as of June 30, 2001 give effect
to the following transactions:
. The contribution of certain historical assets and liabilities of
Diversified Opportunities Group Ltd. into Gameco, Inc. Diversified
Opportunities' consolidated financial statements include the accounts of
Colonial since Diversified owns over 50.0% voting control of Colonial's
shares
. The contribution to capital in Gameco of a related party debt
. The contribution of the assets and liabilities of Jalou II, Inc. into
Gameco
. The acquisition of the publicly held shares of Colonial Holdings, Inc.
. The acquisition of the publicly held shares of Black Hawk Gaming &
Development Company, Inc.
. The acquisition of the Louisiana entities which occurred in February,
2001 by Diversified Opportunities, Jalou, L.L.C. and Jalou II, Inc.
. The acquisition of Gold Dust Casino, which occurred in January, 2001 by
Black Hawk
. The acquisition of certain other Louisiana entities which are considered
probable
. The completion of an assumed $135.0 million debt offering and assumed
$14 million capital contribution to be used to finance the acquisition
of the publicly held shares of Colonial Holdings, Inc. and Black Hawk
and to repay certain existing debt
All of the above acquisitions were accounted for using the purchase method of
accounting. Accordingly, the results of Diversified Opportunities, Jalou II, and
Black Hawk for the period ended June 30, 2001 include the completed Louisiana
properties and Gold Dust, respectively, from the date of acquisition. The
unaudited pro forma statements of income have been prepared assuming the above
transactions occurred on January 1, 2000. The unaudited pro forma balance sheet
as of June 30, 2001 has been prepared assuming the above transactions occurred
on such date.
The purchase method of accounting requires the aggregate purchase price to be
allocated to assets acquired based on their estimated fair value. For purposes
of the unaudited pro forma consolidated financial statements the allocation of
the purchase price is based on management's best estimate. The final allocation
of the purchase price for the assets acquired will be determined in a reasonable
time after the consummation of the transactions and will be based on a complete
evaluation of the assets acquired. Accordingly, the information presented herein
may differ from the final purchase price allocation; however, such allocation is
not expected to differ materially from the preliminary estimates. For the Jalou
L.L.C. completed acquisitions and Gold Dust, amortization expense has been
recorded for the goodwill arising from the acquisitions. As all other
acquisitions will occur after June 30, 2001, based on the
F-1
Financial Accounting Standards Board's proposed rules for business combinations
and amortization of goodwill, no goodwill amortization has been presented in the
pro forma financial statements. The unaudited pro forma financial statements of
income do not include the impact of nonrecurring charges or credits directly
attributable to the transactions. In the opinion of management, all adjustments
have been made that are necessary to present fairly the pro forma data.
The unaudited pro forma consolidated financial statements should be read in
conjunction with the related notes. The unaudited pro forma consolidated
financial statements are presented for illustrative purposes only and are not
necessarily indicative of the results of operations or financial position that
would have been achieved had the transactions reflected therein been consummated
as of the date indicated, or of the results of operations or financial position
for any future periods.
F-2
GAMECO UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF INCOME (in thousands)
Six Months Ended June 30, 2001
Jalou
Jalou II (Comp. Acq.
Diversified Black Hawk Period prior period prior to Jalou
Opportunities Gaming Jalou II (a) to acq.date)(C) acq.date) (b) (Probable Acq.) (d)
------------- ----------- ------------ --------------- ---------------- -------------------
Revenues
Gaming revenues $ 13,570 $ 48,450 $ 975 $ 127 $ 350 $ 2,607 (7)
(10)
Other 5,221 7,342 1,810 413 302 7,188 (4)
------------- ----------- ------------ --------------- ---------------- -------------------
Total revenue 18,791 55,792 2,785 540 652 9,795
Less: promotional allowances - (8,201) - - - -
------------- ----------- ------------ --------------- ---------------- -------------------
Net revenues 18,791 47,591 2,785 540 652 9,795
------------- ----------- ------------ --------------- ---------------- -------------------
Costs and expenses
Direct expenses 13,126 20,729 1,915 383 265 6,163 (7)
Selling, general and
administrative 3,109 15,540 568 90 169 1,995 (4)
(11)
(12)
(10)
Depreciation and amortization 1,120 3,761 91 - 22 410 (1)
(5)
(10)
Privatization and other
non-recurring costs 328 1,115 - - - - (8)
------------- ----------- ------------ --------------- ---------------- -------------------
17,683 41,145 2,574 473 456 8,568
------------- ----------- ------------ --------------- ---------------- -------------------
Operating income 1,108 6,446 211 67 196 1,227
(3)
Interest expense (1,768) (2,707) (173) (17) (14) (261) (6)
------------- ----------- ------------ --------------- ---------------- -------------------
Income before equity interest
in investments, minority
interest and income taxes (660) 3,739 38 50 182 966
Six Months Ended June 30, 2001
Proforma Gameco
Adjustments Consolidated
------------- --------------
Revenues
Gaming revenues $ 2,483 $ 68,525
(37)
Other (999) 21,277
------------- --------------
Total revenue 1,447 89,802
Less: promotional allowances - (8,201)
------------- --------------
Net revenues 1,447 81,601
------------- --------------
Costs and expenses
Direct expenses 1,924 44,505
Selling, general and
administrative (999) 19,341
(956)
(100)
(75)
Depreciation and amortization 47 5,283
(166)
(2)
Privatization and other
non-recurring costs (1,443)
------------- --------------
(1,770) (69,129)
------------- --------------
Operating income 3,217 12,472
(4,841)
Interest expense 687 (9,094)
------------- --------------
Income before equity interest
in investments, minority
interest and income taxes ( 937) 3,378
F-3
Equity in earnings of investments 1,352 - - - - - (4) (1,352) -
Minority interests 370 (885) - - - - (4) 515 -
------ ------- ------ ------ ------ ------ ------- ------
Income before income taxes 1,062 2,854 38 50 182 966 (1,774) 3,378
Income taxes - (1,391) - - - - (2) 1,391 -
------ ------- ------ ------ ------ ------ ------- ------
Net income $1,062 $ 1,463 $ 38 $ 50 $ 182 $ 966 $ (383) $3,378
====== ======= ====== ====== ====== ====== ======= ======
(a) Includes the accounts of Winner's Choice Truck Stop, Inc. since its February
2001 acquisition date.
(b) Includes the accounts of Houma Truck Stop and Casino and Cash's Casino
management contract revenue for the period prior to their February 2001
acquisition date.
(c) Includes the accounts of Winner's Choice Truck Stop, Inc.contract for the
period prior to its February 2001 acquisition date.
(d) Includes the accounts of the proposed truck stop acquisitions described in
Note 1 to these financial statements.
See accompanying notes to unaudited pro forma consolidated financial statements.
F-4
GAMECO UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET (in thousands)
June 30, 2001
Diversified Black Hawk Jalou Jalou II Jalou Gold Dust West
Opportunities Gaming (Comp. Acq.) (Comp. Acq.) (Probable Acq.) Acquisition
------------- ---------- ------------ ------------ --------------- --------------
Assets
Current
Cash and equivalents $ 5,065 $ 9,557 $ - $ 478 $ 1,054 $ -
Other 4,861 2,733 - 342 1,131 -
------------- ---------- ------------ ------------ --------------- --------------
9,926 12,290 - 820 2,185 -
------------- ---------- ------------ ------------ --------------- --------------
Property and equipment, net 65,231 87,994 - $ 3,258 9,217 -
------------- ---------- ------------ ------------ --------------- --------------
Other assets
Goodwill, net 10,736 20,443 - 912 418 -
Investments 19,368 - - - - -
Other 318 2,574 - - - -
------------- ---------- ------------ ------------ --------------- --------------
30,422 23,017 - 912 418 -
------------- ---------- ------------ ------------ --------------- --------------
Total assets $ 105,579 $ 123,301 $ - $ 4,990 $ 11,820 $ -
============= ========== ============ ============ =============== ==============
Proforma Gameco
Adjustments Consolidated
----------- ------------
Assets
Current
Cash and equivalents (1) $ (454) $ 16,407
(3) 3,370
(10) (2,663)
(2) (619)
Other (10) (220) 8,228
----------- ------------
(586) 24,635
----------- ------------
(1) 1,850
(5) (13,290)
Property and equipment, net (10) (506) 153,754
------------
Other assets
Goodwill, net (1) 4,884 43,058
(5) 5,680
(10) (15)
Investments (4) (19,158) -
(10) (210)
(3) 6,500
Other (10) (318) 9,074
----------- ------------
(2,637) 52,132
----------- ------------
Total assets $ (15,169) $ 230,521
----------- ------------
F-5
Liabilities and Equity
Current liabilities
Accounts payable and accrued expenses $ 7,877 $ 7,473 $ - $ 301 $ 303 $ - (1) $ (303) 14,652
(10) (999)
Advances from affiliates - - - - 4,327 - (1) (4,327) -
Notes payable - related parties, current 1,000 - - - - - (10) (1,000) -
(1) (951)
Current maturities of long-term debt 1,069 375 - 6 951 - (3) (6) 1,444
------- ------- ------- ------- ------- ------- --------- -------
9,946 7,848 - 307 5,581 - (7,586) 16,096
------- ------- ------- ------- ------- ------- --------- -------
Long-term liabilities
Long-term debt 11,246 63,908 - 3,499 5,875 - (1) (5,875) 160,008
(1) 18,100
(3) 21,665
(5) 41,590
Notes payable - related parties 33,300 - - - - - (10) (13,100) -
(6) (20,200)
Other liability - 1,221 - - - - (2) (627) 594
------- ------- ------- ------- ------- ------- --------- -------
44,546 65,129 - 3,499 5,875 - 41,553 160,602
------- ------- ------- ------- ------- ------- --------- -------
Total Liabilities 54,492 72,977 - 3,806 11,456 - 33,967 176,698
------- ------- ------- ------- ------- ------- --------- -------
(5) (25,039)
Minority interests 18,212 7,008 - - - - (4) (181) -
------- ------- ------- ------- ------- ------- --------- -------
(1) (364)
(2) 8
(3) 14,000
(4) 181
(5) (43,320)
(6) 20,200
F-6
Equity 32,875 43,316 - 1,184 364 - (10) (14,621) 53,823
---------- --------- -------- -------- --------- --------- --------- ---------
Total liabilities and equity $ 105,579 $ 123,301 $ - $ 4,990 $ 11,820 $ - $ (15,169) $ 230,521
========== ========== ======== ======== ========= ========= ========= =========
See accompanying notes to unaudited pro forma consolidated financial statements.
F-7
GAMECO UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF INCOME (in thousands)
Year Ended December 31, 2000
Diversified Black Hawk Jalou Jalou II Jalou Gold Dust West
Opportunities Gaming (Comp. Acq.) (Comp. Acq.) (Probable Acq.)(a) Acquisition
------------- ---------- ------------ ------------ ------------------ --------------
Revenues
Gaming revenues $27,419 $ 81,988 $3,367 $1,295 $ 1,988 $17,262 (7)
(10)
(4)
Other 3,289 10,945 2,622 4,287 10,913 2,703 (9)
------- -------- ------ ------ ------- -------
Total revenue 30,708 92,933 5,989 5,582 12,901 19,965
Less: promotional allowances - (14,058) - - - (941)
------- -------- ------ ------ ------- -------
Net revenues 30,708 78,875 5,989 5,582 12,901 19,024
------- -------- ------ ------ ------- -------
Costs and expenses
Direct expenses 23,703 34,693 2,128 3,936 9,644 6,528 (7)
Selling, general and
administrative 5,126 24,801 1,049 748 2,571 7,569 (4)
(9)
(11)
(12)
(10)
(1)
(5)
(9)
Depreciation and amortization 1,719 5,746 300 219 423 1,324 (10)
------- -------- ------ ------ ------- -------
30,548 65,240 3,477 4,903 12,638 15,421
------- -------- ------ ------ ------- -------
Operating income (loss) 160 13,635 2,512 679 263 3,603
(3)
(6)
Interest expense, net (3,104) (3,139) (118) (228) (466) (724) (9)
------- -------- ------ ------ ------- -------
Proforma Gameco
Adjustments Consolidated
----------- ------------
Revenues
Gaming revenues $ 4,156 $137,422
(53)
(1,453)
Other (322) 32,984
-------- --------
Total revenue 2,328 170,406
Less: promotional allowances - (14,999)
-------- --------
Net revenues 2,328 155,407
-------- --------
Costs and expenses
Direct expenses 3,194 83,826
Selling, general and
administrative (1,453) 38,548
(592)
(1,070)
(200)
(1)
93
(332)
527
Depreciation and amortization (87) 9,932
-------- --------
79 132,306
-------- --------
Operating income (loss) 2,249 23,101
(10,428)
1,526
Interest expense, net (1,296) (17,977)
-------- --------
F-8
Income before equity interest in
investments,
minority interest and income taxes (2,944) 10,496 2,394 451 (203) 2,879
Equity in earnings of investments
3,833 - - - - - (4)
Minority interests 1,566 (2,059) - - - - (4)
------- ------- ------- ------- ------- -------
Income before income taxes 2,455 8,437 2,394 451 (203) 2,879
Income taxes - (2,976) - - - - (2)
------- ------- ------- ------- ------- -------
Net income (loss) $ 2,455 $ 5,461 $ 2,394 $ 451 $ (203) $ 2,879
======= ======= ======= ======= ======= =======
Income before equity interest in
investments,
minority interest and income taxes (7,949) 5,124
Equity in earnings of investments (3,833) -
Minority interests 493 -
------- -------
Income before income taxes (11,289) 5,124
Income taxes 2,976 -
------- -------
Net income (loss) $(8,313) $ 5,124
======= =======
(a) Includes the accounts of the proposed truck stop acquisitions
described in Note 1 to these financial statements.
See accompanying notes to unaudited pro forma consolidated financial statements.
F-9
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
------------------------------------------
FINANCIAL STATEMENTS
--------------------
(1) To record probable acquisitions of the assets of Jalou video poker truck
stops which include the following four entities:
Jace, Inc., Lucky Magnolia Truck Stop and Casino, Bayou Vista Truck Plaza
and Casino, LLC and Raceland Truck Plaza and Casino, LLC
$18.1 million purchase price, estimated $1.85 million write-up of fixed
assets to fair value. Excess of purchase price over fair value of assets
acquired of $4.88 million allocated to non-amortizing goodwill. Debt of
$18.1 million incurred to fund the acquisition. Pro forma adjustments to
record the acquisition are as follows (in thousands):
Reduce cash to amount acquired $ (454)
Eliminate liabilities not assumed 11,456
Estimated fair value of fixed assets in
excess of book value 1,850
Record goodwill 4,884
Record acquisition debt (18,100)
Eliminate existing equity (364)
Additional depreciation expense of $93,000 and $47,000 recorded for the
year ended December 31, 2000 and the six months ended June 30, 2001,
respectively, due to the write-up of fixed assets.
(2) Eliminate deferred income taxes and tax expense as Gameco, Inc will be a
Subchapter "S" corporation and therefore its owners will be liable for the
taxes on their share of the corporation's taxable income.
(3) Eliminate refinanced debt, record new funding and classify current
maturities of new funding, including estimated additional interest expense
(in millions):
New funding:
Principal Balance Interest Rate
----------------- -------------
Capital contribution $ 14.00
=======
Bonds $135.00 11.25%
Claude Penn notes (probable acquisitions) 5.10 8.50
-------
Total new debt 140.10
-------
Existing funding which will not be refinanced:
Black Hawk bonds 5.48 6.70
Claude Penn Notes (prior acquisitions) 4.80 8.00
Subordinated debt to affiliates 9.00 10.00
Maryland Jockey Club and other 2.07 7.75
-------
Total pro forma debt outstanding $161.45
=======
F-10
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
------------------------------------------
FINANCIAL STATEMENTS
--------------------
(3) cont. Estimated uses of new funding are as follows (in millions):
Total new funding (capital contribution and debt proceeds) $154.10
Less:
Pay-off Black Hawk line of credit (58.80)
Pay-off notes to affiliates - Jalou and Jalou II (9.00)
Pay-off notes to affiliate - Colonial Holdings (25.74)
Purchase of Black Hawk shares (36.85)
Purchase of Colonial shares (4.74)
Proposed Jalou acquisitions (Note 1) (18.10)
Debt issuance costs (6.50)
--------
Net funds credited to cash $ 3.37
========
An additional $.5 million will be advanced by an affiliate to Colonial
Downs, subsequent to June 30, 2001, to provide additional working capital.
The advance will be repaid from the new debt proceeds.
Debt issuance costs will be amortized to interest expense over the term of
the new bonds (seven years).
(4) Eliminate intercompany investments, minority interest, earnings and
management fees.
(5) Record acquisition of unowned Colonial and Black Hawk shares summarized as
follows (in millions):
Colonial Black Hawk
----------------- -----------
Purchase price $ 4.74 $36.85
Diversified Opportunities Group
existing investment balance 13.94 12.15
------- ------
Total investment 18.68 49.00
Net assets acquired 31.97 43.32
------- ------
Excess (deficiency) of total investment
over net assets acquired $(13.29) $ 5.68
======= ======
Excess of total investment for Black Hawk is allocated to non-amortizing
goodwill and deficiency for Colonial Holdings is allocated to property and
equipment (also results in
F-11
reduction of depreciation expense of $332,000 and $166,000 for the year
ended December 31, 2000 and six months ended June 30, 2001, respectively).
(6) To transfer an existing affiliated loan of $20.2 million to equity, and
eliminate the related interest expense for the periods presented
($1,526,000 and $687,000, for December 31, 2000 and June 30, 2001,
respectively) as it will be contributed to capital in conjunction with the
transaction
F-12
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
------------------------------------------
FINANCIAL STATEMENTS
--------------------
(7) To eliminate third party management contracts related to the truck stops
that will be cancelled upon the acquisitions, and record expense that will
be incurred to perform the services provided under the cancelled contracts
as well as reclass state gaming taxes which had been netted against gaming
revenue under the former contracts.
(8) Elimination of privatization and other non-recurring costs.
(9) Gold Dust West pro forma acquisition and adjustments for period prior to
acquisition as follows:
(a) Elimination of lease payments and rent paid to the sole stockholder
under leasehold property rights and other leases. The title to the
leased and rented property owned by the sole stockholder transferred
to the new owner at closing.
(b) Elimination of various expense allowances and salaries paid on behalf
of the sole stockholder.
(c) Adjustment to depreciation of gaming facilities and amortization of
goodwill and debt issue costs based on the allocation of the purchase
price with assumed useful lives of 39 years for the building and
improvements, 5 years for the furniture, fixture, and equipment, and
15 years for the intangible assets, and forty months for the debt
issue costs.
(d) Elimination of interest income associated with a note receivable from
sole stockholder not assumed in the purchase.
(e) Adjustment to interest expense on borrowings from the Bank Credit
Facility net of interest expense related to Gold Dust Motel, Inc. debt
not assumed by the Company at an effective rate of 8.375%.
(10) Eliminate assets, liabilities and certain operations held by Diversified
Opportunities that will not be contributed to Gameco.
(11) Remove Diversified Opportunities business developmental expenses as this
function will no longer be performed through Gameco.
(12) Remove redundant corporate overhead (i.e., investor relations function)
estimated at $200,000 annually.
F-13
COLONIAL HOLDINGS, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Pursuant to Section 13.1-663 of the Code of Virginia of 1950, as amended, the
undersigned shareholder (the "Shareholder") of COLONIAL HOLDINGS, INC., a
Virginia corporation (the "Corporation"), hereby appoints Stephen D. Peskoff and
Ian M. Stewart, or either of them, with full power of substitution, as proxies
to represent and to vote all shares of the Common Stock of the Corporation owned
by the Shareholder (together the "Shares"), as directed below at the Special
Meeting of Shareholders of the Corporation to be held at 1:00 p.m., on
Wednesday, November 7, 2001, at _____________________________________, and all
adjournments thereof (the "Special Meeting"), as if the Shareholder were present
in person and voting at the Special Meeting. Any proxy heretofore given by the
Shareholder for the Special Meeting is hereby revoked.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" PROPOSAL 1 BELOW.
1. The Proposal, as described in the Notice of Special Meeting of
Shareholders and Proxy Statement dated, September 14, 2001, previously delivered
to the Shareholder (the "Notice"), and specifically the approval of the
Agreement and Plan of Merger, dated as of June 11, 2001, among the Corporation,
Gameco, Inc., Gameco Acquisition, Inc. and Jeffrey P. Jacobs described in and a
copy of which accompanies the Notice (the "Merger Agreement"), in substantially
the same form and substance as the copy accompanying the Notice:
FOR [_] AGAINST [_] ABSTAIN [_]
2. In the event it becomes necessary, a motion to adjourn the Special
Meeting to another time and/or place (for the purpose of soliciting additional
proxies or allowing additional time for the satisfaction of conditions to the
Merger Agreement).
FOR [_] AGAINST [_] ABSTAIN [_]
3. In their discretion, the proxies are authorized to vote the Shares
upon such other business as may properly come before the Special Meeting.
FOR [_] AGAINST [_] ABSTAIN [_]
The Shareholder acknowledges having received and reviewed prior to the
Special Meeting the Merger Agreement. If this proxy is executed, but no
direction is provided as to how the shareholder desires to vote under either of
the foregoing proposals, the proxy shall be deemed voted "FOR" the proposal
where no direction is provided.
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ON THE RECORDS OF THE CORPORATION. IF
HELD JOINTLY, BOTH JOINT TENANTS MUST SIGN. WHEN SIGNING IN A REPRESENTATIVE
CAPACITY, INCLUDING AS TRUSTEE OR CUSTODIAN, PLEASE GIVE YOUR FULL TITLE AS
SUCH. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY AN AUTHORIZED
OFFICER. IF A PARTNERSHIP OR LIMITED LIABILITY COMPANY, PLEASE SIGN IN THE
PARTNERSHIP'S OR COMPANY'S NAME BY AN AUTHORIZED PERSON.
______________________________________
Signature
______________________________________
Title (if signed by representative)
______________________________________
Additional Signature (if held jointly)
Date: _____________________
______________________________________
Print Shareholder Name(s)
Please sign, date and return the proxy card promptly using the enclosed postage
prepaid envelope.