SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period ended March 31, 2001
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 333-18295
COLONIAL HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
VIRGINIA 54-1826807
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
10515 Colonial Downs Parkway
New Kent, VA 23124
(Address of Principal Executive Offices)
(804) 966-7223
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of Shares of Class A Common Stock outstanding as of May 11, 2001 -
5,025,239
Number of Shares of Class B Common Stock outstanding as of May 11, 2001 -
2,242,500
COLONIAL HOLDINGS, INC.
INDEX
Page
PART I. FINANCIAL STATEMENTS AND NOTES Number
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Item 1. Financial Statements and Notes 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
2
COLONIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
March 31, December 31,
ASSETS 2001 2000
------------ --------------
Current assets:
Cash and cash equivalents $ 1,278 $ 1,119
Horsemen's deposits 1,461 602
Accounts receivable 438 351
Prepaid expenses and other assets 418 97
------------ --------------
Total current assets 3,595 2,169
Property, plant and equipment
Land and improvements 15,640 15,640
Buildings and improvements 48,795 48,586
Equipment, furnishings, and fixtures 2,973 2,972
Leasehold improvements 1,124 1,124
------------ --------------
68,532 68,322
Less accumulated depreciation 5,820 5,433
------------ --------------
Property, plant and equipment, net 62,712 62,889
Licensing costs, net of accumulated
amortization of $348 and $337, respectively 689 703
Other assets 73 92
------------ --------------
Total assets $ 67,069 $ 65,853
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,521 $ 2,967
Purses due horsemen 1,668 306
Accrued liabilities and other 2,397 2,089
Current maturities of long-term debt 1,127 936
------------ --------------
Total current liabilities 7,713 6,298
Long-term debt and capital lease obligations 1,088 1,160
Notes payable - related parties 25,738 25,738
------------ --------------
Total liabilities 34,539 33,196
Commitments and contingencies
Stockholders' equity
Class A, common stock, $0.01 par value; 12,000 shares
authorized; 5,025 shares issued and outstanding 50 50
Class B, common stock, $0.01 par value; 3,000 shares
authorized; 2,242 shares issued and outstanding 23 23
Additional paid-in capital 42,873 42,873
Accumulated deficit (10,416) (10,289)
------------ --------------
Total stockholders' equity 32,530 32,657
------------ --------------
Total liabilities and stockholders' equity $ 67,069 $ 65,853
============ ==============
The accompanying notes are an integral part of the financial statements.
3
COLONIAL HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
Three Months Ended
March 31,
2001 2000
------- -------
Revenues
Pari-mutuel and simulcasting commissions $6,929 $6,524
Other 476 376
------- -------
Total revenues 7,405 6,900
Operating expenses
Direct operating expenses
Purses, fees, and pari-mutuel taxes 3,198 2,789
Simulcast and other direct expenses 2,544 2,384
------- -------
Total direct operating expenses 5,742 5,173
Selling, general and administrative expenses 720 781
Depreciation and amortization 401 425
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Total operating expenses 6,863 6,379
------- -------
Earnings from operations 542 521
Interest expense, net (669) (707)
------- -------
Loss before income taxes (127) (186)
Provision for (benefit from) income taxes - -
------- -------
Net loss $ (127) $ (186)
======= =======
Earnings (loss) per share data:
Basic and diluted loss per share $(0.02) $(0.03)
Weighted average number of shares outstanding 7,267 7,267
The accompanying notes are an integral part of the financial statements.
4
COLONIAL HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Three Months Ended
March 31,
2001 2000
------- -------
OPERATING ACTIVITIES:
Net loss $ (127) $ (186)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 401 425
Changes in operating assets and liabilities:
Increase in accounts receivable and other assets (389) (559)
Net decrease in trade accounts payable and accrued liabilities (98) (270)
Decrease in horsemen's deposits net of purses due
horsemen 503 872
------- -------
Net cash provided by operating activities 290 282
------- -------
INVESTING ACTIVITIES:
Capital expenditures, net of disposals (210) (6)
Decrease in construction payables (40) -
------- -------
Net cash used in investing activities (250) (6)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt, capital leases, and other 335 265
Payments on long-term debt and capital leases (216) (326)
------- -------
Net cash provided by (used in) financing activities 119 (61)
------- -------
Net increase in cash and cash equivalents 159 215
Cash and cash equivalents, beginning of period 1,119 1,313
------- -------
Cash and cash equivalents, end of period $1,278 $1,528
======= =======
The accompanying notes are an integral part of the financial statements.
5
COLONIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted. These financial
statements should be read in conjunction with the Company's annual financial
statements for the year ended December 31, 2000 included in the Company's Form
10=K filed with the Securities and Exchange Commission on April 3, 2001.
In the opinion of management, the financial statements include all
adjustments (consisting only of normal recurring adjustments) considered
necessary to present fairly the financial position of the Company as of March
31, 2001 and the results of its operations and its cash flows for the respective
three month periods ended March 31, 2001 and 2000. Interim results for the
three months ended March 31, 2001 are not necessarily indicative of results that
may be expected for the fiscal year ending December 31, 2001.
Basic earnings (loss) per share is computed by dividing earnings available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilutive effect of securities (which can consist of stock options and warrants)
that could share in earnings of an entity.
Certain reclassifications have been made in the prior period's financial
statements in order to conform to the March 31, 2001 presentation.
2. LONG-TERM DEBT AND NOTES PAYABLE-RELATED PARTIES
Long-Term Debt and Notes Payable-Related Parties consisted of the
following:
March 31, December 31,
2001 2000
----------- ------------
Credit facility payable to CD Entertainment, Ltd., maturing
June 2005, with monthly interest payments at 9.96% and
principal payments of $1 million each due June 30, 2002,
2003 and 2004, with all unpaid principal and interest due
2005, collateralized by substantially all assets of
the Company $25,737,937 $ 25,737,937
6
COLONIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. LONG-TERM DEBT AND NOTES PAYABLE-RELATED PARTIES - (CONTINUED)
March 31, December 31,
2001 2000
----------- -------------
Note payable to Maryland Jockey Club, maturing December
2005, bearing interest at a rate of 7.75% payable quarterly for
the first two years and equal installments of interest and
principal to be paid quarterly over the remaining five year
term of the note, beginning in the first quarter of 2001 1,450,000 1,450,000
Note payable to Maryland Jockey Club, bearing interest at
the prime rate (8.0% at March 31, 2001), payable in two
equal installments during the years 2000 and 2001 300,308 300,308
Note payable to a bank, maturing October 2001, bearing
interest at prime plus 1.0% (9.0% at March 31, 2001),
with monthly principal payment of $15,000, collateralized
by certain fixed assets 255,000 300,000
Notes payable to an insurance company, maturing in 2001,
bearing interest at 7.52% 209,334 45,398
----------- -------------
27,952,579 27,833,643
Less current maturities 1,127,142 935,706
Current maturities - related parties - -
----------- -------------
26,825,437 26,897,937
Less long-term debt - related parties 25,737,937 25,737,937
----------- -------------
Long-term debt $ 1,087,500 $ 1,160,000
=========== =============
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
The Company, through its subsidiaries, holds the only licenses to own and
operate a racetrack (the "Track") and Racing Centers in Virginia. The Company
currently operates Racing Centers in Chesapeake, Richmond, Hampton, and Alberta,
Virginia, and may open up to two additional Racing Centers under applicable law
if suitable opportunities are identified and referenda are passed.
The Company's revenues are comprised of (i) pari-mutuel commissions from
wagering on races broadcast from out-of-state racetracks to the Company's Racing
Centers and the Track using import simulcasting; (ii) wagering at the Track and
the Company's Racing Centers on its live races; (iii) admission fees, program
and racing form sales, and certain other ancillary activities; (iv) commissions
from food and beverage sales and concessions; (v) fees from wagering at
out-of-state locations on races run at the Track using export simulcasting; and
(vi) starting in 2001, management fees for the operation of truckstops and
gaming assets owned by an affiliate of the Company's largest shareholder.
PROFIT CENTER ANALYSIS
For the three months ended March 31, 2001 net loss decreased $59,000
compared to the corresponding period of the prior year. Net income at the
Racing Centers decreased compared to the corresponding prior period by $154,000
for the three months ended March 31, 2001. Net loss for the Track and live
racing operations decreased by $73,000, corporate overhead decreased by $107,000
and Colonial Holdings Management, Inc. (Colonial Management), a wholly owned
subsidiary of the Company, generated $33,000 in net management fees for the
three months ended March 31, 2001. An analysis of these changes is set forth
below in reviews of the operations at the Racing Centers and the Track,
respectively.
Racing Centers. Revenues at the Racing Centers increased $386,000 for the
three months ended March 31, 2001, compared to the corresponding period of the
prior year. Direct expenses increased by $569,000 compared to the corresponding
period of the prior year due primarily to a $277,000 increase in purse expense.
The Company entered into a three year agreement with the Virginia Horsemen's
Benevolent and Protective Association ("VaHBPA"), effective January 1, 1999,
that set a minimum payment of $3.125 million for 1999 purses, with 25 days of
live racing with average daily purses of no less than $125,000. Of the total
$3.125 million guaranteed payments, $1.5 million was considered to be an advance
of purse money due in years 2000 and 2001.
In 2000, the Company paid 5 1/4% of the Handle generated on simulcast
thoroughbred racing to the thoroughbred purse account and will continue to do so
in 2001. In 2000, the VaHBPA repaid $750,000 of the advance plus interest
thereon back to the Company, effectively reducing the Company's 2000 purse
expense. Because of loan arrangements being made by the VaHBPA, the Company
believes that the proposed purse expenditure for 2001 will exceed the Company's
contractually required payments into the purse account. Accordingly, the Company
anticipates that the remaining $750,000 due from the VaHBPA will not be
8
repaid in 2001 and therefore will not effectively reduce the Company's 2001
purse expense. The purse expense will ultimately be reduced when the advance is
repaid. Other expenses increased by $86,000 for the three months ended March
31, 2001, compared to the corresponding period of the prior year. As a result,
net income at the Racing Centers decreased $154,000 for the three months ended
March 31, 2001.
Track. Net loss at the Track decreased by $73,000 for the three months
ended March 31, 2001, compared to the corresponding periods of the prior year.
Off season revenue at the Track increased $19,000 compared to the corresponding
period of the prior year. Overhead and other costs associated with maintaining
the Track facility decreased $54,000 for the three months ended March 31, 2001,
compared to the corresponding period of the prior year.
Corporate Overhead and Colonial Management. Increases in salaries, and
consulting fees were offset by reductions in facilities expenses, professional
fees, and administrative expenses, resulting in a net $107,000 decrease in
corporate overhead for the three months ended March 31, 2001, compared to the
corresponding period of the prior year. Colonial Management generated revenues
of $100,000 and had $67,000 of related labor and travel expenses from managing
truckstops in Louisiana for the three months ended March 31, 2001.
Interest Expense, Net. Interest expense, net of interest income, was
approximately the same for the three months ended March 31, 2001 as for the
corresponding period of the prior year.
REVENUE AND EXPENSE ANALYSIS
The following table sets forth certain operating results as a percentage of
total revenues for the periods indicated:
(Percentage of Net Revenues)
Three Months Ended
March 31,
---------------
2001 2000
------ -------
Revenues:
Pari-mutuel and simulcasting commissions 93.6% 94.6%
Other 6.4% 5.4%
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Total revenues 100.0% 100.0%
Direct operating expenses:
Purses, fees, and pari-mutuel taxes 43.2% 40.4%
Simulcast and other direct expenses 34.4% 34.6%
------ -------
Total direct operating expenses 77.6% 75.0%
Selling, general, and administrative expenses 9.7% 11.3%
Depreciation and amortization 5.4% 6.2%
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Earnings from operations 7.3% 7.5%
Interest income (expense), net (9.0)% (10.2)%
------ -------
Net loss (1.7)% (2.7)%
====== =======
Net Earnings (Loss). Net loss for the three months ended March 31, 2001
was $127,000, compared to net loss of $187,000 for the corresponding period of
the prior year.
Total Revenues. Total revenues for the three months ended March 31, 2001
increased $505,000 (7.3%) from the corresponding period of the prior year.
Compared to the first quarter of 2000, off season track revenues increased
$19,000. Revenues from the Racing Centers increased $386,000 for the three
months ended March 31, 2001, compared to the corresponding period of the prior
year. In January 2000, the Racing Centers were closed for two days because of
snow and operated for several more days with limited simulcast signals due to
9
the closure of several Northeastern tracks. Current year revenues have been
adversely affected by passage of legislation in April 2000 requiring the Company
to remit 30% of breakage revenue to horseman's benevolent associations. Prior
to enactment of this law, the Company was entitled to retain all breakage.
Breakage revenue lost for the three months ended March 31, 2001 was
approximately $41,000.
Direct Operating Expenses. As a percentage of revenues, direct operating
expenses increased 2.6% for the three months ended March 31, 2001, from the
corresponding period of the prior year. The increase in operating expenses is
primarily due to an increase in purse expense. Purse expense was $285,000
higher for the three months ended March 31, 2001 compared to the corresponding
period of the prior year. Other direct expenses were $177,000 higher the three
months ended March 31, 2001, than for the corresponding periods of the prior
year. The increase in other direct expenses correlated to the increase in
Handle.
Selling, General and Administrative Expenses (SG&A). As a percentage of
revenues, SG&A decreased 1.6% from 11.3% to 9.7% for the three months ended
March 31, 2001 from the corresponding period of the prior year. The decrease in
SG&A as a percentage of revenues for the three months ended March 31, 2001 was
due primarily to reductions in taxes and licenses, utilities, depreciation,
amortization, professional and legal fees offset by increases in salaries,
consulting and marketing expenses.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has incurred aggregate net losses of
approximately $10.4 million and has a working capital deficit of $4.1 million at
March 31, 2001. The Company's continued existence is dependent upon its ability
to obtain adequate working capital to support its operations until they become
profitable. The Company has been and continues to be largely dependent on the
financial support of its principal stockholder, who through affiliated entities
and related parties is the holder of $25.7 million of debt from the Company as
of March 31, 2001. The Company is seeking continued financial support from this
stockholder.
Cash Flows. After adjusting the net loss of $127,000 for non-cash items
such as depreciation and amortization, $274,000 in cash was provided. The
decrease in accounts payable and other operating liabilities and the increases
in accounts receivable and other assets and horsemen's deposits and purses
provided $16,000 of cash resulting in net cash provided by operating activities
of $290,000. Investing activities, consisting of capital expenditures and
decreases in construction payables, utilized approximately $250,000 of cash.
Financing activities provided approximately $119,000 of cash.
10
EBITDA is a widely accepted financial indicator of a company's ability to
service and incur debt. The Company's EBITDA for the first three months of 2001
and 2000 was substantially unchanged at approximately $942,000 and $946,000,
respectively. EBITDA should not be considered in isolation from or as a
substitute for net income or cash flow measures prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity. EBITDA is defined as the sum of income before
interest, income taxes, and depreciation and amortization.
EFFECT OF INFLATION
The impact of inflation on the Company's operations has not been
significant in recent years. There can be no assurance, however, that a high
rate of inflation in the future will not have an adverse effect on the Company's
operating results.
SEASONALITY AND THE EFFECT OF INCLEMENT WEATHER
Revenues and expenses relating to the Track may be higher during scheduled
live racing than at other times of the year. In addition, weather conditions
such as those produced by a hurricane (Hurricane Floyd struck the area in 1999),
sometimes cause cancellation of outdoor horse races or curtail attendance, both
of which reduce wagering. Attendance and wagering at both outdoor races and
indoor Racing Centers also may be adversely affected by certain holidays and
professional and college sports seasons as well as other recreational
activities. Conversely, attendance and wagering may be favorably affected by
special racing events which stimulate interest in horse racing, such as the
Triple Crown races in May and June and the Breeders' Cup in November. As a
result, the Company's revenues and net income may fluctuate from quarter to
quarter. Given that a substantial portion of the Company's Track expenses are
fixed, the loss of scheduled racing days could have a material adverse affect on
the Company's profitability. The Company believes that simulcasting diminishes
the effect of inclement weather on wagering.
GOING PRIVATE TRANSACTION
On March 1, 2001, the Company announced that its Board of Directors
received an offer from Jeffrey P. Jacobs, Chairman of the Board, Chief Executive
Officer, and the Company's largest shareholder, to acquire the Company. Upon
receipt of the offer, the Company formed a Special Committee to evaluate the
proposal.
Mr. Jacobs indirectly owns approximately 43.5% of the stock of the Company.
He proposed a transaction to purchase all of the remaining shares for a cash
price of $1.00 per share. U.S. Bancorp Libra, a division of U.S. Bancorp
Investments, Inc., is acting as advisor to Mr. Jacobs. The Special Committee has
employed independent legal counsel and a financial advisor to assist it in
analyzing the offer and negotiating with Mr. Jacobs.
Consummation of the transaction is subject to various conditions, including
the negotiation and execution of definitive agreements, approval by the
Company's Board of Directors and shareholders, the obtaining of various
regulatory approvals, and Mr. Jacobs' ability to obtain financing necessary for
the transaction. If a transaction with Mr. Jacobs occurs, it is anticipated that
it would close in the third quarter of 2001.
11
MANAGEMENT AGREEMENT WITH JALOU
The Company's subsidiary, Colonial Holdings Management, Inc., has signed a
management contract with Jalou, an affiliate of Mr. Jacobs, the Chairman and CEO
of the Company, to manage two truckstops that Jalou recently acquired in
Louisiana and to manage the rights to a portion of the gaming revenues from a
third truckstop. Under the management contract, the Company oversees all
aspects of the operations of the truckstops acquired. The management agreement
calls for the Company to provide these services in return for a fee of 3% of the
truckstops' revenue and 5% of the truckstops' EBITDA. Each truckstop offers
fueling, convenience store and restaurant facilities as well as 50 video poker
gaming devices.
FORWARD LOOKING INFORMATION
The statements contained in this report which are not historical facts,
including, but not limited to, statements found under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" above,
are forward looking statements that involve a number of risks and uncertainties.
The actual results of the future events described in such forward looking
statements in this report could differ materially from those contemplated by
such forward looking statements. Among the factors that could cause actual
results to differ materially are the risks and uncertainties discussed in the
report, including without limitations the portions of such statements under the
caption referenced above, and the uncertainties set forth from time to time in
the Company's other public reports, filings and public statements. Such risks
include but are not limited to acts by parties outside the control of the
Company, including the Maryland Jockey Club, horsemen associations, the Virginia
Racing Commission, political trends, the effects of adverse general economic
conditions, the approval of future Racing Centers by referenda and/or the
Commission and governmental regulation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most of the Company's debt obligations at March 31, 2001 were either fixed
rate obligations or variable rate obligations with its majority shareholder,
which provide the Company various options in determining the rate of interest.
Management therefore does not believe that the Company has any material market
risk from its debt obligations.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Mechanic Lien Litigation. In Baker Roofing Company v. Colonial Downs
-------------------------- ----------------------------------------
Holdings, Inc., et al. (New Kent County Circuit Court Case No. CH98-76), a
- ------------------------
roofing subcontractor seeks payment of $137,790.10 and its subcontractor in turn
seeks payment of $40,541.32 in NCI Building Components v. Baker Roofing Company,
-------------------------------------------------
et al. (New Kent County Circuit Court Case No. CH98-78). An agreement was
- ------
reached to settle these claims in March 2001.
Contract Dispute with AT&T. The Company was served on March 30, 2001 with a
--------------------------
suit by AT&T Corp. alleging a breach of 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). The Company is vigorously contesting
the claim.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Reports on Form 8-K - The Company filed Current Reports
on Form 8-K during the three months
ended March 31, 2001 relating to
the resignation of a member from
the Board of Directors and the
appointment of a replacement and
announcing the formation of a
Special Committee of the Board of
Directors to consider an offer by
the Chairman of the Board and CEO
of the Company to acquire the
Company.
B. Management Agreement, dated as of February 7, 2001, among
Jalou L.L.C., Jalou II Inc. and
Colonial Holdings Management, Inc.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLONIAL HOLDINGS, INC.
By: /s/ Ian M. Stewart
----------------------------------------
Ian M. Stewart, President
and Chief Financial Officer
May 15, 2001
14