1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period ended March 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 333-18295
COLONIAL DOWNS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
VIRGINIA 54-1826807
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
10515 Colonial Downs Parkway
New Kent, VA 23124
(Address of Principal Executive Offices)
(804) 966-7223
(Registrant's telephone number, including area code)
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 13, 1999 - 5,007,500
Number of Shares of Class B Common Stock outstanding
as of May 13, 1999 - 2,242,500
2
COLONIAL DOWNS HOLDINGS, INC.
INDEX
Page
PART I. FINANCIAL STATEMENTS AND NOTES Number
------
Item 1. Financial Statements and Notes 3
Item 2. Management's Dicussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
3
COLONIAL DOWNS HOLDINGS, INC.
BALANCE SHEETS
(In Thousands, Except Per Share Data)
(Unaudited)
March 31, December 31,
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,498 $ 1,155
Horsemen's deposits 1,011 600
Accounts receivable 149 296
Prepaid expenses and other assets 317 227
--------- ---------
Total current assets 2,975 2,278
Property, plant and equipment
Land and improvements 15,449 15,581
Buildings and improvements 48,292 47,363
Equipment, furnishings, and fixtures 2,749 3,444
Leasehold improvements 1,122 1,122
--------- ---------
67,612 67,510
Less accumulated depreciation 2,579 2,186
--------- ---------
Property, plant and equipment, net 65,033 65,324
Licensing and organization costs, net of accumulated
amortization of $277 and $266, respectively 761 772
Other assets 360 207
--------- ---------
Total assets $ 69,129 $ 68,581
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,715 $ 6,417
Purses due horsemen 1,144 608
Accrued liabilities and other 1,022 730
Current maturities of long-term debt
and capital lease obligations 9,207 9,184
--------- ---------
Total current liabilities 17,088 16,939
Long-term debt and capital lease obligations 8,393 8,508
Notes payable - related parties 6,500 6,500
--------- ---------
Total liabilities 31,981 31,947
Commitments and contingencies
Stockholders' equity
Class A, common stock, $0.01 par value; 12,000 shares
authorized; 5,008 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 42,842 42,842
Accumulated deficit (5,767) (6,281)
--------- ---------
Total stockholders' equity 37,148 36,634
--------- ---------
Total liabilities and stockholders' equity $ 69,129 $ 68,581
========= =========
The accompanying notes are an integral part of the financial statements.
4
COLONIAL DOWNS HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
1999 1998
---------- ----------
Revenues
Pari-mutuel and simulcasting commissions $ 6,622 $ 6,444
Other 402 328
---------- ----------
Total revenues 7,024 6,772
Operating expenses
Direct operating expenses
Purses, fees, and pari-mutuel taxes 2,013 3,193
Simulcast and other direct expenses 2,331 2,592
---------- ----------
Total direct operating expenses 4,344 5,785
Selling, general, and administrative expenses 1,521 1,495
---------- ----------
Total operating expenses 5,865 7,280
---------- ----------
Earnings (loss) from operations 1,159 (508)
Interest expense, net (644) (444)
---------- ----------
Earnings (loss) before income taxes 515 (952)
Provision for (benefit from) income taxes - -
---------- ----------
Net earnings (loss) $ 515 $ (952)
========== ==========
Earnings (loss) per share data:
Basic and diluted earnings (loss) per share $ 0.07 $ (0.13)
Weighted average number of shares outstanding 7,250 7,250
The accompanying notes are an integral part of the financial statements.
5
COLONIAL DOWNS HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
March 31, March 31,
1999 1998
----------- -----------
OPERATING ACTIVITIES
Net earnings (loss) $ 515 $ (952)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 405 516
Changes in operating assets and liabilities:
Increase in accounts receivable and other assets (98) (310)
Decrease in trade accounts payable (311) (281)
Decrease (increase) in horsemen's deposits (411) 50
Increase in amounts due horsemen and accrued liabilities 829 354
----------- -----------
Net cash provided by (used in) operating activities 929 (623)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (102) (610)
Decrease in construction payables (391) (4,256)
----------- -----------
Net cash used in investing activities (493) (4,866)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from long-term debt, capital leases, and other 96 4,628
Payments on long-term debt and capital leases (189) (177)
----------- -----------
Net cash provided by (used in) financing activities (93) 4,451
----------- -----------
Net change in cash and cash equivalents 343 (1,038)
Cash and cash equivalents, beginning of period 1,155 3,348
----------- -----------
Cash and cash equivalents, end of period $ 1,498 $ 2,310
=========== ===========
The accompanying notes are an integral part of the financial statements.
6
COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted. These financial
statements should be read in conjunction with the annual financial statements
for the year ended December 31, 1998 of Colonial Downs Holdings, Inc. (the
"Company") included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 31, 1999.
In the opinion of management, the financial statements include all
adjustments (consisting only of normal recurring adjustments) considered
necessary to present fairly the financial position of the Company as of March
31, 1999 and the results of its operations and its cash flows for the
respective three month periods ended March 31, 1999 and 1998. Interim results
for the three months ended March 31, 1999 are not necessarily indicative of
results that may be expected for the fiscal year ending December 31, 1999.
Basic earnings (loss) per share is computed by dividing earnings available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilutive effect of securities (which can consist of stock options and warrants)
that could share in earnings of an entity.
Certain reclassifications have been made in the prior years' financial
statements in order to conform to the March 31, 1999 presentation.
4. LONG-TERM DEBT, NOTES PAYABLE-RELATED PARTIES, AND CAPITAL LEASES
Long-Term Debt, Notes Payable-Related Parties, and Capital Leases,
consisted of the following:
March 31, December 31,
1999 1998
----------- -------------
Note payable to a bank maturing June 2000, with two one year
extensions, bearing interest at a variable rate (8.69% at
March 31, 1999), quarterly principal payments of
$500,000 commencing in March 1999, collateralized by
substantially all assets, except the Racing Centers, of the
Company and guaranteed by certain shareholders and related
parties $ 10,000,000 $ 10,000,000
Convertible subordinated note payable to CD Entertainment,
Ltd., maturing September 2000, with interest payable quarterly
at a rate of 7.25%, collateralized by a second deed of
trust on the racetrack facility 5,500,000 5,500,000
7
COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Unaudited)
2. LONG-TERM DEBT, NOTES PAYABLE-RELATED PARTIES, AND CAPITAL LEASES -
(CONTINUED)
March 31, December 31,
----------- -------------
Note payable to a bank, maturing August 1999, bearing
interest at prime plus 1.0% (8.75% at March 31, 1999),
with monthly principal payments of $15,000, collateralized
by certain fixed assets 600,000 645,000
Note payable to an insurance company, maturing October 1999,
bearing interest at 6.83%, with monthly payments of $8,622
including interest 58,977 83,557
Installment loans and capitalized leases collateralized by
certain vehicles, machinery and equipment, maturing at
various dates through September 2000, at interest rates
ranging from 3% to 9% 130,376 153,974
Note payable to Maryland Jockey Club, maturing December 2005,
bearing interest at a rate of 7.75% payable quarterly for
the first two years and equal installments of interest and
principal to be paid over the remaining five year term of
the note 1,450,000 1,450,000
Note payable under the revolving credit facility with a bank,
bearing interest at a variable rate (8.65% at March
31, 1999), due June 30, 1999, collateralized by substantially
all assets, except the Racing Centers, of the Company and
guaranteed by certain shareholders and related parties 5,000,000 5,000,000
Convertible subordinated note payable to CD Entertainment,
Ltd., maturing August 2000, with an interest rate of 8.5% 1,000,000 1,000,000
Note payable from the thoroughbred purse account, due
August 1999, with interest rate of 5.48%, collateralized
by the Hampton Racing Center 360,000 360,000
----------- ------------
24,099,353 24,192,531
Less current maturities 9,206,650 9,184,378
----------- ------------
14,892,703 15,008,153
Less long-term debt - related party 6,500,000 6,500,000
----------- ------------
Long-term debt, including capital lease obligations $ 8,392,703 $ 8,508,153
=========== ===========
8
COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Unaudited)
3. COMMITMENTS AND CONTINGENCIES
Pursuant to the terms of the contract (the "Construction Contract") between
Colonial Downs and Norglass, Inc., the Company is proceeding before the American
Arbitration Association ("AAA") against Norglass, the general contractor engaged
to manage the construction of the Track. In the proceeding, the Company
challenges the validity of Norglass's mechanic's liens for approximately $11.8
million (subsequently reduced to $6.5 million) and asserts a damage claim
against Norglass in an amount not less than $7.7 million. Norglass' damage
claim against Colonial Downs, L.P. presented during the arbitration hearing is
$4.1 million. The Company is vigorously pursuing its claims against Norglass
and is vigorously defending against claims for payment by Norglass under the
Construction Contract. Evidence before the AAA panel concluded in April, and
the parties are preparing final briefs for submission to the panel.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
The Company, through its subsidiaries, holds the only licenses to own and
operate a racetrack (the "Track") and Racing Centers in Virginia. The Company
currently operates Racing Centers in Chesapeake, Richmond, Hampton, and Alberta,
Virginia, and may open two additional Racing Centers if suitable opportunities
are identified and referenda are passed.
The Company's revenues are comprised of (i) pari-mutuel commissions from
wagering on races broadcast from out-of-state racetracks to the Company's Racing
Centers and the Track using import simulcasting; (ii) wagering at the Track and
the Company's Racing Centers on its live races; (iii) admission fees, program,
racing form and tip sheet sales, and certain other ancillary activities; (iv)
commissions from food and beverage sales and concessions; and (v) fees from
wagering at out-of-state locations on races run at the Track using export
simulcasting.
The following table sets forth certain operating results as a percentage
of total revenues for the periods indicated:
(Percentage of Net Revenues)
March 31,
----------------------------
1999 1998
------------ ------------
Revenues:
Pari-mutuel and simulcasting commissions 94.3% 95.2%
Other 5.7% 4.8%
-------- --------
Total revenues 100.0% 100.0%
Direct operating expenses:
Purses, fees, and pari-mutuel taxes 28.7% 47.2%
Simulcast and other direct 33.2% 38.2%
-------- --------
Total direct operating expenses 61.9% 85.4%
Selling, general, and administrative expenses 21.6% 22.1%
-------- --------
Earnings (loss) from operations 16.5% (7.5)%
Interest income (expense), net (9.2)% (6.6)%
-------- --------
Earnings (loss) before taxes 7.3% (14.1)%
Total Revenues. Total revenues for the first quarter of 1999 increased
$252,000 or 3.7% to $7,024,000 from $6,772,000 for the same period of the prior
year. The net increase in total revenues primarily reflects increases at the
Chesapeake, Richmond, and Alberta Racing Centers, offset by slight decreases at
the Hampton Racing Center and the Track. Through effective advertising
campaigns, the Company was able to increase business at the Chesapeake,
Richmond, and Alberta Racing Centers (Alberta's revenues increased despite the
reduction of days of operation from seven to five days per week) and minimized
the loss of business at the Hampton Racing Center, the newest Racing Center. A
new Racing Center tends to lose some of its novice patrons as it continues to
develop its customer base. In the first quarter of 1999, the Track facility was
not opened for simulcast wagering as it was in the first quarter of the prior
year, resulting in a decrease in revenues at the Track.
10
Direct Operating Expenses. As a percentage of revenues, direct operating
expenses decreased 21.6%, from 85.5% for the first quarter of 1998 to 61.9% for
the first quarter of 1999. The decrease in operating expenses was principally
attributed to decreases in purse expense, fees, and simulcast and other direct
expenses. The Company guaranteed a minimum thoroughbred purse of $4.5 million
in 1998. Currently, the Company has budgeted a total of $3.1 million for live
racing related expenses for 1999, of which $2.1 million will be expensed in
1999. Purse expense for the first quarter of 1999 was approximately $860,000
less than the same period in 1998 or 60% of the decrease in direct operating
expenses. The remaining $1.0 million of 1999 racing related expenses are
expected to be paid from funds already on deposit and the repayment of a loan
from the thoroughbred purse account. The decrease in fees and parimutuel taxes
was primarily a result of the Company's success in negotiating an amendment to
its Management and Consulting Agreement with Maryland-Virginia Racing Circuit,
Inc., a subsidiary of the Maryland Jockey Club. Savings as a result of this
amendment accounted for approximately $200,000 or 14% of the decrease in direct
operating expenses. The decrease in simulcast and other direct expenses was a
result of the implementation of cost saving measures, personnel reduction, and
improvements in operating efficiencies (approximately $200,000 or 14% of the
decrease in direct operating expenses).
Selling, General and Administrative Expenses (SG&A). As a percentage of
revenues, SG&A decreased 0.5%, from 22.1% for the first quarter of 1998 to
21.6% for the first quarter of 1999. The decrease in SG&A as a percentage of
sales was primarily due to the implementation of cost saving measures,
personnel reduction, and improvements in operating efficiencies offset by an
increase in legal fees of approximately $300,000 relating to the Norglass
arbitration (see footnote 3 to the Financial Statements).
Interest Expense, Net. Interest expense, net of interest income,
Increased $200,000 in the first quarter of 1999 to $644,000 from $444,000 for
the same period of the prior year. The increase in interest expense was
primarily a result of higher levels of debts ($24.1 million in the first
quarter of 1999 compared to $21.2 million for the same period of the prior
year).
Net Earnings. Net earnings for the first quarter of 1999 was $515,000
compared to net loss of $952,000 for the corresponding period of the prior
fiscal year. The increase in net earnings was primarily a result of the
factors discussed above.
LIQUIDITY AND SOURCES OF CAPITAL
Cash Flows. For the three months ended March 31, 1999, operating
activities provided approximately $929,000 of cash. The net earnings adjusted
for non-cash items such as depreciation and amortization provided $920,000.
Increase in accounts receivable and other assets and reduction of accounts
payable utilized $409,000 of cash. Funding of horsemen's deposits and purses
utilized $411,000 of cash and accruals for increases in amounts due horsemen and
accrued liabilites provided $829,000 of cash. Investing activities utilized
approximately $493,000 of cash, principally consisting of reduction of
construction payables and capital expenditures. Financing activities utilized
$93,000 of cash, primarily from principal payments on long-term debt.
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
fiscal year 1999 and 1998 was $1.6 million and $8,000, respectively. The
increase in EBITDA is primarily due to higher income before interest and income
taxes due to the changes in revenues, operating expenses and selling, general
and administrative expenses discussed in "Results of Operations" above,
including a reduction in purse expenses of approximately $860,000. 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.
11
On January 11, 1999, the Company negotiated an agreement with PNC Bank,
N.A. ("PNC"), which restructured the principal payment of the Credit Agreement
dated June 26, 1997. Under the agreement, in lieu of making principal payments
on the due dates, the guarantors are required to deliver to PNC, letters of
credit in the face amount of future principal payments. The letters of credit
shall have an expiration date of July 31, 2000. A guarantor posted letters of
credit in the amounts of $1 million and $500,000 in lieu of the Company making
the principal payment due December 31, 1998 and March 31, 1999, respectively.
The Company anticipates that the guarantors will post letters of credit for the
principal payments due during 1999.
The Company entered into a Management and Consulting Agreement (the
"Agreement") with Maryland-Virginia Racing Circuit, Inc., a subsidiary of the
Maryland Jockey Club ("MJC"), to provide management for the Track and Racing
Centers and to create a Virginia-Maryland Thoroughbred racing circuit. Under
the Agreement, Maryland Jockey Club agreed to suspend live racing at their
racetracks, Laurel Park and Pimlico Race Course, during the Company's live
Thoroughbred meets. Parties to the Agreement also agreed to continue to
exchange simulcast signals for their live meets at no cost to either party. An
amendment to the Agreement (the "Amended Agreement") was signed by both parties
on January 15, 1999, which restructured among other terms, MJC's
responsibilities as managers and the management fee paid to MJC. Effective May
1, 1999, MJC assumed management responsibility for the Standardbred meet that
commences May 31, 1999. Effective July 1, 1999, MJC will have operating
responsibilities for the Company's Racing Centers as well as the live
Standardbred and Thoroughbred meets. Under the prior agreement, MJC agreed to
manage the Company's Thoroughbred meet, and the Company agreed to reimburse MJC
for the personnel it provided to manage such meet. MJC will no longer be
reimbursed for expenses incurred while acting as managers of these operations.
Under the Amended Agreement, the management fee incurred in 1998 was reduced
from 2% of amounts wagered at the Company's facilities (other than on live
Standardbred meets conducted at the Track), to 1.0% of the first $75 million of
the aggregate gross amounts wagered in any calendar year in the Commonwealth of
Virginia excluding certain conditions ("Handle") specified in the Amended
Agreement. In addition, the Company will pay MJC an annual management fee equal
to 2.0% of all Handle in excess of $75 million per calendar year. Management
fees relating to the Company's new Racing Centers in certain locations will
increase up to 3.25% of Handle.
On March 16, 1999, the Company amended its agreement with Virginia Harness
Horse Association, the representative group of Virginia Standardbred horsemen.
The amendment provides for 30 days of live racing in 1999, rather than 50 days.
Purse contributions by the Company are expected to be approximately $1.5 million
rather than $2.5 million provided in the original agreement. Amounts generated
from handle at the Racing Centers that result in purse contributions in excess
of $1.5 million will be carried over to purses for future Standardbred race
meetings. The Company and the VHHA are taking several steps to minimize losses
during the harness meet. These steps include racing on Monday, Tuesday, and
Wednesday afternoons in order to attempt to maximize simulcast sales and opening
only the 1st and 4th levels of the grandstand to the public.
12
On March 31, 1999, the Company obtained amendments to two notes payable
with a shareholder, which deferred the due date of the notes from March 31, 2000
to September 30, 2000 and from August 26, 1999 to August 26, 2000.
The Company expects, as a result of the implementation of operating
efficiencies and the recent renegotiations of the MJC and VHHA contracts, that
cash flows from operations and the availability of other capital and financial
resources will provide sufficient liquidity to meet its normal operating
requirements, capital expenditure plans, and existing debt service over the 1999
fiscal year.
SEASONALITY AND THE EFFECT OF INCLEMENT WEATHER
Revenues and expenses relating to the Track may be higher during scheduled
live racing than at other times of the year. In addition, weather conditions
sometimes cause cancellation of outdoor horse races or curtail attendance, both
of which reduce wagering. Attendance and wagering at both outdoor races and
indoor Racing Centers also may be adversely affected by certain holidays and
professional and college sports seasons as well as other recreational
activities. Conversely, attendance and wagering may be favorably affected by
special racing events which stimulate interest in horse racing, such as the
Triple Crown races in May and June and the Breeders' Cup in November. As a
result, the Company's revenues and net income may fluctuate from quarter to
quarter. Given that a substantial portion of the Company's Track expenses are
fixed, the loss of scheduled racing days could have a material adverse affect on
the Company's profitability. The Company believes that simulcasting diminishes
the effect of inclement weather on wagering.
IMPACT OF YEAR 2000
The result of computer programs being written using two digits rather than
four to define the applicable year is known as the "Year 2000" issue. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This computer
mistake could result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions, or engage in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company is currently in
the process of replacing certain hardware and software in order to be year 2000
compliant. The project is scheduled to be completed during the first half of
1999 without material costs. The Company relies significantly on the
totalisator system used in pari-mutuel wagering, which is provided and supported
by an outside vendor and the year 2000 is a concern. If the software changes
and modifications (both internal and external) of existing software are not
made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company.
13
FORWARD LOOKING INFORMATION
The statements contained in this report which are not historical facts,
including, but not limited to, statements found under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" above,
are forward looking statements that involve a number of risks and uncertainties.
The actual results of the future events described in such forward looking
statements in this report could differ materially from those contemplated by
such forward looking statements. Among the factors that could cause actual
results to differ materially are the risks and uncertainties discussed in the
report, including without limitations the portions of such statements under the
caption referenced above, and the uncertainties set forth from time to time in
the Company's other public reports and filings and public statements. Such
risks include but are not limited to acts by parties outside the control of the
Company, including the Maryland Jockey Club, horsemen associations, and the
Virginia Racing Commission, political trends, the effects of adverse general
economic conditions, and governmental regulation.
14
PART II - OTHER INFORMAION
Item 1. LEGAL PROCEEDINGS
The Company appealed the February 25, 1999 ruling of the Virginia Racing
Commission (the "Commission") regarding several issues relating to the award of
1999 racing dates. In its ruling, the Commission required Colonial Downs, L.P.
and Stansley Racing (collectively, "Colonial Downs") to conduct 25 days of live
thoroughbred racing in September-October 1999 and 30 days of Standardbred racing
in July-August 1999. As a condition to the thoroughbred racing days, the
Commission ruled that Colonial Downs had to post a bond in the amount of $3.125
million by March 10, 1999, or make daily deposits beginning March 1, 1999, into
a thoroughbred purse account equal to 5 1/4 percent of the amounts wagered at
the Racing Centers on thoroughbred horse races. The Commission also ruled that
Colonial Downs must continue to fund the Standardbred purse account from July 6,
1999 through December 31, 1999 at the rate previously established by a contract
between Colonial Downs and the Virginia Harness Horse Association ("VHHA").
On March 8, 1999, Colonial Downs filed a notice of appeal of the
Commission's rulings in the Circuit Court of the City of Richmond (Colonial
Downs, L.P. and Stansley Racing Corp. v. Virginia Racing Commission (Case No.
HK-647). Colonial Downs argued in its appeal that (i) the Commission committed
reversible error and exceeded its authority by ordering Colonial Downs to make
daily deposits beginning March 1, 1999, into a thoroughbred purse account equal
to 5 1/4 percent of the amounts wagered at the Racing Centers on thoroughbred
horse races and by requiring Colonial Downs to continue to fund a Standardbred
purse account from July 6, 1999 through December 31, 1999 at the rate previously
established by a contract between Colonial Downs and the VHHA; (ii) the
Commission violated a bond agreement it entered into with Colonial Downs and
committed reversible error by acting arbitrarily and beyond the scope of its
authority through its imposition of an alternative requirement that Colonial
Downs post a bond in the amount of $3.125 million by March 10, 1999; and (iii)
the Commission committed reversible error and ignored the substantial evidence
presented to it by arbitrarily requiring Colonial Downs to conduct 25 days of
thoroughbred racing in September-October 1999 and 30 days of Standardbred racing
in July-August 1999 at purse levels mandated by the Commission without regard
for Colonial Downs' financial inability to conduct both meets for the durations
and at the purse levels mandated by the Commission.
The Circuit Court of the City of Richmond in its April 13 decision ruled
that (i) the Commission did exceed its authority by ordering Colonial Downs to
make daily deposits beginning March 1, 1999, into a thoroughbred purse account
equal to 5 1/4 percent of the amounts wagered at the Racing Centers on
thoroughbred horse races and by requiring Colonial Downs to continue to fund a
Standardbred purse account from July 6, 1999 through December 31, 1999 at the
rate previously established by a contract between Colonial Downs and the VHHA;
(ii) the Commission did not have the authority to enter into a bond agreement,
and as a result, the bond agreement was of no force or effect; (iii) based upon
the evidence in the record, the Commission did not err in requiring Colonial
Downs to post a bond in the amount of $3.125 million; and (iv) based upon
evidence in the record, the Commission could order Colonial Downs to conduct 25
days of thoroughbred racing in September-October 1999 and 30 days of
Standardbred racing in July-August 1999; however the amount of purses was to be
established by private contractual negotiations between Colonial Downs and the
horsemen representative groups.
15
Colonial Downs subsequently posted a bond in the amount of $3.125 million
with the Commission. However, the bond was posted four days later than the
deadline set by the Commission, and a Commission ordered informal fact finding
conference was conducted on May 12, 1999 on the matter. As a result of the fact
finding conference, the Commission could censure or fine Colonial Downs or
possibly suspend or revoke Colonial Downs' licenses. Colonial Downs is
vigorously contesting the matter.
In addition, the Commission ordered Colonial Downs to enter into an
agreement with the thoroughbred horsemen representative group, the Virginia
Horsemen's Benevolent and Protective Association, Inc. (the "VaHBPA"), by April
28, 1999. Colonial Downs was unsuccessful in reaching an agreement with the
VaHBPA by April 28, and the Commission has ordered that an informal fact finding
conference be conducted on May 14, 1999 on the matter. As a result of such fact
finding conference, the Commission could censure or fine Colonial Downs or
possibly suspend or revoke Colonial Downs' licenses. Colonial Downs is
vigorously contesting the matter.
The information set forth in Note 3 in the Notes to the Financial
Statements in Part I of this report is also incorporated by reference thereto.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 10.41 Second Amendment to Standardbred Horsemen's Agreements
Exhibit 27 Financial Data Schedule
B Reports on Form 8-K None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLONIAL DOWNS HOLDINGS, INC.
By: /s/ Ian M. Stewart
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Ian M. Stewart, President
and Chief Financial Officer
May 14, 1999