1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period ended June 30, 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 September 9, 1999 - 5,017,742
Number of Shares of Class B Common Stock outstanding
as of September 9, 1999 - 2,242,500
2
COLONIAL DOWNS HOLDINGS, INC.
BALANCE SHEETS
(In Thousands, Except Per Share Data)
(Unaudited)
June 30, December 31,
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,331 $ 1,155
Horsemen's deposits 1,217 600
Accounts receivable 224 296
Prepaid expenses and other assets 418 227
--------- ---------
Total current assets 3,190 2,278
Property, plant and equipment
Land and improvements 15,449 15,581
Buildings and improvements 48,566 47,363
Equipment, furnishings, and fixtures 2,746 3,444
Leasehold improvements 1,122 1,122
--------- ---------
67,883 67,510
Less accumulated depreciation 2,975 2,186
--------- ---------
Property, plant and equipment, net 64,908 65,324
Licensing and organization costs, net of accumulated
amortization of $288 and $266, respectively 754 772
Other assets 295 207
--------- ---------
Total assets $ 69,147 $ 68,581
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,380 $ 6,417
Purses due horsemen 1,793 608
Accrued liabilities and other 1,820 730
Current maturities of long-term debt
and capital lease obligations 15,666 9,184
--------- ---------
Total current liabilities 24,659 16,939
Long-term debt and capital lease obligations 1,839 8,508
Notes payable - related parties 6,500 6,500
--------- ---------
Total liabilities 32,998 31,947
Commitments and contingencies
Stockholders' equity
Class A, common stock, $0.01 par value; 12,000,000 shares
authorized; 5,017,742 shares issued and outstanding 50 50
Class B, common stock, $0.01 par value; 3,000,000 shares
authorized; 2,242,500 shares issued and outstanding 23 23
Additional paid-in capital 42,873 42,842
Accumulated deficit (6,797) (6,281)
--------- ---------
Total stockholders' equity 36,149 36,634
--------- ---------
Total liabilities and stockholders' equity $ 69,147 $ 68,581
========= =========
The accompanying notes are an integral part of the financial statements.
3
COLONIAL DOWNS HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------------- --------------------
Revenues
Pari-mutuel and simulcasting commissions $ 6,700 $ 6,833 $ 13,321 $ 13,277
Other 533 935 935 1,263
-------- -------- -------- --------
Total revenues 7,233 7,768 14,256 14,540
Operating expenses
Direct operating expenses
Purses, fees, and pari-mutuel taxes 2,639 3,323 4,651 6,374
Simulcast and other direct expenses 2,882 4,105 5,213 7,402
-------- -------- -------- --------
Total direct operating expenses 5,521 7,428 9,864 13,776
Selling, general and administrative
expenses 1,377 1,340 2,493 1,829
Depreciation and amortization 409 401 814 815
-------- -------- -------- --------
Total operating expenses 7,307 9,169 13,171 16,420
Earnings (loss) from operations (74) (1,401) 1,085 (1,880)
Interest expense, net (957) (526) (1,601) (999)
-------- -------- -------- --------
Loss before income taxes (1,031) (1,927) (516) (2,879)
Provision for (benefit from) income taxes - - - -
-------- -------- -------- --------
Net loss $ (1,031) $ (1,927) $ (516) $ (2,879)
======== ======== ======== ========
Earnings (loss) per share data:
Basic and diluted loss per share $ (0.14) $ (0.27) $ (0.07) $ (0.40)
Weighted average number of
shares outstanding 7,260 7,250 7,260 7,250
The accompanying notes are an integral part of the financial statements.
4
COLONIAL DOWNS HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
June 30, June 30,
1999 1998
----------- -----------
OPERATING ACTIVITIES
Net loss $ (516) $ (2,879)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 814 815
Other 31 -
Changes in operating assets and liabilities:
Increase in accounts receivable and other assets (214) (106)
Increase (decrease) in trade accounts payable (169) 605
Increase in horsemen's deposits (617) (218)
Increase in amounts due horsemen and accrued liabilities 2,167 482
----------- -----------
Net cash provided by (used in) operating activities 1,496 (1,301)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (373) (1,025)
Decrease in construction payables (759) (4,316)
----------- -----------
Net cash used in investing activities (1,132) (5,341)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from long-term debt, capital leases, and other 96 5,287
Payments on long-term debt and capital leases (284) (364)
----------- -----------
Net cash provided by (used in) financing activities (188) 4,923
----------- -----------
Net change in cash and cash equivalents 176 (1,719)
Cash and cash equivalents, beginning of period 1,155 3,348
----------- -----------
Cash and cash equivalents, end of period $ 1,331 $ 1,629
=========== ===========
The accompanying notes are an integral part of the financial statements.
5
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 June
30, 1999 and the results of its operations and its cash flows for the
respective six month periods ended June 30, 1999 and 1998. Interim results for
the six months ended June 30, 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 June 30, 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:
June 30, December 31,
1999 1998
----------- -------------
Note payable to a bank maturing June 2000, bearing interest
at a variable rate (8.69% at June 30, 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
6
COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Unaudited)
2. LONG-TERM DEBT, NOTES PAYABLE-RELATED PARTIES, AND CAPITAL LEASES -
(CONTINUED)
June 30, December 31,
1999 1998
----------- -------------
Note payable to a bank, maturing August 2001, bearing
interest at prime plus 1.0% (8.75% at June 30, 1999),
with monthly principal payments of $15,000, collateralized
by certain fixed assets 555,000 645,000
Note payable to an insurance company, maturing October 1999,
bearing interest at 6.83%, with monthly payments of $8,622
including interest 33,975 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% 106,366 153,974
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 June
30, 1999), due June 30, 2000, collateralized by substantially
all assets, except the Racing Centers, of the Company and
guaranteed by certain shareholders and related parties 5,000,000 5,000,000
Convertible subordinated note payable to CD Entertainment,
Ltd., maturing August 2000, with an interest rate of 8.5% 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
----------- ------------
24,005,341 24,192,531
Less current maturities 15,666,391 9,184,378
----------- ------------
7,338,950 15,008,153
Less long-term debt - related party 6,500,000 6,500,000
----------- ------------
Long-term debt, including capital lease obligations $ 1,838,950 $ 8,508,153
=========== ===========
7
COLONIAL DOWNS HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Unaudited)
3. SUBSEQUENT EVENTS
In July 1999, the Company signed a letter of intent to enter into a
purchase option agreement to acquire 85 acres of land for the development of a
new racetrack and simulcast wagering racing center in Dumfries, Virginia. The
Company intends to apply for a license from the Virginia Racing Commission to
operate a racetrack (including live and simulcast wagering) on this property.
Pursuant to the terms of the contract between Colonial Downs, L.P. and
Norglass, Inc., the general contractor engaged to manage the construction of
the Track, the Company filed an arbitration claim against Norglass in which
Norglass counterclaimed. In the proceeding, Colonial Downs, L.P. challenged
the validity of Norglass' mechanic's liens for approximately $11.8 million
(subsequently reduced to $6.5 million) and asserted a damage claim against
Norglass for approximately $7.7 million. Norglass filed a counterclaim against
Colonial Downs, L..P. for $5.8 million. In August 1999, the American
Arbitration Association rendered a decision favorable to Norglass. Colonial
Downs L..P. was ordered to pay Norglass $1,965,000 in the arbitration. In
addition, Colonial Downs L..P. was ordered to pay interest of approximately
$285,000 and arbitration costs of approximately $98,000.
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 (Brunswick County), 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.
PROFIT CENTER ANALYSIS
For the three months and six months ended June 30, 1999, net loss
decreased $0.9 million and $2.4 million, respectively, compared to the
corresponding periods of the prior year. Net income at the Racing Centers
improved compared to the corresponding prior periods by $1.0 million and $2.5
million for the three months and six months ended June 30, 1999, respectively.
Net income at the Track improved by $0.6 million and $1.1 million for the three
months and six months ended June 30, 1999, respectively. Corporate overhead
increased by $0.3 million and $0.6 million for the three months and six months
ended June 30, 1999, respectively, and net interest expense increased by $0.4
million and $0.6 million for the three months and six months ended June 30,
1999, respectively.
Racing Centers. Revenues at the Racing Centers increased $0.4 million and
$0.7 million for the three months and six months ended June 30, 1999,
respectively, compared to the corresponding periods of the prior year. These
increases are believed to be the result of effective target marketing and an
increasing effort to reach new patrons through promotions and out-door
billboard advertising. Purse expenses decreased $0.3 million and $1.1 million
for the three months and six months ended June 30, 1999, respectively compared
to the corresponding period of the prior year as a result of the new
thoroughbred and amended harness horsemen's contracts. The changes reflected
in the Amended and Restated Management and Consulting Agreement between the
Company and Maryland-Virginia Racing Circuit, Inc., a wholly-owned subsidiary
of the Maryland Jockey Club (the "MJC Agreement"), resulted in a reduction of
expenses by $ 0.2 million and $0.4 million for the three months and six months
ended June 30, 1999, respectively, compared to the corresponding periods of the
prior year. Efficiencies in personnel costs, printing, and other expenses
reduced costs by an additional $0.1 million and $0.3 million for the three
months and six months ended June 30, 1999, respectively, compared to the
corresponding periods of the prior year. As a result, net income at the Racing
Centers increased $1.0 million and $2.5 million for the three months and six
months ended June 30, 1999, respectively.
Track. Revenues at the Track decreased $0.9 million and $1.0 million for
the three months and six months ended June 30, 1999, respectively, compared to
the corresponding periods of the prior year as there were only 15 race days in
these periods in 1999 versus 38 race days in 1998. Expenses decreased $1.5
million and $2.1 million for the three months and six months ended June 30,
1999, respectively, compared to the corresponding periods of the prior year due
to the same reason. In an effort to minimize losses during the 1999 live
harness season, the Company put an emphasis on signal sales by running a Monday
through Wednesday schedule. Despite such efforts, the live harness season has
lost approximately $450,000 through June 30, 1999.
10
Corporate. For the three months and six months ended June 30, 1999,
respectively, corporate overhead increased $0.3 million and $0.6 million over
the corresponding periods of the prior year. The increase in corporate
overhead was primarily attributed to an increase in professional fees of $0.4
million and $0.7 million for the three months and six months ended June 30,
1999, respectively, relating to the Norglass arbitration offset by cost savings
of $0.1 million for the three months and six months ended June 30, 1999.
Interest Expense, Net. Interest expense, net of interest income,
increased $0.4 million and $0.6 million for the three months and six months
ended June 30, 1999, respectively, from the corresponding periods of the prior
year. The increase in interest expense was primarily a result of an increase
in debt from $21.9 million at June 30, 1998 to $24.0 million at June 30, 1999
and the provision for interest of $285,000 relating to the Norglass arbitration
award. (The increase in debt is largely attributable to the issuance of $1.45
million note to Maryland-Virginia Racing Circuit, Inc. in settlement of
disputed management fees for 1997 and 1998.
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 Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------- -------- -------- --------
Revenues:
Pari-mutuel and simulcasting commissions 92.6% 88.0% 93.4% 91.3%
Other 7.4% 12.0% 6.6% 8.7%
------- -------- -------- --------
Total revenues 100.0% 100.0% 100.0% 100.0%
Direct operating expenses:
Purses, fees, and pari-mutuel taxes 36.5% 42.8% 32.6% 43.8%
Simulcast and other direct expenses 39.8% 52.8% 36.6% 50.9%
------- -------- -------- --------
Total direct operating expenses 76.3% 95.6% 69.2% 94.7%
Selling, general, and administrative expenses 19.0% 17.3% 17.5% 12.6%
Depreciation and amortization 5.7% 5.2% 5.7% 5.6%
------- -------- -------- --------
Earnings (loss) from operations (1.0)% (18.1)% 7.6% (12.9)%
Interest income (expense), net (13.2)% (6.7)% (11.2)% (6.9)%
------- -------- -------- --------
Loss before taxes (14.2)% (24.8)% (3.6)% (19.8)%
Total Revenues. Total revenues for the three months and six months ended
June 30, 1999 decreased $0.5 million (6.9%) and $0.3 million (2.0%),
respectively, from the corresponding periods of the prior year. The decrease
in total revenues primarily reflects a reduction of $0.9 million and $1.0
million in live harness revenues due to an earlier Harness season in 1998. The
earlier harness season is also primarily responsible for the decrease in other
revenue. The Company's inaugural live Harness season was from April 24 to July
5, 1998 (38 race days as of June 30) as compared to the 1999 season which was
from May 31 to August 4, 1999 (15 race days as of June 30). Excluding the
impact of the change in Harness season from the corresponding prior period, the
Company's Racing Centers generated an increase of $0.4 million (6.9%) and $0.7
million (5.3%) for the three months and six months ended June 30, 1999,
respectively, from the corresponding periods of the prior year. Management
believes that through effective advertising campaigns, the Company was able to
increase revenue at the Racing Centers even though Alberta was only opened five
days per week in 1999. From January until late April 1998, Alberta was opened
seven days per week.
11
Direct Operating Expenses. As a percentage of revenues, direct operating
expenses decreased 19.3% and 25.5% for the three months and six months ended
June 30, 1999, respectively, from the corresponding periods of the prior year.
The decrease in operating expenses was principally attributed to decreases in
purse expense, fees, and simulcast and other direct expenses. The Company
incurred purse expense of $6.1 million in 1998. In 1999, the Company will
contribute a total of $4.6 million for thoroughbred and harness purses, of
which $3.6 million will be expensed in 1999. The remaining $1.0 million of
1999 purse contribution is expected to be paid from funds on deposit at
December 31, 1998 and the repayment of a loan from the thoroughbred purse
account. As a result of a new thoroughbred contract and an amended harness
horsemen's contract, purse expense for the three months and six months ended
June 30, 1999 was approximately $0.4 million and $1.3 million less than the
corresponding periods in 1998, which accounted for 23.2% and 33.3% of the
decrease in direct operating expenses, respectively, from the corresponding
periods in 1998. The decrease in fees and pari-mutuel taxes was primarily a
result of the Company's success in negotiating an amendment to the MJC
Agreement. Savings as a result of this amendment accounted for approximately
$0.2 million and $0.4 million or 9.4% and 9.7% of the decrease in direct
operating expenses for the three months and six months ended June 30, 1999,
respectively. The decrease in simulcast and other direct expenses was
primarily a result of the changes in Track operations (approximately $0.9
million and $1.1 million or 45.9% and 28.9% of the decrease in direct operating
expenses for the three months and six months ended June 30, 1999, respectively)
discussed in Total Revenues above and the implementation of cost saving
measures, personnel reduction, and improvements in operating efficiencies
(approximately $0.4 million and $1.1 million or 10.5% and 28.2% of the decrease
in direct operating expenses for the three months and six months ended June 30,
1999, respectively).
Selling, General and Administrative Expenses (SG&A). As a percentage of
revenues, SG&A increased 1.7% and 4.9% for the three months and six months
ended June 30, 1999, respectively, from the corresponding periods of the prior
year. The increase in SG&A as a percentage of sales was primarily due to an
increase in professional fees of approximately $0.4 million and $0.7 million
for the three months and six months ended June 30, 1999, respectively, relating
to the Norglass arbitration (see footnote 3 to the Financial Statements and
Legal Proceedings in Part II) offset by implementation of cost saving measures.
Interest Expense, Net. See Profit Center Analysis above.
Net Loss. Net loss for the three months and six months ended June 30,
1999 was $1.0 million and $0.5 million, respectively, compared to net loss of
$1.9 million and $2.9 million for the corresponding periods of the prior year.
The decrease in net loss was a result of the factors discussed above.
12
LIQUIDITY AND SOURCES OF CAPITAL
Cash Flows. For the six months ended June 30, 1999, operating activities
provided approximately $1.5 million of cash. The net loss adjusted for non-
cash items such as depreciation and amortization provided $0.3 million.
Accruals for increases in amounts due horsemen and other accrued liabilities
also provided $2.2 million of cash. The increase in accounts receivable and
the other assets and reduction of accounts payable utilized $0.4 million of
cash. Funding of horsemen's deposits utilized an additional $0.6 million of
cash. Investing activities utilized approximately $1.1 million of cash,
resulting from the reduction of construction payables and capital expenditures.
Financing activities utilized $0.2 million of cash, primarily from principal
payments on long-term debt.
The Company received commitments from an affiliate of a shareholder and
the Maryland Jockey Club to lend the Company $900,000 and $600,000,
respectively to be used for purses during the 1999 thoroughbred meet. These
loans are expected to close and be funded by August 31, 1999. The loans will
bear interest at the prime rate and will be repaid in the amount of $750,000
per year from amounts that would otherwise be contributed to the thoroughbred
purse account.
In June 1999, the Company entered into a three year contract with the
Virginia Horsemen's Benevolent and Protective Association to provide for
thoroughbred purses. Under the contract, $3,125,000 is guaranteed to be
available for purses for the 1999 thoroughbred meet. Of this amount,
$1,500,000 is considered to be an advance of purse money due in years 2000 and
2001. In years 2000 and 2001, the Company is required to pay 5 1/4% of the
handle generated from simulcast thoroughbred racing at the Company's Racing
Centers and the Track to the thoroughbred purse account. The advance will be
repaid in an annual amount of $750,000 plus interest at the prime rate from the
5 1/4% that would otherwise be contributed to the purse account.
EBITDA is a widely accepted financial indicator of a company's ability to
service and incur debt. The Company's EBITDA for the first six months of 1999
and 1998 was $2.0 million and $(1.1) million, respectively. The increase in
EBITDA is primarily due to higher income before interest and income taxes due
to the changes in revenues, operating expenses and selling, general and
administrative expenses discussed in "Results of Operations" above. EBITDA
should not be considered in isolation from or as a substitute for net income or
cash flow measures prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity. EBITDA
is defined as the sum of income before interest, income taxes, and depreciation
and amortization.
On January 11, 1999, the Company negotiated an agreement with PNC Bank,
N.A. ("PNC"), which restructured the principal 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 $1.0 million, $500,000, and $500,000 in lieu of the
Company making the principal payment due December 31, 1998, March 31, 1999 and
June 30, 1999, respectively. The Company anticipates that the guarantors will
continue to post letters of credit for the principal payments due during 1999.
13
The Company expects that cash flows from operations and the availability
of other capital and financial resources will provide sufficient liquidity to
meet its normal operating requirements, capital expenditure plans, and existing
debt service over the 1999 fiscal year. Additionally, the Company is assessing
means by which it can pay the arbitration award to Norglass of approximately
$2.3 million (including interest and arbitration fees). The Company has a
strong balance sheet with several unencumbered assets and other means to secure
the funds necessary to pay such award.
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 third quarter
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. The Company has
received notification from this vendor certifying that the system which
supports Colonial Downs is Year 2000 compliant. 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.
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 Virginia Racing Commission (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 conducted an informal
fact finding conference on May 14, 1999 on the matter. The fact finding
conference hearing officer recommended to the Commission that the Company's
license to operate Racing Centers be suspended for five days. The Commission
has deferred acting on the hearing officer's recommendation. Colonial Downs is
vigorously contesting the matter and an appeal of the Commission's order has
been filed in the Richmond Circuit Court. The appeal is currently pending.
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 10.42 Thoroughbred Horsemen's Agreement
Exhibit 27 Financial Data Schedule
B Reports on Form 8-K The Company filed a Current Report on Form 8-K
during the three months ended June 30, 1999
relating to a change in NASDAQ market listing.
8
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
---------------------------------
Ian M. Stewart, President
and Chief Financial Officer
September 10, 1999