-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NDl6JHG0DCKSoJJXsqktotA8Yk3t2uE6CT8SYtDMwCv56+x6+lxKRYgTUst6ULHD IeIPauSCbUhPsWGIJKvlnw== 0000916641-98-000404.txt : 19980401 0000916641-98-000404.hdr.sgml : 19980401 ACCESSION NUMBER: 0000916641-98-000404 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLONIAL DOWNS HOLDINGS INC CENTRAL INDEX KEY: 0001027430 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-RACING, INCLUDING TRACK OPERATION [7948] IRS NUMBER: 541826807 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22213 FILM NUMBER: 98584088 BUSINESS ADDRESS: STREET 1: 10515 COLONIAL DOWNS PARKWAY CITY: NEW KENT STATE: VA ZIP: 23124 BUSINESS PHONE: 8049667223 MAIL ADDRESS: STREET 1: 10515 COLONIAL DOWNS PARKWAY CITY: NEW KENT STATE: VA ZIP: 23124 10-K 1 COLONIAL DOWNS 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 333-18295 COLONIAL DOWNS HOLDINGS, INC. (Exact name of registrant as specified in its charter) - --------------------------------- 54-1826807 VIRGINIA (I.R.S. Employer (State or other jurisdiction of Identification No.) incorporation or organization) 10515 Colonial Downs Parkway New Kent, VA 23124 (Address of principal executive offices) Registrant's telephone number, including area code 804-966-7223 Securities registered pursuant to Section 12(b)of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class on Which Registered Name of Each Exchange Class A Common Stock par value .01 per share NASDAQ National Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [ ] No [X] Aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 26, 1998 was approximately $6,678,437.50 Number of Shares of Class A Common Stock outstanding as of March 26, 1998 - 5,000,000 Number of Shares of Class B Common Stock outstanding as of March 26, 1998- 2,250,000 Documents Incorporated by Reference Registrant's Definitive Proxy Statement with respect to annual meeting of Shareholders to be held on May 8, 1998. This Annual Report contains forward-looking statements that inherently involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed in this Annual Report. Statements regarding anticipated arbitration, referenda, results of operations, liquidity, the opening of additional Racing Centers, and certain other statements contained in this report are forward-looking statements and, as such, involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements, expressed or implied by such forward-looking statements. Such potential risks, uncertainties, and factors include, but are not limited to, acts by parties outside the control of the Corporation, including the Maryland Jockey Club and the Virginia Racing Commission, political trends, the effects of adverse general economic conditions, and governmental regulation, including licensing of additional Racing Centers. The forward-looking statements contained herein speak only as of the date of this report. References to "Colonial Downs Holdings" or the "Company" include Colonial Downs Holdings, Inc. and its subsidiaries, Colonial Downs, L.P., a Virginia limited partnership (the "Partnership"), and Stansley Racing Corporation, a Virginia corporation ("Racing"). PART I ITEM 1 BUSINESS General The Company, which was incorporated in 1996, owns the sole licenses in Virginia to own and operate a horse racing facility and up to six racing centers ("Racing Centers") at which pari-mutuel wagering is permitted. The Company currently provides pari-mutuel wagering opportunities on both live and simulcast thoroughbred and harness horse races at one racetrack and four Racing Centers. The Company owns and operates Colonial Downs Racetrack in New Kent, Virginia (the "Track") and four Racing Centers located in Richmond, Chesapeake, Brunswick, and Hampton, Virginia. The Company intends to develop two additional Racing Centers that are authorized under Virginia law; however, each additional Racing Center may only be developed in additional locations after a local referendum approving a Racing Center in such locality and licenses are granted by the Virginia Racing Commission (the "Commission"). The Company conducts pari-mutuel wagering at all of its locations on thoroughbred and harness races run at the Track and on simulcast broadcasts of thoroughbred and harness races from other racetracks ("Import Simulcasting"). The Company also simulcasts races conducted at the Track for wagering at other locations throughout the United States ("Export Simulcasting"). Pari-mutuel wagering on thoroughbred or harness racing is pooled wagering, in which a totalisator system totals the amounts wagered and adjusts the odds on each horse to reflect the relative amounts wagered on each horse and various possible outcomes. Under Virginia law, a portion of the pooled wagers is retained by the wagering facility, a portion is paid to the applicable local governments and Virginia, a portion is paid to the Virginia Breeders' Fund, and a portion is distributed to the Track's horsemen in the form of "purses" which encourage owners and trainers to enter their horses in races at the Track. The balance of the pooled wagers is paid out to wagerers as winnings in accordance with the payoffs determined by the totalisator system. The Company derives its revenue from wagers placed at the Track and its Racing Centers, export simulcasting of its races, admissions to these facilities, program sales, food and beverage sales, rental of suites and group facilities at the Track and sponsorship income and advertising at the Track. In Virginia, racetrack ownership and operation is a precondition to Racing Center ownership and operation. The Company's plan is to open additional Racing Centers as attractive opportunities arise. The Company will seek to increase the number of venues for pari-mutuel wagering while simultaneously increasing the number of races available for simulcast. The Company may seek legislative changes to allow more than six Racing Centers in Virginia. In addition, the Company will actively seek out export simulcast opportunities in other states. The Company plans to promote attendance and wagering business at the Track and its Racing Centers by introducing additional entertainment activities, including family fun days, premium giveaway programs, contests and special events. Strategy The Company intends to be a leading participant in the wagering industry by capitalizing upon its unique dirt and turf track capabilities for live racing, its horse racing expertise and expanding its wagering network. Capitalizing upon the Track's Unique Racing Surfaces The Track's mile and a quarter dirt track is one of the largest tracks in North America and its 180 foot wide mile turf track is the largest turf course. These unique configurations are expected to attract quality horses to the Track. The 1998 Breeders Crown, one of the premier North American standardbred racing events, will be held at the Track in November 1998. The inaugural Virginia Derby, a race for three-year old thoroughbreds, will be held in October 1998 on the Company's turf course. The Company intends to develop the Virginia Derby as a graded stakes race as a warm up to the Breeders' Cup. Both the Breeders Crown and the Virginia Derby are expected to be televised on national cable networks. By hosting and creating marquee racing events, the Company intends to improve its market visibility, attract additional patrons to the Track and its Racing Centers, and enhance its ancillary revenues from corporate sponsorship, group sales events, and food and beverage sales. Opening Additional Racing Centers The Company's goal is to expand its operations and increase its Racing Center revenues by opening the two additional Racing Centers which are authorized under the Virginia Racing Act. The Company intends to hold referenda in localities that it perceives to be strategically located. Upon a positive vote in a localities referenda, the Company intends to apply for licenses from the Commission and to open two additional Racing Centers in Virginia. Maintaining Quality Import Simulcasting and Increasing Export Simulcasting The Company intends to maintain the quality of the Import Simulcasting races that it makes available for wagering by customers at the Track and Racing Centers and to increase its revenues from the volume of Export Simulcasting of Company races for wagering at the facilities of others. The Company believes that by Import Simulcasting high quality races from nationally known racetracks it can increase the number of wagerers as well as the size of the average wager. The Company also intends to try to increase Export Simulcasting as a way of increasing overall revenue. The Company plans to conduct evening thoroughbred racing in 1998 at times when the Company's signal will encounter little competition from other thoroughbred races. Live Racing The Company ran its first thoroughbred meet from September 1, 1997 through October 12, 1997. Racing was conducted Wednesday through Sunday of each week with an average of nine races per day. The Company will hold its first harness racing meet beginning April 24, 1998 through July 5, 1998. The Company will hold its next thoroughbred meeting commencing August 24, 1998 through October 12, 1998. The Company has also been selected to host the Breeders Crown races which will be held on the weekends of November 7 and 8 and November 13 and 14, 1998. Revenues from live racing at the Track consist of the total amount wagered, less the amount paid as winning wagers. Of the amount not returned to bettors as winning wagers, a portion is paid to New Kent County, Virginia (where the Track is located), the Commonwealth of Virginia and the Virginia Breeders' Fund, and the balance is divided between the Company and purses for the horsemen at the Track. The Virginia Racing Act specifies the maximum percentages of each dollar wagered on horse races in Virginia which can be retained by the Company (prior to required payments to the Breeders' Fund and applicable taxing authorities). The percentages vary, based on the type of wager. For win, place and show wagering the amount of the take out is 18% of the amounts wagered. For all other forms of wagering (exacta, trifica and other "exotic" wagers), the permitted take out is 22%. The average percentage is approximately 21%. The balance of each dollar wagered must be paid out to the public as winning wagers. The Company's revenues on each race are determined pursuant to the Virginia Racing Act. Amounts payable for purses are determined under agreements with the Virginia Horseman's Benevolent and Protective Association ("VaHBPA") and the Virginia Harness Horse Association ("VHHA") (collectively, the "Associations"). See Purses; Agreements With Horsemen. Racing Center Wagering At the Racing Centers, as at the Track, customers place wagers on thoroughbred and harness races simulcast from the Company's Track and on import simulcast races from other tracks around the country. Under the Virginia Racing Act, only licensed owners and operators, such as the Company, can operate Racing Centers or accept customer wagers on simulcast races at a Virginia racetrack. The Company, through its subsidiaries, is the sole holder of such licenses. The Company currently operates four Racing Centers in Richmond, Chesapeake, Brunswick and Hampton and under Virginia law can open two additional facilities. The Company is in the process of identifying localities for referenda on additional Racing Centers. The Company unsuccessfully sought approval in referenda in Manassas Park (November 1996), Fredericksburg (November 1997), Martinsville (November 1997) and Roanoke (November 1997). The Company intends to continue pursuing possible locations until such time as the Company has opened as many Racing Centers as are authorized under Virginia law. Simulcasting Simulcasting involves broadcasting a live race to other locations. Wagers are then placed on the race being broadcast. The Company both imports simulcast races from other tracks around the country as well as exports simulcasts of its races to other venues. Generally, wagering conducted on simulcast races is aggregated with the pool of wagers placed at the track at which the live race is run and wherever the race is broadcast, so that track odds are maintained. The Company has been receiving import simulcasts at its Chesapeake Racing Center from racetracks in other states since February 1996 and at its Richmond Racing Center since December 1996. The Company has been receiving import simulcasts at its Brunswick and Hampton Racing Centers since December 18, 1997 and December 23, 1997, respectively. At the Racing Centers, the Company regularly receives import simulcasts from over 15 different racetracks (including Belmont Park, Saratoga, Gulfstream Park, and Santa Anita) during a day of operation. The Company currently receives simulcast signals from these tracks pursuant to an agreement with Penn National (the "Hubbing Agreement") under which the Company receives the benefit of Import Simulcasting terms negotiated by Penn National with other racetracks. The Company believes that these terms may be more favorable than the terms it could separately negotiate with such racetracks because of the economies of scale achieved under the Hubbing Agreement. The original term of the Hubbing Agreement expired December 31, 1996, and the Company and Penn National have elected to extend the agreement on a month-to-month basis. The Company intends to increase the number and quality of races it imports for simulcast wagering in the future. The Company believes that by simulcasting high-quality races from nationally known racetracks it will increase the number of wagerers as well as the size of the average wager. The Company's success in implementing this strategy will depend upon the terms it negotiates individually and in conjunction with Penn National with such tracks. The Company believes that simulcasting diminishes the negative effect of inclement weather on wagering. Indoor facilities featuring simulcasting make available wagering on races from racetracks regardless of local weather. Typical simulcast arrangements usually require the receiver of a signal to pay a fee equal to approximately 2% to 4% of the handle (the total amount wagered at the off-track facilities) attributable to such signal. The Company has entered into an agreement with Maryland-Virginia Racing Circuit, Inc., which is affiliated with the owners of the Pimlico and Laurel racetracks in Maryland (collectively, "Maryland Jockey Club"). The Company sends its live racing signal to the Maryland tracks and the Maryland tracks send their live racing signals to the Track and the Company's current and future Racing Center facilities at no cost to either party. Wagers placed at the Company's Racing Centers on races run at other racetracks are treated as part of the common pari-mutuel wagering pool at that track. From such a pool, a fixed percentage is paid out as winning wagers. Winning wagers paid at the Company's Racing Centers may be disproportionate to the winning wagers to be paid from the entire pari-mutuel pool for a particular race. Accordingly, to the extent the Company paid out more or less than its share of winning wagers, it is obligated to pay or be paid funds from the track at which the race originated. In contracting for the receipt of simulcast signals, the Company agrees with the originators of the signals for the reconciliation of winning wagers. The reconciliation occurs on a daily basis with cash reconciliation occurring each week. Through the Hubbing Agreement, Penn National handles the Company's weekly reconciliation with other tracks, and the Company settles with Penn National each week. It is possible that the Company could fail to receive reimbursement for funds to which it is entitled under the Hubbing Agreement. Historically, the Company has not experienced such collection problems. Import Simulcasting of races from other tracks, especially from nationally known tracks in other states, may compete with wagering on live races run at the Track. The Company believes, however, that simulcasting of out-of-state races, and making available wagering on higher quality races, will increase the number of wagerers as well as the size of the average wager. Marketing The Company seeks to increase wagering by broadening its customer base and increasing the wagering activity of its existing customers. To attract new customers, the Company seeks to increase the racing knowledge of its customers by providing "user friendly" automated wagering systems and comfortable surroundings. The Company also seeks to attract new customers by offering various types of promotions including premium give-away programs, contests and handicapping seminars. The Company also seeks to expand its patron base by establishing the Track as a tourist destination. The Track is centrally located among existing tourist attractions - Paramount's Kings Dominion to the northwest and Colonial Williamburg and Busch Gardens to the west, each of which are within forty-five miles by highway of the Track. The Company is working with tour and bus companies to include the Track in their itineraries. Automated Wagering Systems To make wagering more "user friendly" to the novice and more efficient for the expert, the Company leases Autotote Corporation's automated wagering equipment for its Racing Centers. These wagering systems enable the customer to choose a variety of ways to place a bet through touch-screen interactive terminals and personalized portable wagering terminals, provide current odds information and enable customers to place bets and credit winning tickets to their accounts. Modern Facilities The Company provides a comfortable, upscale environment at each of its Racing Centers, including a full bar, a range of restaurant services and an area devoted to televised sporting events. The Company believes that its attractive facilities appeal to its current customers and to new customers, including those who have not previously visited a Racing Center. At the Track, the grandstand has an occupancy capacity of approximately 4,000 patrons. The front apron accommodates an additional 4,000 people and, on special event days, the grass picnic area east of the grandstand accommodates an additional 3,000 non-reserved seats in bleachers and on benches. Valet and general paved parking is available for over 1,825 vehicles. Additional unpaved parking is available for large and capacity crowds. The grandstand and clubhouse has five levels. A grandstand area is on the first level where patrons enter the facility, together with two simulcast/TV amphitheaters, two covered patio seating areas, four bars, one large concession center court, gift shop, restrooms, and wagering locations with approximately 60 tellers. The second level houses administrative offices and a kitchen. The main grandstand area is located on the third level together with a full-service dining area with a seating capacity of 548 patrons, an additional 304 box seats, two separate lounge areas and additional wagering locations with 38 tellers. Ten suites with sky box seating and a private club are located on the fourth level. The fifth level houses the judges' room, stewards' room, a press agents' room, photo finish services, a video room, the announcers' room, the audio/video control room and a VIP room. Virginia-Maryland Thoroughbred Circuit To provide experienced management for the Track and promote thoroughbred racing in Virginia and Maryland, the Company has entered into an agreement with Maryland Jockey Club, to create a Virginia-Maryland thoroughbred racing circuit. Under this agreement (the "Management and Consulting Agreement"), the Maryland Jockey Club will seek permission each year to cease live racing during the Company's thoroughbred meets. While the Maryland thoroughbred tracks are not conducting live racing, the Company expects to attract the thoroughbred race horses that typically have run at the Maryland racetracks at that time. The Management and Consulting Agreement further provides that the Maryland Jockey Club will provide experienced personnel from Laurel Park and Pimlico Race Course to assist the Company in managing its live thoroughbred meet at the Track. The Company has agreed to pay the Maryland Jockey Club a management fee equal to two percent of all amounts wagered at the Company's facilities other than on live standardbred racing, which management fee represents approximately 10% of the Company's revenues from wagering. The Virginia-Maryland thoroughbred circuit was created in part to address the perceived shortage of quality thoroughbred race horses available for racing at U.S. tracks. During its inaugural meet, the Company appears to have successfully attracted a substantial number of thoroughbred horses that have historically raced at Laurel Park and Pimlico Race Course. During the 1997 season, only racing on the Track's dirt course was available. Turf racing is expected to be conducted at the 1998 meet, which is expected to result in additional Maryland horses racing at the Track. Additionally, the Company will intensify its efforts to recruit quality thoroughbred horses from other locales for the 1998 meet. The availability of the turf course for the 1998 season is anticipated to enhance the Company's ability to attract such horses. Purse Structure The Company has taken steps to ensure competitive purses to attract horse owners to race at the Track. The Company guaranteed purses of $150,000 per day for not less than 30 days of racing for each of the 1997 and 1998 thoroughbred meets, and minimum purses of $50,000 per day for not less than 50 days for each of the 1998 and 1999 standardbred meets. The Company expects its purses to be competitive with purses at tracks in the mid-Atlantic market that conduct meets concurrently with the Company's meets, with the possible exception of Delaware Park and Charles Town, West Virginia, each of which have recently legalized VLTs or slot machines, which will likely increase the purses offered at such racetracks. (Charles Town's purses are not currently competitive with the Company's purses. Delaware Park's purses exceed the Company's purses.) The guaranteed purse structure arises from the Company's agreements (the "Purse Agreements") with the Associations. Pursuant to the agreements with the VaHBPA, the Company has agreed, among other things, to contribute to its thoroughbred purse account, a certain percentage (approximately 5.25%) of all money wagered on thoroughbreds at its Racing Centers until such account accumulates a total of $4.5 million. (Under the Virginia Racing Act, the Company is also required to contribute, on average, approximately 8.5% of all money wagered at the Track on live racing to the purse account and these funds are credited to the $4.5 million guarantee.) If such funds are less than $4.5 million, the Company will contribute one half of the deficiency and loan the remaining one half of the deficiency. The agreements with the VHHA reflect a similar arrangement, and requires the Company, among other things, to contribute to its standardbred purse account a certain percentage (approximately 5%) of all money wagered on harness racing at its Racing Centers until such account accumulates a total of $2.5 million. If the total thoroughbred and standardbred purse contributions for any year are greater than $4.5 million and $2.5 million, the Company may be required to make a purse contribution in excess of the minimum amounts based upon a formula which adjusts the Company's net income for items such as cost of equity capital and certain operating expenses. For the year ended December 31, 1997, the Company was not required to make a purse account contribution in excess of the minimum amounts. These additional contributions, if any, to the purse accounts are expected to enhance the Company's ability to attract quality horses to the Track and, as a result, to sell the Company's export simulcast signal. In addition, the Purse Agreements address, among other things, the sharing of export simulcast net revenues, the setting of a schedule of purse amounts, preparation of conditions for races, reconciliation of any over or under payment of purse amounts, the number of Virginia-bred races to be run at each meet, the availability of stalls and track facilities during and after meets, and the sharing of revenues, if any, from television (other than simulcasting) or radio broadcasts of races run at the Track. Each Purse Agreement expires on December 31, 1998 (except as it relates to the 1999 standardbred meet), and renews automatically for successive one year terms. Contributions to the purse accounts after December 31, 1998 are to be negotiated in good faith by the parties based upon annual budgets prepared by the Company. These budgets will contain provisions for net after-tax return consistent with prior years and purse contributions necessary to attract quality horses to race at the Track. Because the Company commenced simulcast operations prior to the commencement of live racing, it has entered into two separate agreements--a live racing agreement and a Simulcast Wagering agreement--with each horsemen group. After 1998, the Company likely will enter into a single agreement with each horsemen group. The agreements are not mandated by law; however, each contains the horsemen group's consent to the receipt and sending of simulcast signals in compliance with the Interstate Horse Racing Act. Competition The Company is subject to competition from racetracks located outside Virginia (including several in Delaware, Maryland, New Jersey, New York, Pennsylvania, and West Virginia) and other forms of gaming, such as land-based casinos, including those in Atlantic City, and statewide lotteries in Virginia and in neighboring states. The Company will also face competition from a wide range of entertainment options, including live and televised sporting events and other recreational activities. The possible legalization of other forms of gaming in Virginia, such as riverboat casino gaming, also could have an adverse effect on the Company's business. Although bills for the creation of riverboat gaming have failed in the Virginia legislature, proponents of riverboat gaming in Virginia may continue to seek legislative approval. It is not possible, at this time, to determine if or when additional forms of gaming will be permitted in Virginia or neighboring states and, if so, the impact, if any, on the Company. If additional gaming opportunities become available in or around Virginia, such as in Maryland, and the Company is unable to participate in such gaming opportunities, it could have a material adverse effect on the Company and its operations. The Company competes and will compete for wagering dollars and simulcast fees with live racing and races simulcast from horse racetracks in other states, particularly racetracks in neighboring states such as Charles Town in West Virginia, Pimlico Race Course, Laurel Park and Rosecroft Raceway in Maryland, and Delaware Park in Delaware. In addition, patrons may be attracted to thoroughbred races in Maryland during the Company's harness racing meet. The Company believes that the Management and Consulting Agreement will promote coordination of thoroughbred events between the two states. However, if the Virginia or Maryland Racing Commissions do not approve a party's proposed racing days, or if the Virginia-Maryland thoroughbred racing circuit is otherwise unsuccessful, the Track may compete directly with thoroughbred racetracks in Maryland. In addition, new racetracks could be constructed in adjacent states that would compete with the Track, or new licenses could be granted to Company competitors in Virginia. Based on the stated intent of the Virginia Racing Commission, the Company does not believe that the Virginia Racing Commission is likely to grant licenses to other entities in the foreseeable future. The Company anticipates competition from VLTs and slot machines, in particular. Delaware legalized slot machines at three racetracks as of January 1, 1996. Slot machines have been installed at Delaware Park, Dover Downs and additionally, VLTs have been legalized and installed at Charles Town racetrack in Lewistown, West Virginia. VLTs and slot machines are prohibited in Virginia. The Company believes that the legalization of VLTs and slot machines in neighboring states may adversely affect its business in two ways. First, VLTs and slot machines may attract the Company's potential Racing Center and Track customers, thereby reducing the Company's revenues. Second, racetracks with VLTs and/or slot machines generally are required to devote a significant portion of VLT and/or slot machine revenues to the purses for which horses race. As a result, such racetracks may be able to offer higher purses than the Track, and, consequently, the Company may encounter difficulty in attracting horsemen to race at the Track if other nearby racetracks offer higher purses. Seasonality and the Effects 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 and the hosting of the Breeders Crown at the Track. 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. Government Regulation The Company's success is dependent upon continued government and public acceptance of horse racing as a form of legalized gaming. Although the Company believes that pari-mutuel wagering on horse racing will continue to be legal in Virginia, gaming has come under increasing scrutiny nationally and locally. The United States Congress recently passed legislation creating a national gaming study commission (the "National Gaming Commission"). The National Gaming Commission has the duty to conduct a comprehensive legal and factual study of gambling in the United States and existing federal, state, and local policies and practices with respect to the legalization or prohibition of gambling activities, to formulate and propose changes in such policies and practices, and to recommend legislation and administration actions for such changes. It is not possible to predict the future impact of any such proposals on the Company and its operations. Any such proposals could have a material adverse effect on the Company's business. Opposition to the Virginia Racing Act has been unsuccessfully introduced in the Virginia legislature in the past, but additional legislative opposition may arise in the future. If the Virginia Racing Act were repealed or materially amended, such action could have a material adverse effect on the Company's business of pari-mutuel wagering. Virginia Racing Act. Under the Virginia Racing Act, the Virginia Racing Commission is vested with control over all aspects of horse racing with pari-mutuel wagering and the power to prescribe regulations and conditions under which such racing and wagering are conducted. The Virginia Racing Commission is responsible for, among other things, (i) conducting an annual review of the Company's Track and Racing Center licenses, (ii) annually approving the Company's proposed schedule of racing days, (iii) approving new or modified types of pari-mutuel wagering pools requested by the Company, (iv) issuing permits to all officers, directors, racing officials, and other employees of the Company, and (v) approving simulcast schedules at the Track and at the Racing Centers. The Virginia Racing Commission also has the authority to promulgate regulations pertaining to the Company's Track facilities, equipment, safety and security measures, and controls the issuing of licenses and permits for participants in pari-mutuel racing, including Company employees at the Track and at the Racing Centers and the Maryland Jockey Club as manager of the Company's thoroughbred meets pursuant to the Management and Consulting Agreement. In addition, the Virginia Racing Commission must approve any acquisition or continuing ownership of a 5% or greater interest in the Company. Action by the Virginia Racing Commission that is inconsistent with the Company's business plan could have a material adverse effect on the Company. The licenses issued by the Virginia Racing Commission to the Company are for a period of not less than 20 years, but are subject to annual review by the Virginia Racing Commission. It is possible that such licenses will not be renewed or that such licenses could be suspended or revoked by the Virginia Racing Commission for violations of the Virginia Racing Act or Virginia Racing Commission rules. Other State and Local Regulation. The Company, the Track, and the Racing Centers are also subject to a variety of other laws and regulations, including zoning, construction, and land-use laws and the regulations of the Virginia Alcoholic Beverage Control Board. Such laws and regulations may affect the selection of Racing Center sites because of parking, traffic flow, and other similar considerations. Any interruption or termination of the Company's ability, or that of its concessionaires, to serve alcoholic beverages could have a material adverse effect on the Company. Federal Regulation. The Company's interstate simulcast operations are subject to the provisions of the federal Interstate Horse Racing Act, which regulates interstate off-track wagering. In order to conduct wagering on import simulcasting at the Track or any Racing Center, the Interstate Horse Racing Act requires the Company to obtain the consent of the Virginia Racing Commission, the consent of the racing commission of the state where the horse racing meet originates and the consent of the representative horsemen groups in the originating state. To conduct Export Simulcasting, the Company must obtain the consent of the VaHBPA or the VHHA, as the case maybe, and the Virginia Racing Commission. Also, in the case of off-track wagering to be conducted at any of the Company's Racing Centers, the Interstate Horse Racing Act requires the Company to obtain the approval of all currently operating horse racetracks within sixty miles of the Racing Center or, if there are no currently operating tracks within sixty miles, the approval of the closest operating horse racetrack, if any, in an adjoining state. Significant delay in obtaining such consents and approvals or failure to obtain such consents or approvals could have a material adverse effect on the Company. Future Regulation. The Company's operations may become subject to additional regulation from any of the foregoing or from other governmental bodies. Such additional regulation could have a material adverse effect on the Company. Taxation The Company is subject to a number of federal, state, and local taxes and fees. These include fees to support the Virginia Breeders' Fund, taxes payable to the Commonwealth of Virginia, taxes payable to New Kent County where the Track is located, and taxes payable to localities in which Racing Centers are located based upon the amount of monies wagered both at the Track and at the Company's Racing Centers. The Company believes that the public acceptance of pari-mutuel wagering on horse races, as well as other forms of gaming, is based, in part, on the governmental revenues it generates from taxes and fees on such activities. It is possible that gaming activities, including horse racing, may become a target for additional federal, state, or local taxes and fees. A significant increase in such taxes or fees or the creation of significant additional taxes or fees could have a material adverse effect on the Company. Employees And Labor Relations At December 31, 1997, the Company had 376 permanent employees, of whom 36 were full-time and 340 part-time. Of the total employees, 52 were employed at the Track, and 324 were employed at the Company's Racing Centers. During the live thoroughbred meet, the Company hires 250 to 300 additional persons and during the standardbred meet an additional 150 to 200 persons. ITEM 2 PROPERTIES Track The Track site consists of approximately 345 acres of land located approximately 25 miles east of Richmond, Virginia and approximately 25 miles west of Williamsburg, Virginia. The Track includes a dirt race track, a unique 180 foot wide turf track, a five-level grandstand with ten luxury sky suites, bleachers, six bars, a gift shop, two simulcast/TV amphitheaters, and over 95 wagering stations. The Track site is located in an area that Chesapeake Corporation, its subsidiaries and possibly other developers, plan to develop into a resort area. An 18-hole golf course adjacent to the Track site was opened in July 1996 by The Legends Golf Group, a golf course developer based in Hilton Head, South Carolina. Future development plans for the area include hotels, theaters, restaurants, additional golf courses, commercial offices, and residential development. This development is planned to occur in four phases over the next 25 years. The first phase of development is in the areas adjacent to the Track site and the golf course and is expected to be completed over the next eight years. According to plans filed with New Kent County by the developer, 460 residential units and approximately 930,000 square feet of commercial space will be completed in the next three years. New Kent residents have demonstrated support for this development, but the Company has no control over the extent and timing of the development or the grant of governmental approvals required for its completion as planned. Racing Centers The Company's Racing Centers provide areas for viewing import simulcasts and televised sporting events, placing pari-mutuel wagers and dining. The facilities also provide convenient parking. The Company's current Racing Center properties are described in the following chart: Location Owned or Leased Building Size (in square feet) Brunswick Owned Approx. 8,000 Chesapeake Leased Approx. 15,000 Hampton Owned Approx. 13,500 Richmond Owned Approx. 20,000 ITEM 3 LEGAL PROCEEDINGS The following claims were asserted as of December 31, 1997: Norglass, Inc. The Partnership is engaged in a contract dispute under the Construction Agreement, dated February 10, 1997 (the "Construction Contract") between the Partnership and Norglass, Inc. ("Norglass"). Pursuant to the terms of the Construction Contract, the Partnership is proceeding before the American Arbitration Association ("AAA") against Norglass, the general contractor engaged to manage the construction of Colonial Downs' racetrack. In the proceeding, the Partnership challenges the validity of Norglass' 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 $4.4 million. The Partnership is vigorously pursuing its claims against Norglass and is vigorously defending against claims for payment by Norglass under the Construction Contract. If the Partnership does not prevail in its claims and assuming it receives credit against Norglass' claims for the amount the Partnership has paid directly to the subcontractors, its potential liability, included in accounts payable at December 31, 1997, is approximately $1.9 million in construction costs, plus interest, from a date to be established and legal fees. Additionally, it will be unable to recover approximately $3.8 million it has paid to subcontractors of Norglass. Subcontractor Liens. In connection with the dispute with Norglass, subcontractors of Norglass and parties claiming direct contracts with the Partnership and the Corporation filed mechanic's liens against the property in the aggregate amount of approximately $4 million. As of the date hereof, all but $501,000.00 of such mechanic's liens have been released. Colonial Downs is negotiating with these subcontractors and contractors for the release of the balance of such liens. Maryland-Virginia Racing Circuit, Inc. On January 8, 1998, Colonial Downs filed a demand for arbitration against the Maryland-Virginia Racing Circuit, Inc. ("MVRC") before the Virginia Racing Commission (the "Commission"). In its arbitration demand, Colonial Downs challenged the management fee claimed to be due by MVRC pursuant to a Management and Consulting Agreement dated as of April 22, 1996 (the "Consulting Agreement") between Colonial Downs and MVRC. The arbitration is based upon the fact that the demanded compensation under the Consulting Agreement has failed to consider certain changed circumstances as well as the original intent of the parties. Specifically, the compensation demanded by MVRC has been based upon the assumptions that MVRC was to manage a 102-day thoroughbred racing season at Colonial Downs' racetrack and during that 102-day season the Maryland tracks owned and operated by MVRC would be closed. In reality, however, the number of thoroughbred race days has been (and will be for the foreseeable future) much less and MVRC has failed to close its Maryland tracks as contemplated. As a result, Colonial Downs has requested that the Commission (as provided in the Agreement) arbitrate this dispute and reform the Consulting Agreement accordingly, thereby reducing the compensation to MVRC to reflect the fewer number of race days during which MVRC is actually managing Colonial Downs' thoroughbred season. In the alternative, Colonial Downs has requested the Commission to declare the Consulting Agreement null and void and to direct the parties to enter into a new agreement. The Commission declined Colonial Downs' request that it arbitrate the dispute on January 21, 1998; hence a third-party arbitrator must be named. As of December 31, 1997, Colonial Downs had withheld payment of $487,648.00 of the management fee purported due MVRC. Richmond Racing Center. The Partnership intervened as a defendant in Robin J. Pearsall and Monument Avenue Park Association v. The Virginia Racing Commission (Case No. HH777-3) then pending in the Circuit Court of the City of Richmond. The plaintiffs challenged the award of licenses to the Partnership and Racing for the ownership and operation of a Racing Center in Richmond, Virginia. The plaintiffs asserted that the requisite referendum held in Richmond was void and that the Commission exceeded its statutory authority in considering the Partnership's amendment to its application for the licenses and granting the licenses. Accordingly, the plaintiffs asserted that the licenses were void. Pursuant to an order and opinion dated February 20, 1997, the Circuit Court ruled that the plaintiffs had no standing to bring suit and dismissed the case. The plaintiffs appealed to the Virginia Court of Appeals. The Virginia Court of Appeals affirmed the Circuit Court's decision by order and opinion dated January 20, 1998. The time for the appeal of the Court of Appeal's decision has expired. Vendor Dispute. One of the Company's vendors that provides marketing services has asserted a claim for an additional $30,000 to $150,000 against the Company. McGrath/Crossen Associates claims that it provided services in addition to those for which it was previously paid and has demanded additional payment. Although a claim has been threatened, no suit has been filed. The Company disputes that any amounts are due. The Company has a number of other outstanding claims that arise in the ordinary course of business and that individually and in the aggregate are immaterial. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is quoted on The NASDAQ National Market under the symbol "CDWN". The following table sets forth for the periods indicated the high and low closing sales prices per share of the Company's Common Stock as reported on The NASDAQ National Market since the date on which the Class A Common Stock commenced trading. HIGH LOW 1997 First Quarter 9.500 7.375 Second Quarter 7.875 6.500 Third Quarter 9.375 6.438 Fourth Quarter 7.250 3.500 The closing price as of March 26, 1998 was $4.375 per share of Class A Common Stock. There are approximately 3,100 holders of record of Class A Common Stock. The Company's stock began trading on March 18, 1997. There is no established market for the Class B Common Stock. There are five holders of record of Class B Common Stock. Dividend Policy The Company has not paid any dividends to date and does not anticipate paying any dividends on any class of its Common Stock in the foreseeable future and intends to retain earnings to finance the development and expansion of its operations. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the financial condition of the Company and general business conditions. Recent Sales of Unregistered Securities None. ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data of the Company for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, except for Other Data, are derived from financial statements that have been audited by BDO Seidman, LLP independent certified public accountants, adjusted as described in the notes below. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements, and Notes related thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included herein.
Year Ended December 31, (1) 1997 1996 1995 1994 1993(2) ---- ---- ---- ---- ------- (in thousands) Income Statement Data: Total Revenues $ 23,647 $ 8,527 $ -- $ -- $ -- ----------- ----------- ----------- ----------- ----------- Loss from operations (467) (469) (318) (19) (17) ----------- ----------- ----------- ----------- ----------- Net earnings (loss) before income taxes 92 (645) (320) (19) (17) Taxes on income 84 -- -- -- -- ----------- ----------- ----------- ----------- ------------- Net earnings (loss) $ 8 $ (645) $ (320) $ (19) $ (17) =========== =========== =========== ============ ============= Basic and diluted net earnings (loss) per share $ 0.01 $ (0.22) $ (0.11) $ (0.01) $ (0.01) Weighted average number of shares outstanding(3) 6,318,000 3,000,000 3,000,000 3,000,000 3,000,000
At December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands) Balance Sheet Data: Current assets $ 6,013 $ 1,765 $ 330 $ 2 $ -- Total assets 67,875 12,176 3,142 667 227 Working capital (9,467) (5,925) (1,589) (669) (213) Short-term debt, including current portion of long-term debt 1,373 1,685 632 671 213 Long-term debt, excluding current portion 15,390 3,491 1,548 -- -- Total liabilities 30,954 11,182 3,467 671 213 Shareholders' equity (deficit) 36,921 995 (325) (4) 14 At December 31, 1997 1996 1995 Other Data (in thousands): ---- ---- ---- EBITDA (4) $ 188 $ (184) $ (315) Net cash provided (absorbed) by: Operating activities $ 3,053 $ 327 $ (160) Investing activities $ (48,851) $ (3,999) $ (920) Financing activities $ 47,767 $ 4,722 $ 1,408 Brunswick Chesapeake Hampton Richmond Track --------- ---------- ------- -------- ----- Operating Data: Days of operation 14 363 7 363 64 Total pari-mutuel wagering (in thousands) $ 226 $ 35,139 $ 328 $ 51,302 $ 7,891 Average daily wagering (in thousands) $ 16 $ 97 $ 47 $ 141 $ 123 Total attendance 1,522 148,290 1,454 205,491 111,626 Average daily attendance 109 409 208 566 1,744 Average daily per capita wager $ 148 $ 237 $ 226 $ 250 $ 71
(1) The consolidated financial statements of the Company include entities which prior to the Reorganization (see Note 1 to consolidated financial statements) were affiliated through common ownership and control. (2) From inception on September 30, 1993 to December 31, 1993. (3) Based on 3,000,000 shares of Common Stock outstanding before the initial public offering ("IPO") and 7,250,000 shares of Common Stock outstanding after the IPO. (4) EBITDA consists of the sum of the Company's net earnings (loss), net interest expense and depreciation and amortization. EBITDA data is unaudited and is presented because such data is used by certain investors to determine the Company's ability to meet debt service requirements. The Company considers EBITDA to be an indicative measure of the Company's ability to service debt and fund capital expenditures. However, such information should not be considered as an alternative to net earnings (loss), operating loss, cash flows from operations, or any other operating or liquidity performance measure prescribed by generally accepted accounting principles. EBITDA is not a measurement under generally accepted accounting principles and may not be comparable to other similarly titled measures presented by other companies. Cash expenditures for various long-term assets and interest expense have been, and will be, incurred which are not reflected in the EBITDA presentation. ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company was organized to pursue opportunities for horse racing and pari-mutuel wagering and holds the only licenses to own and operate a racetrack and racing centers in Virginia. The Company currently operates Racing Centers in Chesapeake, Richmond, Hampton, and Brunswick, and may apply for licenses for up to two additional Racing Centers if suitable opportunities are identified. In September and October 1997, the Company completed its inaugural thirty day thoroughbred live meet at the Track in New Kent County, Virginia. Both thoroughbred and standardbred live meets are planned for 1998. 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) admissions fees, program, racing form and tip sheet sales, and certain other ancillary activities; (iv) rent from food and beverage sales and concessions; and (v) fees from wagering at out-of-state locations on races run at the Track using Export Simulcasting. The amount of revenue the Company earns from each wager depends on where the race is run and where the wagering takes place. Revenues from Import Simulcasting of out-of-state races and from wagering at the Track and at the Racing Centers on races run at the Track consist of the total amount wagered at the Company's facilities, less the amount paid as winning wagers. The percentage of each dollar wagered on horse races that must be returned to the public as winning wagers (typically approximately 79%) is legislated by the state in which a race takes place. Revenues from Export Simulcasting will consist of amounts payable to the Company by the out-of-state racetracks and the racing centers with respect to wagering on races run at the Track. The Company's revenues are heavily dependent on the operations of its Racing Centers. Revenues from the Racing Centers help support live racing at the Track. Until the Company opens its fifth and sixth Racing Centers or acquires other sources of revenues, the Company expects to achieve results similar to those in 1997. Although revenues from the first months of operations of the Hampton and Brunswick Racing Centers have been lower than anticipated, management expects additional marketing efforts will improve those centers' performance. The Company's operating expenses include (i) purses payable to the horsemen for races run at the Track; (ii) amounts payable to host racetracks for import simulcast races (approximately 3% of amounts wagered on such races at the Company's Racing Centers and Track); (iii) a management fee of 2% of amounts wagered (other than on standardbred races run at the Track) payable to the Maryland Jockey Club, which represents approximately 10% of the Company's revenues; (iv) pari-mutuel taxes payable to the Commonwealth of Virginia, New Kent County, and the locality of each Racing Center, which represents about 2.5% of all amounts wagered and 12.5% of the Company's revenues; (v) 1% of all amounts wagered payable to the Virginia Breeders Fund (about 4.9% of revenues); (vi) totalisator, video and audio expenses at the Company's Racing Centers and the Track; (vii) direct salaries, payroll, and benefit expenses; and (viii) other direct and indirect operating expenses. For further information on the Company's business environment and strategies, refer to the discussion in Item 1 - Business. Results Of Operations The following table presents the major components from the Company's consolidated statements of earnings as a percent of total revenues: Year Ended December 31 ---------------------- 1997 1996 ---- ---- Revenues: Pari-mutuel and simulcasting commissions.. 88.3% 92.0% Other .................................... 11.7 8.0 ----- ----- Total revenues ...................... 100.0 100.0 Direct operating expenses: Purses, fees, and pari-mutuel taxes ...... 43.0 47.0 Simulcast and other direct expenses ...... 37.8 35.0 ----- ----- Total direct operating expenses ..... 80.8 82.0 Selling, general, and administrative expenses.. 21.2 23.5 ----- ----- Loss from operations .......................... (2.0) (5.5) Interest income (expense) ..................... 2.4 (2.1) ----- ----- Earnings (loss) before taxes .................. .4% (7.6)% ===== ===== Comparison of Fiscal 1997 to Fiscal 1996 Total revenues in fiscal 1997 were $23.6 million, an increase of $15.1 million (177%) over fiscal 1996 revenue of $8.5 million. The increase primarily reflects the operation of the Richmond Racing Center for a full year in 1997 versus only 21 days in 1996 ($11.1 million), and the operation of the thirty day inaugural live thoroughbred meet held September-October 1997 ($3.5 million). Operating expenses in 1997 of $24.1 million increased $15.1 million (168%) from $9.0 million in 1996. The overall increase was primarily attributable to higher expenses ($8.6 million) resulting from a full year of operations in the Richmond Racing Center versus only twenty-one days in 1996, and the costs associated with conducting the inaugural thirty day live thoroughbred meet in 1997 ($6.1 million). Also affecting the 1997 increase over 1996 operating expenses were referenda campaign costs incurred ($.59 million) in the Company's attempt to win voter approval for additional Racing Centers in targeted Virginia localities, start-up marketing expenses of approximately $900,000 to familiarize Virginians with pari-mutuel wagering and an increase in depreciation expense as a result of the completion of the Track. The Company also incurred expenses of approximately $300,000 in connection with its day-to-day operations of the thoroughbred meet that it does not expect to incur in 1998. The loss from operations of $466,692 remained substantially unchanged from 1996 due to the factors discussed above. Other income increased to $559,000 in 1997 compared to other expense of $177,000 in 1996, primarily reflecting the interest income earned on the proceeds from the Company's initial public offering in March 1997. Net income increased by approximately $653,000 from a loss of $645,000 in 1996 to earnings of $7,863 for the year ended December 31, 1997, reflecting the factors described above. Prior Fiscal Years The Company had no meaningful operations prior to the opening of the Chesapeake facility in February 1996. The Company had four employees before staffing the Chesapeake Racing Center; after its opening, the Company had approximately 160 employees. As a result, the Company reported no revenue from its inception on September 30, 1993 until February 1996. The Company incurred costs since its inception in obtaining the licenses and developing the Track and Racing Centers. The majority of costs specific to the acquisition and development of the Chesapeake Racing Center were incurred in fiscal 1995, whereas those relating to the Richmond Racing Center generally were not incurred until 1996. Liquidity And Capital Resources The Company's primary sources of liquidity and capital resources have been proceeds from the initial public offering of the Company's stock, long-term debt, and stockholders loans. The Company believes that its cash on hand, cash generated from operations, its existing unused line of credit, and access to other capital and financial resources will be sufficient to cover its anticipated operating expenses and other cash requirements for 1998. Net cash provided by operating activities grew to $3.1 million in 1997, an increase of about $2.7 million from $327,000 in 1996. The increase was primarily attributable to a $653,000 increase in earnings and a $3.1 million increase in accounts payable, partially offset by increases in accounts receivable and other assets. Net cash used in investing activities totaled $48.9 million for fiscal 1997 and primarily included $47.1 million in capital expenditures for the continued construction and completion of both the Track and the Company's new Racing Centers in Hampton and Brunswick. The Company anticipates that its capital spending in fiscal 1998 will approximate $800,000. Net cash provided by financing activities was $47.8 million in fiscal 1997 compared to $4.7 million in the same period of the prior year. The increase was primarily the result of the March 1997 initial public offering of 4,250,000 shares of common stock, which provided net proceeds of approximately $36.3 million, and a net increase in borrowing of $11.6 million. These proceeds were primarily used to complete the construction of the Track, Hampton and Brunswick Racing Centers. The Company is currently assessing the impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems and products purchased by the Company. The Company believes that its internal information systems are either year 2000 compliant or will be so prior to the year 2000 without incurring material costs. There can be not assurance, however, that the Company will not experience unexpected costs and delays in achieving year 2000 compliance for its internal information systems and current products, which could result in a material adverse effect on the Company's future results of operations. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
December 31, 1997 1996 - -------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 3,348,110 $ 1,379,884 Horsemen's deposits 1,656,529 337,738 Accounts receivable 293,101 38,519 Prepaid expenses and other 497,143 9,335 Refundable income taxes 217,956 - - -------------------------------------------------------------------------------------------- Total current assets 6,012,839 1,765,476 - -------------------------------------------------------------------------------------------- Property and equipment 61,500,165 9,364,587 Less accumulated depreciation and amortization 659,957 126,167 - -------------------------------------------------------------------------------------------- Net property and equipment 60,840,208 9,238,420 - -------------------------------------------------------------------------------------------- Other Licensing and organization costs, net of accumulated amortization of $207,063 and $160,867 841,029 789,205 Miscellaneous 180,653 383,389 - -------------------------------------------------------------------------------------------- Total other 1,021,682 1,172,594 - -------------------------------------------------------------------------------------------- Total assets $67,874,729 $12,176,490 ============================================================================================ See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets December 31, 1997 1996 - --------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities Accounts payable $11,678,242 $ 3,567,388 Accrued expenses 637,063 480,356 Current maturities of long-term debt and capital lease obligations 1,373,059 47,678 Notes payable - related parties - 1,637,619 Deferred revenue 194,625 - Purses due horsemen 1,597,075 1,957,683 - --------------------------------------------------------------------------------------------- Total current liabilities 15,480,064 7,690,724 - --------------------------------------------------------------------------------------------- Long-term liabilities Long-term debt and capital lease obligations, net of current maturities 9,889,592 42,159 Notes payable - related parties 5,500,000 3,448,782 Deferred income taxes 84,000 - - --------------------------------------------------------------------------------------------- Total long-term liabilities 15,473,592 3,490,941 - --------------------------------------------------------------------------------------------- Total liabilities 30,953,656 11,181,665 - --------------------------------------------------------------------------------------------- Stockholders' equity Common stock Class A, $.01 par value, 12,000,000 shares authorized; 5,000,000 and 750,000 shares outstanding 50,000 7,500 Class B, $.01 par value, 3,000,000 shares authorized; 2,250,000 shares outstanding 22,500 22,500 Additional paid-in capital 37,842,054 1,966,169 Retained earnings (deficit) (993,481) (1,001,344) - --------------------------------------------------------------------------------------------- Total stockholders' equity 36,921,073 994,825 - --------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $67,874,729 $12,176,490 ============================================================================================= See accompanying notes to consolidated financial statements.
F-3
Consolidated Statements of Earnings Year Ended December 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Revenues Pari-mutuel and simulcasting commissions $20,876,330 $7,847,822 $ - Other 2,770,953 679,488 - - ---------------------------------------------------------------------------------------------------------------- Total revenues 23,647,283 8,527,310 - - ---------------------------------------------------------------------------------------------------------------- Operating expenses Direct operating expenses Purses, fees and pari-mutuel taxes 10,164,135 4,001,805 - Simulcast and other direct expenses 8,936,255 2,986,438 - - ---------------------------------------------------------------------------------------------------------------- Total direct operating expenses 19,100,390 6,988,243 - Selling, general and administrative expenses 5,013,585 2,007,584 318,235 - ---------------------------------------------------------------------------------------------------------------- Total operating expenses 24,113,975 8,995,827 318,235 - ---------------------------------------------------------------------------------------------------------------- Loss from operations (466,692) (468,517) (318,235) - ---------------------------------------------------------------------------------------------------------------- Other income (expense) Interest expense (278,667) (183,118) (2,252) - ---------------------------------------------------------------------------------------------------------------- Interest income 837,222 6,220 - - ---------------------------------------------------------------------------------------------------------------- Total other income (expense) 558,555 (176,898) (2,252) - ---------------------------------------------------------------------------------------------------------------- Earnings (loss) before income taxes 91,863 (645,415) (320,487) Income taxes 84,000 - - - ---------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ 7,863 $ (645,415) $ (320,487) - ---------------------------------------------------------------------------------------------------------------- Earnings per share data: Basic and diluted earnings per share $ .01 $ (0.22) $ (0.11) - ---------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 6,318,493 3,000,000 3,000,000 ================================================================================================================ See accompanying notes to consolidated financial statements.
F-4
Consolidated Statements of Stockholders' Equity Common Stock ----------------------- Class A Class B Additional Retained ----------- ------------- Paid-in Earnings Shares Amount Shares Amount Capital (Deficit) Total - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 750,000 $ 7,500 2,250,000 $22,500 $ 1,100 $ (35,442) $ (4,342) Net loss - - - - - (320,487) (320,487) - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 750,000 7,500 2,250,000 22,500 1,100 (355,929) (324,829) Conversion of shareholder debt to equity - - - - 1,965,069 - 1,965,069 Net loss - - - - - (645,415) (645,415) - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 750,000 7,500 2,250,000 22,500 1,966,169 (1,001,344) 994,825 Sale of common stock 4,250,000 42,500 - - 35,875,885 - 35,918,385 Net earnings - - - - - 7,863 7,863 - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 5,000,000 $50,000 2,250,000 $22,500 $37,842,054 $(993,481) $36,921,073 ============================================================================================================================= See accompanying notes to consolidated financial statements. F-5
Consolidated Statements of Cash Flows Year Ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Operating activities Net earnings (loss) $ 7,863 $ (645,415) $(320,487) Adjustments to net earnings (loss) Depreciation and amortization 654,778 283,974 3,060 Increase in accounts receivable and other assets (1,094,224) (47,854) - Increase in accounts payable - trade 3,108,604 638,867 112,922 Increase in accrued expenses and other 435,333 435,595 44,761 Increase in horsemen's deposits and purses (59,400) (337,738) - - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided (absorbed) by operating activities 3,052,954 327,429 (159,744) - ----------------------------------------------------------------------------------------------------------------------------- Investing activities Purchases of property and equipment (47,133,328) (5,770,738) (436,570) (Decrease) increase in purse notes payable due horsemen (1,620,000) 1,957,683 - Investment in other assets (98,020) (186,332) (483,649) - ----------------------------------------------------------------------------------------------------------------------------- Net cash absorbed by investing activities (48,851,348) (3,999,387) (920,219) - ----------------------------------------------------------------------------------------------------------------------------- Financing activities Increase in financing costs (70,215) (200,793) (100,000) Proceeds from long-term debt and capital leases 11,388,503 45,796 15,489 Payments on long-term debt and capital leases (215,689) (10,931) - Proceeds from notes payable 4,612,381 4,987,704 1,492,117 Payments on notes payable (4,198,782) (100,000) - Proceeds from sale of common stock, net 36,250,422 - - - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 47,766,620 4,721,776 1,407,606 - ----------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 1,968,226 1,049,818 327,643 Cash and cash equivalents, beginning of year 1,379,884 330,066 2,423 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 3,348,110 $ 1,379,884 $ 330,066 ============================================================================================================================= See accompanying notes to consolidated financial statements.
F-6 Notes to Consolidated Financial Statements 1. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the following entities of Colonial Downs Holdings, Inc. (collectively, the "Company"), which prior to the reorganization, were affiliated through common ownership and control: Colonial Downs, L.P. ("Partnership") Stansley Racing Corp. ("SRC") Colonial Downs Holdings, Inc. ("CD Holdings") The consolidated financial statements have been prepared as if the entities had operated as a single consolidated group and assuming that the reorganization had taken place as of December 31, 1993. All significant intercompany accounts and transactions have been eliminated. Reorganization The Company's licenses to own and operate the racetrack and its racing centers ("Racing Centers") are held by the Partnership and SRC. Prior to the Reorganization (defined below), Stansley Management Corp. ("SMC") and CD Entertainment Ltd. each owned 50% of the Partnership. The ownership and operating licenses held by the Partnership and SRC are non-transferable under the Virginia Racing Act. In order to bring the licenses under the control of one entity while avoiding transfer of the licenses, CD Holdings became a holding company for the Partnership and SRC pursuant to an Agreement and Plan of Reorganization ("Reorganization"). Pursuant to the Reorganization, CD Holdings acquired, in exchange for 3,000,000 shares of its common stock, a 99% limited partner interest in the Partnership and 100% of the outstanding stock of SRC. Also, in conjunction with the Reorganization, SRC acquired a 1% general partner interest in the Partnership. The Reorganization became effective on March 12, 1997. F-7 Notes to Consolidated Financial Statements (continued) 1. Significant Accounting Policies (continued) As a result of the Reorganization, the Company owns, directly, or through its wholly-owned subsidiaries, the operating licenses for the racetrack and the Chesapeake, Richmond, Hampton, and Brunswick Racing Centers; the property for the Richmond, Hampton and Brunswick Racing Centers; the rights to apply for licenses to own and operate up to two additional Racing Centers in Virginia; the 345 acres on which the racetrack exists; and the racetrack facilities and certain related infrastructure. Description of Business The Company, which was organized in 1993, currently owns and operates the Colonial Downs racetrack (the "Track") on approximately 345 acres between Interstate Highway 64 and State Route 155 in New Kent County. The facility accommodates thoroughbred and standardbred racing as well as simulcast wagering. The Company also operates four Racing Centers. The first Racing Center began operations in Chesapeake, Virginia during February 1996. The second facility opened in Richmond, Virginia in December 1996. The third and fourth Racing Centers began operations in Hampton, Virginia and Brunswick County, Virginia in December 1997. The Company plans to work towards obtaining licenses for the remaining two Racing Centers authorized by the Commission. Cash and Cash Equivalents For the purposes of preparing the Company's statement of cash flows, investments with maturities of less than three months are considered to be cash equivalents. Notes to Consolidated Financial Statements (continued) 1. Significant Accounting Policies (continued) Interest Expense Interest expense of approximately $1,068,000 and $72,000 was capitalized during 1997 and 1996, respectively, in connection with the construction of the racetrack and development of the Racing Centers. Property, Equipment, Depreciation and Amortization Property and equipment is stated at cost. Expenditures for ordinary maintenance and repairs are charged to income as incurred. Costs of betterments, renewals, and major replacements are capitalized. At the time properties are retired or otherwise disposed of, the related cost and allowance for depreciation and amortization are eliminated from the accounts and any gain or loss on disposition is reflected in income. Depreciation and amortization is computed using the straight-line method over the following estimated useful lives: Years ------------------------------------------------------------ Land improvements 20-40 Building and improvements 5-40 Leasehold improvements 7-40 Equipment, furnishings and fixtures 3-15 Licensing Costs and Amortization Licensing costs, which are being amortized over a period of twenty years, consist primarily of professional fees associated with the application for the racetrack licenses and related licensing fees for the Racing Centers, which are 20 year licenses. F-8 Notes to Consolidated Financial Statements (continued) 1. Significant Accounting Policies (continued) Revenue Recognition The Company primarily derives revenue from import simulcasting, which is the Company's share of wagering at its Racing Centers on races simulcast from other racetracks. Revenue also is derived from live racing at the Company's track as well as export simulcasting of its live racing to other racetracks. Horsemen's Purses and Awards Amounts due under agreements with the Virginia Horsemen's Benevolent and Protective Association, Inc. and the Virginia Harness Horse Association (Note 9) are accrued based on the terms of the agreements. Funds not yet remitted to the associations to satisfy the liability are held in a restricted cash account. As of December 31, 1997 and 1996 approximately $1,656,500 and $337,800, respectively, were held in the restricted cash accounts. Income Taxes The Company and its subsidiaries file a consolidated income tax return. However, prior to the reorganization on March 12, 1997, the Partnership and SRC (an "S" Corporation for income tax purposes) filed income tax returns as separate entities. Colonial Downs Holdings, Inc. was incorporated in November 1996 but had no activities until the Reorganization and IPO, and therefore had no activity for tax purposes for the periods prior to the reorganization. Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. F-9 Notes to Consolidated Financial Statements (continued) 1. Significant Accounting Policies (continued) Earnings Per Share For the year ended December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 provides for the calculation of basic and diluted earnings per share. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilutive effect of securities that could share in earnings of an entity. At December 31, 1997, there were no securities which had a dilutive effect. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made in prior years' financial statements to conform to the December 31, 1997 presentation. Concentration of Credit Risk Financial instruments which potentially subject the Company to credit risk consist of cash equivalents, including horsemen's deposits, and accounts receivable. The Company's policy is to limit the amount of credit exposure to any one financial institution and place funds with financial institutions evaluated as being creditworthy. At December 31, 1997 and 1996, the Company had cash deposits which exceeded federally insured limits by approximately $3,477,000 and $899,000, respectively. F-10 Notes to Consolidated Financial Statements (continued) 1. Significant Accounting Policies (continued) Long-Lived Assets Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of." SFAS 121 requires that long-lived assets and certain intangibles to be held and used by an entity be reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. In addition, SFAS 121 requires long-lived assets and certain intangibles to be disposed of to be reported at the lower of carrying amount of fair value less costs to sell. The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable based on undiscounted estimated future operating cash flows. As of December 31, 1997, the Company has determined no impairment has occurred. Stock Based Compensation Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." SFAS No. 123 allows companies to continue to account for their stock option plans in accordance with APB Opinion 25 but encourages the adoption of a new accounting method based on the estimated fair value of employee stock options. Companies electing not to follow the new fair value based method are required to provide expanded footnote disclosures, including pro forma net income and earnings per share, determined as if the company had applied the new method. The application of this pronouncement did not have a material effect on the financial statements of the Company. Fair Value of Financial Instruments The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practical to estimate. Cash and Cash Equivalents - The carrying amount approximates the fair value due to the short maturity of the cash equivalents. Long-Term Debt and Capital Lease Obligations - The fair value of the Company's long-term debt and capital lease obligations is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying amount approximates fair value since the Company's interest rates approximate current interest rates. F-11 Notes to Consolidated Financial Statements (continued) 1. Significant Accounting Policies (continued) Recent Accounting Pronouncements Statement of Financial Accounting Standards No. 129 (SFAS 129), "Disclosure of Information about Capital Structure," effective for periods ending after December 15, 1997, establishes standards for disclosing information about an entity's capital structure. SFAS 129 requires disclosure of the pertinent rights and privileges of various securities outstanding (stock, options, warrants, preferred stock, debt and participation rights) including dividend and liquidation preferences, participant rights, call prices and dates, conversion or exercise prices and redemption requirements. Adoption of SFAS 129 had no effect on the Company because it currently discloses the information specified. Statement of Financial Accounting No. 130 (SFAS 130), "Reporting Comprehensive Income," effective for periods beginning after December 15, 1997, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. 2. Property and Equipment - ----------------------------------------------------------------------- December 31, 1997 1996 Land and improvements $ 8,243,180 $ 800,000 Buildings and improvements 49,240,717 1,788,343 Leasehold improvements 1,114,629 807,643 Equipment, furnishings and fixtures 2,901,639 888,503 Construction in progress - 5,080,098 --------------------------------- Total $61,500,165 $9,364,587 --------------------------------- 3. Management and Consulting Agreement with Maryland - Virginia Racing Circuit The Company entered into an agreement with the Maryland - Virginia Racing Circuit, Inc. ("Circuit") an affiliate of the Maryland Jockey Club ("MJC"). Pursuant to the agreement, MJC will suspend live racing at the Pimlico and Laurel, Maryland racetracks, which it controls, during the Company's live thoroughbred racing period in order to manage the thoroughbred racing at the Company's racing facility. F-12 Notes to Consolidated Financial Statements (continued) 3. Management and Consulting Agreement with Maryland - Virginia Racing Circuit (continued) The agreement provides that the Company pay the Circuit a fee of two percent of gross amounts wagered on all racing, except for live harness racing at the Company's racetrack. This fee represents approximately 10% of pari-mutuel revenues. Additionally, the Company will pay a pro-rata share of the salaries of the MJC employees that participate in the management of the Company's live thoroughbred racing. The Company will bear all other expenses associated with the management and operation of the thoroughbred meet. Under the agreement, approximately $2,713,000 and $739,000 of costs were incurred for the years ended December 31, 1997 and 1996, respectively. (See Note 12) The Management and Consulting Agreement will remain in effect for so long as the Company owns, controls or operates the Track, not to exceed a term of 50 years. At the Company's option, the Company may terminate the agreement any time after 25 years upon payment of a fee equal to 17 times the average management fee paid during the three years immediately preceding such termination. 4. Land Conveyance and Land Development Delmarva Properties, Inc. and Chesapeake Forest Products Company (collectively "Delmarva") and the Company entered into an agreement in which Delmarva, at no cost to the Company, conveyed the land required to build the racetrack and facilities in New Kent county. The land is subject to reversion to Delmarva if the Company fails to complete, open and operate for three years a racetrack licensed by the Commission on the land. Conveyance occurred upon completion of the IPO, at which time the land, which the Company estimates the fair value to be approximately $5,000,000, was recorded as a refundable advance with an offset to a liability account in the same amount. For financial statement purposes, the liability has been recorded as a contra-asset against the refundable advance, and will remain so until the likelihood for reversion is remote. F-16 Notes to Consolidated Financial Statements (continued) 5. Notes Payable, Notes Payable- Related Parties, and Capital Lease Obligations - ------------------------------------------------------------------------- Notes payable, notes payable-related parties, and capital lease obligations consist of the following: December 31, 1997 1996 Note payable to a Bank maturing June 2000, with two one year extensions, bearing interest at a variable rate (8.69% at December 31, 1997), with a $1,000,000 principal payment due in December 1998 and quarterly principal payments of $500,000 commencing in March 1999, collateralized by substantially all assets of the Company and guaranteed by certain shareholders and related parties $10,000,000 $ - Convertible subordinated note payable to CD Entertainment, Ltd., maturing March 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 - Note payable to a Bank, maturing August 1999, bearing interest at prime (8.5% at December 31, 1997) plus 1%, with monthly principal payments of $15,000, collateralized by certain fixed assets 840,000 - Note payable to an Insurance Company, maturing October 1999, bearing interest at 6.83%, with monthly payments of $8,622 including interest 170,186 - Installment notes 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% 252,465 69,737 F-13 Notes to Consolidated Financial Statements (continued) 5. Notes Payable, Notes Payable- Related Parties, and Capital Lease Obligations (continued) December 31, 1997 1996 Note payable to CD Entertainment, Ltd., maturing January 1998 bearing interest at LIBOR (5.625% at December 31, 1996) plus 2%; collateralized by land and building $ - $3,000,000 Note payable to CD Entertainment, Ltd., bearing interest at LIBOR (5.625% at December 31, 1996) plus 2% with maximum borrowings of $5,000,000, unsecured - 1,387,619 Notes payable to Arnold Stansley, maturing January 1997 and March 1998, non-interest bearing, unsecured - 386,788 Notes payable to Norglass, Inc., maturing January 1997 and March 1998, non-interest bearing, unsecured - 311,994 Demand note payable to a Bank, with interest payable at prime plus 2%; unsecured - 20,100 ---------- --------- 16,762,651 5,176,238 Less current maturities 1,373,059 1,685,297 ---------- --------- Long-term debt $15,389,592 $3,490,941 ========== ========= The notes payable to Arnold Stansley and Norglass, Inc. were repaid with proceeds from the IPO in 1997. A portion of outstanding debt to CD Entertainment, Ltd. at December 31, 1996 was repaid with proceeds from the IPO and the remainder was refinanced in 1997. Capital lease obligations as of December 31, 1997 and 1996 were approximately $207,600 and $29,300, respectively. The amount of leased fixed assets capitalized at December 31, 1997 and 1996 was approximately $233,200 and $39,500, respectively. F-14 Notes to Consolidated Financial Statements (continued) 5. Notes Payable, Notes Payable- Related Parties and Capital Lease Obligations (continued) Arnold Stansley, Norglass, Inc. and CD Entertainment, Ltd. are related to the Company either directly or indirectly (See Notes 1 and 7). The aggregate amounts of notes payable and capital lease obligations at December 31, 1997 mature as follows: Through December 31, Amount ----------------------------------------------------------- 1998 $ 1,373,059 1999 2,831,339 2000 12,558,253 ----------------------------------------------------------- $16,762,651 =========================================================== 6. Income Taxes Income tax expense for the year ended December 31, 1997 consists of the following: Federal State Total -------------------------------------------------------- Current $ -- $ -- $ -- Deferred expense 57,000 27,000 84,000 --------- -------- --------- $ 57,000 $ 27,000 $ 84,000 ========= ======== ========= Deferred income tax assets (liabilities) at December 31, 1997 consist of the following: Noncurrent Assets Net operating loss $ 276,000 Liabilities Depreciation and amortization (360,000) ---------- Net deferred tax liability $ (84,000) ========== F-15 Notes to Consolidated Financial Statements (continued) 6. Income Taxes (continued) Income tax expense as reported differs from the amounts computed by applying the statutory federal income tax rate to pre-tax income as follows: Year ended December 31, 1997 Amount Income taxes at statutory rate $ 31,000 Increases (decreases) resulting from State taxes, net of federal income tax benefit (10,000) Campaign costs 211,000 Income allocable to entities prior to reorganization (158,000) Other 10,000 --------- $ 84,000 ========= 7. Related Party Transactions The Company had a management agreement to pay directly and indirectly to SRC and CD Entertainment Ltd. a monthly management fee of $10,000 and $5,000, respectively, per month. The Company incurred management fees of $180,000 and $30,000 under this agreement during the years ended December 31, 1996 and December 31, 1995, respectively. Upon consummation of the IPO, these agreements were terminated and the Company entered into a new five year consulting agreement with Arnold Stansley. Under the agreement, Mr. Stansley receives $75,000 annually. Total expense under the agreement was $59,375 for the year ended December 31, 1997. F-16 Notes to Consolidated Financial Statements (continued) 7. Related Party Transactions (continued) Virginia Concessions, L.L.C., an affiliate of a shareholder, has an agreement with the Company to manage the food and beverage concessions at the initial six Racing Centers. Under the agreement, Virginia Concessions, L.L.C. pays commissions to the Company based upon a percentage of gross sales at each Racing Center. The Company had approximately $146,500 and $89,000 of rental income generated from the Company's Racing Centers for the years ended December 31, 1997 and 1996, respectively. Norglass, Inc. ("Norglass"), an affiliate of shareholder James M. Leadbetter, was engaged as the general contractor to construct the race track and related facilities in New Kent County, Virginia. The original contract value with Norglass, Inc. for the facilities (which does not include approximately $8.1 million for certain equipment, furniture, fixtures and improvements) was estimated at approximately $29.5 million. The Company is currently engaged in a contract dispute under the construction agreement, dated February 10, 1997 between the Company and Norglass, See Note 8. The Company paid and capitalized a $125,000 development fee to Premier Development Co. ("Premier"), an affiliate of a shareholder, pursuant to a 1996 agreement. On October 1, 1997, the Company entered into a new agreement with Premier to pay annual consulting fees in the amount of $226,000 through September 30, 1999. The Company paid $50,000 under the new agreement, of which $35,000 was capitalized and included in property and equipment at December 31, 1997. 8. Commitments and Contingencies In 1995, the Company entered into an agreement with a totalisator company which provides wagering services and designs, programs, and manufactures totalisator systems for use in wagering applications. The basic terms of the agreement state that the totalisator company shall provide totalisator services to the Company for all wagering held at the Company's facilities during the first six years of operations. As a part of the agreement, the Company agreed to pay the totalisator company certain percentages of the gross amounts wagered at the facilities, as well as a minimum of $37,500, payable annually for equipment installed at the racetrack for live race meets. In addition, the Company agreed to use certain equipment provided by the totalisator company. F-17 Notes to Consolidated Financial Statements (continued) 8. Commitments and Contingencies (continued) In 1996, the Company entered into agreements with a company which provides closed circuit television service and equipment. The basic terms of the agreement state that the company shall provide closed circuit television at the track and the Company's Racing Centers. As a part of the agreement, the Company agreed to pay the company certain amounts per simulcast day. Total expense incurred for totalisator and TVs (excluding host fees) was approximately $493,000 and $190,000 for the years ended December 31, 1997 and 1996, respectively. The Company is liable under several operating leases for automobiles, equipment and buildings expiring at various dates. Total rental expense under these non-cancelable leases was approximately $393,000 and $144,000 for the years ended December 31, 1997 and 1996, respectively. The following are the future estimated minimum commitments relating to non-cancelable operating agreements and leases. TVs and Year Ending December 31, Totalisator Other Total 1998 $1,626,300 $116,000 $1,742,300 1999 1,371,000 108,500 1,479,500 2000 1,246,000 48,800 1,294,800 2001 1,246,000 1,700 1,247,700 2002 1,246,000 500 1,246,500 ---------- -------- ---------- $6,735,300 $275,500 $7,010,800 ========== ======== ========== The Company has a $200,000 letter of credit that secures the Company's obligations under certain erosion control bonds related to construction of the racetrack. F-18 Notes to Consolidated Financial Statements (continued) 8. Commitments and Contingencies (continued) At December 31, 1997, the Company had a $5,000,000 line of credit with a commercial bank at various interest rates, which expires in June 2000. The line of credit is secured by substantially all assets of the Company and assignment of certain rights and revenues of the Company. The line of credit is also guaranteed by certain shareholders and related parties of the Company. The credit facility contains various covenants in conjunction with the $10,000,000 note payable with the same commercial bank which include tangible net worth, profitability, and debt coverage ratios. No amounts were outstanding under this line of credit facility at December 31, 1997. Pursuant to an agreement to provide credit support to the Company, Diversified Opportunities Group Ltd. ("Diversified"), an affiliate of a shareholder, will receive an annual fee equal to 3% of the amount of any letters of credit or guarantees provided to the Company (subject, in the case of a letter of credit, to a minimum annual fee of $50,000). Costs incurred under this agreement were $165,124 in 1997. To assist in the development and improvement in certain public roads adjacent to the racetrack facility, the Company entered into an agreement in July 1996 with New Kent County and the Capital Area Training Consortium for a Community Development Block Grant of $700,000. In addition to the grant, an additional amount of approximately $700,000 was allocated by the Virginia Department of Transportation to complete a project which widened State Route 155 from I-64 to the entrance of the racetrack grounds. Under the above agreements, the Company must take affirmative steps to employ a minimum number of low and moderate income persons based on HUD Section 8 Income Limits. In the event that the Company fails to honor its commitment to take such affirmative steps, the Company must repay any local or grant funds already expended in full to the locality and the Virginia Department of Housing and Community Development. The Company is in compliance with the requirements. F-19 Notes to Consolidated Financial Statements (continued) 8. Commitments and Contingencies (continued) Pursuant to the terms of the Construction Contract with Norglass, the Company is proceeding before the American Arbitration Association ("AAA") against Norglass, the general contractor engaged to manage the construction of the Company's racetrack. In the proceeding, the Company challenges the validity of Norglass' mechanic's liens for approximately $11.8 million at December 31, 1997 (subsequently reduced to $6.5 million) and asserts a damage claim against Norglass in an amount not less than $4.4 million. The Company is vigorously pursuing its claims against Norglass and is vigorously defending against claims for payment by Norglass under the Construction Contract. If the Company does not prevail in its claims, and assuming the Company receives a credit against Norglass' claim for amounts the Company has paid directly to subcontractors, its potential liability, included in accounts payable at December 31, 1997, is approximately $1.9 million in construction costs, plus interest, from a date to be established and legal fees. Additionally, it will be unable to recover approximately $3.8 million it has paid to subcontractors of Norglass as of December 31, 1997. In connection with the dispute with Norglass, subcontractors of Norglass and parties claiming direct contracts with the Company filed mechanic's liens against the property in the aggregate amount of approximately $4 million. As of the date hereof, all but $501,000 of such mechanic's liens have been released. The Company is negotiating with these subcontractors and contractors for the release of the balance of such liens. 9. Horsemen's Agreement The Company entered into an agreement effective February 17, 1996 with the Virginia Horsemen's Benevolent and Protective Association, Inc. ("VAHBPA") applicable to revenue generated from pari-mutuel wagering on simulcast thoroughbred races at all facilities owned and operated by the Company in Virginia, and simulcasting of live thoroughbred races at the racetrack. In accordance with the agreement, the Company maintains a separate joint bank account (the "Thoroughbred Partner Account") into which the Company deposits an amount equal to 5.25%, which is approximately 26.25% of thoroughbred pari- mutuel revenues, of the thoroughbred handle at each Racing Center. Also, 5% of net revenue derived from export simulcasting of live thoroughbred races at the racetrack is due to the Virginia Breeders Fund. The initial period of the agreement runs through December 31, 1998, and renews automatically for successive one year terms. If the sum of 5.25% of the Racing Centers' thoroughbred handle plus the total amount of handle generated by live thoroughbred racing at the racetrack for each period is less than a guaranteed $4.5 million, then the Company shall pay the difference into the Thoroughbred Partner Account, used to pay purses, with half of such amount being considered a loan by the Company to the VAHBPA. The Company met the $4.5 milion guarantee during the year ended December 31, 1997. F-20 Notes to Consolidated Financial Statements (continued) 9. Horsemen's Agreements (continued) The Company entered into another agreement effective February 17, 1996 with the Virginia Harness Horse Association ("VHHA") applicable to revenue generated from pari-mutuel wagering on simulcast standardbred races at all facilities owned and operated by the Company in Virginia, and simulcasting of live races held at the racetrack. In accordance with the agreement, the Company maintains a separate joint bank account (the "Standardbred Partner Account") into which the Company deposits an amount equal to 5%, which is approximately 25% of standardbred pari-mutuel revenue, of the Racing Center standardbred handle. Under the agreement, 5% of the revenue derived from export simulcasting of live standardbred races at the racetrack is due to the Virginia Breeders Fund, 47.5% is shared between VHHA and the breeders, and the remaining 47.5% retained by the Company. The initial period of the agreement runs through completion of the 1999 standardbred race meet, and renews automatically for successive one year terms. If the sum of 5% of the standardbred handle plus the total amount of handle generated by live standardbred racing at the racetrack for the initial period is less than a guaranteed $2.5 million, then the Company shall pay the difference into the Standardbred Partner Account, used to pay purses, with half of such amount being considered a loan by the Company to the VHHA. Under the VAHBPA and VHHA agreements, the Company may be required to make purse contributions in excess of the minimum amounts based upon a formula which adjusts the Company's net income. For the year ended December 31, 1997, the Company was not required to make any additional purse account contributions. Under the Virginia Racing Act, the Company is required to contribute approximately 8.5% of all money wagered at the racetrack on live racing to the purse accounts and these funds will count towards the required minimum $4.5 million and $2.5 million for thoroughbred and standardbred purses, respectively. 10. Stockholders' Equity In March 1997, the Company completed its initial public offering. The proceeds, net of expenses, amounted to $35,918,385 for 4,250,000 shares of common stock issued. The offering price per share was $9.50. F-21 Notes to Consolidated Financial Statements (continued) 10. Stockholders Equity (continued) In conjunction with the Reorganization and IPO, the Company implemented a stock option plan. Options granted under the plan may be either Incentive Stock Options or Non-qualified Stock Options, based on the discretion of the Board of Directors. The maximum aggregate number of shares which may be optioned and sold under the plan is 300,000 shares of Class A Common Stock. The exercise price per share for Incentive Stock Options will be no less than the fair value of the stock at the grant date. The exercise of Non-qualified Options is determined by the Board of Directors on the grant date. The term of the plan is ten years. Weighted Average Exercise Available Options Vested and Price for Grant Outstanding Exercisable Balance at March 21, 1997 (plan inception) $ - 300,000 - - Granted 9.86 (242,000) 242,000 - Vested - - - - Exercised - - - Forefeited - 50,000 (50,000) - ------ ------- ------- ------- Balance at December 31, 1997 $ 9.86 108,000 192,000 - ====== ======= ======= ======= The Company applies APB Opinion 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized. The weighted average fair value of options granted at December 31, 1997 is $3.22. The proforma effect of options issued and outstanding under the provisions of SFAS 123 for the year ended December 31, 1997 are is follows: Net earnings: As reported $ 7,863 Proforma (125,637) Basic and diluted earnings per share: As reported $ 0.01 Proforma (0.02) For the purposes of computing the pro forma amounts indicated above, the fair value of each option on the date of grant is estimated using the Black-Scholes option pricing model with the following assumptions: no dividend yield, expected volatility of 25%, risk-free interest rate of 6.74% and an expected life of 5 years. Substantially all options become vested and exerciseable evenly over a five year period. 11. Supplemental Disclosures of Cash Flow Year ended December 31, 1997 1996 1995 Cash paid for interest $1,094,380 $ 94,674 $ 2,400 Conversion of debt to equity $ - $ 1,965,069 $ - Capital lease obligation incurred $ 229,353 $ 39,483 $ - Income taxes paid $ 217,956 $ - $ - F-22 Notes to Consolidated Financial Statements (continued) 11. Supplemental Disclosures of Cash Flows (continued) At December 31, 1997 and 1996, $7,964,354, and $2,815,599, respectively, were due vendors for property and equipment purchases. During the year ended December 31, 1996, $1,965,069 of debt due to CD Entertainment, Ltd. was converted to equity and treated as capital contributions. No shares of common or preferred stock were issued in connection with the conversion. 12. Subsequent Events On January 8, 1998, the Company filed a demand for arbitration against Maryland-Virginia Racing Circuit, Inc. ("MVRC") before the Virginia Racing Commission (the "Commission"). In its arbitration demand, the Company challenged a management fee claimed to be due to MVRC pursuant to a Management and Consulting Agreement (see Note 3), dated as of April 22, 1996 (the "Consulting Agreement") between the Company and MVRC. The arbitration is based upon the fact that the demanded compensation under the Consulting Agreement has failed to consider certain changed circumstances as well as the original intent of the parties. Specifically, the compensation demanded by MVRC has been based upon the assumptions that MVRC was to manage a 102-day thoroughbred racing season at Colonial Downs' racetrack and during that 102-day season the Maryland tracks owned and operated by MVRC would be closed. In reality, however, the number of thoroughbred race days has been (and will be for the foreseeable future) much less and MVRC has failed to close its Maryland tracks as contemplated. As a result, the Company has requested that the Commission (as provided in the Agreement) arbitrate this dispute and reform the Consulting Agreement accordingly, thereby reducing the compensation to MVRC to reflect the fewer number of race days during which MVRC is actually managing the Company's thoroughbred season. In the alternative, the Company has requested the Commission to declare the Consulting Agreement null and void and to direct the parties to enter into a new agreement. The Commission declined Colonial Downs' request that it arbitrate the dispute on January 21, 1998; hence a third-party arbitrator must be named. F-23 Report of Independent Certified Public Accountants Colonial Downs Holdings,Inc. New Kent, Virginia We have audited the accompanying consolidated balance sheets of Colonial Downs Holdings, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Colonial Downs Holdings, Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. BDO Seidman, LLP Richmond, Virginia March 25, 1998 ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated by reference from the Company's definitive proxy statement with respect to the Company's Annual Meeting of Shareholders to be held on May 8, 1998. Such proxy statement shall be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 11 EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference from the Company's definitive proxy statement with respect to the Company's Annual Meeting of Shareholders to be held on May 8, 1998. Such proxy statement shall be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement with respect to the Company's Annual Meeting of Shareholders to be held on May 8, 1998. Such proxy statement shall be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference from the Company's definitive proxy statement with respect to the Company's Annual Meeting of Shareholders to be held on May 8, 1998. Such proxy statement shall be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) (1) The Financial Statements included in the Index to Part II, Item 8, are filed as part of this Report. (B) Reports of Form 8-K The Company filed the following Form 8-K during the fourth quarter of 1997: 1. On November 14, 1997 the Company filed Form 8-K which reflected the intention of the Company to seek, through arbitration, a reduction in the fees it pays to the Maryland Jockey Club. Further, the Form 8-K reflected an announcement of Jeffrey P. Jacobs interest in proposing a combination of the Company with Black Hawk Gaming & Development Co., Inc., in which Mr. Jacobs holds a substantial interest. Additionally, the Form 8-K announced that the Company may consider seeking referenda in other Virginia cities and counties in connection with spring 1998 elections for city councils and the November 1998 Congressional elections. 2. On December 10, 1997, the Company filed Form 8-K which reflected the retirement of O.J. Peterson, III from the positions of President and Chief Operating Officer of the Company effective January 1, 1998. It further announced that Mr. Jacobs would take over as President and Ian Stewart was promoted to Chief Operating Officer. (C) Exhibits See Exhibit Index (D) All financial statements and schedules except those items listed under items 14(a)1 and (a)2 above are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COLONIAL DOWNS HOLDINGS, INC. /s/ Jeffrey P. Jacobs ----------------------------------------------- Jeffrey P. Jacobs, Chief Executive Officer and President, Chairman of the Board and Director March 30, 1998 /s/ Ian M. Stewart ----------------------------------------------- Ian M. Stewart, Chief Operating Officer and Chief Financial Officer March 30, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Jeffrey P. Jacobs ----------------------------------------------- Jeffrey P. Jacobs, Chairman of the Board, Director March 30, 1998 /s/ Arnold W. Stansley ----------------------------------------------- Arnold W. Stansley, Director March 30, 1998 /s/ William J. Koslo ----------------------------------------------- William J. Koslo, Jr., Director March 30, 1998 /s/ Stephen Peskoff ----------------------------------------------- Stephen Peskoff, Director March 30, 1998 /s/ Robert H. Hughes ----------------------------------------------- Robert H. Hughes, Director March 30, 1998 /s/ David C. Grunenwald ----------------------------------------------- David C. Grunenwald, Director March 30, 1998 /s/ Patrick J. McKinley ----------------------------------------------- Patrick J. McKinley, Director March 30, 1998 EXHIBIT INDEX EXHIBIT NOS. DESCRIPTION OF EXHIBIT 2.1 Agreement and Plan of Reorganization (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 3.1 Amended and Restated Articles of Incorporation of Colonial Downs Holdings, Inc. (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 3.2 Amended and Restated By-laws of Colonial Downs Holdings, Inc. (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 4.1 Stock Certificate representing Colonial Downs Holdings, Inc. Common Stock (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.1 Management and Consulting Agreement (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.2 Amended and Restated Performance Guarantee Agreement (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.3 Form of Deed for Track site (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.4 Construction Agreement (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.5 Development Agreement (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.6 Hubbing Agreement (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.7 VHHA Simulcast Wagering Agreement (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.8 VaHBPA Simulcast Wagering Agreement (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.9 Form of Convertible Subordinated Note (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.10 Forms of Employment Agreements (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.11 Form of Stansley Racing Agreement (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.12 Amended and Restated Promissory Note to CD Entertainment Ltd. (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.13 Agreement for Interim Financing (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.14 Registration Rights Agreement (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.16 Form of 1997 Stock Option Plan (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.17 Agreement for Provision of Credit (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 10.18 Management Agreement between Colonial Downs, L.P. and Virginia Concessions, L.L.C. (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated August 14, 1997) 10.19 Construction Loan Agreement between Colonial Downs, L.P. and PNC Bank, National Association (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated August 14, 1997) 10.20 Revolving Line of Credit Agreement (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated August 14, 1997) 10.21 Deed of Trust Note (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated August 14, 1997) 10.22 Revolving Line of Credit Note (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated August 14, 1997) 10.23 Deed of Trust and Security Agreement (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated August 14, 1997) 10.24 Assignment of Leases and Rents (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated August 14, 1997) 10.25 Agreement of Guaranty and Suretyship (Completion) between Stansley Racing Corp. and PNC Bank, National Association (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated August 14, 1997) 10.26 Agreement of Guaranty and Suretyship (Completion) between Colonial Downs Holdings, Inc. and PNC Bank, National Association (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated August 14, 1997) 10.27 Agreement of Guaranty and Suretyship (Payment), between Stansley Racing Corp. and PNC Bank, National Association (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated August 14, 1997) 10.28 Agreement of Guaranty and Suretyship (Payment) between Stansley Racing Corp. and PNC Bank, National Association (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated August 14, 1997) 10.29 Promissory Note payable to Citizens and Farmers Bank (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated September 14, 1997) 10.30 Business Loan Agreement between the Company, the Partnership and Citizens and Farmers Bank (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated September 14, 1997) 10.31 Commercial Security Agreement among the Company, the Partnership and Citizens and Farmers Bank (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated September 14, 1997) 10.32 Subordination Agreement (Lighting) among the Company, CD Entertainment, the Partnership and David F. Belkowitz and James W. Theobold (Incorporated by reference to the Company's 10-Q, File # 333-18295, dated September 14, 1997) 10.33 Employment Agreement dated June 23, 1997 between the Company and Ian M. Stewart 10.34 Souvenir and Gift Concessions Agreement dated August 1, 1997, by and between the Partnership, and Stansley Racing Corp, and Colonial Gifts and Sportswear, Inc. 21.1 Subsidiaries of the Registrant (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 23.1 Consent of Hogan & Hartson L.L.P. (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 23.2 Consent of BDO Seidman, LLP (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 24.1 Power of Attorney (Incorporated by reference to the Company's registration statement on Form S-1, File # 333-18295, dated March 14, 1997) 27.1 Financial Data Schedule EX-10.33 2 EMPLOYMENT AGREEMENT Exhibit 10.33 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, is made as of June 23, 1997, by and between COLONIAL DOWNS HOLDINGS, INC., a Virginia corporation (the "Company"), and IAN M. STEWART ("Executive") and recites and provides as follows: WHEREAS, the Company is engaged in the business of seeking opportunities for horse racing and pari-mutuel wagering in Virginia, and its subsidiaries are currently the holders of the only unlimited licenses to own and operate a horse racetrack with pari-mutuel wagering in Virginia (the "Track") and the only entities authorized to apply for licenses to own and operate satellite wagering facilities ("SWF") in Virginia; WHEREAS, the Company desires to employ Executive as Chief Financial Officer of the Company; and WHEREAS, Executive desires to be so employed by Company on the terms and conditions hereinafter set forth; WHEREAS, through his relationship with the Company, the Executive will become acquainted with certain confidential or proprietary aspects of the Company's business, including without limitation, operating methods, marketing strategy, sponsorship and advertising agreements, design and layout of the Track facilities and potential sites for additional SWFs, and other confidential and proprietary information that constitute valuable assets of the Company and which the Company desires to protect. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment. The Company hereby employs the Executive, and the Executive hereby accepts employment with the Company as Vice President and Chief Financial Officer. 2. Duties of the Executive. As the Chief Financial Officer of the Company, the Executive shall faithfully serve the Company and shall at all times devote his full time, best efforts, skills, attention, and energies to the development, organization, management, and expansion of the Company's business to the utmost of the Executive's ability, and shall do and perform all such services, acts, and things connected therewith as are reasonably required and as the Company shall from time to time direct. The Executive shall not become engaged or involved in any activities or matters which may adversely affect or reflect discredit on the Company or its business, or conflict with his services to the Company. This Agreement shall not prohibit the Executive from investing personal assets in other businesses or entities that do not compete with the Company (as described in Section 11 of this Agreement). 3. Term. Subject to the provisions of Section 8 regarding termination, this Agreement shall remain in effect for a term of two (2) years beginning on the date hereof. This Agreement may be renewed and extended on terms and conditions mutually agreeable to the parties hereto. 4. Compensation. For all services rendered by the Executive pursuant to this Agreement, the Company shall pay the Executive a base salary of $90,000 per annum, payable in equal semi-monthly installments, or at such other times as may be mutually agreed upon by the parties. 5. Deductions. The Company is authorized to deduct from the actual compensation of the Executive such sums as may be required to be deducted or withheld under the provisions of any federal, state, or local law or regulation now in effect or hereafter put into effect during the term of this Agreement, including without limitation, social security, unemployment, and income withholding taxes. 6. Benefits. (a) The Executive shall be entitled to a paid vacation each year of two (2) weeks, the timing of which shall be subject to mutual agreement between the Company and the Executive. The Executive's attendance at trade shows, training, educational, and professional programs and meetings shall not be charged against Executive's vacation allowance. The Executive shall also be entitled to paid sick leave of five (5) days each year. (b) The Executive shall be entitled to the use of an automobile, the make and model of which shall be mutually agreeable to the Company and Executive, leased by the Company at its expense. (c) The Company shall reimburse the Executive for all expenses reasonably and necessarily incurred by him in the performance of his duties hereunder. To be reimbursed, the Executive must submit written evidence of such expenses to the Company within thirty (30) days after incurring such expense. (d) The Executive shall receive such other benefits, if any, as the Company generally provides to all other Executives involved in the operations of the Company, whether now in effect or hereafter adopted, including group hospital and accidental insurance benefits and group disability insurance coverage. 7. Stock Options. In connection with Executive's employment hereunder, the Company will grant to the Executive stock options for an aggregate of 10,000 shares of Class A Common Stock (the "Stock") at an exercise price equal to the initial public offering price of the shares of Stock. Such options shall vest for 2,000 shares per year on each anniversary of the date hereof for five years. 8. Termination of Employment. (a) Upon the occurrence of any of the following events and the expiration of any required notice, this Agreement and the Executive's employment hereunder automatically shall terminate: (1) The death or bankruptcy of the Executive; (2) The Board of Director's termination of the Executive's employment at any time, "for cause" or not "for cause" (as defined below). This Agreement and the Executive's employment hereunder shall terminate upon the expiration of a period of thirty (30) days after delivery by the Company of written notice to the Executive of his termination. The phrase "for cause" shall include termination because of the Executive's personal dishonesty, incompetence, willful misconduct, censure or reprimand by any regulatory body (including the Virginia Racing Commission), breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses), failure to perform assigned duties in a reasonably satisfactory manner, or material breach of any provision of this Agreement; (3) The expiration of a period of thirty (30) days after delivery by the Executive of written notice to the Company of his resignation as an Executive of the Company; or (4) The disability of the Executive. "Disability" shall mean a physical or mental disability that prevents the substantial performance by the Executive of his duties hereunder lasting for a continuous period of six (6) months or longer. The reasoned and good faith judgment of the Company's Board of Directors as to the Executive's disability shall be final and shall be based on such competent medical evidence as shall be presented to the Company's Board of Directors by the Executive or by any physician or group of physicians or other competent medical experts on behalf of the Executive and on behalf of the Company. (b) In the event the Executive voluntarily terminates his employment or has his employment terminated "for cause" under this Agreement, he shall be entitled to receive from the Company only the base salary and benefits as set forth herein that have accrued to the date of termination in full settlement of all of the Company's obligations hereunder. (c) In the event the Company terminates the employment of Executive by reason of his disability, the Executive shall be entitled to receive from the Company only the base salary and benefits set forth herein that have accrued to the date of disability in full settlement of all of the Company's obligations hereunder. (d) In the event the Company terminates the employment of the Executive not "for cause", the Executive shall be entitled to three (3) months base salary as set forth herein and the benefits as set forth herein that have accrued to the date of termination in full settlement of all of the Company's obligations hereunder. 9. Fiduciary Relationship. (a) The Executive as a Fiduciary. It is understood and agreed that the Executive will serve in a fiduciary capacity to the Company and, as such, will comply with the standards applicable to fiduciaries and other Executives of the Company. (b) Confidential Information and Trade Secrets. All information relating to or used in the business and operations of the Company (including, but not limited to, marketing plans, business procedures, trade secrets, patents, sources of supplies and materials, reports, memoranda, plans, documents, and the like), whether conceived, prepared, originated, developed or compiled by the Executive or by the Company prior to or during the term of this Agreement and the employment of the Executive (hereinafter "Confidential Information and Trade Secrets"), are and shall be confidential information and trade secrets which are the exclusive property of the Company, provided such information is not generally known in the horse racing industry. (c) Property of the Company. All Confidential Information and Trade Secrets as defined in this Section 9(b) are and shall be the exclusive property of the Company. (d) Nondisclosure of Confidential Information and Trade Secrets. Except in the regular course of his employment by the Company hereunder or as the Company may expressly authorize or direct in writing, the Executive shall not, during or after the termination or expiration of this Agreement, copy, reproduce, disclose or divulge to others, use or permit others to use any Confidential Information and Trade Secrets, or any records or materials relating to any such Confidential Information or Trade Secrets. The Executive further covenants and agrees that during the term of this Agreement he shall not remove from the custody and control of the Company any records of or materials relating to such Confidential Information and Trade Secrets and that upon the termination or expiration of his employment he shall deliver the same to the Company. 10. Covenant Not to Compete. (a) In consideration of the fees and benefits that he receives pursuant to this Agreement, during the term of this Agreement and for one (1) year thereafter, the Executive hereby covenants and agrees that he will not, without the prior written consent of the Company, either alone or in partnership with or in conjunction with any other person, firm, or corporation, whether as principal, agent, or shareholder (other than an entity in which Executive holds less than a five percent (5%) equity interest), directly or indirectly, participate, carry on, conduct, or be engaged in, or advise, any person, firm, corporation, or other legal entity carrying on or engaging in the horse racing business in Virginia, Maryland, West Virginia or North Carolina that competes with the business conducted by the Company on the date hereof. In addition, the Executive shall not seek to induce any of the Company' employees to leave the Company' employment to work for any entity with which he is affiliated. In addition, the Executive shall not solicit any sponsors or advertisers of the Company for the purpose of inducing, directly or indirectly, the termination of any sponsorship or advertising agreements. (b) The Executive recognizes that the Company's remedies at law may be inadequate to protect itself against a breach of this provision, and therefore agrees that injunctive or other equitable relief shall be an appropriate remedy for breach of this covenant not to compete, and shall be a remedy in addition to any and all other remedies available to the Company. (c) The parties agree that if the restrictions of this Section 10 are determined by any court of competent jurisdiction, at the time of enforcement, to be unreasonable as to the duration, scope or area of restriction, then such restrictions should be applied only to such activities and territory and only for such period of time as the court determines to be reasonable in light of all circumstances then existing. 11. Remedies. The Executive hereby represents that the services to be performed by the Executive under the terms of this Agreement are of a special, unique, extraordinary, and intellectual character, which gives them a particular value, the breach of which cannot be reasonably or adequately compensated in damages in an action at law. The Executive expressly acknowledges and agrees that the Company shall be entitled to obtain, in addition to any other rights or remedies the Company may possess, injunctive or other equitable relief to prevent a prospective or continuing breach of any provision of this Agreement by the Executive. 12. Notices. All notices or other communications required or permitted by and among the parties shall be in writing and shall be deemed to have been given, delivered or made when delivered by hand or mailed by certified or registered mail, postage prepaid, return receipt requested, and addressed either as follows or in such other manner as a party may subsequently designate to the other party in writing: If to the Company, at: Colonial Downs Holdings, Inc.. Post Office Box 456 Providence Forge, Virginia 23140 If to the Executive, at: The Executive's address as shown on the personnel records of the Company. 13. Severability. In the event any one or more of the provisions contained in this Agreement shall for any reason be held invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. 14. Entire Agreement. This Agreement supersedes any other agreement, whether written or oral, that may have been made or entered into by the Executive and the Company relating to the matters contemplated hereby. This Agreement constitutes the entire agreement concerning the transaction contemplated herein and there are no agreements or commitments in relation to the subject matter hereof except as set forth herein. 15. Amendments. This Agreement may be amended or supplemented at any time only in writing as may mutually be determined by the parties to be necessary, desirable, or expedient to further the purposes of this Agreement, or to clarify the intention of the parties. 16. Applicable Law. This Agreement and the legal relations among the parties hereto shall be governed by and construed in accordance with the substantive laws of the Commonwealth of Virginia, without giving effect to conflict of law provisions and principles thereof. 17. Interpretation. When the context in which words are used in this Agreement indicates that such is the intent, words in the singular number shall include the plural, and vice versa, and words in the masculine gender shall include the feminine and neuter genders, and vice versa. 18. Titles and Headings. Titles and headings to sections and paragraphs herein are inserted for convenience of reference only, and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 19. Binding Effect. This Agreement shall be binding upon and enforceable against the Company and its successors and assigns. 20. No Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary to affect any such action shall be null, void and of no effect. 21. Survival of Certain Provisions. The obligations of the parties pursuant to Sections 9, 10, and 22 of this Agreement shall survive the termination of this Agreement. 22. Consent to Service and Jurisdiction. Executive consents and agrees that the Circuit Court of the City of Richmond, Virginia and the United States District Court for the Eastern District of Virginia, or at the option of the Company, any other court located in the Commonwealth of Virginia in which it shall initiate legal or equitable proceedings and which shall have subject matter jurisdiction over the matter in controversy, shall have exclusive jurisdiction to hear and determine any claims or disputes between the Company and the Executive pertaining directly or indirectly to this Agreement or to any matter arising therefrom. The Executive expressly submits and consents in advance to such jurisdiction in any action or proceeding commenced in any such court, hereby waiving personal service or process or other papers issued therein and agreeing that service of such process or other papers may be made by registered or certified mail to the Executive. 23. Acknowledgments. Executive acknowledges that he has read this Agreement in its entirety and understands each of the provisions contained in this Agreement. Executive acknowledges that the provisions of this Agreement are reasonable and represents that he will be able to engage in other activities for the purpose of earning a livelihood should the provisions of the Agreement be enforced. IN WITNESS WHEREOF the parties hereto have executed this Agreement on the date first above written. COMPANY: COLONIAL DOWNS HOLDINGS, INC., a Virginia corporation By: /s/ O. James Peterson, III O. James Peterson, III, President EXECUTIVE: /s/ Ian M. Stewart Ian M. Stewart EX-10.34 3 SOUVENIR AND GIFT CONCESSIONS AGREEMENT Exhibit 10.34 SOUVENIR AND GIFT CONCESSIONS AGREEMENT THIS SOUVENIR AND GIFT CONCESSIONS AGREEMENT ("Agreement") made as of August 1, 1997, by and between COLONIAL DOWNS, L.P., a Virginia limited partnership, and STANSLEY RACING CORP., a Virginia corporation (collectively, "Licensor"), and COLONIAL GIFTS AND SPORTSWEAR, INC., a Virginia corporation with its principal place of business in Providence Forge, Virginia ("Licensee"). WITNESSETH: WHEREAS, Colonial Downs, L.P. holds a license from the Virginia Racing Commission (the "Commission") to own a pari-mutuel horse racing facility in New Kent County, Virginia (the "Racetrack"); and, WHEREAS, Stansley Racing Corp. holds a license from the Commission to operate the Racetrack; and, WHEREAS, Colonial Downs, L.P. and Stansley Racing Corp. hold licenses to own and operate, respectively, satellite pari-mutuel wagering facilities ("SWFs") in Chesapeake and Richmond, Virginia; and, WHEREAS, Colonial Downs, L.P. and Stansley Racing Corp. intend to apply to the Commission for licenses to own and operate, respectively, throughout Virginia the maximum number of SWFs permitted by law; WHEREAS, Licensor presently has the exclusive right and use of all service marks, trademarks, and tradenames used and developed for its business subject to the terms and conditions of a Coexistence Agreement, dated as of July 3, 1997, between Chesapeake Corporation and Colonial Downs, L.P.("Colonial Marks"); WHEREAS, Licensee is in the business of supplying and selling insignia souvenirs, sportswear, gifts and other novelty items, including, but not limited to, those items listed on Exhibit A attached hereto and made a part hereof (the "Souvenir Items"); WHEREAS, Licensor desires to grant to Licensee certain rights to supply and sell the Souvenir Items, with or without the Colonial Marks, at the Racetrack and at any and all of the SWFs, whether existing now or in the future (the "Premises"), on the terms and subject to the conditions set forth in this Agreement; and WHEREAS, prior to the date hereof Licensee has been selling Souvenir Items at SWFs located in Chesapeake and Richmond, Virginia. NOW, THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties, intending to be legally bound, do hereby agree as follows: I. PURPOSES 1.1 The purposes of this Agreement are (a) to grant Licensee the exclusive right to use the Colonial Marks on the Souvenir Items for sale at the Premises and all non-Premises sales locations, by whatever method of sales, as may be selected by Licensee; and, (b) to memorialize and establish the respective rights and obligations of Licensor and Licensee in the sale of the Souvenir Items at the Premises, and such other non-Premises sales locations as may be selected by Licensee from time to time and not objected to by Licensor. II. TERM 2.1 This Agreement shall be effective as of the date hereof and shall continue thereafter in effect for five (5) years from such date, unless this Agreement is terminated earlier pursuant to the provisions of Article X hereof. Licensor shall have the right commencing ninety (90) days prior to the expiration of the term and ending sixty (60) days thereafter to acquire all of Licensee's right, title, and interest hereunder together with any good will and intellectual property developed by the Licensee for a termination fee equal to the sum of (i) Licensee's inventory and equipment on hand valued at Licensee's costs less depreciation and (ii) good will as calculated by the mutual agreement of the parties (such sum, the "Termination Fee"). Such fee shall be payable in cash within sixty (60) days of the expiration of this Agreement. In the event Licensor elects not to exercise the foregoing option, Licensee shall have the right, but not the obligation, to continue this Agreement in full force and effect for two (2) additional years after the expiration of the original term. If the Agreement is so extended, commencing sixty (60) days prior to the expiration of the extended term and until the expiration of this Agreement, Licensor shall again have the option to acquire Licensee's business for the Termination Fee. 2.2 Upon the termination or expiration of this Agreement, Licensee shall immediately vacate the Premises in as good order and condition as the same shall, or should have been put by Licensee, in compliance with the terms and provisions hereof, reasonable use and natural wear and tear or unavoidable casualty excepted. Upon such termination or expiration, if Licensee requests, Licensor shall purchase from Licensee all of the inventory of Souvenir Items customarily maintained and owned by Licensee, at Licensee's cost therefor based upon evidence of such cost satisfactory to Licensor. III. USE OF TRADENAMES, TRADEMARKS AND SERVICE MARKS 3.1 In exchange for the consideration set forth herein, Licensor grants to Licensee an exclusive license to use any and all Colonial Marks for the purpose of the sale and distribution of the Souvenir Items, whether existing now or in the future, which Licensor has developed or will develop for use in connection with the operation of its business at the Premises. Such license shall continue for the term of this Agreement. IV. RESPONSIBILITIES AND OBLIGATIONS OF LICENSOR 4.1 Licensor shall provide to Licensee a designated area at the Premises, reasonable in size and location to Licensee, for the purpose of selling Souvenir Items, and only Souvenir Items, to the public. Licensee acknowledges that the area provided as of the date hereof at the Chesapeake and Richmond SWFs are reasonable in size and location. When live racing is not conducted at the Racetrack and Licensee elects not to open the gift shop at the Racetrack, Licensor shall provide alternative space similar to that provided at the SWFs for the sale of the Souvenir Items and such alternative space shall be treated as Premises located at a SWF for purposes of this Agreement. 4.2 Licensor shall be responsible for all expenses related to providing space for the sale of Souvenir Items at the Premises and certain other matters set forth in this Section 4.2. Licensor shall also provide, at its expense, the following: a. Licensor shall provide general advertising of the Racetrack and SWFs; b. Licensor shall provide janitorial services for the Premises; c. Licensor shall equip and supply the Premises with shelving, counterspace, display cases and such other equipment reasonably sufficient to satisfy Licensee's needs; (Licensee acknowledges that the equipment provided as of the date hereof at the Chesapeake and Richmond SWFs is reasonably sufficient); d. Licensor shall provide gas, electricity, water, sewerage, and other utilities for the Premises; e. Licensor shall provide an adequate staff of employees to maintain the operations of the Premises for the sale of Souvenir Items at the SWFs only; Licensor shall be responsible for and shall control the conduct, demeanor and appearance of its employees and agents, and upon objection from Licensee concerning the conduct, demeanor or appearance of any such person, shall immediately take all reasonable steps necessary to remove the cause of objection; Licensee acknowledges that such staff shall be engaged simultaneously in other tasks and duties for the Licensor in addition to the provision of services hereunder; and Licensee acknowledges that the staffing provided as of the date hereof at the Chesapeake and Richmond SWFs is sufficient to meet the reasonable demands of patrons for the Souvenir Items; f. Licensor shall make available storage space at the Premises for reasonable quantities of the Souvenir Items but shall have no liability whatsoever for such Souvenir Items; g. Licensor shall continuously operate and staff (at SWFs) the Premises during all hours which the Premises are open for business in accord with the laws of the Commonwealth of Virginia; h. Licensor shall operate the Premises in a careful, safe and proper manner; i. Licensor shall provide liability and workers' compensation insurance for its employees operating the Premises as required by Virginia Law; and j. Licensor shall be responsible for any costs or expenses relating to the repair or replacement of any equipment and Souvenir Items required solely due to the negligence of Licensor or its employees or agents. V. RESPONSIBILITIES OF LICENSEE 5.1 Commencing on the effective date hereof, Licensee shall be responsible for the selection and supplying of the Souvenir Items to the Premises for public sale. Licensee shall also be responsible for setting the prices at which the Souvenir Items shall be sold at the Premises. Licensee acknowledges that the prices for and quality of the Souvenir Items are important to the preservation of the goodwill of the patrons of the Racetrack and SWFs. Licensee shall make available for sale on the Premises Souvenir Items of the type and quality as are normally offered for sale in other racetracks or sporting facilities in the United States. The prices for such Souvenir Items shall be established by Licensee to be competitive with similar items offered for sale by other racetracks and sporting facilities, taking into consideration the quality of such Souvenir Items and cost to Licensee therefor. If Licensor objects to the type, quality or price of any Souvenir Item, Licensee shall provide Licensor examples of comparable Souvenir Items sold at comparable racetracks or sporting facilities and the prices therefore in order to demonstrate Licensee's compliance with this Section 5.1. Licensor may from time to time request Licensee to stock and offer for sale at the Premises Souvenir Items of a type and quality requested by Licensor. To the extent economically feasible and commercially practical, Licensee shall use its best efforts to comply with any such request of Licensor. 5.2 Licensee shall be responsible for any costs or expenses relating to the repair or replacement of any equipment or repair to the Premises required due to the negligence of Licensee or its agents. 5.3 Licensee shall provide Licensor with a monthly accounting of all sales of Souvenir Items at the Racetrack gift shop and all non-Premises locations. 5.4 Licensee shall comply with all of the terms and conditions of the Coexistence Agreement, dated July 3, 1997, between Chesapeake Corporation and Colonial Downs, L.P., a copy of which is attached as Exhibit B, with respect to the Colonial Marks. 5.5 Licensee shall provide an adequate staff of employees to maintain the operations of the Premises for the sale of Souvenir Items at the Racetrack during live race meets and at all other times when the gift store at the Racetrack is open for the business. Licensee shall be responsible for and shall control the conduct, demeanor and appearance of its employees and agents, and upon objection from Licensor concerning the conduct, demeanor or appearance of any such person, shall immediately take call reasonable steps necessary to remove the cause of objection. 5.6 Licensee shall continuously operate and staff the gift shop at the Racetrack during all hours during which the Racetrack is open for live racing in accord with the laws of the Commonwealth of Virginia; 5.7 Licensee shall operate the Premises at the Racetrack in a careful, safe and proper manner; 5.8 Licensee shall provide liability and workers' compensation insurance for its employees operating the Premises at the Racetrack as required by Virginia law; 5.9. Licensee shall retain and pay to the proper taxing authority all amounts due from the sale of the Souvenir Items, provided that such sums attributable sales at the SWFs are paid to it by Licensor pursuant to Section 6.3 hereof. 5.10 Licensee shall permit Licensor to inspect the Premises at the Racetrack at any time. VI. ROYALTIES 6.1 From and after the effective date hereof, in consideration of the license granted in Section III hereof and for Licensor's responsibilities as set forth in Section IV hereof, Licensee shall pay to Licensor a royalty on a monthly basis. The amount of royalty to be paid by Licensee shall be based on a percentage of Licensee's Gross Sales at the Premises and all other sites and locations as selected by Licensee as follows: a. ten percent (10%) of Gross Sales derived from sales of Souvenir Items on the Premises; and b. five percent (5%) of Gross Sales derived from sales of Souvenir Items at all other sites and locations as may selected by Licensee. 6.2 "Gross Sales" shall include all monies received by License from the sale of any and all Souvenir Items upon the Premises and elsewhere, less the deduction of State and Federal sales and similar excise taxes, and excluding any returns, refunds or similar credits against Licensee's sales proceeds. 6.3 Since Licensor will be operating the sales of Souvenir Items on the Premises at SWFs and collecting all monies from such sales, Licensor shall retain the royalty set forth in Section 6.1(a) hereof with respect to sales at the SWFs and shall remit the remaining ninety percent (90%) of the Gross Sales to Licensee monthly on or before the tenth (10th) day of each month based on the Gross Sales generated for the immediately preceding month together with all amounts due for State and Federal sales and similar excise taxes. Within twenty (20) days following the end of each calendar quarter, Licensor shall calculate the Gross Sales at the Premises at SWFs for such calendar quarter and, if appropriate, make an adjusting payment to Licensee to the extent required to ensure that the amounts remitted to Licensee are in accordance with this Section 6.3. Licensee and its authorized agents shall have the right to inspect Licensor's records with respect to sales of Souvenir Items to verify the accuracy of payments to Licensee, such inspection to be made at reasonable hours and at reasonable times. 6.4 Licensee shall pay the royalty set forth in Section 6.1(a) with respect to the gift shop at the Racetrack and Section 6.1(b) hereof to Licensor monthly on or before the tenth (10th) day of each month based on the Gross Sales generated for the immediately preceding month. Within twenty (20) days following the end of each calendar quarter, Licensee shall calculate the Gross Sales at the Racetrack and at all non-Premises sales locations for such calendar quarter and, if appropriate, make an adjusting payment to Licensor to the extent required to ensure that the royalties payable to the Licensor are in accordance with Section 6.1(b) hereof. VII. BOOKS AND RECORDS 7.1 Licensee shall keep and maintain complete and accurate books and records of all of sales and other income from sales of Souvenir Items at the Racetrack and non-Premises sales locations, and shall keep and maintain complete and accurate books and records of all of sales and other income from sales of Souvenir Items at the Premises at SWFs based upon information provided by Licensor, and shall make said books and records available for inspection by Licensor and its authorized agents, and the Commission and its authorized agents at all reasonable hours and at all reasonable times. 7.2 Licensor may, but is not obligated to, cause an audit of Licensee's books and records as necessary to verify the correctness of the amount paid by Licensee to Licensor. Such audit may be conducted not more frequently than annually and shall be at the expense of Licensor. Provided, however, if the audit shows an underpayment to the Licensor of five percent (5%) or more of the amount actually paid, Licensee shall reimburse Licensor for all costs and expenses incidental to such audit, unless such underpayment results from information provided by Licensor. VIII. GENERAL COVENANTS OF LICENSOR AND LICENSEE 8.1 Licensor shall obtain and at all times maintain in full force and effect, at its sole cost and expense, liability insurance covering all aspects of Licensor's operation of the Premises with limits of not less than $1,000,000 for bodily injury for one person, $2,000,000 for any one accident and $300,000 for property damage. Licensee shall be named as an additional insured on such coverage. Licensee shall obtain and at all time maintain in full force and effect similar insurance coverage for the operation of the gift shop at the Racetrack and shall name Licensor as an additional insured on such insurance policies. Upon request, Licensee shall provide Licensor with certificates of insurance evidencing the required coverages and providing for Licensor to be sent all notices of cancellation. 8.2 Licensee shall indemnify and save harmless Licensor and its directors, officers, employees and agents from all third-party demands, claims, causes of action and judgments, and all expenses in connection therewith, resulting from any act or neglect of Licensee, or its employees, agents and contractors on or about the Premises. This indemnity shall continue notwithstanding the termination of this Agreement with respect to any act or occurrence preceding such termination. 8.3 Licensor shall indemnify and save harmless Licensee and its directors, officers, employees and agents from all third-party demands, claims, causes of action and judgments, and all expenses in connection therewith, resulting from any negligence or willful misconduct of Licensor, or its employees, agents and contractors on or about the Premises. This indemnity shall continue notwithstanding the termination of this Agreement with respect to any act or occurrence preceding such termination. IX. INVENTORY 9.1 Licensee acknowledges that it is responsible for the safekeeping and maintenance of all the Souvenir Items which are displayed or otherwise stored at the Premises for public sale. Each calendar quarter or at such other times as selected by Licensee, Licensee may perform, or have performed on its behalf, a physical inventory and accounting of all Souvenir Items at the Premises. In the event that the results of the physical inventory and accounting indicate that the number of Souvenir Items that were delivered to the Premises for sale do not equal the amount of Souvenir Items which remain on the Premises for sale, or which are otherwise accounted for, Licensee shall so notify Licensor,. and Licensor shall take all reasonable steps necessary to improve the safekeeping and maintenance of the Souvenir Items. In no event, however, shall Licensor be liable to Licensee for the cost of such missing inventory. X. DEFAULT AND TERMINATION 10.1 This Agreement may be terminated prior to the expiration of the term upon the occurrence of any of the following events: a. By the written agreement of the parties hereto; b. By Licensor, if Licensee fails to pay any amounts to Licensor within five (5) days following notice from Licensor that such amounts are due; provided, however, that if Licensee fails to pay amounts to Licensor within five (5) days of when due more than twice during any twelve (12) month period, Licensor may terminate this Agreement without further opportunity of Licensee to cure or correct such failure. c. By Licensee, if Licensor fails to pay any amounts to Licensee within five (5) days following notice from Licensee that such amounts are due; provided, however, that if Licensor fails to pay amounts to Licensee within five (5) days of when due more than twice during any twelve (12) month period, Licensee may terminate this Agreement without further opportunity of Licensor to cure or correct such failure. d. By either party, if the other party (1) files or has filed on its behalf or against it a petition under any section or chapter of the Federal Bankruptcy Act, which is not vacated within sixty (60) days, (2) shall become insolvent or unable to pay its debts or meet its obligations, (3) has a receiver or trustee appointed for all or any portion of its assets, which appointment is not vacated within sixty (60) days, or, (4) makes an assignment to or for the benefit of creditors of all or any portion of its assets. e. By either party, if the other party fails to comply with or perform any of the terms, conditions or covenants under this Agreement to be complied with or performed by such party for more than thirty (30) days after written notice of such failure shall have been given to such party, or within such further period as is reasonably required to fully comply with or perform such term, condition or covenant. f. By Licensee, if Colonial Downs, L.P. loses its license from the Commission to own the Racetrack, or, if Stansley Racing Corp. loses its license from the Commission to operate the Racetrack. g. By Licensee, upon ninety (90) days advance written notice to Licensor. Written notice of any termination of this Agreement by either party shall be given to the other party in the manner set forth herein, shall be effective on and as of the date notice is given (or such later date as may be set forth therein), and shall specify the reason for such termination. Upon any termination of this Agreement, Licensee and Licensor shall have all rights and obligations as set forth in Section 2.4 hereof. XI. MISCELLANEOUS 11.1 Any notices by either party to the other shall be in writing and shall be delivered personally; sent by facsimile, acknowledgment of receipt requested; sent by overnight courier service, return receipt requested; or, deposited in U.S. Mail certified mail, return receipt requested, and addressed as follows: To Licensor: Colonial Downs, L.P P. O. Box 228 New Kent, Virginia 23124 Facsimile: 804-966-2063 Telephone: 804-966-2477 with a copy to: James L. Weinberg, Esq. Hirschler, Fleischer, Weinberg, Cox & Allen The Federal Reserve Bank Building 701 East Byrd Street Richmond, Virginia 23219 Facsimile: 804-644-0957 Telephone: 804-771-9527 To Licensee: Colonial Gifts and Sportswear, Inc. c/o Arnold W. Stansley 5700 Telegraph Rd. Toledo, OH 43612 Facsimile: 419-476-7979 Telephone: 419-476-7751 with a copy to: Ronald J. Tice, Esq. Eastman & Smith Ltd. P.O. Box 10032 Toledo, OH 43699-0032 Facsimile: 419-241-1777 Telephone: 419-241-6000 Any party may at any time change the address for notices to it by delivering, as aforesaid, a notice to the other party stating the change and setting forth the changed address. The effective date of any notice shall be the date it is personally delivered, received by telefax or courier, or three (3) days after it is deposited in the U.S. Mail in accordance with the provisions of this Section 11.1. 11.2 Nothing contained in this Agreement shall constitute or be construed to be or create a partnership or joint venture between Licensor and Licensee and, except as specifically set forth herein or otherwise agreed in writing, neither shall have the power or authority to bind or obligate the other. 11.3 This Agreement may not be changed or modified except by another agreement in writing signed by the parties hereto. 11.4 The Section numbers and headings contained herein are for convenience of reference only and are not intended to define, limit or describe the scope or intent of any provision of this Agreement. 11.5 This Agreement shall be binding upon and inure to the benefit of each party hereto, and its respective successors and assigns. This Agreement may not be assigned by any party without the prior written consent of the other party hereto, which consent shall not be unreasonably withheld. Provided, however, that, subject to the approval of the assignee by the Commission, Licensee may assign its rights and obligations to any affiliated entity controlling, controlled by or under common control with Licensee which is formed for the purposes of providing the services contemplated herein with notice to, but not the consent of, Licensor. 11.6 This Agreement shall be deemed to have been made and shall be construed and interpreted in accordance with the laws of the Commonwealth of Virginia. 11.7 The parties acknowledge that Stansley Racing Corp. has been made a party to this Agreement solely because it holds the operator's license for the SWFs located in Chesapeake, Richmond, Hampton, and Brunswick, Virginia, and is expected to apply for SWF licenses for future SWF locations. The parties agree that all obligations of Licensor set forth in this Agreement shall be solely the obligations of Colonial Downs, L.P., except as may specifically relate to the operator's license(s) held by Stansley Racing Corp. 11.8 This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior oral and written discussions and understandings. Acceptance of, or acquiescence in, a course of performance rendered under this Agreement shall not be relevant or admissible to determine the meaning of this Agreement even though the accepting or acquiescing party has knowledge of the nature of the performance and an opportunity to make objection. No representations, understandings or agreements have been made or relied upon in making of this Agreement other than those specifically set forth herein. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement, by and through their respective duly authorized representatives, on the day and year first above written. COLONIAL DOWNS, L.P. By: STANSLEY RACING CORP., its general partner By: /s/ Jeffrey P. Jacobs ------------------------------- Jeffrey P. Jacobs, CEO STANSLEY RACING CORP. By: /s/ Jeffrey P. Jacobs ------------------------------- Jeffrey P. Jacobs, CEO COLONIAL GIFTS AND SPORTSWEAR, INC. By: /s/ Georgia Jean Stansley -------------------------------- Georgia Jean Stansley, Vice President EXHIBIT A Souvenir Items Clothing Hats Pennants Office Supplies (pens, pencils, paper, paperweights, etc.) Post Cards Photobooks Picture Frames Jewelry Watches Golf Items (tees, balls, club covers, etc.) Drinking Containers (mugs, glasses, plastic bottles, etc.) Coolers Drink Holders Coasters Bottle Openers Corkscrews Key Chains Stickers Magnets Towels Napkins Vases Calendars And any and all memorabilia, souvenirs, or goods which may maintain the image of the Colonial Marks. EXHIBIT B Coexistence Agreement EX-27 4 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1997 DEC-31-1997 3,348,110 0 293,101 0 0 6,012,839 61,500,165 659,957 67,874,729 15,480,064 0 0 0 72,500 36,848,573 67,874,729 0 23,647,283 0 24,113,975 (837,222) 0 278,667 91,863 84,000 7,863 0 0 0 7,863 .01 .01
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