<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>doc1.txt
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period ended June 30, 2001
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 333-18295
COLONIAL HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
VIRGINIA 54-1826807
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
10515 Colonial Downs Parkway
New Kent, VA 23124
(Address of Principal Executive Offices)
(804) 966-7223
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of Shares of Class A Common Stock outstanding as of August 10, 2001 -
5,025,239
Number of Shares of Class B Common Stock outstanding as of August 10, 2001 -
2,242,500
<PAGE>
COLONIAL HOLDINGS, INC.
INDEX
Page
PART I. FINANCIAL STATEMENTS AND NOTES Number
------
Item 1. Financial Statements and Notes 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
2
<PAGE>
<TABLE>
<CAPTION>
COLONIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
June 30, December 31,
ASSETS 2001 2000
------------ --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,451 $ 1,119
Horsemen's deposits 2,612 602
Accounts receivable 492 351
Prepaid expenses and other assets 644 97
------------ --------------
Total current assets 5,199 2,169
Property, plant and equipment
Land and improvements 15,761 15,640
Buildings and improvements 48,623 48,586
Equipment, furnishings, and fixtures 3,146 2,972
Leasehold improvements 1,124 1,124
------------ --------------
68,654 68,322
Less accumulated depreciation 6,197 5,433
------------ -------------
Property, plant and equipment, net 62,457 62,889
Licensing costs, net of accumulated
amortization of $361 and $337, respectively 677 703
Other assets 86 92
------------ --------------
Total assets $ 68,419 $ 65,853
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,973 $ 2,967
Purses due horsemen 2,933 306
Accrued liabilities and other 1,028 740
Accrued interest payable 1,693 1,349
Current maturities of long-term debt 1,069 936
Current maturities of long-term debt - related parties 1,000 -
------------ --------------
Total current liabilities 10,696 6,298
Long-term debt 1,015 1,160
Notes payable - related parties 24,738 25,738
------------ --------------
Total liabilities 36,449 33,196
Commitments and contingencies
Stockholders' equity
Class A, common stock, $0.01 par value; 12,000 shares
authorized; 5,025 shares issued and outstanding 50 50
Class B, common stock, $0.01 par value; 3,000 shares
authorized; 2,242 shares issued and outstanding 23 23
Additional paid-in capital 42,873 42,873
Accumulated deficit (10,976) (10,289)
------------ --------------
Total stockholders' equity 31,970 32,657
------------ --------------
Total liabilities and stockholders' equity $ 68,419 $ 65,853
============ ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
COLONIAL HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Pari-mutuel and simulcasting commissions $ 6,678 $ 6,610 $ 13,607 $ 13,133
Other 554 365 1,030 740
----------- ----------- ----------- -----------
Total revenues 7,232 6,975 14,637 13,873
Operating expenses
Direct operating expenses
Purses, fees, and pari-mutuel taxes 2,842 2,893 6,040 5,682
Simulcast and other direct expenses 2,788 2,522 5,332 4,906
----------- ----------- ----------- -----------
Total direct operating expenses 5,630 5,415 11,372 10,588
Selling, general and administrative expenses 767 824 1,487 1,605
Privatization and other non-recurring costs 328 - 328 -
Depreciation and amortization 389 425 790 849
----------- ----------- ----------- -----------
Total operating expenses 7,114 6,664 13,977 13,042
----------- ----------- ----------- -----------
Earnings (loss) from operations 118 311 660 831
Interest expense, net (678) (639) (1,347) (1,346)
----------- ----------- ----------- -----------
Loss before income taxes (560) (328) (687) (515)
Provision for (benefit from) income taxes - - - -
----------- ----------- ----------- -----------
Net loss $ (560) $ (328) $ (687) $ (515)
=========== =========== =========== ===========
Earnings (loss) per share data:
Basic and diluted loss per share $ (0.08) $ (0.05) $ (0.09) $ (0.07)
Weighted average number of shares outstanding 7,267 7,267 7,267 7,267
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
COLONIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Six Months Ended
June 30,
2001 2000
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (687) $ (515)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 790 849
Changes in operating assets and liabilities:
Increase in accounts receivable and other assets (681) (298)
Increase (decrease) in trade accounts payable and accrued liabilities 678 (136)
Increase in horsemen's deposits net of purses due horsemen 616 1,379
------- -------
Net cash provided by operating activities 716 1,279
------- -------
INVESTING ACTIVITIES:
Capital expenditures, net of disposals (332) (89)
Decrease in construction payables (40) (143)
------- -------
Net cash used in investing activities (372) (232)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt, capital leases, and other 422 265
Payments on long-term debt and capital leases (434) (542)
------- -------
Net cash provided by (used in) financing activities (12) (277)
------- -------
Net increase in cash and cash equivalents 332 770
Cash and cash equivalents, beginning of period 1,119 1,313
------- -------
Cash and cash equivalents, end of period $1,451 $2,083
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
COLONIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted. These financial
statements should be read in conjunction with the Company's annual financial
statements for the year ended December 31, 2000 included in the Company's Form
10-K filed with the Securities and Exchange Commission on April 3, 2001.
In the opinion of management, the financial statements include all
adjustments (consisting only of normal recurring adjustments) considered
necessary to present fairly the financial position of the Company as of June 30,
2001 and the results of its operations and its cash flows for the respective
three and six month periods ended June 30, 2001 and 2000. Interim results for
the six months ended June 30, 2001 are not necessarily indicative of results
that may be expected for the fiscal year ending December 31, 2001.
Basic earnings (loss) per share is computed by dividing earnings available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilutive effect of securities (which can consist of stock options and warrants)
that could share in earnings of an entity.
Certain reclassifications have been made in the prior period's financial
statements in order to conform to the June 30, 2001 presentation.
2. LONG-TERM DEBT AND NOTES PAYABLE-RELATED PARTIES
Long-Term Debt and Notes Payable-Related Parties consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
2001 2000
------------- -------------
<S> <C> <C>
Credit facility payable to CD Entertainment, Ltd., maturing
June 2005, with monthly interest payments at 9.96% and
principal payments of $1 million each due June 30, 2002,
2003 and 2004, with all unpaid principal and interest due
2005, collateralized by substantially all assets of
the Company $ 25,737,937 $ 25,737,937
</TABLE>
6
<PAGE>
COLONIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. LONG-TERM DEBT AND NOTES PAYABLE-RELATED PARTIES - (CONTINUED)
<TABLE>
<CAPTION>
June 30, December 31,
2001 2000
----------- -------------
<S> <C> <C>
Note payable to Maryland Jockey Club, maturing December
2005, bearing interest at a rate of 7.75% payable quarterly for
the first two years and equal installments of principal plus
interest to be paid quarterly over the remaining five year
term of the note, beginning in the first quarter of 2001 1,377,500 1,450,000
Note payable to Maryland Jockey Club, bearing interest at
the prime rate (6.75% at June 30, 2001), payable in two
equal installments during the years 2000 and 2001 300,308 300,308
Note payable to a bank, maturing October 2001, bearing
interest at prime plus 1.0% (7.75% at June 30, 2001),
with monthly principal payment of $15,000, collateralized
by certain fixed assets 210,000 300,000
Notes payable to an insurance company, maturing in 2001,
bearing interest at 7.52% 196,487 45,398
----------- -------------
27,822,232 27,833,643
Less current maturities 1,069,295 935,706
Current maturities - related parties 1,000,000 -
----------- -------------
25,752,937 26,897,937
Less long-term debt - related parties 24,737,937 25,737,937
----------- -------------
Long-term debt $ 1,015,000 $ 1,160,000
=========== =============
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
The Company, through its subsidiaries, holds the only licenses to own and
operate a racetrack (the "Track") and satellite wagering facilities ("Racing
Centers") in Virginia. The Company currently operates Racing Centers in
Chesapeake, Richmond, Hampton, and Alberta, Virginia, and may open up to two
additional Racing Centers under applicable law if suitable opportunities are
identified and referenda are passed.
The Company's revenues are comprised of (i) pari-mutuel commissions from
wagering on races broadcast from out-of-state racetracks to the Company's Racing
Centers and the Track using import simulcasting; (ii) wagering at the Track and
the Company's Racing Centers on its live races; (iii) admission fees, program
and racing form sales, and certain other ancillary activities; (iv) commissions
from food and beverage sales and concessions; (v) fees from wagering at
out-of-state locations on races run at the Track using export simulcasting; and
(vi) starting in 2001, management fees for the operation of truckstops and
gaming assets owned by an affiliate of the Company's largest shareholder.
PROPOSED PRIVATIZATION
On June 11, 2001, the Company announced the execution of a merger
agreement. Pursuant to the merger agreement, Gameco, Inc., an entity owned and
controlled by Jeffrey P. Jacobs, Chairman of the Board and Chief Executive
Officer of the Company, has agreed to pay $1.10 per share, in cash, for each
share of common stock of the Company not currently owned by Mr. Jacobs or his
affiliates and the Company will become a wholly-owned subsidiary of Gameco.
Consummation of the transaction is subject to various conditions, including,
among other things, the approval by the Company's stockholders and the obtaining
of various regulatory approvals. In an order dated July 31, 2001, the Virginia
Racing Commission approved the acquisition by Gameco of more than a five percent
(5%) interest in the entities licensed by the Commission. The Commission's
approval is not a recommendation regarding shareholder approval or disapproval
of the proposed merger.
Consummation of the transaction remains subject to other conditions,
including approval by Colonial Holdings' shareholders. Shareholders will be
asked to vote on the merger agreement after a proxy statement has been filed
with and been cleared by the Securities and Exchange Commission. If the merger
is consummated, the registrant will become a wholly owned subsidiary of Gameco,
and will cease to be a public company. Gameco is an entity controlled by Jeffrey
P. Jacobs, Chairman of the Board and Chief Executive Officer of the Company. If
approved by the shareholders, the Company anticipates completing the transaction
in the fourth calendar quarter of 2001.
PROFIT CENTER ANALYSIS
For the three and six months ended June 30, 2001, net loss was $560,000 and
$687,000, respectively, compared to net loss of $328,000 and $515,000 for the
corresponding periods of the prior year. Net income at the Racing Centers
increased by $191,000 and $37,000, respectively, compared to the corresponding
three and six month periods of the prior year. Net loss for the Track and live
8
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racing operations increased by $173,000 and $100,000, respectively, and
corporate overhead, including Colonial Holdings Management, Inc. ("Colonial
Management"), a wholly owned subsidiary of the Company, increased by $250,000
and $109,000, respectively, for the three and six months ended June 30, 2001
compared to the corresponding periods of the prior year. For the three and six
months ended June 30, 2001 Colonial Management generated $81,000 and $114,000,
respectively, in net management fees. An analysis of these changes is set forth
below in reviews of the operations at the Racing Centers and the Track,
respectively.
Racing Centers
Revenues at the Racing Centers increased $71,000 and $457,000 for the three
and six months, respectively, ended June 30, 2001, compared to the corresponding
periods of the prior year. These results reflect an increase in amounts wagered
("handle") for the six months ended June 30, 2001 and a slight increase in
average pari-mutuel commission rates payable to the Company for its export
simulcasts. Direct expenses decreased by $45,000 and increased by $410,000 for
the three and six months, respectively, ended June 30, 2001 compared to the
corresponding periods of the prior year. The change in these expenses is
directly correlated with the decreases and increases in handle during the three
and six month periods ended June 30, 2001 and reflect the proportional
commissions payable to other racetracks for import simulcasts.
The Company entered into a three year agreement with the Virginia
Horsemen's Benevolent and Protective Association ("VaHBPA"), effective January
1, 1999, that set a minimum payment of $3.125 million for 1999 purses, with 25
days of live racing with average daily purses of no less than $125,000. Of the
total $3.125 million guaranteed payments, $1.5 million was considered to be an
advance of purse money due in years 2000 and 2001. In 2000, the Company
contributed 5 1/4% of the Handle generated on simulcast thoroughbred racing to
the thoroughbred purse account and will do so in 2001 as well. In 2000, the
purse account repaid $750,000 of the advance plus interest thereon back to the
Company, effectively reducing the Company's 2000 purse expense. As a result of
an increase in purse expenditures for the 2001 thoroughbred meet, the Company
believes that its contractually required payments into the purse account will
not exceed the purse expenditure for 2001 by enough to facilitate repayment of
the entire remaining $750,00. The Company anticipates that approximately
$500,000 of the remaining $750,000 due from the purse account will be repaid in
2001. Accordingly, an adjustment has been made to effectively reduce purse
expense for the six months ended June 30, 2001 by $250,000. The remaining
unpaid balance of the advance will reduce purse expense when considered
collectible. Other expenses decreased by $75,000 and increased by $10,000,
respectively, for the three and six months ended June 30, 2001, compared to the
corresponding period of the prior year. As a result, net income at the Racing
Centers increased by $191,000 and $37,000, respectively, compared to the
corresponding three and six month periods of the prior year.
Track
Losses at the Track increased by $173,000 and $100,000 for the three and
six months, respectively, ended June 30, 2001, compared to the corresponding
periods of the prior year. The Company incurred expenses in the second quarter
for the 2001 thoroughbred meet which commenced July 3 and ended August 7, 2001.
Off season revenue at the Track increased $27,000 and $47,000, respectively,
compared to the corresponding period of the prior year. The increase in revenue
is the result of efforts to expand the uses of the track facility during periods
when there is no live racing. Overhead and other costs associated with
maintaining the Track facility decreased $39,000 and $92,000, respectively, for
the three and six months ended June 30, 2001, compared to the corresponding
9
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period of the prior year. Marketing and other expenses related to the 2001
thoroughbred meet which opened July 3, 2001 were $239,000.
Corporate Overhead and Colonial Management
For the three and six months ended June 30, 2001, corporate overhead
increased by $331,000 and $223,000, respectively, compared to the corresponding
periods of the prior year. The increase in corporate overhead is due primarily
to legal, accounting and consulting costs of $328,000 resulting from the
proposed merger by Gameco, Inc., an affiliate of Jeffrey P. Jacobs, the
Company's largest shareholder and CEO and Chairman of the Board, with the
Company. For the three and six months ended June 30, 2001, Colonial Management
generated revenues of $158,000 and $258,000, respectively, and had $77,000 and
$144,000, respectively, of related labor and travel expenses from managing
truckstops in Louisiana.
Net Interest Expense
Interest expense, net of interest income, was approximately the same for
the three and six months ended June 30, 2001 as for the corresponding periods of
the prior year.
REVENUE AND EXPENSE ANALYSIS
The following table sets forth certain operating results as a percentage of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
(Percentage of Net Revenues)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Pari-mutuel and simulcasting commissions 92.3% 94.8% 93.0% 94.7%
Other 7.7% 5.2% 7.0% 5.3%
--------- --------- --------- ---------
Total revenues 100.0% 100.0% 100.0% 100.0%
Direct operating expenses:
Purses, fees, and pari-mutuel taxes 39.3% 41.5% 41.3% 41.0%
Simulcast and other direct expenses 38.6% 36.2% 36.4% 35.4%
--------- --------- --------- ---------
Total direct operating expenses 77.9% 77.7% 77.7% 76.4%
Selling, general, and administrative expenses 15.1% 11.8% 12.4% 11.6%
Depreciation and amortization 5.4% 6.1% 5.4% 6.1%
--------- --------- --------- ---------
Earnings (loss) from operations 1.6% 4.4% 4.5% 5.9%
Interest income (expense), net (9.4)% (9.2)% (9.2)% (9.7)%
--------- --------- --------- ---------
Loss before taxes (7.8)% (4.8)% (4.7)% (3.8)%
</TABLE>
Total Revenues. Total revenues for the three and six months ended June 30,
2001 increased $257,000 (3.7%) and $764,000 (5.5%), respectively, from the
corresponding periods of the prior year. Compared to the corresponding three
and six months ended June 30, 2000, off season track revenues increased $28,000
and $47,000, respectively. Revenues from the Racing Centers increased $71,000
and $457,000 for the three and six months, respectively, ended June 30, 2001,
compared to the corresponding periods of the prior year. The increase for the
six-month period is due, in part, from the Racing Centers' closure for two days
in January 2000 because of snow and limited operations for several more days
10
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with limited simulcast signals due to the closure of several Northeastern
tracks. Colonial Management revenue was $158,000 and $258,000 for the three-
and six-month periods, respectively, ended June 30, 2001.
Direct Operating Expenses. As a percentage of revenues, direct operating
expenses increased .2% and 1.4%, respectively, for the three and six months
ended June 30, 2001, from the corresponding period of the prior year. As a
result of the adjustment to purse expense discussed in Profit Center Analysis,
purse expense decreased $69,000 for the three months ended June 30, 2001
compared to the corresponding period of the previous year. Purse expense was
$216,000 higher for the six months ended June 30, 2001 compared to the
corresponding period of the prior year due to the increase in handle. Fees,
pari-mutuel taxes, simulcast and other direct expenses increased $284,000 and
$568,000 for the three and six months, respectively, ended March 31, 2001,
compared to the corresponding periods of the prior year. The increase in other
direct expenses correlated to the increase in handle.
Selling, General and Administrative Expenses (SG&A). As a percentage of
revenues, SG&A increased 3.3% from 11.8% to 15.1% for the three months ended
June 30, 2001 and increased .8% from 11.6% to 12.4% for the six months ended
June 30, 2001 from the corresponding periods of the prior year. The increase in
SG&A is due to the increase in advertising due to the timing of the 2001 live
thoroughbred meet and the costs associated with the proposed merger offset by
reductions in regular legal expenses.
Net Earnings (Loss). Net loss for the three and six months ended June 30,
2001 was $560,000 and $687,000, respectively, compared to net loss of $328,000
and $515,000 for the corresponding periods of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has incurred aggregate net losses of
approximately $11.0 million and has a working capital deficit of $5.5 million at
June 30, 2001. The Company's continued existence is dependent upon its ability
to obtain adequate working capital to support its operations until they become
profitable. The Company has been and continues to be largely dependent on the
financial support of its principal stockholder, who through affiliated entities
and related parties is the holder of $25.7 million of debt from the Company as
of June 30, 2001. In conjunction with the merger agreement with Gameco, the
Company's principal shareholder has agreed to provide Colonial up to $1.0
million in working capital through December 31, 2001, a minimum of $600,000 of
which must be in cash, and the balance of which may be in the form of
forgiveness of fees and expenses payable to Mr. Jacobs and his affiliates.
Cash Flows. After adjusting the net loss of $687,000 for the six months
ended June 30, 2001 for non-cash items such as depreciation and amortization,
$103,000 in cash was provided. The increase in accounts payable and other
operating liabilities provided $678,000 of cash. This was offset by the
increases in accounts receivable and other assets which used $681,000. The
increase in purses due to horsemen in excess of amounts funded resulting from
the adoption of a provision in the thoroughbred horsemen's agreement that allows
the Company to contribute less than 5 % of handle early in the year and more
than 5 % later in the year, for an aggregate annual contribution of 5 % of the
thoroughbred handle. This provided $616,000 of cash. As a result, total cash
provided by operating activities was $716,000. Investing activities, consisting
of capital expenditures and decreases in construction payables, utilized
11
<PAGE>
approximately $372,000 of cash. Financing activities used approximately $12,000
of cash. Total cash and cash equivalents increased by $.3 million for the six
months ended June 30, 2001 to $1.4 million.
EBITDA is a widely accepted financial indicator of a company's ability to
service and incur debt. The Company's EBITDA for the first six months of 2001
and 2000 was approximately $1,450,000 and $1,680,000, respectively. The
decrease in EBITDA is primarily due to lower earnings from operations due to
changes in revenues, operating expenses and selling, general and administrative
expenses discussed in "Results of Operations" above. EBITDA should not be
considered in isolation from or as a substitute for net income or cash flow
measures prepared in accordance with generally accepted accounting principles or
as a measure of a company's profitability or liquidity. EBITDA is defined as
the sum of income before interest, income taxes, and depreciation and
amortization.
EFFECT OF INFLATION
The impact of inflation on the Company's operations has not been
significant in recent years. There can be no assurance, however, that a high
rate of inflation in the future will not have an adverse effect on the Company's
operating results.
SEASONALITY AND THE EFFECT OF INCLEMENT WEATHER
Revenues and expenses relating to the Track may be higher during scheduled
live racing than at other times of the year. In addition, weather conditions
such as those produced by a hurricane (Hurricane Floyd struck the area in 1999)
sometimes cause cancellation of outdoor horse races or curtail attendance, both
of which reduce wagering. Attendance and wagering at both outdoor races and
indoor Racing Centers also may be adversely affected by certain holidays and
professional and college sports seasons as well as other recreational
activities. Conversely, attendance and wagering may be favorably affected by
special racing events which stimulate interest in horse racing, such as the
Triple Crown races in May and June and the Breeders' Cup in November. As a
result, the Company's revenues and net income may fluctuate from quarter to
quarter. Given that a substantial portion of the Company's Track expenses are
fixed, the loss of scheduled thoroughbred 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.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
12
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useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
SFAS 141 and 142 are not expected to have a material impact on the
Company's financial statements.
FORWARD LOOKING INFORMATION
This Report contains certain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934 and the Company intends
that such forward-looking statements be subject to the safe harbors created
thereby. These forward-looking statements include the Company's plans and
objectives for future operations, including plans and objectives relating to the
Company's operations and future economic performance, and the Company plans with
respect to a proposed merger described herein. The statements contained in this
report which are not historical facts, including, but not limited to, statements
found under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" above, are forward looking statements that
involve a number of risks and uncertainties. The actual results of the future
events described in such forward looking statements in this report could differ
materially from those contemplated by such forward looking statements. Among
the factors that could cause actual results to differ materially are the risks
and uncertainties discussed in the report, including without limitations the
portions of such statements under the caption referenced above, and the
uncertainties set forth from time to time in the Company's other public reports,
filings and public statements. Such risks include but are not limited to acts
by parties outside the control of the Company, including the Maryland Jockey
Club, horsemen associations, the Virginia Racing Commission, political trends,
the effects of adverse general economic conditions, the approval of future
Racing Centers by referenda and/or the Commission, governmental regulation, and
the proposed merger.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most of the Company's debt obligations at June 30, 2001 were either
fixed rate obligations or variable rate obligations with its majority
shareholder, which provide the Company various options in determining the rate
of interest. Management therefore does not believe that the Company has any
material market risk from its debt obligations.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Contract Dispute with AT&T. The Company was served on March 30, 2001
-----------------------------
with a suit by AT&T Corp. alleging a breach of contract and a tariff violation.
AT&T seeks recovery of $131,343.81, plus interest and costs of suit. The matter
is pending in the Federal District Court for the Eastern District of Virginia
(Richmond Division, Case No. 3:01CV187). The Company is vigorously contesting
the claim.
Gregory. The Company was served on June 6, 2001 as a party to a
lawsuit by a trainer, George E. Gregory, Jr., who was injured during the
Colonial Downs 2000 thoroughbred meet while being assisted by an outrider. Mr.
Gregory seeks $250,000, costs, expenses and attorney fees. The matter is pending
in Circuit Court of the County of New Kent (Case No. 127CL00000051). The
Company's insurance carrier is vigorously contesting the claim.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Reports on Form 8-K - The Company filed a Current Reports on
Form 8-K during the three months ended
June 30, 2001 reporting the execution of
a merger agreement with Gameco.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLONIAL HOLDINGS, INC.
By: /s/ Ian M. Stewart
----------------------------
Ian M. Stewart, President
and Chief Financial Officer
August 20, 2001
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</TEXT>
</DOCUMENT>