10-Q 1 doc1.txt 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 September 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 November 12, 2001 - 5,815,239 Number of Shares of Class B Common Stock outstanding as of November 12, 2001 - 1,452,500 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 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 2
COLONIAL HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) (Unaudited) September 30, December 31, ASSETS 2001 2000 Current assets: Cash and cash equivalents $ 1,682 $ 1,119 Horsemen's deposits 1,885 602 Accounts receivable 679 351 Prepaid expenses and other assets 390 97 Total current assets 4,636 2,169 Property, plant and equipment Land and improvements 15,761 15,640 Buildings and improvements 48,776 48,586 Equipment, furnishings, and fixtures 3,146 2,972 Leasehold improvements 1,124 1,124 68,807 68,322 Less accumulated depreciation 6,573 5,433 Property, plant and equipment, net 62,234 62,889 Licensing costs, net of accumulated amortization of $372 and $337, respectively 666 703 Other assets 83 92 Total assets $ 67,619 $ 65,853 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,177 $ 2,967 Purses due horsemen 1,760 306 Accrued liabilities and other 1,149 740 Accrued interest payable 2,127 1,349 Current maturities of long-term debt 909 936 Current maturities of long-term debt - related parties 1,000 - Total current liabilities 10,122 6,298 Long-term debt 943 1,160 Notes payable - related parties 25,238 25,738 Total liabilities 36,303 33,196 Commitments and contingencies Stockholders' equity Class A, common stock, $0.01 par value; 12,000 shares authorized; 5,815 shares issued and outstanding 58 50 Class B, common stock, $0.01 par value; 3,000 shares authorized; 1,452 shares issued and outstanding 15 23 Additional paid-in capital 42,873 42,873 Accumulated deficit (11,630) (10,289) Total stockholders' equity 31,316 32,657 Total liabilities and stockholders' equity $ 67,619 $ 65,853
The accompanying notes are an integral part of the financial statements. 3
COLONIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (Unaudited) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ----------- ----------- ----------- ---------- Revenues Pari-mutuel and simulcasting commissions $ 7,838 $ 7,083 $ 21,445 $ 20,216 Other 785 573 1,815 1,313 ----------- ----------- ----------- ---------- Total revenues 8,623 7,656 23,260 21,529 Operating expenses Direct operating expenses Purses, fees, and pari-mutuel taxes 3,310 3,006 9,350 8,688 Simulcast and other direct expenses 3,675 3,225 9,007 8,131 ----------- ----------- ----------- ---------- Total direct operating expenses 6,985 6,231 18,357 16,819 Selling, general and administrative expenses 1,020 1,138 2,507 2,744 Privatization costs 210 - 538 - Depreciation and amortization 388 415 1,178 1,265 ----------- ----------- ----------- ---------- Total operating expenses 8,603 7,784 22,580 20,828 ----------- ----------- ----------- ---------- Earnings (loss) from operations 20 (128) 680 701 Interest expense, net (674) (704) (2,021) (2,049) ----------- ----------- ----------- ---------- Loss before income taxes (654) (832) (1,341) (1,348) Provision for (benefit from) income taxes - - - - ----------- ----------- ----------- ---------- Net loss $ (654) $ (832) $ (1,341) $ (1,348) =========== =========== =========== ========== Earnings (loss) per share data: Basic and diluted loss per share $ (0.09) $ (0.11) $ (0.18) $ (0.19) Weighted average number of shares outstanding 7,267 7,267 7,267 7,267
The accompanying notes are an integral part of the financial statements. 4
COLONIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited) Nine Months Ended September 30, 2001 2000 ----------- ----------- OPERATING ACTIVITIES: Net loss $ (1,341) $ (1,348) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,178 1,265 Changes in operating assets and liabilities: Increase in accounts receivable and other assets (614) (432) Increase in trade accounts payable and accrued liabilities 1,438 1,085 Increase in horsemen's deposits net of purses due horsemen 171 764 ----------- ----------- Net cash provided by operating activities 832 1,334 ----------- ----------- INVESTING ACTIVITIES: Capital expenditures, net of disposals (485) (251) Decrease in construction payables (40) (1,850) ----------- ----------- Net cash used in investing activities (525) (2,101) ----------- ----------- FINANCING ACTIVITIES: Proceeds from long-term debt, capital leases, and other 990 25,397 Payments on long-term debt and capital leases (734) (24,109) ----------- ----------- Net cash provided by financing activities 256 1,288 ----------- ----------- Net increase in cash and cash equivalents 563 521 Cash and cash equivalents, beginning of period 1,119 1,313 ----------- ----------- Cash and cash equivalents, end of period $ 1,682 $ 1,834 =========== ===========
The accompanying notes are an integral part of the financial statements. 5 COLONIAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 September 30, 2001 and the results of its operations and its cash flows for the respective three and nine month periods ended September 30, 2001 and 2000. Interim results for the nine months ended September 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 September 30, 2001 presentation.
2. LONG-TERM DEBT AND NOTES PAYABLE-RELATED PARTIES Long-Term Debt and Notes Payable-Related Parties consisted of the following: September 30, December 31, 2001 2000 Credit facility payable to CD Entertainment, Ltd., maturing June 2005, with monthly interest payments at 9.96% and principal payments of $1 million each due June 30, 2002, 2003 and 2004, with all unpaid principal and interest due 2005, collateralized by substantially all assets of the Company $ 26,237,937 $ 25,737,937 6 COLONIAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. LONG-TERM DEBT AND NOTES PAYABLE-RELATED PARTIES - (CONTINUED) September 30, December 31, 2001 2000 Note payable to Maryland Jockey Club, maturing December 2005, bearing interest at a rate of 7.75% payable quarterly for the first two years and equal installments of principal plus interest to be paid quarterly over the remaining five year term of the note, beginning in the first quarter of 2001 1,232,500 1,450,000 Note payable to Maryland Jockey Club, bearing interest at the prime rate (6.0% at September 30, 2001), payable in two equal installments during the years 2000 and 2001 300,308 300,308 Note payable to a bank, maturing August 2002, bearing interest at 8.5%, with monthly principal payment of $15,000, collateralized by certain fixed assets. 165,000 300,000 Notes payable to an insurance company, maturing in 2001, bearing interest at 7.52% 153,455 45,398 28,089,200 27,833,643 Less current maturities 908,763 935,706 Current maturities - related parties 1,000,000 - 26,180,473 26,897,937 Less long-term debt - related parties 25,237,937 25,737,937 Long-term debt $ 942,500 $ 1,160,000
3. 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, 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. If the transaction is consummated, 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. 7 4. Subsequent Event Colonial Holdings' Board of Directors agreed to an amendment to the merger agreement among Colonial Holdings, Gameco Acquisition, Inc. and Jeffrey P. Jacobs. Pursuant to the amendment, Colonial Holdings agreed to extend the closing date of the proposed merger from no later than December 31, 2001 to no later than April 1, 2002. In exchange for the extension, Gameco and Mr. Jacobs agreed to increase the offering price for shares of Colonial Holdings from $1.10 to $1.12 per share and to provide up to $300,000 of working capital (in addition to the $1 million committed thorough December 31, 2001) to Colonial Downs for the first quarter of 2002. 5. Equity CD Entertainment, Ltd. converted 790,000 shares of Class B common stock to Class A common stock in September 2001. 8 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 generated by Colonial Holdings Management, Inc. (Colonial Management), a wholly owned subsidiary of the Company 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, 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. If the transaction is consummated, 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 at a special meeting of shareholders. Colonial Holdings will file and mail to its shareholders, a definitive proxy statement. Shareholders are urged to read the proxy statement carefully before making a decision about the proposed merger. 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. PROFIT CENTER ANALYSIS For the three and nine months ended September 30, 2001, net loss was $654,000 and $1,341,000, respectively, compared to net loss of $832,000 and $1,348,000 for the corresponding periods of the prior year. Net income at the Racing Centers decreased by $92,000 and $55,000, respectively, compared to the corresponding three and nine month periods of the prior year. Net loss for the 9 Track and live racing operations decreased by $368,000 and $267,000, respectively, and corporate overhead, including Colonial Management, increased by $98,000 and $205,000, respectively, for the three and nine months ended September 30, 2001 compared to the corresponding periods of the prior year. Corporate overhead includes privatization costs of $210,000 and $538,000 for the three and nine month periods ended September 30, 2001, respectively. For the three and nine months ended September 30, 2001 Colonial Management generated $108,000 and $222,000, 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 $128,000 and $586,000 for the three and nine month periods ended September 30, 2001, respectively, compared to the corresponding periods of the prior year. These results reflect an increase in amounts wagered ("handle") for the nine months ended September 30, 2001. Direct expenses, which correlate with changes in handle, increased by $114,000 and $403,000 for the three and nine months ended September 30, 2001, respectively, compared to the corresponding periods of the prior year. The Company recorded an offset to purse expense for the anticipated repayment of loans to the horsemen that was $60,000 less than the amount recorded in 2000 for the three month period ended September 30, 2001 and $180,000 less than the amount for the nine-month period ended September 30, 2001. Other operating expenses increased $46,000 and $58,000 for the three and nine month periods ended September 30, 2001, respectively. 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. Per the agreement, the Company has contributed 5 1/4% of the Handle generated on simulcast thoroughbred racing to the thoroughbred purse account in 2000 and in 2001. 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 $750,000. 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 nine months ended September 30, 2001 by $375,000. The remaining unpaid balance of the advance will reduce purse expense when considered collectible. Track Losses at the Track decreased by $368,000 and $267,000 for the three and nine month periods ended September 30, 2001, respectively, compared to the corresponding periods of the prior year. This decrease is primarily due to the results of the 2001 thoroughbred meet. The 2001 thoroughbred meet commenced July 3 and ended August 7, 2001. There were 25 days of live thoroughbred racing during the three and nine months ended September 30, 2001, compared to 19 days of live thoroughbred racing during the corresponding period of the prior year. The 2000 live thoroughbred meet concluded with an additional 13 days in October. Net income from the thoroughbred meet for the three and nine month periods ended September 30, 2001 increased by $422,000 and $186,000, respectively, compared to 10 the corresponding periods of the prior year. The significant increase in net income for the live thoroughbred meet for the three month period ended September 30, 2001 was primarily due to the timing of related advertising costs which were expensed in the second quarter of 2001. The advertising costs related to the 2000 live thoroughbred meet were expensed in the third quarter of 2000. Non-racing revenue at the Track increased $5,000 and $52,000, respectively, compared to the corresponding periods of the prior year. The increase in non-racing revenue is the result of efforts to expand the uses of the Track during periods when there is no live racing. Overhead and other costs associated with maintaining the Track increased by $59,000 and decreased by $29,000 for the three and nine month periods ended September 30, 2001, respectively, compared to the corresponding period of the prior year. Corporate Overhead and Colonial Management The increase in corporate overhead is due primarily to legal, accounting and consulting costs of $210,000 and $538,000 for the three and nine month periods ended September 30, 2001, respectively, resulting from the proposed merger with 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 nine month periods ended September 30, 2001, Colonial Management generated revenues of $179,000 and $438,000, respectively, and had $71,000 and $215,000, respectively, of related expenses from managing truckstops in Louisiana. Other corporate overhead items decreased $5,000 and $110,000, respectively, for the three and nine month periods ended September 30, 2001. Net Interest Expense Interest expense, net of interest income, was approximately the same for the three and nine months ended September 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:
(Percentage of Net Revenues) Three Months Ended Nine Months Ended September 30, September 30, ---------- ---------- ---------- ---------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenues: Pari-mutuel and simulcasting commissions 90.9% 92.5% 92.2% 93.9% Other 9.1% 7.5% 7.8% 6.1% ---------- ---------- ---------- ---------- Total revenues 100.0% 100.0% 100.0% 100.0% Direct operating expenses: Purses, fees, and pari-mutuel taxes 38.4% 39.3% 40.2% 40.4% Simulcast and other direct expenses 42.6% 42.1% 38.7% 37.8% ---------- ---------- ---------- ---------- Total direct operating expenses 81.0% 81.4% 78.9% 78.2% Selling, general, and administrative expenses 14.3% 14.9% 13.1% 12.7% Depreciation and amortization 4.5% 5.4% 5.1% 5.9% ---------- ---------- ---------- ---------- Earnings (loss) from operations .2% (1.7)% 2.9% 3.2% Interest income (expense), net (7.8)% (9.2)% (8.7)% (9.5)% ---------- ---------- ---------- ---------- Loss before taxes (7.6)% (10.9)% (5.8)% (6.3)%
11 Total Revenues. Total revenues for the three and nine month periods ended September 30, 2001 increased $967,000 (12.6%) and $1,731,000 (8.0%), respectively, from the corresponding periods of the prior year. Compared to the corresponding three and nine month periods ended September 30, 2000, track and live racing revenues increased $660,000 and $707,000, respectively. Revenues from the Racing Centers increased $128,000 and $586,000 for the three and nine month periods, respectively, ended September 30, 2001, compared to the corresponding periods of the prior year. The increase for the nine-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 with limited simulcast signals due to the closure of several Northeastern tracks. Colonial Management revenue was $179,000 and $438,000 for the three and nine month periods, respectively, ended September 30, 2001. Direct Operating Expenses. As a percentage of revenues, direct operating expenses decreased 0.4% and increased 0.8%, respectively, for the three and nine month periods ended September 30, 2001, from the corresponding periods of the prior year. Purse expense increased $169,000 and $386,000, respectively, for the three and nine month periods ended September 30, 2001 compared to the corresponding periods of the previous year due to the increase in handle. Fees, pari-mutuel taxes, simulcast and other direct expenses increased $585,000 and $1,152,000 for the three and nine months, respectively, ended September 30, 2001, compared to the corresponding periods of the prior year. The increase in other direct expenses correlated to the increase in handle and the increase in live racing days during the period. Selling, General and Administrative Expenses (SG&A) and Privatization Costs. As a percentage of revenues, for the three and nine month periods ended September 30, 2001, SG&A decreased by 0.6% from 14.9% to 14.3% and increased by 0.4% from 12.7% to 13.1%, respectively. SG&A for the three and nine month periods ended September 30, 2001 includes costs associated with the proposed merger of $210,000 and $538,000, respectively. Net Earnings (Loss). Net loss for the three and nine month periods ended September 30, 2001 was $654,000 and $1,341,000, respectively, compared to net loss of $832,000 and $1,348,000 for the corresponding periods of the prior year. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has incurred aggregate net losses of approximately $11.6 million and has a working capital deficit of $5.5 million at September 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 $26.2 million of debt from the Company as of September 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 $500,000 of which has been received as of September 30, 2001. The balance of the provision of working capital 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 $1,341,000 for the nine months ended September 30, 2001 for non-cash items such as depreciation and amortization, $163,000 in cash was used. The increase in accounts payable and other operating liabilities provided $1,438,000 of cash. This was offset by the 12 increases in accounts receivable and other assets which used $614,000. The increase in horsemen's deposits net of purses due to horsemen provided $171,000 of cash. As a result, total cash provided by operating activities was $832,000. Investing activities, consisting of capital expenditures and decreases in construction payables, utilized approximately $525,000 of cash. Financing activities provided approximately $256,000 of cash. Total cash and cash equivalents increased by $600,000 for the nine months ended September 30, 2001 to $1.7 million. The adoption of a provision in the thoroughbred horsemen's agreement 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. Because of the timing of the 2001 thoroughbred meet, sufficient funding had not yet accumulated in the purse account to support the agreed upon purse structure at the time the meet began. In an agreement between the VaHBPA, Jeffrey P. Jacobs and others, $1.9 million was advanced to the horsemen and deposited to the purse account to facilitate the payment of purses. The advance has and will continue to be repaid to Jeffrey P. Jacobs and others by the VaHBPA from the purse account as the funds become available through purse account funding from the Company. EBITDA is a widely accepted financial indicator of a company's ability to service and incur debt. The Company's EBITDA for the first nine months of 2001 and 2000 was approximately $1,858,000 and $1,966,000, 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 effect on the Company's profitability. The Company believes that simulcasting diminishes the effect of inclement weather on wagering. 13 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 September 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. 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None 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 None 15 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 November 16, 2001 16