-----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, LfvspzDLn22tW/cmez5XW8wUIe+tANzquidYYsbpeXNE4tWGfrBSIVXToDXaObH4 zd1V5m26+yM7eIWt+5x79w== 0001024739-96-000099.txt : 19961223 0001024739-96-000099.hdr.sgml : 19961223 ACCESSION NUMBER: 0001024739-96-000099 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19961219 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLONIAL DOWNS HOLDINGS INC CENTRAL INDEX KEY: 0001027430 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-18295 FILM NUMBER: 96683497 BUSINESS ADDRESS: STREET 1: P O BOX 456 CITY: PROVIDENCE FORGE STATE: VA ZIP: 23140 BUSINESS PHONE: 8049667223 MAIL ADDRESS: STREET 1: P O BOX 456 CITY: PROVIDENCE FORGE STATE: VA ZIP: 23140 S-1 1 FORM S-1 As Filed with the Securities and Exchange Commission on December 19, 1996 Registration No. 333-___________ ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- COLONIAL DOWNS HOLDINGS, INC. (Exact name of registrant as specified in its charter)
Virginia 7948 54-1826807 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
3610 North Courthouse Road Providence Forge, Virginia 23140 (804) 966-7223 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- Michael D. Salmon 3610 North Courthouse Road Providence Forge, Virginia 23140 (804) 966-7223 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to:
J. Warren Gorrell, Jr., Esq. L. Charles Long, Jr., Esq. Emanuel Faust, Jr., Esq. Bruce W. Gilchrist, Esq. James L. Weinberg, Esq. Howard S. Jatlow, Esq. HOGAN & HARTSON L.L.P. HIRSCHLER, FLEISCHER, DICKSTEIN SHAPIRO MORIN & 555 Thirteenth Street, N.W. WEINBERG, COX & ALLEN OSHINSKY LLP Washington, D.C. 20004-1109 701 East Byrd Street 2101 L Street, N.W. (202) 637-5600 Richmond, VA 23219 Washington, D.C. 20037 (804) 771-9500 (202) 785-9700
Approximate date of commencement of proposed sale to the public: As soon as practicable following effectiveness of this Registration Statement. --------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /_/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. /_/ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. /_/ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. /_/ --------------- CALCULATION OF REGISTRATION FEE
==================================================================================================================== Proposed Proposed Amount Maximum Maximum Amount of Title of Securities to be Registered(1) Offering Price Aggregate Registration Fee To Be Registered Per Unit(2) Offering Price(2) - --------------------------------------------------------------------------- ---------------------------------------- Class A Common Stock, par value $0.01 per share 4,485,000 $10.00 $44,850,000 $13,591 =========================================================================== ======================================== (1) Includes 585,000 shares of Class A Common Stock which may be purchased by the Underwriters to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ SUBJECT TO COMPLETION, DATED DECEMBER 19, 1996 PROSPECTUS 3,900,000 Shares [LOGO] COLONIAL DOWNS HOLDINGS, INC. Class A Common Stock Colonial Downs Holdings, Inc. ("Colonial Downs Holdings" and, together with its subsidiaries, the "Company") was organized to pursue opportunities for horse racing and pari-mutuel wagering in Virginia. The Company holds the only unlimited licenses to own and operate a racetrack and satellite wagering facilities ("SWFs") in Virginia. The Company is constructing a racetrack scheduled to open and begin live racing prior to July 1, 1997. The Company also holds licenses for two SWFs, of which the first opened in February 1996 and the second opened in December 1996, has applied for licenses for a third SWF, and plans to apply for licenses for up to three additional SWFs during the next 12 to 18 months as suitable sites are selected. The shares of Class A common stock, $.01 par value per share ("Class A Common Stock"), offered hereby are being sold by the Company. Prior to this offering, there has been no public market for the Class A Common Stock. It is currently anticipated that the initial public offering price for the Class A Common Stock will be between $8 and $10 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Company has two classes of common stock, the Class A Common Stock and Class B common stock, $.01 par value per share (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock"). The rights of the holders of the Class A Common Stock and the holders of the Class B Common Stock are substantially identical, except that holders of the Class A Common Stock are entitled to one vote per share and holders of the Class B Common Stock are entitled to five votes per share generally, provided that on any vote or approval with respect to a merger, consolidation or other business combination, or a sale of all or substantially all of the assets of the Company, the holders of Class B Common Stock are entitled to one vote per share. The Class B Common Stock is fully convertible into Class A Common Stock, at the option of the holder, on a one-for-one basis. Both classes of Common Stock vote together as one class on all matters generally submitted to a vote of stockholders, including the election of directors. The Class B Common Stock will be held by certain founders of the Company. See "Description of Capital Stock." There is no established market for the Class A Common Stock, and there can be no assurance an established market for the Class A Common Stock will develop. The Company plans to apply for inclusion of the Class A Common Stock on The Nasdaq SmallCap Market. See "Risk Factors" beginning on page 6 for a discussion of certain factors that should be considered by prospective purchasers of the Class A Common Stock. --------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
========================================================================================================================== Price to Underwriting Discounts Proceeds to Public and Commissions(1) Company(2) ========================================================================================================================== Per Share........................ $ $ $ Total(3)......................... $ $ $ ========================================================================================================================== (1) The Company has agreed to indemnify the Underwriters named herein against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated expenses of $ payable by the Company. (3) The Company has granted the Underwriters a 30-day over-allotment option to purchase up to 585,000 additional shares of Class A Common Stock on the same terms and conditions as set forth above. If all such shares are purchased by the Underwriters, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $_____, $_____, and $______, respectively. See "Underwriting."
The shares of Class A Common Stock are offered by the Underwriters named herein, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to their right to withdraw, modify, correct and reject orders in whole or in part. It is expected that delivery of the certificates representing the shares of Class A Common Stock will be made against payment therefor at the offices of Friedman, Billings, Ramsey & Co., Inc., Arlington, Virginia or in book entry form through the book entry facilities of The Depository Trust Company on or about __________, 1997. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. The date of this Prospectus is ____________, 1997. [INSIDE COVER: ARTIST'S RENDITION OF COLONIAL DOWNS TRACK] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. - -------------------------------------------------------------------------------- PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, financial statements and notes thereto appearing elsewhere in this Prospectus. The information in this Prospectus, unless otherwise indicated, (i) does not give effect to the exercise of the over-allotment option granted to the Underwriters, (ii) assumes that a convertible subordinated note issued by the Company in the principal amount of $3 million on the closing date of this offering (the "Convertible Subordinated Note") is not converted, and (iii) is set forth as if the Reorganization described herein had already been completed. See "The Reorganization." Unless the context indicates otherwise, the term "Company" refers to Colonial Downs Holdings, Inc. ("Colonial Downs Holdings") and its wholly owned subsidiaries, Colonial Downs, L.P. ("Colonial LP") and Stansley Racing Corp. ("Stansley Racing"), collectively, or any of them. Certain of the matters discussed under the captions "Risk Factors," "Management's Discussion and Analysis of Results of Operations and Financial Condition," "Business," and elsewhere in this Prospectus contain 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 forward-looking statements speak only as of the date of this Prospectus. THE COMPANY The Company was organized to pursue opportunities for horse racing and pari-mutuel wagering in Virginia. The Company is the only entity that has been awarded unlimited licenses to own and operate a horse racetrack with pari-mutuel wagering in Virginia and is the only entity eligible to apply for licenses to own and operate satellite wagering facilities ("SWFs") in Virginia. The Company plans to conduct thoroughbred and standardbred ("harness") horse racing at a racetrack that it is currently constructing in New Kent County, Virginia (the "Track"). The Company also intends to conduct pari-mutuel wagering at the Track and at its SWFs on races run at the Track and on races telecast from out-of-state tracks ("import simulcasting"). After it begins live racing at the Track, the Company will seek to increase its revenues by entering into agreements to simulcast races run at the Track to out-of-state racetracks, SWFs, casinos and other gaming facilities ("export simulcasting"). The Track is scheduled to open and begin live racing prior to July 1, 1997. The Track's initial racing season is expected to consist of 30 days of thoroughbred racing and 50 days of harness racing. The Company's goal is to establish the Track as one of the premier venues for thoroughbred horse racing in the East by attracting high quality horses and offering an appealing environment for racing participants and customers. The Company believes that its average purses will be competitive with those currently offered by most other tracks in the mid-Atlantic region that hold racing meets at the same time as the Company's scheduled meets, enabling the Track to attract high quality thoroughbred horses, trainers and jockeys to the Company's meets. 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. When completed, the Track will include a dirt race track, a unique double-width turf track, a four-level grandstand and clubhouse, 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 and its subsidiaries 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, commercial offices and residential development. New Kent County residents have demonstrated support for this development, but the Company has no control over the extent and timing of the development and, therefore, there can be no assurance that the development will be actively pursued or completed. See "Business -- The Track and Track Facilities." The Company currently holds licenses for and operates two SWFs: a 15,000 square foot facility that opened in Chesapeake, Virginia in February 1996 and a 19,700 square foot facility that opened in Richmond in December 1996. Under current Virginia law, which allows a maximum of six SWFs in the state, the Company holds the right to seek licenses for up to four more SWFs. The Company applied in December 1996, for the necessary licenses to own and - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- operate a third SWF in Hampton, which is located in southeastern Virginia. The Company plans to apply for licenses for additional SWFs as soon as desirable locations are selected, which the Company believes will be within 12 to 18 months after this offering closes. The Company intends to locate its additional SWFs near the population centers in northern and southeastern Virginia and on the southern border of Virginia, where the Company hopes to attract business from residents of the Chapel Hill-Raleigh-Durham area of North Carolina. The Company expects to apply for licenses in December 1996 for a fourth SWF in Brunswick County on the North Carolina border. The Company plans to seek an appropriate location in northern Virginia for one of its two remaining SWFs. In order to obtain licenses for the fifth and sixth SWFs in the areas desired by the Company, the Company will initiate referenda in certain localities in which the additional SWFs may be located. Five northern Virginia localities have rejected such referenda. In the future, the Company may seek legislative changes to allow more than six SWFs in Virginia. There can be no assurance that the Company will be able to obtain licenses for any additional SWFs. Since it opened in February 1996, the Company's Chesapeake SWF has had average daily attendance of 550 customers, average daily wagers of $110,000, and annualized pari-mutuel wagering of approximately $39,000,000 (based on seven and one-half months of actual results). In the future, the Company plans to promote attendance and wagering business at the Track and its SWFs by introducing entertainment activities, including family fun days, premium give-away programs, contests and special events. See "Business -- Satellite Wagering Facilities." To provide experienced management for the Track and promote thoroughbred racing in Virginia and Maryland, 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"), to create a Virginia-Maryland thoroughbred racing circuit. Under this agreement (the "Management and Consulting Agreement"), the Maryland Jockey Club will request permission from the Maryland Racing Commission to close from mid-June until mid-October of each year. The Company plans to host a thoroughbred meet at the Track during part of this period and expects to attract the thoroughbred race horses that typically have run at the Maryland racetracks at this time. The Company has been informed that the Maryland racetracks plan to host their thoroughbred meets from January to May and November through December, during which time the Track will not be used for live thoroughbred racing, but will feature live harness racing and import simulcasting. 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 thoroughbred meet at the Track. See "Business -- Virginia-Maryland Thoroughbred Racing Circuit." RISK FACTORS For a discussion of considerations relevant to an investment in the Class A Common Stock and the Company's ability to develop its operations and achieve its objectives, see "Risk Factors." - -------------------------------------------------------------------------------- 2 - -------------------------------------------------------------------------------- THE OFFERING Class A Common Stock offered.......... 3,900,000 shares(1) Common Stock to be outstanding after the Offering......................... 4,650,000 shares of Class A Common Stock and 2,250,000 shares of Class B Common Stock(2) Use of Proceeds...................... The Company will use the estimated net proceeds of this offering (the "Offering"), the Bank Credit Facility (see "Description of Certain Indebtedness-- Bank Credit Facility"), and the proceeds of the Convertible Subordinated Note (see "Description of Certain Indebtedness -- Convertible Subordinated Note") (i) to complete construction and commence operation of the Track; (ii) to acquire, construct, renovate and/or equip SWFs; (iii) to repay interim financing provided by certain shareholders; and (iv) for working capital and other general corporate purposes. See "Use of Proceeds." Other financing sources include the Bank Credit Facility and the Convertible Subordinated Note. See "Description of Certain Indebtedness -- Bank Credit Facility" and "--Convertible Subordinated Note." The completion of this Offering is contingent upon the Company securing the Bank Credit Facility and the Company issuing the Convertible Subordinated Note. Nasdaq SmallCap Market Symbol........ Dividend Policy...................... The Company has never declared or paid any dividends on its capital stock and does not anticipate paying dividends in the foreseeable future. See "Dividend Policy." - ---------------------- (1) No purchaser of shares in this Offering will be permitted to acquire beneficial ownership of 5% or more of the Company's Common Stock, due to certain provisions of the Horse Racing and Pari-Mutuel Wagering Act of Virginia (the "Virginia Racing Act"). See "Risk Factors -- 5% Ownership Limit; Virginia Racing Act Restrictions on Stock Ownership." (2) Excludes 300,000 shares of Class A Common Stock issuable pursuant to the Company's stock option plan, 317,460 shares of Class B Common Stock issuable upon the conversion of the Convertible Subordinated Note (assuming an initial public offering price of $9 per share for the Class A Common Stock), and up to 300,000 shares of Class B Common Stock issuable upon the exercise of the warrants that may be issued to Mr. Jacobs in connection with credit enhancement relating to the Bank Credit Facility. (See "Description of Certain Indebtedness -- Bank Credit Facility.") - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- SUMMARY FINANCIAL AND OPERATING DATA(1) The summary financial and operating data set forth below gives effect to the Reorganization as if it had occurred as of September 30, 1993 and should be read in conjunction with "Capitalization," "Selected Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included elsewhere in this Prospectus. (In thousands, except share, per share, per capita, days of operation, and attendance data.)
Nine months ended Year ended September 30, December 31, ----------------- ------------ 1996 1995 1995 ---- ---- ---- Income Statement Data: Revenues: Pari-mutuel commissions - Import simulcasting............ $ 5,231 $ -- $ -- Other related revenues........... 473 -- -- ----------- ----------- ----------- Total revenues...................... 5,704 -- -- ----------- ----------- ----------- Direct operating expenses Direct expense of import simulcasting..................... 3,043 -- -- Other direct operating expenses 1,758 -- -- ----------- ----------- ----------- Total direct operating expenses..... 4,801 -- -- ----------- ----------- ----------- EBITDA before general and administrative (2)............... 903 -- -- General and administrative....... 1,041 156 315 Depreciation and amortization.... 182 2 3 ----------- ----------- ----------- Loss from operations................ (320) (158) (318) Interest expense (net).............. (88) (2) (2) ----------- ----------- ----------- Net loss............................ $ (408) $ (160) $ (320) =========== =========== =========== Net loss per share (2).............. $ (0.14) $ (0.05) $ (0.11) Weighted average number of shares outstanding (3).................. 3,000,000 3,000,000 3,000,000
At September 30, 1996 At December 31, ----------------------------- --------------- Actual As Adjusted (4) 1995 ------ --------------- ---- Balance Sheet Data: Current assets...................... $ 689 $ 50,744 $ 330 Total assets........................ 6,104 56,159 3,142 Working capital..................... (1,572) 49,384 (1,589) Short-term debt, including current portion.................. 260 10 632 Long-term debt, excluding current portion.................. 2,196 21,509 1,548 Total liabilities................... 4,837 32,999 3,467 Shareholders' equity................ $ 1,267 $ 33,160 $ (325)
For the 7.5 Months February 17, 1996 (Opening Day) Through September 30, 1996 -------------------------------- Operating Data: Number of satellite wagering facilities...... 1 Chesapeake SWF operations: Days of operation.......................... 226 Total pari-mutuel wagering (in thousands).. $ 24,756 Average daily wagering (in thousands)...... $ 110 Total attendance........................... 124,336 Average daily attendance................... 550 Average daily per capita wager............. $ 199 - ------------------ (1) Includes entities which prior to the Reorganization were affiliated through common ownership and control. See "The Reorganization." [Notes continued on next page] - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- (2) EBITDA consists of the sum of the Company's net income (loss), net interest expense and depreciation and amortization. EBITDA data are unaudited and are presented because such data are 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 income (loss), operating profit, cash flows from operations, or any other operating or liquidity performance measure prescribed by generally accepted accounting principles. Cash expenditures for various long-term assets and interest expense have been, and will be, incurred which are not reflected in the EBITDA presentation. (3) Based on 3,000,000 shares of Common Stock outstanding prior to the consummation of this Offering. (4) As adjusted to reflect (i) the sale of 3,900,000 shares of Class A Common Stock by the Company and the application of the net proceeds therefrom, (ii) borrowing by the Company of the full amount available under a certain bank credit facility (see "Description of Certain Indebtedness -- Bank Credit Facility"), and (iii) proceeds from the Convertible Subordinated Note. See "Description of Certain Indebtedness -- Convertible Subordinated Note." - -------------------------------------------------------------------------------- 5 RISK FACTORS In addition to the other information contained in this Prospectus, prospective investors should consider carefully the following factors before purchasing any of the Class A Common Stock offered hereby. Limited Operating History; Losses The Company was organized on September 30, 1993, was awarded the Track licenses in October 1994, opened the Chesapeake SWF in February 1996, and opened the Richmond SWF in December 1996. The Company has incurred losses since its organization and anticipates that it will continue to incur losses until the Track is completed and operating and four SWFs are opened and operating at the levels projected by the Company, as is planned to occur prior to July 1, 1997, although the Company may continue to incur losses thereafter. There can be no assurance that the Company will achieve its objectives or that the Company's operations as a whole will be profitable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements included elsewhere in this Prospectus. Financing Requirements Although the Company believes that the proceeds of this Offering, a bank credit facility in the amount of up to $18.5 million that the Company will enter into on or before completion of this Offering (the "Bank Credit Facility"), and the issuance by the Company of the Convertible Subordinated Note in the principal amount of $3 million on the closing date of this Offering, together with operating cash flow, will provide sufficient funds to complete the Track and the related infrastructure for which the Company is responsible, acquire and equip its planned additional SWFs and provide sufficient working capital for the foreseeable future, there can be no assurance that such funds will be adequate. There can be no guarantee that the Company will secure any additional financing, or if it is able to do so, that the Company will secure such additional financing in a timely fashion and on terms favorable to the Company. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Risk of New and Uncertain Market Horse racing with pari-mutuel wagering is a new industry in Virginia. Although there is a long history of horse racing in Virginia, it is impossible to predict with any certainty the economic outlook or future of the pari-mutuel wagering industry in Virginia. There can be no guarantee that the market will be sufficient to generate enough revenue to make the Company profitable. The Company's business plan for operating its Track and system of SWFs is unproven and there can be no assurance that the Company's business plan will be successful. Attendance and wagering at the Track and at the Company's SWFs may be adversely affected by matters outside the Company's control, such as competing gaming and entertainment opportunities, changes in public attitudes toward gaming and pari-mutuel wagering, or other factors. In addition, the Company is subject to risks to which other new businesses and industries in general are subject, such as changes in general economic conditions, markets, and interest rates. Risk of Delay in Opening the Track and SWFs Significant delays in the Company's plan to open the Track and open and operate four SWFs prior to July 1, 1997 would have a material adverse effect on the Company's expected revenues and its ability to offer competitive purses at the Track. See "Business -- Purse Structure and Guarantees," and "Business -- Competition." In addition, a delay in the opening of the Track would cause the invalidation of the Company's licenses to own and operate its SWFs and would result in the closing of the SWFs until such time, if ever, as the SWFs are relicensed. Delay in the opening of the Track beyond July 17, 1997, could cause the Company to become obligated to pay some or all of a $1,000,000 performance guarantee provided to the Virginia Racing Commission. The Virginia Racing Commission's decision awarding licenses to the Company required a performance guarantee of the Company's obligation to construct, complete and open the Track for racing by July 17, 1997. For each day beyond 6 July 17, 1997 that the Track is not complete and open for racing, the Company will pay a penalty of $5,000, up to a maximum of $1,000,000. The July 17 deadline may be extended by amendment at the discretion of the Virginia Racing Commission, or by an act of God, war, terrorism or other force majeure event beyond the control of the Company. Although the Company believes that it will be able to complete the Track and commence racing in advance of such deadline, there can be no assurance that it will be able to do so, and no assurance that the Company will not have to pay a portion or all of the performance guarantee. The Track site is subject to reversion to the grantors of the site if the Company fails to complete, open and operate for three years a racetrack licensed by the Virginia Racing Commission on the site. State and Local Approval of Satellite Wagering Facilities The Company's strategy and future success is dependent, in significant part, upon the Company being awarded licenses from the Virginia Racing Commission to own and operate the maximum of six SWFs permitted by Virginia law. As set forth below, passage of a local referendum approving the location of SWFs within a locality will be required as a condition to issuance of licenses to the Company in certain localities where the Company wishes to operate. Under the Virginia Racing Act, only the Company, as the holder of licenses to own and operate a pari-mutuel racetrack in Virginia, may be licensed to own and operate SWFs in Virginia. The Company has received licenses for two such facilities: a Chesapeake SWF, which has operated since February 1996, and a Richmond SWF which opened in December 1996. The Company has applied for licenses to own and operate a third SWF in Hampton. In December 1996, the Company intends to apply for licenses to own and operate an SWF in Brunswick County, where a referendum has passed. There can be no guarantee that the Virginia Racing Commission will issue licenses for the Hampton and Brunswick SWFs or the remaining two SWFs to the Company, or if issued, that they will be issued consistent with the Company's schedule for opening SWFs. See "Business -- Satellite Wagering Facilities." The Virginia Racing Act provides that the Company cannot apply for a license to own or operate a SWF in any county or city in Virginia unless a local referendum approving such SWF has been passed. Although such referenda have passed in several localities which are potential SWF sites, such referenda have failed in certain parts of northern Virginia, which is a highly desirable market to the Company for the location of additional SWFs. See "Business -- Satellite Wagering Facilities." There can be no guarantee that the Company will be able to obtain such local approval in localities considered desirable by the Company for an SWF, or at all. This process may also delay or otherwise limit the Company's ability to respond rapidly to changing operating or other conditions. 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 will have 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. Legislative opposition to the Virginia Racing Act is also possible. 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. See "Business -- The Company's Licenses." The Virginia Racing Commission is responsible for, among other things, (i) conducting an annual review of the Company's Track and SWF 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 7 schedules at the Track and at the SWFs. 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 permits for participants in pari-mutuel racing, including Company employees at the Track and at the SWFs. 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. See "Business -- The Company's Licenses." Other State and Local Regulation. The Company, the Track and the SWFs 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 SWF 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 SWF, 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 Virginia Horsemen's Benevolent & Protective Association, the Virginia Harness Horse Association and the Virginia Racing Commission. Also, in the case of off-track wagering to be conducted at any of the Company's SWFs, the Interstate Horse Racing Act requires the Company to obtain the approval of all currently operating horse racetracks within sixty miles of the SWF 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. Compliance With Regulation. No assurance can be given that the Company will be able to obtain all necessary regulatory approvals for the operation or expansion of its business without undue delay, cost or significant conditions imposed therein, if at all. See "-- Risk of Delays in Opening the Track and the SWFs." 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 SWFs are located based upon the amount of monies wagered both at the Track and at the Company's SWFs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." 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 affect on the Company. Certain Income Tax Considerations Related to the Acquisition of the Track Site The Company will receive the property on which the Track is being constructed from neighboring landowners, subject to a right of reversion if the Company ceases to operate the Track, as licensed by the Virginia 8 Racing Commission, within three years after transfer. The Company intends to take the position that the conveyance should qualify as a nontaxable contribution to capital. Nonetheless, the Internal Revenue Service may seek to recharacterize the transaction as a taxable transfer, and there can be no assurance that a court would not agree with that characterization. If the Internal Revenue Service is successful, the Company would be obligated to pay federal income tax based upon the land's fair market value of $5,000,000 as estimated by the Company at the time of transfer (but the Company's gain on any subsequent disposition of the land would be reduced by a corresponding amount). Dependence on Key Personnel; Future Need to Hire Additional Qualified Personnel The Company believes it currently employs sufficient personnel to apply for additional SWF licenses to the Virginia Racing Commission, to staff its Chesapeake and Richmond SWFs, to oversee the development and construction of the Track, and to develop future SWF sites. As Track construction nears completion, however, the Company will need to hire additional personnel to operate the Track and to supplement its management team. The Company anticipates hiring approximately 200 full-time employees and approximately 200 part-time employees for the Track. There can be no guarantee that the Company will be able to hire such additional personnel on terms favorable to the Company or at all. In addition, Arnold W. Stansley, who has directed the operations of the Company to date, will assume a more passive role in the operations of the Company after this Offering. He will serve as Vice-Chairman of the Board of Directors and will provide management consultation and advice. The future success of the Company will depend upon the continuing active participation of Jeffrey P. Jacobs, who will serve as Chairman of the Board, Chief Executive Officer and President. Mr. Jacobs will enter into an employment agreement with the Company to be effective upon the completion of the Reorganization. See "Management -- Directors and Executive Officers." Risk of New Construction/Infrastructure Completion The Track is scheduled to open prior to July 1, 1997; however, there can be no guarantee that the opening will occur by that time or that budgeted construction costs for the project will be sufficient. Major construction projects such as the Track entail significant risks, including shortages of materials or skilled labor, unforeseen engineering, environmental and/or geological problems, work stoppages, weather interference and unanticipated cost increases. Such problems, or difficulties in obtaining any of the requisite licenses, permits or authorizations from regulatory authorities, could increase the cost of or delay the construction or opening of the Track. The Company is currently negotiating a construction agreement (the "Construction Agreement") with Norglass, Inc. which would provide, among other matters, for a guaranteed maximum price of $26 million for construction of the Track. There can be no assurance that the Track will be completed without exceeding such guaranteed maximum price or consistent with the Company's development schedule. See "Certain Transactions." Additional parties beyond the Company's control are responsible for several infrastructure improvements affecting the Track. New Kent County has agreed to widen Route 155, the road leading to the entrance of the Track's main boulevard. Similarly, pursuant to a development agreement with the Company, a grantor of the Track site will develop and construct a sewer and water system that will service the Track, with costs reimbursed by the Company not to exceed $985,000. There can be no guarantee that the widening of Route 155 and the sewer and water system will be completed consistent with the Company's development schedule. Potential Fluctuations in Operating Results; Seasonality The Company anticipates that its operating results will fluctuate from quarter to quarter because revenues may be higher during scheduled live racing than at other times of the year. Adverse weather conditions may cause cancellation of or curtail attendance at outdoor races, thereby reducing wagering. Attendance and wagering at both outdoor races and indoor SWFs may be adversely affected by holidays and other competing seasonal activities. Given that a substantial portion of the Company's expenses are fixed, the loss of scheduled racing days could adversely effect the Company's profitability. See "Business -- Seasonality and the Effects of Inclement Weather," and "Business -- Simulcasting." 9 Competition The Company competes and will compete for wagering dollars and simulcast fees with live racing and races simulcast from horse racetracks in other states, such as Charles Town in West Virginia, Pimlico Race Course and Laurel Park in Maryland, and Delaware Park in Delaware. The Company believes that the Management and Consulting Agreement will effectively promote thoroughbred racing in Maryland and Virginia by enhancing coordination of thoroughbred events between the two states. If the Virginia-Maryland thoroughbred racing circuit is unsuccessful, however, the Track will also compete directly with thoroughbred racetracks in Maryland. See "Business -- Virginia-Maryland Thoroughbred Racing Circuit." 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. See "-- Additional Licenses May Be Granted." The Company will face competition from a wide range of entertainment options, including other forms of gaming, live and televised professional and collegiate sporting events, and other recreational activities. The legalization of other forms of gaming in Virginia or any neighboring states also may provide competition for the Company. The Company anticipates competition from video lottery terminals ("VLTs") and slot machines. In particular, Delaware legalized slot machines at three racetracks as of January 1, 1996 and a Maryland legislative panel is studying the legalization of slot machines at Maryland racetracks and SWFs. In addition, a referendum for the legalization of VLTs was passed on November 5, 1996 in Lewistown, West Virginia, where the Charles Town racetrack is located. VLTs and slot machines are prohibited in Virginia. The Company believes that the legalization of VLTs and/or slot machines in neighboring states may adversely affect its business by attracting the Company's potential SWF and Track customers and enabling other tracks to offer higher purses than the Track. It may be more difficult for the Company to attract horsemen to race at the Track if other nearby racetracks offer higher purses. See "Business -- Competition." Additional Licenses May Be Granted The Company was awarded the only unlimited licenses to own and operate a horse racetrack with pari-mutuel wagering issued by the Virginia Racing Commission. The Company's licenses were awarded on October 12, 1994 after a competitive one-year application process involving five other applicants. The Company does not believe that an award of additional licenses in the immediate future is likely; however, the Virginia Racing Commission has the authority to award subsequent licenses if it finds such award to be in the best interest of the Virginia horse racing industry. The issuance of any additional unlimited licenses to other parties could have a material adverse effect on the Company's financial performance. The Virginia Racing Commission also has the authority to issue limited licenses for race meets of less than 15 days. To date, the Commission has only issued limited licenses to a nonprofit organization that sponsors one day of pari-mutuel racing per year. See "Business -- The Company's Licenses." Decline in Live Racing Attendance at Racetracks; Future Growth Dependent on SWFs A substantial historic decline has occurred in attendance and wagering on live racing at racetracks nationwide. The Company believes this decline results primarily from competition from other forms of entertainment and gaming, including wagering at SWFs, and an increasing unwillingness of customers to travel a significant distance to racetracks. In light of this historical decline in on-track customers, the Company believes that its future growth is dependent upon the opening of additional SWFs to increase its total revenues. The Company intends to obtain licenses for up to four additional SWFs. The Company's wagering business, however, has a limited history. There can be no assurance that the Chesapeake SWF will increase or maintain its current level of revenues, that the Richmond SWF will be profitable, or that any or all of the additional planned SWFs will be opened, or that, if opened, they will achieve or maintain profitability. See "Business -- Satellite Wagering Facilities." Reliance on Independent Horse Owners; Relationship with Maryland Racing Organizations The Company is dependent upon its ability to attract individual horse owners to obtain and maintain a supply of race horses necessary for the Track to operate. The Company has entered into agreements with certain associations representing the Virginia thoroughbred and standardbred horse owners, pursuant to which the Company 10 has guaranteed certain purse levels which it believes will be attractive to thoroughbred and standardbred horse owners. See "Business -- Purse Structure and Guarantees." The future success of the Company is dependent upon its maintaining a positive working relationship with such horsemen's groups and negotiating future agreements with such groups on satisfactory terms. There can be no assurance that the Company will be able to do so. To help promote its thoroughbred racing, the Company entered into the Management and Consulting Agreement with Maryland-Virginia Racing Circuit, Inc. to create a Virginia-Maryland thoroughbred racing circuit. See "Business -- Virginia-Maryland Thoroughbred Racing Circuit." The Virginia-Maryland thoroughbred racing circuit is designed to encourage Maryland horsemen who historically have run their horses at the Maryland tracks during certain time periods to send their horses to the Track. The Company and the Maryland Jockey Club have agreed to encourage such horsemen to ship their horses to the Track for its thoroughbred meet. There can be no guarantee that the Virginia-Maryland thoroughbred racing circuit will be successful, however, or that the Company's purses will be sufficient to attract horse owners to the Track. Control of Company; Conflicts of Interest Following the completion of this Offering, Jeffrey P. Jacobs, the Company's Chairman of the Board, Chief Executive Officer and President, will have effective voting control of the Company, directly and indirectly through a family trust and other entities, by virtue of ownership of 1,500,000 shares of Class B Common Stock, which will represent approximately 47.2% of the total voting power of the Common Stock as to matters other than any vote or approval with respect to a merger, consolidation or other business combination, or a sale of all or substantially all of the assets of the Company ("Special Voting Matters") (21.2% for Special Voting Matters). If Mr. Jacobs converts the Convertible Subordinated Note, he will own 1,817,460 shares of Class B Common Stock, which would represent approximately 52.0% of the total voting power of the Common Stock (25.2% for Special Voting Matters). Mr. Jacobs is also a substantial shareholder, directly and indirectly, in other gaming companies, including, but not limited to, Jacobs Entertainment Ltd., which holds interests in a number of casinos in Colorado and Nevada. The Company does not anticipate any conflicts of interest with such casinos; however, there can be no assurance that future activities of Mr. Jacobs or the companies in which he holds interests will not compete with the Company. Except for Special Voting Matters, Mr. Jacobs effectively controls and will be able to control all matters submitted to stockholders for a vote. See "Principal Shareholders." See also "Certain Transactions." Conflicts of interest also may arise in connection with any credit enhancement that Mr. Jacobs may provide pursuant to the Bank Credit Facility and related payments he may be required to make. See "Certain Transactions -- Credit Enhancement for Bank Credit Facility." 5% Ownership Limit; Virginia Racing Act Restrictions on Stock Ownership No purchaser of shares in this Offering will be permitted to acquire beneficial ownership of 5% or more of the Company's Common Stock. The Virginia Racing Act requires that any person proposing to acquire beneficial ownership of 5% or more of the Company's shares obtain the prior approval of the Virginia Racing Commission. In addition, under the Virginia Racing Act, the Virginia Racing Commission has the authority to order a 5% or greater beneficial shareholder of the Company to dispose of his or her Common Stock of the Company if it determines that such shareholder (i) is or has been guilty of any illegal, corrupt or fraudulent act, conduct or practice in connection with horse racing in Virginia or any other state, (ii) knowingly failed to comply with the Virginia Racing Act or the Virginia Racing Commission's regulations, or (iii) has had a license or permit to hold or conduct a race meet suspended, denied for cause, or revoked. See "-- Government Regulation." No Prior Market for the Class A Common Stock Prior to this Offering, there has been no public market for the Class A Common Stock, and there can be no assurance that a regular trading market for the Class A Common Stock will develop or be sustained. The initial offering price for the Class A Common Stock will be determined through negotiation between the Company and Friedman, Billings, Ramsey & Co., Inc. as representative of the Underwriters. There can be no assurance that future market prices for the Class A Common Stock will equal or exceed the initial public offering price set forth on the cover page of this Prospectus. Recent history relating to the market prices of other newly public companies indicates that the market price of the Class A Common Stock following this Offering may be highly volatile. The market price of the Class A Common Stock could be subject to significant fluctuations in response to such factors as 11 regulation, competitive conditions, the Company's operating results, prevailing interest rates and the markets for similar securities. Provisions with Possible Anti-Takeover Effect Certain provisions of Virginia law and the Company's Amended and Restated Articles of Incorporation could delay or impede the removal of incumbent directors or the acquisition of the Company by an outside party even if such events would be beneficial to the interests of the shareholders. Such provisions could limit the price that certain investors might be willing to pay in the future for the Class A Common Stock. Such statutory provisions include the 5% ownership limit under the Virginia Racing Act, the Virginia Affiliated Transactions statute, and the Virginia Control Share Acquisition statute. Provisions of the Company's Amended and Restated Articles of Incorporation include the two classes of Common Stock with disproportionate voting power, a staggered Board of Directors and the ability of the Company to issue up to 17 million shares of capital stock, including up to 2 million shares of preferred stock, for which the Board of Directors could establish special preferences or rights without a vote of the shareholders. See "Description of Capital Stock -- Certain Charter and Statutory Provisions," and "-- 5% Ownership Limit; Virginia Racing Act Restrictions on Stock Ownership." In addition, following the completion of this Offering, Jeffrey P. Jacobs will have direct or indirect effective voting control of the Company. See "-- Control of Company; Conflicts of Interest." Dividend Policy The Company does not anticipate paying any dividends on the Class A Common Stock in the foreseeable future, and intends to retain earnings to finance the development and expansion of its operations. See "Dividend Policy." Dilution Purchasers of the Class A Common Stock will experience immediate and substantial dilution in pro forma net tangible book value per share of Class A Common Stock of $4.33 from the initial public offering price, assuming an offering price of $9.00 per share. See "Dilution." Shares Eligible for Future Sale; Registration Rights Upon completion of this Offering, there will be 4,650,000 shares of Class A Common Stock outstanding (5,235,000 shares if the Underwriters' over-allotment option is exercised in full), of which the 3,900,000 shares of Class A Common Stock sold in this Offering are freely transferable by persons other than "affiliates" of the Company without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"). The remaining 750,000 shares of Class A Common Stock and the 2,250,000 shares of Class B Common Stock may be deemed "restricted" or "affiliate" securities within the meaning of the Securities Act and, if so, may not be sold in the absence of registration under the Securities Act or an exemption therefrom, including the exemption contained in Rule 144. No prediction can be made as to the effect, if any, that future sales of shares of Class A Common Stock will have on the market price of the shares of the Class A Common Stock prevailing from time to time. Sales of substantial amounts of Class A Common Stock in the public market following this Offering, or the possibility that such sales could occur, could adversely affect the market price of the Class A Common Stock. In connection with this Offering the Company has agreed not to issue any shares of Common Stock, and the Company's current directors, officers and all existing shareholders have agreed not to, directly or indirectly, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock for a period ending on the later of (i) 180 days following the consummation of this Offering and (ii) the date on which the Company has four SWFs (excluding SWF operations at the Track) in operation, without the prior written consent of Friedman, Billings, Ramsey & Co., Inc. In addition, the Company has granted certain registration rights to the holders of such shares. See "Shares Eligible for Future Sale," and "Certain Transactions -- Registration Rights." 12 THE COMPANY Colonial Downs Holdings is a Virginia corporation organized in November 1996 to pursue opportunities for wagering and horse racing in Virginia. The Company holds the only unlimited licenses to own and operate a horse racetrack with pari-mutuel wagering in Virginia and is the only entity authorized to apply for licenses to own and operate SWFs in Virginia. Upon completion of this Offering and the Reorganization described below, Colonial Downs Holdings will be a holding company for Colonial LP and Stansley Racing. Colonial LP was formed on September 30, 1993, and was awarded the license to own the Track by the Virginia Racing Commission in October 1994. Stansley Racing was formed on June 3, 1994, and was awarded the license to operate the Track by the Virginia Racing Commission in October 1994. Colonial LP also holds owner's licenses for the Chesapeake and Richmond SWFs and Stansley Racing holds the operator's licenses for those facilities. The Company has applied for licenses to own and operate a third SWF in Hampton. The Company was delayed in commencing construction of the Track and operation of its SWFs pending resolution of an appeal by a competitor of the award of the initial licenses to the Company. That appeal was resolved in May 1996. The Company opened its first SWF in Chesapeake in February 1996, opened its second SWF in Richmond in December 1996, has applied for licenses for a third SWF in Hampton, and during the next 12 to 18 months intends to apply for licenses for, and to open, three additional SWFs. The Company's Track in New Kent County, Virginia, which will host thoroughbred and harness racing, is scheduled to open and begin live racing prior to July 1, 1997. The Company plans to conduct pari-mutuel wagering at the Track and at the Company's SWFs, on live races run at the Track or imported by simulcast from other racetracks. After it begins live racing at the Track, the Company also intends to enter into agreements for the export simulcasting of races run at the Track. The Company's principal executive offices are located at 3610 N. Courthouse Road, Providence Forge, Virginia 23140 and its telephone number is (804) 966-7223. THE REORGANIZATION The Company's licenses to own and operate the Track and its SWFs are held by Colonial LP and Stansley Racing. These ownership and operating licenses 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, Colonial Downs Holdings will become a holding company for Colonial LP and Stansley Racing pursuant to an Agreement and Plan of Reorganization (the "Plan of Reorganization"). Pursuant to the Plan of Reorganization, concurrent with the consummation of this Offering, Colonial Downs Holdings will acquire a 99% limited partner interest in Colonial LP and 100% of the outstanding stock of Stansley Racing, in exchange for 750,000 shares of its Class A Common Stock and 2,250,000 shares of its Class B Common Stock. Also pursuant to the Plan of Reorganization, Stansley Racing will acquire a 1% general partner interest in Colonial LP. The transactions described in the Plan of Reorganization are collectively referred to herein as the "Reorganization." As a result of the Reorganization, the Company will own, through its wholly owned subsidiaries Colonial LP and Stansley Racing, the ownership and operating licenses for the Track and the Chesapeake and Richmond SWFs, the real property on which the Richmond SWF will be located, the 345 acres on which the Track is being constructed, the Track facilities and certain related infrastructure, and the rights under various agreements described in this Prospectus. 13 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,900,000 shares of Class A Common Stock offered in this Offering are estimated to be approximately $31.9 million (assuming an initial public offering price of $9.00 per share) after deducting estimated underwriting discounts and estimated expenses of this Offering. The Company plans to use the net proceeds of this Offering, the Bank Credit Facility and the issuance of the Convertible Subordinated Note (i) for completion and operation of the Track; (ii) to acquire, renovate and/or equip SWFs; (iii) to repay interim financing provided by certain shareholders totaling $6.2 million; and (iv) for working capital and other general corporate purposes, such as marketing activities, and other development and operating costs. Pending the application of proceeds for these uses, the Company intends to invest the net proceeds from this Offering in interest-bearing bank accounts, United States government securities, certificates of deposit of major banks or high grade commercial paper. Financing Plan A brief description of the Company's financing plan through December 1997 is set forth below. The financing plan includes the Company's present expectations regarding the sources of necessary funding and assumes completion of this Offering on January 31, 1997. See "Risk Factors -- Financing Requirements."
$ (millions) % of Total Sources: Net proceeds from this Offering (1)....... $ 31.9 59.7% Bank Credit Facility...................... 18.5 34.7 Convertible Subordinated Note............. 3.0 5.6 ------- ------ Total $ 53.4 100.0% ======= ====== Uses: Construction of the Track................. $34.5 64.8% Acquisition, renovation and equipping of SWFs.................................. 6.3 11.8 Payment of interim financing owed to certain shareholders(2).................. 6.2 11.6 Funding of Purse Accounts(3).............. 2.5 4.7 Working Capital........................... 2.2 4.1 Other..................................... 1.7 3.0 ------- ----- Total $ 53.4 100.0% ======= ===== ---------------------- (1) Net proceeds from this Offering are net of approximately $3.2 million of estimated offering expenses. (2) Interim financing includes loans and other credit facilities aggregating $5.5 million from CD Entertainment Ltd., loans aggregating $386,788 from Arnold W. Stansley, and loans aggregating $311,994 from Norglass, Inc. See "Certain Transactions." (3) Upon funding of the purse accounts, a letter of credit provided by CD Entertainment Ltd. as support for the Company's purse funding obligation will be terminated.
DIVIDEND POLICY The Company 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. 14 CAPITALIZATION The following table sets forth as of September 30, 1996 (i) the actual capitalization of the Company after giving effect to the Reorganization and (ii) the capitalization of the Company as adjusted to reflect the net proceeds from this Offering, borrowing by the Company of the full amount available under the Bank Credit Facility and the issuance of the Convertible Subordinated Note. See "Use of Proceeds." This table should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Prospectus.
September 30, 1996 ------------------- Actual As Adjusted(1) ------ -------------- (In thousands) Current portion of long-term debt and notes.............. $ 260 $ 10 Long-term debt and notes................................. 2,196 21,509 Shareholders' equity: Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued........... -- -- Common stock, $.01 par value, 15,000,000 outstanding, shares authorized; 3,000,000 issued and 6,900,000 shares as adjusted....................... 30 69 Additional paid-in capital........................... 2,001 33,855 Retained earnings (deficit).......................... (764) (764) ------ ------- Total stockholders' equity........................... 1,267 33,160 ------ ------- Total capitalization..................................... $3,723 $54,679 ====== ======= - --------------- (1) Gives effect to this Offering, borrowing by the Company of the full amount available under the Bank Credit Facility and the issuance of the Convertible Subordinated Note as if each had occurred as of September 30, 1996.
15 DILUTION As of September 30, 1996, the Company had a net tangible book value of $343,291 or approximately $0.11 per share. After giving effect to the sale of the Class A Common Stock offered by the Company hereby and the application by the Company of the estimated net proceeds of this Offering, the Bank Credit Facility and the issuance of the Convertible Subordinated Note as described in "Use of Proceeds," the pro forma net tangible book value of the Company as of September 30, 1996 would have been $32,236,291, or $4.67 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value of $4.56 per share of Common Stock to the current shareholders and an immediate dilution in pro forma net tangible book value per share of Common Stock of $4.33 after the completion of this Offering from the price per share paid by purchasers in this Offering. The following table illustrates this dilution:
Assumed initial public offering price per share of Class A Common Stock (1)............ $9.00 Net tangible book value per share of Common Stock as of September 30, 1996, before this Offering (2)....................................... $0.11 Increase attributable to this Offering............................................. $4.56 ==== Pro forma net tangible book value per share of Common Stock after this Offering................................................................ $4.67 ==== Dilution per share of Class A Common Stock to purchasers of Class A Common Stock in this Offering.............................................. $4.33 ==== - ------------------------ (1) Before deduction of underwriting discounts and concessions and estimated offering expenses. (2) Net tangible book value per share is determined by dividing the net tangible book value of the Company (total assets less intangible assets less total liabilities) by the number of shares of Common Stock outstanding.
The following table sets forth as of September 30, 1996, on a pro forma basis after giving effect to this Offering: (i) the total number of shares of Common Stock held by the current shareholders, the total consideration given for such shares and the average price per share paid or invested in the Company for such shares; (ii) the total number of shares to be purchased from the Company, the total consideration for such shares and the average price per share to be paid by new investors purchasing such shares in this Offering; and (iii) the percentage of shares purchased and the percentage of total consideration paid by the current shareholders and the new investors.
Shares Purchased Total Consideration Average ---------------- ------------------- Price (thousands) (thousands) Per Share --------- Number Percent Amount Percent ------ ------- ------ ------- Current Shareholders............. 3,000 43.5% $ 2,031 5.5% $0.68 New Investors.................... 3,900 56.5% 35,100 94.5% $9.00 ----- ----- ------ ---- Total................... 6,900 100.0% $ 37,131 100.0% ===== ===== ====== =====
16 SELECTED FINANCIAL AND OPERATING DATA(1) The following selected consolidated financial data of the Company for the years ended December 31, 1995, 1994, and the period ended December 31, 1993, except for Operating Data, are derived from financial statements that have been examined by BDO Seidman, LLP, independent certified public accountants, adjusted as described in the notes below. The selected consolidated financial data for each of the nine month periods ended September 30, 1996 and 1995 are derived from the Company's unaudited financial statements, which reflect in the opinion of management all adjustments, consisting only of normal recurring expenditures, necessary for a fair presentation of the results of such periods, adjusted as described in the notes below. The results for the nine month periods ended September 30, 1996 and 1995 are not necessarily indicative of results for the full year or any future period. The selected consolidated financial data should be read in conjunction with the consolidated financial statements, and related notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included herein. (In thousands, except share, per share, per capita, days of operation, and attendance data.)
Nine months ended September 30, Year ended December 31, ------------- ----------------------- 1996 1995 1995 1994 1993(2) ---- ---- ---- ---- ---- Income Statement Data: Revenues: Pari-mutuel commissions - Import simulcasting............ $ 5,231 $ -- $ -- $ -- $ -- Other related revenues........... 473 -- -- -- -- ---------- ---------- ---------- ---------- --------- Total revenues...................... 5,704 -- -- -- -- ---------- ---------- ---------- ---------- --------- Direct operating expenses Direct expense of import simulcasting..................... 3,043 -- -- -- -- Other direct operating expenses 1,758 -- -- -- -- ---------- ---------- ---------- ---------- ---------- -- Total direct operating expense 4,801 -- -- -- -- ---------- ---------- ---------- ---------- --------- EBITDA before general and administrative (3)............... 903 -- -- -- -- General and administrative....... 1,041 156 315 19 17 Depreciation and amortization 182 2 3 -- -- ---------- ---------- ---------- ---------- --------- Loss from operations................ (320) (158) (318) (19) (17) Interest expense (net).............. (88) (2) (2) -- -- ---------- ---------- ---------- ---------- --------- Net loss............................ $ (408) $ (160) $ (320) $ (19) $ (17) ========== ========== ========== ========== ========= Net loss per share (4).............. $ (0.14) $ (0.05) $ (0.11) $ (0.01) $ (0.01) Weighted average number of shares outstanding...................... 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000
At September 30, 1996 At December 31, --------------------- --------------- Actual As Adjusted(5) 1995 1994 1993 ------ -------------- ---- ---- ---- Balance Sheet Data: Current assets...................... $ 689 $ 50,744 $ 330 $ 2 $ -- Total assets........................ 6,104 56,159 3,142 667 227 Working capital..................... (1,572) 49,384 (1,589) (669) (213) Short-term debt, including current portion.................. 260 10 632 671 213 Long-term debt, excluding current portion.................. 2,196 21,509 1,548 -- -- Total liabilities................... 4,837 22,999 3,467 671 213 Shareholders' equity................ 1,267 33,160 (325) (4) 14
17 For the 7.5 Months February 17, 1996 (Opening Day) Through September 30, 1996 -------------------------- Operating Data: Number of satellite wagering facilities 1 Days of operation.................... 226 Total pari-mutuel wagering (in thousands)..................... $ 24,756 Average daily wagering (in thousands) $ 110 Total attendance..................... 124,336 Average daily attendance............. 550 Average daily per capita wager....... $ 199 ---------------- (1) The consolidated financial statements of the Company include entities which prior to the Reorganization were affiliated through common ownership and control. See "The Reorganization." (2) From inception on September 30, 1993 to December 31, 1993. (3) EBITDA consists of the sum of the Company's net income (loss), net interest expense and depreciation and amortization. EBITDA data are unaudited and are presented because such data are 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 income (loss), operating profit, cash flows from operations, or any other operating or liquidity performance measure prescribed by generally accepted accounting principles. Cash expenditures for various long-term assets and interest expense have been, and will be, incurred which are not reflected in the EBITDA presentation. (4) Based on 3,000,000 shares of Common Stock outstanding before this Offering. (5) As adjusted to reflect (i) the sale of 3,900,000 shares of Class A Common Stock by the Company and the application of the net proceeds therefrom, (ii) borrowing by the Company of the full amount available under the Bank Credit Facility, and (iii) proceeds from the Convertible Subordinated Note. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the selected financial information and the Company's consolidated financial statements and the notes thereto appearing elsewhere in this Prospectus. Overview The Company has incurred losses since its organization and anticipates that it will continue to incur losses until the Track is completed and operating and four SWFs are operating, as is planned to occur prior to July 1, 1997. However, the Company may continue to incur losses thereafter. The Company's revenues currently are derived from: (i) pari-mutuel commissions from wagering on races broadcast from out-of-state racetracks to the Company's Chesapeake and Richmond SWFs using import simulcasting; (ii) admissions fees, program, racing form and tip sheet sales, and certain other ancillary activities at the Chesapeake and Richmond SWFs; and (iii) rent from food and beverage sales and concessions at the Chesapeake and Richmond SWFs. Upon the opening of the Track and additional SWFs, the Company expects to derive additional revenue from (i) wagering on races at the Track and at the Company's SWFs; (ii) admissions fees, program, racing form and tip sheet sales, and certain other ancillary activities; (iii) rent from food and beverage sales and concessions; and (iv) fees from wagering at out-of-state locations on races run at the Track using export simulcasting. The Company operates in a single industry segment. 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 SWFs 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 80%), 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 SWFs with respect to wagering on races run at the Track. The Company's operating expenses have included or will include (i) purses payable to the horsemen for races run at the Track, (ii) commissions payable to other racetracks with respect to wagering at their facilities on races run at the Track (iii) amounts payable to host racetracks for import simulcast races (approximately 3% of amounts wagered on such races at the Company's SWFs), (iv) pari-mutuel taxes payable to Virginia (approximately 1.6% of all amounts wagered), New Kent County (approximately 0.4% of all amounts wagered) and the SWF's locality (approximately 0.4% of all amounts wagered at that locality), (v) 1.0% of all amounts wagered payable to the Virginia Breeders Fund, and (vi) other direct and indirect operating expenses. Historically, the Company has included management fees paid to Stansley Racing as an operating expense (which have been accrued and will be paid out of the proceeds of this Offering). 19 Results of Operations Nine months ended September 30, 1996 compared to the nine months ended September 30, 1995. The following table sets forth certain consolidated income statement data and such data as a percentage of total revenues.
(In thousands, except share and per share data.) Percent of Percent of September 30, 1996 Total Revenues September 30, 1995 Total Revenues ------------------ -------------- ------------------ -------------- Revenues Pari-mutuel commissions - Import simulcasting....... $ 5,231 91.7% $ -- $ -- Admissions.................. 149 2.6% -- -- Programs.................... 240 4.2% -- -- Rental income............... 58 1.0% -- -- Miscellaneous............... 26 0.5% -- -- ----------------- --------------- ------------------ ---------------- Total revenues............ 5,704 100.0% -- -- ----------------- --------------- ------------------ ---------------- Direct operating expenses Purses, awards, and breeders fund fees........ 1,539 27.0% -- -- Pari-mutuel taxes........... 650 11.4% -- -- Simulcast and totalisator expenses.................. 867 15.2% -- -- Direct salaries, payroll tax and benefits.......... 590 10.3% -- -- Other direct operating expenses.................. 660 11.6% -- -- Management fees paid to Maryland Jockey Club...... 495 8.7% -- -- ----------------- --------------- ------------------ ---------------- Total direct operating expenses............... 4,801 84.2% -- -- ----------------- --------------- ------------------ --------------- EBITDA before general and administrative expenses(2) 903 15.8% -- -- General and administrative expenses.................... 1,041 18.3% 156 -- Depreciation and amortization.. 182 3.1% 2 -- ----------------- --------------- ------------------ --------------- Loss from operations........... (320) 5.6% (158) -- Interest expense (net)...... (88) 1.5% (2) -- ----------------- --------------- ------------------ --------------- Net loss....................... $ (408) 7.1% $ (160) -- ================== =============== ================== =============== Net loss per share (3)......... $ (0.14) $ (0.05) Weighted average of shares outstanding................. 3,000,000 3,000,000 - --------------------- (1) The consolidated financial statements of the Company include entities which prior to the Reorganization were affiliated through common ownership and control. See "The Reorganization." (2) EBITDA consists of the sum of the Company's net income (loss), net interest expense and depreciation and amortization. EBITDA data are unaudited and are presented because such data are 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 income (loss), operating profit, cash flows from operations, or any other operating or liquidity performance measure prescribed by generally accepted accounting principles. Cash expenditures for various long-term assets and interest expense have been, and will be, incurred which are not reflected in the EBITDA presentation. (3) Based on 3,000,000 shares of Common Stock outstanding prior to the consummation of this Offering.
The following table sets forth certain operating data for the Chesapeake SWF for the period from February 17, 1996, when it opened, through September 30, 1996. Days of operation.................... 226 Total pari-mutuel wagering (in thousands)...................... $ 24,756 Average daily wagering (in thousands) $ 110 Total attendance..................... 124,336 Average daily attendance............. 550 Average daily per capita wager....... $ 199 20 For the nine months ended September 30, 1996, the Company's operating results reflect the opening of the Chesapeake SWF in February 1996. For the operating period of February 17, 1996 through September 30, 1996, the Company had total revenues of $5.7 million and direct operating expenses of $4.8 million, resulting in earnings before general and administrative expenses, interest expense, income taxes, depreciation and amortization of $0.9 million. After general and administrative expenses, depreciation, amortization, and interest expense, the Company had a net loss of $0.4 million for the nine months ended September 30, 1996. The Company expects that general and administrative expenses will decline significantly as a percentage of total revenue after the Company opens additional SWFs. Prior Fiscal Years The Company had no meaningful operations prior to the opening of the Chesapeake SWF in February 1996. 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 the SWFs. Liquidity and Capital Resources Funding to Date. Historically, the Company's primary sources of liquidity and capital resources have been cash flow from operations of the Chesapeake SWF, capital contributions from its partners and shareholders, and borrowings from related parties. From December 31, 1995 to September 30, 1996, the Company's cash position decreased from $330,000 to $313,000. Net cash provided by operating activities for the nine months ended September 30, 1996 totaled $1,277,860, which came from increased accounts payable, accrued expenses, and purses owed to horsemen. Upon the consummation of this Offering, the Company plans to eliminate the accrued expenses relating to the purse accounts from the proceeds of this Offering. CD Entertainment Ltd., Arnold W. Stansley, and Norglass, Inc. each have outstanding loans to the Company aggregating $5.5 million, $386,788 and $311, 994, respectively, each of which will be repaid from the proceeds of this Offering. See "Use of Proceeds." The Company's primary uses of funds have been expenditures relating to securing licenses for the Track and SWFs, coverage of operating costs, and capital improvements at the Track and SWFs. Since inception (September 30, 1993) to the opening of the first SWF (February 17, 1996), the Company expended approximately $814,000 relating to securing licenses for the Track and the SWFs. In addition, since inception the Company expended $4.4 million for property, equipment, development and construction of the Track and the Chesapeake and Richmond SWFs. Capital expenditures during 1995 totaled $1.6 million, and for the nine months ended September 30, 1996 totaled $2.5 million. The Company's capital expenditures from inception through September 30, 1996 reflect approximately: (i) $1.5 million to develop, construct, and equip the Chesapeake SWF; (ii) $1.5 million for the purchase of the Richmond SWF, with a renovation and equipment budget to be expended of $900,000, which will result in a total Richmond SWF investment of $2.4 million; and (iii) $1.2 million towards the development and construction of the Track. Current Funding Requirements. Substantially all of the Company's assets are pledged to secure the Company's loans and loans of certain affiliates. Upon payment of the loans with proceeds from this Offering, the liens will be released. The proceeds from this Offering, the Bank Credit Facility and the issuance of the Convertible Subordinated Note are expected to provide the Company a total of approximately $53.4 million. The Company believes that such proceeds, together with cash generated from operations, will be sufficient to complete construction of and equip and furnish the Track, acquire, construct, equip and open four additional SWFs and satisfy its working capital requirements for the foreseeable future. See "Use of Proceeds." See also "Description of Certain Indebtedness." Historically, the Company has operated with a working capital deficit. As of September 30, 1996, the Company had a working capital deficit of $1.6 million. Such deficit will be eliminated upon the consummation of this Offering. 21 BUSINESS The Company was organized to pursue opportunities for horse racing and pari-mutuel wagering in Virginia. The Company is the only entity that has been awarded unlimited licenses to own and operate a horse racetrack with pari-mutuel wagering in Virginia and as such is the only entity eligible to apply for licenses to own and operate SWFs in Virginia. The Company plans to conduct thoroughbred and harness horse racing at a racetrack that it is currently constructing in New Kent County, Virginia. The Company also intends to conduct pari-mutuel wagering at the Track and at its SWFs on races run at the Track and on races that the Company shows via import simulcasting. After it begins live racing at the Track, the Company intends to increase its revenues by entering into agreements to simulcast races run at the Track to out-of-state racetracks, SWFs, casinos and other gaming facilities. The Company's plan is to open additional SWFs as soon as possible, and to promote a successful inaugural 1997 season at the Track (currently scheduled to include 80 race days, including 30 days of thoroughbred racing from late June to mid-August and 50 days of harness racing from late September through November). 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 SWFs in Virginia. In addition, the Company will actively seek out export simulcast opportunities in other states. In the future, the Company plans to promote attendance and wagering business at the Track and its SWFs by introducing additional entertainment activities, including family fun days, premium giveaway programs, contests and special events. Satellite Wagering Facilities Chesapeake. The Chesapeake SWF opened on February 17, 1996. During the period ended September 30, 1996, the Chesapeake SWF has had average daily attendance of 550 patrons, average daily wagers of $110,000, and annualized revenues of approximately $39,000,000. The Company's Chesapeake SWF is a 15,000 square foot facility featuring wagering, racing and wagering information, a modern lounge area, state-of-the-art television and video monitors, as well as food and beverage services. It is accessible by nearby highways and major thoroughfares and offers patrons free parking. The facility contains a sports bar area in which patrons can watch and wager on horse races and watch other sporting events. A grandstand area provides seating for patrons where they may also watch and wager on horse races. Patrons may select from a variety of food and beverage options, from concession-style sandwiches and salads, to full service dining. The Chesapeake SWF is equipped with state-of-the-art simulcast technology and a total of approximately 170 television screens, including approximately seven large screen televisions for viewing races. The Company leases the premises in which the Chesapeake SWF is located pursuant to a lease expiring in May 2000, subject to two 5-year renewal terms at the option of the Company. Richmond. The Company's Richmond SWF opened on December 10, 1996, in the west end of Richmond, the capital of Virginia. The 19,700 square foot Richmond facility offers similar amenities and services to those offered by the Chesapeake SWF, described above. The Richmond facility is accessible by Interstate 64 and by public transportation and will offer patrons free parking. The Company acquired the Richmond facility for $1.4 million in July 1996 and has made an additional investment of approximately $900,000 to refurbish and renovate the facility. Hampton and Brunswick County. The Company applied in December 1996, for the necessary licenses to own and operate a third SWF in Hampton. The Company expects to apply in December 1996 for the necessary licenses to own and operate a fourth SWF in Brunswick County (in southern Virginia, on the North Carolina border). The referenda approving SWFs in Hampton and Brunswick County expire in November 1997. The Company will custom design and construct the Hampton and Brunswick County SWFs and plans to make similar amenities and services available at these facilities as are available at its Chesapeake SWF described above. The proposed sites for these SWFs are convenient to major thoroughfares. The Company expects to open the Hampton and Brunswick County SWFs by June 1997, provided that it obtains the licenses in a timely manner. There can be no assurance that the licenses will be obtained for these facilities consistent with the Company's development schedule or at all. 22 Two Additional SWFs. Under Virginia law, the Company is eligible to apply for licenses to own and operate up to a total of six SWFs, leaving two SWFs in addition to the current Chesapeake and Richmond, and planned Hampton and Brunswick County SWFs. See "-- The Company's Licenses." The Company may apply for SWF licenses only in those Virginia localities which have passed a referendum approving the location of a SWF within their boundaries. A SWF license must be issued for a locality within five years of the date of the approving referendum. In addition to the localities in which the Company has licenses, has applied for licenses, or for which it intends to apply for licenses in December 1996, two additional localities, Greenville (in southern Virginia) and the City of Virginia Beach (in southeast Virginia), have passed referenda that expire in November 1997. The Company plans to initiate referenda in various localities in 1997 for its fifth and sixth SWFs. The Company anticipates that it will focus on obtaining support for a referendum in northern Virginia, with the goal of opening an SWF in northern Virginia by March 1998, but there can be no assurance that it will be successful and, if the Company is unsuccessful, it may decide to locate both SWFs elsewhere in the state. Referenda initiated by other entities, prior to the receipt of the licenses by the Company, failed in a number of northern Virginia localities: Arlington (1993), Alexandria (1993), Fairfax City (1992), and Falls Church (1992). A referendum organized by the Company failed in Manassas Park in November 1996. A new referendum cannot be sought in a locality for three years from the date of the failed referendum in that locality. If the Company successfully receives licenses for all six SWFs authorized under current law, the Company may make a request to the Virginia General Assembly to amend the Virginia Racing Act to authorize additional SWFs. Additional SWFs would allow the Company to reach a larger patron base and to expand its business. There can be no assurance that the Company will be successful in any such efforts. The Company believes that the opening of its additional SWFs may negatively impact live racing attendance at the Track. The Company expects this potential impact to be minimized, however, by the Company's strategy of opening SWFs at distances that generally are more than 35 miles from the Track. The Company further believes that wagering, food and beverage and other ancillary revenues (such as the sale of racing programs) at its SWFs will more than offset the effects of any such decline in live racing attendance at the Track caused by the opening of additional SWFs. An additional benefit of the SWFs is that they are not as subject to interruptions by adverse weather conditions as is live racing at the Track. Simulcasting Simulcasting involves broadcasting a live race to other locations. Wagers are then placed on the race being broadcast. Generally, wagering conducted on simulcast races is aggregated with the pool of 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 SWF from racetracks in other states since February 1996 and at its Richmond SWF since December 1996. The Company plans to receive import simulcasts at the Track after it opens and at all additional SWFs that the Company opens. At its Chesapeake SWF, the Company regularly receives import simulcasts from over 20 different racetracks (including Belmont Park, Saratoga, Gulfstream Park, Santa Anita and Arlington International Racecourse). The Company currently receives simulcast signals from many of these tracks pursuant to an agreement with Pocono Downs (the "Hubbing Agreement") under which the Company receives the benefit of import simulcasting terms negotiated by Pocono Downs with other racetracks. The Company believes that these terms are 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 expires December 31, 1996, but the parties have extended the agreement until December 31, 1997, and it will continue to be renewed automatically every year unless either party gives notice prior to December 1 of its desire to terminate the agreement. 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 with such tracks. 23 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. In addition, the Company can change the simulcast signals it receives if racing at a particular track is canceled because of poor weather conditions. See "--Seasonality and the Effects of Inclement 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 Management and Consulting Agreement provides for reciprocal simulcasting agreements between the Company and the Maryland Jockey Club. The Company will send its live racing signal to the Maryland tracks and the Maryland tracks will send their live racing signals to the Track and the Company's current and future SWF facilities at no cost to either party. Wagers placed at the Company's SWFs 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 SWFs are likely to 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, Pocono Downs handles the Company's weekly reconciliation with other tracks, and the Company settles with Pocono Downs each month. 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 Company 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. Due to the Company's limited history of simulcasting, the Company is unable to predict whether such simulcasting will favorably or adversely affect its net income. The Track and Track Facilities The Track Site. The Track is being constructed approximately 25 miles east of Richmond, Virginia and approximately 25 miles west of Williamsburg, Virginia. It is scheduled to be completed prior to July 1, 1997. See "Risk Factors -- Risk of New Construction/Infrastructure Completion." The Track is located within a 50-mile radius of a population of approximately 1.8 million people, according to The 1990 Census Report for Virginia, Summary of Social, Economic and Housing Characteristics. Richmond, Williamsburg and their adjoining areas are tourist and business destinations, with such attractions as Busch Gardens, Colonial Williamsburg, Kings Dominion, downtown Richmond, Virginia Beach, and the Williamsburg Pottery Factory. Approximately 1,935,000 people visit the Richmond-Williamsburg area each year based on data maintained by the Virginia Division of Tourism. The Track site is accessible via several major federal and state highways. Interstate 64 intersects the property from the east and west. North and southbound traffic on Interstate 95 will be able to take advantage of the Interstate 295 beltway around Richmond, which intersects with Interstate 64 only 12 miles from the Track site. Interstate 85 and Interstate 95 can be used by patrons traveling up from North Carolina and the southern portion of Virginia. The Track is within a two hour drive of several major Virginia localities, such as Alexandria, Arlington, Charlottesville, Fairfax, Fredericksburg, Norfolk, Richmond, Williamsburg, and Virginia Beach. The Company will own the Track site subject to the reversionary right of the grantors if the Company fails to complete, open and operate for three years a racetrack licensed by the Virginia Racing Commission. Pursuant to a development agreement with the Company, one of the grantors will develop, construct and put into service a sewer and water system that will serve the Track and will provide water to the Track in sufficient quantities to meet the Company's needs, with costs reimbursed by the Company not to exceed $985,000. New Kent County has agreed to widen Route 155, the road leading to the entrance of the Track's main boulevard. The Company will construct a short road leading from Route 155 to the Track. The Company anticipates that the sewer and water system and the road will be completed prior to July 1, 1997. Upon completion, the sewer and water system will become the property of New Kent County and the road will become the property of the Commonwealth of Virginia. 24 The Grandstand and the Clubhouse. The grandstand has been designed with an initial occupancy capacity of approximately 4,000 patrons. The front apron will accommodate an additional 4,000 people and, on special event days, the grass picnic area east of the grandstand will accommodate an additional 3,000 non-reserved seats in bleachers and on benches. Valet, preferred and general paved parking will be available for over 1,825 vehicles. Additional unpaved parking will be available for large and capacity crowds. The grandstand and clubhouse will have four levels. A grandstand area will be on the first level where patrons will enter the facility, together with two simulcast/TV amphitheaters, two covered patio seating areas, four bars, one large concession center court, a gift shop, restrooms, and wagering locations with approximately 60 tellers. The second level will house administrative offices and a kitchen. The main grandstand area will be located on the third level together with a full-service dining area with a seating capacity of 200 patrons, an additional 616 box seats, two separate lounge areas and additional wagering locations with 38 tellers. When live racing is not occurring at the Track, the third level will serve as a SWF. Ten suites with sky box seating and a full-service finish line dining area will be located on the fourth level. The fourth level will also house the judges' room, the stewards' room, a press agents' room, photo finish services, a video room, the announcers' room, the audio/video control room and a VIP room. The Turf and Dirt Tracks. The Track is planned to include a unique one mile double-width (180 feet wide) turf racetrack and a one and one quarter mile dirt racetrack. The Company believes that the tracks' designs will help it to attract highly competitive horses, which will in turn both attract patrons and produce a desirable product for the Company to market via export simulcasting to other racetracks, SWFs, casinos and other gaming facilities outside Virginia. The Company's turf track is designed to be twice as wide as a typical turf track in order to maximize usage. A typical turf track may be raced over only two or three times a day before it requires repair. The Company's turf course will be equipped with two moveable rails, enabling the Company in effect to run turf races over two courses. This design should allow more turf racing per day than at most tracks in the mid-Atlantic region. The turf track will require extensive maintenance and will be expensive to maintain and will also be vulnerable to adverse weather conditions. To prevent damage to the turf track in the event of rain, races will be moved off of this track and onto the dirt track (although thoroughbred horse owners may choose not to participate in a dirt track race). The Company's management, based on its experience, believes that the unique design of the Company's turf track will be attractive to thoroughbred owners, who are believed to prefer to race their horses on turf courses, which are generally considered to be less stressful on the horses and to produce fewer injuries. The Company's dirt track will be used for harness racing and for a significant portion of the Company's thoroughbred racing. Due to the design of the dirt track, standardbreds will be able to race one mile with only one turn. The Company believes that most tracks include more turns over a one mile distance. The dirt track's design is expected to result in extremely fast mile times. The Company believes that the times recorded on its dirt track will help attract standardbred owners to race at the Track. Other Track Facilities. The Track's backstretch area will provide stables for over 1,000 horses, as well as several bath houses, a blacksmith and tack shop, dormitory buildings, a restaurant and horsemen's lounge, and a recreation park/picnic area for the horsemen and backstretch employees. The paddock building will house the jockeys' quarters, the kitchen, dining and lounge areas for the jockeys, the veterinarian's office and lab, and the pre-race and post-race holding area. Simulcast signals from other tracks will be received at the clubhouse and, when live racing is not conducted at the Track, the first level of the grandstand and clubhouse will be operated as a SWF. The Track's features also are conducive to other activities between live race meets. The Track provides a polo field for the staging of polo matches and can be used for horse shows and sales. In addition, the Company anticipates using the facilities for other special events such as concerts, antique shows, and hot air balloon races and exhibitions. Live Racing The Company expects to enter into agreements with the Virginia chapter of the Horsemen's Benevolent and Protective Association (the "VaHBPA"), a representative association of Virginia thoroughbred horsemen, and 25 the Virginia Harness Horsemen Association (the "VHHA"), a representative association of Virginia standardbred horsemen, for the conduct of live racing at the Track. The agreements are expected to address, among other matters, 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. The Company's 1997 race days for the Track have been approved by the Virginia Racing Commission. The Company plans to conduct a thoroughbred meet from June 29 to August 15, 1997 with 30 days of racing. Post times during the week will be between 3:30 and 5:30 p.m. and post times on weekends will be at 1:00 p.m. Few racetracks in the eastern time zone offer twilight thoroughbred racing, and as a consequence, the Company expects to be able to sell its weekday twilight simulcast signal to a number of other tracks, out-of-state SWFs, casinos and other gaming establishments. In addition, the Company will conduct a 50 day harness racing meet from late September through November 1997. The Virginia Racing Act requires the Company to conduct at least 150 days of live racing each calendar year; however, the Commission may permit fewer live race days during the first five years of the Track's operation. In approving the 1997 race schedule, the Virginia Racing Commission approved 80 days of live racing as proposed by the Company. Purse Structure and Guarantees The Company has taken steps to ensure competitive purses to attract horse owners to race at the Track. The Company has guaranteed purses of $150,000 per day for not less than 30 days for thoroughbred meets to be held in 1997 and 1998, and minimum purses of $50,000 per day for not less than 50 days for standardbred meets in 1997 and 1998. 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. The guaranteed purse structure arises from the Company's SWF agreements (the "SWF Agreements") with each of the VaHBPA and the VHHA. Pursuant to the VaHBPA SWF Agreement, the Company has agreed, among other things, to contribute to its thoroughbred purse account, a certain percentage (approximately 5%) of all money wagered on thoroughbreds at its SWFs 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 will be counted towards the $4.5 million target.) If such funds are less than $4.5 million, the Company will contribute one half of the deficiency and loan the purse account the remaining one half of the deficiency. The VHHA SWF Agreement reflects 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 SWFs until such account accumulates a total of $2.5 million. If the total thoroughbred and standardbred purse contributions for any year is greater than $4.5 million and $2.5 million, respectively, then the amounts otherwise payable to such accounts will be paid to the Company until its after-tax income equals $1 million (for the first year) or $3 million (for the second year), after which point such amounts will be shared equally between the Company, on the one hand, and the applicable purse account, on the other hand. 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. Marketing In addition to increasing the number of facilities that it operates, the Company will seek to increase its revenues by further developing its customer base and expanding the wagering activity of its customers. The Company believes that new customers are more likely to wager on races if they feel comfortable doing so. For example, to make wagering more "user friendly" to the novice and more efficient for the expert, the Company employs individuals to give entertaining, on-site instruction at its SWFs on how to place a wager and how to understand printed racing materials. The Company also leases state-of-the-art Autotote automated wagering equipment. These wagering systems enable the customer to choose a variety of ways to place a bet through touch- 26 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. The same strategy will be used at additional planned SWFs. Management currently anticipates that approximately 25% of all wagers at the Track and SWFs will be processed through self-service wagering terminals. The Company also works to create a welcoming physical environment at its SWFs. The Chesapeake and Richmond SWFs are modern, comfortable facilities, each including a lounge, a sports bar area devoted to televised sporting events, multiple state-of-the-art television and video displays, and a range of restaurant services. The same amenities are planned for additional SWFs. The Company believes that its attractive new facilities will appeal to its current customers and to new customers, including those who have not previously visited a SWF or racetrack. The Company also plans to attract new customers by pursuing various types of promotions, including special events, family fun days, premium give-away programs, contests and handicapping seminars. Seasonality and the Effects of Inclement Weather Revenues 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 SWFs also may be adversely affected by certain holidays and professional and college sports seasons as well as other recreational activities. Conversely, attendance and wagering may be favorably affected by special racing events which stimulate interest in horse racing, such as the Triple Crown races in May and June and the Breeders' Cup in November. As a result, the Company's revenues and net income may fluctuate from quarter to quarter. Given that a substantial portion of the Company's Track expenses are fixed, the loss of scheduled racing days could have a material adverse affect on the Company's profitability. The Company believes that simulcasting diminishes the effect of inclement weather on wagering. See "-- Simulcasting." The Company's Licenses The Company (i) holds the only unlimited licenses to own and operate a horse racetrack with pari-mutuel wagering in Virginia, (ii) is the only entity that holds licenses to own and operate SWFs in Virginia (currently in Chesapeake and Richmond), and (iii) is the only entity authorized to apply for additional licenses to own and operate SWFs in Virginia. Each of these licenses is granted by the Virginia Racing Commission. The Company's licenses and current and planned horse racing and pari-mutuel wagering operations are subject to extensive regulation and oversight by the Virginia Racing Commission pursuant to the Virginia Racing Act. See "Risk Factors -- Government Regulation." The Track and each of the current and planned SWFs require both an ownership license and an operating license. Colonial LP holds the Company's ownership licenses and Stansley Racing holds the Company's operating licenses. The Company anticipates applying for additional SWF ownership licenses through Colonial LP and additional SWF operating licenses through Stansley Racing. Each of the Company's current licenses is for a period of not less than 20 years, but is subject to annual review by the Virginia Racing Commission. Such licenses may be suspended or revoked by the Virginia Racing Commission for violations of the Virginia Racing Act or Virginia Racing Commission rules. The SWF ownership and operating license applications must describe, among other matters, the proposed facility in detail, the number of jobs to be created, the social and economic impact of the facility on the locality, the anticipated amount of investment and capital improvements to the facility, requisite governmental actions, and identification of on-site management. The Virginia Racing Commission considers each application at a public hearing at which the objections of any parties are considered, following which the Virginia Racing Commission determines whether to approve the application. Although there is no specified time period for the decision from the Virginia Racing Commission, the Company estimates, based upon its experience, that it can obtain a license and open an additional SWF in approximately six to nine months after submitting a license application. The Virginia Racing Commission will consider a variety of factors when deciding on a license application, including community opposition. The Company has encountered some community opposition, but, to date, once a 27 referendum has been passed, such opposition has not ultimately affected the licensing process. See "-- Legal Proceedings." Virginia-Maryland Thoroughbred Racing Circuit The Company and the Maryland Jockey Club have agreed to create a Virginia-Maryland thoroughbred horse racing circuit to promote thoroughbred racing in the two states. More than 2,200 horses race at Laurel Park and Pimlico Race Course in Maryland each year, making it the nation's second largest year-round thoroughbred racing operation, according to the Maryland Jockey Club. Pursuant to the Management and Consulting Agreement, the Maryland Jockey Club will request permission from the Maryland Racing Commission to close from mid-June until mid-October of each year. The Company plans to host a thoroughbred meet at the Track during this period and expects to attract the thoroughbred race horses that typically have run at the Maryland tracks at this time. The Company understands that the Maryland racetracks plan to host thoroughbred meets from January to May and November through December, during which time the Track will not be used for live thoroughbred racing, but will feature live harness racing and import simulcasting. Pursuant to the Management and Consulting Agreement, the Maryland Jockey Club will be responsible for providing, at the Company's expense, all horse racing officials and management staff essential to the operation of a thoroughbred racing meet. Colonial LP and Stansley Racing, as the licensees, will retain ultimate authority with respect to the operation of the Track during the thoroughbred meet. The Company believes that the Maryland Jockey Club's significant thoroughbred experience and expertise will serve to complement that of Company management. The Management and Consulting Agreement also should allow the Company to reduce labor costs as the Company should not need to employ and maintain a separate staff of thoroughbred race officials. For its undertakings pursuant to the Management and Consulting Agreement, the Maryland Jockey Club will receive 2% of the Company's thoroughbred meet handle and 2% of its SWF handle. All disputes arising under the Management and Consulting Agreement are to be addressed through arbitration. The Maryland Jockey Club and the Company must submit their proposed race days to the Maryland Racing Commission and the Virginia Racing Commission, respectively, each year. The Virginia Racing Commission has approved the Company's proposed 1997 race schedule. The Maryland Racing Commission approved the Maryland Jockey Club's proposed 1997 race schedule without specifically commenting on the Maryland Jockey Club's proposal to not host live racing during the Company's thoroughbred meet. 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 for the last three years, 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 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 and Laurel Park 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. See "Business -- Virginia-Maryland Thoroughbred Racing Circuit." 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 28 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. See "Risk Factors -- Additional Licenses May Be Granted." The Company anticipates competition from VLTs and slot machines, in particular. Delaware legalized slot machines at three racetracks as of January 1, 1996. In addition, a Maryland legislative panel is studying the legalization of slot machines at Maryland racetracks and SWFs, and a referendum for the legalization of VLTs was passed on November 5, 1996 in Lewistown, West Virginia where the Charles Town racetrack is located. 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 SWF 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. It may be more difficult for the Company to attract horsemen to race at the Track if other nearby racetracks offer higher purses. Other Business In addition to SWF and Track wagering revenues, the Company receives revenues from the sale of food and beverages, admission fees, the sale of programs and corporate sponsorship. Such revenues are anticipated to collectively total less than ten percent of total revenue. Other Property and Equipment The Company currently leases office space in an office building in Providence Forge, Virginia. Upon completion of the Track, the Company will relocate its offices to the Track. The Company considers its properties adequate for its present purposes, but, as noted above, the Company intends to open four additional SWFs. Based upon its experience, the Company believes that suitable sites will be available on satisfactory terms. Employees and Labor Relations At November 1, 1996 (prior to the opening of the Richmond SWF), the Company had 163 permanent employees, of whom 64% were full-time and 36% part-time. Other than management personnel and head office staff, all employees worked at the Company's SWF. No employees are represented under a collective bargaining agreement. The Company believes that its relations with its employees are satisfactory. Legal Proceeding The following pending proceeding affects the Company, although the Company is not a party to the proceeding. Robin J. Pearsall and Monument Avenue Park Association, an unincorporated association representing certain individuals residing close to the Richmond SWF, filed suit in Richmond Circuit Court on July 11, 1996, against the Virginia Racing Commission. (Robin J. Pearsall and Monument Avenue Park Association v. The Virginia Racing Commission.) The suit seeks to overturn the award of the Company's licenses for the Richmond SWF on the grounds that the referendum approving the locating of an SWF in Richmond was void and that the Virginia Racing Commission did not have authority to issue the licenses under the Virginia Racing Act. The Virginia Attorney General, representing the Virginia Racing Commission, has moved for dismissal of the case on grounds that the group lacks standing to sue and has failed to properly and timely perfect its appeal of the Virginia Racing Commission's decision. A hearing on the merits in this matter is scheduled for January 31, 1997. Although the ultimate outcome of this proceeding cannot be predicted, the Company believes that it will be ultimately resolved in a manner that will not have a material adverse effect on the Company's business. 29 MANAGEMENT Directors and Executive Officers The following persons are the current directors and executive officers of Colonial Downs Holdings: Name Position Jeffrey P. Jacobs Chairman of the Board, President and Chief Executive Officer Arnold W. Stansley Director, Secretary Robert H. Hughes Vice President, Chief Financial Officer Michael D. Salmon Controller The following is a list of the people who will be directors and executive officers following the consummation of this Offering. Biographies of these individuals follow below. In addition, the Board of Directors will include one additional independent director following consummation of this Offering. Name Age (1) Position Term of Office - ---- ------ -------- -------------- Jeffrey P. Jacobs 42 Chairman of the Board, President and Chief Executive Officer Arnold W. Stansley 62 Vice-Chairman of the Board and Director Robert H. Hughes 55 Chief Financial Officer and Director Stephen Peskoff 54 Director David Grunenwald 43 Secretary and Director Patrick McKinley 41 Director Brett Lee Stansley 33 Vice President of Satellite Wagering Facilities Gilbert Short 50 Vice President of Track Operations Michael D. Salmon 39 Controller Hugh Mellon 47 Vice President of Marketing - ---------------------- (1) All ages are set forth as of September 30, 1996. Information with respect to the business experience and the affiliations of the directors and executive officers of the Company and those persons nominated or chosen to become such following consummation of this Offering for the past five years is set forth below. Jeffrey P. Jacobs serves as Chairman of the Board, President and Chief Executive Officer of the Company. From 1995 to the present, he has served as Chairman and Chief Executive Officer of Jacobs Entertainment, Inc., a company based in Cleveland, Ohio that has investments in other gaming companies and ventures, including Black Hawk Gaming, Inc. based in Denver, Colorado and the Holiday Inn Boardwalk hotel and casino in Las Vegas. From 1975 to present, he has also served as President and CEO of Jacobs Investments, Inc., a 30 company engaged in the development, construction and operation of residential and commercial real estate and entertainment projects in Ohio. Mr. Jacobs also served in the Ohio House of Representatives from 1982 until 1986. Mr. Jacobs became involved with the Company in November, 1995, acquired a fifty percent ownership interest in the Company through an affiliate in July, 1996, and devotes an increasing amount of time to the activities of the Company. Arnold W. Stansley will assume the role of Vice-Chairman of the Board upon the consummation of this Offering. He served as President of Stansley Management Corp., Colonial LP's managing general partner prior to the Reorganization, from 1993 to 1996. He also served as President of Stansley Racing prior to the Reorganization, from 1994 to 1996. Mr. Stansley has devoted a substantial amount of his time to the development of the Company's business. He directed the successful effort to win an owner's license and an operator's license granted by the Virginia Racing Commission and was instrumental in the opening of the Company's Chesapeake SWF and anticipated opening of the Richmond SWF. Mr. Stansley is an owner and has been an executive officer of Raceway Park, a standardbred racetrack in Toledo, Ohio, for seven years. Mr. Stansley has over 30 years of experience in the horse racing industry, as a driver, trainer and owner of standardbred horses. He shares management responsibility at Raceway Park with his sister and brother-in-law. Mr. Stansley is the father of Brett Lee Stansley. Robert H. Hughes has served as Chief Financial Officer of Jacobs Investments, Inc. since 1993. Mr. Hughes is a director of Black Hawk Gaming and Development Co., Inc. Mr. Hughes was a partner in charge of the audit department of the Cleveland office of the accounting firm of Deloitte & Touche LLP until his retirement in 1991. Mr. Hughes is a certified public accountant. Stephen Peskoff has served as President of Underhill Investment Corp. since 1976 and has acted as a consultant to Friedman, Billings, Ramsey & Co., Inc. for the last two years. Mr. Peskoff was active in the thoroughbred horse industry from 1978 to 1992 during which time he won two Eclipse Awards (1983 and 1991) and was the breeder of the 1991 U.S. horse of the year (Black Tie Affair). David Grunenwald has served as Vice President of Development and Leasing for Jacobs Investments, Inc. since 1988 and directs such company's development, construction and leasing operations. Prior to joining Jacobs Investments, Inc., Mr. Grunenwald worked for Weston, Inc. (1987-88) in syndication and property management and Touche Ross & Company from 1981 to 1987 as a tax consultant. Patrick McKinley has served as Executive Vice President of Jacobs Investments, Inc. for more than twenty years and is responsible for such company's day-to-day operations. Mr. McKinley has over twenty years' experience in restaurant operations and real estate development and management. Brett Lee Stansley will assume the role of Vice President of Satellite Wagering Facilities upon the consummation of this Offering. He has served as Vice President of Stansley Management Corp., Colonial LP's managing general partner prior to the Reorganization, since 1994. From 1987 to 1994, Mr. Stansley was a grain analyst with Merrill Lynch. Mr. Stansley has worked as a trainer and groom of standardbred race horses and has owned several standardbred race horses. Brett Lee Stansley is the son of Arnold W. Stansley. Gilbert Short will assume the role of Vice President of Track Operations upon the consummation of this Offering. He joined the Company in 1994 as General Manager and has overseen the design and development of the Track and the Chesapeake and Richmond SWFs. Prior to joining the Company, Mr. Short served as Director of Operations of Trinity Meadows, a thoroughbred racetrack outside of Fort Worth, Texas, from 1991 to 1994. He has been a standardbred horse owner and trainer for over twenty years. Michael D. Salmon will assume the role of controller upon the consummation of this Offering. He has served as the Company's Certified Public Accountant from January 1, 1996 until June 1, 1996 at which time he joined the Company as Controller. Mr. Salmon was an accounting manager with Philip Morris from 1979 to 1989 at which time he started a public accounting firm as a sole proprietor and merged his practice with a larger firm in 1995 before joining the Company. Mr. Salmon has consulted in a number of mergers, acquisitions, and start-ups of small businesses as a CPA, as well as starting a mortgage banking company and being its initial officer and director. Mr. Salmon also served as an elected official on the New Kent County, Virginia, Board of Supervisors from 1992 through 1995. 31 Hugh R. Mellon will assume the role of Vice President of Marketing upon the consummation of this Offering. He has served as Marketing Director of the Playfair Race Course from 1993 to 1996. For ten years prior to 1993, Mr. Mellon was an independent consultant providing marketing, advertising and corporate sponsorship consulting services for Hialeah Park, Delaware Park, Arlington International and other racetracks across the country. Mr. Mellon has also worked in the marketing and publicity departments of Charles Town Races, Penn National Race Course, and Delta Downs. The Amended and Restated Bylaws of Colonial Downs Holdings provide for a staggered Board of Directors divided into three classes. See "Description of Capital Stock -- Certain Charter and Statutory Provisions." Officers are appointed by and serve at the discretion of the Board of Directors. Board Committees The Board of Directors intends to establish an Audit Committee, a Compensation Committee and a Stock Option Committee within 90 days of the consummation of this Offering. Executive Compensation The Company to date has not paid any compensation to its executive officers. The Company has paid certain management and other fees to affiliates of Messrs. Stansley, Leadbetter and Jacobs. The Company plans to enter into employment agreements effective upon the completion of the Reorganization with Jeffrey P. Jacobs, Brett Lee Stansley, Mike Salmon, Hugh Mellon and Gilbert Short, at annual base salaries of approximately $120,000, $75,000, $60,000, $60,000 and $60,000, respectively. The agreements are expected to terminate two years after consummation of this Offering. Such employment agreements are expected to restrict the ability of the employee to engage in certain activities which compete with the Company during its term and for one year thereafter. Such agreements are further expected to provide that Mr. Jacobs devote so much of his time to the Company as is reasonably necessary for the performance of his duties. Pursuant to the remaining employment agreements, each of the executives is expected to agree to devote his full time to the Company. Upon the consummation of this Offering, the Company will enter into a five-year consulting agreement with Arnold W. Stansley. Mr. Stansley will advise and assist the Company in the operation of the Track and the SWFs as the Company requests. For his services, the Company will pay Mr. Stansley $75,000 annually, payable quarterly. Stock Option Plan Immediately prior to the consummation of this Offering, the Company's Board of Directors will adopt and approve a stock option plan (the "Stock Option Plan"). The Stock Option Plan will be administered by a committee (the "Committee") consisting of at least two persons who are appointed by, and serve at the pleasure of, the Board of Directors and at least two of whom are "disinterested persons" as that term is defined in Rule 16b-3(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Pending election of two independent directors, the Stock Option Plan is to be administered by the Board of Directors, which does not consist of two "disinterested persons." Subject to the express provisions of the Stock Option Plan, the Committee has the sole discretion to determine to whom, among those eligible, options will be granted and the time or times at which options may be exercised. Options are designated at the time of grant as either "incentive stock options" or "non-qualified options." Unless the Stock Option Plan is terminated earlier by the Board of Directors, the Stock Option Plan will terminate ten years from the date of its approval by the shareholders. Subject to adjustments resulting from changes in capitalization, 300,000 shares of Class A Common Stock may be issued pursuant to the exercise of options granted under the Stock Option Plan. If any option expires or terminates for any reason, without having been exercised in full, the unpurchased shares subject to such option will be available again for purposes of the Stock Option Plan. An option may not be transferred other than by will or by laws of descent and distribution, and, during the lifetime of any option holder, may be exercised only by such holder. 32 Director Compensation Directors of the Company who are also employees of the Company (other than Mr. Hughes) will receive no directors' fees. Non-employee directors and Mr. Hughes will receive directors fees of $________ for each Board and committee meeting attended in person and $________ for each Board and committee meeting attended by telephone. In addition, directors are reimbursed for their reasonable out-of-pocket travel expenditures incurred in attending Board and committee meetings. Limitation of Liability and Indemnification of Directors and Officers The Company's Amended and Restated Articles of Incorporation provide that in any proceeding brought in the name of the Company or by or on behalf of shareholders of the Company, the damages assessed against an officer or director arising out of a single transaction, occurrence, or course of conduct shall not exceed one dollar, unless the officer or director engaged in willful misconduct or a knowing violation of the criminal law or any federal or state securities law, including without limitation, any claim of unlawful insider trading or manipulation of the market for any security. Additionally, the Company's Amended and Restated Articles of Incorporation and Amended and Restated Bylaws provide that the Company shall indemnify an officer, director or employee who is, was or is threatened to be made a party to a proceeding (including a proceeding by or in the right of the Company) because he is or was an officer, director, or employee of the Company, against liability incurred in the proceeding and against expenses incurred by him in connection therewith except such liabilities and expenses incurred because of his willful misconduct or knowing violation of the criminal law. 33 CERTAIN TRANSACTIONS Historically, the Company has not had a formal mechanism for addressing potential conflicts of interest. Following the completion of the Reorganization, the Company plans to adopt a policy requiring that any material transactions between the Company and persons or entities affiliated with officers, directors or principal shareholders of the Company be on terms no less favorable to the Company than reasonably could have been obtained in arm's-length transactions with independent third parties. The management of the Company believes that the terms of the related party transactions set forth below are consistent with what would have been negotiated in an arm's-length transaction with an independent third party, except for management fees described below, which will be terminated on the date of the Reorganization, and the Food and Beverages Concessions Agreement described below. The following is a summary of certain transactions and relationships among the Company and its associated entities, and among the directors, executive officers, nominees for directors and shareholders of the Company and its associated entities. Loans to the Company CD Entertainment Ltd. has made a loan and has provided credit support to the Company aggregating $8.0 million. CD Entertainment Ltd. is beneficially owned by Jeffrey P. Jacobs, and Gary L. Bryenton and Jeffrey P. Jacobs as Trustees under the Opportunities and Trust Agreement dated February 1, 1996. The indebtedness under these facilities bears interest at a variable rate equal to CD Entertainment's cost of funds. The current rate is LIBOR plus 2%. Interest is payable monthly. Principal is due on the earlier to occur of January 31, 1998 or the consummation of this Offering. In addition to principal and interest payments, the Company has agreed to pay all fees, costs and expenses incurred by CD Entertainment Ltd. in making such funds available. As of September 30, 1996, the Company had incurred aggregate interest costs of $110,000 and made no principal payments. The proceeds of the credit facilities were used to acquire and renovate the Chesapeake and Richmond SWFs, to fund improvements at the Track site and to pay for expenses incurred in seeking licenses for other SWFs. A portion of such indebtedness is secured by a first deed of trust on the Richmond SWF and the pledge of certain other assets of the Company. These facilities are to be repaid from the proceeds of this Offering, at which time the deeds of trust and other security interests of CD Entertainment Ltd. will be released. Arnold W. Stansley, a principal shareholder, loaned the Company $386,788, which is evidenced by notes dated as of September 30, 1995 and January 23, 1996. These notes do not bear interest unless the notes are not repaid from the proceeds of this Offering. The loan proceeds were used to fund the operations of the Company and will be repaid from the proceeds of this Offering. Norglass, Inc. loaned $311,994 to the Company, which is evidenced by notes dated as of September 30, 1995 and January 23, 1996. Norglass, Inc. is owned by James Leadbetter, a principal shareholder of the Company. The loan does not bear interest unless not repaid from the proceeds of this Offering. The loan proceeds were used to fund the operations of the Company and will be repaid from the proceeds of this Offering. Construction The Company has agreed to enter into a guaranteed maximum price contract with Norglass, Inc. for the construction of the Track. Pursuant to the contract, Norglass, Inc. will receive a fixed fee of $ ________. In addition, Norglass, Inc. will be paid for certain out-of-pocket expenses. Pursuant to the contract terms, absent certain force majeure events, the guaranteed maximum price for the contract is expected to be $26,000,000. Norglass, Inc. will warrant and guarantee its labor for periods running from one to two years and will warrant the materials provided to the project for periods ranging from one to fifteen years. (The project's roofing is warranted for fifteen years.) Norglass, Inc. will provide market terms for insurance and bonding requirements. The Company will retain 10% of the cost of all work, including Norglass, Inc.'s fee until substantial completion of the Track. The contract may be terminated by the Company upon seven days' written notice for Norglass, Inc.'s failure to perform and may be terminated by Norglass, Inc. upon seven days' written notice for the Company's failure to pay amounts when due. In addition, Norglass, Inc. acted as general contractor for the renovation of the Chesapeake and Richmond SWFs, for which it received from the Company aggregate fees of approximately $160,500 and reimbursement of expenses of approximately $97,000. 34 Concessions Agreement The Company is party to a Food and Beverages Concessions Agreement with Virginia Concessions LLC, an entity owned by Jeffrey P. Jacobs. Pursuant to the Food and Beverages Concessions Agreement, Virginia Concessions LLC was granted an option to manage the food and beverage concessions at the initial six SWFs and up to 50% of any additional SWFs that may be licensed and developed by the Company. Virginia Concessions LLC pays the Company rent based upon gross sales equal to 10% of the first $500,000 of gross sales, 13% of the next $500,000 of sales and 15% of all gross sales above $1,000,000 at each SWF. The Company is responsible for site-related expenses such as updating, refurbishing, equipping, and repairing each SWF. It also is responsible for all advertising, cleaning of areas other than those relating to food service, linen, casualty insurance, one-half of the premiums for liquor liability insurance, utilities, real estate taxes and assessments, trash removal and equipment repair and replacement. The agreement is for a term of ten years from the opening date of each applicable SWF, but in no event beyond February 17, 2011. In addition, within six months prior to the expiration of the initial term with respect to any SWF, Virginia Concessions LLC has a first right of refusal to meet any competing offer to provide food and beverage service; however, Virginia Concessions LLC is entitled to a 1% discount to such competing offer. Management Fees The Company is party to a management agreement with Stansley Racing (the "Management Agreement"), which prior to the Reorganization is owned by Messrs. Stansley and Leadbetter. Stansley Racing is in turn party to a submanagement agreement (collectively with the Management Agreement, the "Management Agreements") with CD Entertainment Ltd., an affiliate of Mr. Jacobs. Pursuant to the Management Agreements, the Company is obligated to pay a $15,000 monthly management fee. As of September 30, 1996, the accrued and unpaid management fees are $165,000. Upon consummation of this Offering, the Management Agreements will be terminated and the accrued management fees will be paid to Messrs. Stansley and Leadbetter and CD Entertainment Ltd. The Company also has agreed to pay Premier Development Co., an affiliate of Mr. Jacobs, a fee of $250,000 upon consummation of this Offering for real estate development and construction consulting services. Convertible Subordinated Note Concurrently with the consummation of this Offering, CD Entertainment Ltd., an affiliate of Mr. Jacobs, will acquire the Convertible Subordinated Note for $3,000,000. See "Description of Certain Indebtedness -- Convertible Subordinated Note." Credit Enhancement for Bank Credit Facility Concurrently with the consummation of this Offering, the Company will enter into the Bank Credit Facility, which will provide up to $18.5 million of financing for construction of the Track, to acquire, construct, equip and open additional planned SWFs and for general corporate purposes. Mr. Jacobs has agreed to provide credit enhancement if required by the bank or banks providing the Bank Credit Facility. In return for such credit enhancement, if required, Mr. Jacobs may elect either to receive (i) an annual fee equal to 2% of such amount of the Bank Credit Facility as he has guaranteed during the preceding year (based on the average maximum amount guaranteed) or (ii) warrants to purchase up to 300,000 shares of Class B Common Stock (based on the amount of credit enhancement provided) at a price per share of 105% of the initial public offering price of the shares of Class A Common Stock offered hereby. Arnold W. Stansley Consulting Agreement Upon the consummation of this Offering, the Company will enter into a five-year consulting agreement with Arnold W. Stansley. Mr. Stansley will advise and assist the Company in the operation of the Track and the SWFs as the Company requests. For his services, the Company will pay Mr. Stansley $75,000 annually, payable quarterly. 35 Underhill Investment Financial Advisory Fee Pursuant to an agreement with Colonial LP, Underhill Investment Corporation, which is an affiliate of Mr. Peskoff (who will be a director of the Company following consummation of this Offering), has provided financial advisory services to the Company and its founders since in 1995. As compensation for such services, Underhill Investment Corporation received a $50,000 fee for services rendered in 1995. Underhill Investment Corporation also received 15,000 shares of Class A Common Stock from Messrs. Stansley and Leadbetter for such services. Registration Rights Agreement In connection with the Reorganization, the Company will enter into a registration rights agreement on behalf of all holders of Class A Common Stock issued in the Reorganization and Class A Common Stock that may be issued in exchange for shares of Class B Common Stock issued in the Reorganization or issuable upon conversion of the Convertible Subordinated Note and any shares issued to Mr. Jacobs in return for providing credit enhancement in connection with the Bank Credit Facility. 36 PRINCIPAL SHAREHOLDERS The following table provides information concerning beneficial ownership of Common Stock, as of September 30, 1996 (after giving effect to the Reorganization), and as adjusted to reflect the sale of 3,900,000 shares of Class A Common Stock offered hereby and the issuance of the Convertible Subordinated Note, by (1) each person or entity known by the Company to beneficially own more than 5% of the outstanding Common Stock, (2) each director of the Company following this Offering, (3) the Chief Executive Officer, and (4) all directors and executive officers of the Company as a group following this Offering. The information as to beneficial ownership has been furnished by the respective shareholders, directors and executive officers of the Company, and, unless otherwise indicated, each of the shareholders has sole voting and investment power with respect to the shares beneficially owned. Unless otherwise specified, the address of all shareholders is the address of the Company set forth herein.
Voting Power as Percent of Common Percent of Common Name of Beneficial Stock Outstanding Stock Outstanding Owner Shares Owned After Offering After Offering(4) ----- ------------ -------------- ----------------- Class A Class B ------- ------- CD Entertainment Ltd. (1) -- 1,817,460(2) 25.2% 52.0% Jeffrey P. Jacobs (3) -- 1,817,460(2) 25.2 52.0 Arnold W. Stansley....... 496,250 510,000 14.6 19.2 James M. Leadbetter...... 211,250 225,000 6.3 8.4 Stephen Peskoff.......... 15,000 -- 0.2 0.1 David Grunenwald......... -- -- -- -- Robert H. Hughes......... -- -- -- -- Patrick McKinley......... -- -- -- -- All executive officers and directors as a group (10 persons)............... 722,500 2,552,460 45.4% 77.1%
- ------------- (1) CD Entertainment Ltd. is beneficially owned by Jeffrey P. Jacobs, and Gary L. Bryenton and Jeffrey P. Jacobs as Trustees under the Opportunities Trust Agreement dated February 1, 1996. (2) Includes 317,460 shares of Class B Common Stock issuable upon conversion of the Convertible Subordinated Note (assuming a $9 per share initial public offering price for the Class A Common Stock). Excludes 300,000 shares of Class B Common Stock which may be issued to Mr. Jacobs in return for providing credit enhancement in connection with the Bank Credit Facility. (3) Represents the shares owned by CD Entertainment Ltd. (4) Except for votes on Special Voting Matters, in which case the voting power of the Company's officers and directors will be equal to their respective percentage ownership of Common Stock outstanding after this Offering, as set forth above. 37 DESCRIPTION OF CAPITAL STOCK The following summary description of the capital stock of the Company does not purport to be complete and is subject to the provisions of the Company's Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, which are included as exhibits to the Registration Statement of which this Prospectus forms a part and by the provisions of applicable law. Authorized and Outstanding Capital Stock Pursuant to the Company's Amended and Restated Articles of Incorporation, which will become effective upon the consummation of the Reorganization, the Company has authority to issue 17,000,000 shares of capital stock, consisting of 12,000,000 shares of Class A Common Stock, par value $.01 per share, 3,000,000 shares of Class B Common Stock par value $.01 per share, and 2,000,000 shares of Preferred Stock. As of the date hereof, the Company has two outstanding shares of Common Stock, one each held by CD Entertainment Ltd. and Arnold W. Stansley, and no outstanding shares of Preferred Stock. Immediately following the Reorganization, the Company will have outstanding 750,000 shares of Class A Common Stock, 2,250,000 shares of Class B Common Stock and no outstanding shares of Preferred Stock. Immediately following this Offering, the Company will have outstanding 4,650,000 shares of Class A Common Stock and 2,250,000 shares of Class B Common Stock. All the shares of Common Stock outstanding on the date of this Prospectus are validly issued, fully paid and non-assessable, and the shares offered hereby, when sold, will be validly issued, fully paid, and non-assessable. The Company will reserve 317,460 shares of Class B Common Stock (subject to adjustment) for issuance upon conversion of the Convertible Subordinated Note (assuming a $9 per share initial public offering price for the Class A Common Stock). Class A Common Stock Voting Rights. Each holder of the Class A Common Stock shall be entitled to attend all special and annual meetings of the stockholders of the Company and, together with the holders of shares of Class B Common Stock and the holders of all other classes of stock entitled to attend and vote at such meetings, to vote upon any matter or thing (including, without limitation, the election of one or more directors) properly considered and acted upon by the stockholders. Holders of the Class A Common Stock will be entitled to one vote per share. The holders of Class A Common Stock will have certain class voting rights as set forth in the Amended and Restated Articles of Incorporation and as required under Virginia law. Liquidation Rights. In the event of any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of the Class A Common Stock, the holders of the Class B Common Stock and holders of any class or series of stock entitled to participate therewith, shall become entitled to participate in the distribution of any assets of the Company remaining after the Company shall have paid, or provided for payment of, all debts and liabilities of the Company and after the Company shall have paid, or set aside for payment to the holders of any class of stock having preference over the Common Stock in the event of dissolution, liquidation or winding up the full preferential amounts (if any) to which they are entitled. Dividends. Dividends may be paid on the Class A Common Stock, the Class B Common Stock and on any class or series of stock entitled to participate therewith when and as declared by the Board. The Class A Common Stock and Class B Common Stock will be entitled to participate equally in any dividend declared by the Board in respect of the Common Stock. Class B Common Stock Voting Rights. Each holder of the Class B Common Stock shall be entitled to attend all special and annual meetings of stockholders of the Company and, together with the holders of shares of Class A Common Stock and the holders of all other classes of stock entitled to attend and vote at such meetings to vote upon any matter or thing (including without limitation, the election of one or more directors) properly considered and acted upon by the stockholders. Holders of the Class B Common Stock are entitled to five votes per share generally, other than votes on any Special Voting Matters, and any amendments to the Amended and Restated Articles of Incorporation or Amended 38 and Restated Bylaws to alter or adversely effect the voting rights of the Class B Common Stock. The holders of Class B Common Stock will have certain class voting rights as set forth in the Amended and Restated Articles of Incorporation and as required under Virginia law. Liquidation Rights. In the event of any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of the Class B Common Stock, the holders of the Class A Common Stock, and the holders of any class or series of stock entitled to participate therewith shall become entitled to participate in the distribution of any assets of the Company remaining after the Company shall have paid, or provided for payment of, all debts and liabilities of the Company and after the Company shall have paid, or set aside for payment, to the holders of any class of stock having preference over the Common Stock in the event of dissolution, liquidation or winding up the full preferential amounts (if any) to which they are entitled. Dividends. Dividends may be paid on the Class B Common Stock the Class A Common Stock and any class or series of stock entitled to participate therewith when and as declared by the Board. The Class A Common Stock and Class B Common Stock will be entitled to participate equally in any dividend declared by the Board in respect of the Common Stock. Conversion into Class A Common Stock. The shares of Class B Common Stock may be converted at any time at the option of the holder into fully paid and nonassessable shares of Class A Common Stock at the rate of one share of Class A Common Stock for each share of Class B Common Stock (as adjusted for any stock split or combination). Restrictions on Transfer. The Class B Common Stock shall not be transferable to any person or entity other than any of CD Entertainment Ltd., Jeffrey P. Jacobs, or members of Mr. Jacob's immediate family. Preferred Stock The Board of Directors is authorized to have the Company issue one or more series of shares of Preferred Stock, and to provide for the designation, preferences, limitations and relative rights thereof. The Board of Directors can fix and determine, among other things: (i) whether the shares of such class or series shall have voting rights, in addition to any voting rights provided by law, and if so, the terms of such voting rights; (ii) the rate or rates (which may be fixed or variable) at which dividends, if any, are payable on such series; (iii) whether the shares of such series shall be subject to redemption or repurchase by the Company; (iv) the amount or amounts payable upon shares of such series upon, and rights of the holders of such series in, the voluntary or involuntary liquidation, dissolution or winding up, or any distribution of the assets of the Company, whether the shares of such series shall be subject to the operation of a retirement or sinking fund, and if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the repurchase or redemption of the shares of such series for retirement or other corporate purposes and the terms and provisions relative to the operation thereof; and (v) whether the shares of such series shall be convertible into, or exchangeable for, shares of stock or any other securities (including Common Stock) and, if so, the price or prices or the rate or rates of conversion or exchange. Certain Charter and Statutory Provisions The Amended and Restated Bylaws of the Company provide for the Board of Directors to be divided into three classes of directors, with each class to consist as nearly as possible of an equal number of the directors. The terms of office of one class of directors (2 directors) will expire at the 1998 annual meeting of shareholders; the term of the next class of directors (2 directors) will expire at the 1999 annual meetings of shareholders; and the term of the third class of directors (3 directors) will expire at the 2000 annual meeting of shareholders. At each annual meeting of shareholders, the class of directors to be elected at such meeting will be elected for a three-year term, and the directors in the other two classes will continue in office. Because holders of Common Stock have no right to cumulative voting for the election of directors, at each annual meeting of shareholders, the holders of the shares of Common Stock with a majority of the voting power of the Common Stock will be able to elect all of the successors of the class of directors whose term expires at that meeting. The over-all effect of the provision of the Bylaws with respect to a classified Board of Directors may be to render more difficult a change in control of the Company or the removal of incumbent management. Because under the Amended and Restated Articles of Incorporation the Board of Directors has the power to establish the preferences and rights of additional series of capital stock without further shareholder vote, the Board of Directors may afford the holders of any series of senior capital stock preferences, powers and rights, voting or otherwise, senior to the rights of holders of Common Stock. The issuance of any such senior capital stock could have the effect of delaying or preventing a change in control of the Company. The Board of Directors, however, currently 39 does not contemplate the issuance of any series of capital stock other than the Class A Common Stock and the Class B Common Stock. The Virginia Racing Act requires that any person proposing to acquire beneficial ownership of 5% or more of the Company's shares acquire the approval of the Virginia Racing Commission. The shares of any 5% or greater shareholder may be redeemed at fair market value by the Company pursuant to the Company's Amended and Restated Articles of Incorporation upon a vote of the majority of its shareholders if the Virginia Racing Commission determines that such shareholder (i) is or has been guilty of any illegal, corrupt or fraudulent act, conduct or practice in connection with horse racing in Virginia or any other state, (ii) knowingly failed to comply with the Virginia Racing Act or the Virginia Racing Commission's regulations, or (iii) has had a license or permit to hold or conduct a race meet suspended, denied for cause or revoked. Each of CD Entertainment Ltd., Stansley Racing and Stansley Management Corp. and the controlling persons thereof, including Mr. Jacobs, Arnold Stansley and Mr. Leadbetter, have been approved as beneficial owners of 5% or more of the Company's voting stock by the Virginia Racing Commission. The Virginia Affiliated Transactions statute imposes restrictions on certain transactions between a public Virginia corporation and a 10% beneficial shareholder of the corporation (the "Interested Shareholder"). Under this statute, significant transactions (such as a merger, a transfer to the Interested Shareholder of corporate assets worth more than 5% of net worth, or a reclassification of securities having the effect of increasing by 5% or more the corporation's outstanding voting shares held by any Interested Shareholder) between the corporation and an Interested Shareholder must receive the approval of both a majority of disinterested directors and the holders of two-thirds of the corporation's voting shares (not including the Interested Shareholder's shares). After an Interested Shareholder has held the stock for three years, the transaction may proceed upon the approval of either the disinterested directors or the holders of two-thirds of the voting shares. The corporation may avoid application of the statute if a majority of the disinterested directors approves the initial 10% stock acquisition by the Interested Shareholder. In addition, this statute does not apply to an Interested Shareholder who has been such continuously since the date the corporation first became a public corporation. Pursuant to the Virginia Control Share Acquisition statute, any person acquiring 20% or more of the outstanding shares of the Company may not be able to vote such shares and such shares may be redeemed by the Company at their cost of acquisition unless such acquisition is approved by a majority of the Company's shareholders and the Board of Directors. Pursuant to Section 13.1-648 of the Virginia Stock Corporation Act, the Board of Directors has the ability to create or issue rights, options or warrants for the purchase of shares of the Company upon such terms and conditions and for such consideration, if any, as the Board may approve. The terms and conditions of such rights, options or warrants may include restrictions or conditions that preclude or limit the exercise, transfer or receipt of such rights, options or warrants by designated persons or classes of persons (such as 10% or more shareholders) that invalidate or void such rights, options or warrants held by them. Transfer Agent and Registrar The transfer agent and registrar for the Class A Common Stock will be - -------------------------. 40 DESCRIPTION OF CERTAIN INDEBTEDNESS Set forth below is a summary of certain indebtedness to which the Company will be subject following completion of this Offering. This summary does not purport to be complete and is qualified in its entirety by reference to the applicable agreements filed as exhibits to the Registration Statement of which this Prospectus is a part. Convertible Subordinated Note Concurrently with the consummation of this Offering, CD Entertainment Ltd. will purchase the Convertible Subordinated Note at a purchase price equal to its $3 million principal amount. The Convertible Subordinated Note will be unsecured, bear interest, payable quarterly, at a floating rate equal to the cost of funds of CD Entertainment Ltd. from time to time. Currently, such cost of funds is LIBOR plus 2% per annum (currently ____%). The principal of the Convertible Subordinated Note will be payable in a single balloon payment at maturity, which will be three years after issuance. The Company will have the right to redeem the Convertible Subordinated Note at any time upon specified notice to the holder, at a price equal to the principal amount thereof plus interest accrued to the date of redemption. The holder will have the option to convert the Convertible Subordinated Note in whole or in part into Class B Common Stock, at a conversion price equal to 105% of the initial public offering price of the Class A Common Stock in this Offering (subject to adjustment in certain events), at any time or from time to time prior to maturity or any earlier date specified for redemption by the Company. The Convertible Subordinated Note will be subordinated in right of payment to Senior Indebtedness (as defined therein), including indebtedness under the Bank Credit Facility. Bank Credit Facility Concurrently with the consummation of this Offering, the Company will enter into the Bank Credit Facility, pursuant to which one or more banks or other institutional lenders will provide up to $18.5 million of secured financing to the Company, to be used to construct the Track, acquire, construct, equip and open additional planned SWFs and for general corporate purposes. The Company has not yet entered into negotiations relating to such financing. Mr. Jacobs has agreed to provide credit enhancement for such financing if the lenders require such enhancement as a condition for providing terms that the Company believes are the most favorable to the Company. See "Certain Transactions -- Credit Enhancement of Bank Credit Facility." SHARES ELIGIBLE FOR FUTURE SALE Prior to this Offering, there has not been any public market for securities of the Company. No prediction can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. An increase in the number of shares of Class A Common Stock that may become available for sale in the public market after the expiration of the restrictions described below could adversely affect the market price prevailing from time to time of the Class A Common Stock in the public market and could impair the Company's ability to raise additional capital through the sale of its equity securities in the future. Upon consummation of this Offering, the Company will have issued and outstanding 4,650,000 shares of Class A Common Stock (5,235,000 shares if the Underwriters' over-allotment is exercised in full) and 2,250,000 shares of Class B Common Stock. The 3,900,000 shares of Class A Common Stock sold in this Offering are freely transferable by persons other than "affiliates" of the Company without restriction or further registration under the Securities Act. The 750,000 shares of Class A Common Stock and the 2,250,000 shares of Class B Common Stock currently outstanding (the "Restricted Shares") are "restricted securities" within the meaning of Rule 144 under the Securities Act and may only be sold if they are registered under the Securities Act or unless an exemption from registration is available, including an exemption afforded by Rule 144 of the Securities Act. Under Rule 144, a person who holds Restricted Shares that were acquired from the Company or an affiliate of the Company at least two years prior to any proposed resale of such securities is entitled to sell, within any three-month period, that number of shares that does not exceed the greater of (i) 1.0% of the then outstanding shares of Common Stock or (ii) the average weekly trading volume in the over-the-counter market of the then outstanding shares of Common Stock during the four calendar weeks preceding each such sale. However, a person who is not 41 an affiliate of the Company and who has held Restricted Shares acquired from the Company or an affiliate of the Company for at least three years prior to any proposed resale is entitled to sell such shares under Rule 144 without regard to the volume limitations described above. Under Rule 144, the Company's existing shareholders will be deemed to have acquired the shares of Common Stock currently held by them upon their acquisition of shares in the Company. Accordingly, no existing shareholder will be able to commence any public sale of any of its currently-held shares of Common Stock until one year or thereafter, absent registration of such shares of Common Stock to be sold. The Company has granted certain registration rights to the holders of the Common Stock issued in the Reorganization and issuable upon conversion of the Convertible Subordinated Note. See "Certain Transactions -- Registration Rights." In connection with this Offering, the Company has agreed not to issue any shares of Common Stock, and the Company's current directors, officers and existing shareholders have agreed not to, directly or indirectly, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock, until the later of (i) 180 days after the consummation of this Offering or (ii) such time as the Company is operating four SWFs, not including any SWF operations at the Track, without the prior written consent of Friedman, Billings, Ramsey & Co., Inc. See "Underwriting." 42 UNDERWRITING The Underwriters named below, represented by Friedman, Billings, Ramsey & Co., Inc. (the "Representative"), have severally agreed to purchase, subject to the terms and conditions of a purchase agreement (the "Purchase Agreement"), and the Company has agreed to sell, the number of shares of Class A Common Stock set forth opposite the name and each Underwriter. Number of Underwriters Shares ------------ ------ Friedman, Billings, Ramsey & Co., Inc.......................... --------- Total................................................. 3,900,000 ========= The Purchase Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will be obligated to purchase all of the shares of Class A Common Stock if any shares are purchased. The Representative has advised the Company that the Underwriters propose initially to offer the shares of Class A Common Stock to the public on the terms set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $_____ per share. After the shares of Class A Common Stock have been released for sale to the public, the offering price and concession may be changed. The Class A Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject orders in whole or in part. The Representative has informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. The Company has granted the Underwriters an option, exercisable not later than 30 days from the date of this Prospectus, to purchase up to an aggregate of 585,000 additional shares of Class A Common Stock at the public offering price less underwriting discounts and commissions shown on the cover of this Prospectus. The Underwriters may exercise such options solely to cover over-allotments. To the extent that such options are exercised, each Underwriter will be committed, subject to certain conditions, to purchase a number of additional shares of Class A Common Stock proportionate to such Underwriter's initial commitment as indicated in the preceding table. Prior to the Offering, there has been no public market for the Class A Common Stock. The offering price has been determined by negotiation between the Company and the Representative. In determining such price, consideration was given to, among other things, the financial and operating history and trends of the Company, the experience of its management, the position of the Company in its industry, the Company's prospects and the Company's financial results. In addition, consideration has been given to the status of the securities markets, market conditions for new offerings of securities and the prices of similar securities of comparable companies. In connection with this Offering, the Company, and the Company's executive officers, directors and existing shareholders have agreed not to, directly or indirectly, offer for sale, sell or otherwise dispose of any shares of Common Stock (other than shares purchased in the Offering or otherwise in the open market, if any), until the later of (i) 180 days after the consummation of this Offering or (ii) such time as the Company is operating four SWFs, not including any SWF operations at the Track, without the prior written consent of the Representative. See "Shares Eligible for Future Sale." The Company has agreed to indemnify the Underwriters against certain civil liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect 43 thereof. The Company will reimburse the Underwriters for their reasonable out-of-pocket expenses (including legal fees and expenses) incurred in connection with this Offering. The Company has also granted the Representative the exclusive right to act as the Company's financial advisor, placement agent and underwriter in connection with any debt financings, equity financings or sale transactions by the Company during the period ending 24 months after the closing date of this Offering. LEGAL MATTERS The validity of the Class A Common Stock offered hereby has been passed upon for the Company by Hogan & Hartson L.L.P., Washington, D.C. Certain legal matters are being passed upon for the Underwriters by Dickstein Shapiro Morin & Oshinsky LLP, Washington, D.C. EXPERTS The financial statements included in this Prospectus and in the Registration Statement have been audited by BDO Seidman, LLP, independent certified public accountants, to the extent and for the periods set forth in their report appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") under the Securities Act, a Registration Statement on Form S-1 (of which this Prospectus is a part) with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and in the exhibits and schedules thereto. For further information with respect to the Company, reference is made to the Registration Statement and to the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document filed as an exhibit to the Registration Statement are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement, including all exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Seven World Trade Center, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission, at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission and the address of such web site is http://www.sec.gov. As a result of this Offering, the Company will be subject to the informational requirements of the Exchange Act. In accordance therewith, the Company will file certain reports and other information with the Commission. The Company intends to furnish its shareholders with annual reports containing financial statements audited by the Company's independent accountants and unaudited quarterly consolidated financial statements and other reports. 44 COLONIAL DOWNS HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Certified Public Accountants F-2 Consolidated Financial Statements Balance Sheets as of December 31, 1995 and 1994, and September 30, 1996 (Unaudited) F-3 Statements of Operations for the Periods Ended December 31, 1995, 1994 and 1993 and for the Nine Months Ended September 30, 1996 and 1995 (Unaudited) F-4 Statements of Stockholders' Equity (Capital Deficit) for the Periods Ended December 31, 1995, 1994 and 1993 and for the Nine Months Ended September 30, 1996 (Unaudited) F-5 Statements of Cash Flows for the Periods Ended December 31, 1995, 1994 and 1993 and for the Nine Months Ended September 30, 1996 and 1995 (Unaudited) F-6 Notes to Consolidated Financial Statements F-8 F-1 Report of Independent Certified Public Accountants (the following is the form of the report that BDO Seidman, LLP will be in a position to issue upon completion of the reorganization described in Note 1) Colonial Downs Holdings,Inc. Providence Forge, Virginia We have audited the accompanying consolidated balance sheets of Colonial Downs Holdings, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity (capital deficit), and cash flows for the years ended December 31, 1995 and 1994, and for the period since inception (September 30, 1993) to December 31, 1993. 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, 1995 and 1994, and the results of their operations and their cash flows for the years ended December 31, 1995 and 1994, and for the period since inception (September 30, 1993) to December 31, 1993 in conformity with generally accepted accounting principles. BDO Seidman, LLP Richmond, Virginia November 21, 1996 F-2
September 30, December 31, December 31, 1996 1995 1994 ---------- ---------- ---------- (Unaudited) Assets Current Cash $ 312,996 $ 330,066 $ 2,423 Horsemen's deposits (Note 9) 364,935 -- -- Accounts receivable 10,335 -- -- Prepaid expenses 1,250 -- -- ---------- ---------- ---------- Total current assets 689,516 330,066 2,423 ---------- ---------- ---------- Property and equipment (Notes 1, 6 and 7) Land 800,000 -- -- Building 650,000 -- -- Leasehold improvements 1,174,519 737,864 -- Equipment, furnishings and fixtures 546,111 253,222 -- Vehicles 19,585 19,585 -- Construction in progress (Note 8) 1,165,768 858,029 302,197 ---------- ---------- ---------- 4,355,983 1,868,700 302,197 Less accumulated depreciation and amortization 83,464 3,060 -- ---------- ---------- ---------- Net property and equipment 4,272,519 1,865,640 302,197 ---------- ---------- ---------- Other Financing costs 198,698 131,244 31,244 Organization and licensing costs (Note 1) 813,932 775,092 291,443 Miscellaneous 41,352 40,000 40,000 Horsemen's deposits (Note 9) 190,168 -- -- ---------- ---------- ---------- 1,244,150 946,336 362,687 Less accumulated amortization 101,743 -- -- ---------- ---------- ---------- Total other 1,142,407 946,336 362,687 ---------- ---------- ---------- $6,104,442 $3,142,042 $ 667,307 ========== ========== ==========
Colonial Downs Holdings, Inc. and Subsidiaries Consolidated Balance Sheets
September 30, December 31, December 31, 1996 1995 1994 ----------- ----------- ----------- (Unaudited) Liabilities and Stockholders' Equity (Capital Deficit) Current liabilities Accounts payable $ 728,633 $ 1,242,855 $ -- Management fee payable (Note 7) 165,000 30,000 -- Accrued expenses 83,900 14,761 -- Uncashed pari-mutuel tickets 112,123 -- -- Current maturities of long-term debt and capital lease obligations (Note 6) 10,289 4,403 -- Notes payable - stockholders (Note 9) 250,000 400,000 -- Advances from stockholders (Note 6) -- 227,234 671,649 Purses due horsemen (Note 9) 911,831 -- -- ----------- ----------- ----------- Total current liabilities 2,261,776 1,919,253 671,649 ----------- ----------- ----------- Long-term liabilities Long-term debt and capital lease obligations, net of current maturities (Note 6) 9,552 11,086 -- Notes payable - stockholders (Note 6) 2,186,532 1,536,532 -- Purses due horsemen (Note 9) 379,802 -- -- ----------- ----------- ----------- Total long-term liabilities 2,575,886 1,547,618 -- ----------- ----------- ----------- Total liabilities 4,837,662 3,466,871 671,649 ----------- ----------- ----------- Commitments and contingencies (Notes 2, 3, 4, 5, 7, 8 and 9) Stockholders' equity (capital deficit) Preferred stock, $.01 par value, 2,000,000 shares authorized; none issued -- -- -- Common stock Class A, $.01 par value, 12,000,000 shares authorized; 750,000 shares outstanding 7,500 7,500 7,500 Class B, $.01 par value, 3,000,000 shares authorized; 2,250,000 shares outstanding 22,500 22,500 22,500 Additional paid-in capital 2,001,100 1,100 1,100 Retained earnings (deficit) (764,320) (355,929) (35,442) ----------- ----------- ----------- Total stockholders' equity (capital deficit) 1,266,780 (324,829) (4,342) ----------- ----------- ----------- $ 6,104,442 $ 3,142,042 $ 667,307 =========== =========== ===========
See accompanying summary of accounting policies and notes to consolidated financial statements. F-3 Colonial Downs Holdings, Inc. and Subsidiaries Consolidated Statements of Operations
Nine Months Nine Months From Inception Ended Ended Year Ended Year Ended (September 30, 1993) September 30, September 30, December 31, December 31, to December 31, 1996 1995 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) Revenues Pari-mutuel commissions - import simulcasting $ 5,230,899 $ -- $ -- $ -- $ -- Admissions 148,972 -- -- -- -- Programs 240,046 -- -- -- -- Miscellaneous (Note 7) 84,201 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total revenues 5,704,118 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Operating expenses Purses and awards 1,291,632 -- -- -- -- Totalisator expenses 774,159 -- -- -- -- Breeder's fund fees 247,564 -- -- -- -- Pari-mutuel taxes 650,011 -- -- -- -- Simulcast expenses 92,880 -- -- -- -- Direct salaries, payroll taxes and employee benefits 770,789 67,371 110,040 -- -- Management fees (Note 7) 135,000 -- 30,000 -- -- Consulting fees (Note 2) 577,218 -- -- -- -- Depreciation and amortization 182,147 2,490 3,060 -- -- Attorney and professional fees 364,037 -- -- -- -- Other operating expenses 938,653 88,937 175,135 18,648 16,794 ----------- ----------- ----------- ----------- ----------- Total operating expenses 6,024,090 158,798 318,235 18,648 16,794 ----------- ----------- ----------- ----------- ----------- Loss from operations (319,972) (158,798) (318,235) (18,648) (16,794) Interest expense, net (88,419) (1,655) (2,252) -- -- ----------- ----------- ----------- ----------- ----------- Net loss $ (408,391) $ (160,453) $ (320,487) $ (18,648) $ (16,794) =========== =========== =========== =========== =========== Earnings per share data: Earnings per share $ (0.14) $ (0.05) $ (0.11) $ (0.01) $ (0.01) Weighted average number of shares outstanding 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000
See accompanying summary of accounting policies and notes to consolidated financial statements. F-4 Colonial Downs Holdings, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (Capital Deficit)
Common Stock ----------------------------------------------------- Class A Class B Additional Retained ------------------------- ------------------------- Paid-in Earnings Partners' Shares Amount Shares Amount Capital (Deficit) Capital Total ----------- ----------- ----------- ----------- ----------- ----------- ----------- -------- Partners' contributions -- $ -- -- $ -- $ -- $ -- $ 1,100 $ 1,100 Elimination of partners' capital due to reorganization -- -- -- -- 1,100 -- (1,100) -- Issuance of the reorganized common stock 750,000 7,500 2,250,000 22,500 -- -- -- 30,000 Net loss for the period ended December 31, 1993 -- -- -- -- -- (16,794) -- (16,794) ----------- ----------- ----------- ----------- ----------- ----------- ----------- -------- Balance, December 31, 1993 750,000 7,500 2,250,000 22,500 1,100 (16,794) -- 14,306 Net loss for the year ended December 31, 1994 -- -- -- -- -- (18,648) -- (18,648) ----------- ----------- ----------- ----------- ----------- ----------- ----------- -------- Balance, December 31, 1994 750,000 7,500 2,250,000 22,500 1,100 (35,442) -- (4,342) Net loss for the year ended December 31, 1995 -- -- -- -- -- (320,487) -- (320,487) ----------- ----------- ----------- ----------- ----------- ----------- ----------- -------- Balance, December 31, 1995 750,000 7,500 2,250,000 22,500 1,100 (355,929) -- (324,829) Net loss for the nine months ended September 30, 1996 (unaudited) -- -- -- -- -- (408,391) -- (408,391) Conversion of shareholder debt to equity (Note 6) (unaudited) -- -- -- -- 2,000,000 -- -- 2,000,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -------- Balance, September 30, 1996 (unaudited) 750,000 $ 7,500 2,250,000 $ 22,500 $ 2,001,100 $(764,320) $ -- $1,266,780 ----------- ----------- ----------- ----------- ----------- ----------- ----------- --------
See accompanying summary of accounting policies and notes to consolidated financial statements. F-5 Colonial Downs Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Ended Ended Year Ended Year Ended (September 30, 1993) September 30, September 30, December 31, December 31, to December 31, 1996 1995 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) Operating activities Net loss $ (408,391) $(160,453) $ (320,487) $ (18,648) $ (16,794) Adjustments to net loss Depreciation 80,404 2,490 3,060 -- -- Amortization 101,743 -- -- -- -- Increase in purses due horsemen 1,291,633 -- -- -- -- Increase in uncashed tickets 112,123 -- -- -- -- Increase in accounts receivable and other assets (11,585) -- -- -- -- Increase in accounts payable - trade 462,897 -- 112,922 -- -- Increase in accrued expenses and other 158,077 -- 44,132 -- -- Increase in accrued interest payable 46,062 -- 629 -- -- Increase in horsemen's deposits (555,103) -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net cash provided (absorbed) by operating activities 1,277,860 (157,963) (159,744) (18,648) (16,794) ----------- ----------- ----------- ----------- ----------- Investing activities Purchases of property and equipment (2,487,283) (282,272) (436,570) (223,240) (78,957) Investment in other assets (107,646) (61,518) (583,649) (214,388) (118,299) ----------- ----------- ----------- ----------- ----------- Net cash absorbed by investing activities (2,594,929) (343,790) (1,020,219) (437,628) (197,256) ----------- ----------- ----------- ----------- -----------
continued... F-6 Colonial Downs Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued)
Nine Months Nine Months From Inception Ended Ended Year Ended Year Ended (September 30, 1993) September 30, September 30, December 31, December 31, to December 31, 1996 1995 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) Financing activities Net proceeds from borrowings and other, net $ (972,767) $ 16,508 $ 15,489 $ -- $ -- Net increase in stockholders' advances and notes payable 2,272,766 485,254 1,492,117 458,699 212,950 Capital contributions -- -- -- -- 1,100 ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities 1,299,999 501,762 1,507,606 458,699 214,050 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (17,070) 9 327,643 2,423 -- Cash and cash equivalents, beginning of period 330,066 2,423 2,423 -- -- ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents, end of period $ 312,996 $ 2,432 $ 330,066 $ 2,423 $ -- ----------- ----------- ----------- ----------- -----------
Supplemental Disclosures of Cash Flow Information Cash paid for interest during the nine months ended September 30, 1996 and 1995, and year ended December 31, 1995 was approximately $76,000, $0 and $2,400, respectively. During the nine months ended September 30, 1996, a stockholder of the Company converted $2,000,000 of debt to equity. At December 31, 1995, $1,129,933 was due vendors for property and equipment purchases. See accompanying summary of accounting policies and notes to consolidated financial statements. F-7 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) 1. Significant Principles of Consolidation Accounting Policies The consolidated financial statements include the following entities of Colonial Downs Holdings, Inc. (collectively, the "Company"), which prior to the planned 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 September 30, 1993. All significant intercompany accounts and transactions have been eliminated. Reorganization The Company intends to obtain funds to develop, construct, and operate a pari-mutuel horse racing facility and six satellite wagering facilities through a public offering of $35.1 million in common stock, and securing $18.5 million in bank debt and a $3 million Convertible Subordinated note. On November 25, 1996, the Company entered into a letter of intent with an investment banking firm to sell approximately 3,900,000 shares of its common stock in an underwritten initial public offering ("IPO"). The IPO is expected to close during the first quarter of 1997. In order to facilitate the IPO, CD Holdings intends to enter into an Agreement and Plan of Reorganization (the "Plan") with the shareholders and partners of SRC and the Partnership. Pursuant to the Plan, and concurrent with the consummation of the IPO, CD Holdings will acquire, 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, pursuant to the Plan, SRC will acquire a 1% general partner interest in the Partnership. F-8 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) 1. Significant Reorganization (continued) Accounting Policies As a result of the reorganization, the Company will own, (continued) directly, or through its wholly-owned subsidiaries, the ownership and operating licenses for the racetrack and the Chesapeake and Richmond Satellite Wagering Facilities ("SWF's"); the property for the Richmond SWF; the rights to apply for licenses to own and operate up to four additional SWFs in Virginia; upon conveyance, the 345 acres on which the racetrack is being constructed; and the racetrack facilities and certain related infrastructure. Description of Business The Company's wholly-owned subsidiary, Colonial Downs, L.P., a Virginia limited partnership, was organized on September 30, 1993. The Partnership, along with its affiliate, Stansley Racing Corp., was formed to apply to the Virginia Racing Commission for licenses to acquire, own and operate a pari-mutuel horse racing facility in New Kent County, Virginia, in accordance with the regulations stipulated by the Virginia Racing Commission (the "Commission"). On October 12, 1994, the Commission awarded the ownership and operating licenses for the facility to the Partnership and SRC. In addition to the construction and operation of the pari-mutuel horse racing facility, the Partnership and SRC are the only entities authorized to be awarded by the Commission the licenses to own and operate up to six SWFs, which offer off-track pari-mutuel wagering on simulcast races from tracks around the country. The Company is seeking to secure the funds necessary to construct the facilities and begin operation of the racetrack. Upon obtaining the necessary funds, the Company intends to construct the Colonial Downs racing facility on approximately 345 acres between Interstate Highway 64 and State Route 155 in New Kent County. The facility has been designed to accommodate thoroughbred and standardbred racing as well as simulcast wagering. The Company currently operates two SWFs. The first SWF began operations in Chesapeake, Virginia during February 1996. The second facility opened in Richmond, Virginia in December 1996. The Company has applied for licenses to own and operate a third SWF in Hampton, Virginia, and plans to apply for licenses in Brunswick County, Virginia, which the Company expects to open in the second quarter of 1997. The Company plans to work towards obtaining licenses for the remaining two SWFs authorized by the Commission. F-9 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) (continued) 1. Significant Cash and Cash Equivalents Accounting Policies For the purposes of preparing the Company's statement of (continued) cash flows, investments with maturities of less than three months are considered to be cash equivalents. Construction in Progress Construction in progress is recorded at cost and includes capitalized costs such as architect, contractor, and engineering fees at December 31, 1995 and 1994 and September 30, 1996. Property, Equipment and Depreciation 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 are eliminated from the accounts and any gain or loss on disposition is reflected in income. Depreciation is computed using the straight-line method over the following estimated useful lives: Years ------------------------------------------------- Building 30 Leasehold improvements 7 - 39 Vehicles 3 - 7 Machinery and equipment 3 - 7 Office equipment 3 - 7 Organization Costs and Amortization Organization costs consist primarily of legal and professional fees associated with the application for the racetrack license and related licensing fees for the SWF. Also included are legal and professional fees incurred in conjunction with organizing the Company. Organization costs are being amortized over a period of sixty months. F-10 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) (continued) 1. Significant Revenue Recognition Accounting Policies The Company currently primarily derives revenue from (continued) import simulcasting, which is the Company's share of wagering (approximately 20%) at the Company's SWFs on races simulcast from other racetracks. Revenue is recognized under the accrual method. Income Taxes Subsequent to the reorganization, the Company and its subsidiaries will file a consolidated income tax return. Prior to the reorganization, the Partnership and SRC filed income tax returns as separate entities. No provision for income taxes has been made with respect to the Partnership, SRC or CD Holdings due to the Company incurring operating losses since inception. The Company adopted the provisions of Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes" effective January 1, 1993. SFAS 109 requires a company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in a company's financial statements or tax returns. Under this method, 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. 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. Interim Financial Statements The financial statements for the nine months ended September 30, 1996 and 1995 are unaudited but, in the opinion of management, include all adjustments, consisting of only normal recurring accruals, necessary for fair presentation of financial position and results of operations. Results for the interim periods are not necessarily indicative of the results for a full year. F-11 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) (continued) 1. Significant Concentration of Credit Risk Accounting Policies Financial instruments which potentially subject the (continued) Company to credit risk consist of cash equivalents and accounts receivable. The Company's policy is to limit the amount of credit exposure to any one financial institution and place the investments with financial insitituions evaluated as being creditworthy. At December 31, 1995 and September 30, 1996, the Company had cash deposits which exceeded federally insured limits by approximately $230,000 and $213,000, respectively. Fair Value of Financial Instruments The carrying amount of cash and cash equivalents approximates the fair value due to the short maturity of any cash equivalents. 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 and on the current rates offered to the Company for the debt of the same remaining maturities. The carrying amount approximates fair value since the Company's interest rates approximate current interest rates. F-12 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) (continued) 2. Management and The Company entered into a consulting agreement Consulting Agreement with the Maryland - Virginia Racing Circuit, with Maryland - Inc. ("Circuit") an affiliate of the Maryland Virginia Racing Jockey Club ("MJC"). Pursuant to the agreement, Circuit MJC plans to suspend live racing at the Pimlico and Laurel racetracks during the Company's live thoroughbred racing period to manage the thoroughbred racing at the Company's racing facility. The agreement provides that the Company pay Circuit two percent of gross amounts wagered on all racing, exclusive of live harness racing at the Company's racetrack, at all of the Company's locations. In addition, the Company must pay a pro-rata share of all of MJC salaries. Under the agreement, $495,000 of costs were incurred through September 30, 1996. 3. Land Conveyance Delmarva Properties, Inc. and Chesapeake Forest and Land Products Company (collectively "Delmarva") and Development the Company entered into an agreement in which Delmarva, at no cost to the Company, will convey the land required to build the racetrack and facilities in New Kent County upon the Company obtaining the financing required to build the racetrack and facilities. Under the agreement, Delmarva will convey the land to the Company or designee within five days of such a request by the Company. 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. The land will be recorded at fair value upon conveyance and satisfaction that reversion to Delmarva will not occur. The Company has entered into a development agreement with Delmarva in which Delmarva is responsible for the construction of water and sewer lines on the property. Under the agreement, the Company will reimburse Delmarva for 100% of the construction costs, not to exceed $985,000. The water and sewer system will become property of New Kent County upon completion. F-13 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) (continued) 4. Performance As part of obtaining the pari-mutuel license from Guarantee the Virginia Racing Commission, the Company was required to provide the Commission with a $1,000,000 performance agreement. The agreement stipulates that the Company must construct the racetrack and related facilities, as proposed, within 14 months of the unappealable award of the licenses to the Company. The award of the licenses became unappealable on May 17, 1996; therefore, the racetrack facilities must be completed by July 17, 1997. Current legislation requires that live racing commence at the track facilities by July 1, 1997 or the Company will lose all licenses to own and operate SWFs, however, should that occur it is expected that the Commission will reissue the licenses to the Company upon commencement of live racing, but there is no assurance that the Commission would do so. If the Company does not perform under the agreement, the Commission is to be paid $5,000 a day that performance is not complete, up to a maximum of $1,000,000. The July 17, 1997 deadline can be extended by consent of the Commission or if an event specified in the performance agreement outside of the Company's control prevents performance. As part of the agreement, the Commission required the Company to provide it with two letters of credit of $500,000 each. In connection with this requirement, the Company obtained two letters of credit in the sum of $1,000,000, which can be drawn on by the Commission. The letters of credit expire in December 1996 and are renewable for two additional twelve month terms. F-14 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) (continued) 5. Industrial To assist in the development and improvement in Development certain public roads adjacent to the racetrack Agreement 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 will be allocated by the Virginia Department of Transportation to complete a project which will widen State Route 155 from I-64 to the entrance of the racetrack grounds. Under the agreement, the Company will 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 all local or grant funds already expended in full to the locality and the Virginia Department of Housing and Community Development. 6. Notes Payable, Notes payable and advances from stockholders Advances from consist of the following: Stockholders, and Capital Lease Obligations
September 30, December 31, December 31, 1996 1995 1994 ------------------------------------------------------ Advances from Arnold Stansley $ - $ 227,234 $ 186,621 Note payable to Arnold Stansley, maturing March 1998, unsecured 211,788 273,213 - Note payable to Arnold Stansley, maturing January 1997, unsecured 175,000 - - Advances from James Leadbetter - - 485,028
F-15 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) (continued)
September 30, December 31, December 31, 1996 1995 1994 ------------------------------------------------------- 6. Notes Payable, Note payable to Norglass, Advances from Inc., maturing March $ 236,994 $ 263,319 $ - Stockholders, 1998, unsecured and Capital Lease Obligations Note payable to Norglass, (continued) Inc., maturing January 1997 75,000 - - Convertible promissory note to Jacobs Entertainment, Inc. maturing with principal and interest on March 1998 at a rate of 10%; collateralized by machinery, equipment, inventory, and receivables - 1,000,000 - Demand note payable to Jacobs Entertainment, Inc. payable on demand, with interest payable monthly at a rate of 10%; collateralized by machinery, equipment, inventory, and receivables - 400,000 - Note payable to Jacobs Entertainment, Inc. maturing January 1998 bearing interest at LIBOR plus 2%; collateralized by land and building 1,737,750 - -
F-16 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) (continued)
September 30, December 31, December 31, 1996 1995 1994 ------------------------------------------------------- 6. Notes Payable, Installment notes and Advances from capitalized leases stockholders, collateralized by and Capital certain vehicles, Lease Obligations machinery, and equipment, (continued) maturing at various dates, primarily March 1997 through January 1999, at interest rates ranging from 3% to 12% $ 19,841 $ 15,489 $ - ------------------------------------------------------- 2,456,373 2,179,255 671,649 Less current maturities 260,289 631,637 671,649 ------------------------------------------------------------------------------- $ 2,196,084 $ 1,547,618 $ - ------------------------------------------------------------------------------- The aggregate amounts of notes payable at September 30, 1996 matures as follows: Through December 31, Amount ------------------------------------------------------------------------------- 1997 $ 261,976 1998 2,193,897 1999 500 ------------------------------------------------------------------------------- $ 2,456,373 ------------------------------------------------------------------------------- During the period ended September 30, 1996, $2,000,000 of shareholder debt was converted to equity and treated as a capital contribution.
F-17 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) (continued) 7. Related Party The Company has a management agreement to pay certain Transactions shareholders a management fee of $15,000 per month until closing of the IPO. The Company incurred management fees of $30,000 and $135,000 during the periods ended December 31, 1995 and September 30, 1996, respectively. Virginia Concessions, LLC, an affiliate of a shareholder, was granted an option by the Company to manage the food and beverage concessions at the initial six SWF's. Under the agreement, Virginia Concessions, LLC pays rent to the Company based upon gross sales equal to 10% of the first $500,000 of gross sales, 13% of the next $500,000 of gross sales, and 15% of all gross sales above $1,000,000 at each SWF. The Company had approximately $58,000 of rental income generated from the Chesapeake SWF for the nine months ended September 30, 1996. Norglass Inc., an affiliate of one of the Company's principal shareholders, is engaged as the general contractor to construct the racetrack and related facilities in New Kent County, Virginia. The original contract value with Norglass, Inc. for the facilities (which does not include approximately $8.5 million for certain equipment, furniture, fixtures and improvements) is estimated at approximately $26 million. Norglass, Inc. has also been engaged to perform all remodeling or new construction related to the SWFs. Total construction costs incurred with Norglass, Inc. were approximately $2,267,000 through September 30, 1996. F-18 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) (continued) 8. Commitments and Total estimated costs to complete the racetrack as of Contingencies September 30, 1996 were $34.5 million. Pursuant to 1996 Acts of the General Assembly, the Virginia Racing Commission has directed the Company to establish a construction account into which are deposited total net profits derived from the operation of the SWFs. There were no amounts deposited into the construction account at December 31, 1995 and September 30, 1996 since there were no net profits. 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. 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 to the Company at the Chesapeake and Richmond SWFs. As a part of the agreement, the Company agreed to pay the company approximately $245 and $246 per simulcast day at the Chesapeake and Richmond SWFs, respectively, as well as certain additional amounts per television per day. Total expense incurred for totalisator and TVs (excluding host fees) was approximately $106,000 for the nine months ended September 30, 1996. The Company is liable under numerous operating leases for automobiles, equipment and buildings expiring at various dates. In addition, the Company currently rents its temporary main office facilities on a month to month basis for $1,200 a month. Total rental expense under non-cancelable leases was approximately $23,000 and $87,000 for the year ended December 31, 1995 and for the nine months ended September 30, 1996, respectively. F-19 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) (continued) 8. Commitments and The following are the future estimated minimum lease Contingencies commitments relating to non-cancelable operating (continued) agreements and leases. The totalisator and TV categories include amounts for the Chesapeake and Richmond SWFs. The SWF category includes rent and other operating leases for the Chesapeake facility.
Year Ending December 31, Totalisator TVs SWF Other Total ------------ ----------- -------- --------- ------- ---------- 1997 $192,000 $178,200 $ 87,400 $15,900 $ 473,500 1998 192,000 178,200 87,400 -- 457,600 1999 125,000 178,200 87,400 -- 390,600 2000 -- 178,200 42,000 -- 220,200 2001 -- 38,300 -- -- 38,300 ------------ ----------- -------- --------- ------- ---------- $509,000 $751,100 $304,200 $15,900 $1,580,200 ============ =========== ======== ========= ======= ==========
9. Horsemen's The Company entered into an agreement effective February Agreements 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, exclusive of live races at the racetrack. In accordance with the agreement, the Company will maintain a separate joint bank account into which the Company will deposit an amount equal to 5.25% of the SWF thoroughbred handle (the "Thoroughbred Partner Account"). The initial period of the agreement runs through December 31, 1997 with an additional term to follow through December 31, 1998, with similar terms. If the sum of 5.25% of the SWF thoroughbred handle plus the total amount of handle generated by live thoroughbred racing at the racetrack for each period is less than the 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. F-20 Colonial Downs Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the Nine Months Ended September 30, 1996 and 1995 is Unaudited) (continued) 9. Horsemen's The Company entered into another agreement effective Agreements February 17, 1996 with the Virginia Harness Horse (continued) 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, exclusive of live races held at the racetrack. In accordance with the agreement, the Company will maintain a separate joint bank account into which the Company will deposit an amount equal to 5% of the SWF standardbred handle (the "Standardbred Partner Account"). The initial period of the agreement runs through December 31, 1997, with an additional term to follow through December 31, 1998, with similar terms. If the sum of 5% of the SWF standardbred handle plus the total amount of handle generated by live standardbred racing at the Racetrack for the initial period is less than the 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. If the sum of all thoroughbred and standardbred purse contributions is greater than $4.5 million and $2.5 million, respectively, then such excess contributions will be paid back to the Company until $1 million (year 1) and $3 million (year 2) after tax net income is achieved by the Company after which point any remaining amounts will be shared equally between the Company and the VAHBPA and VHHA respectively. 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. F-21 [INSIDE BACK COVER-- INSERT PHOTO OF INTERIOR OF CHESAPEAKE SWF] ================================================================================ No dealer, salesperson or any other person has been authorized to give any information or to make any representations not contained in this Prospectus in connection with the offer contained herein, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriter. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy the shares of Class A Common Stock offered hereby by anyone in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such solicitation or offer. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to the date hereof. ---------------- TABLE OF CONTENTS Page Prospectus Summary.......................... 1 Risk Factors................................ 6 The Company................................. 13 The Reorganization.......................... 13 Use of Proceeds............................. 14 Dividend Policy............................. 14 Capitalization.............................. 15 Dilution.................................... 16 Selected Financial and Operating Data ...... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 19 Business.................................... 22 Management.................................. 30 Certain Transactions........................ 34 Principal Shareholders...................... 37 Description of Capital Stock................ 38 Description of Certain Indebtedness......... 41 Shares Eligible for Future Sale............. 41 Underwriting................................ 43 Legal Matters............................... 44 Experts..................................... 44 Available Information....................... 44 Index to Consolidated Financial Statements F-1 Until _______________, 1997 (25 days after the date of this Prospectus), all dealers effecting in the shares of Class A Common Stock, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ================================================================================ ================================================================================ 3,900,000 Shares [LOGO] COLONIAL DOWNS HOLDINGS, INC. Class A Common Stock ---------- PROSPECTUS ---------- FRIEDMAN, BILLINGS, RAMSEY & CO., INC. , 1997 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Expenses of Issuance and Distribution. The following is an estimate of the expenses to be incurred by the Company in connection with the issuance and distribution of the securities being registered, other than the underwriting discounts and commissions: SEC registration fee.............................. $ 13,591 NASD filing fee................................... * Nasdaq SmallCap Market fee........................ * Blue Sky fees and expenses........................ * Printing.......................................... * Transfer agent's fees and expenses................ * Attorneys' fees and expenses...................... * Accountants' fees and expenses.................... * Miscellaneous..................................... -------- Total ................................ $ * ======== ----------------- *To be filed by amendment. Item 14. Indemnification of Directors and Officers. Article J of the Company's Amended and Restated Articles of Incorporation provides that the Company will, to the fullest extent permitted by the laws of Virginia, indemnify an individual who is or was a director or officer of the Company and who was, is, or is threatened to be made a named defendant or respondent in any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (collectively, a "proceeding"), against any obligation to pay a judgment, settlement, penalty, fine (including any excise tax assessed with respect to any employee benefit plan) or other liability and reasonable expenses (including counsel fees) incurred with respect to such a proceeding, except such liabilities and expenses as are incurred because of such director's or officer's willful misconduct or knowing violation of the criminal law. Article J also provides that unless a determination has been made that indemnification is not permissible, the Company will make advances and reimbursements for expenses reasonably incurred by a director or officer in a proceeding as described above upon receipt of an undertaking from such director or officer to repay the same if it is ultimately determined that such director or officer is not entitled to indemnification. Article J also provides that the determination that indemnification under such Article J is permissible, the authorization of such indemnification (if applicable), and the evaluation as to the reasonableness of expenses in a specific case shall be made as provided by law. Special legal counsel selected to make determinations under such Article J may be counsel for the Company. The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent will not of itself create a presumption that a director or officer acted in such a manner as to make him or her ineligible for indemnification. For the purposes of Article J, every reference to a director or officer includes, without limitation, (i) every individual who is a director or officer of the Company, (ii) an individual who, while a director or officer, is or was serving at the Company's request as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, II-1 partnership, joint venture, trust, employee benefit plan or other enterprise, (iii) an individual who formerly was a director or officer of the Company or who, while a director or officer, occupied at the request of the Company any of the other positions referred to in clause (ii) of this sentence, and (iv) the estate, personal representative, heirs, executors and administrators of a director or officer of the Company or other person referred to herein. Service as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise controlled by the Company shall be deemed service at the request of the Company. A director or officer shall be deemed to be serving an employee benefit plan at the Company's request if such person's duties to the Company also impose duties on, or otherwise involve services by, such person to the plan or to participants in or beneficiaries of the plan. Section 13.1-704(B) of the Virginia Stock Corporation Act provides that a corporation may provide indemnification and make provision for advances and reimbursement of expenses so long as the party who is seeking indemnification, advances or reimbursement did not commit willful misconduct or a knowing violation of criminal law. As provided in Section ___ of the Underwriting Agreement, the Underwriter has agreed, under certain conditions, to indemnify the Company, each of its directors, each of its officers who has signed the Registration Statement and each person who controls the Company within the meaning of the Securities Act of 1933, against certain civil liabilities, including certain civil liabilities under the Act. The Company intends to purchase directors and officers liability insurance in the amount of $___________ million. Item 15. Recent Sales of Unregistered Securities. Since the formation of Colonial Downs Holdings, Inc. in November 1996, the Company has issued and sold the following unregistered securities: The Company will issue an aggregate of 750,000 shares of Class A Common Stock and 2,250,000 shares of Class B Common Stock to CD Entertainment Ltd., the shareholders of Stansley Management Corp. and the shareholders of Stansley Racing in exchange for their interests in those entities. No underwriters were engaged in connection with the foregoing sales and/or issuances of securities. Such sales were made in reliance upon the exemption from the registration provisions of the Securities Act set forth in Rule 701 thereunder permitting unregistered sales to employees and consultants, and/or Section 4(2) thereof as transactions not involving a public offering, the respective purchasers thereof having acquired such shares for their respective accounts without a view to the distribution thereof. II-2 Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits Exhibit Number Description *1.1 Form of Underwriting Agreement *2.1 Agreement and Plan of Reorganization *3.1 Amended and Restated Articles of Incorporation of Colonial Downs Holdings, Inc. *3.2 Amended and Restated By-laws of Colonial Downs Holdings, Inc. *4.1 Stock certificate representing Colonial Downs Holdings, Inc. Common Stock *4.2 Form of Indenture *5.1 Opinion of Hogan & Hartson L.L.P. regarding the validity of the Common Stock being registered *10.1 Management and Consulting Agreement *10.2 Performance Guarantee *10.3 Form of Deed for Track site *10.4 Construction Agreement *10.5 Development Agreement *10.6 Hubbing Agreement *10.7 VHHA SWF Agreement *10.8 VaHBPA SWF Agreement *10.9 Form of Convertible Subordinated Note *10.10 Employment Agreements *10.11 Stansley Consulting Agreement *10.12 Notes to CD Entertainment Ltd. and Jacobs Entertainment, Inc. *10.13 Notes to Arnold W. Stansley *10.14 Notes to Norglass, Inc. *10.15 Food and Beverages Concessions Agreement *11.1 Statement regarding computation of net income per share *21.1 Subsidiaries of the Registrant *23.1 Consent of Hogan & Hartson L.L.P. (included in exhibit 5.1) 23.2 Consent of BDO Seidman, LLP 24.1 Power of attorney (included on signature page) *27.1 Financial Data Schedule *99.1 Consents of persons named as directors ============= * To be filed by amendment (b) Financial Statement Schedules The financial statement schedules required to be filed as part of this Registration Statement are listed on the attached Index to Financial Statement Schedules. All other schedules have been omitted because they are inapplicable or the information is provided in the Financial Statements including the Notes thereto included in the Prospectus. Item 17. Undertakings. The undersigned Registrant hereby undertakes to provide to the Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. II-3 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant under the provisions referred to in Item 14 of this Registration Statement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of New Kent, Virginia, on the 19th day of December, 1996. COLONIAL DOWNS HOLDINGS, INC. By: /s/ Jeffrey P. Jacobs ______________________________ Jeffrey P. Jacobs Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY Know all men by these presents, that each individual whose signature appears below constitutes and appoints Jeffrey P. Jacobs and Robert H. Hughes, and each of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign a registration statement (the "Registration Statement") relating to a registration of shares of common stock on Form S-1 and to sign any and all amendments (including post-effective amendments) to the Registration Statement, and to file the same, with all exhibits and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their, his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Capacity Date -------- ---- /s/ Jeffrey P. Jacobs Chairman of the Board, December 19, 1996 - ---------------------- President and Chief Jeffrey P. Jacobs Executive Officer /s/ Arnold W. Stansley Secretary and Director December 19, 1996 - ---------------------- Arnold W. Stansley /s/ Robert H. Hughes Chief Financial Officer December 19, 1996 - ---------------------- Robert H. Hughes /s/ Michael D. Salmon Controller December 19, 1996 - ---------------------- Michael D. Salmon II-6 EXHIBIT INDEX Exhibit Number Description Page Number - -------------- ----------- ----------- *1.1 Form of Underwriting Agreement *2.1 Agreement and Plan of Reorganization *3.1 Amended and Restated Articles of Incorporation of Colonial Downs Holdings, Inc. *3.2 Amended and Restated By-laws of Colonial Downs Holdings, Inc. *4.1 Stock certificate representing Colonial Downs Holdings, Inc. Common Stock *4.2 Form of Indenture *5.1 Opinion of Hogan & Hartson L.L.P. regarding the validity of the Common Stock being registered *10.1 Management and Consulting Agreement *10.2 Performance Guarantee *10.3 Form of Deed for Track site *10.4 Construction Agreement *10.5 Development Agreement *10.6 Hubbing Agreement *10.7 VHHA SWF Agreement *10.8 VaHBPA SWF Agreement *10.9 Form of Convertible Subordinated Note *10.10 Employment Agreements *10.11 Stansley Consulting Agreement *10.12 Notes to CD Entertainment Ltd. and Jacobs Entertainment, Inc. *10.13 Notes to Arnold W. Stansley *10.14 Notes to Norglass, Inc. *10.15 Food and Beverages Concessions Agreement *11.1 Statement regarding computation of net income per share *21.1 Subsidiaries of the Registrant *23.1 Consent of Hogan & Hartson L.L.P. (included in exhibit 5.1) 23.2 Consent of BDO Seidman, LLP 24.1 Power of attorney (included on signature page) *27.1 Financial Data Schedule *99.1 Consents of persons named as directors - ----------------- * To be filed by amendment EX-23.2 2 CONSENT OF ACCOUNTANTS Exhibit 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS (the following is the form of the consent that BDO Seidman, LLP will be in a position to issue upon completion of the reorganization described in Note 1 to the consolidated statements) Colonial Downs Holdings, Inc. Providence Forge, Virginia We hereby consent to the use in the Prospectus constituting a part of this Registration Statement, of our report dated November 21, 1996, relating to the consolidated financial statements of Colonial Downs Holdings, Inc., which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. BDO Seidman, LLP Richmond, Virginia December 18, 1996 -----END PRIVACY-ENHANCED MESSAGE-----