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Canterbury Park Holding Corp - Quarter Report: 2016 September (Form 10-Q)

 

 

 

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016. 

   

OR

   

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____. 

 

Commission File Number: 001-37858

 

(CANTERBURY PARK) 

 

CANTERBURY PARK HOLDING CORPORATION

 

 (Exact Name of Registrant as Specified in Its Charter) 

 

  Minnesota   47-5349765  
 

(State or Other Jurisdiction

of Incorporation or

Organization)

 

(I.R.S. Employer

Identification

No.)

 

 

 

1100 Canterbury Road

Shakopee, MN 55379

 

(Address of principal executive offices and zip code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

  YES   NO ☐   

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). 

  YES   NO ☐   

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

 

   Large accelerated filer   Accelerated filer  
   Non-accelerated filer   Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

  YES  ☐   NO  

 

The Company had 4,321,900 shares of common stock, $.01 par value, outstanding as of November 1, 2016.

 

 

 

1 

 

 

Canterbury Park Holding Corporation 

INDEX 

         
        Page
         
PART I. FINANCIAL INFORMATION    
       
  Item 1. Financial Statements (unaudited)    
         
    Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015   3
         
    Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015   4
         
    Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015   5
         
    Notes to Condensed Consolidated Financial Statements   7
         
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   15
         
  Item 3. Quantitative and Qualitative Disclosures about Market Risk   22
         
  Item 4. Controls and Procedures   22
         
PART II. OTHER INFORMATION    
       
  Item 1. Legal Proceedings   22
         
  Item 1A. Risk Factors   22
         
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   22
         
  Item 3. Defaults Upon Senior Securities   22
         
  Item 4. Mine Safety Disclosures   23
         
  Item 5. Other Information   23
         
  Item 6. Exhibits   23
         
  Signatures   24
       
  Certifications   25

 

2 

 

  

PART 1 – FINANCIAL INFORMATION 

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS 

         
   (Unaudited)     
   September 30,   December 31, 
   2016   2015 
ASSETS          
CURRENT ASSETS          
Cash and cash equivalents  $4,449,952   $8,274,112 
Restricted cash   2,137,266    1,563,058 
Short-term investments   205,405    205,192 
Accounts receivable, net of allowance of $28,000 for both periods   1,008,396    155,861 
Current portion of notes receivable   1,048,654     
Inventory   274,813    253,334 
Prepaid expenses   308,043    396,705 
Income taxes receivable       355,060 
Due from Minnesota horsemen associations   1,101,444     
Total current assets   10,533,973    11,203,322 
           
LONG-TERM ASSETS          
Deposits   25,000    20,000 
Notes receivable - long term portion   2,142,512     
Land, buildings and equipment, net of accumulated depreciation of $27,205,552 and $25,538,147, respectively   35,509,276    34,117,760 
   $48,210,761   $45,341,082 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Current maturities of capital lease obligations  $   $585,563 
Accounts payable   4,278,174    2,710,661 
Card Casino accruals   2,550,643    1,759,314 
Accrued wages and payroll taxes   949,625    1,370,577 
Cash dividend payable   215,331     
Accrued property taxes   530,422    711,482 
Income taxes payable   204,969     
Payable to horsepersons   13,323    171,355 
Total current liabilities   8,742,487    7,308,952 
           
LONG-TERM LIABILITIES          
Capital lease obligations - long term portion       2,592,731 
Deferred income taxes   3,557,333    2,341,900 
Total long-term liabilities   3,557,333    4,934,631 
TOTAL LIABILITIES   12,299,820    12,243,583 
           
STOCKHOLDERS’ EQUITY          
Common stock, $.01 par value, 10,000,000 shares authorized, 4,285,826 and 4,238,430, respectively, shares issued and outstanding   42,858    42,383 
Additional paid-in capital   18,608,937    18,019,658 
Retained earnings   17,259,146    15,035,458 
Total stockholders’ equity   35,910,941    33,097,499 
   $48,210,761   $45,341,082 

 

 See notes to condensed consolidated financial statements

 

3 

 

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

(Unaudited) 

                 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
OPERATING REVENUES:                    
Pari-mutuel  $3,554,975   $3,887,494   $7,971,295   $8,583,730 
Card Casino   7,324,936    7,404,926    21,445,127    21,627,459 
Food and beverage   3,446,063    3,299,659    6,751,260    6,822,197 
Other   2,347,464    2,190,060    4,801,471    4,545,952 
Total Revenues   16,673,438    16,782,139    40,969,153    41,579,338 
Less: Promotional allowances   (43,030)   (50,571)   (106,451)   (118,655)
Net Revenues   16,630,408    16,731,568    40,862,702    41,460,683 
                     
OPERATING EXPENSES:                    
Purse expense   2,155,361    2,363,961    5,003,159    5,296,326 
Minnesota Breeders’ Fund   252,465    259,933    636,268    658,515 
Other pari-mutuel expenses   300,635    320,927    1,061,019    1,266,797 
Salaries and benefits   6,218,896    6,129,355    17,068,272    16,409,714 
Cost of food and beverage and other sales   1,537,438    1,534,696    3,180,245    3,193,221 
Depreciation   672,465    567,190    1,866,975    1,738,900 
Utilities   540,468    495,849    1,134,365    1,074,966 
Advertising and marketing   1,012,905    774,296    1,950,611    1,683,603 
Gain on sale of land           (3,990,519)    
Gain on sale of assets       (347,348)       (347,348)
Gain on insurance recoveries   (592,276)   (120,090)   (592,276)   (120,090)
Other operating expenses   2,973,146    3,365,288    7,565,158    7,587,370 
Total Operating Expenses   15,071,503    15,344,057    34,883,277    38,441,974 
INCOME FROM OPERATIONS   1,558,905    1,387,511    5,979,425    3,018,709 
OTHER INCOME (EXPENSE):                    
Interest income(expense), net   538    348    (48,488)   1,653 
      Net Other Income(Expense)   538    348    (48,488)   1,653 
INCOME BEFORE INCOME TAXES   1,559,443    1,387,859    5,930,937    3,020,362 
INCOME TAX EXPENSE   (633,606)   (574,800)   (2,419,447)   (1,247,049)
NET INCOME  $925,837   $813,059   $3,511,490   $1,773,313 
                     
Basic earnings per share  $.22   $.19   $.82   $.42 
Diluted earnings per share  $.21   $.19   $.82   $.42 
Weighted Average Basic Shares Outstanding   4,296,581    4,233,315    4,276,387    4,221,164 
Weighted Average Diluted Shares Outstanding   4,322,801    4,229,438    4,294,153    4,221,939 
Cash dividends declared per share  $.05   $.00   $.30   $.25 

 

See notes to condensed consolidated financial statements.

 

4 

 

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(Unaudited) 

 

         
   Nine Months Ended September 30, 
   2016   2015 
Operating Activities:          
Net income  $3,511,490   $1,773,313 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   1,866,975    1,738,900 
Stock-based compensation expense   179,141    224,921 
Deferred income taxes   1,215,433    (96,700)
Stock appreciation rights       141,686 
Gain on disposal of assets       (347,348)
Gain on sale of land   (3,990,519)    
Gain on insurance proceeds   (592,276)   (120,090)
Tax benefit from exercise of stock-based awards   1,050    (4,060)
Changes in operating assets and liabilities:          
Increase in restricted cash   (574,208)   (115,456)
Decrease (increase) in accounts receivable   (260,259)   277,145 
(Increase) decrease in other current assets   62,183    (412,962)
Decrease (increase) in income taxes (payable) receivable   560,029    (433,252)
Increase in due from Minnesota horsemen associations   (1,101,444)   (476,524)
Increase in accounts payable   1,633,682    1,104,482 
Increase in Card Casino accruals   791,329    540,097 
Increase in accrued wages and payroll taxes   (420,952)   296,418 
Increase in accrued property taxes   (181,060)   160,895 
Increase in payable to horsepersons   (158,032)   (109,523)
Net cash provided by operating activities   2,542,562    4,141,941 
           
Investing Activities:          
Additions to buildings and equipment   (3,777,239)   (3,841,087)
Proceeds from sale of RV Park       99,441 
Proceeds from insurance claims       120,091 
Purchase of investments   (213)   (465)
Net cash used in investing activities   (3,777,452)   (3,622,019)
           
Financing Activities          
Proceeds from issuance of common stock   371,564    109,540 
Principal payments on capital lease obligations   (1,887,349)    
Cash dividends to shareholders   (1,072,470)   (1,055,720)
Tax benefit from exercise of stock-based awards   (1,015)   4,060 
Net cash provided by (used in) financing activities   (2,589,270)   (942,120)
           
Net increase (decrease) in cash and cash equivalents   (3,824,160)   (422,198)
           
Cash and cash equivalents at beginning of period   8,274,112    8,761,925 
           
Cash and cash equivalents at end of period  $4,449,952   $8,339,727 

 

See notes to condensed consolidated financial statements.

 

5 

 

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited) 

 

         
   2016   2015 
Schedule of non-cash investing and financing activities          
Additions to buildings and equipment funded through accounts payable  $65,000   $87,000 
Dividend declared   215,000     
Issuance of promissory notes receivable   3,191,000     
Insurance recoveries proceeds receivable   592,000     
           
Proceeds from land sale remitted to qualified intermediary  $1,051,000   $ 
Principal payments of capital lease obligation remitted from qualified intermediary   1,051,000     
           
Supplemental disclosure of cash flow information:          
Income taxes paid, net of refunds  $2,121,000   $1,852,000 

 

6 

 

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Overview; Recent Reorganization - Canterbury Park Holding Corporation (the “Company”) was incorporated as a Minnesota corporation in October 2015. The Company is a successor corporation to another corporation, also named Canterbury Park Holding Corporation, that was incorporated in 1994 (“CPHC”). Effective as of the close of business on June 30, 2016 CPHC’s business and operations were reorganized into a holding company structure (the “Reorganization”) pursuant to an Agreement and Plan of Merger dated as of March 1, 2016 that was approved by CPHC’s shareholders on June 28, 2016. Pursuant to the Reorganization:

 

The Company replaced CPHC as the public company owned by CPHC’s shareholders, with each shareholder at June 30, 2016 owning the same number of shares and having the same percentage ownership in the Company (and, indirectly, in all property and other assets then owned by CPHC) immediately after the Reorganization as that shareholder had in CPHC immediately before the Reorganization.

 

The Company became the holding company for and parent company of two subsidiaries, Canterbury Park Entertainment LLC (“EntertainmentCo”) and Canterbury Development LLC (“DevelopmentCo”).

 

EntertainmentCo is the surviving business entity in a merger with CPHC pursuant to the Reorganization and it became the direct owner of all land, facilities, and substantially all other assets related to the CPHC’s pari-mutuel wagering, Card Casino, concessions and other related businesses (“Racetrack Operations”), and EntertainmentCo continues to conduct these businesses consistent with CPHC’s past practices and will continue to be subject to direct regulation by the Minnesota Racing Commission (“MRC”).

 

DevelopmentCo will continue CPHC’s efforts to commercially develop approximately 140 acres of land currently owned or controlled that is not needed for our Racetrack Operations. DevelopmentCo is not subject to direct regulation by the MRC.

 

On July 1, 2016 the shares of the Company’s common stock began trading on the NASDAQ Global Market under the symbol “CPHC.”

 

Further information regarding the Reorganization is set forth in the Company’s Registration Statement on Form S-4 (File No. 333-210877) filed with the SEC on April 22, 2016, which information is incorporated herein by reference.

 

For purposes of this Report on Form 10-Q, when the term “Company” is used with reference to information covering or related to periods up to and including June 30, 2016, such term refers to the operations of CPHC prior to the Reorganization.

 

Business – The Company’s Racetrack operations are conducted at facilities located in Shakopee, Minnesota, approximately 25 miles southwest of downtown Minneapolis. In May 1994, the Company commenced year-round horse racing simulcast operations and hosted the first annual live race meet during the summer of 1995. The Company’s live racing operations are a seasonal business as it hosts live race meets each year from May until September. The Company earns additional pari-mutuel revenue by televising its live racing to out-of-state racetracks around the country. Canterbury Park’s Card Casino operates 24 hours a day, seven days a week and is limited by Minnesota State law to conducting card play on a maximum of 80 tables. The Card Casino currently offers a variety of poker and table games. The Company’s three largest sources of revenues include: Card Casino operations, pari-mutuel operations and food and beverage sales. The Company also derives revenues from related services and activities, such as admissions, advertising signage, publication sales, and from other entertainment events and activities held at the Racetrack.

 

Basis of Presentation and Preparation – The accompanying condensed consolidated financial statements include the accounts of the Company (Canterbury Park Holding Corporation, Canterbury Park Entertainment, LLC, Canterbury Park Concession, Inc. and Canterbury Development, LLC) Intercompany accounts and transactions have been eliminated. The preparation of these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

 

7

 

 

These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2015, included in its Annual Report on Form 10-K (the “2015 Form 10-K”).

 

Summary of Significant Accounting Policies – A detailed description of our significant accounting policies can be found in our most recent Annual Report filed on Form 10-K for the fiscal year ended December 31, 2015. There were no material changes in significant accounting policies during the quarter ended September 30, 2016.

 

Due to Minnesota Horsemen’s Benevolent and Protective Association, Inc. (“MHBPA”) – The Minnesota Pari-mutuel Horse Racing Act specifies that the Company is required to segregate a portion of funds (recorded as purse expense in the statements of operations), received from Card Casino operations and wagering on simulcast and live horse races, for future payment as purses for live horse races or other uses of the horsepersons’ associations. Pursuant to an agreement with the MHBPA, the Company transferred into a trust account or paid directly to the MHBPA, $3,640,000 and $6,273,000 for the three and nine months ended September 30, 2016, respectively, compared to $3,285,000 and $5,233,000 for the comparable periods in 2015 related to thoroughbred races. Minnesota Statutes specify that amounts transferred into the trust account are the property of the trust and not of the Company, and therefore are not recorded on the Company’s Consolidated Balance Sheet.

 

Reclassifications – Prior period financial statement amounts have been reclassified to conform to current period presentations. Insurance recovery proceeds received in the third quarter of 2015 have been reclassified on the Consolidated Statement of Operations to Gain on insurance recoveries from Other revenue in the amount of approximately $120,000.

 

Recent Accounting Pronouncement –In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies various aspects related to share-based payments. Previously, tax benefits in excess of compensation cost (“windfalls”) were recorded as an increase to shareholders’ equity. Under the new ASU, windfalls are recorded as a component of income tax expense. ASU 2016-09 also requires that tax-related cash flows resulting from share-based payments be reported as a part of cash flows from operating activities. The Company believes the adoption of this ASU will not have a material impact on our consolidated financial statements or diluted earnings per share.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance will become effective for annual periods beginning after December 15, 2017 and will be applied retrospectively to each period presented or as a cumulative- effect adjustment as of the date of adoption. We are assessing the impact of the new accounting guidance and currently cannot estimate the financial statement impact of adoption.

 

2.STOCK-BASED COMPENSATION

 

Stock-based compensation is recorded at fair value as of the date of grant and included in the salaries and benefits expense line item on the Condensed Consolidated Statements of Operations and amounted to $64,000 for both years for the three months ended September 30, 2016 and 2015. For the nine months ended September 30, 2016 and 2015, stock-based compensation totaled $179,000 and $225,000, respectively.

 

Adoption of Long Term Incentive Plan and Award of Deferred Stock

 

Effective March 30, 2016, the Board of Directors of the Company approved a new plan for long-term incentive compensation of the Company’s named executive officers (NEOs) and other Senior Executives called the Canterbury Park Holding Corporation Long Term Incentive Plan (the “LTI Plan”). The LTI Plan authorizes the grant of Long Term Incentive Awards that provide an opportunity to NEOs and other Senior Executives to receive a payment in cash or shares of the Company’s common stock to the extent of achievement at the end of a period greater than one year (the “Performance Period”) as compared to Performance Goals established at the beginning of the Performance Period. The LTI is a sub-plan of the Company’s Stock Plan which authorizes the grant of Deferred Stock awards that represent the right to receive Company common stock if conditions specified in the awards are satisfied.

 

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Effective March 30, 2016, the Board approved granting opportunities to Company officers and key employees to earn long-term incentive compensation under the LTI Plan. Each officer and key employee was granted an Incentive Award (that was also a Deferred Stock Award under the Stock Plan) which provided an opportunity to receive a payout of shares of the Company’s common stock to the extent of achievement compared to Performance Goals at the end of the period beginning January 1, 2016 and ending December 31, 2018. Pursuant to these awards the Company has reserved 24,000 shares that potentially may be issued under the Deferred Stock Awards. Further information regarding the LTI Plan and the awards approved effective March 30, 2016 is presented under Item 5.02 in the Company’s Report on Form 8-K for March 30, 2016 (filed April 5, 2016), which information is incorporated herein by reference.

 

Board of Directors Stock Option and Restricted Stock Grants

 

The Company’s Stock Plan authorizes annual grants of restricted stock or stock options, or both, to non-employee members of the Board of Directors at the time of the Company’s annual shareholders meeting as determined by the Board prior to each such meeting. Options granted under the Plan generally expire 10 years after the grant date. Restricted stock grants generally vest 100% one year after the date of the annual meeting in the prior year, are subject to restrictions on resale for an additional year, and are subject to forfeiture if a board member terminates prior to the shares vesting. The following table presents a summary of changes in Board of Directors’ unvested restricted stock as of September 30, 2016:

 

        Weighted 
        Average 
    Restricted   Fair Value 
    Stock   Per Share 
Non-Vested Balance, January 1, 2016   13,940   $10.76 
Granted   14,410    10.41 
 Vested   (13,940)   10.76 
 Forfeited        
Non-Vested Balance, September 30, 2016   14,410   $10.41 
             

Employee Stock Option Grants

 

The Company has granted incentive stock options to employees pursuant to the Company’s Stock Plan with an exercise price equal to the market price on the date of grant. The options vest over a 42-month period and expire in 10 years.

 

9

 

 

A summary of stock option activity as of September 30, 2016 and changes during the nine months ended is presented below:

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
   Number of   Exercise   Contractual   Grant Date 
Stock Options  Options   Price   Term   Fair Value 
                     
Outstanding at January 1, 2016   223,002   $9.30           
Granted                  
Exercised   (2,000)   7.14           
Expired/Forfeited   (30,000)   14.42           
Outstanding at September 30, 2016   191,002   $8.51    2.8 Years   $1,626,582 
                     
Exercisable at September 30, 2016   191,002   $8.51    2.8 Years   $1,626,582 

 

Deferred Stock Awards

 

Prior to January 1, 2016 the Company’s Board awarded deferred compensation to executive officers and key employees that were not performance-based in the form of Deferred Stock awards under the Company’s Stock Plan. Such deferred stock awards are subject to forfeiture if an employee terminates employment prior to the vesting. Generally, the awards vest ratably over a four-year period and compensation costs are recognized over the vesting period. Compensation costs are recorded in “Salaries and benefits” on the Condensed Consolidated Statements of Operations. As of September 30, 2016, 18,375 shares were not vested with a weighted average fair value of $10.26 per share.

 

3.NET INCOME PER SHARE COMPUTATIONS

 

The following is a reconciliation of the numerator and denominator of the earnings per common share computations for the nine months ended September 30, 2016 and 2015:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
Net income (numerator) amounts used for basic and diluted per share computations:   $925,837   $813,059   $3,511,490   $1,773,313 
                     
Weighted average shares (denominator) of common stock outstanding:                    
Basic   4,296,581    4,233,315    4,276,387    4,221,164 
Plus dilutive effect of stock options   26,220    (3,877)   17,766    775 
Diluted   4,322,801    4,229,438    4,294,153    4,221,939 
                     
Net income per common share:                    
Basic  $.22   $.19   $.82   $.42 
Diluted   .21    .19    .82    .42 

 

Options to purchase 45,000 shares of common stock at an average price of $12.80 per share were outstanding but not included in the computation of diluted net income per share for the nine months ended September 30, 2016 because the options were out of the money at September 30, 2016.

 

10

 

 

Options to purchase 75,000 shares of common stock at an average price of $13.45 per share were outstanding but not included in the computation of diluted net income per share for the three and nine months ended September 30, 2015 because the options were out of the money at September 30, 2015.

 

4.PROMISSORY NOTES RECEIVABLE

 

During May 2016, the Company sold approximately 24 acres of land adjacent to the Racetrack for a total consideration of approximately $4.3 million. Promissory notes receivable consist of two promissory notes totaling $3,191,000 bearing interest at the mid-term applicable federal rate, which equaled 1.43%. The payments totaling $1,094,000 are due annually and the notes mature May 2019. The promissory notes are secured by the mortgage of approximately 24 acres and management believes no allowance for doubtful accounts is necessary.

 

5.GENERAL CREDIT AGREEMENT

 

The Company had a general credit and security agreement with Bremer Bank, which provided a revolving credit line of up to $3,000,000 and which expired on September 30, 2016. The line of credit was collateralized by all receivables, inventory, equipment, and general intangibles of the Company. This agreement was replaced with a new agreement, See Note 9. Subsequent Events. The Company had no borrowings under the credit line during the nine months ended September 30, 2016 or the year ended December 31, 2015.

 

6.OPERATING SEGMENTS

 

The Company has three reportable operating segments: horse racing, card casino, and food and beverage. The horse racing segment primarily represents simulcast and live horse racing operations. The Card Casino segment represents operations of Canterbury Park’s Card Casino, and the food and beverage segment represents food and beverage operations provided during simulcast and live racing, in the Card Casino, and during special and other catering and events operations. The Company’s reportable operating segments are strategic business units that offer different products and services. They are managed separately because the segments differ in the nature of the products and services provided as well as processes to produce those products and services. The Minnesota Racing Commission regulates the horse racing and Card Casino segments.

 

Depreciation, interest and income taxes are allocated to the segments, but no allocation is made to food and beverage for shared facilities. However, the food and beverage segment pays approximately 25% of gross revenues earned on live racing and special event days to the horse racing segment for use of the facilities.

 

The following tables provide information about the Company’s operating segments (in 000’s):

                 
   Nine Months Ended September 30, 2016 
   Horse Racing   Card Casino   Food and Beverage   Total 
                 
Net revenues from external customers  $12,389   $21,445   $7,029   $40,863 
                     
Intersegment revenues   653        1,015    1,668 
                     
Net interest income (expense)   (48)           (48)
                     
Depreciation   1,430    317    120    1,867 
                    
Segment (loss) income before income taxes (1)   1,229    5,317    890    7,436 

 

   At September 30, 2016 
Segment Assets  $46,778   $478   $18,912   $66,168 

  

   Nine Months Ended September 30, 2015 
   Horse Racing   Card Casino   Food and Beverage   Total 
                     
Net revenues from external customers  $12,756   $21,628   $7,077   $41,461 
                     
Intersegment revenues   674        1,029    1,703 
                     
Net interest income   2            2 
                     
Depreciation   1,324    317    98    1,739 
                     
Segment (loss) income before income taxes   (2,260)   5,302    1,272    4,314 
                     
   At December 31, 2015 
Segment Assets  $44,283   $795   $17,303   $62,381 

 

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1 – For September 30, 2016, Segment (loss) income before income taxes for Horse Racing includes the gain on sale of land of approximately $3,990,000.

 

The following are reconciliations of reportable segment revenues, income before income taxes, and assets, to the Company’s consolidated totals (in 000’s):

 

   Nine Months Ended September 30, 
   2016   2015 
Revenues          
Total net revenues for reportable segments  $42,531   $43,164 
Elimination of intersegment revenues   (1,668)   (1,703)
Total consolidated net revenues  $40,863   $41,461 

 

Income before income taxes          
Total segment income before income taxes  $7,436   $4,314 
Elimination of intersegment income before income taxes   (1,505)   (1,294)
Total consolidated income before income taxes  $5,931   $3,020 

 

   September 30,   December 31, 
   2016   2015 
Assets          
Total assets for reportable segments  $66,168   $62,381 
Elimination of intercompany receivables   (17,958)   (17,040)
Total consolidated assets  $48,210   $45,341 

 

7.COMMITMENTS AND CONTINGENCIES

 

In accordance with an Earn Out Promissory Note given to the prior owner of the Racetrack as part of the consideration paid by the Company to acquire the Racetrack in 1994, if (i) off-track betting becomes legally permissible in the State of Minnesota and (ii) the Company begins to conduct off-track betting with respect to or in connection with its operations, the Company will be required to pay to the IMR Fund, L.P. the greater of $700,000 per operating year, as defined, or 20% of the net pretax profit, as defined for each of five operating years. At this time, management believes that the likelihood that these two conditions will be met and that the Company will be required to pay these amounts is remote. At the date (if any) that these two conditions are met, the five minimum payments will be discounted back to their present value and the sum of those discounted payments will be capitalized as part of the purchase price in accordance with GAAP. The purchase price will be further increased if payments become due under the “20% of Net Pretax Profit” calculation. The first payment is to be made 90 days after the end of the third operating year in which off-track betting is conducted by the Company. Remaining payments would be made within 90 days of the end of each of the next four operating years.

 

Additionally, the Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community (“SMSC”) which became effective on June 15, 2012 and was amended in January 2015 and 2016. The CMA contains certain covenants which, if breached, would trigger an obligation to repay a specified amount related to such covenant. At this time, management believes that the likelihood that the breach of a covenant will occur and that the Company will be required to pay the specified amount related to such covenant is remote.

 

On December 14, 2015, the Company entered into a five-year lease agreement for approximately 32 acres of land adjacent to the Racetrack. The lease payments were payable monthly at $58,533, with an interest rate of 4.0% and a maturity date of December 15, 2020. The capital lease obligation was paid in full on May 13, 2016, and the title to the land transferred to the Company.

 

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The Company is periodically involved in various claims and legal actions arising in the normal course of business. Management believes that the resolution of any pending claims and legal actions at September 30, 2016 and as of the date of this report will not have a material impact on the Company’s consolidated financial positions or results of operations.

 

8.COOPERATIVE MARKETING AGREEMENT

 

As discussed in Note 7, on June 4, 2012, the Company entered into the CMA with the SMSC. The primary purpose of the CMA is to increase purses paid during live horse racing at Canterbury Park’s Racetrack in order to strengthen Minnesota’s thoroughbred and quarter horse industry. Under the CMA, as amended, this is achieved through “Purse Enhancement Payments to Horsemen” paid directly to the MHBPA. Such payments have no direct impact on the Company’s consolidated financial statements or operations.

 

Under the terms of the CMA, the SMSC paid the horsemen $6.7 million and $6.2 million in the first nine months of 2016 and 2015, respectively, primarily for purse enhancements for the live race meets in the respective years.

 

Under the CMA, as amended, SMSC also agreed to make “Marketing Payments” to the Company relating to joint marketing efforts for the mutual benefit of the Company and SMSC, including signage, joint promotions, player benefits and events. Under the CMA, the SMSC paid the Company $1,197,000 and $944,000 for marketing purposes during the nine months ended September 30, 2016 and 2015, respectively.

 

During January 2015 and 2016, the CMA was amended to adjust the payment amounts between the “Purse Enhancement Payments to Horsemen” and “Marketing Payments to Canterbury Park.” SMSC has currently agreed to make the following purse enhancement and marketing payments for 2017 through 2022:

 

Year  Purse Enhancement Payments to Horsemen 1    Marketing Payments to Canterbury Park 
2017  $7,466,910   $1,317,690 
2018   7,650,000    1,350,000 
2019   7,650,000    1,350,000 
2020   7,650,000    1,350,000 
2021   7,650,000    1,350,000 
2022   7,650,000    1,350,000 

 

1Includes $100,000 each year payable to various horsemen associations

 

The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s consolidated statements of operations. For the nine months ended September 30, 2016, the Company recorded $610,000 in other revenue and incurred $440,000 in advertising and marketing expense and $170,000 in depreciation related to the SMSC marketing payment. For the nine months ended September 30, 2015, the Company recorded $800,000 in other revenue and incurred $630,000 in advertising and marketing expense and $170,000 in depreciation related to the SMSC marketing payment. The excess of amounts received over revenue is reflected as deferred revenue which is included in accounts payable on the consolidated balance sheets.

 

Under the CMA, the Company agreed for the term of the CMA that it would not promote or lobby the Minnesota legislature for expanded gambling authority and will support the SMSC’s lobbying efforts against expanding gambling authority.

 

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As part of the CMA, and pursuant to a related SAR Agreement dated June 14, 2012, the Company issued stock appreciation rights to the SMSC. For the nine months ended September 30, 2015, the Company recognized $142,000 of expense related to these stock appreciation rights, of which $142,000 was recorded as an offset to other revenue. On July 30, 2015, the Company sold the land and buildings related to the Shakopee Valley RV Park located in Shakopee, Minnesota to SMSC for $100,000 plus the cancellation of the vested and unvested SARs. As a result, there was no expense for the nine months ended September 30, 2016.

 

9.SUBSEQUENT EVENTS

 

During October 2016, the Company received additional insurance proceeds of $592,000 from multiple severe storms during 2014 that caused damage to buildings at the Track. As of September 30, 2016, the Company recognized a $592,000 insurance recoveries gain in the Consolidated Statements of Operations as “Gain on insurance recoveries”. Based on future events, the Company may receive additional insurance proceeds. The Company has concluded that these additional funds represent contingent gains and in accordance with U.S. GAAP, has not recorded an estimate for any additional future proceeds in the Company’s 2016 third quarter financial statements.

 

On November 11, 2016, the Company entered into a new general credit and security agreement with Bremer Bank, which provides a revolving credit line of up to $6,000,000 and expires on November 11, 2017. The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company.

 

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ITEM 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Canterbury Park Holding Corporation, our operations, our financial results and financial condition and our present business environment. This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes to the financial statements (the “Notes”).

 

Overview:

 

Canterbury Park Holding Corporation (the “Company,” “we,” “our,” or “us”) conducts pari-mutuel wagering operations and hosts “unbanked” card games at its Canterbury Park Racetrack and Card Casino facility (the “Racetrack”) in Shakopee, Minnesota, which is approximately 25 miles southwest of downtown Minneapolis. The Racetrack is the only facility in the State of Minnesota that offers live pari-mutuel thoroughbred and quarter horse racing.

 

The Company’s pari-mutuel wagering operations include both wagering on thoroughbred and quarter horse races during live meets at the Racetrack each year from May through September and year-round wagering on races held at out-of-state racetracks that are televised simultaneously at the Racetrack (“simulcasting”). Unbanked card games, in which patrons compete against each other, are hosted in the Card Casino at the Racetrack. The Card Casino operates 24 hours a day, seven days a week. The Card Casino offers both poker and table games at up to 80 tables. The Company also derives revenues from related services and activities, such as concessions, parking, advertising signage, publication sales, and from other entertainment events and activities held at the Racetrack.

 

Recent Reorganization. The Company was incorporated as a Minnesota corporation in October 2015. The Company is a successor corporation to another corporation, also named Canterbury Park Holding Corporation, that was incorporated in 1994 (“CPHC”). Effective as of the close of business on June 30, 2016, CPHC’s business and operations were reorganized into a holding company structure (the “Reorganization”) pursuant to an Agreement and Plan of Merger dated as of March 1, 2016 that was approved by CPHC’s shareholders on June 28, 2016.

 

Further information regarding the Reorganization is set forth at Note 1 in the Notes to Condensed Consolidated Financial Statements under Part I above and in the Company’s Registration Statement on Form S-4 (File No. 333-210877) filed with the SEC on April 22, 2016, which information is incorporated herein by reference.

 

For purposes of this Report on Form 10-Q, when the term “Company” is used with reference to information covering or related to periods up to and including June 30, 2016, such term refers to the operations of CPHC prior to the Reorganization.

 

Operations Review for the Three and Nine Months Ended September 30, 2016:

 

EBITDA

 

EBITDA represents earnings before interest income, income tax expense, and depreciation and amortization. Adjusted EBITDA excludes certain non-recurring items to provide a better measure of the Company’s core operating results and to provide period-to-period comparisons. EBITDA and Adjusted EBITDA are not a measure of performance or liquidity calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and should not be considered an alternative to, or more meaningful than, net income as an indicator of our operating performance or cash flows from operating activities as a measure of liquidity. EBITDA and Adjusted EBITDA have been presented as a supplemental disclosure because they are widely used measures of performance and a basis for valuation of companies in our industry. Moreover, other companies that provide EBITDA and Adjusted EBITDA information may calculate EBITDA and Adjusted EBITDA differently than we do. For the nine months ended September 30, 2016, Adjusted EBITDA excluded the gain on sale of land, gain on disposal of assets and gain on insurance recoveries.

 

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The following table sets forth a reconciliation of net income, a GAAP financial measure, to EBITDA and Adjusted EBITDA (defined above), which is a non-GAAP measure, for the nine months ended September 30, 2016 and 2015: 

         
Summary of EBITDA Data        
   Nine Months Ended September 30, 
   2016   2015 
NET INCOME  $3,511,490   $1,773,313 
Interest (income) expense, net   48,488    (1,653)
Income tax expense   2,419,447    1,247,049 
Depreciation   1,866,975    1,738,900 
EBITDA   7,846,400    4,757,609 
Gain on insurance recoveries   (592,276)   (120,090)
Gain on disposal of assets       (347,348)
Gain on sale of land   (3,990,519)    
ADJUSTED EBITDA  $3,263,605   $4,290,171 
           

Adjusted EBITDA decreased $1,027,000, or 23.9%, and decreased as a percentage of net revenues to 8.0% from 10.3% for the nine months ended September 30, 2016 as compared to the same period in 2015. The decrease is primarily due to the decline in revenues and an increase in salaries and benefits for the nine months ended September 30, 2016 compared to the same period in 2015.

 

Revenues:

 

Total net revenues decreased $102,000, or 0.6%, for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015. This decrease primarily consists of decreases in pari-mutuel and Card Casino revenue of 8.6% and 1.1%, respectively, partially offset by an increase in food and beverage revenue of 4.4%. Total net revenues decreased $598,000, or 1.4%, for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. This decrease primarily consists of decreases in pari-mutuel, Card Casino and food and beverage revenue of 7.1%, 0.8% and 1.0%, respectively. The following discussion provides further information regarding our operating revenues.

 

Pari-mutuel Data Revenues:

         
   Nine Months Ended September 30, 
Racing Days  2016   2015 
Simulcast only racing days   205    203 
Live and simulcast racing days   69    70 
Total Number of Racing Days   274    273 
           
On-Track Simulcast Handle          
Simulcast handle on simulcast only racing days  $13,364,000   $13,665,000 
Simulcast handle on live racing days   7,973,000    9,057,000 
Total simulcast handle   21,337,000    22,722,000 
           
Live Racing Handle   12,140,000    12,509,000 
Total On-Track Handle   33,477,000    35,231,000 
           
Out-of-state Live Handle   31,164,000    28,621,000 
Total Handle  $64,641,000   $63,852,000 

 

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During 2016, the Company implemented a live racing take-out reduction to become the lowest take-out racetrack in the industry to promote our racing on a national scale. As indicated in the table above, total handle wagered increased $789,000, or 1.2%, in the nine months ended September 30, 2016 compared to the same period last year.

 

The increase in total handle is primarily attributable to the following factors. Out-of-state handle increased by $2,543,000, or 8.9%, for the nine months ended September 30, 2016, compared to the same period in 2015. The increase was partially offset by a 3.0% decrease in live racing handle primarily due to one less day of racing and a 6.0% decrease in simulcast handle due in part to the lack of a Triple Crown contender in 2016.

 

The increase in out-of-state wagering volume didn’t offset the take-out rate reduction for the three and nine months ended September 30, 2016 compared to the same periods in 2015. Pari-mutuel revenue decreased $332,000, or 8.5%, and $613,000, or 7.1%, for the three and nine months ended September 30, 2016, respectively, compared to the same periods in 2015. In addition, the decrease in revenue is attributable to the decline in simulcast and live racing handle.

 

 Card Casino Revenue: 

                 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
Poker Games  $2,238,000   $2,358,000   $6,953,000   $7,156,000 
Table Games   4,475,000    4,433,000    12,557,000    12,639,000 
Total Collection Revenue   6,713,000    6,791,000    19,510,000    19,795,000 
Other Revenue   612,000    614,000    1,935,000    1,832,000 
Total Card Casino Revenue  $7,325,000   $7,405,000   $21,445,000   $21,627,000 
                     

 

The primary source of Card Casino revenue is a percentage of the wagers received from the players as compensation for providing the Card Casino facility and services, which is referred to as “collection revenue.” Other Revenue presented above includes fees collected for the administration of tournaments and amounts earned as reimbursement of the administrative costs of maintaining jackpot funds.

 

As indicated in the table above, total Card Casino revenue decreased $182,000 or 0.8%, for the three and nine months, respectively, ended September 30, 2016 compared to the same periods in 2015. Card Casino revenue was relatively flat for the three and nine months ended September 30, 2016 compared to the same periods in 2015.

 

Food and Beverage Revenue:

 

Food and beverage revenue increased $146,000, or 4.4%, for the three months ended September 30, 2016 compared to the same period in 2015. The increase is attributable to increased catering sales and price increases on select menu items. Food and beverage revenue decreased $71,000, or 1.0%, for the nine months ended September 30, 2016 compared to the same periods in 2015, primarily attributable to the loss of a major annual musical festival hosted in 2015 due to the sale of our festival field land as noted below in “Gain on sale of land”.

 

Other Revenue:

 

Other revenue increased $157,000, or 7.2%, September 30, 2016 compared to the same periods in 2015. This increase is primarily due to increased advertising revenue payments under the CMA agreement for joint marketing efforts.

 

Operating Expenses:

 

Total operating expenses decreased $273,000, or 1.8%, for the three months ended September 30, 2016 compared to the same period in 2015. Total operating expenses increased $432,000, or 1.1%, excluding the gain on sale of land of $3,991,000 in 2016, for the nine months ended September 30, 2016 compared to the same period in 2015. The following paragraphs provide further detail regarding operating expenses.

 

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Purse expense decreased $209,000, or 8.8%, and $293,000, or 5.5%, for the three and nine months, respectively, ended September 30, 2016 compared to the same periods in 2015. The change is primarily due to a decrease in live racing handle and a change in the statutory formula by which our purse expense is determined. Pursuant to legislation that took effect January 1, purse rates are now determined based on a single rate, rather than the variable rate depending on the time of the year that was previously in effect. This change will cause our purse expense in the fiscal year to be higher in the first and fourth quarters and lower in the second and third quarters when compared to payments calculated under the previous statutory structure. However, the change is not expected to have any material impact on our purse expense on an annual basis.

 

Salaries and benefits increased $90,000, or 1.5%, and $658,000, or 4.0%, for the three and nine months, respectively, ended September 30, 2016 compared to the same periods in 2015. The increase is primarily due to the State of Minnesota mandated increase in the minimum wage from $8.00 per hour to $9.00 per hour effective August 1, 2015 to $9.50 per hour effective August 1, 2016.

 

The gain on sale of land is due to the sale of approximately 24 acres of land adjacent to the Racetrack for a total consideration of $4.3 million.

 

The gain on disposal of assets is due to sale of the land and buildings related to the Shakopee Valley RV Park to SMSC during 2015. The purchase price paid by SMSC for these assets was $100,000 and the cancellation of an agreement granting stock appreciation rights with a liability carrying value of $641,000 that the Company issued to SMSC pursuant to the CMA. The Company recorded a gain of $347,000.

 

During 2014, the Company incurred damage to buildings from multiple severe storms at the Racetrack. As of September 30, 2015, the Company recognized a $120,000 insurance recoveries gain in the Consolidated Statements of Operations as “Gain on insurance recoveries”. During October 2016, the Company received additional insurance proceeds of $592,000. As of September 30, 2016, the Company recognized a $592,000 insurance recoveries gain as a “Recognized Subsequent Event” in the Consolidated Statements of Operations as “Gain on insurance recoveries”, in accordance with U.S. GAAP. The storms did not cause any material interruptions to the business or impact on the Company’s consolidated financial results of operations. Based on future events, the Company may receive additional insurance proceeds. The Company has concluded that these additional funds represent contingent gains and in accordance with U.S. GAAP, has not recorded an estimate for any additional future proceeds in the Company’s 2016 third quarter consolidated financial statements.

 

Other operating expenses increased $392,000, or 11.6%, and $22,000, or 0.3%, for the three and nine months, respectively, ended September 30, 2016 compared to the same periods in 2015. The changes are primarily attributable to the implementation of a new human capital management software system, and professional fees related to an announced corporate restructuring and efforts to develop unused or underutilized land.

 

Income tax expense increased $59,000, or 10.3%, for the three months ended September 30, 2016 compared to the same period in 2015. Income tax expense increased $1,720,000, or 94.0%, for the nine months ended September 30, 2016 compared to the same period in 2015. The effective rate was comparable year-over-year, but the increase in deferred tax expense is attributable to recording a deferred tax liability on the gain on sale of the land and gain on insurance recoveries.

 

Net Income for the three months ended September 30, 2016 and 2015 was $926,000 and $813,000, respectively. Net Income for the nine months ended September 30, 2016 and 2015 was $3,511,000 and $1,773,000, respectively.

 

Contingencies:

 

The Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community which became effective on June 4, 2012, and was amended in January 2015 and 2016. The CMA contains certain covenants which, if breached, would trigger an obligation to repay a specified amount related to such covenant. At this time, management believes that the likelihood that the breach of a covenant would occur and that the Company would be required to pay the specified amount related to such covenant is remote.

 

The Company continues to analyze the feasibility of various options related to the development of our underutilized land. The Company may incur substantial costs during the feasibility and predevelopment process, but the Company believes available funds are sufficient to cover the costs. See Liquidity and Capital Resources for more information on liquidity and capital resource requirements.

 

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Liquidity and Capital Resources:

 

Net cash provided by operating activities for the nine months ended September 30, 2016 was $2,543,000 primarily as a result of the following: The Company reported net income of $3,511,000, depreciation of $1,867,000, and deferred income taxes of $1,215,000. The Company also experienced an increase in accounts payable of $1,634,000 and Card Casino accruals of $791,000. This was partially offset by an increase in restricted cash of $574,000 and due from Minnesota horsemen associations of $1,101,000, and partially offset by the gain on disposal of assets relating to the sale of land of $3,990,000 and gain on insurance recoveries of $592,000.

 

Net cash provided by operating activities for the nine months ended September 30, 2015 was $4,142,000 primarily as a result of the following: The Company reported net income of $1,773,000 and depreciation of $1,739,000. The Company also experienced an increase in accounts payable of $1,104,000 and Card Casino accruals of $540,000. This was partially offset by an increase in net income taxes paid of approximately $433,000 and other current assets of $413,000.

 

Net cash used in investing activities for the first nine months of 2016 was $3,777,000, primarily for building remodel projects and the purchase of land. Net cash used in investing activities for the first nine months of 2015 of $3,622,000 was primarily for a variety of equipment purchases and building remodel projects.

 

Net cash used in financing activities during the first nine months of 2016 was $2,589,000, primarily for principal payments of capital lease obligations and payment of cash dividends to shareholders. Net cash used in financing activities during the first nine months of 2015 was $942,000 primarily for the payment of cash dividends.

 

The Company had a general credit and security agreement with Bremer Bank, which provided a revolving credit line of up to $3,000,000 and expired on September 30, 2016. The Company had no borrowings under the credit line during the nine months ended September 30, 2016 or the year ended December 31, 2015. This general credit line was replaced with a new agreement, see below.

 

On November 11, 2016, the Company signed a new general credit and security agreement with Bremer Bank, which provides a revolving credit line of up to $6,000,000 and expires on November 11, 2017. The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company.

 

The Company’s cash and cash equivalent balance at September 30, 2016 was $ 4.4 million compared to $ 8.3 million at December 31, 2015. The Company believes that unrestricted funds available in its cash accounts, amounts available under its revolving line of credit, along with funds generated from operations, will be sufficient to satisfy its liquidity and capital resource requirements for regular operations, as well as predevelopment expenses during 2016. However, if the Company engages in real estate development, additional financing would more than likely be required.

 

Critical Accounting Policies and Estimates:

 

The preparation of consolidated financial statements in accordance with GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

 

Our significant accounting policies are included in Note 1 to our consolidated financial statements in our 2015 Annual Report on Form 10-K. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

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Property and Equipment - We have significant capital invested in our property and equipment, which represents approximately 73.7% of our total assets at September 30, 2016. We utilize our judgment in various ways including: determining whether an expenditure is considered a maintenance expense or a capital asset; determining the estimated useful lives of assets; and determining if or when an asset has been impaired or has been disposed. Management periodically reviews the carrying value of property and equipment for potential impairment by comparing the carrying value of these assets with their related expected undiscounted future net cash flows. If the sum of the related expected future net cash flows is less than the carrying value, management would determine how much of an impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. To date, we have determined that no impairment of these assets exists.

 

Stock-Based Compensation – Accounting guidance requires recognition of services provided in exchange for a share-based payment based on the grant date fair market value. We utilize our judgment in determining the assumptions used to determine the fair value of equity instruments granted using a Black-Scholes model.

 

Commitments and Contractual Obligations:

 

On June 4, 2012, and amended in January 2015 and 2016, the Company entered into the CMA with the SMSC that expires December 31, 2022. See “Cooperative Marketing Agreement” below. 

 

Legislation:

 

Minimum Wage Legislation

 

Legislation that was enacted into law in 2014 increased the minimum wage that must be paid to most company employees from $7.25 to $8.00 on August 1, 2014, and from $8.00 to $9.00 per hour on August 1, 2015. A further increase from $9.00 to $9.50 per hour went into effect on August 1, 2016. In addition, starting January 1, 2018, the minimum wage will increase at the beginning of each year by the rate of inflation with a maximum increase of up to 2.5% per year. Prior to August 1, 2014, the Company employed a large number of individuals who received an hourly wage equal to or slightly above $7.25 per hour. As a result, this legislation had an adverse impact in 2014 and 2015 and will continue to have an adverse impact in 2016 and beyond. We have implemented measures, and will continue to implement measures, to mitigate the impact of this increase by raising our prices and/or reducing our employee count. However, these measures could themselves have an adverse effect because higher prices and diminished service levels may discourage customers from visiting the Racetrack. To the extent we are not able to implement such price increases and other cost cutting measures, the increase in the minimum wage will adversely affect our net income.

 

Advanced Deposit Wagering Legislation

 

During May 2016, the Advanced Deposit Wagering (“ADW”) legislation was signed into law by the governor of Minnesota. The bill will establish licensing criteria and regulatory oversight of ADW providers doing business in the State of Minnesota. This would allow the Minnesota Racing Commission (“MRC”) to regulate pari-mutuel wagering already occurring in Minnesota and allow Canterbury Park to contract for source market fees from this wagering. These source market fees from ADW handle from Minnesota residents would benefit the Company, the MRC, Minnesota horseracing industry and Minnesota breeders although it may also have a negative impact on handle as more customers may wager online. Currently, the Company is assessing the financial impact of the new legislation and cannot estimate it at this time.

 

Cooperative Marketing Agreement:

 

On June 4, 2012, the Company entered into the CMA with the SMSC. The primary purpose of the CMA is to increase purses paid during live horse racing at Canterbury Park’s Racetrack in order to strengthen Minnesota’s thoroughbred and quarter horse industry. Under the CMA, as amended, this is achieved through “Purse Enhancement Payments to Horsemen” paid directly to the MHBPA. Such payments have no direct impact on the Company’s consolidated financial statements or operations.

 

Under the terms of the CMA, the SMSC paid the horsemen $6.7 million and $6.2 million in the first nine months of 2016 and 2015, respectively, primarily for purse enhancements for the live race meets in the respective years.

 

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Under the CMA, as amended, SMSC also agreed to make “Marketing Payments” to the Company relating to joint marketing efforts for the mutual benefit of the Company and SMSC, including signage, joint promotions, player benefits and events. Under the CMA, the SMSC paid the Company $1,197,000 and $944,000 for marketing purposes during the nine months ended September 30, 2016 and 2015, respectively.

 

During January 2015 and 2016, the CMA was amended to adjust the payment amounts between the “Purse Enhancement Payments to Horsemen” and “Marketing Payments to Canterbury Park.”

 

SMSC has currently agreed to make the following purse enhancement and marketing payments for 2017 through 2022:

 

Year   Purse Enhancement Payments to Horsemen 1  Marketing Payments to Canterbury Park  
2017   $  7,466,910   $  1,317,690  
2018      7,650,000      1,350,000  
2019      7,650,000      1,350,000  
2020      7,650,000      1,350,000  
2021      7,650,000      1,350,000  
2022      7,650,000      1,350,000  

 

1  Includes $100,000 each year payable to various horsemen associations

 

The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s consolidated statements of operations. For the nine months ended September 30, 2016, the Company recorded $610,000 in other revenue and incurred $440,000 in advertising and marketing expense and $170,000 in depreciation related to the SMSC marketing payment. For the nine months ended September 30, 2015, the Company recorded $800,000 in other revenue and incurred $630,000 in advertising and marketing expense and $170,000 in depreciation related to the SMSC marketing payment. The excess of amounts received over revenue is reflected as deferred revenue which is included in accounts payable on the consolidated balance sheets.

 

Under the CMA, the Company agreed for the term of the CMA that it would not promote or lobby the Minnesota legislature for expanded gambling authority and will support the SMSC’s lobbying efforts against expanding gambling authority.

 

As part of the CMA, and pursuant to a related SAR Agreement dated June 14, 2012, the Company issued stock appreciation rights to the SMSC. For the nine months ended September 30, 2015, the Company recognized $142,000 of expense related to these stock appreciation rights, of which $142,000 was recorded as an offset to other revenue. On July 30, 2015, the Company sold the land and buildings related to the Shakopee Valley RV Park located in Shakopee, Minnesota to SMSC for $100,000 plus the cancellation of the vested and unvested SARs. As a result, there was no expense for the nine months ended September 30, 2016.

 

Forward-Looking Statements:

 

From time-to-time, in reports filed with the Securities and Exchange Commission, in press releases, and in other communications to shareholders or the investing public, we may make forward-looking statements concerning possible or anticipated future financial performance, prospective business activities or plans which are typically preceded by words such as “believes,” “expects,” “anticipates,” “intends” or similar expressions. For such forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in federal securities laws. Shareholders and the investing public should understand that such forward-looking statements are subject to risks and uncertainties which could affect our actual results and cause actual results to differ materially from those indicated in the forward-looking statements. Such risks and uncertainties include, but are not limited to: material fluctuations in attendance at the Racetrack, decline in interest in wagering on horse races at the Racetrack, at other tracks, or on unbanked card games offered at the Card Casino, competition from other venues offering unbanked card games or other forms of wagering, a greater than anticipated expenses or lower than anticipated return on our development of our underutilized land. competition from other sports and entertainment options, increases in compensation and employee benefit costs, increases in the percentage of revenues allocated for purse fund payments, higher than expected expenses related to new marketing initiatives, the impact of wagering products and technologies introduced by competitors, legislative and regulatory decisions and changes, the general health of the gaming sector, and other factors that are beyond our ability to control or predict.

 

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ITEM 3:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Canterbury Park is not required to provide the information requested by this Item as it qualifies as a smaller reporting company. 

 

ITEM 4:CONTROLS AND PROCEDURES

 

(a)Evaluation of Disclosure Controls and Procedures:

 

The Company’s Chief Executive Officer, Randall D. Sampson, and Chief Financial Officer, David C. Hansen, have reviewed the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based upon this review, these officers have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that the disclosure controls are also effective to ensure that information required to be disclosed in the Company’s Exchange Act reports is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

 

(b)Changes in Internal Control over Financial Reporting:

 

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred during our fiscal quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II  

OTHER INFORMATION 

 

Item 1.Legal Proceedings

 

 Not Applicable.

 

Item 1A.Risk Factors

 

 There have been no material changes to the Risk Factors reported under Item 1A in the Form 10-K for the year ended December 31, 2015, and the risk factors presented therein are incorporated by reference herein.

  

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)Not Applicable. 

(b)Not Applicable. 

(c)On December 17, 2007, the Company’s Board of Directors adopted a plan that authorized the repurchase of up to 250,000 shares of the Company’s common stock pursuant to Exchange Act Rule 12b-18 in open market transactions, block purchases of privately negotiated transactions (the “2008 Stock Repurchase Plan”). From its adoption until August 13, 2012, the Company repurchased 216,543 shares under the 2008 Stock Repurchase Plan and, on such date, authorized the repurchase of an additional 100,000 shares of the Company’s common stock. The Company did not repurchase any shares during the third quarter of 2016. The maximum number of shares that may yet be purchased under the above authorizations is 128,781 as of September 30, 2016.

 

Item 3.Defaults upon Senior Securities

 

 Not Applicable.

 

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Item 4.Mine Safety Disclosures

 

 Not Applicable.

 

Item 5.Other Information

 

 Not Applicable.

 

Item 6.Exhibits

 

(a)The following exhibits are included herein: 

 

11Statement re computation of per share earnings – See Net Income Per Share under Note 1 of Notes to Consolidated Financial Statements under Part 1, Item 1, which is incorporated herein by reference. 

 

31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (rules 13a-14 and 15d-14 of the Exchange Act). 

 

31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (rules 13a-14 and 15d-14 of the Exchange Act). 

 

32Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).  

 

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SIGNATURES 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 

 

      Canterbury Park Holding Corporation
       
Dated: November 14, 2016   /s/ Randall D. Sampson
      Randall D. Sampson,
      President and Chief Executive Officer

 

Dated: November 14, 2016   /s/ David C. Hansen
      David C. Hansen,
      Vice President and Chief Financial Officer

 

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