10-K 1 cphc-20181231x10k.htm 10-K cphc_Current_Folio_10K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10‑K

(Mark One)

 

 

 

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2018

 

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 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)

 

Registrant’s telephone number, including area code:  (952) 445‑7223

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Common Stock, $.01 par value

 

NASDAQ

Title of Each Class

 

Name of Exchange on which Registered

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

YES

 

NO

 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

 

 

 

 

 

 

 

YES

 

NO

 

 

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,  every Interactive Data File required to be submitted 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 such files).

 

 

 

 

 

 

 

 

YES

 

NO

 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

Large accelerated filer

Non-accelerated filer

Accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

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

 

 

 

 

 

 

 

 

YES

 

NO

 

 

The aggregate market value of the shares of voting and non-voting common equity held by non-affiliates based on the price at which the Company’s common stock was last sold on the NASDAQ Global Market, on June 30, 2018, the end of the registrant’s most recently completed second fiscal quarter, was $35,100,683.

 

On March 29, 2019, the Company had 4,573,658 shares of common stock, $.01 par value, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive Proxy Statement for its Annual Meeting of Shareholders, to be held on June 5, 2019 and which will be filed on or before April 26, 2019, are incorporated by reference into Part III of this Form 10‑K.

 

 

 

 


 

CANTERBURY PARK HOLDING CORPORATION

FORM 10‑K ANNUAL REPORT

FOR THE YEAR ENDED DECEMBER 31, 2018

TABLE OF CONTENTS

 

 

 

 

Page

PART I

 

 

 

ITEM 1. 

Business

3

ITEM 1A. 

Risk Factors

12

ITEM 1B. 

Unresolved Staff Comments

17

ITEM 2. 

Properties

17

ITEM 3. 

Legal Proceedings

18

ITEM 4. 

Mine Safety Disclosures

18

 

 

PART II 

 

 

 

 

ITEM 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

19

ITEM 6. 

Selected Financial Data  

20

ITEM 7. 

Management’s Discussion and Analysis of Financial Condition and Results of Operation  

22

ITEM 7A. 

Quantitative and Qualitative Disclosures about Market Risk

32

ITEM 8. 

Financial Statements and Supplementary Data

33

ITEM 9. 

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

58

ITEM 9A. 

Controls and Procedures

58

ITEM 9B. 

Other Information

59

 

 

PART III 

 

 

 

 

ITEM 10. 

Directors, Executive Officers and Corporate Governance

60

ITEM 11. 

Executive Compensation

60

ITEM 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

60

ITEM 13. 

Certain Relationships, Related Transactions and Director Independence

60

ITEM 14. 

Principal Accounting Fees and Services

60

 

 

PART IV 

 

 

 

 

ITEM 15. 

Exhibits and Financial Statement Schedules

61

ITEM 16. 

Form 10‑K Summary

63

 

 

 

SIGNATURES 

64

 

 

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Item 1. BUSINESS

(a) General Development of the Business

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 was 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 the Racetrack operations continue to be subject to direct regulation by the Minnesota Racing Commission (“MRC”).

 

·

DevelopmentCo continues CPHC’s efforts prior to June 30, 2016 to commercially develop approximately 140 acres of Company land that is not needed for 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.”

 

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

 

Business Overview - Canterbury Park Holding Corporation (the “Company,” “we,” “our,” or “us”) hosts pari-mutuel wagering on horse races and “unbanked” card games at its Canterbury Park Racetrack and Card Casino facility (the “Racetrack”) in Shakopee, Minnesota.  The Company’s pari-mutuel wagering operations include both wagering on thoroughbred and quarter horse races during live meets at the Racetrack 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 Company also derives revenues from related services and activities, such as food and beverage, parking, advertising signage, publication sales, and catering and events held at the Racetrack.  The ownership and operation of the Racetrack and the Card Casino are significantly regulated by the Minnesota Racing Commission (“MRC”), a state regulatory commission whose board members are appointed by the Minnesota Governor and confirmed by the Minnesota State Senate.

 

The Company acquired the Racetrack on March 29, 1994, commenced seven day a week simulcast operations on May 6, 1994, and, beginning in May 1995, launched live horse racing and related pari-mutuel wagering on a seasonal basis, generally from early May to early September.  The Card Casino opened on April 19, 2000 and, with authority to host card games at up to 80 tables, the Company currently hosts live play on approximately 65 tables on a daily basis.

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In June 2012, the Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community (“SMSC”) pursuant to which SMSC agreed, through 2022, to supplement purses for live races at the Racetrack, as well as provide funds to the Company for joint marketing efforts with SMSC.  See “Cooperative Marketing Agreement” at (c)(ix) below for additional information.

The Company’s website is www.canterburypark.com.  Our Annual Reports on Form 10‑K, our Quarterly Reports on Form 10‑Q and our periodic reports on Form 8‑K (and any amendments to these reports) are available free of charge on our website.

(b) Financial Information About Segments

The Company divides its business into four segments: horse racing, Card Casino, food and beverage, and development.  The horse racing segment represents our pari-mutuel wagering operations on simulcast and live horse races; the Card Casino segment represents our unbanked card operations; the food and beverage segment includes concessions, catering and events services provided at the Racetrack; and the development segment represents our real estate development operations.

(c) Narrative Description of Business

(i)           Horse Racing Operations

The Company’s horse racing operations consist of year-round simulcasting of horse races from around the U.S. and internationally, and wagering on live thoroughbred and quarter horse races (“live meets”) held on a seasonal basis beginning in May and generally concluding in September each year.

Live Racing

For the years ended December 31, 2018 and 2017, the Racetrack hosted 69 days and 67 days, respectively, of live racing beginning in early May and concluding in September.  Currently, Minnesota law requires the Company to schedule a minimum of 125 days of live racing annually, unless the Minnesota Horsemen’s Benevolent and Protective Association (the “MHBPA”) agrees to a fewer number of live racing days. Since 1995, the MHBPA has agreed to waive the 125‑day requirement and has allowed the Company to run a live meet of at least 50 days each year. Pursuant to the CMA, the MHBPA entered into a Horse Association Agreement with the Company in which the MHBPA agreed to waive the 125‑day requirement if at least 65 days of live racing are scheduled each year during the term of the agreement.  If, for any reason, the MHBPA ceases to be bound by its obligations under the Horse Association Agreement, and the Company and the MHBPA are unable to agree on a live meet shorter than 125 days, the Company’s operations could be adversely affected by a decrease in the daily purses, potential reduction in the quality of horses, lower attendance, lower overall average amount wagered (“handle”), and substantially greater operating expenses.

Simulcasting

Simulcasting is the process by which live horse races held at one facility (the “host track”) are transmitted simultaneously to other locations to allow patrons at each receiving location (the “guest track”) to place wagers on races transmitted from the host track.  Monies are collected at the guest track and the information with respect to the total amount wagered is electronically transmitted to the host track.  All of the amounts wagered at guest tracks are combined into the appropriate pools at the host track with the final odds and payouts based upon all the monies in the respective pools.

The Company offers simulcast racing from up to 20 racetracks per day, seven days a week, 364 days per year, including Churchill Downs, Santa Anita, Gulfstream Park, Belmont Park, and Saratoga Racecourse.  In addition, races of national interest, such as the Kentucky Derby, the Preakness Stakes, the Belmont Stakes, and the Breeders’ Cup supplement the regular simulcast program.  The Company regularly evaluates its agreements with other racetracks to offer the most popular simulcast signals of live horse racing that are reasonably available.

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Under federal and state law, in order to conduct simulcast operations either as a host or guest track, the Company must obtain the consent of the state’s regulatory authority and the organization that represents a majority of the owners and trainers of the horses who race at the Racetrack.  In Minnesota, these consents must be obtained from the MRC and the MHBPA, respectively.  As these consents are obtained annually, no assurance can be given that the MRC and the MHBPA will allow the Company to conduct simulcast operations either as a host or guest track after 2018. If either the MRC or the MHBPA does not consent, the Company’s operations could be adversely affected by a decrease in pari-mutuel revenue, potential reduction in the quality of horses, lower attendance, and lower overall handle.

(ii)          Card Casino Operations

The Card Casino is open 24 hours per day, seven days per week, and offers two forms of unbanked card games: poker and table games.

Poker games, including Texas Hold ‘Em, Stud, and Omaha, with betting limits per hand ranging between $2 and $100, are currently offered in the poker room.  A dealer employed by the Company regulates the play of the game at each table and deals the cards but does not participate in play.  In poker games, the Company is allowed to deduct a percentage from the accumulated wagers and impose other charges for hosting the activity but does not have an interest in the outcome of a game.  The Company may add additional prizes, awards or money to any game for promotional purposes.

The Card Casino currently offers the following table games: Blackjack, Mississippi Stud, Fortune Pai Gow, Three Card Poker, Ultimate Texas Hold ‘Em, EZ Baccarat, Criss Cross Poker, and Free Bet Blackjack.  The Company has the option to offer banked games under laws governing Card Casino operations but currently only offers “unbanked” games.  “Unbanked” refers to a wagering system or game where wagers lost in card games are accumulated into a player pool liability for purposes of enhancing the total amount paid back to winning players.  The Company can only serve as custodian of the player pool, may not have an active interest in any card game and does not recognize amounts that dealers “win” or “lose” during the course of play as revenue.

Under Minnesota law, the Company is required to pay 10% of the first $6 million of gross Card Casino revenues towards purses for live horse racing at the Racetrack.  After meeting the $6 million threshold, the Company must pay 14% of gross Card Casino revenues as purse monies. Effective January 1 2019, the $6 million threshold was eliminated and the Company is required to pay 14% of gross Card Casino revenue as purse monies. Of funds allocated for purses, the Company pays 10% of the purse monies to the Minnesota Breeders’ Fund (the “MBF”), which is a fund apportioned by the MRC among various purposes related to Minnesota’s horse breeding and horse racing industries.  The remaining 90% of purse monies are divided between thoroughbred (90%) and quarter horse (10%) purse funds. Starting January 1 2019, thoroughbred will receive 91% and quarter horse will receive 9% of the purse funds.

(iii)         Food and Beverage Operations

The Company’s food and beverage operations consist of concession stands, restaurant and buffet, bars and other food venues.  The Company currently offers two year-round café style restaurants and full service bars within the Card Casino and simulcast area.  The Card Casino offers tableside menu service 24 hours a day. Our Triple Crown Club TM offers lounge services along with a buffet restaurant.  During live racing, a wide variety of concession style food and beverage options are available to our guests.

The food and beverage operations also include our catering and events services. The Company is the fourth largest event space in the Twin Cities with more than 100,000 square feet of available space. The Company’s facilities provide a variety of purposes for year-round events and other activities.  The Company’s event space has been used for craft shows, trade shows, pool and poker tournaments, automobile and other utility vehicle shows, major art shows, and fundraisers.  The Company’s outdoor spaces have been used for concerts, snowmobile races and other competitions. In 2016, the Company completed construction of a redesign of the infield of the Racetrack to use the space as a concert and event area. In addition to event space, the Company rents space in its horse stable area for boat storage during the winter months.

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(iv)         Development Operations

The Company owns approximately 370 acres of land in Shakopee, Minnesota where the Racetrack is located. Approximately 273 acres of this land is specifically designated as being subject to MRC regulation as part of the Company’s  Class A license.  The amount of land currently needed to conduct Racetrack operations (grandstand, racetrack, stable area, parking areas, and land for other facilities including the expo center) is approximately 243 acres.  As a result, approximately 127 acres are considered underutilized (the “Underutilized Land”). This land is available for real estate development compatible with the Company’s Racetrack Operations.

For the past several years, the Company has explored various ways to develop the Underutilized Land.  The Company has reported on is plans to develop the Underutilized Land from time to time in reports to Securities and Exchange Commission and in press releases. The Company continues to pursue various mixed use development opportunities, such as residential development, office, restaurants, hotel, entertainment and retail operations. See footnote 14 of the consolidated financial statements for more detailed information on recent transactions.

(v)          Sources of Revenue

General

The Company’s revenues are principally derived from three activities: Card Casino operations, wagering on live and simulcast horse races, and food and beverage sales. For the year ended December 31, 2018, revenues from Card Casino operations represented 57.4% of total revenues, wagering on horse races generated 28.3% of total revenues, and food and beverage revenue represented 14.3% of total revenues.  

Card Casino Operations

The Company currently receives collection revenue from poker and table games wagering in its Card Casino, which operates 24 hours per day, seven days per week. The primary source of Card Casino revenue is a percentage of the wagers received from the players, aggregated up to 20% per day, as defined by the MRC regulations, as compensation for providing the Card Casino facility and services, referred to as “collection revenue.”  In addition, several table games offer a progressive jackpot.  The player has the option of playing the jackpot with the opportunity to win some or the entire jackpot amount, depending upon the player’s hand.  The Company collects a “rake” of 5%‑10%, depending on the limit of the game, of each addition to the “pot” up to a maximum of $5 per hand as its collection revenue.  In addition, poker games offer progressive jackpots for most games.  In order to fund the jackpot pools, the dealer withholds $1 from each final pot in excess of the $15 minimum.

Pari-Mutuel Wagering – General

In pari-mutuel wagering, bettors wager against each other in a pool, rather than against the operator of the facility or with preset odds.  From the total handle wagered, the Minnesota Pari-Mutuel Horse Racing Act (the “Minnesota Racing Act”) specifies the maximum percentage, referred to as the “takeout,” that may be withheld by the Racetrack, with the balance returned to the winning bettors.  From the takeout, funds are set aside for purses and paid to the State of Minnesota for pari-mutuel taxes and to the MBF.  The balance of the takeout remaining after these deductions is commonly referred to as the “retainage.”

Pari-mutuel wagering can be divided into two categories: straight wagering pools and multiple wagering pools, which are also referred to as “exotic” wagering pools.  Examples of straight wagers include: “win,” “place,” and “show.”  Examples of exotic wagers include: “daily double,” “exacta,” ”trifecta,” and “pick four.”

The amount of takeout earned by the Company depends on where the race is run and the form of wager (straight or exotic).  Net revenues from pari-mutuel wagering on live races run at the Racetrack consist of the total amount wagered, less the amounts paid (i) to winning patrons, (ii) for purses, (iii) to the MBF and (iv) for pari-mutuel taxes to the State of Minnesota.  Net revenues from pari-mutuel wagering on races being run at out-of-state racetracks and simulcast to the Racetrack have similar expenses but also include a host fee payment to the host track.  The host fee,

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which is calculated as a percentage of monies wagered (generally 3.0% to 10.0%), is negotiated with the host track and must comply with state laws governing the host track. Pari-mutuel revenues also include commission and breakage revenues on live on-track and simulcast racing, fees received from out-of-state racetracks for wagering on our live races and proceeds from unredeemed pari-mutuel tickets.

Additionally, Minnesota Advanced Deposit Wagering (“ADW”) legislation allows Minnesota residents to engage in pari-mutuel wagering on out-of-state horse races online with a prefunded account through an ADW provider. The Company collects a percentage of monies wagered (generally 3.25% to 5.0%) by Minnesota residents through the ADW provider as a source market fee. The Company pays 28% of the collected revenues to another Minnesota-based horse track, and records the remaining 72% as revenues and records expenses of at least 50% for purses and breeders’ awards.

Wagering on Live Races

The Minnesota Racing Act establishes the maximum takeout that may be deducted from the handle.  The takeout percentage on live races depends on the type of wager.  The total maximum takeouts are 17% from straight wagering pools and 23% from exotic wagering pools.  From this takeout, Minnesota law requires deductions for purses, pari-mutuel taxes, and payments to the MBF.  

While the Minnesota Racing Act regulates that a minimum of 8.4% of the live racing handle be paid as purses to the owners of the horses, purse contributions from other sources are subject to an agreement with the MHBPA and the Minnesota Quarter Horse Association (the “horsepersons’ associations”).  In addition, the MBF receives 1% of the handle.  The current pari-mutuel tax applicable to wagering on all simulcast and live races is 6% of takeout in excess of $12 million during the twelve-month period beginning July 1 and ending the following June 30.

Food and Beverage Revenue

The Company earns revenue from sales in its restaurant, catering areas and numerous concession stands located throughout the facility. Food and beverage sales are also offered in the card room during live and simulcast racing and during events.

Other Revenue

The Company generates cash revenues from the receipt of reserved seating charges, preferred and valet parking and the sales of various daily pari-mutuel publications.  Additional revenues are derived from special events and other space rentals. The Company also generates revenue from providing advertising signage space.

(vi)         Competition

The Company faces direct competition from North Metro Harness Initiative, LLC (“NMHI”), which operates the Running Aces Harness Park in Columbus Township, Anoka County, Minnesota, a racetrack and card room that is located approximately 50 miles from Canterbury Park.  NHMI offers pari-mutuel wagering on live races of standardbred (“harness”) horses on a seasonal basis and year round wagering on simulcasting of all breeds of horse races.  In addition to pari-mutuel wagering, NHMI operates a card room that directly competes with the Company’s Card Casino.   Due to its proximity and similar wagering and gaming offerings, NHMI’s direct and substantial competition could adversely affect the Company’s business, financial condition and results of operations.

The Company operates in a highly competitive wagering and gaming environment with a large number of participants. The Company competes with competitive wagering operations and activities that include tribal casinos, state-sponsored lotteries and other forms of legalized gaming in the U.S. and other jurisdictions.  The Company competes with a number of tribal casinos in the State of Minnesota that offer video slot machines, table games and unbanked card games, including Minnesota’s largest casino, Mystic Lake, which is located approximately four miles from the Racetrack and which is owned by the SMSC.

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Additionally, Internet-based interactive gaming and wagering is growing rapidly and adversely affects all forms of wagering offered by the Company. Legislation became effective November 1, 2016 in Minnesota that allowed the Company to begin collecting source market fees from companies that offer ADW wagering. These companies provide legal simulcast horse wagering over the internet. The legislation now allows the Company to recoup a percentage of all simulcast horse racing wagers made by Minnesota residents over the internet on out-of-state races; however, the legal clarification of this type of wagering will significantly intensify the competition in the marketplace. The Company anticipates competition from other existing and new Internet-based gaming ventures, including Fantasy Sports, will become more intense as state and federal regulation of Internet-based activities is clarified.

The Company also faces indirect competition from a variety of sources for discretionary consumer spending including spectator sports and other entertainment and gaming options. In the Minneapolis-Saint Paul metropolitan area, competition includes a wide range of live and televised professional and collegiate sporting events.  In addition, live horse racing competes with a wide variety of summer attractions, including amusement parks, sporting events, and other local activities.

Finally, the Company competes with racetracks located throughout the United States in securing horses to run at the Racetrack.  Attracting owners and trainers that can bring high quality horses to our Racetrack is largely dependent on our ability to offer competitive purses.  The Company experiences significant competition for horses from racetracks located near Des Moines, Iowa and Chicago, Illinois. We expect this competition to continue for the foreseeable future.

(vii)        Regulation

General

The ownership and operation of the Racetrack in Minnesota is subject to significant regulation by the MRC under the Minnesota Racing Act and the rules adopted by the MRC.  The Minnesota Racing Act governs the allocation of each wagering pool to winning bettors, the Racetrack, purses, pari-mutuel taxes, and the MBF, and empowers the MRC to license and regulate substantially all aspects of horse racing in the State.  The MRC, among other things, grants operating licenses to racetracks after an application process and public hearings, licenses all racetrack employees, jockeys, trainers, veterinarians, and other participants, regulates the transfer of ownership interests in licenses, allocates live race days and simulcast-only race days, approves race programs, regulates the conduct of races, sets specifications for the racing ovals, animal facilities, employee quarters and public areas of racetracks, regulates the types of wagers on horse races, and approves significant contractual arrangements with racetracks, including management agreements, simulcast arrangements, and totalizator contracts.

A federal statute, the Interstate Horse Racing Act of 1978, also requires that a racetrack must obtain the consent of the group representing the horsepersons (owners and trainers) racing the breed of horses that race a majority of the time at the racetrack (the MHBPA), and the consent of the state agency regulating the racetrack (in Minnesota, the MRC), in order to transmit simulcast signals of its live races or to receive and use simulcast signals from other racetracks.

Issuance of Class A and Class B Licenses to the Company

The Company holds a Class A License, issued by the MRC, that allows the Company to own and operate the Racetrack.  The Class A License is effective until revoked, suspended by the MRC or relinquished by the licensee.  Currently, the fee for a Class A License is $253,000 per fiscal year.

The Company also holds a Class B License, issued by the MRC, that allows the Company to sponsor and manage horse racing on which pari-mutuel wagering is conducted at its Class A licensed racetrack and on other horse races run at out-of-state locations as authorized by the MRC.  The Class B License is renewable each year by the MRC after a public hearing (if required by the MRC).  Currently, the fee for the Class B License is $500 for each assigned race day on which live racing is actually conducted and $100 for each day on which simulcasting is authorized and actually takes place.

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In addition, the law requires that the Company reimburse the MRC for actual costs, including stewards, state veterinarians and drug testing, related to the regulating of live racing. For fiscal years ended December 31, 2018 and 2017, the Company paid $628,000 and $638,000 respectively, to the MRC as reimbursement for costs of regulating live racing operations.

Limitation on the Number of Class A and Class B Licenses

Pursuant to the Racing Act, so long as the Racetrack maintains its Class A License, no other Class A License may be issued to allow an entity to own and operate a racetrack in the seven county metropolitan area where thoroughbred and quarter horses are raced.  However, the Racing Act provides that the MRC may issue an additional Class A License within the seven-county metropolitan area, if the additional license is issued for a facility that, among other conditions, is located more than 20 miles from the Racetrack, contains a track no larger than five-eighths of a mile in circumference, and is used exclusively for harness racing.  In January 2005 this additional Class A license was issued to NMHI (see “Competition” above).

Limitation on Ownership and Management of an Entity that holds a Class A or Class B License

The Racing Act requires prior MRC approval of all officers, directors, 5% shareholders or other persons having a present or future direct or indirect financial or management interest in any person applying for a Class A or Class B license, and if a change of ownership of more than 5% of the licensee’s shares is made after an application is filed or the license issued, the applicant or licensee must notify the MRC of the changes within five days of this occurrence and provide the information required by the Racing Act.

Card Casino Regulation

The MRC is also authorized by the Racing Act to regulate Card Casino operations. The law requires that the Company reimburse the MRC for its actual costs, including personnel costs, of regulating the Card Casino.  For fiscal years ended December 31, 2018 and 2017, the Company paid $224,000 and $195,000, respectively, to the MRC as reimbursement for costs of regulating Card Casino operations.

On January 19, 2000, the MRC issued an additional Class B License to the Company that authorized the Company to host unbanked card games.  The Class B License is renewable each year by the MRC after a public hearing (if required by the MRC).  Currently, the Class B License fee of $10,000 per calendar year is included in the Class A License fee of $253,000 per calendar year.

Local Regulation

The Company’s operations are subject to state and local laws, regulations, ordinances, and other provisions affecting zoning, public health, and other matters that may have the effect of restricting the uses to which the Company’s land and other assets may be used.  Also, any development of the Racetrack site is, among other things, subject to applicable zoning ordinances and requires approval by the City of Shakopee and other authorities. There can be no assurance these approvals will be obtained for any future development the Company proposes.

Federal Regulation

In December 2017, the Tax Cuts and Jobs Act (“TCJA”) went into effect. The TCJA contained substantial changes to the Internal Revenue Code, effective January 1, 2018, some of which could have an adverse effect on our business.

9


 

(viii)       Recent Legislation

Minimum Wage Legislation

In 2014, Minnesota legislation enacted into law an increase in the minimum wage that must be paid to most Company employees. On January 1, 2018, the minimum wage was set to increase at the beginning of each year by the rate of inflation with a maximum increase of up to 2.5% per year. The minimum wage for 2019 will be $9.86 per hour. 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 financial impact in 2014 through 2018, and will continue to have an adverse impact. We have implemented measures to partially mitigate the impact of this increase by raising our prices and reducing our employee count. These measures could themselves have an adverse effect because higher prices and diminished service levels may discourage customers from visiting the Racetrack.

Advanced Deposit Wagering Legislation

Minnesota ADW legislation that became effective November 1, 2016, requires ADW providers to be licensed by the MRC and established licensing criteria and regulatory oversight of ADW providers doing business in the State of Minnesota. The law allows licensed racetracks to negotiate separate agreements with the ADW providers to remit source market fees to those racetracks. The ADW source market revenue to the Company totaled approximately $878,000 and $881,000 for the fiscal years ended December 31, 2018 and 2017, respectively. As part of the agreement, 50% of source market fees is allocated to purse accounts and the MBF.

(ix)         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 through horse industry.  Under the CMA, as amended, this is achieved through “Purse Enhancement Payments to Horsemen” paid directly to the MHBPA.  These payments have no direct impact on the Company’s consolidated financial statements or operations.

Under the CMA, as amended, the SMSC paid the horsemen $7.3 million and $7.2 million for purse enhancements for the years ended December 31, 2018 and 2017, respectively.

Under the CMA, 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 $1.6 million for marketing purposes for the years ended December 31, 2018 and 2017.

In January 2015, 2016, 2017, and 2018 the CMA was amended to adjust the payment amounts between the “Purse Enhancement Payments to Horsemen” and “Marketing Payments to Canterbury Park.” As the CMA has most recently been amended, SMSC has agreed to make the following purse enhancement and marketing payments in 2019 through 2022:

 

 

 

 

 

 

 

 

 

Purse Enhancement Payments to

    

Marketing Payments to Canterbury

Year

    

Horsemen

1

Park

2019

 

$

7,380,000

 

$

1,620,000

2020

 

 

7,380,000

 

 

1,620,000

2021

 

 

7,380,000

 

 

1,620,000

2022

 

 

7,380,000

 

 

1,620,000


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

The amounts received 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

10


 

consolidated statements of operations. For the year ended December 31, 2018, the Company recorded $1,275,000 in other revenue and incurred $1,049,000 in advertising and marketing expense and $226,000 in depreciation related to the SMSC marketing payment. For the year ended December 31, 2017, the Company recorded $1,399,000 in other revenue and incurred $1,173,000 in advertising and marketing expense and $226,000 in depreciation related to the SMSC marketing payment. The excess of amounts received over revenue is reflected as deferred revenue on the company’s 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.

If the Company breaches its obligations under the terms of the agreement, the Company is obligated to repay (1) all amounts paid by SMSC pursuant to the agreement; (2) pay to the SMSC an amount equal to all Horse Association Payments paid by SMSC; and (3) pay to SMSC any additional amounts for any other damages SMSC incurs. The Company has not violated and does not intend to violate its obligations with respect to the agreement. The Company believes the likelihood of a breach of obligations is remote.

 (x)          Marketing

The Company’s primary market is the seven-county Minneapolis-Saint Paul metropolitan area (Hennepin, Ramsey, Anoka, Washington, Dakota, Scott, and Carver) plus the two counties to the south of the Racetrack and Card Casino (Le Sueur and Rice).  The City of Shakopee, located in the southwestern portion of the metropolitan area, is one of the fastest growing communities in the region, and Scott County is one of the fastest growing counties in the country.

To support its pari-mutuel horse racing, Card Casino, and catering and events businesses, the Company conducts year-round marketing efforts to maintain the loyalty of existing customers and attract new players to the property.  The Company uses radio, television, digital advertising, social media, print advertising and direct marketing to communicate to its audiences.  In addition to its regular advertising and communication program, the Company conducts numerous special promotions, handicapping contests and poker tournaments to attract incremental visits.   The Company also uses a robust player rewards and database marketing program to enhance the loyalty of its guests.

The Company continues to focus on creating a premier guest experience as the core element of its marketing efforts.  This includes delivering great customer service, developing new food and beverage offerings, creating fan education programs, and providing entertainment opportunities that go beyond the traditional pari-mutuel wagering and card playing activities.

(xi)         Employees

At December 31, 2018, the Company had 257 full-time employees and 597 part-time employees. The Company adds approximately 350 employees on a seasonal basis for live racing operations from early May until early September.  The Company’s management believes its employee relations are good.

(xii)        Executive Officers

The executive officers of the Company, their ages and their positions with the Company at March 15, 2019 are as follows:

 

 

 

 

 

 

Name

    

Age

    

Position with Company

Randall D. Sampson

 

60

 

President and CEO

 

 

 

 

 

Robert M. Wolf

 

50

 

Senior Vice President of Finance and CFO

 

11


 

Randall D. Sampson has been President and Chief Executive Officer since the formation of the Company in March 1994. He has been active in horse industry associations, currently serving as Director of the Thoroughbred Racetracks of America and is a past Vice President of the Thoroughbred Racetracks of America and past President of the Minnesota Thoroughbred Association. Mr. Sampson also currently serves as a director of Communications Systems, Inc. (NASDAQ:JCS), a manufacturer of telecommunications and data communications products based in Minnetonka, Minnesota. Mr. Sampson is the son of Curtis A. Sampson, who is the Company’s non-executive Chairman of the Board and the beneficial owner of approximately 20% of the Company’s common stock.

Robert M. Wolf was hired as Vice President of Finance in March 2017 and was named Senior Vice President of Finance and Chief Financial Officer in September 2017. Prior to joining Canterbury, he served as CFO for two public companies in the Twin Cities, Rimage Corporation and MGC Diagnostics Corporation.

Item 1A. RISK FACTORS

In addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that are specific to our industry and us could materially affect our future performance and results. Management believes the factors described below are the most significant risks that could have a material impact on our business.

Our business is sensitive to economic conditions that may affect consumer confidence, consumer discretionary spending, or our access to credit in a manner that adversely affects our operations.

Economic trends can affect consumer confidence and consumers’ discretionary spending:

·

Negative economic conditions and the persistence of elevated levels of unemployment can affect consumers’ disposable incomes and, therefore, affect the demand for entertainment and leisure activities.

·

Declines in the residential real estate market, increases in individual tax rates and other factors that we cannot accurately predict may reduce the disposable income of our customers.

·

Decreases in consumer discretionary spending could affect us even if these decreases occur in other markets. For example, reduced wagering levels and profitability at racetracks to which we provide our live-racing signal or from which we receive simulcast signals could adversely affect, respectively, simulcast revenues or the content we provide to our customers.

Lower consumer confidence or reductions in consumer discretionary spending could result in fewer patrons spending money at our racetrack. Our access to and cost of credit may be affected to the extent global and U.S. credit markets are affected by downward economic trends. Our ability to respond to periods of economic contraction may be limited, as some of our costs remain fixed or even increase when revenue declines.

A lack of confidence in the integrity of our core businesses could affect our ability to retain our customers and engage with new customers.

The integrity of horseracing, casino gaming and pari-mutuel wagering industries must be perceived as fair to patrons and the public at large. To prevent cheating or erroneous payouts, oversight processes must be in place to ensure that these activities cannot be manipulated. A loss of confidence in the fairness of our industries could have a material adverse impact on our business.

We face significant competition, both directly from other racing and gaming operations and indirectly from other forms of entertainment and leisure time activities, which could have a material adverse effect on our operations.

We face intense competition in our market, particularly competition from NMHI, which offers unbanked card games similar to those we offer.  We also compete with Native American owned casinos.  These facilities have the advantage of being exempt from some state and federal taxes and state regulation of indoor smoking, and have the ability to offer a wider variety of gaming products.  Internet-based interactive gaming and wagering, both legal and illegal, is growing rapidly and we anticipate competition in this area will become more intense as new Internet-based

12


 

ventures enter our industry and as state and federal regulations on Internet-based activities are clarified. Additionally, we compete with other forms of gambling, spectator sports, other forms of entertainment, and other racetracks throughout the country as we discussed under “Competition” above.

We expect competition for our existing and future operations to increase from NMHI, existing tribal casinos, and racetracks that are able to subsidize their purses with alternative gaming revenues. Competition for simulcasting customers will be intense given the 2016 legalization of online internet wagering on horse racing in Minnesota, through ADW providers. In addition, several of our tribal gaming competitors in Minnesota have substantially larger marketing and financial resources than we do.  We are unable to predict with any certainty the effects of existing and future competition on our operating results.

We are subject to extensive regulation from gaming authorities that could adversely affect us.

We are subject to significant regulation by the MRC under the Racing Act and the rules adopted by the MRC.  The MRC has the authority to increase the Class A and Class B license fees.  In addition, the Minnesota Racing Act requires that we reimburse the MRC for its actual costs of regulating the Card Casino, including personnel costs.  Increases in these licensing and regulatory costs could adversely affect our results of operations.

Amendments to the Minnesota Racing Act or decisions by the MRC in regard to any one or more of the following matters could also adversely affect the Company’s operations: the granting of operating licenses to Canterbury Park and other racetracks after an application process and public hearings; the licensing of all track employees, jockeys, trainers, veterinarians, and other participants; regulating the transfer of ownership interests in licenses; allocating live race days and simulcast-only race days; approving race programs; regulating the conduct of races; setting specifications for the racing ovals, animal facilities, employee quarters, and public areas of racetracks; changes to the types of wagers on horse races; and approval of significant contractual agreements.

We are subject to changes in the laws that govern our business, including the possibility of an increase in gaming taxes, which would increase our costs, and changes in other laws may adversely affect our ability to compete.

Our operations and oversight by the MRC are ultimately subject to the laws of Minnesota including, but not limited to, the Minnesota Racing Act, and there exists the risk that these laws may be amended in ways adverse to our operations.  In particular, we are required to pay special racing-related and Card-Casino-related taxes and fees in addition to normal federal, state, and local income taxes. These taxes and fees are subject to increase at any time.  From time to time, state and local legislators and officials have proposed changes in tax laws, or in the administration of laws affecting our industry, such as the allocation of each wagering pool to winning bettors, the Racetrack, purses, and the MBF.  In addition, poor economic conditions could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes.  It is not possible to predict with certainty the likelihood of changes in tax laws or in the administration of these laws.  These changes, if adopted, could have a material adverse effect on our operations.

We are also subject to federal and Minnesota laws that affect businesses generally.  Some of these laws, such as laws pertaining to immigration, have severe penalties for law violations.  In addition, it is possible, as a result of the legislative process, that legislation directly or indirectly adverse to the Company may be enacted into law.

We depend on key personnel.

Our continued success and our ability to maintain our competitive position is largely dependent upon, among other things, the skills and efforts of our senior executives and management team including Randall D. Sampson, our Chief Executive Officer.  We have no employment agreements with our senior executives and key personnel, and we cannot guarantee that these individuals will remain with us. Their retention is affected by the competitiveness of our terms of employment and our ability to compete effectively against other gaming companies.  Our inability to retain key personnel could have a material adverse impact on our business, financial condition, and results of operations.

13


 

We process, store and use personal information and other data, which subjects us to governmental regulation and other legal obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our business.

We receive, store and process personal information and other customer data.  There are numerous federal, state and local laws regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other data.  Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other player data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause our customers to lose trust in us, which could have an adverse effect on our business.

While we maintain insurance coverage specific to cyber-insurance matters, any failure on our part to maintain adequate safeguards may subject us to significant liabilities.

Additionally, if third parties we work with, such as vendors, violate applicable laws or our policies, these violations may also put our customers’ information at risk and could in turn have an adverse effect on our business.  The Company is also subject to payment card association rules and obligations under its contracts with payment card processors.  Under these rules and obligations, if information is compromised, the Company could be liable to payment card issuers for the associated expense and penalties.  In addition, if the Company fails to follow payment card industry security standards, even if no customer information is compromised, the Company could incur significant fines or experience a significant increase in payment card transaction costs.

Energy and fuel price increases may adversely affect our costs of operations and our revenues.

Our facility uses significant amounts of electricity, natural gas, and other forms of energy.  Increases in the cost of electricity or natural gas negatively affect our results of operations.  In addition, energy and fuel price increases could negatively affect our operations by reducing disposable income of potential customers and decreasing visits to our facility.

Our CMA with the SMSC may be terminated by the SMSC prior to December 31, 2022 under certain circumstances.

The CMA grants to the SMSC the right to terminate the CMA without cause if the SMSC determines, in its sole discretion that a change of circumstance adverse to its interests with respect to gaming in the State of Minnesota has occurred.  If the SMSC exercises this right, the Company would be entitled to substantial wind-down payments approximately equal to 2.5 times the average annual payment due under the CMA in the three years following the year it gives notice of termination.  While any wind-down payments would cushion the impact of the SMSC’s exercise of this right to terminate the CMA, a termination of the CMA prior to the expiration of its term in 2022 could have a material adverse effect on the Company.

If the Company breaches its obligations under the terms of the agreement, the Company is obligated to repay (1) all amounts paid by SMSC pursuant to the agreement; (2) pay to the SMSC an amount equal to all Horse Association Payments paid by SMSC; and (3) pay to SMSC any additional amounts for any other damages SMSC incurs. The Company has not violated and does not intend to violate its obligations with respect to the agreement. The Company believes the likelihood of a breach of obligations is remote.

Purse Enhancement Payments and Marketing Payments under our CMA with SMSC may not continue after 2022.

The term of the CMA with SMSC ends December 31, 2022, and there is no certainty the CMA can be extended or renegotiated on terms that are mutually acceptable to SMSC, the horsepersons’ associations and the Company.  In particular, there can be no assurance that, after December 31, 2022, SMSC’s purse enhancement payments to the horsepersons’ associations and marketing payments to the Company will continue at the levels currently being paid, if at all. If, by December 31, 2022, the CMA is not extended or renegotiated on economic terms substantially similar to those

14


 

currently in effect or due to the parties being unable to mutually agree on other terms, the Company’s future revenue from live racing and its profitability could be materially adversely affected.

Nationally the popularity of horse racing has declined.

There has been a general decline in the number of people wagering on live horse races at North American racetracks, either in person or via simulcasting, due to a number of factors, including increased competition from other wagering and entertainment alternatives as discussed above. According to industry sources, pari-mutuel handle declined 27% from 2007 to 2011 and has been relatively stable since 2011, experiencing less than a 1% decline between 2011 and 2018. Declining interest in horse racing has had a negative impact on revenues and profitability in our racing business. Our business plan anticipates a slight reduction in attendance and pari-mutuel wagering during our 2019 live meet due to a reduction in the number of racing days. However, as a result of the purse enhancement payments and marketing payments we receive under the CMA, we still expect to outperform the industry as it relates to field size, live handle, and simulcast handle in 2019 and beyond. Regardless, we recognize that a general decline in interest in horse racing and pari-mutuel wagering could have a material adverse impact on our business, financial condition and results of operations in future years

We may not be able to attract a sufficient number of horses and trainers to achieve above average field sizes.

We believe that patrons prefer to wager on races with a number of horses in the race (the “field”) at or above the national average. A failure to offer races with adequate fields results in less wagering on our horse races.  Our ability to attract adequate fields depends on several factors.  First, it depends on our ability to offer and fund competitive purses. Second, it depends on the overall horse population available for racing.  Various factors have led to declines in the horse population in some areas of the country, including competition from racetracks in other areas, increased costs and changing economic returns for owners and breeders, and the spread of various debilitating and contagious equine diseases.  If our racetrack is faced with a sustained outbreak of a contagious equine disease, it could have a material impact on our profitability.  Finally, if we are unable to attract horse owners to stable and race their horses at our racetrack by offering a competitive environment, including high-quality facilities, a well-maintained racetrack, comfortable conditions for backstretch personnel involved in the care and training of horses stabled at our racetrack and a competitive purse structure, our profitability could also decrease.  We also face increased competition for horses and trainers from racetracks that are licensed to operate slot machines and other electronic gaming machines that provide these racetracks an advantage in generating new additional revenues for race purses and capital improvements.  While our ability to offer adequate fields to patrons during our live meets has been substantially strengthened by the purse enhancement payments that are scheduled to be made under the CMA through 2022, our inability to attract adequate fields, for whatever reason, could have a material adverse impact on our business, financial condition and results of operations.

Inclement weather and other conditions may affect our ability to conduct live racing.

Since horse racing is conducted outdoors, unfavorable weather conditions, including extremely high and low temperatures, high winds, storms, tornadoes and hurricanes, could cause events to be postponed or canceled or attendance to be lower, resulting in reduced wagering.  Our operations, as well as the racetracks from which we receive simulcast signals, are subject to reduced patronage, disruptions or complete cessation of operations due to weather conditions, natural disasters and other casualties.  If a business interruption were to occur due to inclement weather and continue for a significant length of time at our racetrack, it could have a material adverse impact on our business, financial condition and results of operations. The Company maintains insurance for incremental weather conditions that would help mitigate the financial impact on our business.

Horse racing is an inherently dangerous sport and our racetrack is subject to personal injury litigation.

Although we carry jockey accident insurance at our racetrack to cover personal jockey injuries that may occur during races or daily workouts, there are certain exclusions to our insurance coverage, and we are still subject to litigation from injured participants.  We renew our insurance policies on an annual basis.  The cost of coverage may become so high that we may need to further reduce our policy limits or agree to certain exclusions from our coverage.  

15


 

Our results may be affected by the outcome of litigation, as this litigation could be costly and time consuming and could divert our management and key personnel from our business operations.

Our business depends on using totalizator services.

Our customers use information provided by a third party vendor that accumulates wagers, records sales, calculates payoffs and displays wagering data in a secure manner to patrons who wager on our horse races.  Any failure to keep this technology current could limit our ability to serve patrons effectively or develop new forms of wagering or affect the security of the wagering process, thus affecting patron confidence in our product.  A perceived lack of integrity in the wagering systems could result in a decline in bettor confidence and could lead to a decline in the amount wagered on horse racing.  In addition, a totalizator system failure could cause a considerable loss of revenue if betting machines are unavailable for a significant period of time or during an event with high betting volume.

An increase in the minimum wage mandated under Federal or Minnesota law could have a material adverse effect on our operations and financial results.

The Company employs a large number of individuals at an hourly wage equal to or slightly above the current state mandated wage of $9.65 per hour.  See “Recent Legislation” above for additional information regarding recently enacted minimum wage legislation.  Most of these employees are either high school or college students employed on a seasonal basis or tipped employees, many of whom receive, on average, tip income that is significantly higher than the current minimum wage.  From time to time legislation is introduced in the U.S. Congress or the Minnesota legislature that would substantially increase the minimum wage.   Passage of legislation that would substantially increase the minimum wage could have a material adverse impact on the Company.

Uncertainty regarding the success of a possible real estate development project.

The Company is currently pursuing the commercial development of its Underutilized Land.  See discussion above titled “Development Operations.”  The development of residential and commercial real estate involves many risks, including but not limited to the selection of development partners; building design and construction; obtaining government permits; financing; securing and retaining tenants; and the volatility of real estate market conditions.  Accordingly, there can be no assurance that the Company’s real estate development activities will be successful.

Uncertainty regarding Tax Increment Financing

Under the Redevelopment Agreement with the City of Shakopee, the Company has agreed to undertake a number of specific infrastructure improvements within the TIF District. The funding that the Company will be paid as reimbursement under the TIF program for these improvements is not guaranteed, but will depend on future tax revenues generated from the developed property

The payment and amount of future dividends is subject to Board of Director discretion and to various risks and uncertainties.

The payment and amount of future quarterly dividends is within the discretion of the Board of Directors and will depend on factors the Board deems relevant at each time it considers declaring a dividend. These factors include, but are not limited to: available cash; management’s expectations regarding future performance and free cash flow; alternative uses of cash to fund capital expenditures and real estate development; and the effect of various risks and uncertainties described in this “Risk Factors” section.

Our information technology and other systems are subject to cyber security risk including misappropriation of customer information or other breaches of information security.

We rely on information technology and other systems to maintain and transmit customers’ personal and financial information, credit card information, mailing lists and other information. We have taken steps designed to safeguard our customers’ personal and financial information and have implemented systems designed to meet all

16


 

requirements of the Payment Card Industry standards for data protection. However, our information and processes are subject to the ever-changing threat of compromised security, in the form of a risk of potential breach, system failure, computer virus or unauthorized or fraudulent access or use by unauthorized individuals. The steps we take to deter and mitigate these risks may not be successful, and any resulting compromise or loss of data or systems could adversely impact operations or regulatory compliance and could result in remedial expenses, fines, litigation and loss of reputation, potentially impacting our financial results. Although we have invested in and deployed security systems and developed processes that are designed to protect all sensitive data, prevent data loss and reduce the impact of any security breach, such measures cannot provide absolute security.

Item 1B. UNRESOLVED STAFF COMMENTS

Not Applicable.

Item 2. PROPERTIES

General

The Company’s facilities, which are owned and operated under the name “Canterbury Park,” are a modern complex of buildings and grounds that generally compare favorably to other major racetracks located throughout the country.  The Racetrack’s grandstand has a patron capacity of approximately 10,000 within enclosed areas and a maximum patron capacity of over 30,000 including outside areas around the grandstand.  The grandstand and most public outdoor areas contain numerous pari-mutuel windows, odds information boards, video monitors, food and beverage stands and other amenities.

The Racetrack is located approximately 25 miles southwest of downtown Minneapolis.  The area immediately surrounding the Racetrack consists of retail, commercial and industrial buildings, farmland and residential areas.  The Racetrack is in reasonable proximity to a number of major entertainment destinations including:  Valleyfair, an amusement park about two miles from the Racetrack that annually attracts visitors during the spring and summer; the Renaissance Festival, a seven-weekend late summer annual event located about five miles from the Racetrack; and Mystic Lake Casino, located about four miles from the Racetrack, which draws thousands of visitors daily.  The Mall of America, the largest enclosed shopping mall in the United States, which attracts more than 40 million visitors per year, is approximately 17 miles from the Racetrack.

Racing Surfaces

The racing surfaces consist of a one-mile oval dirt/limestone track and a 7/8‑mile oval turf course.  The dirt track includes a one and one-quarter mile front stretch chute, a 6‑1/2 furlong backstretch chute, and a 3‑1/2 furlong chute and is lighted for night racing.

Grandstand

The grandstand is a modern, air-conditioned enclosed structure of approximately 275,000 square feet with a variety of facilities on six levels.  The lower level contains space for support functions such as jockey quarters, administrative offices, Racing Commission offices, first aid, mechanical rooms, and electrical rooms.  The track level includes pari-mutuel windows, restrooms, a variety of concession stands and other services as well as the Card Casino, which occupies 22,000 square feet. The mezzanine level contains 1,320 fixed seats in a glass-enclosed, air-conditioned area and an additional 3,000 seats located outside.  The mezzanine level also contains pari-mutuel windows, restrooms, concession stands, and other guest facilities.  A portion of the mezzanine level is currently being used as a simulcast center during live racing, and for banquets and other events during the off-season.  The kitchen level is an intermediate level located between the mezzanine and clubhouse floors.  It contains a full-service kitchen that supports a full dining menu for the track-side dining terraces on the clubhouse level and food preparation for the other concession areas.  The clubhouse level is a multi-purpose area that includes a simulcast center for wagering on televised races, a full-service dining area during the live racing season, and a year-round banquet facility. The clubhouse level includes 325 trackside tables, each equipped with a television set, with a total seating capacity of 1,200 patrons and an additional 1,000 seats

17


 

are located in lounges located throughout the area.  The press box and officials’ level is located in the roof trusses over the clubhouse and contains work areas for the press, racing officials, closed-circuit television, photo finish, and the track announcer.  In addition, the grandstand was structurally built to accommodate skyboxes under the press box/officials’ level, although none have yet been constructed.  Escalators and elevators are available to move patrons among the various levels within the grandstand.

Expo Center

In 2014, the Company added an Expo Center, which is a 30,000 square foot structure designed for year-round special events, trade shows and exhibits.  The facility features 24,000 square feet of open event space and another 6,000 square feet containing an entry area, offices, restrooms and storage.  Canterbury Park now offers the fourth largest event space in the Twin Cities with more than 100,000 total square feet of available space.

Barn and Backside Facilities

The stable area consists of 33 barns with a total of approximately 1,650 stalls.  In the stable area, there are 240 dormitory rooms for the grooms and others working at the Racetrack.  The stable area also contains a combination racing office and cafeteria/recreation building for stable personnel, two blacksmith buildings, and a one and 5/8 mile training track.

Parking

Approximately 7,500 paved parking spaces are available for patron and employee vehicles at the Racetrack, including parking spaces that are reserved for handicapped patrons.  The Racetrack also has unpaved areas available for overflow parking for approximately 5,000 additional automobiles.

Underutilized Land

In 2018, the Company transferred approximately 13 acres of land to the Doran Canterbury I joint venture as part of its equity contribution in the first phase of the apartment complex. The Company has approximately 127 acres of land remaining that are owned or controlled by the Company that are not currently used for its business operations, and could be developed or sold, in whole or in part.  See discussion above titled “Development Operations” and footnote 14 to the consolidated financial statements for more information.

Item 3. LEGAL PROCEEDINGS

There are no material legal proceedings pending against the Company.  From time to time, the Company is party to ordinary and routine litigation or claims incidental to our business.  We do not expect the outcome of any such litigation or claims pending at this time to have a material adverse effect on our consolidated financial position or results of operations.

Item 4. MINE SAFETY DISCLOSURES

Not Applicable.

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PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)          MARKET INFORMATION

The Company’s common stock trades on the NASDAQ Global Market under the symbol CPHC. The table set forth below indicates the high and low sale prices and cash dividends declared for the Common Stock in the quarterly periods ending December 31, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

Price Range

 

Cash Dividends

 

Common Stock

    

High

    

Low

    

Declared

 

2018

 

 

  

 

 

  

 

 

  

 

First Quarter

 

$

16.50

 

$

13.55

 

$

0.07

 

Second Quarter

 

 

17.72

 

 

14.20

 

 

0.07

 

Third Quarter

 

 

15.90

 

 

14.56

 

 

0.07

 

Fourth Quarter

 

 

17.00

 

 

12.20

 

 

0.07

 

2017

 

 

  

 

 

  

 

 

  

 

First Quarter

 

 

10.75

 

 

9.80

 

 

0.05

 

Second Quarter

 

 

11.38

 

 

9.99

 

 

0.06

 

Third Quarter

 

 

12.80

 

 

10.98

 

 

0.06

 

Fourth Quarter

 

 

17.55

 

 

11.75

 

 

0.06

 

 

(b)          HOLDERS

At March 15, 2019, the Company had 740 shareholders of record of its common stock. Since many holders’ shares are listed under their brokerage firms’ names, the actual number of shareholders is estimated by the Company to be over 2,000.

(c)          DIVIDENDS

The Company has a dividend policy to pay regular quarterly cash dividends to its shareholders based on the Company’s earnings, projected future earnings and cash requirements. In 2017 under this policy, the Company paid a $.05 per share dividend to its shareholders in January and April and $.06 per share dividend in July and October. In 2018, the Company paid a $.06 per share dividend in January and $.07 per share dividend in April, July, and October.

19


 

(d)          SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth information as of December 31, 2018 regarding our equity compensation plans:

Securities Authorized for Issuance Under Equity Compensation Plans

 

 

 

 

 

 

 

 

 

    

(a)

    

 

 

    

(c)

 

 

Number of shares

 

 

 

 

Number of shares of

 

 

of common stock to

 

(b)

 

common stock

 

 

be issued upon

 

Weighted-average

 

remaining available for

 

 

exercise of

 

exercise price of

 

future issuance under

 

 

outstanding 

 

outstanding

 

equity compensation

 

 

options, warrants

 

options, warrants

 

plans (excluding shares

Plan Category

 

and rights

 

and rights

 

in column (a))

Equity compensation plans approved by security holders:

 

  

 

 

  

 

  

1994 Stock Plan

 

75,062

 

$

7.95

 

377,030

1995 Employee Stock Purchase Plan

 

 —

 

 

 —

 

43,829

Equity compensation plans not approved by security holders:

 

  

 

 

  

 

  

Stock Option Plan for Non-Employee Consultants and Advisors (1)

 

 —

 

 

 —

 

162,500

Total

 

75,062

 

 

  

 

583,359


(1)

Adopted by the Company’s Board of Directors in 1997, the purpose of the Stock Option Plan for Non-Employee Consultants and Advisors is to attract and retain the services of experienced and knowledgeable non-employee consultants and advisors to assist in projects having strategic significance for the Company, to provide an alternative form of cash compensation to such persons and to provide such persons with the opportunity to participate in the Company’s long term progress and success.

(e)          REGULATION S-K, ITEM 201(e) INFORMATION

Not Applicable for Smaller Reporting Companies.

(f)           RECENT SALE OF UNREGISTERED SECURITIES

Not Applicable.

(g)          PURCHASES OF EQUITY SECURITIES BY THE ISSUER

In 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 10b‑18 in open market transactions or block purchases of privately negotiated transactions (the “Stock Repurchase Plan”).  The Company repurchased 216,543 shares under the 2008 Stock Repurchase Plan and in 2012, authorized the repurchase of an additional 100,000 shares of the Company’s common stock.  No shares were repurchased in 2018 or 2017, and currently the Company is authorized to repurchase up to 128,781 shares under the Stock Repurchase Plan.

Item 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data for each of the five fiscal years ended December 31, 2018. The operating and balance sheet data for the years ended and as of December 31, 2018,  2017, 2016, 2015 and 2014 are derived from our audited consolidated financial statements.  The following information should be read

20


 

in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and the related notes thereto included elsewhere in this report.

(In thousands except for per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 

 

OPERATING DATA

    

2018

    

2017

    

2016

    

2015

    

2014

 

Net Revenues

 

$

59,142

 

$

56,953

 

$

52,460

 

$

52,263

 

$

48,470

 

Operating Expenses

 

 

51,495

(5)  

 

52,432

(4)  

 

45,319

(3)  

 

47,649

(2)  

 

44,370

(1)  

Income Before Income Taxes

 

 

7,708

 

 

4,571

 

 

7,120

 

 

4,617

 

 

4,102

 

Income Tax Expense

 

 

(1,990)

 

 

(480)

 

 

(2,924)

 

 

(1,890)

 

 

(1,691)

 

Net Income

 

 

5,718

 

 

4,091

 

 

4,196

 

 

2,727

 

 

2,411

 

Basic Net Income per Share

 

$

1.28

 

$

0.93

 

$

0.98

 

$

0.65

 

$

0.58

 

Diluted Net Income per Share

 

 

1.26

 

 

0.93

 

 

0.97

 

 

0.64

 

 

0.57

 

Dividends Declared per Share

 

 

0.28

 

 

0.23

 

 

0.35

 

 

0.25

 

 

 —

 

Cash Flows from Operating Activities

 

$

6,333

 

$

7,086

 

$

4,941

 

$

4,429

 

$

4,590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 

BALANCE SHEET DATA

    

2018

    

2017

    

2016

    

2015

    

2014

Land, Buildings and Equipment, Net

 

$

38,131

 

$

36,962

 

$

35,379

 

$

34,118

 

$

28,076

Total Assets

 

 

61,426

 

 

54,537

 

 

49,625

 

 

45,341

 

 

39,496

Total Stockholders’ Equity

 

$

46,734

 

$

40,717

 

$

36,551

 

$

33,097

 

$

30,995

Number of Common Shares Outstanding at Year End

 

 

4,528

 

 

4,414

 

 

4,325

 

 

4,238

 

 

4,201


1

During fiscal year 2014, the Company reduced operating expenses $958,000 by recording a gain on insurance recoveries due to damage to our property resulting from multiple severe storms at the Racetrack.

2

During fiscal year 2015, the Company reduced operating expenses $1,502,000 by recording a $495,000 gain on insurance recoveries, $347,000 gain on sale of its Shakopee Valley RV Park, and $660,000 gain on sale of land

3

During fiscal year 2016, the Company reduced operating expenses $5,311,000 by recording a $1,465,000 gain on insurance recoveries and $3,846,000 gain on sale of land.

4

During fiscal year 2017, the Company reduced operating expenses $141,000 by recording a gain on insurance recoveries.

5

During fiscal year 2018, the Company reduced operating expenses $2,392,000 by recording a $21,000 gain on insurance recoveries,  $129,580 gain on sale of land, and $2,241,000 gain on transfer of land.

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Item 7.   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 consolidated financial statements and the accompanying notes to the consolidated financial statements (the “Notes”).  Our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in “Risk Factors” and “Forward-Looking Statements” included elsewhere in this Annual Report on Form 10‑K.

STRATEGIC OVERVIEW

Canterbury Park Holding Corporation (the “Company,” “we,” “our,” or “us”) hosts pari-mutuel wagering on thoroughbred and quarter horse races and “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 primarily 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 food and beverage, parking, advertising signage, publication sales, and from other entertainment events and activities held at the Racetrack.

The following summarizes our financial performance for the last five years (in 000’s):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Performance Summary

    

2018

    

2017

    

2016

    

2015

    

2014

 

Net Revenues

 

$

59,142

 

$

56,953

 

$

52,460

 

$

52,263

 

$

48,470

 

Operating Expenses

 

 

51,495

(5)  

 

52,432

(4)  

 

45,319

(3)  

 

47,649

(2)  

 

44,370

(1)  

Income Before Income Taxes

 

 

7,708

 

 

4,571

 

 

7,120

 

 

4,617

 

 

4,102

 

Income Tax Expense

 

 

(1,990)

 

 

(480)

 

 

(2,924)

 

 

(1,890)

 

 

(1,691)

 

Net Income

 

 

5,718

 

 

4,091

 

 

4,196

 

 

2,727

 

 

2,411

 


1

During fiscal year 2014, the Company reduced operating expenses $958,000 by recording a gain on insurance recoveries due to damage to our property resulting from multiple severe storms at the Racetrack.

2

During fiscal year 2015, the Company reduced operating expenses $1,502,000 by recording a $495,000 gain on insurance recoveries, a $347,000 gain on sale of its Shakopee Valley RV Park, and a $660,000 gain on sale of land.

3

During fiscal year 2016, the Company reduced operating expenses $5,311,000 by recording a $1,465,000 gain on insurance recoveries and $3,846,000 gain on sale of land.

4

During fiscal year 2017, the Company reduced operating expenses by $141,000 by recording a gain on insurance recoveries.

5

During fiscal year 2018, Company reduced operating expenses  $2,392,000 by recording a $21,000 gain on insurance recoveries, $129,580 gain on sale of land, and $2,241,000 gain on transfer of land.

Our management team has extensive knowledge of the horse racing, Card Casino, and food and beverage operations, and our staff has demonstrated a commitment to enhancing the customer experience.  The Company believes that management has a good relationship with our workforce and is able to retain qualified personnel as demonstrated by our low turnover rate.

Our facilities are modern by racetrack industry standards, and we have invested heavily in the past few years to update and upgrade them to meet the needs of our customers and horsemen.  Our site, in a prime location on the edge of

22


 

the Minneapolis–St. Paul metropolitan area in one of the fastest-growing counties in Minnesota, provides us with great long-term growth and development opportunities; our Board of Directors regularly considers additional uses for underutilized portions of our property.  Our long-term strategic direction is to continue to enhance our Racetrack as a unique gaming and entertainment destination and develop approximately 127 acres of underutilized land not needed for our current business uses.

We have a strong commitment to live racing and have been particularly successful in attracting new customers and providing a quality live racing experience for our horse racing fans as well as the horsemen who enter their horses in live races at Canterbury Park.  However, we face a number of longer-term challenges in improving our financial results, including challenges described under “Risk Factors” elsewhere in this report.

OPERATIONS REVIEW

YEAR ENDED DECEMBER 31, 2018 COMPARED TO YEAR ENDED DECEMBER 31, 2017

EBITDA represents earnings before interest income, income tax expense, and depreciation and amortization.  EBITDA is not a measure of performance or liquidity calculated in accordance with generally accepted accounting principles 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.  We present EBITDA as a supplemental disclosure because it is a widely used measure of performance and basis for valuation of companies in our industry.  Other companies that provide EBITDA information may calculate EBITDA differently than we do. We also compute Adjusted EBITDA, which reflects additional adjustments to Net Income to eliminate unusual or non-recurring items. For the year ended December 31, 2018, Adjusted EBITDA excluded the loss on disposal of assets,  gain on insurance recoveries, gain on sale of land, and gain on transfer of land. For the year ended December 31, 2017, Adjusted EBITDA excluded the gain on insurance recoveries and loss on disposal of assets.

The following table sets forth a reconciliation of net income, a GAAP financial measure, to EBITDA and Adjusted EBITDA (defined above), which is also a non-GAAP measure, for the years ended:

SUMMARY OF EBITDA DATA

 

 

 

 

 

 

 

 

 

    

Year Ended December 31, 

 

 

    

2018

    

2017

    

NET INCOME

 

$

5,718,444

 

$

4,090,781

 

Interest income, net

 

 

(61,515)

 

 

(49,624)

 

Income tax expense

 

 

1,990,000

 

 

480,000

 

Depreciation

 

 

2,563,579

 

 

2,529,437

 

EBITDA

 

 

10,210,509

 

 

7,050,594

 

Gain on insurance recoveries

 

 

(21,064)

 

 

(140,552)

 

Loss on disposal of assets

 

 

120,940

 

 

2,198

 

Gain on sale of land

 

 

(129,580)

 

 

 —

 

Gain on transfer of land

 

 

(2,241,206)

 

 

 —

 

ADJUSTED EBITDA

 

$

7,939,599

 

$

6,912,240

 

 

Adjusted EBITDA increased $1,027,000, or 14.9%, and increased as a percentage of net revenues to 13.4% from 12.1% for 2018 compared to 2017.

REVENUES

Total net revenues for 2018 were $59,142,000, an increase of $2,189,000, or 3.8%, compared to total net revenues of $56,953,000 for 2017. Total pari-mutuel revenue increased 2.5%, Card Casino revenue increased 6.1%, and

23


 

food and beverage revenue increased 1.0% in 2018 compared to 2017. See below for a further discussion of our sources of revenues.

PARI-MUTUEL REVENUES

 

 

 

 

 

 

 

 

 

    

Year Ended December 31, 

 

 

    

2018

    

2017

    

Simulcast

 

$

5,821,000

 

$

5,648,000

 

Live racing

 

 

2,295,000

 

 

2,335,000

 

Guest fees

 

 

1,483,000

 

 

1,279,000

 

Other revenue

 

 

1,040,000

 

 

1,116,000

 

Total Pari-Mutuel Revenue

 

$

10,639,000

 

$

10,378,000

 

 

 

 

 

 

 

 

 

Racing Days

 

 

  

 

 

  

 

Simulcast only racing days

 

 

295

 

 

297

 

Live and simulcast racing days

 

 

69

 

 

67

 

Total Number of Racing Days

 

 

364

 

 

364

 

 

Simulcast and Live Racing pari-mutuel revenues include commission and breakage revenues from on-track live and simulcast wagering. We receive guest fees from out-of-state racetracks and ADW companies for out-of-state wagering on our live races.  Other revenues include source market fees paid by ADW companies for wagers made by Minnesota residents on out-of-state races and proceeds from unredeemed pari-mutuel tickets.

Total 2018 pari-mutuel revenue increased $261,000, or 2.5%, compared to 2017.  Simulcast revenue increased $173,000, or 3.1%, in 2018 compared to 2017. This is primarily due to the possibility of a Triple Crown winner in 2018 as well as a stronger Breeders Cup in 2018. Guest Fees also increased $204,000, or 15.9%, primarily due to increased out of state handle as a result of racing Wednesdays in August 2018 compared to Sundays in August 2017. This is partially offset by a decrease in Live Racing revenue of $40,000, or 1.7%, primarily due to the impact of inclement weather in 2018 on a number of our premium days as well as racing Wednesdays in 2018 compared to Sundays in 2017.

CARD CASINO REVENUES

 

 

 

 

 

 

 

 

    

Year Ended December 31, 

 

    

2018

    

2017

Poker Games

 

$

8,290,000

 

$

8,917,000

Table Games

 

 

22,486,000

 

 

20,215,000

Total Collection Revenue

 

 

30,776,000

 

 

29,132,000

Other Revenue

 

 

3,144,000

 

 

2,848,000

Total Card Casino Revenue

 

$

33,920,000

 

$

31,980,000

 

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, 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.  Card Casino revenue represented 56.6% and 56.2% of the Company’s net revenues for the years ended December 31, 2018 and 2017, respectively.

Total Card Casino revenue increased $1,940,000, or 6.1%, in 2018 compared to 2017. Poker revenue decreased $627,000, or 7.0%, in 2018 compared to 2017. The decrease in poker revenue reflects a continuing industry decline in the popularity of poker. Table games collection revenue increased $2,271,000, or 11.2%, in 2018 compared to 2017.  Effective March 2018, the Minnesota Racing Commission approved an amendment to the Canterbury Park Operating Plan that allowed the Company to increase the maximum percentage of table games buy-in that it can record as revenue from 18% to 20%. This amendment, combined with a higher than normal table games hold percentage during 2018, resulted in revenue percentages of 18.5% for March and April, 20% for May-August, and 18.5% in September-December. The comparable rate for 2017 was 18%. The impact of this increase in revenue percentage was

24


 

approximately $1,100,000. The remainder of the increase was due to increased table games play that the Company attributes to players wagering more due to a strong economy and change in game mix. Also, higher jackpots on specific games in early 2018 contributed to increased play.

FOOD AND BEVERAGE REVENUES

Food and beverage revenue increased $79,000, or 1.0%, to $8,018,000 for the year ended December 31, 2018 compared to 2017. This increase is primarily due to price increases on select menu items and two additional live racing days compared to 2017.

OTHER REVENUES

Other revenue decreased $92,000, or 1.4%, to $6,565,000 in 2018 compared to 2017. This decrease is primarily due to lower admission and publications revenue resulting from a  decline in paid attendance on live racing days compared to the same period in 2017.  

OPERATING EXPENSES

Total operating expenses decreased approximately $937,000, or 1.8%, to $51,495,000 in 2018, from $52,432,000 in 2017. Total operating expenses as a percentage of net revenues decreased to 87.1% in 2018 from 92.1% in 2017. Excluding the reduction in operating expenses from all gains and losses from both years, total operating expenses increased $1,196,000, or 2.3% in 2018 compared to 2017.

Total purse expense increased $325,000, or 4.7%, in 2018 compared to 2017 due to an increase in Card Casino and pari-mutuel revenue.  These factors also resulted in an increase in MBF expense (shown below).  As discussed in greater detail in Item 1 above, Minnesota law requires us to allocate a portion of Card Casino revenues, wagering handle on simulcast and live horse races, and ADW source market fees for future payment as purses for live horse races and other authorized uses. While most of these amounts were paid into the purse funds for thoroughbred and quarter horse races, Minnesota law requires that a portion of the amounts allocated for purses be paid into the Minnesota Breeders’ Fund (the “MBF”).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minnesota Breeders’

 

 

Purse Expense

 

Fund Expense

 

    

2018

    

2017

    

2018

    

2017

Card Casino

 

$

4,058,000

 

$

3,765,000

 

$

451,000

 

$

424,000

Simulcast Racing

 

 

1,793,000

 

 

1,731,000

 

 

472,000

 

 

492,000

Live Racing

 

 

1,330,000

 

 

1,361,000

 

 

116,000

 

 

114,000

Total

 

$

7,181,000

 

$

6,857,000

 

$

1,039,000

 

$

1,030,000

 

Salaries and benefits expense increased $1,256,000, or 5.4%, in 2018 compared to 2017. The increase is due to the State of Minnesota mandated increase of $0.15 in the minimum wage effective January 1, 2018, as well as additional non-exempt labor needed resulting from the increase in operating revenues. Furthermore, the Company added several new exempt level positions in 2018 due to its continued growth.  

Utilities expense increased $107,000, or 7.6%, in 2018 compared to 2017. This is due to an increase in electricity, gas, and water and sewer rates. 

Advertising and marketing costs decreased $216,000, or 8.0%, in 2018 compared to 2017. The changes are primarily attributable to the decreased expenditures related to RiverSouth, an area wide marketing initiative that is designed to increase visitors to Shakopee’s entertainment, hospitality and retail businesses. 

25


 

During 2014, the Company incurred damage to buildings from multiple severe storms at the Racetrack. During the year ended December 31, 2015, the Company recognized as a reduction in operating expenses a $495,000 insurance recoveries gain in the Consolidated Statements of Operations as “Gain on insurance recoveries.”  For the year ended December 31, 2016, the Company received additional insurance proceeds of $592,000 and recognized as a reduction in operating expenses as insurance recoveries gain in the Consolidated Statements of Operations as “Gain on insurance recoveries.” The Company had also concluded an additional $873,000 of insurance reimbursement would be received in 2017 when roof repair work was completed.  However, the Company was notified in 2017 that the costs of the repairs have exceeded the original contract price. Therefore, the Company recognized an additional $141,000 “Gain on insurance recoveries” as a reduction in operating expenses in the Consolidated Statements of Operations for the year ended December 31, 2017.  Additionally, the Company recorded an additional gain of $21,000 in 2018. Because the claim has been settled and confirmed by the insurance company, that amount has been recognized as a gain on insurance recovery receivable in accordance with U.S. GAAP.  The storms did not cause any interruptions to the business or otherwise affect the Company’s consolidated financial results of operations.

On October 6, 2015, the Company sold six acres of land adjacent to the Racetrack for $1,459,000 and recorded a gain of $660,000, reported on the Consolidated Statements of Operations – Gain on sale of land.  This transaction was structured as a “deferred exchange using a qualified intermediary” pursuant to Internal Revenue Code (IRC) Section 1031 exchange (“1031 Exchange”) for income tax purposes.  Under the agreement, the Company had the option to repurchase up to one acre within three years from closing date at the sale price of approximately $240,000 per acre. According to ASC 360‑20‑40‑38 - Derecognition, the Company recorded the repurchase option acre as a deferred gain liability in the amount of $240,000 on the Consolidated Balance Sheets. Since the risks and rewards were not completely transferred to the buyer based on the repurchase option the Company maintained the asset on our financials in the amount of $110,000.  In October 2018, the repurchase option expired and the Company did not repurchase the land. Therefore, the Company recognized the gain of $130,000 on the Consolidated Statement of Operations for the year ended December 31, 2018.  

In 2018, the Company recorded a $2,241,000 gain on transfer of land as a result of transferring approximately 13 acres of land to the Doran Canterbury I joint venture.

Other operating expenses decreased $392,000, or 7.1%, in 2018 compared to 2017. The decrease is primarily due to a decrease in real estate tax expense as the Company is capitalizing all real estate taxes payable in Canterbury Development LLC, a subsidiary of the Company, while Canterbury Development LLC completes activities necessary to prepare the property for its intended us.

Income tax expense for 2018 and 2017 was $1,990,000 and $480,000, respectively.  As a result of the U.S Tax Cuts and Jobs Act (“TCJA”) signed on December 22, 2017, we recorded a tax benefit of $1,345,000 in the fourth quarter of 2017 as a result of a revaluation of the net deferred tax liabilities due to the corporate tax rate change from 34% to 21% starting in 2018.

Net Income for the years 2018 and 2017 was $5,718,000 and $4,091,000, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements have been prepared in conformity with U.S. GAAP and are based upon certain critical accounting policies. These policies may require management to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole and information available from other outside sources. Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ from those initial estimates.

Our critical accounting policies are:

·

revenue recognition;

26


 

·

property and equipment; and

·

income tax expense.

Our significant accounting policies and recently adopted accounting policies are more fully described in Note 2 to the Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10‑K.

Revenue recognition - Racing revenue is generated by pari-mutuel wagering on live and simulcast racing content. Additionally, we also generate revenue through sponsorships, admissions, concessions, and publications. Our racing revenue and income are influenced by our racing calendar. Therefore, revenue and operating results for any interim quarter are not generally indicative of the revenue and operating results for the year and may not be comparable with results for the corresponding period of the previous year. We recognize pari-mutuel revenue upon occurrence of the live race that is presented for wagering after that live race is made official by the respective state’s racing regulatory body. We recognize other operating revenue such as sponsorships, admissions, concessions, and publication revenue once delivery of the product or service has occurred. Card Casino revenue is a percentage of the wagers received from the players as compensation for providing the Card Casino facility and services, referred to as “collection revenue.”

Property and Equipment - We have significant capital invested in our property and equipment, which represents approximately 62% of our total assets at December 31, 2018. We use 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, we will determine whether an impairment loss should be recognized.  An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset.  As of December 31, 2018, we have determined that no impairment of these assets exists.

Income taxes - We use estimates and judgments for financial reporting to determine our current tax liability and deferred taxes. In accordance with the liability method of accounting for income taxes, we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Adjustments to deferred taxes are determined based upon changes in differences between the book basis and tax basis of our assets and liabilities and measured by enacted tax rates we estimate will be applicable when these differences are expected to reverse. Changes in current tax laws, enacted tax rates or the estimated level of taxable income or non-deductible expense could change the valuation of deferred tax assets and liabilities and affect the overall effective tax rate and tax provision. See footnote 4 of the consolidated financial statements for more information on the U.S Tax Cuts and Jobs Act (“TCJA”) signed on December 22, 2017.

MINIMUM WAGE LEGISLATION

In 2014, Minnesota legislation enacted into law an increase in the minimum wage that must be paid to most Company employees.  Beginning January 1, 2018, the minimum wage was set to increase at the beginning of each year by the rate of inflation with a maximum increase of up to 2.5% per year. The minimum wage for 2019 is $9.86 per hour. 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 financial impact on the Company in 2014 through 2018, and will continue to have an adverse impact on the Company. We have implemented measures to partially mitigate the impact of this increase by raising our prices and reducing our employee count. These measures could themselves have an adverse effect because higher prices and diminished service levels may discourage customers from visiting the Racetrack.

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  

27


 

thoroughbred and quarter horse industry.  Under the CMA, this is achieved through “Purse Enhancement Payments to Horsemen” paid directly to the MHBPA.  These 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 $7.3 million and $7.2 million for purse enhancements for the years ended December 31, 2018 and 2017, respectively.

Under the CMA, 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 $1,620,000 and $1,581,000 for marketing purposes for 2018 and 2017, respectively.

The CMA was amended three times effective January 2016, 2017 and 2018 to adjust the payment amounts between the “Purse Enhancement Payments to Horsemen” and “Marketing Payments to Canterbury Park.” Under the CMA as most recently amended, SMSC has agreed to make the following purse enhancement and marketing payments for 2018 through 2022:

 

 

 

 

 

 

 

 

 

Purse Enhancement Payments to

    

Marketing Payments to Canterbury

Year

    

Horsemen

1

Park

2019

 

$

7,380,000

 

$

1,620,000

2020

 

 

7,380,000

 

 

1,620,000

2021

 

 

7,380,000

 

 

1,620,000

2022

 

 

7,380,000

 

 

1,620,000


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

The amounts received 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 year ended December 31, 2018, the Company recorded $1,275,000 in other revenue and incurred $1,049,000 in advertising and marketing expense and $226,000 in depreciation related to the SMSC marketing payment. For the year ended December 31, 2017, the Company recorded $1,399,000 in other revenue and incurred $1,173,000 in advertising and marketing expense and $226,000 in depreciation related to the SMSC marketing payment. The excess of amounts received over revenue is reflected as deferred revenue on the company’s consolidated balance sheets.

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

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 would be required to pay to the IMR Fund, L.P. the greater of (a) $700,000 per operating year, as defined, or (b) 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 would be required to pay these amounts is remote. If these two conditions are met, the five minimum payments would be discounted back to their present value and the sum of those discounted payments would be capitalized as part of the purchase price in accordance with generally accepted accounting principles. The purchase price would 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.

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The Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community that became effective on June 4, 2012 and has been amended. The CMA contains certain covenants that, 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.

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 December 31, 2018 and as of the date of this report will not have a material impact on the Company’s consolidated financial position or results of operations.

The Company has committed to payment of statutory distributions under a $500,000 bond issued to the MRC as required under Minnesota law. The Company was not required to make any payments related to this bond in 2018 or 2017, and there is no liability related to this bond on the balance sheet as of December 31, 2018.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS FROM OPERATING ACTIVITIES

Cash provided by operating activities for 2018 was $6,333,000 primarily as a result of net income of $5,718,000.  Cash from operating activities was increased by noncash charges from depreciation of $2,564,000, stock-based compensation expense of $346,000, and a  stock-based employee match contribution of $525,000.  Cash from operating activities was reduced by a gain on transfer of land of $2,241,000 and gain on sale of land of $130,000. This was partially offset by a decline in Card Casino accruals of $1,190,000.

Cash provided by operating activities for 2017 was $8,233,000 primarily as a result of the following: The Company reported net income of $4,091,000, which included a gain from insurance recoveries of $141,000. Cash from operating activities was increased by noncash charges from depreciation of $2,529,000, stock-based compensation expense of $352,000, and a  stock-based employee match contribution of $487,000. This was partially offset by a decline in deferred income taxes of $1,355,000.

CASH FLOWS FROM INVESTING ACTIVITIES

Net cash used in investing activities for 2018 of $6,628,000 was used primarily for additions to land, buildings, and equipment, and the issuance of a note receivable to a related party. This was partially offset by a decrease in notes receivable and proceeds received from insurance recoveries.

Net cash used in investing activities for 2017 of $3,782,000 was used primarily for building remodel projects.

CASH FLOWS FROM FINANCING ACTIVITIES

Net cash used by financing activities for 2018 was $526,000 and primarily consisted of $1,206,000 cash dividend paid to shareholders, partially offset by proceeds from issuance of common stock of $686,000.

Net cash used by financing activities for 2017 was $715,000 and primarily consisted of $962,000 cash dividend paid to shareholders, partially offset by proceeds from issuance of common stock of $246,000.

CASH AND CAPITAL RESOURCES

At December 31, 2018, we had cash,  cash equivalents, and restricted cash of $11,204,000 compared to $12,026,000 at December 31, 2017. This $822,000 decrease consisted of $6,333,000 of net cash provided by operating activities, offset by $6,628,000 of net cash used in investing activities and $526,000 of net cash used in financing activities.

29


 

The Company has a general credit and security agreement with a financial institution. This agreement was amended and restated effective as of September 30, 2018 to extend the maturity date to September 30, 2019, increase the revolving credit line to $8,000,000, and allow for letters of credit in the aggregate amount of up to $2,000,000 to be issued under the credit agreement. The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company. The Company had no borrowings under the credit line during the year ended December 31, 2018. The credit agreement contains covenants requiring the Company to maintain certain financial ratios. The Company was in compliance with these requirements at all times throughout 2018.

Our three largest sources of revenue: pari-mutuel wagering, Card Casino operations and food and beverage, are all based on cash transactions. Consequently, we have significant inflows of cash on a daily basis. We designate cash balances that will be required to satisfy certain short-term liabilities such as progressive jackpots, the player pool and amounts due horsemen for purses and awards as “restricted” as a separate balance sheet item.

The Company offers unbanked table games that refer to a wagering system or game where wagers “lost” or “won” by the host are accumulated into a “player pool” to enhance the total amount paid back to players in any other card game. The Company is required to return accumulated player pool funds to the players through giveaways, promotional items, prizes or by other means. The player pool liability was $983,000 and $1,711,000 at December 31, 2018 and 2017, respectively. Additionally, the table games jackpot pool was $385,000 and $663,000 at December 31, 2018 and 2017, respectively.

The Card Casino offers progressive jackpots for poker games. Amounts collected for these jackpot funds are accrued as liabilities until paid to winners. At December 31, 2018 and 2017, accrued jackpot funds totaled $24,000 and $58,000, respectively. The MRC regulates the operation of the player pool and progressive jackpot pools. These liabilities have the potential for significant fluctuation on a daily basis.

All games in the Card Casino are played using chips. The value of chips issued and outstanding, referred to as the “outstanding chip liability,” was $398,000 and $425,000 at December 31, 2018 and 2017, respectively. This liability has the potential for significant fluctuation on a daily basis depending upon the demand for chip redemptions and sales.

Our second largest individual operating expense item is purse expense. Pursuant to an agreement with the MHBPA, we transferred into a trust account or paid directly to the MHBPA, approximately $6,442,000 and $5,716,000 in purse funds related to thoroughbred races for 2018 and 2017, respectively. Minnesota law provides that amounts transferred into this trust account are the property of the trust and not the Company. There were no unpaid purse fund obligations due to the MHBPA at December 31, 2018 or 2017.

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 for the foreseeable future. However, if the Company engages in any additional significant real estate development, additional financing would more than likely be required.

OFF-BALANCE SHEET ARRANGEMENTS

The Company currently has no off-balance sheet arrangements and has no intent to enter into any such agreements in the near future.

RELATED PARTY TRANSACTIONS

For a description of the nature and extent of related party transactions, see Note 16.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

In March 2014, the Company entered into a seven-year agreement with a new totalizator provider. Pursuant to the agreement, the vendor provides totalizator equipment and related software that records and processes all wagers and

30


 

calculates odds and payoffs. The amounts charged to operations for totalizator expenses for the years ended December 31, 2018 and 2017 were $230,000 and $228,000, respectively.

The Company has entered into operating leases for rental of office equipment and for track equipment to maintain the Racetrack. Amounts charged to operations under these agreements for 2018 and 2017 were $60,000 and $85,000, respectively. All these leases expire on or before December 2020.

In August 2018, the Company entered into a Contract for Private Redevelopment with the City of Shakopee in connection with a Tax Increment Financing District (“TIF District”). The Company is obligated to construct certain infrastructure improvements within the TIF District, and will be reimbursed by the City of Shakopee by future tax increment revenue generated from the developed property. See Note 14 for a more detailed description of the agreement.

Subsequent to December 31, 2018, there have been no material changes outside the ordinary course of business to our contractual obligations as set forth above. As of December 31, 2018, we had no borrowings pursuant to our line of credit and were not party to capital lease obligations, significant purchase obligations or other long-term obligations, other than described above.

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 that are typically preceded by words such as “believes,” “expects,” “anticipates,” “intends” or similar expressions. For these 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 these forward-looking statements are subject to risks and uncertainties that could affect our actual results and cause actual results to differ materially from those indicated in the forward-looking statements. These 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;

·

greater-than-anticipated expenses or a lower-than-anticipated return on the development of our underutilized land, including our joint venture to develop a luxury apartment complex;

·

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, including decision or actions related to sports betting that would adversely affect our betting environment;

·

any legal, judicial, legislative or regulatory action or event that would adversely affect our ten-year Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community, which enhances the purses for daily racing at Canterbury Park and supports cooperative marketing programs for the two organizations, benefiting the stability and quality of live horse racing;

·

the fact that under the Redevelopment Agreement with the City of Shakopee, the Company has agreed to undertake a number of specific infrastructure improvements within the TIF District, and the funding that

31


 

Canterbury Park will be paid as reimbursement under the TIF program for these improvements is not guaranteed, but will depend in part on future tax revenues generated from the developed property;

·

the general health of the gaming sector;

·

the success of the Company’s Canterbury Commons real estate development, including our reliance upon our joint venture partner Doran Companies to construct, and profitably operate the upscale apartment complex; and

·

other factors that are beyond our ability to control or predict.  

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pursuant to Item 3.05(e) of Regulation S-K, Canterbury Park Holding Company is not required to provide the information requested by this Item as it qualifies as a smaller reporting company.

32


 

33


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Canterbury Park Holding Corporation

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Canterbury Park Holding Corporation and Subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financials are the responsibility of Company’s management.  Our responsibility is to express an opinion on the Company’s financial statements based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Wipfli LLP

We have served as the Company’s auditor since 2014.

Minneapolis, Minnesota

March 29, 2019

34


 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2018 AND 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2018

    

2017

ASSETS

 

 

  

 

 

  

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

  

 

 

  

Cash and cash equivalents

 

$

4,895,359

 

$

8,888,162

Restricted cash

 

 

5,058,639

 

 

3,137,391

Short-term investments

 

 

206,545

 

 

206,005

Accounts receivable, net of allowance of $19,250 for both periods

 

 

241,743

 

 

1,278,289

Current portion of notes receivable

 

 

1,063,650

 

 

1,048,654

Inventory

 

 

297,209

 

 

262,989

Prepaid expenses

 

 

625,025

 

 

588,634

Income taxes receivable

 

 

417,003

 

 

 —

Total current assets

 

 

12,805,173

 

 

15,410,124

 

 

 

 

 

 

 

LONG-TERM ASSETS

 

 

  

 

 

  

Deposits

 

 

49,500

 

 

22,500

Restricted cash - long-term portion

 

 

1,250,000

 

 

 —

TIF receivable

 

 

1,908,065

 

 

 —

Notes receivable - long-term portion

 

 

1,078,861

 

 

2,142,512

Related party receivable (Note 16)

 

 

3,208,400

 

 

 —

Equity investment (Note 14)

 

 

2,995,010

 

 

 —

Land, buildings and equipment, net (Note 3)

 

 

38,131,052

 

 

36,962,188

TOTAL ASSETS

 

$

61,426,061

 

$

54,537,324

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

  

 

 

  

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

  

 

 

  

Accounts payable

 

 

3,587,328

 

 

2,854,305

Card Casino accruals

 

 

1,740,926

 

 

2,931,205

Accrued wages and payroll taxes

 

 

2,268,351

 

 

2,291,261

Cash dividend payable

 

 

316,938

 

 

265,113

Accrued property taxes

 

 

1,001,200

 

 

936,562

Deferred revenue

 

 

979,358

 

 

905,030

Payable to horsepersons

 

 

706,122

 

 

630,921

Current portion of capital lease obligations

 

 

23,216

 

 

 —

Income taxes payable

 

 

 —

 

 

3,830

Total current liabilities

 

 

10,623,439

 

 

10,818,227

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

  

 

 

  

Deferred income taxes (Note 4)

 

 

3,970,000

 

 

3,002,000

Capital lease obligations, net of current portion

 

 

98,272

 

 

 —

Total long-term liabilities

 

 

4,068,272

 

 

3,002,000

TOTAL LIABILITIES

 

 

14,691,711

 

 

13,820,227

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY (Note 5)

 

 

  

 

 

  

Common stock, $.01 par value, 10,000,000 shares authorized, 4,527,685 and 4,414,492, respectively, shares issued and outstanding

 

 

45,277

 

 

44,145

Additional paid-in capital

 

 

21,420,886

 

 

19,865,273

Retained earnings

 

 

25,268,187

 

 

20,807,679

Total stockholders’ equity

 

 

46,734,350

 

 

40,717,097

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

61,426,061

 

$

54,537,324

See notes to consolidated financial statements.

 

35


 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2018 AND 2017

 

 

 

 

 

 

 

 

 

 

 

 

2018

    

2017

OPERATING REVENUES:

 

 

  

 

 

  

Pari-mutuel

 

$

10,639,029

 

$

10,377,317

Card Casino

 

 

33,919,928

 

 

31,979,818

Food and beverage

 

 

8,017,747

 

 

7,938,975

Other

 

 

6,564,866

 

 

6,656,666

Total Net Revenues

 

 

59,141,570

 

 

56,952,776

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

  

 

 

  

Purse expense

 

 

7,181,683

 

 

6,856,708

Minnesota Breeders’ Fund

 

 

1,039,452

 

 

1,029,510

Other pari-mutuel expenses

 

 

1,423,980

 

 

1,350,411

Salaries and benefits

 

 

24,322,840

 

 

23,376,186

Cost of food and beverage and other sales

 

 

3,586,617

 

 

3,704,576

Depreciation

 

 

2,563,579

 

 

2,529,437

Utilities

 

 

1,527,942

 

 

1,420,666

Advertising and marketing

 

 

2,499,345

 

 

2,715,245

Professional and Contracted Services

 

 

4,491,719

 

 

4,376,420

Loss on disposal of assets

 

 

120,940

 

 

2,198

Gain on insurance recoveries (Note 13)

 

 

(21,064)

 

 

(140,552)

Gain on Sale of Land

 

 

(129,580)

 

 

 —

Gain on Transfer of Land (Note 14)

 

 

(2,241,206)

 

 

 —

Other operating expenses

 

 

5,128,394

 

 

5,210,814

Total Operating Expenses

 

 

51,494,641

 

 

52,431,619

INCOME FROM OPERATIONS

 

 

7,646,929

 

 

4,521,157

OTHER INCOME

 

 

  

 

 

  

Interest income, net

 

 

61,515

 

 

49,624

Net Other Income

 

 

61,515

 

 

49,624

INCOME BEFORE INCOME TAXES

 

 

7,708,444

 

 

4,570,781

INCOME TAX EXPENSE (Note 4)

 

 

(1,990,000)

 

 

(480,000)

NET INCOME

 

$

5,718,444