NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
OVERVIEW AND
BA
SIS OF PRESENTATION
Business
– The Company’s Racetrack operations are conducted at facilities located in Shakopee, Minnesota, approximately 25 miles southwest of downtown Minneapolis. In May 1994, the Company commenced year-round horse racing simulcast operations and hosted the first annual live race meet during the summer of 1995. The Company’s live racing operations are a seasonal business as it hosts live race meets each year from May until September. The Company earns additional pari-mutuel revenue by televising its live racing to out-of-state racetracks around the country. Canterbury Park’s Card Casino operates 24 hours a day, seven days a week and is limited by Minnesota State law to conducting card play on a maximum of 80 tables. The Card Casino currently offers a variety of poker and table games. The Company’s three largest sources of revenues include: Card Casino operations, pari-mutuel operations and food and beverage sales. The Company also derives revenues from related services and activities, such as admissions, advertising signage, publication sales, and from other entertainment events and activities held at the Racetrack.
Additionally, the Company is developing approximately 140 acres of underutilized land
surrounding the Racetrack in a project known as Canterbury Commons. The Company is pursuing several mixed-use development opportunities for this land, directly and through joint ventures.
Basis of Presentation and Preparation
– The accompanying condensed consolidated financial statements include the accounts of the Company (Canterbury Park Holding Corporation and its subsidiaries Canterbury Park Entertainment, LLC; Canterbury Park Concession, Inc
.
; and Canterbury Development, LLC). Intercompany accounts and transactions have been eliminated. The preparation of these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and the notes thereto for the fiscal year ended
December 31, 2017
, included in its Annual Report on Form 10-K (the “2017 Form 10-K”).
The condensed consolidated balance sheets and the related condensed consolidated statements of operations and the cash flows for the periods ended
September
30, 2018 and 2017 have been prepared by Company management. In the opinion of management, all adjustments (which include only normal recurring adjustments, except where noted) necessary to present fairly the financial position, results of operations, and cash flows at
September
30, 2018 and 2017 and for the periods then ended have been made.
Effective January 1, 2018, we adopted the requirements of Accounting Standards Update (“ASU”) No 2014-09,
Revenue from Contracts with Customers
and ASU No. 2016-18,
Statement of Cash Flows, Restricted Cash
as discussed in Note 2. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards.
Deferred Revenue –
Deferred revenue includes advance sales related to racing, events and corporate partnerships.
Revenue from these advance billings
is
recognized when the related event occurs or services have been performed. Deferred revenue also includes advanced Cooperative Marketing Agreement (
“
CMA
”
) promotional funds
, for which revenue is
recognized when expenses are incurred.
The Company maintains a deferred gain on sale of land of
$240,000
due to
its
repurchase right.
On October 6, 2018, the
Company’s
repurchase right for this land expired
.
Payable to Horsepersons -
The Minnesota Pari-mutuel Horse Racing Act
requires
the Company
to
segregate a portion of funds (recorded as purse expense in the statements of operations) received from Card Casino operations and wagering on simulcast and live horse races, for future payment as purses for live horse races or other uses of the horsepersons’ association. Pursuant to an agreement with the MHBPA, the Company transferred into a trust account or paid directly to the MHBPA,
$
5,861,000
and
$
5,314
,000
for the
nine
months ended
September
30, 2018
and 2017,
respectively, related to thoroughbred races. Minnesota Statutes
provide
that amounts transferred into the trust account are the property of the trust and not of the Company, and therefore these amounts are not recorded on the Company’s Consolidated Balance Sheet.
Reclassifications –
Prior period financial statement amounts have been reclassified to conform to current period presentations. Certain amounts due to horsepersons have been reclassified on the December 31, 2017
Consolidated Balance Sheets
to Payable to Horsepersons from
Due to MHBPA
. This reclassification has also been reflected on the Consolidated Statements of Cash Flows for the
nine
months ended
September
30, 2017. Workers compensation amounts have been reclassified from other operating expenses to salaries and benefits on the Consolidated Statement of Operations for the three and
nine
months ended
September
30, 2017.
2. ACCOUNTING STANDARDS AND SIGNIFICANT ACCOUNTING POLICIES
Recently Adopted Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-18,
Statement of Cash Flows (Topic 230) – Restricted Cash
. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. As a result of the adoption of ASU 2016-18 on January 1, 2018, we began combining amounts generally described as restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the condensed consolidated statement of cash flows. See the table at the end of this note for the effects of the adoption of ASU 2016-18 on our condensed consolidated statement of cash flows for the
nine
months ended
September
30, 2017.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers ("Topic 606")
. Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition ("Topic 605"), and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. Collectively, we refer to Topic 606 as the "new standard."
We adopted the requirements of the new standard as of January 1, 2018, using the full retrospective method. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition and promotional allowances as detailed below. We applied the new standard using a practical expedient where the consideration allocated to the remaining performance obligations or an explanation of when we expect to recognize that amount as revenue for all reporting periods presented before the date of the initial application is not disclosed.
The impact of adopting the new standard on our fiscal 2018 and fiscal 2017 revenues is not material and resulted in no cumulative effect adjustment on net income or cash flows. The primary impact of adopting the new standard is the removal of the promotional allowance line item on the condensed consolidated statement of operations. The amounts previously included as promotional allowance
are
now presented on a net basis within Pari-mutuel revenues.
We adjusted our condensed consolidated financial statements from amounts previously reported due to the adoption of ASU No. 2014-09 and ASU No. 2016-18. Select unaudited condensed consolidated statement of operations line items, which reflect the adoption of ASU No. 2014-09 are as follows:
|
|
|
|
|
Three months ended September 30, 2017
|
|
As previously reported
|
Adjustments
|
As Adjusted
|
OPERATING REVENUES:
|
|
|
|
Pari-mutuel
|
$ 3,866,158
|
$ (45,490)
|
$ 3,820,668
|
Promotional allowances
|
(45,490)
|
(45,490)
|
-
|
|
|
|
|
|
Nine
months ended
September
30, 2017
|
|
As previously reported
|
Adjustments
|
As Adjusted
|
OPERATING REVENUES:
|
|
|
|
Pari-mutuel
|
$ 8,901,920
|
$ (120,577)
|
$ 8,781,343
|
Promotional allowances
|
(120,577)
|
(120,577)
|
-
|
Select unaudited condensed consolidated statement of cash flow line items, which reflects the adoption of ASU No. 2016-18 are as follows:
|
|
|
|
|
Nine
months ended
September
30, 2017
|
|
As previously reported
|
Adjustments
|
As Adjusted
|
Net cash provided by operating activities
|
5,104,355
|
768,622
|
5,872,977
|
Net increase in cash and cash equivalents
|
1,386,484
|
768,622
|
2,155,106
|
Cash, cash equivalents and restricted cash at beginning of period
|
6,298,807
|
1,990,013
|
8,288,820
|
Cash, cash equivalents and restricted cash at end of period
|
$ 7,685,291
|
$ 2,758,635
|
$ 10,443,926
|
Summary of Significant Accounting Policies
Except for the accounting policies for revenue recognition, promotional allowances, and restricted cash that were updated as a result of our recently adopted accounting pronouncements, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 27, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.
Revenue Recognition – The Company’s primary revenues with customers consist of Card Casino operations, pari-mutuel wagering on simulcast and live horse races, and food and beverage transactions. We determine revenue recognition through the following steps:
|
·
|
|
Identification of the contract, or contracts, with a customer
|
|
·
|
|
Identification of the performance obligations in the contract
|
|
·
|
|
Determination of the transaction price
|
|
·
|
|
Allocation of the transaction price to the performance obligation in the contract
|
|
·
|
|
Recognition of revenue when, or as, we satisfy a performance obligation
|
The transaction price for a Card Casino contract is a set percentage of wagers and is recognized at the time that the wagering process is complete. The transaction price for pari-mutuel wagering is the commission received on a wager, exclusive of any track fees and is recognized upon occurrence of the live race that is presented for wagering and after that live race is made official by the respective state’s racing regulatory body. The transaction price for food and beverage contracts is the net amount collected from the customer for
these
goods. Food and beverage services have been determined to be separate, stand-alone performance obligations and the transaction price is recorded as revenue as the good is transferred to the customer when delivery is made.
Contracts for Card Casino operations and pari-mutuel wagering involve two performance obligations for those customers earning points under the Company’s loyalty program and a single performance obligation for customers who do
not
participate in the program. The Company applies a practical expedient by accounting for its gaming contracts on a portfolio basis as these wagers have similar characteristics and the Company reasonably expects the effects on the financial statements of applying the revenue recognition guidance to the portfolio
will
not differ materially from that which would result if applying the guidance to an individual wagering contract. For purposes of allocating the transaction price in a wagering contract between the wagering performance obligation and the obligation associated with the loyalty points earned, the Company allocates an amount to the loyalty point contract liability based on the stand-alone
redemption value
of the points earned, which is determined by the value of a point that can be redeemed for a cash voucher, food and beverage voucher, racing admission, valet parking, or racing forms. Based on past experience, the majority of customers redeem their points for cash vouchers. Therefore, there are no further performance obligations by the Company.
We have two general types of liabilities related to contracts with customers: (1) our MVP Loyalty Program and (2) outstanding chip liability. These are included in the line item card casino accruals on the consolidated balance sheet. We defer the full retail value of these complimentary reward items until the future revenue transaction occurs.
The Company offers certain promotional allowances at no charge to patrons who participate in its player rewards program. The retail value of these promotional items is included as a deduction from pari-mutuel revenues and no longer shown as a separate line item on the Company’s condensed consolidated statements of operations.
We evaluate our on-track revenue, export revenue, and import revenue contracts to determine whether we are acting as the principal or as the agent when providing services, which we consider in determining if revenue should be reported gross or net. An entity is a principal if it controls the specified service before that service is transferred to a customer.
The revenue we recognize for on-track revenue and import revenue is the commission we are entitled to retain for providing a wagering service to our customers. For these arrangements, we are the principal as we control the wagering service; therefore, any charges, including simulcast fees, we incur for delivering the wagering service are presented as operating expenses.
For export revenue, our customer is the third party wagering site such as a race track, OTB, or advance deposit wagering provider. Therefore, the revenue we recognize for export revenue is the simulcast host fee we earn for exporting our racing signal to the third party wagering site.
Additionally, we adopted the clarified scope guidance of ASC 610-20, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets" in conjunction with ASU 2014-09, which applies to the sale, transfer and
derecognition of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales, and eliminates the guidance specific to real estate in ASC 360-20.
Generally, the Company’s sales of its
land
would be considered a sale of a nonfinancial asset as defined
by ASC 610-20
. Under ASC 610-20, the Company will derecognize the asset and recognize a gain or loss on the sale of the
land
when control of the underlying asset transfers to the buyer.
With respect to partial sales of real estate to joint ventures, the new guidance requires us to recognize a full gain where an equity investment is retained. These transactions could result in a basis difference as we will be required to measure our retained equity interest at fair value, whereas the joint venture may continue to measure the assets received at carryover basis.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842), which requires that lessees recognize assets and liabilities for leases with lease terms greater than 12 months in the statement of financial position and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The update is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years. Early adoption is permitted. We are currently analyzing the impact of this ASU and, at this time, we are unable to determine the impact on the new standard, if any, on our consolidated financial statements.
3
. STOCK-BASED COMPENSATION
Long Term Incentive Plan and Award of Deferred Stock
The Long Term Incentive Plan (the “LTI Plan”) authorizes the grant of Long Term Incentive Awards that provide an opportunity to Named Executive Officers (“NEOs”) and other Senior Executives to receive a payment in cash or shares of the Company’s common stock to the extent of achievement at the end of a period greater than
one
year (the “Performance Period”) as compared to Performance Goals established at the beginning of the Performance Period.
Currently, there are three awards outstanding that are for three
-
year periods ending December 31, 2018, 2019, and 2020.
Board of Directors Stock Option
, Deferred Stock Awards, and Restricted
Stock Grants
The Company’s Stock Plan
was amended to
authorize annual grants of restricted stock
, deferred stock,
stock options, or
any combination of the three
, to non-employee members of the Board of Directors at the time of the Company’s annual shareholders
’
meeting as determined by the Board prior to each such meeting. Options granted under the Plan generally expire
10
years after the grant date. Restricted stock and deferred stock grants generally vest
100%
one
year after the date of the annual meeting
at which they were granted
, are subject to restrictions on resale for an additional year, and are subject to forfeiture if a board member terminates
his or her board service
prior to the shares vesting.
The Board of Directors’ unvested deferred stock awards as of
September
30, 2018
consisted of
7,456
shares with a weighted average fair value per share of
$16.10
.
There were no unvested
restricted stock or
stock options outstanding at
September
30, 2018
.
Employee
Deferred Stock Awards
Prior to January 1, 2016 the Company’s Board awarded deferred compensation to executive officers and key
employees
,
that
were not performance-based
,
in the form of
d
eferred
s
tock awards under the Company’s Stock Plan.
These
deferred stock awards are subject to forfeiture if an employee terminates employment prior to the vesting. Generally, the awards vest ratably over a
four
-year period and compensation costs are recognized over the vesting period. Compensation costs are recorded in “Salaries and benefits” on the Condensed Consolidated Statements of Operations.
There were no unvested
employee
deferred stock awards outstanding at
September
30, 2018
.
Stock-based compensation expense related to the LTI Plan, deferred stock awards and restricted stock awards
is
included on the
Condensed Consolidated Statements of Operations
and
totaled
$
269
,000
and
$
264
,000
for the
nine
months ended
September
30, 2018
and
201
7
, respectively.
Employee Stock Option Grants
The Company has granted incentive stock options to employees pursuant to the Company’s Stock Plan with an exercise price equal to the market price on the date of grant. The options vest over a
42
-month period and expire in
10
years.
A summary of stock option activity as of
September 30, 2018
and changes during the
nine
months
then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Number of
|
|
Exercise
|
|
Contractual
|
|
Grant Date
|
Stock Options
|
|
Options
|
|
Price
|
|
Term
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2018
|
|
|
142,502
|
|
$
|
8.19
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
(55,500)
|
|
|
8.43
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
87,002
|
|
$
|
8.03
|
|
|
1.2
Years
|
|
$
|
698,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2018
|
|
|
87,002
|
|
$
|
8.03
|
|
|
1.2
Years
|
|
$
|
698,802
|
4. NET INCOME PER SHARE COMPUTATIONS
The following is a reconciliation of the numerator and denominator of the earnings per common share computations
for the three and
nine
months ended
September
30, 2018
and 2017:
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income (numerator) amounts used for basic and diluted per share computations:
|
|
$
|
1,632,845
|
|
$
|
952,635
|
|
$
|
3,347,890
|
|
$
|
2,182,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (denominator) of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,497,072
|
|
|
4,393,523
|
|
|
4,467,897
|
|
|
4,369,489
|
Plus dilutive effect of stock options
|
|
|
36,442
|
|
|
25,913
|
|
|
46,118
|
|
|
26,045
|
Diluted
|
|
|
4,533,514
|
|
|
4,419,436
|
|
|
4,514,015
|
|
|
4,395,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.36
|
|
$
|
.22
|
|
$
|
.75
|
|
$
|
.50
|
Diluted
|
|
|
.36
|
|
|
.22
|
|
|
.74
|
|
|
.50
|
There were no out of-the-money options at
September
30, 2018
; thus, all outstanding options to purchase shares of common stock were included in the computation of diluted net income per share.
Options to purchase
30,000
shares of common stock at an average price of
$12.33
per share were outstanding but not included in the computation of diluted net income per share for the
three and nine
months ended
September
30, 2017 because the exercise price of the options exceeded the market price of the Company’s common stock at
September
30, 2017.
5.
PROMISSORY NOTES RECEIVABLE
In May 2016, the Company sold approximately
24
acres of land adjacent to the Racetrack for a total consideration of approximately
$4.3
million. Promissory notes receivable
consists
of two promissory notes totaling
$
2,145,000
bearing interest at
1.43%
. On May 31, 2017, the Company signed an amendment extending the maturity date of the notes to
May 2020
. Payments totaling
$1,094,000
are due annually on May 13
th
until the notes mature. The promissory notes are secured by the mortgage on approximately 24 acres and management believes
no
allowance for
collectability
is necessary.
6. GENERAL CREDIT AGREEMENT
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 three months ended
September
30, 2018.
7
. OPERATING SEGMENTS
The Company has
four
reportable
operating
segments: horse racing, Card Casino, food and beverage, and development. The horse racing segment primarily represents simulcast and live horse racing operations. The Card Casino segment represents operations of Canterbury Park’s Card Casino, the food and beverage segment represents food and beverage operations provided during simulcast and live racing, in the Card Casino, and during special events. The development segment represents our real estate development operations. The Company’s reportable operating segments are strategic business units that offer different products and services. They are managed separately because the segments differ in the nature of the products and services provided as well as process to produce those products and services. The Minnesota Racing Commission regulates the horse racing and Card Casino segments.
Depreciation, interest and income taxes are allocated to the segments, but no allocation is made to the food and beverage segment for shared facilities. However, the food and beverage segment pays approximately
25
% of gross revenues earned on live racing and special event days to the horse racing segment for use of the facilities.
The following tables represent a disaggregation of revenues from contracts with customers along with the Company’s operating segments (in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
Horse Racing
|
|
Card Casino
|
|
Food and Beverage
|
|
Development
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
14,333
|
|
$
|
25,397
|
|
$
|
7,373
|
|
$
|
-
|
|
$
|
47,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
|
746
|
|
|
-
|
|
|
1,054
|
|
|
-
|
|
|
1,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (expense) income
|
|
|
(3)
|
|
|
-
|
|
|
-
|
|
|
29
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,758
|
|
|
5
|
|
|
133
|
|
|
-
|
|
|
1,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (loss) income before income taxes
|
|
|
(766)
|
|
|
5,772
|
|
|
739
|
|
|
(8)
|
|
|
5,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income tax (benefit) expense
|
|
|
(504)
|
|
|
1,394
|
|
|
178
|
|
|
(2)
|
|
|
1,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2018
|
Segment Assets
|
|
$
|
43,297
|
|
$
|
628
|
|
$
|
23,924
|
|
$
|
10,787
|
|
$
|
78,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
Horse Racing
|
|
Card Casino
|
|
Food and Beverage
|
|
Development
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
13,952
|
|
$
|
23,797
|
|
$
|
7,207
|
|
$
|
-
|
|
$
|
44,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
|
682
|
|
|
-
|
|
|
1,106
|
|
|
-
|
|
|
1,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
37
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,428
|
|
|
317
|
|
|
124
|
|
|
-
|
|
|
1,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (loss) income before income taxes
|
|
|
(801)
|
|
|
4,828
|
|
|
1,407
|
|
|
-
|
|
|
5,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income tax (benefit) expense
|
|
|
(1,039)
|
|
|
1,923
|
|
|
560
|
|
|
-
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017
|
Segment Assets
|
|
$
|
41,077
|
|
$
|
642
|
|
$
|
21,583
|
|
$
|
11,436
|
|
$
|
74,738
|
The following are reconciliations of reportable segment revenues, income before income taxes, and assets, to the Company’s consolidated totals (in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
Revenues
|
|
|
|
|
|
|
Total net revenues for reportable segments
|
|
$
|
48,903
|
|
$
|
46,745
|
Elimination of intersegment revenues
|
|
|
(1,800)
|
|
|
(1,789)
|
Total consolidated net revenues
|
|
$
|
47,103
|
|
$
|
44,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
Total segment income before income taxes
|
|
$
|
5,737
|
|
$
|
5,434
|
Elimination of intersegment income before income taxes
|
|
|
(1,323)
|
|
|
(1,807)
|
Total consolidated income before income taxes
|
|
$
|
4,414
|
|
$
|
3,627
|
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Assets
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
$
|
78,636
|
|
$
|
74,738
|
Elimination of intercompany receivables
|
|
|
(21,526)
|
|
|
(20,201)
|
Total consolidated assets
|
|
$
|
57,110
|
|
$
|
54,537
|
8. COMMITMENTS AND CONTINGENCIES
In accordance with an Earn Out Promissory Note given to the prior owner of the Racetrack as part of the consideration paid by the Company to acquire the Racetrack in 1994, if (i) off-track betting becomes legally permissible in the State of Minnesota and (ii) the Company begins to conduct off-track betting with respect to or in connection with its operations, the Company will be required to pay to the IMR Fund, L.P. the greater of
(a)
$
700,000
per
O
perating
Y
ear, as defined, or
(b)
20
% of the
N
et
P
retax
P
rofit, 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 w
ould
be required to pay these amounts is remote. At the date (if any) that these two conditions are met, the
five
minimum payments w
ould
be discounted back to their present value and the sum of those discounted payments w
ould
be capitalized as part of the purchase price in accordance with GAAP. The purchase price will be further increased if payments become due under the “20% of Net Pretax Profit” calculation. The first payment
would be due
90
days after the end of the third
O
perating
Y
ear 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
O
perating
Y
ears.
The Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community (“SMSC”), which became effective June 4, 2012 and was amended in each of January 2015, 2016, 2017, and 2018, and will expire on December 31, 2022. The CMA contains certain covenants which, if breached, would trigger an obligation to repay a specified amount related to such covenant. At this time, management believes that the likelihood that the breach of a covenant will occur and that the Company will be required to pay the specified amount related to such covenant is remote.
The Company is periodically involved in various claims and legal actions arising in the normal course of business. Management believes that the resolution of any pending claims and legal actions at
September 30, 2018
and as of the date of this report
,
will not have a material impact on the Company’s consolidated financial positions or results of operations.
9.
COOPERATIVE MARKETING AGREEMENT
As discussed
above
in Note 8, on June 4, 2012, the Company entered into the CMA with the SMSC. The primary purpose of the CMA is to increase purses paid during live horse racing at Canterbury Park’s Racetrack in order to strengthen Minnesota’s thoroughbred and quarter horse industry. Under the CMA, as amended, this is achieved through “Purse Enhancement Payments to Horsemen” paid directly to the MHBPA. These payments have no direct impact on the Company’s consolidated financial statements or operations.
Under the terms of the CMA, as amended, the SMSC paid the horsemen
$7.4
million and
$7.2
million in the first
nine
months of 2018 and 2017, respectively, primarily for purse enhancements for the live race meets in the respective years.
Under the CMA, as amended, SMSC also agreed to make “Marketing Payments” to the Company relating to joint marketing efforts for the mutual benefit of the Company and SMSC, including signage, joint promotions, player benefits and events. Under the CMA, the SMSC paid the Company
$1,620,000
and
$1,581,000
for marketing purposes during the
nine months ended September 30, 2018 and 2017, respectively.
In each of 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.” SMSC is currently obligated to make the following purse enhancement and marketing payments for 2019 through 2022:
Year
|
|
Purse Enhancement Payments to Horsemen
|
1
|
Marketing Payments to Canterbury 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 earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s
condensed
consolidated statements of operations. For the three
and
nine
months ended
September
30
, 2018, the Company recorded
$
491,000
and
$
1,169,000
in other revenue and incurred
$
434,000
and
$
999
,000
in advertising and marketing expense and
$
57
,000
and
$1
70
,000
in depreciation related to the SMSC marketing funds.
For the three and nine months ended September 30, 2017, the Company recorded $672,000 and $1,298,000 in other revenue and incurred $569,000 and $1,128,000 in advertising and marketing expense and $57,000 and $170,000 in depreciation related to the SMSC marketing payment.
Under the CMA, the Company agreed for the term of the CMA, which is currently scheduled to terminate on December 31, 2022, 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.
10. REAL ESTATE DEVELOPMENT
Joint Venture
On April 2, 2018,
the
Company’s subsidiary Canterbury Development LLC, entered into an Operating Agreement (“Operating Agreement”) with an affiliate of Doran Companies (“Doran”), a national commercial and residential real estate developer, as the two members of a Minnesota limited liability company named Doran Canterbury I, LLC (
“
Doran Canterbury I
”
).
Doran Canterbury I was formed as part of a joint venture between Doran and Canterbury Development LLC to construct an upscale apartment complex on land adjacent to the Company’s Racetrack (the “Project”). Doran Canterbury
I
will pursue development of Phase I of the Project, which will include approximately 300 units, a heated parking ramp, and a clubhouse.
The Operating Agreement was amended and restated on August 17, 2018 to expand the definition of allowable mortgage financing for the development and construction of the Project. The amended and restated agreement did not have a material effect on Canterbury’s contribution to, or obligations in connection with, the Project.
In connection with the execution of the Amended Doran Canterbury I Agreement, on August 18, 2018, Canterbury Development
LLC
entered into an Operating Agreement with Doran Shakopee, LLC as the two members of a Minnesota limited liability company entitled Doran Canterbury II, LLC (“ Doran Canterbury II”). Under the Doran Canterbury II Operating Agreement, Doran Canterbury II will pursue development of Phase II of the Project, which is expected to begin after the completion of Phase I. Phase II will include approximately 300 apartment units and a
heated
parking ramp. Canterbury Development’s equity contribution to Doran Canterbury for Phase II will be approximately
10
acres of land. In connection with its contribution, Canterbury Development will become a 27.4% equity member
in
Doran
Canterbury II
with Doran
owning the remaining 72.6%.
On September 27, 2018,
the Company’s subsidiary
Canterbury Development LLC contributed approximately
13
acres of land
to Doran Canterbury I
as its equity contribution
to
the joint venture
.
As stated in the Operating Agreement, Doran is responsible for securing financing for Doran Canterbury I. As of November 14, 2018, financing for Doran Canterbury I has not been secured
and if it is not secured, the land contributed to the joint venture will be returned to the Company
. Therefore, the Company did not record an investment in the joint venture
and a gain on transfer of land
as of September 30, 2018.
Tax Increment Financing
On August 8, 2018, the City Council of the City of Shakopee, Minnesota approved a Contract for Private Redevelopment (“Redevelopment Agreement”) between the City of Shakopee Economic Development Authority (“Shakopee EDA”) and Canterbury Park Holding Corporation and its subsidiary Canterbury Development LLC in connection with a Tax Increment Financing District (“TIF District”) that the City had approved in April 2018. The City of Shakopee, the Shakopee EDA and the Company entered into the Redevelopment Agreement on August 10, 2018.
Under the Redevelopment Agreement, the Company has agreed to undertake a number of specific infrastructure improvements within the TIF District, including the development of public streets, utilities, sidewalks, and other public infrastructure. More specifically, the Company is obligated to construct improvements on Shenandoah Drive and Barenscheer Boulevard with these improvements required to be substantially complete on or before December 31, 2019 and December 31, 2020, respectively.
If the Company does not proceed with the improvements to Shenandoah Drive on or before December 15, 2018 or the improvements to Barenscheer Boulevard on or before December 15, 2019, the City of Shakopee has the right to construct the improvements itself and assess the Company for the costs of these improvements.
Under the Redevelopment Agreement, the City of Shakopee has agreed that a portion of the tax increment revenue generated from the developed property will be paid to the Company to reimburse it for its expense in constructing infrastructure improvements. The total estimated costs of TIF eligible improvements
to be
borne by the Company is
$23,336,500
. A detailed Schedule of the Public Improvements under the Redevelopment Agreement, the timeline for their construction and the source and amount of funding is set forth on Exhibit C of the Redevelopment Agreement
, which was filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30, 2018
. The total amount of funding that Canterbury will be paid as reimbursement under the TIF program for these improvements is not guaranteed, however, and will depend on future tax revenues generated from the developed property.
The Company expects to finance its improvements under the Redevelopment Agreement with funds from its current operating resources and existing credit facility
and, potentially, third-party financing sources.
11. SUBSEQUENT EVENTS
As part of its development efforts, the Company has recently entered into several real estate purchase and sale agreements.
On October 22, 2018, the Company entered into an agreement to sell approximately
1.7
acres of land on the
W
est side of the Racetrack to a third party for total consideration of approximately $564,000. Closing is subject to the satisfaction of certain customary conditions. The Company expects the transaction to close in 2019.
On October 30, 2018, the Company entered into an agreement to purchase approximately
2.6
acres of land on the
E
ast side of the Racetrack for total consideration of approximately $1.0 million. Closing is subject to the satisfaction of certain customary conditions. The Company expects the transaction to close in 2019.
On November 1, 2018, the Company entered into an agreement to sell between
19
and
21
acres of land on the East side of the Racetrack to a third party for total consideration of approximately $3.7 million to $4.1 million, depending upon completion of a survey and determination of the final acreage. Closing is subject to the satisfaction of certain customary conditions. The Company expects the transaction to close in 2019.