NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
OVERVIEW AND BASIS 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.
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 March 31, 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 March 31, 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 are recognized when the related event occurs or services have been performed. Deferred revenue also
includes advanced Cooperative Marketing Agreement (“CMA”) promotional funds and revenue is recognized when expenses
are incurred.
The Company maintains a deferred gain on sale of land of $240,000 due to a repurchase right.
Due to Minnesota Horsemen’s Benevolent and
Protective Association, Inc. (“MHBPA”)
– The Minnesota Pari-mutuel Horse Racing Act specifies that the Company
is required to segregate a portion of funds (recorded as purse expense in the statements of operations) received from Card Casino
operations and wagering on simulcast and live horse races, for future payment as purses for live horse races or other uses of the
horsepersons’ association. Pursuant to an agreement with the MHBPA, the Company transferred into a trust account or paid
directly to the MHBPA, $1,090,000 and $668,000 for the three months ended March 31, 2018 and 2017 respectively, related to thoroughbred
races. Minnesota Statutes specify that amounts transferred into the trust account are the property of the trust and not of the
Company, and therefore 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 three months ended March 31, 2017. Additionally, workers
compensation amounts have been reclassified from other operating expenses to salaries and benefits on the Consolidated Statement
of Operations for the three months ended March 31, 2017.
|
2.
|
ACCOUNTING STANDARDS AND SIGNIFICANT ACCOUNTING POLICIES
|
Recently Adopted Accounting Pronouncements
In November 2016, the 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 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 three months ended March 31, 2017.
In May 2014, the Financial Accounting Standards Board
("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 of the transition. 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 consolidated statement
of operations. The amounts previously included as promotional allowance will now be 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 March 31, 2017
|
|
|
|
As previously
reported
|
|
|
Adjustments
|
|
|
As Adjusted
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pari-mutuel
|
|
$
|
1,531,864
|
|
|
$
|
(25,927
|
)
|
|
$
|
1,505,937
|
|
Promotional allowances
|
|
|
(25,927
|
)
|
|
|
25,927
|
|
|
|
-
|
|
Select unaudited condensed consolidated statement
of cash flow line items, which reflects the adoption of ASU No. 2016-18 are as follows:
|
|
Three months ended March 31, 2017
|
|
|
|
As previously
reported
|
|
|
Adjustments
|
|
|
As Adjusted
|
|
Net cash provided by operating activities
|
|
|
2,088,925
|
|
|
|
1,017,707
|
|
|
|
3,106,632
|
|
Net increase in cash, cash equivalents, and restricted cash
|
|
|
1,348,974
|
|
|
|
1,017,707
|
|
|
|
2,366,681
|
|
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
|
|
$
|
7,647,781
|
|
|
$
|
3,007,720
|
|
|
$
|
10,655,501
|
|
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 such 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 don’t 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 to 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 selling price 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, and 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. We also do not estimate breakage revenue for outstanding chips. Therefore, we do not recognize
any contract revenue associated with future performance obligations.
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 consolidated statements
of operations.
We evaluate our on-track revenue, export revenue,
and import revenue contracts in order 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.
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 and Restricted
Stock Grants
The Company’s Stock Plan was amended to authorize
annual grants of restricted stock or stock options, or both, to non-employee members of the Board of Directors at the time of the
Company’s annual shareholders meeting as determined by the Board prior to each such meeting. Options granted under the Plan
generally expire 10 years after the grant date. Restricted stock 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 restricted stock as of March 31, 2018 was 11,264 shares with a weighted average fair value per share of $10.65. There
were no unvested stock options outstanding at March 31, 2018.
Deferred Stock Awards
Prior to January 1, 2016 the Company’s Board
awarded deferred compensation to executive officers and key employees that were not performance-based, in the form of deferred
stock awards under the Company’s Stock Plan. 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 deferred stock awards outstanding at March 31, 2018.
Stock-based compensation expense related to the LTI
Plan, deferred stock awards and restricted stock awards are included on the
Condensed Consolidated Statements of Operations
and totaled $103,000 and $91,000 for the three months ended March 31, 2018 and 2017.
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 March 31,
2018 and changes during the three months ended is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
Grant Date
|
|
Stock Options
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2018
|
|
|
142,502
|
|
|
$
|
8.19
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
(22,000
|
)
|
|
|
10.25
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
120,502
|
|
|
$
|
7.81
|
|
|
1.6 Years
|
|
$
|
941,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2018
|
|
|
120,502
|
|
|
$
|
7.81
|
|
|
1.6 Years
|
|
$
|
941,142
|
|
|
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 months ended March 31, 2018 and 2017:
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net income (numerator) amounts used for basic and diluted per share computations:
|
|
$
|
989,690
|
|
|
$
|
512,997
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (denominator) of common stock outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,439,652
|
|
|
|
4,342,610
|
|
Plus dilutive effect of stock options
|
|
|
51,211
|
|
|
|
49,405
|
|
Diluted
|
|
|
4,490,863
|
|
|
|
4,392,015
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.22
|
|
|
$
|
.12
|
|
Diluted
|
|
|
.22
|
|
|
|
.12
|
|
There were no out of-the-money options at March 31,
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 months ended March 31, 2017 because the exercise price of the options exceeded the market price of the Company’s
common stock at March 31, 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 consist of two promissory
notes totaling $3,191,000 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 doubtful accounts is necessary.
|
6.
|
GENERAL CREDIT AGREEMENT
|
The Company has a general credit and security agreement
with a financial institution, which provides a revolving credit line of up to $6,000,000, and expires September 30, 2018. 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 March 31, 2018.
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):
|
|
Three Months Ended March 31, 2018
|
|
|
|
Horse Racing
|
|
|
Card
Casino
|
|
|
Food and
Beverage
|
|
|
Development
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
2,597
|
|
|
$
|
8,277
|
|
|
$
|
1,346
|
|
|
$
|
-
|
|
|
$
|
12,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
|
109
|
|
|
|
|
|
|
|
319
|
|
|
|
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
589
|
|
|
|
5
|
|
|
|
41
|
|
|
|
|
|
|
|
635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (loss) income before income tax taxes
|
|
|
(129
|
)
|
|
|
1,531
|
|
|
|
(39
|
)
|
|
|
(6
|
)
|
|
|
1,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment tax (benefit) expense
|
|
|
(32
|
)
|
|
|
424
|
|
|
|
(11
|
)
|
|
|
(2
|
)
|
|
|
379
|
|
|
|
|
At March 31, 2018
|
|
Segment Assets
|
|
$
|
42,533
|
|
|
$
|
638
|
|
|
$
|
21,841
|
|
|
$
|
11,525
|
|
|
$
|
76,537
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
Horse Racing
|
|
|
Card
Casino
|
|
|
Food and
Beverage
|
|
|
Development
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
2,363
|
|
|
$
|
7,705
|
|
|
$
|
1,375
|
|
|
$
|
-
|
|
|
$
|
11,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
|
|
123
|
|
|
|
-
|
|
|
|
356
|
|
|
|
-
|
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
493
|
|
|
|
106
|
|
|
|
47
|
|
|
|
-
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (loss) income before income tax taxes
|
|
|
(442
|
)
|
|
|
1,297
|
|
|
|
196
|
|
|
|
-
|
|
|
|
1,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment tax (benefit) expense
|
|
|
(252
|
)
|
|
|
533
|
|
|
|
81
|
|
|
|
-
|
|
|
|
361
|
|
|
|
|
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):
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
Total net revenues for reportable segments
|
|
$
|
12,648
|
|
|
$
|
11,922
|
|
Elimination of intersegment revenues
|
|
|
(428
|
)
|
|
|
(479
|
)
|
Total consolidated net revenues
|
|
$
|
12,220
|
|
|
$
|
11,443
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
Total segment income before income taxes
|
|
$
|
1,357
|
|
|
$
|
1,051
|
|
Elimination of intersegment loss (income) before income taxes
|
|
|
12
|
|
|
|
(177
|
)
|
Total consolidated income before income taxes
|
|
$
|
1,369
|
|
|
$
|
874
|
|
|
|
At March 31,
|
|
|
At December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
$
|
76,537
|
|
|
$
|
74,738
|
|
Elimination of intercompany receivables
|
|
|
(20,190
|
)
|
|
|
(20,203
|
)
|
Total consolidated assets
|
|
$
|
56,347
|
|
|
$
|
54,535
|
|
|
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 $700,000 per
operating year, as defined, or 20% of the net pretax profit, as defined for each of five operating years. At this time, management
believes that the likelihood that these two conditions will be met and that the Company will be required to pay these amounts is
remote. At the date (if any) that these two conditions are met, the five minimum payments will be discounted back to their present
value and the sum of those discounted payments will be capitalized as part of the purchase price in accordance with GAAP. The purchase
price will be further increased if payments become due under the “20% of Net Pretax Profit” calculation. The first
payment is to be made 90 days after the end of the third operating year in which off-track betting is conducted by the Company.
Remaining payments would be made within 90 days of the end of each of the next four operating years.
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 March 31, 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 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 three 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. The Company did not receive a marketing payment during the 2018
first quarter but expects to receive $1,620,000 in the 2018 second quarter. Under the CMA, the SMSC paid the Company $1,581,000
for marketing purposes during the three months ended March 31, 2017.
In each of January 2015, 2016,
and 2017 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 consolidated statements of operations. For the three months ended March 31, 2018, the Company
recorded $106,000 in other revenue and incurred $49,000 in advertising and marketing expense and $57,000 in depreciation related
to the SMSC marketing funds. For the three months ended March 31, 2017, the Company recorded $156,000 in other revenue and incurred
$99,000 in advertising and marketing expense and $57,000 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.
In March 2016, the FASB issued ASU 2016-09, “
Improvements
to Employee Share-Based Payment Accounting
”, which requires companies to recognize additional tax benefits or expenses
related to the vesting or settlement of employee share based awards as income tax expense or benefit in the income statement in
the reporting period in which they occur. In addition, ASU 2016-09 requires that all tax related cash flows resulting from share-based
payments, including the excess tax benefits related to settlement of stock-based awards, be classified as cash flows from operating
activities in the statement of cash flows. The Company adopted this ASU at March 31, 2017. The adoption of ASU 2016-09 required
no retrospective adjustments to the financial statements. In addition there was no material cumulative-effect adjustment to retained
earnings. Upon adoption, the Company is required to recognize all excess tax benefits in the statement of earnings.
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. The Operating Agreement has a stated effective date of March 1, 2018.
Doran Canterbury I, LLC was formed as part of a joint venture between Doran and Canterbury Development LLC to construct a luxury
apartment complex on land adjacent to the Company’s Racetrack (the “Project”). Doran Canterbury I, LLC will
pursue development of Phase I of the Project, which will include approximately 300 units, a heated parking ramp, and a clubhouse.
Under the Operating Agreement, Doran will lead the development, design and construction of the Phase I apartment complex, provide
property management and leasing services, and be responsible for the day-to-day operations of the Project. Further information
about the Operating Agreement and Project is presented under Item 1.01 of the Company’s Form 8-K dated April 2, 2018 and
filed with the Commission on April 6, 2018.