Other operating expenses increased $173,000, or 2.5%, in 2011 compared to 2010. The increase is primarily due to increased expenditures in support of legislation that would authorize electronic gaming devices at the Racetrack.
Net other income decreased $7,000, or 54.7%, in 2011 compared to 2010. This decrease is primarily attributable to a decrease in interest income on our primary bank account balance during 2011.
Income taxes as a percentage of pre-tax loss and income decreased to 62.2% for the year ended December 31, 2011 from 78.5% for the year ended December 31, 2010. The decrease is primarily attributable to the increase in net income before taxes in 2011 compared to 2010. The higher than statutory income tax rate is due to the Company’s expenditures on non-deductible lobbying expenses in pursuit of passing Racino legislation.
Net income increased $1,390,000, which resulted in net income for 2011 in the amount of $398,000 compared to a net loss of $992,000 for the year ended December 31, 2010. As mentioned above, the primary reasons for this change was the loss on disposal of assets that during the first quarter of 2010 and the increase in Card Casino revenue in 2011.
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with generally accepted accounting principles. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are included in Note 1 to our consolidated financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
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CONTINGENCIES
In connection with the purchase of the Racetrack, the Company entered into an Earn Out Promissory Note dated March 29, 1994. In accordance with the Earn Out Note, if (i) off-track betting becomes legally permissible in the State of Minnesota and (ii) we begin to conduct off-track betting with respect to or in connection with its operations, we 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, we believe that the likelihood that these two conditions will be met and that we 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 generally accepted accounting principles. 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 us. Remaining payments would be made within 90 days of the end of each of the next four operating years.
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, 2011 and as of the date of this report will not have a material impact on the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operations during the year ended December 31, 2011 was $3,441,441 and was the result of several factors. Net income for 2011 was $397,667. In addition, depreciation during 2011 was $1,894,277. Also, deferred income taxes increased $362,300 primarily due to the carryback of the 2010 federal net operating loss and the partial utilization of the state net operating loss in 2011. Finally, income taxes receivable decreased $540,198 due to the utilization of prepaid income taxes carried on the balance sheet at December 31, 2010 due to the Company having federal taxable income in 2011.
Net cash provided by operations during the year ended December 31, 2010 was $2,984,065 and was the result of several factors. During the first quarter of 2010, the Company incurred a one-time loss on disposal of assets in the amount of $909,540 relating to the remodel of our card room. In addition, depreciation during 2010 was $2,043,758. Finally, during the third quarter of 2010, the Company had a cost segregation study performed on our assets in use. Primarily as a result of the study, our deferred tax liability increased $839,450. These items were somewhat offset by an increase in restricted cash in the amount of $391,662 due primarily to the increase in the amount payable to the Minnesota Horsemen’s Benevolence & Protective Association (MHBPA).
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in investing activities for the year ended December 31, 2011 of $920,632 resulted primarily from purchasing a variety of fixtures and equipment for operational purposes.
Cash used in investing activities for the year ended December 31, 2010 of $2,417,119 resulted primarily from costs to remodel our Card Casino totaling $2,296,000. The Company used cash on hand to fund the project and avoided drawing on its line of credit.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash provided by financing activities was $296,508 for the year ended December 31, 2011 consisted of proceeds and excess tax benefits received upon the exercise of stock options and proceeds received upon the exercise of shares of common stock purchased by employees pursuant to our Employee Stock Purchase Plan.
Cash provided by financing activities was $143,319 for the year ended December 31, 2010 and represented proceeds received upon the exercise of stock options and shares of common stock purchased by employees pursuant to our Employee Stock Purchase Plan.
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CASH AND CAPITAL RESOURCES
At December 31, 2011, we had unrestricted cash and cash equivalents of $8,268,000 compared to $5,451,000 at December 31, 2010. This $2.8 million increase consists of $3.4 million net cash provided by operating activities and $0.3 million net cash provided by financing activities, offset by $0.9 million net cash used in investing activities. In addition, as of December 31, 2011, we had $3.0 million of capacity under a commercial revolving credit line as part of a general credit and security agreement with Bremer Bank that will expire on May 6, 2012. The Company plans to renew this credit line before it expires. We had no borrowings under the credit line in 2011 or 2010.
Our three largest sources of revenue: pari-mutuel wagering, Card Casino operations and concessions, are all based on cash transactions. Consequently, we have significant inflows of cash on a daily basis. We designate cash balances which 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’s table games are required by law to be “unbanked”. “Unbanked” refers to a wagering system or game where wagers “lost” or “won” by the host are accumulated into a player pool liability for purposes of enhancing the total amount paid back to players in any other card game. The Company may only serve as custodian of the player pool. It may not have an active interest in any card game and does not recognize net “wins” or “losses” as revenue. 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 approximately $128,000 at December 31, 2011 compared to $206,000 at December 31, 2010.
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, 2011, accrued jackpot funds totaled approximately $557,000 compared to $516,000 at December 31, 2010. 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 approximately $145,000 at December 31, 2011, compared to $187,000 at December 31, 2010. 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 $5,235,000 and $5,207,000 in purse funds for the years ended December 31, 2011 and 2010, respectively. Minnesota Statutes specify that amounts transferred into trust are the property of the trust and not the Company. Unpaid purse fund obligations due the MHBPA were $158,616 and $193,592 at December 31, 2011 and 2010, respectively.
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.
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.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
In March 2008, the Company entered into a six-year service agreement with its totalizator provider. Pursuant to the agreement, the vendor provides totalizator equipment and computer programs which record and process all wagers and calculate odds and payoffs. In April 2009, the Company entered into a four-year service agreement to outsource its information technology (IT) function. Amounts charged to operations under these agreements for the years ended December 31, 2011 and 2010 were approximately $615,000 and $637,000, respectively.
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The Company has entered into operating leases for rental of office equipment, equipment to print certain publications, and track equipment to maintain the Racetrack. Amounts charged to operations under these agreements for the years ended December 31, 2011 and 2010 were approximately $128,000 and $140,000, respectively. All such leases expire on or before December 31, 2014.
Since December 31, 2011, there have been no material changes outside the ordinary course of business to our contractual obligations as set forth above. As of December 31, 2011, 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.
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange Commission, in press releases, and in other communications to shareholders or the investing public, we may make forward-looking statements concerning possible or anticipated future financial performance, prospective business activities or plans which are typically preceded by words such as “believes,” “expects,” “anticipates,” “intends” or similar expressions. For such forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in federal securities laws. Shareholders and the investing public should understand that such forward-looking statements are subject to risks and uncertainties which could affect our actual results and cause actual results to differ materially from those indicated in the forward-looking statements. Such risks and uncertainties include, but are not limited to: material fluctuations in attendance at the Racetrack, decline in interest in wagering on horse races at the Racetrack, at other tracks, or on unbanked card games offered at the Card Casino, competition from other venues offering unbanked card games or other forms of wagering, competition from other sports and entertainment options, costs associated with our efforts to obtain legislative authority for additional gaming options, increases in compensation and employee benefit costs, increases in the percentage of revenues allocated for purse fund payments, higher than expected expense related to new marketing initiatives, the impact of wagering products and technologies introduced by competitors, legislative and regulatory decisions and changes, the general health of the gaming sector, and other factors that are beyond our ability to control or predict.
| |
Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Canterbury Park is not required to provide the information requested by this Item as it qualifies as a smaller reporting company.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial Statements
The following financial statements of the Company are set forth on pages 29 through 46 of the Form 10-K:
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Canterbury Park Holding Corporation
We have audited the accompanying consolidated balance sheets of Canterbury Park Holding Corporation (a Minnesota corporation) and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Canterbury Park Holding Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
| |
/s/ Grant Thornton LLP | |
Minneapolis, Minnesota | |
March 30, 2012 | |
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|
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES |
|
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2011 AND 2010 |
| | | | | | | |
| | 2011 | | 2010 | |
| | | | | | | |
ASSETS | | | | | | | |
| | | | | | | |
CURRENT ASSETS | | | | | | | |
Cash | | $ | 8,268,779 | | $ | 5,451,462 | |
Restricted cash | | | 1,146,163 | | | 1,341,656 | |
Short-term investments (Note 3) | | | 201,669 | | | — | |
Accounts receivable, net of allowance of $27,773 and $34,805, respectively | | | 540,167 | | | 394,314 | |
Inventory | | | 183,122 | | | 176,211 | |
Prepaid expenses | | | 682,404 | | | 564,984 | |
Income taxes receivable | | | — | | | 381,898 | |
Deferred income taxes (Note 4) | | | 315,200 | | | 320,400 | |
Due from Minnesota horsemen associations | | | 44,372 | | | 49,241 | |
Total current assets | | | 11,381,876 | | | 8,680,166 | |
| | | | | | | |
LONG-TERM ASSETS | | | | | | | |
Deposits | | | 26,400 | | | 20,000 | |
Land, buildings and equipment, net (Note 2) | | | 22,776,115 | | | 23,948,330 | |
| | | | | | | |
| | $ | 34,184,391 | | $ | 32,648,496 | |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
CURRENT LIABILITIES | | | | | | | |
Accounts payable | | $ | 2,432,818 | | $ | 2,252,527 | |
Card Casino accruals | | | 1,314,173 | | | 1,433,798 | |
Accrued wages and payroll taxes | | | 775,256 | | | 686,964 | |
Due to MHBPA (Note 1) | | | 158,616 | | | 193,592 | |
Accrued property taxes | | | 606,252 | | | 562,349 | |
Payable to horsepersons | | | 17,745 | | | 21,551 | |
Income taxes payable | | | 97,000 | | | — | |
Total current liabilities | | | 5,401,860 | | | 5,150,781 | |
| | | | | | | |
LONG-TERM LIABILITIES | | | | | | | |
Deferred income taxes (Note 4) | | | 1,309,000 | | | 951,900 | |
| | | | | | | |
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10) | | | — | | | — | |
| | | | | | | |
STOCKHOLDERS’ EQUITY (Notes 5 and 6) | | | | | | | |
Common stock, $.01 par value, 10,000,000 shares authorized, 4,101,701 and 4,053,660, respectively, shares issued and outstanding | | | 41,017 | | | 40,537 | |
Additional paid-in capital | | | 16,413,468 | | | 15,883,899 | |
Retained earnings | | | 11,019,046 | | | 10,621,379 | |
Total stockholders’ equity | | | 27,473,531 | | | 26,545,815 | |
| | | | | | | |
| | $ | 34,184,391 | | $ | 32,648,496 | |
See notes to consolidated financial statements.
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|
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES |
|
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2011 AND 2010 |
| | | | | | | |
| | 2011 | | 2010 | |
| | | | | | | |
OPERATING REVENUES: | | | | | | | |
Pari-mutuel | | $ | 9,512,476 | | $ | 10,222,981 | |
Card Casino | | | 23,384,552 | | | 22,160,076 | |
Concessions | | | 5,042,387 | | | 5,218,523 | |
Other | | | 2,847,966 | | | 2,501,697 | |
Total Revenues | | | 40,787,381 | | | 40,103,277 | |
Less: Promotional allowances | | | (200,955 | ) | | (183,093 | ) |
Net Revenues | | | 40,586,426 | | | 39,920,184 | |
OPERATING EXPENSES: | | | | | | | |
Purses | | | 5,578,949 | | | 5,782,877 | |
Minnesota Breeders’ Fund | | | 761,929 | | | 778,715 | |
Other pari-mutuel expenses | | | 1,412,084 | | | 1,451,192 | |
Salaries and benefits | | | 17,476,580 | | | 17,699,849 | |
Cost of concession and other sales | | | 2,950,202 | | | 3,044,434 | |
Depreciation | | | 1,894,277 | | | 2,043,758 | |
Loss on disposal of assets | | | — | | | 906,940 | |
Utilities | | | 1,139,332 | | | 1,112,776 | |
Advertising and marketing | | | 1,090,772 | | | 1,314,649 | |
Other | | | 7,235,400 | | | 7,062,113 | |
Total Operating Expenses | | | 39,539,525 | | | 41,197,303 | |
| | | | | | | |
INCOME (LOSS) FROM OPERATIONS | | | 1,046,901 | | | (1,277,119 | ) |
| | | | | | | |
OTHER (EXPENSE) INCOME: | | | | | | | |
Interest expense | | | (802 | ) | | (225 | ) |
Interest income | | | 6,650 | | | 13,138 | |
Net Other Income | | | 5,848 | | | 12,913 | |
| | | | | | | |
INCOME (LOSS) BEFORE INCOME TAXES | | | 1,052,749 | | | (1,264,206 | ) |
| | | | | | | |
Income tax (expense) benefit (Note 4) | | | (655,082 | ) | | 272,000 | |
| | | | | | | |
NET INCOME (LOSS) | | $ | 397,667 | | $ | (992,206 | ) |
| | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | | | 4,084,762 | | | 4,038,103 | |
| | | | | | | |
WEIGHTED AVERAGE NUMBER OF DILUTIVE SHARES OUTSTANDING | | | 4,133,339 | | | 4,038,103 | |
| | | | | | | |
BASIC NET INCOME (LOSS) PER COMMON SHARE (Note 7) | | $ | .10 | | $ | (.25 | ) |
| | | | | | | |
DILUTED NET INCOME (LOSS) PER COMMON SHARE (Note 7) | | $ | .10 | | $ | (.25 | ) |
See notes to consolidated financial statements.
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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES |
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2011 AND 2010 |
| | | | | | | | | | | | | | | | |
| | Number
of Shares | | Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Total | |
| | | | | | | | | | | |
Balance at December 31, 2009 | | | 4,021,702 | | $ | 40,217 | | $ | 15,648,200 | | $ | 11,613,585 | | $ | 27,302,002 | |
| | | | | | | | | | | | | | | | |
Exercise of stock options | | | 28,101 | | | 281 | | | 114,651 | | | — | | | 114,932 | |
Stock-based compensation | | | — | | | — | | | 187,959 | | | — | | | 187,959 | |
Net tax shortfall from exercise of stock options | | | — | | | — | | | (95,502 | ) | | — | | | (95,502 | ) |
Shares issued under Employee Stock Purchase Plan | | | 3,857 | | | 39 | | | 28,591 | | | — | | | 28,630 | |
Net loss | | | — | | | — | | | — | | | (992,206 | ) | | (992,206 | ) |
| | | | | | | | | | | | | | | | |
Balance at December 31, 2010 | | | 4,053,660 | | $ | 40,537 | | $ | 15,883,899 | | $ | 10,621,379 | | $ | 26,545,815 | |
| | | | | | | | | | | | | | | | |
Exercise of stock options | | | 45,640 | | | 456 | | | 213,214 | | | — | | | 213,670 | |
Stock-based compensation | | | — | | | — | | | 233,541 | | | — | | | 233,541 | |
Tax benefit from exercise of stock options | | | — | | | — | | | 61,300 | | | — | | | 61,300 | |
Shares issued under Employee Stock Purchase Plan | | | 2,401 | | | 24 | | | 21,514 | | | — | | | 21,538 | |
Net income | | | — | | | — | | | — | | | 397,667 | | | 397,667 | |
Balance at December 31, 2011 | | | 4,101,701 | | $ | 41,017 | | $ | 16,413,468 | | $ | 11,019,046 | | $ | 27,473,531 | |
See notes to consolidated financial statements.
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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2011 AND 2010 |
| | | | | | | |
| | 2011 | | 2010 | |
Operating Activities: | | | | | | | |
Net income (loss) | | $ | 397,667 | | $ | (992,206 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | |
Depreciation | | | 1,894,277 | | | 2,043,758 | |
Stock–based compensation expense | | | 233,541 | | | 187,959 | |
(Gain) loss on disposal of assets | | | (1,400 | ) | | 906,940 | |
Tax (benefit) shortfall from exercise of stock options | | | (61,300 | ) | | 95,502 | |
Increase in deferred income taxes | | | 362,300 | | | 956,850 | |
Changes in operating assets and liabilities: | | | | | | | |
(Increase) decrease in accounts receivable | | | (145,853 | ) | | 10,878 | |
Decrease (increase) in restricted cash | | | 195,493 | | | (391,662 | ) |
Increase in other current assets | | | (130,731 | ) | | (97,599 | ) |
Decrease (increase) in income taxes receivable | | | 540,198 | | | (403,923 | ) |
Increase in accounts payable and accrued wages & payroll taxes | | | 266,884 | | | 226,551 | |
(Decrease) increase in Card Casino accruals | | | (119,625 | ) | | 258,415 | |
Increase in accrued property taxes | | | 43,903 | | | 51,213 | |
Decrease in payable to horsepersons | | | (3,806 | ) | | (9,893 | ) |
(Decrease) increase in due to MHBPA | | | (30,107 | ) | | 141,282 | |
Net cash provided by operating activities | | | 3,441,441 | | | 2,984,065 | |
| | | | | | | |
Investing Activities: | | | | | | | |
Additions to land, buildings and equipment | | | (720,363 | ) | | (3,035,613 | ) |
Proceeds from sale of equipment | | | 1,400 | | | 2,600 | |
Proceeds from redemption of investments | | | 29,430 | | | 644,387 | |
Purchase of investments | | | (231,099 | ) | | (28,493 | ) |
Net cash used in investing activities | | | (920,632 | ) | | (2,417,119 | ) |
| | | | | | | |
Financing Activities: | | | | | | | |
Proceeds from issuance of common stock | | | 235,208 | | | 143,319 | |
Tax benefit from exercise of stock options | | | 61,300 | | | — | |
Net cash provided by financing activities | | | 296,508 | | | 143,319 | |
| | | | | | | |
Net increase in cash | | | 2,817,317 | | | 710,265 | |
| | | | | | | |
Cash at beginning of year | | | 5,451,462 | | | 4,741,197 | |
| | | | | | | |
Cash at end of year | | $ | 8,268,779 | | $ | 5,451,462 | |
| | | | | | | |
Non-cash investing and financing activities: | | | | | | | |
Additions to buildings and equipment funded through accounts payable | | $ | 29,286 | | $ | 27,587 | |
Proceeds from issuance of common stock funded through shares swapped | | $ | 210,470 | | $ | 251,530 | |
Supplemental disclosure of cash flow information: | | | | | | | |
Income taxes (refunded) paid, net of amount paid (refunded) | | $ | (247,436 | ) | $ | 914,971 | |
See notes to consolidated financial statements.
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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
YEARS ENDED DECEMBER 31, 2011 AND 2010 |
| |
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| |
| Business – Canterbury Park Holding Corporation was incorporated on March 24, 1994. On March 29, 1994, the Company acquired all the outstanding securities of Jacobs Realty, Inc. (JRI) from Irwin Jacobs and IMR Fund, L.P. (an investment fund for various pension plans and trusts). JRI was merged into the Company, and the acquisition was accounted for under the purchase method of accounting whereby the acquired assets and liabilities have been recorded at the Company’s cost. The primary asset of JRI was Canterbury Downs Racetrack and the 325 acres of surrounding land. |
| |
| On May 20, 1994, the Company adopted a plan of Reorganization pursuant to which the sole shareholder of Canterbury Park Concessions, Inc. (CPC), and majority shareholder of the Company, agreed to exchange his shares of CPC stock for 198,888 shares of the Company’s common stock concurrent with the closing of a public offering. Pursuant to the Plan of Reorganization, CPC became a wholly owned subsidiary of the Company in August 1994 when the Company completed the initial public offering of its common stock. This reorganization was treated in a manner similar to a pooling of interests. Net proceeds received by the Company from the public offering were approximately $4,847,000, which along with additional borrowings under the Company’s line of credit with the majority shareholder, were used to pay off the remaining notes payable from the acquisition of JRI. |
| |
| The consolidated financial statements include the accounts of the Company, CPC and Shakopee Valley RV Park Acquisition Company, LLC after elimination of intercompany accounts and transactions. |
| |
| Reclassifications – Certain cash flow classifications included in the consolidated financial statements have been reclassified from the prior years’ presentations to conform to the current year presentation. |
| |
| Revenue Recognition – Our revenues are derived primarily from the operations of a Card Casino, pari-mutuel wagering on simulcast and live horse races, concession sales, and related activities. Collection revenue from Card Casino operations, a set percentage of wagers, is recognized at the time that the wagering process is complete. Pari-mutuel revenues are 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. Revenues related to concession and publication sales and parking and admission fees are recognized as revenue when the service has been performed or the product has been delivered. All sales taxes are presented on a net basis and are excluded from revenue. |
| |
| Estimates – The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. |
| |
| Unrestricted Cash – Cash includes all investments with original maturities of three months or less or which are readily convertible into known amounts of cash and are not legally restricted. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. |
| |
| Restricted Cash – Restricted cash represents refundable deposits and amounts due to horsemen for purses, stakes and awards, and amounts accumulated in card game progressive jackpot pools, the player pool and poker promotional fund to be used to repay card players in the form of promotions, giveaways, prizes, or by other means. |
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| |
| Uncashed Winning Tickets – The Company records a liability for winning tickets upon the completion of a race. As winning tickets are redeemed, this liability is reduced for the respective cash payment. We recognize revenue associated with the uncashed winning tickets when the likelihood of the redemption of the winning ticket is remote. |
| |
| Promotional Allowances – The Company offers certain promotional allowances at no charge to patrons who participate in our player rewards program. The retail value of these promotional items is shown as a deduction from total revenues on the Company’s consolidated statements of operations. |
| |
| 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 room operations and wagering on simulcast and live horse races, for future payment as purses for live horse races or other uses of the horsepersons’ associations. Pursuant to an agreement with the MHBPA, the Company has transferred into a trust account or paid directly to the MHBPA, approximately $5,235,000 and $5,207,000 for the years ended December 31, 2011 and 2010, 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. |
| |
| Impairment of Long-Lived Assets – Management of the Company periodically reviews the carrying value of property and equipment for potential impairment by comparing the carrying value of these assets with their related expected future net cash flows. Should the sum of the related expected future net cash flows be less than the carrying value, management 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. To date, management has determined that no impairment of these assets exists. |
| |
| Advertising and Marketing – Advertising and marketing costs are charged to expense as incurred. The related amounts are presented separately in the Company’s consolidated statements of operations. |
| |
| Land, Buildings, and Equipment – Land, buildings, equipment, and building improvements are capitalized at a level of $1,000 or greater and are recorded at cost. Repair and maintenance costs are charged to operations when incurred. Furniture, fixtures, and equipment are depreciated using the straight-line method over estimated useful lives ranging from 5 – 7 years, while buildings are depreciated over 15 – 39 years. Building improvements are amortized using the straight-line method over the useful life of the assets. |
| |
| Card Casino Accruals –Minnesota law allows the Company to collect amounts from patrons to fund progressive jackpot pools in the Card Casino. These amounts, along with amounts earned by the player pool, promotional funds, and the outstanding chip liability, are accrued as short-term liabilities at each balance sheet date. |
| |
| Income Taxes – Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to reverse. |
| |
| Interest and penalties associated with uncertain income tax positions are presented in income tax expense. During the twelve months ended December 31, 2011, we recognized no expenses for interest and penalties. During the twelve months ended December 31, 2010, we recognized expenses of $19,003 for interest and penalties. We do not have any amounts accrued at December 31, 2011 for the payment of interest and penalties. |
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| |
| As of December 31, 2011 the Company had state net operating losses of approximately $390,000. These losses, if unutilized, will expire in 2024. The Company also has approximately $13,000 of state alternative minimum tax credits as of December 31, 2011, which carry forward indefinitely. |
| |
| Net Income Per Share – Basic net income per common share is based on the weighted average number of common shares outstanding during each year. Diluted net income per common share takes into effect the dilutive effect of potential common shares outstanding. The Company’s only potential common shares outstanding are stock options. |
| |
| FairValues of Financial Instruments– Due to the current classification of all financial instruments of the Company and given the short-term nature of the related account balances, carrying amounts reported in the consolidated balance sheets approximate fair value. |
| |
| Stock Based Employee Compensation – We recognize employee services provided in exchange for a share-based payment based on the grant date fair market value over the requisite period. |
| |
| The Company uses the Black-Scholes method to measure the compensation cost for stock options. The Black-Scholes method requires the use of significant assumptions to estimate the fair value of the stock option awards. The expected term of both the board of director and key employee options was calculated using the simplified method. The expected volatility was calculated primarily with reliance on historical volatility rates. During 2010, the Company adjusted its dividend yield rate to reflect the current expectation that no dividends will be declared. This assumption was also used in 2011. The risk-free rate utilized in the Black-Scholes calculations was the U.S. Constant Maturity Treasury Security for the period equivalent to the expected term of the option. |
| |
| The fair value of options granted under the 1994 Stock Plan during 2011 and 2010 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results: |
| | | | | | | |
| | 2011 | | 2010 | |
Dividend yield | | | 0.00 | % | | 0.00 | % |
Expected volatility | | | 50 | % | | 44 | % |
Risk-free interest rate | | | 2.02 | % | | 2.54 | % |
Expected term of options in years | | | 5.5 | | | 5.9 | |
Fair value of options on grant date | | $ | 93,750 | | $ | 345,855 | |
| |
| For more information on our stock-based compensation plans, see Note 6. |
| |
2. | LAND, BUILDINGS AND EQUIPMENT |
| |
| Land, buildings and equipment, at cost, consists of the following at December 31: |
| | | | | | | |
| | 2011 | | 2010 | |
| | | | | | | |
Land | | $ | 6,673,076 | | $ | 6,673,076 | |
Buildings and building improvements | | | 20,196,599 | | | 19,937,187 | |
Furniture and equipment | | | 16,270,494 | | | 16,344,381 | |
| | | 43,140,169 | | | 42,954,644 | |
Accumulated depreciation | | | (20,364,054 | ) | | (19,006,314 | ) |
| | $ | 22,776,115 | | $ | 23,948,330 | |
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| |
3. | FAIR VALUE |
| |
| Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. |
| |
| There are three levels of inputs that may be used to measure fair value: |
| |
| Level 1 – Quoted prices in active markets for identical assets or liabilities. |
| |
| Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| |
| Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
| |
| Assets and liabilities measured at fair value on a recurring basis for December 31, 2011 are summarized below. The Company had no assets and liabilities measured at fair value on a recurring basis for December 31, 2010. |
| | | | | | | | | | | | | |
| | Fair Value Measurements as of
December 31, 2011 | |
Description | | Total | | Level 1 | | Level 2 | | Level 3 | |
|
Short-term investments (Certificates of Deposit) | | $ | 201,669 | | $ | — | | $ | 201,669 | | $ | — | |
Total | | $ | 201,669 | | $ | — | | $ | 201,669 | | $ | — | |
| |
4. | INCOME TAXES |
| |
| A reconciliation between income taxes computed at the statutory federal income tax rate and the effective tax rate is as follows: |
| | | | | | | |
| | 2011 | | 2010 | |
| | | | | | | |
Federal tax expense (benefit) at statutory rates | | $ | 357,935 | | $ | (429,400 | ) |
Nondeductible lobbying expense | | | 179,263 | | | 144,900 | |
State expense (benefit), net of federal impact | | | 114,799 | | | (45,100 | ) |
Stock option expense | | | 28,942 | | | 41,100 | |
Other | | | (25,857 | ) | | 16,500 | |
| | $ | 655,082 | | $ | (272,000 | ) |
| |
| Income tax expense (benefit) for the years ended December 31, 2011 and 2010 consists of the following: |
| | | | | | | |
| | 2011 | | 2010 | |
Current | | | | | | | |
Federal | | $ | 533,847 | | $ | (1,064,650 | ) |
State | | | 16,171 | | | (46,800 | ) |
| | | 550,018 | | | (1,111,450 | ) |
Deferred, primarily Federal | | | 105,064 | | | 839,450 | |
| | $ | 655,082 | | $ | (272,000 | ) |
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| |
| Deferred income tax expense differs from the actual change in the net deferred tax liability due to a federal net operating loss carryback. The Company recovered approximately $257,236 in federal taxes paid in a prior tax year in November 2011. The Company recognized certain tax deficiencies related to stock option plans in the amount of $117,400 for the year ended December 31, 2010. The deficiency was recorded as a decrease in additional paid-in capital. |
| |
| Current and long term temporary differences and tax carryforwards at December 31 are as follows: |
| | | | | | | |
| | 2011 | | 2010 | |
Current | | | | | | | |
Vacation accrual | | $ | 66,900 | | $ | 104,400 | |
Player rewards program accrual | | | 224,400 | | | 199,900 | |
Other | | | 23,900 | | | 16,100 | |
Net current deferred tax asset | | $ | 315,200 | | $ | 320,400 | |
| | | | | | | |
| | 2011 | | 2010 | |
Long-Term | | | | | | | |
Tax depreciation greater than book depreciation | | $ | (1,388,400 | ) | $ | (1,364,800 | ) |
Deferred gain on sale of land | | | (104,000 | ) | | (104,000 | ) |
Stock options | | | 143,800 | | | 93,700 | |
Net operating loss carryforwards | | | 25,200 | | | 406,000 | |
Other | | | 14,400 | | | 17,200 | |
Net long-term deferred tax liability | | $ | (1,309,000 | ) | $ | (951,900 | ) |
| |
| The Company is subject to U.S. and Minnesota taxation. The Company is no longer subject to U.S. federal, state or local examinations by tax authorities for years before 2007. |
| |
5. | STOCKHOLDERS’ EQUITY
Employee Stock Purchase Plan: |
| |
| On April 3, 1995, the Board of Directors adopted an Employee Stock Purchase Plan (the “ESPP”). The ESPP is open to all employees of the Company working more than 15 hours per week. Pursuant to Board action taken in September 2011, the ESPP was amended to consist of three-month phases. From the plan inception date until September 30, 2011, the ESPP consisted of one-year phases. The first phase using the amended ESPP commenced on October 1, 2011 and under the terms of the plan, employees are allowed to set aside a portion of their payroll earnings to purchase shares of the Company’s common stock. The purchase price is 95% of the fair market value of the shares on the termination date of the phase. The plan provides for the sale of up to 350,000 shares. The plan issued 2,401 and 3,857 shares in 2011 and 2010, respectively. The ESPP has issued a total of 244,586 shares since its inception. |
| |
| 401(k) Plan: |
| |
| On June 1, 1998 the Company established a defined contribution savings plan for employees who had completed one year of service, as defined in the Plan document. The defined contribution savings plan allows for employee compensation deferral contributions under Section 401(k) of the Internal Revenue Code and discretionary contributions by the Company. In January 2009, the Company suspended its employer contributions for fiscal 2009. In March 2011, the Company reinstated its discretionary contribution match. Employer contributions charged to operations in 2011 were approximately $82,997. There were no employer contributions charged to operations in 2010. |
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| |
| Employee Stock Ownership Plan: |
| |
| In December 2004, the Company’s Board of Directors approved an Employee Stock Ownership Plan (the “ESOP”) effective for calendar years beginning January 1, 2004. All eligible employees of the Company participate in the ESOP after completing one full calendar year of service. Contributions to the ESOP are determined by the Board of Directors and can be made in cash or shares of the Company’s common stock. Annual contributions are allocated to each participant based on compensation and vest in accordance with a six year graded vesting schedule. Compensation expense for the ESOP is determined based on the average fair value of shares on the date the Company commits to the contribution to the ESOP. For the purposes of earnings per share, ESOP shares are included in weighted-average common shares outstanding at year-end as the shares are committed to be contributed on that date. On October 24, 2008, the Company suspended its ESOP contribution for fiscal 2008. As of the date of this filing, the Company had taken no action to resume making contributions. |
| |
| Stock Repurchase Plan: |
| |
| On January 16, 2008, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 250,000 shares of the Company’s common stock pursuant to Exchange Act Rule 12b-18. During 2008, the Company repurchased 216,543 shares of common stock at an average price of $8.71 for an aggregate purchase price of $1,886,034. The Company did not repurchase any shares in 2010 or 2011. |
| |
6. | STOCK BASED COMPENSATION |
| |
| Stock Options: |
| |
| The Company’s 1994 Stock Plan (the “Plan”) provides for the granting of awards in the form of stock options, restricted stock, stock appreciation rights, and deferred stock to key employees and non-employees, including directors of and consultants to the Company and any subsidiary, to purchase up to a maximum of 1,450,000 shares of common stock. The Company currently has 221,000 shares available for grant under the Plan. Options that are granted under the Plan may be either options that qualify as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (Incentive Stock Options), or those that do not qualify as Incentive Stock Options (Non-Qualified Stock Options). The Plan is administered by the Board of Directors which determines the persons who are to receive awards under the Plan, the type of award to be granted, the number of shares subject to each award and, if an option, the exercise price of each option. The Plan also provides for formula grants of Non-Qualified Stock Options to non-employee directors and consultants of the Company. |
| |
| The Plan provides that payment of the exercise price may be made in the form of unrestricted shares of common stock already owned by the optionee. The Company calculates the fair market value of unrestricted shares as the average of the high and low sales prices on the date of exercise. The Company’s common stock is purchased upon the exercise of stock options, and restricted stock awards are settled in shares of the Company’s common stock. |
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| |
| Stock option activity related to the Plan during the years ended December 31, 2011 and 2010 is summarized below: |
| | | | | | | | | | | | | |
| | 2011 | | 2010 | |
| | Shares | | Weighted
Average
Exercise
Price | | Shares | | Weighted
Average
Exercise
Price | |
| | | | | | | | | | | | | |
Outstanding at beginning of year | | | 368,437 | | $ | 9.21 | | | 403,244 | | $ | 10.15 | |
| | | | | | | | | | | | | |
Granted | | | 15,000 | | | 13.30 | | | 106,500 | | | 8.15 | |
Exercised | | | (62,185 | ) | | 6.82 | | | (62,557 | ) | | 5.86 | |
Expired/Forfeited | | | (3,250 | ) | | 7.23 | | | (78,750 | ) | | 15.27 | |
| | | | | | | | | | | | | |
Outstanding at end of year | | | 318,002 | | $ | 9.89 | | | 368,437 | | $ | 9.21 | |
| | | | | | | | | | | | | |
Options exercisable at end of year | | | 257,252 | | $ | 10.44 | | | 264,812 | | $ | 9.92 | |
| |
| The grant-date fair value of options outstanding and exercisable at December 31, 2011 and 2010 was $1,091,000 and $1,129,000, respectively. The weighted average remaining contractual term of these options is 5.8 and 5.2 years, respectively. |
| |
| The weighted-average grant-date fair value of options granted during the years 2011 and 2010 was $93,750 and $382,808, respectively. The total fair value of options exercised during the years ended December 31, 2011 and 2010 was $229,000 and $231,000, respectively. The total income tax benefit recognized in the income statement for stock-based compensation arrangements was $61,000 and $23,000 for 2011 and 2010, respectively. |
| |
| As of December 31, 2011, total compensation cost related to non-vested stock options not yet recognized was $170,226, which is expected to be recognized over the next 1.67 years on a weighted-average basis. |
| |
| The following table summarizes information concerning all options outstanding and options exercisable as of December 31, 2011: |
| | | | | | | | | | | | | | | | |
Range of Exercise Price | | Options
Outstanding | | Weighted
Average
Remaining
Contractual
Life in Years | | Weighted
Average
Exercise
Price | | Options
Exercisable | | Weighted
Average
Exercise Price | |
$5.00 – 7.50 | | | 110,252 | | | 6.8 | | $ | 6.25 | | | 90,252 | | $ | 6.31 | |
$7.51 – 11.25 | | | 88,250 | | | 7.8 | | $ | 8.36 | | | 47,500 | | $ | 8.43 | |
$11.26 – 16.50 | | | 90,000 | | | 5.0 | | $ | 13.52 | | | 90,000 | | $ | 13.52 | |
$16.51 – 17.25 | | | 29,500 | | | 2.6 | | $ | 16.94 | | | 29,500 | | $ | 16.94 | |
Total | | | 318,002 | | | 6.2 | | $ | 9.89 | | | 257,252 | | $ | 10.44 | |
| |
| Board of Director Grants |
| |
| Prior to June 2, 2011, the Company’s Stock Plan provided for annual, automatic grants to each non-employee member of the Board of Directors on the first business day each February of non-qualified stock options to acquire 3,000 shares of common stock. Pursuant to this provision, on February 1, 2011, 15,000 options were granted to five non-employee board members with an exercise price per share equal to the market price on the date of grant of $13.30. The stock options vest over a six-month period and expire in ten years. The compensation cost associated with this grant of Board of Directors options is $93,750 and was recognized as expense over the six-month vesting period. On February 1, 2010, 15,000 options were granted to the five non-employee board members with an exercise price per share equal to the market price on the date of grant of $7.05. |
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| |
| Pursuant to Board action taken on April 15, 2011 and shareholder approval on June 2, 2011, the Company’s Stock Plan was amended to authorize annual grants of restricted stock or stock options, or both, as determined by the Board, and, pursuant to the amended Stock Plan, on June 2, 2011, 1,000 shares of restricted stock were granted to each of the five non-employee members of the Board of Directors. The restricted stock will vest 100% after one year and will be subject to restrictions on resale for an additional year. The compensation cost associated with the total grant of 5,000 shares is $73,300 that will be recognized as expense over the one-year vesting period. |
| |
| 2009 Employee Stock Option Grant |
| |
| On April 23, 2009, 100,000 options were granted to employees with an exercise price equal to the market price on the date of grant of $6.00. The stock options vest over a 42-month period and expire in ten years. The compensation cost associated with this grant of employee options is $92,555 to be recognized as expense over the 42-month vesting period. The compensation cost related to these employee option awards included in salaries and benefits expense was $26,444 for the years ended December 31, 2011 and 2010. As of December 31, 2011, there was $22,037 of total unrecognized compensation cost related to these stock options which is expected to be recognized over 0.8 years. |
| |
| 2010 Employee Stock Option Grant |
| |
| On February 25, 2010, 86,500 options were granted to employees with an exercise price equal to the market price on the date of grant of $8.28. The stock options vest over a 42-month period and expire in ten years. The compensation cost associated with this grant of employee options is $282,355 to be recognized as expense over the 42-month vesting period. The compensation cost related to these employee option awards included in salaries and benefits expense for the years ended December 31, 2011 and 2010 was $70,589 and $94,118, respectively. As of December 31, 2011, there was $117,648 of total unrecognized compensation cost related to these stock options which is expected to be recognized over 1.7 years. |
| |
| 2010 Non-Employee Consultant and Advisor Grant |
| |
| On November 4, 2010, 5,000 options were granted to a non-employee consultant with an exercise price equal to the market price on the date of grant of $9.15. The stock options vest immediately and expire in ten years. There was no compensation cost associated with this grant for the year ended December 31, 2011. The compensation cost associated with this grant for the year ended December 31, 2010 was $18,050. As of December 31, 2011, there was no unrecognized compensation cost related to these stock options. |
| |
| 2011 Employee Stock Option Grant |
| |
| On September 8, 2011, 54,250 shares of deferred stock awards were granted to employees with a price per share equal to the market price on the date of grant of $9.27. The issuance of these deferred stock awards is contingent upon the Company obtaining legislation authorizing the operation of a Racino at Canterbury Park on or before December 31, 2012 and the Racino opens for business to the public pursuant to such legal authority by December 31, 2014. There was no compensation cost associated with this grant for the year ended December 31, 2011. |
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| |
7. | EARNINGS PER SHARE COMPUTATIONS |
| |
| The following is a reconciliation of the numerator and denominator of the earnings per common share computations: |
| | | | | | | | |
| | | 2011 | | 2010 | |
| | | | | | | | |
| Net income (loss) (numerator) amounts used for basic and diluted per share computations: | | $ | 397,667 | | $ | (992,206 | ) |
| | | | | | | | |
| Weighted average shares (denominator) of common stock outstanding: | | | | | | | |
| Basic | | | 4,084,762 | | | 4,038,103 | |
| Plus dilutive effect of stock options | | | 48,577 | | | — | |
| Diluted | | | 4,133,339 | | | 4,038,103 | |
| | | | | | | | |
| Net income (loss) per common share: | | | | | | | |
| Basic | | $ | .10 | | $ | (.25 | ) |
| Diluted | | | .10 | | | (.25 | ) |
| |
| Options to purchase 104,500 shares of common stock at an average of $14.80 per share were outstanding but not included in the computation of diluted EPS at December 31, 2011 because the options were out of the money at December 31, 2011. |
| |
| Options to purchase 368,437 shares of common stock at an average of $9.21 per share were outstanding at December 31, 2010 but were not included in the computation of diluted EPS because the Company experienced a net loss for the year ended December 31, 2010. |
| |
8. | GENERAL CREDIT AGREEMENT |
| |
| The Company has a general credit agreement with Bremer Bank, which provides a revolving credit line of up to $3,000,000. On May 8, 2011, the Company signed an amendment with Bremer Bank extending the expiration date from May 8, 2011 to May 6, 2012, while keeping previous provisions intact. The Company had no borrowings under this credit line at December 31, 2011 and December 31, 2010. The credit agreement contains certain covenants requiring the Company to maintain certain financial ratios. The Company was in compliance with these requirements as of December 31, 2011. The Company believes that unrestricted funds available in its cash accounts, funds available under this line of credit, along with funds generated from operations, will be sufficient to satisfy its liquidity and capital resource requirements during 2012. |
| |
9. | OPERATING LEASES AND COMMITMENTS |
| |
| Purchase Obligations |
| |
| In March 2008, the Company entered into a six-year service agreement with its totalizator provider. Pursuant to the agreement, the vendor provides totalizator equipment and computer programs which record and process all wagers and calculate odds and payoffs. In April 2009, the Company entered into a four-year service agreement to outsource its information technology (IT) function. Amounts charged to operations under these agreements for the years ended December 31, 2011 and 2010 were approximately $615,000 and $637,000, respectively. |
| |
| Operating Lease Obligations |
| |
| The Company has entered into operating leases for rental of office equipment, equipment to print certain publications, and track equipment to maintain the Racetrack. Amounts charged to operations under these agreements for the years ended December 31, 2011 and 2010 were approximately $128,000 and $140,000, respectively. All such leases expire on or before December 31, 2014. Future lease payment obligations under these leases are provided in the table below. |
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| |
| FUTURE MINIMUM LEASE PAYMENTS |
| |
| The following table reflects our future minimum lease payments as of December 31, 2011: |
| | | | | | | | | | | | | |
| | Payments Due by Period | |
|
Lease Obligation | | TOTAL | | 2012 | | 2013 | | 2014 | |
| | | | | | | | | | | | | |
Operating Lease Obligations (1) | | $ | 91,400 | | $ | 53,600 | | $ | 29,500 | | $ | 8,300 | |
| | |
| (1) | Includes operating lease obligations for general office and printing equipment rental. |
| |
10. | CONTINGENCIES |
| |
| In connection with the purchase of the Racetrack (Note 1), the Company entered into an Earn Out Promissory Note dated March 29, 1994. In accordance with the Earn Out Note, 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 generally accepted accounting principles. 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 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, 2011 and as of the date of this report will not have a material impact on the consolidated financial statements. |
| |
| The Company has committed to payment of statutory distributions under a $500,000 bond issued to the Minnesota Racing Commission as required by Minnesota statute. |
| |
11. | RELATED-PARTY TRANSACTIONS |
| |
| The Company paid a total of $46,733 and $50,100 in 2011 and 2010, respectively, to the Chair and Vice Chair of the Company in consideration for the services they provided pursuant to consulting agreements. In addition, another non-employee Board member received $12,000 in 2010 for services regarding the Company’s strategic planning matters. Finally, an additional non-employee Board member received $18,000 in 2010 for services regarding the Company’s effort to pass Racino legislation. |
| |
12. | OPERATING SEGMENTS |
| |
| The Company has three reportable operating segments: horse racing, Card Casino, and concessions. The horse racing segment includes simulcast and live horse racing operations, the Card Casino segment includes operations of Canterbury Park’s Card Casino, and the concessions segment provides concessions during simulcast and live racing, in the Card Casino and during special events. The Company’s reportable operating segments are strategic business units that offer different products and services. The horse racing and Card Casino segments are regulated by the Minnesota Racing Commission. |
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| |
| Depreciation, interest expense and income taxes are allocated to the segments but no allocation is made to concessions for shared facilities. However, the concessions segment paid approximately 25% of gross revenues on live racing and special event days to the horse racing segment for use of the facilities in 2011 and 2010. The following tables provide information about the Company’s operating segments (in 000’s): |
| | | | | | | | | | | | | | |
| | | Year Ended December 31, 2011 | |
| | | Horse Racing | | Card Casino | | Concessions | | Total | |
| | | | | | | | | | | | | | |
| Net revenues from external customers | | $ | 12,148 | | $ | 23,385 | | $ | 5,053 | | $ | 40,586 | |
| | | | | | | | | | | | | | |
| Intersegment revenues | | | 315 | | | — | | | 1,383 | | | 1,698 | |
| | | | | | | | | | | | | | |
| Net interest income | | | 7 | | | — | | | — | | | 7 | |
| | | | | | | | | | | | | | |
| Depreciation | | | 1,119 | | | 634 | | | 141 | | | 1,894 | |
| | | | | | | | | | | | | | |
| Segment (loss) income before income taxes | | | (2,000 | ) | | 3,221 | | | 544 | | | 1,765 | |
| | | | | | | | | | | | | | |
| Segment Assets | | $ | 30,832 | | $ | 2,838 | | $ | 11,222 | | $ | 44,892 | |
| | | | | | | | | | | | | | |
| | | Year Ended December 31, 2010 | |
| | | Horse Racing | | Card Casino | | Concessions | | Total | |
| | | | | | | | | | | | | | |
| Net revenues from external customers | | $ | 12,517 | | $ | 22,160 | | $ | 5,243 | | $ | 39,920 | |
| | | | | | | | | | | | | | |
| Intersegment revenues | | | 590 | | | — | | | 1,545 | | | 2,135 | |
| | | | | | | | | | | | | | |
| Net interest income | | | 13 | | | — | | | — | | | 13 | |
| | | | | | | | | | | | | | |
| Depreciation | | | 1,123 | | | 768 | | | 153 | | | 2,044 | |
| | | | | | | | | | | | | | |
| Segment (loss) income before income taxes | | | (2,336 | ) | | 1,347 | | | 410 | | | (579 | ) |
| | | | | | | | | | | | | | |
| Segment Assets | | $ | 28,446 | | $ | 3,566 | | $ | 10,353 | | $ | 42,365 | |
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| |
| The following are reconciliations of reportable segment revenue, income before income taxes, and assets, to the Company’s consolidated totals (in 000’s): |
| | | | | | | | |
| | | 2011 | | 2010 | |
| Revenues | | | | | | | |
| Net revenues for reportable segments | | $ | 42,284 | | $ | 42,055 | |
| Elimination of intersegment revenues | | | (1,698 | ) | | (2,135 | ) |
| Total consolidated net revenues | | $ | 40,586 | | $ | 39,920 | |
| | | | | | | | |
| Income (loss) before income taxes | | | | | | | |
| Total segment income (loss) before income taxes | | $ | 1,765 | | $ | (579 | ) |
| Elimination of intersegment income before income taxes | | | (712 | ) | | (685 | ) |
| Total consolidated income (loss) before income taxes | | $ | 1,053 | | $ | (1,264 | ) |
| | | | | | | | |
| | | December 31,
2011 | | December 31,
2010 | |
| | | | | | | | |
| Assets | | | | | | | |
| Total asset for reportable segments | | $ | 44,892 | | $ | 42,365 | |
| Elimination of intercompany receivables | | | (10,708 | ) | | (9,717 | ) |
| Total consolidated assets | | $ | 34,184 | | $ | 32,648 | |
| |
13. | SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) |
| | | | | | | | | | | | | | |
| | | 2011 Quarter Ended: | |
|
| | | March 31 | | June 30 | | September 30 | | December 31 | |
| | | | | | | | | | | | | | |
| Net revenues | | $ | 8,307,810 | | $ | 11,665,520 | | $ | 10,917,762 | | $ | 9,695,334 | |
| | | | | | | | | | | | | | |
| Operating expenses | | | 7,670,842 | | | 11,691,019 | | | 11,217,248 | | | 8,960,416 | |
| | | | | | | | | | | | | | |
| Net income (loss) | | | 210,555 | | | (348,056 | ) | | 230,132 | | | 305,036 | |
| | | | | | | | | | | | | | |
| Basic earnings (loss) per share | | | .05 | | | (.09 | ) | | .06 | | | .07 | |
| | | | | | | | | | | | | | |
| Diluted earnings (loss) per share | | | .05 | | | (.09 | ) | | .06 | | | .07 | |
| | | | | | | | | | | | | | |
| | | 2010 Quarter Ended: | |
|
| | | March 31 | | June 30 | | September 30 | | December 31 | |
| | | | | | | | | | | | | | |
| Net revenues | | $ | 7,788,613 | | $ | 11,453,879 | | $ | 12,011,366 | | $ | 8,666,326 | |
| | | | | | | | | | | | | | |
| Operating expenses | | | 8,578,307 | | | 11,989,419 | | | 12,159,378 | | | 8,470,199 | |
| | | | | | | | | | | | | | |
| Net (loss) income | | | (639,641 | ) | | (380,969 | ) | | (132,875 | ) | | 161,279 | |
| | | | | | | | | | | | | | |
| Basic (loss) earnings per share | | | (.16 | ) | | (.09 | ) | | (.03 | ) | | .04 | |
| | | | | | | | | | | | | | |
| Diluted (loss) earnings per share | | | (.16 | ) | | (.09 | ) | | (.03 | ) | | .04 | |
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| |
14. | LOSS ON DISPOSAL OF ASSETS |
| |
| In January 2010, and in accordance with Minnesota Statute 240, the Company obtained approval from the MRC to remodel its existing card room. Construction and architectural contracts with various firms were signed shortly thereafter, and the card room was moved to a temporary location on the mezzanine level on January 25, 2010. The Company used cash on hand to fund the project and avoided drawing on its line of credit. As part of the remodeling project, the Company disposed of assets during the first quarter of 2010 with an original cost of $2,354,619 and associated accumulated depreciation of $1,445,079, resulting in a loss on disposal of $909,540. The remodeling project was completed during the second quarter of 2010 and on April 14, 2010, Canterbury Park opened its new Card Casino. |
| |
15. | SUSPENSION OF ALL OPERATIONS FROM JULY 1 TO JULY 20, 2011 |
| |
| Effective at midnight on June 30, 2011, the Company suspended all operations. This action stemmed from the inability of Minnesota’s Governor and Legislature to reach agreement on the State’s budget for the biennium beginning July 1, 2011. The inability to reach an agreement forced many state agencies to immediately shut down because no monies had been appropriated for their operations. The Minnesota Racing Commission (“MRC”), the agency which regulates Canterbury Park’s pari-mutuel and Card Casino gaming operations, was one of the many state agencies ordered to close, and, without this regulatory oversight, the Company was directed to cease all operations pending the appropriation of funds for the MRC. A budget agreement was approved on July 20, 2011 which included an appropriation for the MRC, and Canterbury Park resumed all operations on July 21, 2011. The suspension of operations until July 21, 2011 had a material, adverse effect on the Company’s results of operations for the year ending December 31, 2011, as compared to 2010. |
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| |
Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
| |
| Not Applicable. |
| |
Item 9A. | CONTROLS AND PROCEDURES |
| |
(a) | Evaluation of Disclosure Controls and Procedures: |
| |
| The Company’s Chief Executive Officer, Randall D. Sampson, and Chief Financial Officer, David C. Hansen, have reviewed the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based upon this review, these officers have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that the disclosure controls are also effective to ensure that information required to be disclosed in the Company’s Exchange Act reports is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. |
| |
(b) | Management’s annual report on internal control over financial reporting: |
| |
| Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting of the Company. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. |
| |
| The Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. |
| |
| Because of its inherent limitations, internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. |
| |
| Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting as of December 31, 2011. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework.Based on management’s evaluation and those criteria, management concluded that the Company’s system of internal control over financial reporting was effective as of December 31, 2011. |
| |
(c) | Changes in Internal Control Over Financial Reporting: |
| |
| There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934) that occurred during our fiscal quarter ended December 31, 2011, that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. |
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| |
Item 9B. | OTHER INFORMATION |
| |
| Not Applicable. |
| |
PART III |
| |
Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
| |
| Information Incorporated by Reference. |
| |
| Information required under Item 401 (except as noted below), 405, 406, and 407 (c) (3), (d) (4), and (d) (5) of Regulation S-K to the extent applicable to the Company will be set forth in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on June 7, 2012 (the “2012 Proxy Statement”), a definitive copy of which will be filed with the Commission within 120 days of the close of the 2011 fiscal year, which information is incorporated herein by reference. Information required under Item 402 of Regulation S-K regarding executive officers is presented under Item 1(c)(x) herein. |
| |
| Code of Ethics |
| |
| The Company has adopted a code of ethics applicable to all employees of and consultants to the Company. A copy of the Code of Conduct can be obtained free of charge upon written request directed to the Company’s Secretary at the executive offices of the Company. |
| |
Item 11. | EXECUTIVE COMPENSATION |
| |
| Information required under Item 402 of Regulation S-K to the extent applicable to the Company will be set forth in the Company’s 2012 Proxy Statement which information is incorporated herein by reference. |
| |
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
| |
| Information required under Item 201(d) and 403 of Regulation S-K to the extent applicable to the Company will be set forth in the Company’s 2012 Proxy Statement which information is incorporated herein by reference. |
| |
Item 13. | CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
| |
| Information, if any, required by Item 404 of Regulation S-K to the extent applicable to the Company will be set forth in the Company’s 2012 Proxy Statement which information is incorporated herein by reference. |
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| | |
Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
| | |
| Information required by Item 14 of this Form 10-K and Item 9(e) of Schedule 14A will be set forth in a section entitled “The Company’s Auditors” in the Company’s 2012 Proxy Statement which information is incorporated herein by reference. |
| | |
PART IV |
| | |
Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| | |
| (a). | The following Consolidated Financial Statements of Canterbury Park Holding Corporation and subsidiaries are included in Part II, Item 8 pages 29-46: |
| | |
| | Report of Independent Registered Public Accounting Firm |
| | |
| | Consolidated Balance Sheets as of December 31, 2011 and 2010 |
| | |
| | Consolidated Statements of Operations for the years ended December 31, 2011 and 2010 |
| | |
| | Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2011 and 2010 |
| | |
| | Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010 |
| | |
| | Notes to Consolidated Financial statements |
| | |
| (b). | The exhibits listed on the “Exhibits Index” on pages 51 & 52 are filed with this Form 10-K or incorporated by reference in this report. |
| | |
| (c). | No financial statement schedules are required by Item 8 and Item 15(c) of Form 10-K. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | |
Dated: | March 30, 2012 | CANTERBURY PARK HOLDING CORPORATION |
| | | | |
| | By | | /s/ Randall D. Sampson |
| | | | Randall D. Sampson |
| | | | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the Registrant and in the capacities and the dates indicated have signed this report below.
Power of Attorney
Each person whose signature appears below constitutes and appoints CURTIS A. SAMPSON, DALE H. SCHENIAN and RANDALL D. SAMPSON as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any of all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ Curtis A. Sampson | | Chairman of the Board | | March 30, 2012 |
Curtis A. Sampson | | | | |
| | | | |
/s/ Dale H. Schenian | | Vice Chairman; Director | | March 30, 2012 |
Dale H. Schenian | | | | |
| | | | |
/s/ Randall D. Sampson | | Chief Executive Officer, President, | | March 30, 2012 |
Randall D. Sampson | | General Manager, Treasurer and | | |
| | Director | | |
| | | | |
/s/ Patrick R. Cruzen | | Director | | March 30, 2012 |
Patrick R. Cruzen | | | | |
| | | | |
/s/ Burton F. Dahlberg | | Director | | March 30, 2012 |
Burton F. Dahlberg | | | | |
| | | | |
/s/ Carin J. Offerman | | Director | | March 30, 2012 |
Carin J. Offerman | | | | |
| | | | |
/s/ David C. Hansen | | Chief Financial Officer* and Secretary | | March 30, 2012 |
David C. Hansen | | | | |
| | | | |
* Principal Accounting Officer | | | | |
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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY
Exhibit Index To
Form 10-K for the Year Ended December 31, 2011
| | | | |
Exhibit Table
Reference | | Title of Document | | Location in Consecutive Numbering
System as Filed with the Securities
and Exchange Commission |
| | | | |
3.1 | | Articles of Incorporation, as amended. | | Filed as Exhibit 3.1 to the Forms SB-2 Registration Statement of the Company, File No. 33-81262C, (the “SB-2 Registration Statement”) and incorporated herein by reference. |
| | | | |
3.2 | | Bylaws, as amended | | Filed as Exhibit 3.2 to the SB-2 Registration Statement and incorporated herein by reference. |
| | | | |
10.1 | | Plan of Reorganization dated as of May 20, 1994 between Canterbury Park Holding Corporation and Canterbury Park Concessions, Inc. | | Filed as Exhibit 10.1 to the SB-2 Registration Statement and incorporated herein by reference. |
| | | | |
10.2 | | Restated Stock Purchase Agreement | | Filed as Exhibit 10.2 to the SB-2 Registration Statement and incorporated herein by reference. |
| | | | |
10.3 | | Letter dated April 4, 1994 from the Minnesota Horsemen’s Benevolent and Protective Association, Inc. to Minnesota Racing Commission waiving 125 day racing minimum | | Filed as Exhibit 10.3 to the SB-2 Registration Statement and incorporated herein by reference. |
| | | | |
10.5 | | Stock Option Plan, as amended* | | Filed as Exhibit 4.1 to the Registration Statement on Form S-8 of the Company filed on August 28, 1997 (File No. 333-34509) and incorporated herein by reference. |
| | | | |
10.6 | | Form of Non-qualified Stock Option Agreement | | Filed as Exhibit 10.6 to the SB-2 Registration Statement and incorporated herein by reference. |
|
* Denotes an exhibit that covers management contracts or compensatory plans or arrangements. |
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Table of Contents
| | | | |
Exhibit Table
Reference | | Title of Document | | Location in Consecutive Numbering
System as Filed with the Securities
and Exchange Commission |
| | | | |
10.7 | | Curtis A. Sampson Guaranty to HRA | | Filed as Exhibit 10.7 to the SB-2 Registration Statement and incorporated herein by reference. |
| | | | |
10.10 | | General Credit and Security Agreement dated as of June 3, 1998 between Canterbury Park Holding Corporation and Bremer Bank N.A. (previously First American Bank, N.A.) This exhibit 10.10 replaces exhibit 10.10 filed previously as an exhibit to the SB-2 Registration Statement. | | Filed as Exhibit 10.10 to the Form 10-KSB for the fiscal year ended December 31, 1998 and incorporated herein by reference. |
| | | | |
10.11 | | Stock Purchase Savings Plan | | Filed as Exhibit 10.11 to Form 10-KSB for the fiscal year ended December 31, 1997 and incorporated herein by reference. |
| | | | |
10.13 | | Stock Option Plan for Non-Employee Consultants and Advisors | | Filed as Exhibit 4.3 to the Registration Statement on Form S-8 of the Company filed on August 28, 1997 (File No. 333-34509) and incorporated herein by reference. |
| | | | |
21 | | Subsidiaries of the Registrant | | Filed herewith. |
| | | | |
23.1 | | Consent of Independent Registered Public Accounting Firm | | Filed herewith. |
| | | | |
24 | | Power of Attorney | | Included in signature page at page 50. |
| | | | |
| | | | |
31.1 | | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act 0f 2002 | | Filed herewith. |
| | | | |
31.2 | | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith. |
| | | | |
32 | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith. |
The exhibits referred to in this Exhibit will be supplied to a shareholder at a charge of $.25 per page upon written request directed to the Company’s Secretary at the executive offices of the Company.
52
