Canterbury Park Holding 10-Q 2014 Q3 Quarterly report

UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014.

OR

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

Commission File Number: 001-31569

CANTERBURY PARK HOLDING CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Minnesota	41-1775532
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1100 Canterbury Road
Shakopee, MN 55379

(Address of principal executive offices and zip code)

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

YES                    x                    NO                    o

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

YES                    x                     NO                    o

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

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

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

YES                    o                     NO                    x

The Company had 4,201,371 shares of common stock, $.01 par value, outstanding as of November 11, 2014.

1

Canterbury Park Holding Corporation

INDEX

			Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of  September 30, 2014 and December 31, 2013	3
		Condensed Consolidated Statements of Operations for the Periods Ended September 30, 2014 and 2013	4
		Condensed Consolidated Statements of Cash Flows for the Periods Ended September 30, 2014 and 2013	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
	Item 4.	Controls and Procedures	25
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	26
	Item 1A.	Risk Factors	26
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
	Item 3.	Defaults Upon Senior Securities	26
	Item 4.	Mine Safety Disclosures	26
	Item 5.	Other Information	26
	Item 6.	Exhibits	27
	Signatures		28
	Certifications		29

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PART 1 – FINANCIAL INFORMATION

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30, 2014 (Unaudited)		December 31, 2013
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	9,654,083	$	8,739,209
Restricted cash			1,568,778		1,139,003
Short-term investments			204,525		203,902
Accounts receivable, net of allowance of $40,268 for both periods			1,133,403		338,971
Inventory			261,960		244,281
Prepaid expenses			365,712		624,553
Deferred income taxes			275,300		333,300
Income taxes receivable			—		330,672
Due from Minnesota horsemen associations			110,014		2,355
Total current assets			13,573,775		11,956,246
LONG-TERM ASSETS
Deposits			26,400		26,400
Land, buildings and equipment, net of accumulated depreciation of $23,476,619, and $22,314,286, respectively			26,992,027		25,129,986
		$	40,592,202	$	37,112,632
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	4,174,775	$	3,502,871
Card Casino accruals			1,912,302		1,546,123
Accrued wages and payroll taxes			1,280,197		946,111
Accrued property taxes			813,108		650,797
Income taxes payable			234,445		—
Payable to horsepersons			142,782		8,201
Total current liabilities			8,557,609		6,654,103
LONG-TERM LIABILITIES
Deferred income taxes			1,484,400		1,726,100
Stock appreciation rights			547,287		467,380
Total long-term liabilities			2,031,687		2,193,480
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS’ EQUITY	��
Common stock, $.01 par value, 10,000,000 shares authorized, 4,198,840 and 4,177,951, respectively, shares issued and outstanding			41,988		41,779
Additional paid-in capital			17,536,016		17,270,615
Retained earnings			12,424,902		10,952,655
Total stockholders’ equity			30,002,906		28,265,049
		$	40,592,202	$	37,112,632

See notes to condensed consolidated financial statements.

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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
OPERATING REVENUES:
Pari-mutuel	$	3,844,749		$	4,058,977		$	8,650,597		$	9,327,663
Card Casino		6,645,197			6,061,877			19,997,434			18,941,554
Concessions		2,954,609			2,797,639			6,022,989			5,576,638
Other		1,707,660			1,459,766			3,726,150			3,056,812
Total Revenues		15,152,215			14,378,259			38,397,170			36,902,667
Less: Promotional allowances		(105,257	)		(103,800	)		(191,044	)		(202,690	)
Net Revenues		15,046,958			14,274,459			38,206,126			36,699,977
OPERATING EXPENSES:
Purse expense		2,238,549			2,369,657			5,124,414			5,210,118
Minnesota Breeders’ Fund		253,485			263,992			654,225			663,069
Other pari-mutuel expenses		328,224			365,675			1,223,832			1,210,025
Salaries and benefits		5,598,259			5,639,944			15,073,566			15,496,465
Cost of concession and other sales		1,393,160			1,380,994			2,954,875			2,935,807
Depreciation		537,405			467,490			1,572,660			1,360,770
Utilities		417,680			513,886			1,091,425			1,094,092
Advertising and marketing		709,767			599,357			1,529,839			1,467,162
(Gain) on disposal of assets		—			(22,000	)		—			(23,752	)
Other operating expenses		2,505,576			2,420,759			6,471,724			6,173,564
Total Operating Expenses		13,982,105			13,999,754			35,696,560			35,587,320
INCOME FROM OPERATIONS		1,064,853			274,705			2,509,566			1,112,657
OTHER INCOME:
Interest income		644			553			1,993			2,225
Net Other Income		644			553			1,993			2,225
INCOME BEFORE INCOME TAXES		1,065,497			275,258			2,511,559			1,114,882
INCOME TAX EXPENSE		(442,191	)		(104,755	)		(1,039,312	)		(460,050	)
NET INCOME	$	623,306		$	170,503		$	1,472,247		$	654,832
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		4,188,120			4,159,588			4,188,669			4,160,149
WEIGHTED AVERAGE NUMBER OF DILUTIVE SHARES OUTSTANDING		4,188,122			4,177,124			4,205,706			4,182,426
BASIC NET INCOME PER COMMON SHARE	$	.15		$	.04		$	.35		$	.16
DILUTED NET INCOME PER COMMON SHARE	$	.15		$	.04		$	.35		$	.16

See notes to condensed consolidated financial statements. 

4

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Nine Months Ended September 30,
	2014			2013
Operating Activities:
Net income	$	1,472,247		$	654,832
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,572,660			1,360,770
Stock-based compensation expense		189,602			211,201
(Decrease) increase in deferred income taxes		(183,700	)		369,300
Tax (benefit) expense from exercise of stock-based awards		(7,895	)		3,144
Gain on disposal of assets		—			(23,752	)
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash		(429,775	)		288,380
Increase in accounts receivable		(794,432	)		(560,500	)
Decrease (increase) in other current assets		241,162			(272,516	)
Decrease (increase) in income taxes receivable		573,012			(367,250	)
Increase in accounts payable and accrued wages and payroll taxes		1,233,813			788,705
Increase in Card Casino accruals		366,179			281,801
Increase in stock appreciation rights		79,907			235,678
Increase in accrued property taxes		162,311			162,605
Increase (decrease) in payable to horsepersons		134,581			(15,753	)
Decrease in due to MHBPA		(107,659	)		(1,377,996	)
Net cash provided by operating activities		4,502,013			1,738,649
Investing Activities:
Additions to buildings and equipment		(3,662,523	)		(3,711,528	)
Proceeds from sale of assets		—			28,700
Purchase of investments		(623	)		(585	)
Net cash used in investing activities		(3,663,146	)		(3,683,413	)
Financing Activities
Common stock repurchases		—			(7,509	)
Proceeds from issuance of common stock		68,112			70,196
Tax benefit (expense) from exercise of stock-based awards		7,895			(3,144	)
Net cash provided by financing activities		76,007			59,543
Net increase (decrease) in cash and cash equivalents		914,874			(1,885,221	)
Cash and cash equivalents at beginning of period		8,739,209			9,384,983
Cash and cash equivalents at end of period	$	9,654,083		$	7,499,762
Supplemental disclosure of non-cash investing and financing activities:
Additions to buildings and equipment funded through accounts payable	$	361,406		$	300,490
Supplemental disclosure of cash flow information:
Income taxes paid, net of refunds	$	650,000		$	458,000

See notes to condensed consolidated financial statements.

5

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 (Unaudited)

	The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and, in the opinion of management, contain all adjustments necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (GAAP), the financial position of Canterbury Park Holding Corporation as of September 30, 2014 and December 31, 2013, the results of its operations for the three and nine months ended September 30, 2014 and 2013, and the results of its cash flows for the nine months ended September 30, 2014 and 2013. The condensed consolidated balance sheet as of December 31, 2013 was derived from the audited financial statements. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Results for an interim period are not necessarily indicative of results for a full year.
	The complete summary of significant accounting policies is included in the notes to consolidated financial statements in the Company’s 2013 Annual Report on Form 10-K.
1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
	Business – Canterbury Park Holding Corporation (the “Company”) was incorporated under the laws of Minnesota and acquired land and buildings to conduct pari-mutuel horse racing operations (the “Racetrack”) in March 1994. The Racetrack is 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, Card Casino operations, pari-mutuel operations and concession sales, generate cash revenues. 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.
	Revenue Recognition –The Company’s 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 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.
	Cash and Cash Equivalents – Cash and cash equivalents include 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. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
	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.

6

Short-term Investments – Securities are classified as held to maturity when the Company has the positive intent and ability to hold them to maturity, and are measured at amortized cost. At September 30, 2014 and December 31, 2013, all investments were classified as held to maturity. The Company continually reviews its investments to determine whether a decline in fair value below the cost basis is other than temporary. If the decline in fair value is judged to be other than temporary, the cost basis of the security is written down to fair value and the amount of the write-down is included in earnings. Short-term investments consist of certificates of deposit at September 30, 2014 and December 31, 2013 and amortized cost approximated fair value at both dates.

Accounts Receivable – Accounts receivable are initially recorded for amounts due from other tracks for simulcast revenue, net of amounts due to other tracks, and for amounts due from customers related to special events. Credit is granted in the normal course of business without collateral. Accounts receivable are stated net of allowances for doubtful accounts, which represent estimated losses resulting from the inability of customers to make the required payments. Accounts that are outstanding longer than the contractual terms are considered past due. When determining the allowances for doubtful accounts, the Company takes several factors into consideration including the overall composition of the accounts receivable aging, its prior history of accounts receivable write-offs, the type of customers and its day-to-day knowledge of specific customers. The Company writes off accounts receivable when they become uncollectible. Changes in the allowances for doubtful accounts are recorded as bad debt expense and are included in other operating expenses in the Company’s consolidated statements of operations.

Inventory –Inventory consists primarily of food and beverages, small wares and supplies, and retail goods and is recorded at the lower of cost (first-in, first-out) or market.

Unredeemed Pari-mutuel Tickets – The Company records a liability for winning tickets upon the completion of a race and for vouchers when a voucher is printed. As uncashed winning tickets and vouchers are redeemed, this liability is reduced for the respective cash payment. The Company recognizes revenue associated with the uncashed winning tickets and vouchers when the likelihood of redemption, based on historical experience, is remote. While the Company continues to honor all winning tickets and vouchers presented for payment, management may determine the likelihood of redemption to be remote due to the length of time that has elapsed since the ticket was issued. In these circumstances, if management also determines there is no requirement for remitting balances to government agencies under unclaimed property laws, uncashed winning tickets and vouchers may then be recognized as revenue in the Company’s consolidated statements of operations.

Promotional Allowances –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 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 Casino operations and wagering on simulcast and live horse races, for future payment as purses for live horse races or other uses of the horsepersons’ associations. Pursuant to an agreement with the MHBPA, the Company transferred into a trust account or paid directly to the MHBPA, approximately $2,300,000 and $4,375,000 for the three and nine-month periods ended September 30, 2014, respectively, compared to $3,150,000 and $6,075,000 for the comparable periods in 2013 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 undiscounted 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. Management has determined that no impairment of these assets exists at September 30, 2014.

7

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 pools, 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.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

Interest and penalties associated with uncertain income tax positions are presented in income tax expense. For the nine months ended September 30, 2014 and 2013, the Company did not recognize any expense related to interest and penalties.

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 – The Company accounts for share-based compensation awards on a fair value basis. The estimated grant date fair value of each stock-based award is recognized as expense over the requisite service period (generally the vesting period). The estimated fair value of each option is calculated using the Black-Scholes option-pricing model.

Recent Accounting Pronouncement – In May 2014, the Financial Accounting Standards Board issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance implements a five-step process for customer contract revenue recognition. The guidance also requires enhanced disclosures relating to the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. This new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption is prohibited. Entities can transition to the new guidance either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the impact of the amended revenue recognition guidance on the Company’s consolidated financial statements but does not believe it will have a significant impact.

8

2.	STOCK-BASED COMPENSATION
	Stock-based compensation is calculated at fair value as of the date of grant, recorded over the requisite service periods, and included in the salaries and benefits expense line item on the consolidated statements of operations. Stock-based compensation expense amounted to $62,117 and $189,602 for the three and nine months ended September 30, 2014, respectively, compared to $70,638 and $211,201 for the three and nine months ended September 30, 2013, respectively.
	Board of Directors Stock Option and Restricted Stock Grants
	The Company’s Stock Plan authorizes annual grants of restricted stock or stock options, or both, as determined by the Board. Pursuant to the amended Stock Plan, on June 7, 2012, 2,364 shares of restricted stock were granted to each of the five non-employee members of the Board of Directors with a price per share equal to the market price on the date of grant of $12.69. The restricted stock vested after one year and was subject to restrictions on resale for an additional year. The compensation cost associated with the total grant of 11,820 shares for the nine months ended September 30, 2013 was $62,498. As of September 30, 2014, there was no unrecognized compensation cost related to this restricted stock grant.
	Additionally, on January 4, 2013, 1,250 shares of restricted stock were granted to a newly named non-employee member of the Board of Directors with a price per share equal to the market price on the date of grant of $10.00. The restricted stock vested after one year and is subject to restrictions on resale for an additional year. The compensation cost associated with this restricted stock grant of 1,250 shares for the nine months ended September 30, 2013 was $9,375. As of September 30, 2014, there was no unrecognized compensation cost related to this restricted stock grant.
	Also, on May 30, 2013, 2,840 shares of restricted stock were granted to each of the six non-employee members of the Board of Directors with a price per share equal to the market price on the date of grant of $10.56. The restricted stock vested after one year and is subject to restrictions on resale for an additional year. The compensation cost associated with the total grant of 17,040 shares for the nine months ended September 30, 2014 and 2013 was $74,976 and $59,981, respectively. As of September 30, 2014, there was no unrecognized compensation cost related to this restricted stock grant.
	Finally, on June 5, 2014, 2,608 shares of restricted stock were granted to each of the five non-employee members of the Board of Directors with a price per share equal to the market price on the date of grant of $11.50. 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 13,040 shares for the nine months ended September 30, 2014 was $49,987. As of September 30, 2014, there was $99,973 of total unrecognized compensation cost related to this restricted stock grant which is expected to be recognized over 0.7 years.
	The number of shares that may be issued pursuant to restricted stock granted and the weighted average fair value during the periods presented is summarized below:

	Nine Months Ended
	September 30, 2014				September 30, 2013
	Grant		Weighted Average Fair Value Per Share		Grant		Weighted Average Fair Value Per Share
Board restricted stock		13,040	$	11.50		18,290	$	10.52
Total shares		13,040				18,290

9

Employee Stock Option Grants

On February 25, 2010, 86,500 incentive stock options were granted to employees pursuant to the Company’s Stock Plan with an exercise price equal to the market price on the date of grant of $8.28. The options vested over a 42-month period and expire in ten years. The compensation cost associated with this grant of employee options was $282,355 and was recognized as expense over the 42-month vesting period. The compensation cost associated with these options included in salaries and benefits expense for the nine months ended September 30, 2013 was $47,059. As of September 30, 2014, there was no unrecognized compensation cost related to these stock options.

A summary of stock option activity as of September 30, 2014 and changes during the nine months then ended is presented below:

Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Grant Date Fair Value
Outstanding at January 1, 2014		271,752		$	9.99
Granted		—			—
Exercised		(2,000	)		6.57
Expired/Forfeited		(14,500	)		16.78
Outstanding at September 30, 2014		255,252		$	9.63		4.1 Years	$	2,457,912
Exercisable at September 30, 2014		255,252		$	9.63		4.1 Years	$	2,457,912

A summary of stock option activity as of September 30, 2013 and changes during the nine months then ended is presented below:

Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Grant Date Fair Value
Outstanding at January 1, 2013		292,267		$	10.13
Granted		—			—
Exercised		(3,265	)		6.87
Expired/Forfeited		(15,000	)		13.86
Outstanding at September 30, 2013		274,002		$	9.97		4.9 Years	$	2,731,257
Exercisable at September 30, 2013		274,002		$	9.97		4.9 Years	$	2,731,257
Employee Deferred Stock Award Grants

10

On December 13, 2012, 20,500 shares of deferred stock awards were granted to employees pursuant to the Company’s Stock Plan with a price per share equal to the market price on the date of grant of $9.84. The awards vest ratably over a four-year period. The compensation cost associated with this grant of employee awards of $172,200 is being recognized as expense over the four-year vesting period. The compensation cost related to these awards included in salaries and benefits expense for the nine months ended September 30, 2014 and 2013 was $32,288 for each period. As of September 30, 2014, there was $95,069 of total unrecognized compensation cost related to these deferred stock awards which is expected to be recognized over 2.2 years.

Additionally, on March 18, 2014, 23,500 shares of deferred stock awards were granted to employees pursuant to the Company’s Stock Plan with a price per share equal to the market price on the date of grant of $10.46. The awards vest ratably over a four-year period. The compensation cost associated with this grant of employee awards of $221,844 is being recognized as expense over the four-year vesting period. The compensation cost related to these awards included in salaries and benefits expense for the nine months ended September 30, 2014 was $32,352. As of September 30, 2014, there was $189,492 of total unrecognized compensation cost related to these deferred stock awards which is expected to be recognized over 3.4 years.

KSOP Plan

During the first quarter of 2013, the Company’s Board of Directors approved an action to combine the Company’s Employee Stock Ownership Plan (the “ESOP”) with the 401(k) Plan to create a KSOP Plan. This KSOP Plan authorizes the Company to issue Company stock to match contributions from its employees should it so choose. This combination became effective on July 15, 2013. No shares were issued as matching contributions to the KSOP during the first nine months of 2014 or calendar year 2013.

Employee Stock Purchase Plan

On April 3, 1995, the Board of Directors adopted an Employee Stock Purchase Plan (the “ESPP”). The ESPP currently gives employees the right to purchase Company stock at a 10% discount from fair market value at the end of each fiscal quarter. Employees purchased 2,236 and 2,003 shares during the third quarter of 2014 and 2013, respectively. As of September 30, 2014, a total of 265,800 shares have been issued since inception out of the 350,000 shares authorized.

Stock Appreciation Rights (“SARs”)

As part of the Cooperative Marketing Agreement discussed in Note 7, on June 14, 2012, the Company signed a Stock Appreciation Rights Agreement (the “SAR Agreement”) and issued SARs to non-employees. The SAR Agreement grants rights to the non-employees to benefit from the appreciation in the value of 165,000 shares of Company common stock above $14.30 per share, a price agreed upon by the two parties. Each right represents the right to be paid the appreciation in the value of one share of stock above $14.30. Ten percent of the rights (16,500 rights) vested immediately and the remaining rights vest at the rate of 16,500 per year beginning in January 2013. As of September 30, 2014, 49,500 rights had vested. The SAR Agreement provides for the cash payment of the excess of the fair market value of Canterbury Park Holding Corporation’s common stock price on the date of exercise over $14.30. SARs have no effect on dilutive shares or shares outstanding as any appreciation of the Company’s common stock value over $14.30 is paid in cash and not in common stock. The SAR Agreement and all rights granted expire on December 31, 2022.

The fair value of SARs is revalued (mark-to-market) each reporting period using the Black-Scholes valuation model based on the Company’s period-end stock price. The expected term of the SARs granted is based on the contractual term. Expected volatility is based on the historical volatility of the Company’s stock for the length of time corresponding to the expected term of the SARs. The expected dividend yield is based on the Company’s anticipated dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the reporting date for the length of time corresponding to the expected term of the SARs.

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The following weighted-average assumptions were used in calculating the fair value of SARs granted during the nine-month periods ended September 30, 2014 and 2013, using the Black-Scholes valuation model;

	2014			2013
Expected dividend yield		0.00	%		0.00	%
Expected weighted-average volatility		51.9	%		48.7	%
Risk-free interest rate		2.35	%		2.49	%
Expected term of SARs (in years)		8.25			9.25

There have been no exercises of SARs as of September 30, 2014. The total liability of the SARs at September 30, 2014 was $547,287.

Changes to the Company’s non-vested SARs during the nine months ended September 30, 2014 are as follows:

	SARs			Weighted Average Fair Value
Non-vested SARs at December 31, 2013		132,000		$	5.41
Granted		—			—
Vested		(16,500	)		6.02
Cancellations		—			—
Non-vested SARs at September 30, 2014		115,500		$	5.22

Changes to the Company’s non-vested SARs during the nine months ended September 30, 2013 are as follows:

	SARs			Weighted Average Fair Value
Non-vested SARs at December 31, 2012		148,500		$	5.24
Granted		—			—
Vested		(16,500	)		5.03
Cancellations		—			—
Non-vested SARs at September 30, 2013		132,000		$	5.03

3.	NET INCOME PER SHARE COMPUTATIONS
	The following is a reconciliation of the numerator and denominator of the earnings per common share computations for the three and nine-month periods ended September 30, 2014 and 2013:

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Net income (numerator) amounts used for basic and diluted per share computations	$	623,306	$	170,503	$	1,472,247	$	654,832
Weighted average shares (denominator) of common stock outstanding:
Basic		4,188,120		4,159,588		4,188,669		4,160,149
Plus dilutive effect of stock options		2		17,536		17,037		22,277
Diluted		4,188,122		4,177,124		4,205,706		4,182,426
Net income per common share:
Basic	$	.15	$	.04	$	.35	$	.16
Diluted		.15		.04		.35		.16

	Options to purchase 90,000 shares of common stock at an average price of $14.06 per share were outstanding but not included in the computation of diluted net income per share for both the three and nine-month periods ended September 30, 2014 because the options were out of the money at September 30, 2014.
	Options to purchase 104,500 shares of common stock at an average price of $14.44 per share were outstanding but not included in the computation of diluted net income per share for both the three and nine-month periods ended September 30, 2013 because the options were out of the money at September 30, 2013.
4.	GENERAL CREDIT AGREEMENT
	The Company has a general credit and security agreement with Bremer Bank, which provides a revolving credit line of up to $3,000,000 and expires on May 4, 2015. The Company had no borrowings under the credit line during the nine months ended September 30, 2014 or the year ended December 31, 2013. The credit agreement contains covenants requiring the Company to maintain certain financial ratios. The Company was in compliance with these requirements at all times throughout the nine months ended September 30, 2014.
5.	OPERATING SEGMENTS
	The Company has three reportable operating segments: horse racing, Card Casino, and concessions. The horse racing segment primarily represents simulcast and live horse racing operations. The Card Casino segment represents operations of Canterbury Park’s Card Casino, and the concessions segment represents food and beverage operations provided 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. They are managed separately because the segments differ in the nature of the products and services provided as well as processes to produce those products and services. The Minnesota Racing Commission regulates the horse racing and Card Casino segments.
	The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the 2013 Annual Report on Form 10-K.

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

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

	Nine Months Ended September 30, 2014
	Horse Racing			Card Casino		Concessions		Total
Net revenues from external customers	$	12,178		$	19,997	$	6,031	$	38,206
Intersegment revenues		562			—		992		1,554
Net interest income		2			—		—		2
Depreciation		1,179			317		77		1,573
Segment (loss) income before income taxes		(1,863	)		4,956		986		4,079

	At September 30, 2014
Segment Assets	$	38,620	$	1,323	$	15,496	$	55,439

	Nine Months Ended September 30, 2013
	Horse Racing			Card Casino		Concessions		Total
Net revenues from external customers	$	12,166		$	18,942	$	5,592	$	36,700
Intersegment revenues		585			—		1,143		1,728
Net interest income		2			—		—		2
Depreciation		860			405		96		1,361
Segment (loss) income before income taxes		(1,757	)		3,517		622		2,382

	At December 31, 2013
Segment Assets	$	34,870	$	1,640	$	13,845	$	50,355

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

	Nine Months Ended September 30,
	2014			2013
Revenues
Total net revenues for reportable segments	$	39,760		$	38,428
Elimination of intersegment revenues		(1,554	)		(1,728	)
Total consolidated net revenues	$	38,206		$	36,700
Income before income taxes
Total segment income before income taxes	$	4,079		$	2,382
Elimination of intersegment income before income taxes		(1,567	)		(1,267	)
Total consolidated income before income taxes	$	2,512		$	1,115

	September 30, 2014			December 31, 2013
Assets
Total assets for reportable segments	$	55,439		$	50,355
Elimination of intercompany receivables		(14,847	)		(13,242	)
Total consolidated assets	$	40,592		$	37,113

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6.	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 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.
	Additionally, the Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community which became effective on June 4, 2012. 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.
	In March 2014, the Company entered into a seven-year agreement with a new totalizator provider. Pursuant to the agreement, the vendor provides totalizator equipment and related software which records and processes all wagers and calculates odds and payoffs. Under the new agreement, $221,345 will be charged to operations in the first full year.
	During the second quarter of 2014, the Company entered into multiple agreements with various vendors to construct an expo and event center at the Racetrack. The cost of this facility will total approximately $3,000,000 of which approximately $2,400,000 was incurred through September 30, 2014. The Company believes that unrestricted funds available in its cash accounts and funds generated from operations will be sufficient to satisfy these obligations.
	The Company is periodically involved in various claims and legal actions arising in the normal course of business. Management believes that the resolution of any pending claims and legal actions at September 30, 2014 and as of the date of this report will not have a material impact on the Company’s consolidated financial results of operations.
7.	COOPERATIVE MARKETING AGREEMENT
	On June 4, 2012, the Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community (“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 horse industry. Under the terms of the CMA, the SMSC paid the horsemen $5.3 million in February 2013 and $5.8 million in February 2014 for purse enhancements. After 2014, the SMSC is obligated to contribute the additional amounts listed below for purse enhancements.
	The Company and the SMSC have also agreed in the CMA to partner in joint marketing efforts for their mutual benefit, including signage, joint promotions, player benefits and events. Under the CMA, the SMSC paid the Company $600,000 in February 2013 and $660,000 in February 2014 for marketing purposes. After 2014, the SMSC is obligated to pay the additional amounts listed below to be used for mutually agreeable marketing purposes.

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The purse enhancement and marketing payments the SMSC has agreed to make in 2015 through 2022 are as follows:

Year	Purse Enhancement Payments to Horsemen	Marketing Payments to Canterbury Park
2015	$6,434,000	$726,000
2016	7,087,400	798,600
2017	7,806,140	878,460
2018	8,000,000	900,000
2019	8,000,000	900,000
2020	8,000,000	900,000
2021	8,000,000	900,000
2022	8,000,000	900,000

The Company does not have a financial interest in any part of the purse enhancement payments. Therefore, purse enhancement payments have no impact on the Company’s financial statements.

The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s consolidated statements of operations. For the nine months ended September 30, 2014, the Company recorded $711,142 in other revenue and incurred $551,515 in advertising and marketing expense and $159,627 in depreciation related to the SMSC marketing payment. For the nine months ended September 30, 2013, the Company recorded $397,344 in other revenue and incurred $397,344 in advertising and marketing expense related to the SMSC marketing payment. The excess of amounts received over revenues earned is reflected as deferred revenue which is included in accounts payable on the consolidated balance sheets.

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

As part of the CMA and pursuant to a related SAR Agreement dated June 14, 2012, the Company issued stock appreciation rights to the SMSC. The SAR Agreement grants rights to the SMSC to benefit from the appreciation in the value of 165,000 shares of Company common stock above $14.30 per share, a price agreed upon by the two parties. Each right represents the right to be paid the appreciation in the value of one share of stock above $14.30. Ten percent of the rights (16,500 rights) vested immediately and the remaining rights vest at the rate of 16,500 per year beginning in January 2013. As of September 30, 2014, 49,500 rights had vested. The SAR Agreement provides for the cash payment of the excess of the fair market value of Canterbury Park Holding Corporation’s common stock price on the date of exercise over $14.30. The SAR Agreement and all rights granted expire on December 31, 2022. The liability related to these stock appreciation rights is recorded as a long-term liability and the Company recognizes the income or expense related to the fluctuation in the value of the stock appreciation rights against the revenues recorded relating to the marketing payment due to the nature of the CMA. Any excess expenses will be recognized as a component of other operating expenses. For the nine months ended September 30, 2014, the Company recognized $79,907 of expense related to these stock appreciation rights, of which $79,907 was recorded as an offset to other revenue. For the nine months ended September 30, 2013, the Company recognized $235,678 of expense related to these stock appreciation rights, of which $235,678 was recorded as an offset to other revenue. In the future, changes in the fair value of these stock appreciation rights will increase or decrease the stock appreciation rights liability, and the Company will recognize an additional offset to other revenue and/or other operating expenses related to these changes.

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

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

Strategic Overview:

          Canterbury Park Holding Corporation (the “Company,” “we,” “our,” or “us”) owns and operates the Canterbury Park Racetrack and Card Casino facility (the “Racetrack”) in Shakopee, Minnesota, which is approximately 25 miles southwest of downtown Minneapolis. The Racetrack is the only facility in the State of Minnesota that offers live pari-mutuel thoroughbred and quarter horse racing. The primary businesses of the Company are simulcast and live pari-mutuel horse racing, hosting unbanked card games, and food and beverage operations.

          The Company’s pari-mutuel wagering operations include both wagering on thoroughbred and quarter horse races during live meets at the Racetrack each year from May through mid-September (“live race meet”) and year-round wagering on races held at out-of-state racetracks throughout the country that are televised simultaneously at the Racetrack (“simulcasting”). During the live race meet, the Company televises its races to out-of-state racetracks around the country, and earns additional pari-mutuel revenue on wagers placed on its races at the out-of-state racetracks.

          The Card Casino at Canterbury Park currently hosts “unbanked” card games in which players compete against each other and not against the house. In addition, 2012 changes to the law governing Card Casino operations authorize the Company to offer banked games, an option that, to date, the Company has not yet elected to implement. The Card Casino operates 24 hours a day, seven days a week. The Card Casino offers both poker and table games at up to 80 tables. Under Minnesota law, the Company is required to pay up to 14% of gross Card Casino revenues to the Racetrack’s purse fund and the State of Minnesota Breeders’ Fund.

          The Company also derives revenues from related services and activities, primarily concessions, but also admissions, advertising signage, publication sales, and from other entertainment events and activities held at the Racetrack.

Operations Review for theThree and NineMonths Ended September 30, 2014 and 2013:

EBITDA:

          EBITDA represents earnings before interest income, income tax expense, and depreciation and amortization. EBITDA is not a measure of performance or liquidity calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”), and should not be considered an alternative to, or more meaningful than, net income as an indicator of our operating performance or cash flows from operating activities as a measure of liquidity. EBITDA is presented as a supplemental disclosure because it is a widely used measure of performance and basis for valuation of companies in our industry. Moreover, other companies that provide EBITDA information may calculate EBITDA differently than we do.

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          The following table sets forth a reconciliation of net income, a GAAP financial measure, to EBITDA (defined above), which is a non-GAAP measure, for the nine months ended September 30, 2014 and 2013:

	Nine Months Ended September 30,
	2014			2013
Net income	$	1,472,247		$	654,832
Interest income		(1,993	)		(2,225	)
Income tax expense		1,039,312			460,050
Depreciation		1,572,660			1,360,770
EBITDA	$	4,082,226		$	2,473,427

          EBITDA increased $1,608,799, or 65.0%, and also increased as a percentage of net revenues to 10.7% from 6.7% for the nine months ended September 30, 2014 as compared to the same period in 2013. The significant increase is primarily due to the increased net income as well as increases in income tax expense and depreciation.

Revenues

          Total net revenues increased $1,506,149, or 4.1%, during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 and increased $772,499, or 5.4%, during the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The nine-month improvement is primarily attributable to increases in Card Casino and Concession revenue of 5.6% and 8.0%, respectively, offset by a decrease in Pari-mutuel revenue of 7.3%. The three-month increase is primarily attributable to increases in Card Casino and Concession revenue of 9.6% and 5.6%, respectively, offset by a decrease in Pari-mutuel revenue of 5.3%. See below for a further discussion of revenue.

Summary of Pari-mutuel Data:

	Nine Months Ended September 30,
	2014		2013
Racing Days
Simulcast racing days		205		204
Live and Simulcast racing days		68		69
Total Number of Racing Days		273		273
On-Track Handle
Simulcast racing handle on simulcast only days	$	15,369,000	$	16,041,000
Live and Simulcast days:
Live racing handle		12,299,000		13,299,000
Simulcast racing handle		9,269,000		9,758,000
Total On-Track Handle		36,937,000		39,098,000
Out-of-State Live Handle		24,643,000		24,412,000
Total Handle	$	61,580,000	$	63,510,000
On-Track Average Daily Handle
Simulcast only racing days	$	74,971	$	78,632
Live and simulcast racing days	$	317,176	$	334,159

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          Pari-mutuel revenue decreased $677,066, or 7.3%, in the nine-month period ended September 30, 2014 compared to the same period in 2013, and decreased $214,228, or 5.3%, for the three-month period ended September 30, 2014 compared to the same period in 2013. Total handle for the first nine months of 2014 was down $1,930,000, or 3.0%, compared to the same period last year. The decrease in our pari-mutuel revenue in the 2014 nine-month period compared to the same period in 2013 is primarily attributable to an unfavorable comparison to a change in accounting estimate that was made in the second quarter of 2013 regarding the Company’s unredeemed pari-mutuel tickets. For the nine months ended September 30, 2013, the change in accounting estimate decreased our liability for outstanding pari-mutuel vouchers and increased Pari-mutuel revenue in our Condensed Consolidated Statements of Operations for the period by approximately $412,000 (pre-tax difference), increasing Income from Operations by this amount as well. The decrease in our pari-mutuel revenue in the 2014 three-month period compared to the same period in 2013 is due to a 10% decrease in on-track live racing revenues and a 10% decline in simulcast revenues, partially offset by an increase in revenue from out-of-state wagering on Canterbury Park live races of 21%. The Company believes the decline in revenue from pari-mutuel wagering at the track was the result of the growing impact of Internet wagering, the resumption of thoroughbred and Quarter Horse simulcasting at Running Aces Harness Park, one less day of live racing and a general industry-wide decline in horse racing handle during the period.

Summary of Card Casino Revenue:

	Nine Months Ended September 30,
	2014		2013
Poker Games	$	7,262,000	$	7,320,000
Table Games		10,913,000		9,523,000
Total Collection Revenue		18,175,000		16,843,000
Other Revenue		1,822,000		2,099,000
Total Card Casino Revenue	$	19,997,000	$	18,942,000
Number of Days Offered		273		273
Average Revenue per Day	$	73,249	$	69,385

          The primary source of Card Casino revenue is a percentage of the wagers received from the players as compensation for hosting card games and providing related services in our Card Casino facility, which is referred to as “collection revenue.” Other Revenue presented above includes fees collected for the administration of tournaments and amounts earned as reimbursement of the administrative costs of maintaining jackpot funds. Total Card Casino revenue represented 52.3% and 44.2% of consolidated net revenues for the nine-month and three-month periods ended September 30, 2014, respectively. The third quarter percentage is usually lower in every calendar year due to substantially increased revenue from live racing.

          Total Card Casino revenue increased $1,055,000, or 5.6%, for the first nine months of 2014 and also increased $583,000, or 9.6%, for the third quarter of 2014 compared to the same periods in 2013. Poker collection revenue during the first nine months of 2014 decreased $58,000, or 0.8%, and decreased $29,000, or 1.2% for the third quarter of 2014 compared to the same periods in 2013. Table games collection revenue increased $1,390,000, or 14.6%, compared to the first nine months of 2013 and $721,000, or 23.9%, for the quarter ended September 30, 2014 compared to the same period in 2013. The Company believes these increases in table games collection revenue were due to the increased effectiveness of our direct marketing programs resulting from our new customer relationship management system, which was installed in late 2013, and the optimization of our table games mix.

          We experience significant competition from North Metro Harness Initiative, LLC (another card room located approximately 50 miles to the northeast), illegal Internet wagering, and wagering at tribal casinos, and we expect this competition will continue to challenge our efforts to grow our Card Casino operating revenues in future periods. As a result, we continue to search for opportunities to make Canterbury Park the most attractive alternative when our customers want to wager on card games.

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Summary of Concessions Revenue:

          Concessions revenue increased $446,351, or 8.0% for the nine months ended September 30, 2014 when compared to the same period in 2013. Concessions revenue increased $156,970, or 5.6%, for the quarter ended September 30, 2014 compared to the same quarter in 2013. The increases are primarily a result of price increases in food and beverage items implemented in the second quarter of 2014. Also, the Company experienced higher special event attendance in 2014 which generated more concession sales.

Operating Expenses:

          Total operating expenses increased $109,240, or 0.3%, and decreased $17,649, or 0.1%, for the nine months and three months ended September 30, 2014, respectively, compared to the same periods in the prior year, as discussed in further detail below.

          Total expense for statutory purses and the Minnesota Breeders’ Fund decreased $94,548, or 1.6%, and $141,615, or 5.4%, for the nine-month and three-month periods ended September 30, 2014, respectively, compared to the same periods in 2013. As both purse and Breeders’ Fund expenses are determined by wagering levels on our Card Casino and live and simulcast racing, the decreases in both purse and Breeders Fund expenses for the three and nine-month periods ended September 30, 2014 compared to the same periods in 2013 were due to the decrease in pari-mutuel revenues..

          Salaries and benefits decreased $422,899, or 2.7%, for the nine months ended September 30, 2014 and $41,685, or 0.7%, for the three months ended September 30, 2014 compared to the same periods in the prior year. The decreases are primarily due to a reduction in hours worked and reduction in associated payroll taxes.

          Utilities decreased $2,667, or 0.2%, for the nine months ended September 30, 2014 and $96,207, or 18.7%, for the three months ended September 30, 2014 compared to the same periods in the prior year. The decreases are primarily attributable to less utility expense related to air conditioning due to the cooler summer months in 2014 and an electric refund received in September 2014.

          Advertising and marketing costs increased $62,677, or 4.3%, for the nine months ended September 30, 2014 and $110,410, or 18.4%, for the three months ended September 30, 2014 compared to the same periods in the prior year. These increases are primarily as a result of increased expenditures funded by the SMSC joint marketing fund, including the launch of the RiverSouth campaign, an area wide marketing initiative designed to increase visitors to Shakopee’s entertainment, hospitality and retail businesses.

          Other operating expenses increased $298,160, or 4.8%, for the nine months ended September 30, 2014 and $84,817, or 3.5%, for the three months ended September 30, 2014 compared to the same periods in the prior year. The increases are primarily due to increased professional fees related to compliance and special events initiatives.

          Income before income taxes was $2,511,559 for the nine months ended September 30, 2014 compared to $1,114,882 for the nine months ended September 30, 2013. After income tax expense of $1,039,312 for the nine months ended September 30, 2014, the Company reported net income of $1,472,247 in 2014 compared to net income of $654,832 in 2013. For the quarter ended September 30, 2014, our income before income taxes was $1,065,497 compared to $275,258 for the quarter ended September 30, 2013. After income tax expense of $442,191, net income in the third quarter of 2014 was $623,306 compared to net income of $170,503 for the third quarter of 2013.

Contingencies:

          As further discussed below under “Cooperative Marketing Agreement”, the Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community (“SMSC”) which became effective on June 4, 2012. 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.

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Liquidity and Capital Resources:

          Cash provided by operating activities for the nine months ended September 30, 2014 was $4,502,013 primarily as a result of the following: The Company reported net income of $1,472,247 and depreciation of $1,572,660. The Company also experienced an increase in accounts payable and accrued wages and payroll taxes of $1,233,813 and a decrease in income taxes receivable of $573,012. These items were somewhat offset by a seasonal increase in accounts receivable of $794,432 and an increase in restricted cash of $429,775.

          Cash provided by operating activities for the nine months ended September 30, 2013 was $1,738,649 and was due to several factors. First, the Company reported net income of $654,832 and recorded depreciation of $1,360,770. The Company also experienced an increase in accounts payable and accrued wages and payroll taxes of $788,705. These items were somewhat offset by a seasonal increase in accounts receivable of $560,500 and a decrease in due to MHBPA of $1,377,966 resulting primarily from the payment of purses during the third quarter.

          Net cash used in investing activities for the first nine months of 2014 of $3,663,146 was used primarily for the construction of a new expo and event center (discussed under “Commitments and Contractual Obligations” below) and a variety of equipment purchases. During the first nine months of 2013, net cash used in investing activities was $3,683,413 and was used primarily for the purchase of technology upgrades and enhancements, including digital signage and customer relationship management equipment, and building improvements.

          Net cash provided by financing activities during the first nine months of 2014 was $76,007 and consisted of $68,112 of proceeds received upon the issuance of common stock through the Employee Stock Purchase Plan and from the exercise of stock options and $7,895 of tax benefit from the exercise of stock-based awards. During the first nine months of 2013, net cash provided by financing activities was $59,543 and consisted of $70,196 of proceeds received upon the issuance of common stock through the Employee Stock Purchase Plan and from the exercise of stock options, slightly offset by common stock repurchases of $7,509 and tax expense from the exercise of stock-based awards of $3,144.

          As of September 30, 2014, we had $3,000,000 of capacity under a commercial revolving credit line under a general credit and security agreement with Bremer Bank providing for interest at the prime rate but not less than 4.5% per annum, which expires on May 4, 2015. We had no borrowings under the credit line during the nine months ended September 30, 2014 or the year ended December 31, 2013. The credit agreement contains covenants requiring the Company to maintain certain financial ratios. The Company was in compliance with these requirements at all times throughout the nine months ended September 30, 2014.

          The Company’s cash and cash equivalents balance at September 30, 2014 was $9,654,083 compared to $8,739,209 at December 31, 2013. 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 during 2014.

Critical Accounting Policies and Estimates:

          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.

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          Our significant accounting policies are included in Note 1 to our consolidated financial statements in our 2013 Annual Report on Form 10-K. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. 

          Property and Equipment -We have significant capital invested in our property and equipment, which represents approximately 66.5% of our total assets at September 30, 2014. We utilize our judgment in various ways including: determining whether an expenditure is considered a maintenance expense or a capital asset; determining the estimated useful lives of assets; and determining if or when an asset has been impaired or has been disposed. Management periodically reviews the carrying value of property and equipment for potential impairment by comparing the carrying value of these assets with their related expected undiscounted future net cash flows. If the sum of the related expected future net cash flows is less than the carrying value, we will determine whether an impairment loss should be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. To date, we have determined that no impairment of these assets exists.

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

Recent Accounting Pronouncement:

          In May 2014, the Financial Accounting Standards Board issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance implements a five-step process for customer contract revenue recognition. The guidance also requires enhanced disclosures relating to the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. This new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption is prohibited. Entities can transition to the new guidance either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the impact of the amended revenue recognition guidance on the Company’s consolidated financial statements but does not believe it will have a significant impact.

Commitments and Contractual Obligations:

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

          In March 2014, the Company entered into a seven-year agreement with a new totalizator provider. Pursuant to the agreement, the vendor provides totalizator equipment and related software which records and processes all wagers and calculates odds and payoffs. Under the new agreement, $221,345 will be charged to operations in the first full year.

          During the second quarter of 2014, the Company entered into multiple agreements with various vendors to construct an expo and event center at the Racetrack. The cost of this facility will total approximately $3,000,000 of which approximately $2,400,000 was incurred through September 30, 2014. The Company believes that unrestricted funds available in its cash accounts and funds generated from operations will be sufficient to satisfy these obligations.

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Legislation:

          Legislation signed by Minnesota’s Governor on April 15, 2014 increased the minimum wage that must be paid by the Company from $7.25 to $8.00 effective August 1, 2014, with further increases scheduled to $9.00 per hour on August 1, 2015 and to $9.50 per hour on August 1, 2016. In addition, starting January 1, 2018, the minimum wage will increase at the beginning of each year by the rate of inflation up to a maximum increase of up to 2.5% per year. The legislation includes a 90-day training wage of $7.75 for 18- and 19-year-olds and, under certain conditions, for 16- and 17- year olds. Because the Company employs a large number of individuals at an hourly wage equal to or slightly above $7.25 per hour, this legislation will have an adverse effect. While we may be able to mitigate the impact of this increase by raising our prices or reducing our employee count, these measures could themselves have an adverse effect because higher prices and diminished service levels may discourage visits to the Racetrack. However, to the extent we are not able to implement such price increases and cost cutting measures, the increase in the minimum wage will adversely affect our net income.

Cooperative Marketing Agreement:

          On June 4, 2012, the Company entered into the CMA with the SMSC. The primary purpose of the CMA is to increase purses paid during live horse racing at Canterbury Park’s Racetrack in order to strengthen Minnesota’s horse industry. Under the terms of the CMA, the SMSC paid the horsemen $5.3 million in February 2013 and $5.8 million in February 2014 for purse enhancements. After 2014, the SMSC is obligated to contribute the additional amounts listed below for purse enhancements.

          The Company and the SMSC have also agreed in the CMA to partner in joint marketing efforts for their mutual benefit, including signage, joint promotions, player benefits and events. Under the CMA, the SMSC paid the Company $600,000 in February 2013 and $660,000 in February 2014 for marketing purposes. After 2014, the SMSC is obligated to pay the additional amounts listed below to be used for mutually agreeable marketing purposes.

          The purse enhancement and marketing payments the SMSC has agreed to make in 2015 through 2022 are as follows:

Year	Purse Enhancement Payments to Horsemen		Marketing Payments to Canterbury Park
2015	$	6,434,000	$	726,000
2016		7,087,400		798,600
2017		7,806,140		878,460
2018		8,000,000		900,000
2019		8,000,000		900,000
2020		8,000,000		900,000
2021		8,000,000		900,000
2022		8,000,000		900,000

          The Company does not have a financial interest in any part of the purse enhancement payments. Therefore, purse enhancement payments have no impact on the Company’s financial statements.

          The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s consolidated statements of operations. For the nine months ended September 30, 2014, the Company recorded $711,142 in other revenue and incurred $551,515 in advertising and marketing expense and $159,627 in depreciation related to the SMSC marketing payment. For the nine months ended September 30, 2013, the Company recorded $397,344 in other revenue and incurred $397,344 in advertising and marketing expense related to the SMSC marketing payment. The excess of amounts received over revenues earned is reflected as deferred revenue which is included in accounts payable on the consolidated balance sheets.

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

          As part of the CMA and pursuant to a related SAR Agreement dated June 14, 2012, the Company issued stock appreciation rights to the SMSC. The SAR Agreement grants rights to the SMSC to benefit from the appreciation in the value of 165,000 shares of Company common stock above $14.30 per share, a price agreed upon by the two parties. Each right represents the right to be paid the appreciation in the value of one share of stock above $14.30. Ten percent of the rights (16,500 rights) vested immediately and the remaining rights vest at the rate of 16,500 per year beginning in January 2013. As of September 30, 2014, 49,500 rights had vested. The SAR Agreement provides for the cash payment of the excess of the fair market value of Canterbury Park Holding Corporation’s common stock price on the date of exercise over $14.30. The SAR Agreement and all rights granted expire on December 31, 2022. The liability related to these stock appreciation rights is recorded as a long-term liability and the Company recognizes the income or expense related to the fluctuation in the value of the stock appreciation rights against the revenues recorded relating to the marketing payment due to the nature of the CMA. Any excess expenses will be recognized as a component of other operating expenses. For the nine months ended September 30, 2014, the Company recognized $79,907 of expense related to these stock appreciation rights, of which $79,907 was recorded as an offset to other revenue. For the nine months ended September 30, 2013, the Company recognized $235,678 of expense related to these stock appreciation rights, of which $235,678 was recorded as an offset to other revenue. In the future, changes in the fair value of these stock appreciation rights will increase or decrease the stock appreciation rights liability, and the Company will recognize an additional offset to other revenue and/or other operating expenses related to these changes.

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, 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.

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ITEM 3:          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4:          CONTROLS AND PROCEDURES

(a)	Evaluation of Disclosure Controls and Procedures:
	The Company’s Chief Executive Officer, Randall D. Sampson, and Chief Financial Officer, David C. Hansen, have reviewed the Company’s disclosure controls and procedures pursuant to the Securities Exchange Act of 1934, as amended (“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 Securities and Exchange Commission and that the disclosure controls are also effective to ensure that information required to be disclosed in the Company’s Exchange Act reports is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
(b)	Changes in Internal Control Over Financial Reporting:
	There have been no changes in our internal control over financial reporting (as defined in Rules 13a- 15(f) under the Exchange Act) that occurred during our fiscal quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II
OTHER INFORMATION

Item 1.	Legal Proceedings
	Not Applicable.
Item 1A.	RiskFactors
	There have been no material changes to the Risk Factors reported under Item 1A in the Form 10-K for the year ended December 31, 2013, and the risk factors presented therein are incorporated by reference herein.
Item 2.	Unregistered Sales of EquitySecurities and Use of Proceeds
	(a)	Not Applicable.
	(b)	Not Applicable.
	(c)	On December 17, 2007, the Company’s Board of Directors adopted a plan that authorized the repurchase of up to 250,000 shares of the Company’s common stock pursuant to Exchange Act Rule 12b-18 in open market transactions or block purchases of privately negotiated transactions (the “2008 Stock Repurchase Plan”). From its adoption until August 13, 2012, the Company repurchased 216,543 shares under the 2008 Stock Repurchase Plan and, on such date, authorized the repurchase of an additional 100,000 shares of the Company’s common stock. The Company did not repurchase any shares during the third quarter of 2014. The maximum number of shares that may yet be purchased under the above authorizations is 128,781 as of September 30, 2014.
Item 3.	Defaults Upon Senior Securities
	Not Applicable.
Item 4.	Mine Safety Disclosures
	Not Applicable.
Item 5.	Other Information
	Not Applicable.

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Item 6.	Exhibits
	(a)	The following exhibits are included herein:
		11	Statement re computation of per share earnings – See Net Income Per Share under Note 1 of Notes to Condensed Consolidated Financial Statements under Part 1, Item 1, which is incorporated herein by reference
		31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
		31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
		32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

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

	Canterbury Park Holding Corporation
Date: November 14, 2014	/s/ Randall D. Sampson
	Randall D. Sampson
	President and Chief Executive Officer
Date: November 14, 2014	/s/ David C. Hansen
	David C. Hansen
	Vice President and Chief Financial Officer

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