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EX-32 - CERTIFICATION OF CEO/CFO PURSUANT TO SECTION 906 - CANTERBURY PARK HOLDING CORPcphc151191_ex32.htm
EX-21 - SUBSIDIARIES OF THE REGISTRANT - CANTERBURY PARK HOLDING CORPcphc151191_ex21.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - CANTERBURY PARK HOLDING CORPcphc151191_ex23-1.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - CANTERBURY PARK HOLDING CORPcphc151191_ex31-1.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - CANTERBURY PARK HOLDING CORPcphc151191_ex31-2.htm
EXCEL - IDEA: XBRL DOCUMENT - CANTERBURY PARK HOLDING CORPFinancial_Report.xls
EX-23.2 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - CANTERBURY PARK HOLDING CORPcphc151191_ex23-2.htm

Table of Contents

 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-K
 
(Mark One)
     
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 31, 2014
 
OR
     
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Transition period from ______ to ______
 
Commission File Number:  001-31569
 
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)
 
Registrant’s telephone number, including area code:  (952) 445-7223
 
Securities registered pursuant to Section 12(b) of the Act:
         
 
Common Stock, $.01 par value
 
The NASDAQ Stock Market LLC
 
 
Title of Each Class
 
Name of Exchange on which Registered
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
 
Indicate by check mark whether the Registrant has submitted electronically 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 ☒ NO ☐
 
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
           
 
Large accelerated filer
Non-accelerated filer
 
           
 
Accelerated filer
Smaller reporting company
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒
 
The aggregate market value of the shares of voting and non-voting common equity held by non-affiliates based on the price at which the Company’s common stock was last sold on the NASDAQ Global Market, on June 30, 2014, the end of the registrant’s most recently completed second fiscal quarter was $24,073,872.
 
On March 15, 2015, the Company had 4,213,877 shares of common stock, $.01 par value, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Company’s definitive Proxy Statement for its 2014 Annual Meeting of Shareholders, to be held on June 4, 2015 and which will be filed on or before April 22, 2015, are incorporated by reference into Part III of this Form 10-K.
 


 
 

 

 
CANTERBURY PARK HOLDING CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2014
 
TABLE OF CONTENTS
         
     
Page
 
PART I
     
         
 
3
 
 
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54
 
       
  55  
       
  56  
       
CERTIFICATIONS    
 
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Item 1. BUSINESS
 
(a) General Development of the Business
 
Canterbury Park Holding Corporation (the “Company,” “we,” “our,” or “us”) conducts pari-mutuel wagering operations and hosts “unbanked” card games at its Canterbury Park Racetrack and Card Casino facility (the “Racetrack”) in Shakopee, Minnesota.  The Company’s pari-mutuel wagering operations include both wagering on thoroughbred and quarter horse races during live meets at the Racetrack and year-round wagering on races held at out-of-state racetracks that are televised simultaneously at the Racetrack (“simulcasting”).  Unbanked card games, in which patrons compete against each other, are hosted in the Card Casino at the Racetrack.  The Company also derives revenues from related services and activities, such as concessions, parking, advertising signage, publication sales, special events, and from other entertainment events and activities held at the Racetrack.  The ownership and operation of the Racetrack and the Card Casino are significantly regulated by the Minnesota Racing Commission (“MRC”).
 
The Company was incorporated under the laws of Minnesota on March 24, 1994, acquired the Racetrack on March 29, 1994, commenced seven day a week simulcast operations on May 6, 1994, and, beginning in May 1995, launched live horse racing and related pari-mutuel wagering on a seasonal basis, generally from early May to early September.  The Card Casino opened on April 19, 2000, the Company is able to host card games up to 80 tables and currently host live play on approximately 65 tables on a daily basis.
 
In June 2012, the Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community (“SMSC”) pursuant to which, over a 10.5 year term, the SMSC will provide supplements to purses for live races at the Racetrack, as well as payments to the Company for joint marketing efforts with the SMSC.  See “Cooperative Marketing Agreement” at (c)(viii) below for additional information.
 
The Company maintains a website at www.canterburypark.com.  Our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our periodic reports on Form 8-K (and any amendments to these reports) are available free of charge on our website.
 
(b) Financial Information About Segments
 
The Company divides its business into three segments: horse racing, Card Casino, and concessions.  The horse racing segment represents operations related to pari-mutuel wagering on simulcast and live horse races; the Card Casino segment represents our unbanked card operations; and the concessions segment represents food and beverage services provided at the facility, including special events held at the Racetrack.
 
(c) Narrative Description of Business
 
(i)           Horse Racing Operations
 
The Company’s horse racing operations consist of year-round pari-mutuel wagering on simulcast horse races (“simulcasting”) and on live thoroughbred and quarter horse races (“live meets”) held on a seasonal basis beginning in May and generally concluding in September of each year.
 
Live Racing
 
For the years ended December 31, 2014 and 2013 the Racetrack hosted 68 days and 69 days, respectively, of live racing beginning in mid-May and concluding in September.  Currently, Minnesota law requires the Company to schedule a minimum of 125 days of live racing annually, unless the Minnesota Horsemen’s Benevolent and Protective Association (the “MHBPA”) agrees to a lesser number of live racing days.  Since 1995, the MHBPA has agreed to waive the 125-day requirement and has allowed the Company to run a live meet of at least 50 days each year.  Pursuant to the CMA, the MHBPA entered into a Horse Association Agreement in which it agreed to waive the 125-day requirement provided that at least 65 days of live racing are scheduled in each of the ten calendar years beginning in 2013.  If, for any reason, the MHBPA ceases to be bound by its obligations under the Horse Association Agreement, and the Company and the MHBPA are unable to agree on a live meet shorter than 125 days, the Company’s operations could be adversely impacted by a decrease in the daily purses, potential reduction in the quality of horses, lower attendance, lower overall total amount wagered (“handle”), and substantially greater operating expenses.
 
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Simulcasting
 
Simulcasting is the process by which live horse races held at one facility (the “host track”) are transmitted simultaneously to other locations to allow patrons at each receiving location (the “guest track”) to place wagers on races transmitted from the host track.  Monies are collected at the guest track and the information with respect to the total amount wagered is electronically transmitted to the host track.  All of the amounts wagered at guest tracks are combined into the appropriate pools at the host track with the final odds and payouts based upon all the monies in the respective pools.
 
The Company offers simulcast racing from up to 20 racetracks per day, seven days a week, 363 days per year, including Churchill Downs, Santa Anita, Gulfstream Park, Belmont Park, and Saratoga Racecourse.  In addition, races of national interest, such as the Kentucky Derby, the Preakness Stakes, the Belmont Stakes, and the Breeders’ Cup supplement the regular simulcast program.  The Company regularly evaluates its agreements with other racetracks in order to offer the most popular simulcast signals of live horse racing that are feasible.
 
Under applicable provisions of federal and state law, in order to conduct simulcast operations either as a host or guest track, the Company must obtain the consent of the state’s regulatory authority and the organization which represents a majority of the owners and trainers of the horses who race at the Racetrack.  In Minnesota, such consent must be obtained from the MRC and the MHBPA.  As these consents are obtained annually, no assurance can be given that the MRC and the MHBPA will allow the Company to conduct simulcast operations either as a host or guest track after 2014.  If the MRC or the MHBPA do not consent, the Company’s operations could be adversely impacted by a decrease in pari-mutuel revenue, potential reduction in the quality of horses, lower attendance, lower overall handle, and substantially greater operating expenses.
 
(ii)          Card Casino Operations
 
The Card Casino is open 24 hours per day, seven days per week, and offers two forms of unbanked card games: poker and table games.
 
Poker games, including Texas Hold ‘Em, Stud, and Omaha, with betting limits per hand ranging between $2 and $100, are currently offered in the poker room.  A dealer, employed by the Company, regulates the play of the game at each table and deals the cards but does not participate in play.  In poker games, the Company is allowed to deduct a percentage from the accumulated wagers and impose other charges for hosting the activity but does not have an interest in the outcome of a game.  The Company may add additional prizes, awards or money to any game for promotional purposes.  The Company collects a “rake” of 5-10%, depending on the limit of the game, of each addition to the “pot” up to a maximum of $5 per hand as its collection revenue.  In addition, poker games offer progressive jackpots for most games.  In order to fund the jackpot pool, the dealer withholds $1 from each final pot in excess of the $15 minimum.
 
The Card Casino currently offers the following table games: Blackjack, Mississippi Stud, Fortune Pai Gow, Three Card Poker, Crazy 4 Poker, Ultimate Texas Hold ‘Em, EZ Baccarat, and Free Bet Blackjack.  The Company has the option to offer banked games under laws governing Card Casino operations but currently only offer “unbanked” games.  “Unbanked” refers to a wagering system or game where wagers lost or won in card games are accumulated into a player pool liability for purposes of enhancing the total amount paid back to winning players.  The Company can only serve as custodian of the player pool, may not have an active interest in any card game and does not recognize amounts that dealers “win” or “lose” during the course of play as revenue.  The primary source of Card Casino revenue is a percentage of the wagers received from the players, aggregated up to 18% per day as defined by MRC regulations, as compensation for providing the Card Casino facility and services, referred to as “collection revenue.”  In addition, several table games offer a progressive jackpot.  The player has the option of playing the jackpot and has the opportunity to win some or the entire jackpot amount, depending upon their hand.
 
(iii)         Special Events
 
The Company is the fourth largest event space in the Twin Cities with more than 100,000 square feet of available space. The Company’s facilities provide a variety of purposes for year-round events and other activities.  The Company’s event space has been used for craft shows, trade shows, pool and poker tournaments, automobile and other utility vehicle shows, major art shows, and fundraisers.  The Company’s outdoor spaces have been used for concerts, snowmobile races and other competitions. In addition to event space the Company rents space for boat storage during the winter months.
 
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 (iv)         Sources of Revenue
 
General
 
The Company’s revenues are principally derived from three activities: Card Casino operations, wagering on live and simulcast horse races, and concession sales.  For the year ended December 31, 2014, revenues from Card Casino operations represented 55.6% of total revenues, wagering on horse races generated 21.1% of total revenues, and concessions revenue represented 14.3% of total revenues.
 
Card Casino Operations
 
The Company receives revenue from its Card Casino, which operates 24 hours per day, seven days per week.  The Company currently receives collection revenue from poker and table games tables.  Under Minnesota law, the Company is required to pay 10% of the first $6 million of gross Card Casino revenues towards purses for live horse racing at the Racetrack.  After meeting the $6 million threshold, the Company must pay 14% of gross Card Casino revenues as purse monies.  Of funds allocated for purses, the Company pays 10% of the purse monies to the Minnesota Breeders’ Fund (the “MBF”), which is a fund apportioned by the MRC among various purposes related to Minnesota’s horse breeding and horse racing industries.  The remaining 90% of purse monies are divided between thoroughbred (90%) and quarter horse (10%) purse funds.
 
Pari-mutuel wagering – General
 
In pari-mutuel wagering, bettors wager against each other in a pool, rather than against the operator of the facility or with preset odds.  From the total handle wagered, the Minnesota Pari-Mutuel Horse Racing Act (the “Racing Act”) specifies the maximum percentage, referred to as the “takeout,” which may be withheld by the Racetrack, with the balance returned to the winning bettors.  The takeout constitutes one of the Racetrack’s primary sources of operating revenue.  From the takeout, funds are set aside for purses and paid to the State of Minnesota for pari-mutuel taxes and to the MBF.  The balance of the takeout remaining after these deductions is commonly referred to as the “retainage.”
 
The various forms of pari-mutuel wagering can be divided into two categories: straight wagering pools and multiple wagering pools, which are also referred to as “exotic” wagering pools.  Examples of straight wagers include: “win,” “place,” and “show.”  Examples of exotic wagers include: “daily double,” “exacta,” ”trifecta,” and “pick four.”
 
The amount of takeout earned by the Company depends on where the race is run and the form of wager (straight or exotic).  Net revenues from pari-mutuel wagering on live races run at the Racetrack consist of the total amount wagered, less the amounts paid (i) to winning patrons, (ii) for purses, (iii) to the MBF and (iv) for pari-mutuel taxes to the State of Minnesota.  Net revenues from pari-mutuel wagering on races being run at out-of-state racetracks and simulcast to the Racetrack have similar expenses but also include a host fee payment to the host track.  The host fee, which is calculated as a percentage of monies wagered (generally 3.0% to 4.5%), is negotiated with the host track and must comply with state laws governing the host track. Pari-mutuel revenues also include commission and breakage revenues on live on-track and simulcast racing, fees received from out-of-state racetracks for wagering on our live races and proceeds from unredeemed pari-mutuel tickets.
 
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Wagering on Live Races
 
The Racing Act establishes the maximum takeout that may be deducted from the handle.  The takeout percentage on live races depends on the type of wager.  The total maximum takeouts are 17% from straight wagering pools and 23% from exotic wagering pools.  From this takeout, Minnesota law requires deductions for purses, pari-mutuel taxes, and the MBF.
 
While the Racing Act provides that a minimum of 8.4% of the live racing handle is to be paid as purses to the owners of the horses, the size of the purse is subject to further agreement with the horsepersons’ associations.  In addition, the MBF receives 1% of the handle.  The pari-mutuel tax applicable to wagering on all simulcast and live races is 6% of takeout in excess of $12 million during the twelve-month period beginning July 1 and ending the following June 30.
 
The following table indicates  the percentage distribution of each dollar wagered on live races at the Racetrack, as established by the Racing Act, and the Racetrack’s retainage for the years ended December 31, 2014 and 2013
                         
   
Live Racing
 
   
Straight
   
Exotic
 
                         
Returned to Winning Patrons
        83.00 %         77.00 %
Purse (1)
  8.40           8.40        
Minnesota Breeders’ Fund
  1.00           1.00        
Minnesota Pari-Mutuel Taxes (2)
                   
Racetrack Retainage (1)
  7.60           13.60        
Total Takeout
        17.00           23.00  
                         
Total Handle
        100.00 %         100.00 %
 
(1)
Minnesota law provides that the 8.40% purse payment is a minimum.  The actual percentage, if any, above the minimum is determined between the Racetrack and the MHBPA.  Any additional amounts paid for purses decrease the Racetrack’s retainage.
(2)
The current pari-mutuel tax structure exempts the first $12 million of takeout during a statutorily mandated twelve-month period.  The total pari-mutuel tax liability for a twelve-month period will depend upon the total takeout during that period.  There was no pari-mutuel tax liability in 2014 or 2013 and therefore, it is not factored into the above table.
 
Wagering on Simulcast Races
 
The amount of takeout from simulcast wagering is determined by the laws of the state in which the host track is located.  In addition, the Racing Act establishes a minimum that must be set aside from simulcasting for purse payments on racing within Minnesota.  Different amounts are deducted for purses from the takeout depending on whether simulcasting occurs during the “Racing Season,” a statutorily defined 25-week period beginning in early May each year, or outside of the Racing Season.  If simulcasting occurs during the Racing Season, the amount set aside for purses further depends on whether the simulcasting is part of a full racing card that occurs during the part of the day that live races are conducted at the Racetrack.  For races that are part of a full simulcast racing card that takes place within the time of live races at the Racetrack, the amount reserved for purse payout is 8.4%.  For simulcasting conducted during the Racing Season that does not occur within the time period of live races, the purse is equal to 50% of the takeout remaining after deductions for pari-mutuel taxes, payments to the MBF, and payments to the host racetrack for host track fees.  For simulcasting conducted outside of the Racing Season, the amount that must be contributed to the purses is 25% of the takeout after deducting pari-mutuel taxes, payments to the MBF, and host fee payments to the host racetrack.
 
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The following table sets forth the approximate percentage distribution of each dollar wagered on races simulcast at the Racetrack and the Racetrack’s retainage for the years ended December 31, 2014 and 2013
                                     
   
During Racing Season
             
   
Concurrent with
   
Not Concurrent with
   
Outside of Racing
 
   
Live Card
   
Live Card
   
Season
 
                                     
Returned to Winning Patrons (1)
        80.50 %         80.50 %         80.50 %
Minnesota Breeders’ Fund
  1.00           1.00           1.10        
Minnesota Pari-Mutuel Taxes (2)
                             
Purse (3)
  8.40           7.35           4.15        
Host Track Fees (4)
  3.80           3.80           3.80        
Racetrack Retainage (3)
  6.30           7.35           10.45        
Total Takeout
        19.50           19.50           19.50  
                                     
Total Handle
        100.00 %         100.00 %         100.00 %
 
(1)
This amount will depend upon the takeout at the host racetrack. This percentage is determined by local and state law applicable to the host track and ranges from 75.0% to 85.0%.
(2)
The current pari-mutuel tax structure exempts the first $12 million of takeout during a statutorily mandated twelve-month period.  The total pari-mutuel tax liability for a twelve-month period will depend upon the total takeout during that period.  There was no pari-mutuel tax liability in 2014 2013 and therefore, it is not factored into the above table.
(3)
Although Minnesota law specifies purse percentages, the actual percentage is determined by an agreement between the Racetrack and the MHBPA.
(4)
Payments to the host track generally range from 3.0% to 7.25% of total handle, subject to negotiation with each host track.  For purposes of this table, the host track fee is assumed to be 3.8%.
 
Concessions Revenue
 
The Company earns revenue from food and beverage sales in its restaurant, group catering areas and numerous concession stands located throughout the facility.  Food and beverage sales are offered in the card room, during live and simulcast racing, and during special events.
 
Other Revenue
 
The Company generates cash revenues from the receipt of reserved seating charges, preferred and valet parking and the sales of various daily pari-mutuel publications.  Additional revenues are derived from special events and other space rentals. The Company also generates revenue from providing advertising signage space.
 
(v)          Competition
 
The Company faces direct competition from North Metro Harness Initiative, LLC (“NMHI”) that operates Running Aces Harness Park in Columbus Township, Anoka County, Minnesota, a racetrack and card room is located approximately 50 miles from Canterbury Park.  NHMI offers pari-mutuel wagering on live races of standardbred (“harness”) horses on a seasonal basis and year around wagering on simulcasting of all breeds of horse races.  In addition to pari-mutuel wagering, NHMI operates a card room directly competes with the Company’s Card Casino.   Due to its proximity and similar wagering and gaming offerings, NHMI’s direct and substantial competition could have a material adverse impact on the Company’s business, financial conditional and results of operations
 
The Company operates in a highly competitive wagering and gaming industry with a large number of participants. The Company competes with competitive casino activities that include tribal casinos, state-sponsored lotteries and other forms of legalized gaming in the U.S. and other jurisdictions.  A number of tribal casinos in the State of Minnesota offer video slot machines, table games and unbanked card games. Including Minnesota’s largest casino, Mystic Lake which is located approximately four miles from the Racetrack.
 
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Additionally, Internet-based interactive gaming and wagering is growing rapidly and adversely affects all forms of wagering offered by the Company. The Company anticipates competition in this area will become more intense as new Internet-based ventures enter the industry and as state and federal regulations on Internet-based activities are clarified.
 
The Company faces indirect competition from a variety of sources for discretionary consumer spending including spectator sports and other entertainment and gaming options. In the Minneapolis-Saint Paul metropolitan area, competition includes a wide range of live and televised professional and collegiate sporting events.  In addition, live horse racing competes with a wide variety of summer attractions, including amusements parks, sporting events, and other local activities.
 
Finally, the Company competes with racetracks located throughout the United States in securing horses to run at the Racetrack.  Attracting owners and trainers is largely dependent on the ability to offer competitive purses.  The Company experiences significant competition for horses from racetracks located near Des Moines, Iowa and Chicago, Illinois.  This competition is expected to continue for the foreseeable future.
 
(vi)  Regulation
 
General
 
The ownership and operation of the Racetrack in Minnesota is subject to significant regulation by the MRC under the Racing Act and the rules adopted by the MRC.  The Racing Act governs the allocation of each wagering pool to winning bettors, the Racetrack, purses, pari-mutuel taxes, and the MBF, and empowers the MRC to license and regulate substantially all aspects of horse racing in the State.  The MRC, among other things, grants operating licenses to racetracks after an application process and public hearings, licenses all racetrack employees, jockeys, trainers, veterinarians, and other participants, regulates the transfer of ownership interests in licenses, allocates live race days and simulcast-only race days, approves race programs, regulates the conduct of races, sets specifications for the racing ovals, animal facilities, employee quarters and public areas of racetracks, regulates the types of wagers on horse races, and approves significant contractual arrangements with racetracks, including management agreements, simulcast arrangements, and totalizator contracts.
 
A federal statute, the Interstate Horse Racing Act of 1978, also requires that a racetrack must obtain the consent of the group representing the horsepersons (owners and trainers) racing the breed of horses that race a majority of the time at the racetrack (the MHBPA), and the consent of the state agency regulating the racetrack (MRC), in order to transmit simulcast signals of its live races or to receive and use simulcast signals from other racetracks.
 
Issuance of Class A and Class B Licenses to the Company
 
The Company holds a Class A License, issued by the MRC, which allows the Company to own and operate the Racetrack.  The Class A License is effective until revoked, suspended by the MRC or relinquished by the licensee.  Currently, the fee for a Class A License is $253,000 per fiscal year.
 
The Company also holds a Class B License, issued by the MRC, that allows the Company to sponsor and manage horse racing on which pari-mutuel wagering is conducted at its Class A licensed racetrack and on other horse races run at out-of-state locations as authorized by the MRC.  The Class B License is renewable each year by the MRC after a public hearing (if required by the MRC).  Currently, the fee for the Class B License is $500 for each assigned race day on which live racing is actually conducted and $100 for each day on which simulcasting is authorized and actually takes place.
 
Limitation on the Number of Class A and Class B Licenses
 
Pursuant to the Racing Act, so long as the Racetrack maintains its Class A License, no other Class A License may be issued to operate a racetrack in the seven-county metropolitan area (the counties of Hennepin, Ramsey, Washington, Scott, Dakota, Anoka, and Carver), except the MRC may issue an additional Class A License within the seven-county metropolitan area, provided that the additional license may only be issued for a facility which, among other conditions, is located more than 20 miles from the Racetrack, contains a track no larger than five-eighths of a mile in circumference, and is used exclusively for standardbred (harness) racing.  An additional Class A license was issued to NMHI on January 20, 2005 (see “Competition” above).  However, as long as the Company holds its Class A License, only the Company may own and operate a racetrack in the seven county metropolitan area where thoroughbred and quarter horses may be raced.
 
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Limitation on Ownership and Management of an Entity which holds a Class A and/or Class B License
 
The Racing Act requires prior MRC approval of all officers, directors, 5% shareholders or other persons having a present or future direct or indirect financial or management interest in any person applying for a Class A or Class B license, and if a change of ownership of more than 5% of the licensee’s shares is made after an application is filed or the license issued, the applicant or licensee must notify the MRC of the changes within five days of this occurrence and provide the information required by the Racing Act.
 
Card Casino Regulation
 
The MRC is also authorized by law to regulate Card Casino operations, and the law requires that the Company reimburse the MRC for its actual costs, including personnel costs, of regulating the Card Casino.  For fiscal years ended December 31, 2014 and 2013, the Company paid $168,000 and $153,000, respectively, to the MRC as reimbursement for costs of regulating Card Casino operations.
 
The MRC issued an additional Class B License to the Company on January 19, 2000 that authorizes the Company to host unbanked card games.  The Class B License is renewable each year by the MRC after a public hearing (if required by the MRC).  Currently, the Class B License fee of $10,000 per calendar year is included in the Class A License fee of $253,000 per calendar year.
 
Local Regulation
 
The Company’s operations are subject to state and local laws, regulations, ordinances, and other provisions affecting zoning, public health, and other matters which may have the effect of restricting the uses to which the Company’s land and other assets may be used.  Also, any development of the Racetrack site is, among other things, subject to applicable zoning ordinances and requires approval by the City of Shakopee and other authorities, and there can be no assurance such approvals would be obtained if any development was undertaken.
 
(vii)  Recent 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.  The Company employs a large number of individuals who received an hourly wage equal to or slightly above $7.25 per hour, prior to August 1, 2014, this legislation had an adverse effect in 2014 and will continue to have an adverse effect in 2015 and beyond.  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.  Also, 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.
 
(viii)  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 CMA, this is achieved through “Purse Enhancement Payments to Horsemen” paid directly to the MHBPA.  Such payments have no direct impact on the Company’s consolidated financial statements or operations.
 
Under the terms of the CMA, the SMSC paid the horsemen $5.8 million and $5.3 million for purse enhancements for the years ended December 31, 2014 and 2013, respectively.
 
Under the CMA, SMSC also agreed to make “Marketing Payments” to the Company relating to joint marketing efforts for the mutual benefit of the Company and SMSC, including signage, joint promotions, player benefits and events.  Under the CMA, the SMSC paid the Company $660,000 and $600,000 for marketing purposes for the years ended December 31, 2014 and 2013, respectively.
 
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Effective January 2015, the CMA was amended to adjust the payment amounts between the “Purse Enhancement Payments to Horsemen” and “Marketing Payments to Canterbury Park.”  Under the CMA as amended, SMSC agreed to make the following purse enhancement and marketing payments for 2015 through 2022:     
                 
Year
 
Purse Enhancement Payments to 1
Horsemen
 
Marketing Payments to Canterbury
Park
2015
  $ 6,316,200     $ 943,800  
2016
    6,947,820       1,038,180  
2017
    7,642,602       1,141,998  
2018
    7,830,000       1,170,000  
2019
    7,830,000       1,170,000  
2020
    7,830,000       1,170,000  
2021
    7,830,000       1,170,000  
2022
    7,830,000       1,170,000  
 
1 - Includes $100,000 each year to various horsemen associations
 
The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s consolidated statements of operations.  For the year ended December 31, 2014, the Company recorded $824,842 in other revenue and incurred $608,309 in advertising and marketing expense and $216,533 in depreciation related to the SMSC marketing payment.  For the year ended December 31, 2013, the Company recorded $595,628 in other revenue and incurred $490,072 in advertising and marketing expense and $105,556 in depreciation related to the SMSC marketing payment.  The excess of amounts received over revenue 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 granted 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 December 31, 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 the grant price.  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 year ended December 31, 2014, the Company recognized $32,354 of expense related to these stock appreciation rights, of which $32,354 was recorded as an offset to other revenue.   For the year ended December 31, 2013, the Company recognized $227,592 of expense related to these stock appreciation rights, of which $227,592 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.
 
(x)  Marketing
 
The Company’s primary market is the seven-county Minneapolis-Saint Paul metropolitan area plus the two counties to the south of the Racetrack and Card Casino.  The City of Shakopee, located in the southwestern portion of the metropolitan area, is one of the fastest growing communities in the region, and Scott County is one of the fastest growing counties in the country.
 
To support its pari-mutuel horse racing, Card Casino business, and special events and catering, the Company conducts year-round marketing efforts to maintain the loyalty of existing customers and attract new players to the property.  The Company utilizes radio, television, digital advertising, social media, print advertising and direct marketing to communicate to its audiences.  In addition to its regular advertising and communication program, the Company conducts numerous special promotions, handicapping contests and poker tournaments to attract incremental visits.   The Company also utilizes a robust player rewards and database marketing program to enhance the loyalty of its guests.
 
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                The Company continues to focus on creating a premier guest experience as the core element of its marketing efforts.  This includes on delivering great customer service, developing new food and beverage offerings, creating fan education programs, and providing entertainment opportunities that go beyond the traditional pari-mutuel wagering and card playing activities.
 
(xi)  Possible Real Estate Development
        
The Company has entered into a Letter of Intent with Kraus-Anderson, Inc. regarding the possible development of a mixed-use destination lifestyle center on unused and underutilized land adjacent to the Racetrack.  As envisioned by the parties this complex would provide year round synergies to the Company’s Racetrack and Card Casino, as well as nearby entertainment venues, while serving the needs of the community and region.  The components of the project could include destination and local retail shops, restaurants, entertainment, sports venues, multi-family housing, and other compatible uses.
 
Extensive due diligence regarding the feasibility of this project was recently completed and the parties have begun negotiating the terms of a formal Development Agreement that would guide financing and construction of the proposed project.  The process of negotiating the formal agreement is expected to take three months or more to complete.
 
(xii)  Employees
 
At March 15, 2015, the Company had 273 full-time employees and 517 part-time employees.  On a seasonal basis, the Company adds approximately 400 employees for live racing operations from early May until early September.  The Company’s management believes its employee relations are good.
 
(xiii)  Executive Officers
 
The executive officers of the Company, their ages and their positions with the Company are as follows:
         
Name
 
Age
 
Position with Company
         
Randall D. Sampson
 
56
 
President, CEO and General Manager
         
David C. Hansen
 
58
 
Vice President of Finance, CFO and Secretary
         
Eric A. Halstrom
 
46
 
Vice President of Racing Operations
         
Michael J. Garin
 
59
 
Vice President of Non-Gaming Operations and Asst. Secretary
         
Michael Hochman
 
49
 
Vice President of Card Casino Operations
         
Mark Erickson
 
58
 
Vice President of Facilities
         
Mary Fleming
 
49
 
Vice President of Human Resources
         
Randall D. Sampson has been President and Chief Executive Officer since the formation of the Company in March 1994 and General Manager since September 1995.  He has been active in horse industry associations, currently serving as Vice President and Director of the Thoroughbred Racetracks of America and is a past President of the Minnesota Thoroughbred Association.  Mr. Sampson also currently serves as a director of Communications Systems, Inc. (NASDAQ:JCS), a manufacturer of telecommunications and data communications products based in Minnetonka, Minnesota.  Mr. Sampson is the son of Curtis A. Sampson, who is the Company’s non-executive Chairman of the Board and the beneficial owner of approximately 21% of the Company’s common stock.
 
David C. Hansen joined the Company in July 2001 as Vice President of Finance and Chief Financial Officer.  From 2000 to 2001, Mr. Hansen served as Director of Accounting for Prairie Meadows Racetrack and Casino in Altoona, IA, one of the nation’s first Racino operations.  He served as Controller and later Director of Finance at Treasure Island Resort & Casino, in Red Wing, MN, from 1993 until 2000.  Mr. Hansen is a member of the Minnesota Society of Certified Public Accountants, the Hospitality Financial and Technology Professionals Association, and Financial Executives International.
 
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Eric A. Halstrom joined the Company in October 2013 as Vice President of Racing Operations.  From 2008 to 2013 Mr. Halstrom served as Vice President and General Manager of Racing for Fair Grounds Race Course and Slots, owned by Churchill Downs Incorporated.  Prior to his employment with Fair Grounds, Mr. Halstrom served in various capacities at Canterbury Park, including Vice President of Racing from 2005 to 2008.  He is a graduate of the University of Arizona’s racetrack industry program.
 
Michael Hochman joined the Company in March 2000 as a Pit Manager.   Later he was promoted to Director of Table Games, Senior Director of Card Casino and in 2014 he was promoted to Vice President of card Casino operations.  From 1996-2000 Mr. Hochman was the poker room manager at the Clearwater Casino in Suquamish Washington. Prior to 1996 he worked in Las Vegas as a dealer and floor person for the Sahara and Luxor properties. Currently, he serves on the Board of Directors for the Northstar Problem Gambling Alliance.
 
Michael J. Garin was named Vice President of Non-Gaming Operations in October 2009.  Prior thereto, Mr. Garin served as the Vice President of Hospitality since May 1997.  He also previously served as President of Canterbury Park Concessions, Inc. from September 1995 to May 1997.  From 1993 to 1994, Mr. Garin served as Food & Beverage Supervisor for Little Six, Inc., one of the largest tribal casino operations in the country.  Mr. Garin was President of MMR Vending, Inc., a regional vending company, from 1988 to 1992.  Prior to 1988, he was a Regional Director at General Mills Restaurant Group overseeing seven restaurants in three states.  Since 2007, Mr. Garin has served on the Board of Directors for the Minnesota Restaurant Association.
 
Mark A. Erickson has been Vice President of Facilities since May 1997, serving as the Racetrack’s Director of Facilities since April 1994.  From 1992 to 1994, Mr. Erickson served as Maintenance Supervisor for the Mall of America, supervising the interior and exterior maintenance for one of the largest shopping malls in North America.  Mr. Erickson was Master Electrician for Canterbury Downs from 1986 to 1992, supervising the installation and maintenance of all electrical equipment.
 
Mary Fleming joined the Company in July 1994 as Human Resources Manager. Later she was promoted to Senior Director of Human Resources and in 2014 she was promoted to Vice President of Human Resources.  From 1991-1994 Ms. Fleming worked in the Staffing industry for ProStaff Personnel Services. She holds a bachelor’s degree from the University of Minnesota, is a member of the Society for Human Resources Management and is a certified Professional in Human Resources (PHR). Ms. Fleming currently serves on the Board of Directors for the Shakopee Chamber of Commerce.
 
Item 1A. RISK FACTORS
 
In addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that are specific to our industry and to the Company could materially impact our future performance and results.  Such risk factors include, but are not limited to, the matters discussed below as well as the additional risks discussed under “Forward-Looking Statements” on page 29 of this Form 10-K.
 
We face significant competition, both directly from other gaming operations and indirectly from other forms of entertainment and leisure time activities, which could have a material adverse effect on our operations.
 
We face intense competition in our market, particularly competition from NMHI which offers unbanked card games similar to those offered by the Company.  We also compete with Native American owned casinos.  Such facilities have the advantage of being exempt from certain state and federal taxes and state regulation of indoor smoking, as well as the ability to offer a wider variety of gaming products.  Additionally, we compete with illegal Internet wagering on horse races, other forms of gambling, spectator sports, other forms of entertainment, and other racetracks throughout the country as previously discussed under “Competition” above.
 
We expect competition for our existing and future operations to increase from NMHI, existing tribal casinos, and racetracks that are able to subsidize their purses with alternative gaming revenues.  In addition, several of our tribal gaming competitors have substantially larger marketing and financial resources than we do.  We are unable to predict with any certainty the effects of existing and future competition on our operating results.
 
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Our business is highly sensitive to general economic trends.
 
Economic conditions improved during 2013 and 2014 from a previous period of adverse conditions in local, regional, national and global markets, however there remains risk that a downturn may resume.  Additionally, our ability to respond to periods of economic contraction may be limited, as certain of our costs remain fixed or even increase, when revenues decline. Accordingly, any persistence of poor economic conditions, or further deterioration, could have a material, adverse impact on our business, financial condition and results of operations.
 
Our business is highly sensitive to consumer confidence and reductions in consumers’ discretionary spending, which may result from economic conditions, unemployment levels and other changes we cannot accurately predict.
 
Demand for entertainment and leisure activities is sensitive to consumers’ disposable incomes, which have been adversely affected by recent economic conditions.  Further declines in the residential real estate market, changes in consumer confidence, increases in individual tax rates, and other factors that we cannot accurately predict may reduce the disposable income of our customers.  This could result in fewer patrons visiting our racetrack and wagering facilities, and may impact our customers’ ability to wager with the same frequency and maintain their wagering level profiles.  Accordingly, any significant loss of customers or decline in wagering could have a material adverse impact on our business, financial condition and results of operations.
 
We are subject to extensive regulation from gaming authorities that could adversely affect us.
 
The ownership and operation of our Racetrack and Card Casino are subject to significant regulation by the MRC under the Racing Act and the rules adopted by the MRC.  The MRC has the authority to impose increases in the Class A and Class B license fees.  In addition, State law requires that we reimburse the MRC for its actual costs of regulating the Card Casino, including personnel costs.  Increases in these licensing and regulatory costs could adversely affect our results of operations.
 
Decisions by the MRC in regard to any one or more of the following matters could also adversely affect the Company’s operations: the granting of operating licenses to Canterbury Park and other racetracks after an application process and public hearings; the licensing of all track employees, jockeys, trainers, veterinarians, and other participants; regulating the transfer of ownership interests in licenses; allocating live race days and simulcast-only race days; approving race programs; regulating the conduct of races; setting specifications for the racing ovals, animal facilities, employee quarters, and public areas of racetracks; changes to the types of wagers on horse races; and approval of significant contractual agreements.
 
We are subject to changes in the laws that govern our business, including the possibility of an increase in gaming taxes, which would increase our costs, and changes in other laws may adversely affect our ability to compete.
 
Our operations and oversight by the MRC are ultimately subject to the laws of Minnesota and there exists the risk that these laws may be amended in ways adverse to our operations.  In particular, we are required to pay taxes and fees in addition to normal federal, state, and local income taxes, and such taxes and fees are subject to increase at any time.  From time to time, state and local legislators and officials have proposed changes in tax laws, or in the administration of laws affecting our industry, such as the allocation of each wagering pool to winning bettors, the Racetrack, purses, and the MBF.  In addition, poor economic conditions could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes.  It is not possible to predict with certainty the likelihood of changes in tax laws or in the administration of such laws.  Such changes, if adopted, could have a material adverse effect on our operations.
 
We are also subject to federal and Minnesota laws that affect businesses generally.  Some of these laws, such as laws pertaining to immigration, have severe penalties for law violations.  In addition, it is possible, as a result of the legislative process, that legislation directly or indirectly adverse to the Company may be enacted into law.
 
We depend on key personnel.
 
Our continued success and our ability to maintain our competitive position is largely dependent upon, among other things, the skills and efforts of our senior executives and management team including Randall D. Sampson, our Chief Executive Officer.  We have no employment agreements with our senior executives and key personnel, and we cannot guarantee that these individuals will remain with us, and their retention is affected by the competitiveness of our terms of employment and our ability to compete effectively against other gaming companies.  Our inability to retain key personnel could have a material adverse impact on our business, financial condition, and results of operations.
 
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We process, store and use personal information and other data, which subjects us to governmental regulation and other legal obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our business.
 
We receive, store and process personal information and other customer data.  There are numerous federal, state and local laws regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other data.  Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other player data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause our customers to lose trust in us, which could have an adverse effect on our business.  Additionally, if third parties we work with, such as vendors, violate applicable laws or our policies, such violations may also put our customers’ information at risk and could in turn have an adverse effect on our business.  The Company is also subject to payment card association rules and obligations under its contracts with payment card processors.  Under these rules and obligations, if information is compromised, the Company could be liable to payment card issuers for the associated expense and penalties.  In addition, if the Company fails to follow payment card industry security standards, even if no customer information is compromised, the Company could incur significant fines or experience a significant increase in payment card transaction costs.
 
Energy and fuel price increases may adversely affect our costs of operations and our revenues.
 
Our facility uses significant amounts of electricity, natural gas, and other forms of energy.  Increases in the cost of electricity or natural gas negatively affect our results of operations.  In addition, energy and fuel price increases could negatively impact our operations by reducing disposable income of potential customers and decreasing visitation to our facility.
 
Our CMA with the SMSC may be terminated by the SMSC prior to December 31, 2022 under certain circumstances.
 
The CMA grants to the SMSC the right to terminate the CMA without cause if the SMSC determines, in its sole discretion that a change of circumstance adverse to its interests with respect to gaming in the State of Minnesota has occurred.  If the SMSC exercises this right, the Company would be entitled to substantial wind down payments approximately equal to 2.5 times payments due under the CMA in the three years following the year it gives such notice of termination.  While such wind down payments would cushion the impact of the SMSC’s exercise of this right to terminate the CMA, a termination of the CMA prior to the expiration of its term in 2022 could have a material adverse effect on the Company.
 
Nationally the popularity of horse racing is declining.
 
There has been a general decline in the number of people attending and wagering on live horse races at North American racetracks due to a number of factors, including increased competition from other wagering and entertainment alternatives as discussed above.  According to industry sources, pari-mutuel handle declined 28.6% from 2006 to 2014 including a 2.8% decrease in 2014 compared to 2013. Declining interest in horse racing has had a negative impact on revenues and profitability in our racing business.  Our business plan anticipates increased attendance and pari-mutuel wagering during our 2015 live meet and in future live meets because of purse enhancement payments and marketing payments we receive under the CMA.  However, we recognize that a generalized decline in interest in horse racing and pari-mutuel wagering could have a material adverse impact on our business, financial condition and results of operations in future years.
 
We may not be able to attract a sufficient number of horses and trainers to achieve full field horse races.
 
We believe that patrons prefer to wager on races with a large number of horses, commonly referred to as full fields.  A failure to offer races with full fields results in less wagering on our horse races.  Our ability to attract full fields depends on several factors.  It depends on our ability to offer and fund competitive purses and it also depends on the overall horse population available for racing.  Various factors have led to declines in the horse population in certain areas of the country, including competition from racetracks in other areas, increased costs and changing economic returns for owners and breeders, and the spread of various debilitating and contagious equine diseases.  If our racetrack is faced with a sustained outbreak of a contagious equine disease, it would have a material impact on our profitability.  Finally, if we are unable to attract horse owners to stable and race their horses at our racetrack by offering a competitive environment, including improved facilities, a well-maintained racetrack, better conditions for backstretch personnel involved in the care and training of horses stabled at our racetrack and a competitive purse structure, our profitability could also decrease.  We also face increased competition for horses and trainers from racetracks that are licensed to operate slot machines and other electronic gaming machines that provide these racetracks an advantage in generating new additional revenues for race purses and capital improvements.  While our ability to offer full fields to patrons during our live meets has been substantially strengthened by the purse enhancement payments that will be made under the CMA through 2022, our inability to attract full fields, for whatever reason, could have a material adverse impact on our business, financial condition and results of operations.
 
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Inclement weather and other conditions may affect our ability to conduct live racing.
 
        Since horse racing is conducted outdoors, unfavorable weather conditions, including extremely high and low temperatures, high winds, storms, tornadoes and hurricanes, could cause events to be canceled and/or attendance to be lower, resulting in reduced wagering.  Our operations are subject to reduced patronage, disruptions or complete cessation of operations due to weather conditions, natural disasters and other casualties.  If a business interruption were to occur due to inclement weather and continue for a significant length of time at our racetrack, it could have a material adverse impact on our business, financial condition and results of operations.
 
Horse racing is an inherently dangerous sport and our racetrack is subject to personal injury litigation.
 
Although we carry jockey accident insurance at our racetrack to cover personal jockey injuries which may occur during races or daily workouts, there are certain exclusions to our insurance coverage, and we are still subject to litigation from injured participants.  We renew our insurance policies on an annual basis.  The cost of coverage may become so high that we may need to further reduce our policy limits or agree to certain exclusions from our coverage.  Our results may be affected by the outcome of litigation, as this litigation could be costly and time consuming and could divert our management and key personnel from our business operations.
 
Our business depends on utilizing totalizator services.
 
Our customers utilize information provided by a third party vendor that accumulates wagers, records sales, calculates payoffs and displays wagering data in a secure manner to patrons who wager on our horse races.  The failure to keep technology current could limit our ability to serve patrons effectively or develop new forms of wagering and/or affect the security of the wagering process, thus affecting patron confidence in our product.  A perceived lack of integrity in the wagering systems could result in a decline in bettor confidence and could lead to a decline in the amount wagered on horse racing.  In addition, a totalizator system failure could cause a considerable loss of revenue if betting machines are unavailable for a significant period of time or during an event with high betting volume.
 
An increase in the minimum wage mandated under Federal or Minnesota law could have a material adverse effect on our operations and financial results.
 
The Company employs a large number of individuals at an hourly wage equal to or slightly above the current federal mandated wage of $8.00 per hour.  See “Recent Legislation” at (c)(vii) for additional information regarding current minimum legislation.  Most of these employees are either high school or college students employed on a seasonal basis or tipped employees, many of whom receive, on average, tip income that is several times the current minimum wage.  From time to time legislation is introduced in the U.S. Congress or the Minnesota legislature that would substantially increase the minimum wage.  An immediate and substantial increase in the current minimum wage applicable to the Company would materially increase the Company’s operating expenses and could adversely affect the Company’s operations and financial results.  While we might be able to mitigate the impact of a substantial 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.  Furthermore, to the extent we are not able to implement such cost cutting measures, the increase in the minimum wage could materially adversely affect our net income.  
 
Uncertainty regarding the success of a possible real estate development project
 
While the Company has entered into a Letter of Intent with Kraus-Anderson, Inc. regarding the possible development of a mixed use destination lifestyle center on unused and underutilized land adjacent to the Racetrack and the parties are now negotiating the terms of a formal Development Agreement. Such negotiations may not result in the parties agreeing on terms for financing and construction of the proposed project. Also, even if the parties enter into a Development Agreement, there can be no assurance that the proposed mixed use complex or any other real estate project will be financed and constructed, or that, if constructed, it will operate successfully.
 
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Item 1B. UNRESOLVED STAFF COMMENTS
 
Not Applicable.
 
Item 2. PROPERTIES
 
General
 
The Company’s facilities, which are owned and operated under the name “Canterbury Park,” are a modern complex of buildings and grounds which generally compare favorably to other major racetracks located throughout the country.  The Racetrack’s grandstand has a patron capacity of approximately 10,000 within enclosed areas and a maximum patron capacity of over 30,000 including outside areas around the grandstand.  The grandstand and most public outdoor areas contain numerous pari-mutuel windows, odds information boards, video monitors, concessions stands and other amenities.  The audio/visual system includes over 850 television monitors with most areas providing multi-screen viewing of the races.
 
The Racetrack is located approximately 25 miles southwest of downtown Minneapolis.  The area immediately surrounding the Racetrack consists of retail, commercial and industrial buildings, farmland and residential areas.  The Racetrack is in reasonable proximity to a number of major entertainment destinations including:  Valleyfair, an amusement park about two miles from the Racetrack which annually attracts visitors during the spring and summer; the Renaissance Festival, a seven-weekend late summer annual event located about five miles from the Racetrack; and Mystic Lake Casino, located about four miles from the Racetrack, which draws thousands of visitors daily.  The Mall of America, the largest enclosed shopping mall in the United States, which attracts more than 40 million visitors per year, is approximately 17 miles from the Racetrack.
 
Racing Surfaces
 
The racing surfaces consist of a one-mile oval dirt/limestone track and a 7/8-mile oval turf course.  The dirt track includes a one and one-quarter mile front stretch chute, a 6-1/2 furlong backstretch chute, and a 3-1/2 furlong chute and is lighted for night racing.
 
Grandstand
 
The grandstand is a modern, air-conditioned enclosed structure of approximately 275,000 square feet with a variety of facilities on six levels.  The lower level contains space for support functions such as jockey quarters, administrative offices, Racing Commission offices, first aid, mechanical rooms, and electrical rooms.  The track level includes pari-mutuel windows, restrooms, a variety of concession stands and other services as well as the Card Casino, which occupies 22,000 square feet on the track level.  The mezzanine level contains 1,320 fixed seats in a glass-enclosed, air-conditioned area and an additional 3,000 seats located outside.  In addition to the seats, the mezzanine level contains pari-mutuel windows, restrooms, concession stands, and other guest facilities.  A portion of the mezzanine level is currently being used as a simulcast center during live racing, and for banquets and other events during the off-season.  The kitchen level is an intermediate level located between the mezzanine and clubhouse floors.  It contains a full-service kitchen which supports a full dining menu for the track-side dining terraces on the clubhouse level and food preparation for the other concession areas.  The clubhouse level is a multi-purpose area serving as a simulcast center during wagering sessions on televised races, as well as a full-service dining area during the live racing season.  The clubhouse level includes 325 trackside tables, each equipped with a television set, with a total seating capacity of 1,200 patrons and an additional 1,000 seats are located in lounges located throughout the area.  The press box and officials’ level is located in the roof trusses over the clubhouse and contains work areas for the press, racing officials, closed-circuit television, photo finish, and the track announcer.  In addition, the grandstand was structurally built to accommodate skyboxes under the press box/officials’ level, although none have yet been constructed.  Escalators and elevators are available to move patrons among the various levels within the grandstand.
 
Expo Center
 
During 2014, the Company completed the construction of a 30,000 square foot structure designed for year-round special events, trade shows and exhibits.  The Expo Center opened on September 11, 2014, together with other areas, Canterbury Park now offers the fourth largest event space in the Twin Cities with more than 100,000 total square feet of available space. The facility features 24,000 square feet of open event space and another 6,000 square feet including an entry area, offices, restrooms and storage.
 
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Barn and Backside Facilities

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

Parking

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

Undeveloped Land

Approximately 200 acres of the 392 acres owned by the Company could be developed or sold, in whole or in part, depending upon future opportunities.  The Company regularly evaluates other business activities and development opportunities that would maximize the use of the real estate surrounding the Racetrack and which would complement the Company’s primary businesses of horse racing and Card Casino operations.
 
Item 3. 
 
 There are no material legal proceedings pending against the Company.  From time to time, the Company is party to ordinary and routine litigation incidental to our business.  We do not expect the outcome of any such litigation pending at this time to have a material adverse effect on our consolidated financial position or results of operations.

Not Applicable.


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

(a)            MARKET INFORMATION

The Company’s common stock trades on the NASDAQ Global Market under the symbol CPHC.  The table set forth below indicates the high and low sale prices for the Common Stock in the quarterly periods ending December 31, 2014 and 2013
                                 
 
2014
 
2013
 
Common Stock
 
High
 
Low
 
High
 
Low
 
                         
First Quarter
  $ 11.92     $ 9.65     $ 11.45     $ 8.68  
Second Quarter
    12.04       9.76       12.00       9.53  
Third Quarter
    11.90       9.01       11.74       9.36  
Fourth Quarter
    10.61       8.91       11.99       10.00  
 
(b)           HOLDERS

At March 15, 2015, the Company had 802 shareholders of record of its common stock.  Since many holders’ shares are listed under their brokerage firms’ names, the actual number of shareholders is estimated by the Company to be over 2,000.

(c)           DIVIDENDS

The Company has not adopted any plan or policy with regard to paying dividends.  Future dividend action by its Board of Directors, if any, will be based on the Company’s earnings, projected future earnings, and cash requirements when such dividend action is next considered.
 
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(d)          SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth information as of December 31, 2014 regarding our equity compensation plans:
 
Securities Authorized for Issuance Under Equity Compensation Plans
                     
   
(a)
   
 
   
(c)
 
Plan Category (1)
 
Number of shares
of common stock to
be issued upon
exercise of
outstanding
options, warrants
and rights
   
(b)
Weighted-average
 exercise price of
outstanding
options, warrants
and rights
   
Number of shares of
common stock
remaining available for
future issuance under
equity compensation
plans (excluding shares
in column (a))
 
                   
Equity compensation plans approved by security holders:
                 
 1994 Stock Plan
  250,252     $ 9.64     159,100  
1995 Employee Stock Purchase Plan
            81,669  
                     
Equity compensation plans not approved by security holders:
                   
Stock Option Plan for Non-Employee Consultants and Advisors (2)
  5,000       9.15     162,500  
Total
  255,252             403,269  

(1) The Company does not have individual compensation arrangements involving the granting of options, warrants, rights or restricted stock.

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

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

Not Applicable.

(f)           RECENT SALE OF UNREGISTERED SECURITIES
 
Not Applicable.
 
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(g)          PURCHASES OF EQUITY SECURITIES BY THE ISSUER

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 following table presents shares repurchased for the years ended December 31, 2014 and 2013:
                           
Year ending December 31,
 
Total number of
shares purchased
   
Average
price paid
per share
   
Total number of shares
purchased as part of
publicly announced
plan
   
Remaining Shares available under
plan
 
                         
2013
  809     $ 9.28     809     128,781  
2014
      $         128,781  
Total
  809             809        
The following table sets forth selected consolidated financial data for each of the five fiscal years ended December 31, 2014.  The operating and balance sheet data for the years ended and as of December 31, 2014, 2013, 2012, 2011 and 2010 are derived from our audited consolidated financial statements.  The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and the related notes thereto included elsewhere in this report.

(In thousands except for per share amounts)
                                         
   
Year Ended December 31,
 
OPERATING DATA
 
20142
   
2013
   
2012
   
2011
   
20101
 
                               
Net Revenues
  $ 48,470     $ 46,736     $ 45,461     $ 40,586     $ 39,920  
                                         
Operating Expenses
    44,370       45,003       43,501       39,540       41,197  
                                         
Income (Loss) Before Income Taxes
    4,102       1,736       1,966       1,053       (1,264 )
                                         
Income Tax (Expense) Benefit
    (1,691 )     (720 )     (950 )     (655 )     272  
                                         
Net Income (Loss)
    2,411       1,017       1,016       398       (992 )
                                         
   Basic Net Income (Loss) per Share
  $ 0.58     $ 0.24     $ 0.25     $ 0.10     $ (0.25 )
   Diluted Net Income (Loss) per Share
    0.57       0.24       0.24       0.10       (0.25 )
   Dividends per Share
                0.50              
                                         
Cash Flows from Operating Activities
  $ 4,590     $ 3,544     $ 4,057     $ 3,441     $ 2,984  
 
                                         
   
At December 31,
 
BALANCE SHEET DATA
 
2014
   
2013
   
2012
   
2011
   
2010
 
                               
Land, Buildings and Equipment, Net
  $ 28,076     $ 25,130     $ 22,120     $ 22,776     $ 23,948  
                                         
Total Assets
    39,496       37,113       34,900       34,184       32,648  
                                         
Total Stockholders’ Equity
  $ 30,995     $ 28,265     $ 26,885     $ 27,474     $ 26,546  
                                         
Number of Common Shares Outstanding at Year End
    4,201       4,178       4,148       4,102       4,054  
 
¹ During fiscal year 2010, the Company incurred a non-cash loss on disposal of assets in the amount of $909,540 related to remodeling of our card room.
2 During fiscal year 2014, the Company recorded a $958,000 gain on insurance recoveries from multiple severe storms at the Racetrack.
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Canterbury Park Holding Corporation, our operations, our financial results and financial condition, and our present business environment.  This MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes to the consolidated financial statements (the “Notes”).  Our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in “Risk Factors” and “Forward-Looking Statements” included elsewhere in this Annual Report.

STRATEGIC OVERVIEW

Canterbury Park Holding Corporation (the “Company,” “we,” “our,” or “us”) conducts pari-mutuel wagering operations and hosts “unbanked” card games at its Canterbury Park Racetrack and Card Casino facility (the “Racetrack”) in Shakopee, Minnesota, which is approximately 25 miles southwest of downtown Minneapolis. The Racetrack is the only facility in the State of Minnesota that offers live pari-mutuel thoroughbred and quarter horse racing.

The Company’s pari-mutuel wagering operations include both wagering on thoroughbred and quarter horse races during live meets at the Racetrack each year from May through September and year-round wagering on races held at out-of-state racetracks that are televised simultaneously at the Racetrack (“simulcasting”).  Unbanked card games, in which patrons compete against each other, are hosted in the Card Casino at the Racetrack.  The Card Casino operates 24 hours a day, seven days a week.  The Card Casino offers both poker and table games at up to 80 tables.   The Company also derives revenues from related services and activities, such as concessions, parking, advertising signage, publication sales, and from other entertainment events and activities held at the Racetrack.

The following summarizes our financial performance for the last five years (in 000’s):
 
                                       
Financial Performance Summary
 
20142
   
2013
   
2012
   
2011
   
20101
 
                               
Net Revenues
  $ 48,470     $ 46,736     $ 45,461     $ 40,586     $ 39,920  
                                         
Operating Expenses
    44,370       45,003       43,501       39,540       41,197  
                                         
Income (Loss) Before Income Taxes
    4,102       1,736       1,966       1,053       (1,264 )
                                         
Income Tax (Expense) Benefit
    (1,691 )     (720 )     (950 )     (655 )     272  
                                         
Net Income (Loss)
    2,411       1,017       1,016       398       (992 )

¹ During fiscal year 2010, the Company incurred a $910,000 non-cash loss on disposal of assets related to remodeling of our Card Casino.
2 During fiscal year 2014, the Company recorded a $958,000 gain on insurance recoveries from multiple severe storms at the Racetrack.

The primary strengths of Canterbury Park are our dedicated and capable staff, our first-class facilities located on 392 acres of land (including approximately 200 acres of underutilized property) and the legal authority to offer our unique gaming products in our market area.

Our management team has extensive knowledge of the horse racing, Card Casino, and concession operations, and our staff has demonstrated a commitment to enhancing the customer experience.  The Company believes that management has a good relationship with our workforce and is able to retain qualified personnel as demonstrated by our low turnover rate.
 
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Our facilities are modern by racetrack industry standards, and we have invested heavily in the past few years to update and upgrade them to meet the needs of our customers and horsemen.  Our 392-acre site, in a prime location on the edge of the Minneapolis–St. Paul metropolitan area in one of the fastest-growing counties in Minnesota, provides us with great long-term growth and development opportunities, and our Board of Directors regularly considers additional uses for underutilized portions of our property.  Our long-term strategic direction is to more fully develop our property as a unique gaming and entertainment destination.

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

OPERATIONS REVIEW

YEAR ENDED DECEMBER 31, 2014 COMPARED TO YEAR ENDED DECEMBER 31, 2013

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 has been 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.  During the year ended December 31, 2014, adjusted EBITA excluded the gain on insurance recovery from multiple severe storms at the Racetrack.

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 years ended December 31, 2014 and 2013:3
 
SUMMARY OF EBITDA DATA
                 
 
Year Ended December 31,
 
 
2014
 
2013
 
NET INCOME
  $ 2,411,155     $ 1,016,712  
Interest income
    (2,407 )     (2,684 )
Income tax expense
    1,691,177       719,781  
Depreciation
    2,137,778       1,861,702  
EBITDA
    6,237,703       3,595,511  
Gain on insurance recoveries
    (957,597 )      
ADJUSTED EBITDA
  $ 5,280,106     $ 3,595,511  
 
Adjusted EBITDA increased $1,685,000, or 46.9%, and also increased as a percentage of net revenues to 10.9% from 7.7% for the year ended December 31, 2014 compared to the same period in 2013.   

REVENUES

Total net revenues for the year ended December 31, 2014 were $48,470,000, an increase of $1,734,000, or 3.7%, compared to total net revenues of $46,736,000 for the year ended December 31, 2013. Total Card Casino revenue increased 5.8%, concession revenue increased 7.7% and total pari-mutuel revenue decreased 8.8% in 2014 compared to 2013.  See below for a further discussion of our sources of revenues.
 
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SUMMARY OF PARI-MUTUEL DATA
           
             
   
Year Ended December 31,
 
Racing Days
 
2014
   
2013
 
     Simulcast only racing days
    295       294  
     Live and simulcast racing days
    68       69  
Total Number of Racing Days
    363       363  
                 
On-Track Handle
               
     Simulcast handle on simulcast only racing days
  $ 22,322,000     $ 24,476,000  
     Simulcast handle on live racing days
    9,269,000       9,758,000  
       Total simulcast handle
    31,591,000       34,234,000  
                 
Live racing handle
    12,299,000       13,299,000  
              Total On-Track Handle
    43,890,000       47,533,000  
                 
Out-of-state Live Handle
    24,643,000       24,412,000  
     Total Handle
  $ 68,533,000     $ 71,945,000  

Pari-mutuel revenues also include commission and breakage revenues on live on-track and simulcast racing, fees received from out-of-state racetracks for wagering on our live races and proceeds from unredeemed pari-mutuel tickets.  Pari-mutuel revenues decrease $986,000, or 8.8%, to $10,193,000 in 2014 from $11,179,000 in 2013, primarily reflecting a decrease in total amount wagered (“handle”) in 2014 of $3,412,000, or 4.7%, compared to 2013. The primary factors contributing to these decreases are discussed in the following paragraphs.

Total handle wagered on simulcast races in 2014 decreased $2,643,000, or 7.7%, compared to 2013. The decrease is primarily attributable to NMHI resuming simulcast of thoroughbred and quarter horse races during 2014 and increased internet wagering on horse racing.

During 2013, the Company reevaluated the likelihood of redemption relating to outstanding vouchers, and, through this assessment, the Company decreased the projected redemption rate.  For 2013, the change in accounting estimate decreased our liability for outstanding pari-mutuel vouchers and increased pari-mutuel revenue in our consolidated statements of operations for the period by approximately $412,000 (pre-tax difference), increasing income from operations by this amount as well.  For the years ended December 31, 2014 and 2013, the Company recognized revenue from unredeemed pari-mutuel ticket vouchers in the amount of $327,000 and $663,000, respectively.
 
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CARD CASINO REVENUES
 
 
 
 
 
           
   
Year Ended December 31,
 
   
2014
 
2013
 
Poker Games
  $ 9,838,000   $ 9,844,000  
Table Games
    14,592,000     12,805,000  
     Total Collection Revenue
    24,430,000     22,649,000  
Other Revenue
    2,600,000     2,897,000  
    Total Card Casino Revenue
  $ 27,030,000   $ 25,546,000  
 
The primary source of Card Casino revenue is a percentage of the wagers received from the players as compensation for providing the Card Casino facility and services, referred to as “collection revenue”.  Other Revenue presented above includes fees collected for the administration of tournaments and amounts earned as reimbursement of the administrative costs of maintaining jackpot funds.  Card Casino revenue represented 55.8% and 54.7% of the Company’s net revenues for the years ended December 31, 2014 and 2013, respectively.

Total Card Casino revenue increased $1,484,000, or 5.8%, compared to 2013.  Table games collection revenue increased $1,787,000, or 14.0%, in 2014 compared to 2013. Poker revenue had a slight decrease $6,000, or 0.1%, in 2014 over 2013.    The Company believes these increases in table games collection revenue were due to the increased effectiveness of our new customer relationship management system, which was installed in late 2013, and the optimization of the various types of table games the Company offered in 2014.

CONCESSION REVENUES

Concessions revenue increased $501,000, or 7.7% for the year ended December 31, 2014 compared to 2013.  The changes 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.

OTHER REVENUES

Other revenue increased $653,000, or 17.2%, to $4,445,000 in fiscal year 2014 compared to 2013.  This increase was due primarily to an increase in admissions and special events revenue.

OPERATING EXPENSES

Total operating expenses decreased approximately $633,000, or 1.4%, to $44,370,000 in 2014, from $45,003,000 in 2013.  Total operating expenses as a percentage of net revenues decreased to 91.5% from 96.3% in 2013.  The primary factors contributing to these decreases are discussed in the following paragraphs.

Total purse expense decreased $31,000, or 0.5%, in 2014 compared to 2013 due to a decrease in live racing and simulcast pari-mutuel revenue partially offset by an increase in purse expense derived from Card Casino revenue.  These factors also caused an overall decrease in MBF expense, as shown in the table below:
                           
           
Minnesota Breeders’
 
   
Purse Expense
 
Fund Expense
 
   
2014
 
2013
 
2014
 
2013
 
                   
Card Casino
  $ 3,190,000   $ 3,003,000   $ 354,000   $ 333,000  
Simulcast Racing
    1,789,000     1,860,000     354,000     385,000  
Live Racing
    1,305,000     1,452,000     123,000     133,000  
Total
  $ 6,284,000   $ 6,315,000   $ 831,000   $ 851,000  
 
Under Minnesota law, the Company is required to pay 10% of the first $6 million of gross Card Casino revenues towards purses for live horse racing at the Racetrack.  After meeting the $6 million threshold, the Company must pay 14% of gross Card Casino revenues as purse monies.  Of funds allocated for purses, the amounts paid are allocated 90% to the purse funds and 10% to the MBF.
 
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The Company experienced a decrease in other pari-mutuel expenses of $61,000, or 3.7%, in 2014 compared to 2013 primarily as a result of the Company’s handle being down.

Salaries and benefits expense decreased $195,000, or 1.0%, for the year ended December 31, 2014 compared to the year ended December 31, 2013.  The decreases are primarily due to a reduction in hours worked and reduction in associated payroll taxes partially offset by the increase of the minimum wage that went into effect on August 1, 2014.

Depreciation expense increased $276,000, or 14.8%, in 2014 compared to 2013.  The increase is a result of additions to buildings and equipment including the new Expo and Event Center.

Advertising and marketing costs increased $174,000, or 10.1%, in 2014 compared to 2013.  The increases are primarily attributable to the increased expenditures funded by payments under the CMA for joint marketing, including the launch of the RiverSouth campaign, an area wide marketing initiative designed to increase visitors to Shakopee’s entertainment, hospitality and retail businesses.

During 2014, the Company incurred damage to buildings from multiple severe storms at the Racetrack and received $988,000 in total insurance proceeds. As of December 31, 2014, the Company recognized a $958,000 insurance recoveries gain in the Consolidated Statements of Operations as “Gain on insurance recoveries”.  The storms did not cause any material interruptions to the business or impact on the Company’s consolidated financial results of operations. Based on future events, the Company may receive additional insurance proceeds.  The Company has concluded that these additional funds represent contingent gains and in accordance with U.S. GAAP, have not been accounted for them in the Company’s 2014 consolidated financial statements.

Other operating expenses increased $154,000, or 1.9%, in 2014 compared to 2013.  The increases are primarily due to increased professional fees related to racing and compliance initiatives.

Net income for the year ended December 31, 2014 was $2,411,000 compared to net income of $1,017,000 for the year ended December 31, 2013 an increase of $1,394,000, or 137.1%. The increase is primarily due stronger Card Casino revenue, operational efficiencies and a gain on insurance recovery from multiple severe storms at the Racetrack in 2014.
 
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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.

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:

Property and Equipment - We have significant capital invested in our property and equipment, which represents approximately 71.1% of our total assets at December 31, 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 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.  The Company employs a large number of individuals who received an hourly wage equal to or slightly above $7.25 per hour, prior to August 1, 2014, this legislation had an adverse effect in 2014 and will continue to have an adverse effect in 2015 and beyond.  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.  Also, 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 CMA, this is achieved through “Purse Enhancement Payments to Horsemen”, paid directly to the MHBPA. Such payments have no direct impact on the Company’s consolidated financial statements or operations.
 
Under the terms of the CMA, the SMSC paid the horsemen $5.8 million and $5.3 million for purse enhancements for the years ended December 31, 2014 and 2013, respectively.
 
Under the CMA, SMSC also agreed to make “Marketing Payments” to the Company relating to joint marketing efforts for the mutual benefit of the Company and SMSC, including signage, joint promotions, player benefits and events.  Under the CMA, the SMSC paid the Company $660,000 and $600,000 for marketing purposes for the years ended December 31, 2014 and 2013, respectively.
 
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Effective January 2015, the CMA was amended to adjust the payment amounts between the “Purse Enhancement Payments to Horsemen” and “Marketing Payments to Canterbury Park.”  Under the CMA as amended, SMSC agreed to make the following purse enhancement and marketing payments for 2015 through 2022:
           
Year
 
Purse Enhancement Payments to1
Horsemen
 
Marketing Payments to Canterbury
Park
2015
  $6,316,200      $943,800
2016
    6,947,820     1,038,180
2017
    7,642,602     1,141,998
2018
    7,830,000     1,170,000
2019
    7,830,000     1,170,000
2020
    7,830,000     1,170,000
2021
    7,830,000     1,170,000
2022
    7,830,000     1,170,000
           
1 - Includes $100,000 each year to various horsemen associations
           
 The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s consolidated statements of operations.  For the year ended December 31, 2014, the Company recorded $824,842 in other revenue and incurred $608,309 in advertising and marketing expense and $216,533 in depreciation related to the SMSC marketing payment.  For the year ended December 31, 2013, the Company recorded $595,628 in other revenue and incurred $490,072 in advertising and marketing expense and $105,556 in depreciation related to the SMSC marketing payment.  The excess of amounts received over revenue 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 granted 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 December 31, 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 the grant price.  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 year ended December 31, 2014, the Company recognized $32,354 of expense related to these stock appreciation rights, of which $32,354 was recorded as an offset to other revenue.   For the year ended December 31, 2013, the Company recognized $227,592 of expense related to these stock appreciation rights, of which $227,592 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.

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.
 
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 Additionally, the Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community which became effective on June 4, 2012, and was amended in January 2015. The CMA contains certain covenants which, if breached, would trigger an obligation to repay a specified amount related to such covenant. At this time, management believes that the likelihood that the breach of a covenant will occur and that the Company will be required to pay the specified amount related to such covenant is remote.

The Company is periodically involved in various claims and legal actions arising in the normal course of business. Management believes that the resolution of any pending claims and legal actions at December 31, 2014 and as of the date of this report will not have a material impact on the Company’s consolidated financial position or results of operations.

The Company has committed to payment of statutory distributions under a $500,000 bond issued to the Minnesota Racing Commission as required by Minnesota statute. The Company was not required to make any payments related to this bond in 2014 or 2013, and there is no liability related to this bond on the balance sheet as of December 31, 2014.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS FROM OPERATING ACTIVITIES

Cash provided by operating activities for the year ended December 31, 2014 was $4,590,111 primarily as a result of the following: The Company reported net income of $2,411,155, which included a gain from insurance recoveries of $958,000 and depreciation of $2,137,778. The Company also experienced a decrease in accounts payable and accrued wages and payroll taxes of $532,739 and income taxes receivable of $727,477.

Net cash provided by operations during the year ended December 31, 2013 was $3,543,919 primarily as a result of the following: The Company reported net income of $1,016,712 and depreciation of $1,861,702. In addition, deferred income taxes increased by $563,601 in 2013 when compared to 2012 and restricted cash decreased by $466,786. These amounts were partially offset by an increase in income taxes receivable of $328,819 and a decrease in due to MHBPA of $533,826 compared to 2012.

CASH FLOWS FROM INVESTING ACTIVITIES

Net cash used in investing activities for the year ended December 31, 2014 of $4,669,269 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. The capital purchases were partially offset by the proceeds received from insurance claims in the amount of $988,597. For the year ended December 31, 2013, net cash used in investing activities was $4,283,018 and was used primarily for the purchase of technology upgrades and enhancements, including digital signage and customer relationship management equipment, and building improvements.

CASH FLOWS FROM FINANCING ACTIVITIES

Net cash provided by financing activities for the year ended December 31, 2014 was $101,874 and primarily consisted of $93,979 of proceeds received upon the issuance of common stock through the Employee Stock Purchase Plan.

Cash provided by financing activities was $93,325 for the year ended December 31, 2013 and consisted primarily of $102,727 of proceeds received upon the exercise of stock-based awards and from the exercise of shares of common stock purchased by employees pursuant to our Employee Stock Purchase Plan, partially offset by $7,509 of common stock repurchases.

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Non-cash investing activities for the years ended December 31, 2014 and 2013 were $46,157 and $589,229, respectively, and consisted of additions to buildings and equipment that are recorded in “Accounts Payable” on the Consolidated Balance Sheets.  The increase in 2013 is primarily due to the implementation of the Company’s customer relationship management system during the fourth quarter of 2013 with the cash disbursements occurring in 2014.
 
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CASH AND CAPITAL RESOURCES

At December 31, 2014, we had cash and cash equivalents of $8,761,925 compared to $8,739,209 at December 31, 2013. This $22,716 increase consisted of $4,669,269 of net cash used in investing activities partially offset by $4,590,111 of net cash provided by operating activities and $101,874 of net cash provided by financing activities.

As of December 31, 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 year ended December 31, 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 year ended December 31, 2014.

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 offers unbanked table games that refer to a wagering system or game where wagers “lost” or “won” by the host are accumulated into a player pool liability for purposes of enhancing the total amount paid back to players in any other card game. The Company is required to return accumulated player pool funds to the players through giveaways, promotional items, prizes or by other means. The player pool liability was $556,000 and $575,000 at December 31, 2014 and 2013, respectively.

The Card Casino offers progressive jackpots for poker games. Amounts collected for these jackpot funds are accrued as liabilities until paid to winners. At December 31, 2014 and 2013, accrued jackpot funds totaled $134,000 and $205,000, respectively. The Minnesota Racing Commission (“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 $260,000 and $243,000 at December 31, 2014 and 2013, respectively. This liability has the potential for significant fluctuation on a daily basis depending upon the demand for chip redemptions and sales.

Our second largest individual operating expense item is purse expense. Pursuant to an agreement with the MHBPA, we transferred into a trust account or paid directly to the MHBPA, approximately $5,850,000 and $6,325,000 in purse funds related to thoroughbred races for the years ended December 31, 2014 and 2013, respectively. Minnesota Statutes specify that amounts transferred into trust are the property of the trust and not the Company. There were no unpaid purse fund obligations due to the MHBPA at December 31, 2014 or 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 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 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. The amounts charged to operations for totalizator expenses for the years ended December 31, 2014 and 2013 were $226,000 and $225,000, respectively.

        The Company has entered into operating leases for rental of office equipment and for track equipment to maintain the Racetrack. Amounts charged to operations under these agreements for the years ended December 31, 2014 and 2013 were $140,000 and $130,000, respectively. All such leases expire in or before February 2018.
 
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Since December 31, 2014, there have been no material changes outside the ordinary course of business to our contractual obligations as set forth above. As of December 31, 2014, 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, 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 31 through 51 of the Form 10-K:
 
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Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders

Canterbury Park Holding Corporation

 

We have audited the accompanying consolidated balance sheet of Canterbury Park Holding Corporation and Subsidiaries (the Company) as of December 31, 2014 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the year then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit 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 audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

 

/s/ Wipfli LLP

 

Minneapolis, Minnesota

March 27, 2015


 


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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 sheet of Canterbury Park Holding Corporation (a Minnesota corporation) and subsidiaries (the “Company”) as of December 31, 2013, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year ended December 31, 2013.  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 audit.

We conducted our audit 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.  We were not engaged to perform an audit of the Company’s 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 audit 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, 2013, and the results of their operations and their cash flows for the year ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Grant Thornton LLP

Minneapolis, Minnesota
March 30, 2014
 
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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2014 AND 2013
                 
   
2014
   
2013
 
ASSETS
           
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 8,761,925     $ 8,739,209  
Restricted cash
    1,069,181       1,139,003  
Short-term investments
    204,525       203,902  
Accounts receivable, net of allowance of $22,294 and $40,268, respectively
    192,674       338,971  
Inventory
    231,545       244,281  
Prepaid expenses
    541,822       624,553  
Due from Minnesota horsemen associations
    125,828       2,355  
Deferred income taxes (Note 3)
    265,900       333,300  
Income taxes receivable
          330,672  
Total current assets
    11,393,400       11,956,246  
                 
LONG-TERM ASSETS
               
Deposits
    26,400       26,400  
Land, buildings and equipment, net (Note 2)
    28,075,879       25,129,986  
TOTAL ASSETS
  $ 39,495,679     $ 37,112,632  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable
  $ 2,174,466     $ 3,502,871  
Card Casino accruals
    1,401,336       1,546,123  
Accrued wages and payroll taxes
    1,198,705       946,111  
Accrued property taxes
    653,385       650,797  
Payable to horsepersons
    211,571       8,201  
Income taxes payable
    388,910        
Total current liabilities
    6,028,373       6,654,103  
                 
LONG-TERM LIABILITIES
               
Deferred income taxes (Note 3)
    1,972,400       1,726,100  
Stock appreciation rights (Note 5)
    499,734       467,380  
Total long-term liabilities
    2,472,134       2,193,480  
TOTAL LIABILITIES
    8,500,507       8,847,583  
                 
STOCKHOLDERS’ EQUITY (Notes 4 and 5)
               
Common stock, $.01 par value, 10,000,000 shares authorized, 4,201,371 and 4,177,951, respectively, shares issued and outstanding
    42,013       41,779  
Additional paid-in capital
    17,589,349       17,270,615  
Retained earnings
    13,363,810       10,952,655  
Total stockholders’ equity
    30,995,172       28,265,049  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 39,495,679     $ 37,112,632  

See notes to consolidated financial statements.
 
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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2014 AND 2013
                 
   
2014
   
2013
 
OPERATING REVENUES:
           
Pari-mutuel
  $ 10,193,239     $ 11,179,285  
Card Casino
    27,029,750       25,546,328  
Concessions
    6,971,222       6,470,088  
Other
    4,445,210       3,792,471  
Total Revenues
    48,639,421       46,988,172  
Less: Promotional allowances
    (169,584 )     (251,735 )
Net Revenues
    48,469,837       46,736,437  
                 
OPERATING EXPENSES:
               
Purse expense
    6,283,788       6,314,867  
Minnesota Breeders’ Fund
    831,063       851,482  
Other pari-mutuel expenses
    1,575,154       1,635,663  
Salaries and benefits
    19,648,677       19,843,631  
Cost of concession and other sales
    3,497,938       3,499,312  
Depreciation
    2,137,778       1,861,702  
Utilities
    1,333,141       1,326,179  
Advertising and marketing
    1,901,646       1,728,192  
Gain on disposal of assets
    (500 )     (23,752 )
Gain on insurance recoveries (Note 14)
    (957,597 )      
Other operating expenses
    8,118,824       7,965,352  
Total Operating Expenses
    44,369,912       45,002,628  
INCOME FROM OPERATIONS
    4,099,925       1,733,809  
                 
OTHER INCOME
               
Interest income
    2,407       2,684  
                 
INCOME BEFORE INCOME TAXES
    4,102,332       1,736,493  
                 
INCOME TAX EXPENSE (Note 3)
    (1,691,177 )     (719,781 )
                 
NET INCOME
  $ 2,411,155     $ 1,016,712  
                 
NET INCOME PER COMMON SHARE DATA (Note 6):
               
Basic
  $ 0.58     $ 0.24  
Diluted
  $ 0.57     $ 0.24  

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, 2014 AND 2013
                                         
   
Number of
Shares
   
Common
Stock
   
Additional
Paid-in Capital
   
Retained
Earnings
   
Total
 
                               
Balance at December 31, 2012
    4,147,743     $ 41,477     $ 16,903,245     $ 9,940,216     $ 26,884,938  
                                         
Exercise of stock options
    5,515       55       39,300             39,355  
Stock-based compensation
                270,074             270,074  
Tax expense from exercise of stock-based awards
                (1,893 )           (1,893 )
Common stock repurchases
    (809 )     (8 )     (3,228 )     (4,273 )     (7,509 )
Issuance of restricted stock
    18,290       183       (183 )            
Shares issued under Employee Stock Purchase Plan
    7,212       72       63,300             63,372  
Net income
                      1,016,712       1,016,712  
                                         
Balance at December 31, 2013
    4,177,951     $ 41,779     $ 17,270,615     $ 10,952,655     $ 28,265,049  
                                         
Exercise of stock options
    2,000       20       13,120             13,140  
Stock-based compensation
                217,094             217,094  
Tax benefit from exercise of stock-based awards
                7,895             7,895  
Issuance of restricted stock
    13,040       130       (130 )            
Shares issued under Employee Stock Purchase Plan
    8,380       84       80,755             80,839  
Net income
                      2,411,155       2,411,155  
                                         
Balance at December 31, 2014
    4,201,371     $ 42,013     $ 17,589,349     $ 13,363,810     $ 30,995,172  

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, 2014 AND 2013
                 
   
2014
   
2013
 
Operating Activities:
           
Net income
  $ 2,411,155     $ 1,016,712  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    2,137,778       1,861,702  
Stock-based compensation expense
    217,094       270,074  
Stock appreciation rights
    32,354       227,592  
Deferred income taxes
    313,700       563,601  
Tax expense (benefit) from exercise of stock-based awards
    (7,895 )     1,893  
Gain on disposal of assets
    (500 )     (23,752 )
Gain on insurance proceeds
    (957,597 )      
(Increase) decrease in cash resulting from changes in operating assets:
               
Restricted cash
    69,822       466,786  
Accounts receivable
    146,297       73,469  
Other current assets
    95,467       (167,763 )
Income taxes receivable/payable
    727,477       (328,819 )
Increase (decrease) in cash resulting from changes in operating liabilities:
               
Accounts payable and accrued wages and payroll taxes
    (532,739 )     63,360  
Card Casino accruals
    (144,787 )     66,454  
Accrued property taxes
    2,588       1,610  
Payable to horsepersons
    203,370       (15,174 )
Due from MHBPA
    (123,473 )     (533,826 )
Net cash provided by operating activities
    4,590,111       3,543,919  
                 
Investing Activities:
               
Additions to buildings and equipment
    (5,657,743 )     (4,311,011 )
Proceeds from sale of assets
    500       28,700  
Proceeds from insurance claims
    988,597        
Purchase of investments
    (623 )     (707 )
Net cash used in investing activities
    (4,669,269 )     (4,283,018 )
                 
Financing Activities
               
Common stock repurchases
          (7,509 )
Proceeds from issuance of common stock
    93,979       102,727  
Tax benefit (expense) from exercise of stock-based awards
    7,895       (1,893 )
Net cash provided by financing activities
    101,874       93,325  
                 
Net increase (decrease) in cash and cash equivalents
    22,716       (645,774 )
                 
Cash and cash equivalents at beginning of year
    8,739,209       9,384,983  
                 
Cash and cash equivalents at end of year
  $ 8,761,925     $ 8,739,209  
                 
Supplemental disclosure of non-cash investing and financing activities:
               
Additions to buildings and equipment funded through accounts payable
  $ 46,157     $ 589,229  
Supplemental disclosure of cash flow information:
               
Income taxes paid, net of refunds
  $ 650,000     $ 485,000  
 
See notes to consolidated financial statements.
 
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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES
 
YEARS ENDED December 31, 2014 AND 2013
 
1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business – Canterbury Park Holding Corporation (the “Company”) was incorporated on March 24, 1994 and conducts pari-mutuel wagering operations and hosts “unbanked” card games at its Canterbury Park Racetrack and Card Casino facility (the “Racetrack”) in Shakopee, Minnesota.

The Company’s pari-mutuel wagering operations include both wagering on thoroughbred and quarter horse races during live meets at the Racetrack each year from May until September and year-round wagering on races held at out-of-state racetracks that are televised simultaneously at the Racetrack (“simulcasting”).  Unbanked card games, in which patrons compete against each other, are hosted in the Card Casino at the Racetrack.  The Card Casino operates 24 hours a day, seven days a week.  The Card Casino offers both poker and table games at up to 80 tables.   The Company also derives revenues from related services and activities, such as concessions, parking, advertising signage, publication sales and from other entertainment events and activities held at the Racetrack.

The consolidated financial statements include the accounts of the Company, Canterbury Park Concessions, Inc. (CPC), and Shakopee Valley RV Park Acquisition Company, LLC after elimination of intercompany accounts and transactions.

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 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. 

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. 

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 December 31, 2014 and 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 December 31, 2014 and 2013.  Amortized cost approximated fair value for both periods. 
 
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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 and vouchers upon the completion of a race and when a voucher is printed, respectively.  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.

During 2013, the Company reevaluated the likelihood of redemption relating to outstanding vouchers and through this assessment, the Company decreased the projected redemption rate.  The Company has determined that this adjustment to the likelihood of redemption relating to vouchers is a change in accounting estimate and has accounted for the change prospectively; i.e. the accounting change impacts interim reporting periods within fiscal year 2013 and future periods.  For the year ended December 31, 2013, the change in accounting estimate decreased the Company’s liability for outstanding pari-mutuel vouchers and increased pari-mutuel revenue in its consolidated statements of operations for the period by approximately $412,286 (pre-tax difference), increasing income from operations by this amount as well.  Net income increased approximately $239,150 (after taking income taxes into account), or by approximately $0.06 net income per basic and diluted common share.
 
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 $5,850,000 and $6,325,000 for the years ended December 31, 2014 and 2013, 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 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 December 31, 2014. 
 
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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 years ended December 31, 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.

Fair Values 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. For more information on the Company’s stock-based compensation plans, see Note 5.

Recent Accounting Pronouncement – In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which explicitly requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. Management will be required to assess, in each interim and annual period, if there is substantial doubt of an entity’s ability to continue as a going concern as evidenced by relevant known or knowable conditions including an entity’s ability to meet its future obligations. Management will be required to provide disclosures regardless of whether substantial doubt is alleviated by management’s plans. The guidance will become effective for annual fiscal periods ending after December 15, 2016.
 
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In May, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a new comprehensive standard for revenue recognition that is based on the core principle that revenue be recognized in a manner that depicts 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.

2.
LAND, BUILDINGS AND EQUIPMENT

Land, buildings and equipment, at cost, consist of the following at December 31, 2014 and 2013
                 
   
2014
   
2013
 
Land
  $ 6,673,076     $ 6,673,076  
Buildings and building improvements
    26,522,813       22,107,644  
Furniture and equipment
    18,890,728       18,663,552  
      52,086,617       47,444,272  
Accumulated depreciation
    (24,010,738 )     (22,314,286 )
    $ 28,075,879     $ 25,129,986  
 
3.      INCOME TAXES

A reconciliation between income taxes computed at the statutory federal income tax rate and the effective tax rate for the years ended December 31, 2014 and 2013 is as follows:
                 
   
2014
   
2013
 
Federal tax expense at statutory rates
  $ 1,394,793     $ 587,367  
Nondeductible lobbying expense
    29,518       29,115  
State expense, net of federal impact
    280,263       128,146  
Stock option expense
    (364 )     12,465  
Other
    (13,033 )