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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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: 0-24554
CANTERBURY PARK HOLDING CORPORATION
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(Name of small business issuer in its charter)
Minnesota 41-1775532
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1100 Canterbury Road
Shakopee, MN 55379
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (612) 445-7223
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES x NO
-------- --------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. |X|
The Company's operating revenues for its most recent fiscal year were
$19,195,577.
On March 12, 1999, the Company had 3,064,492 shares of common stock, $.01 par
value, outstanding.
The aggregate market value of the shares of voting stock held by non-affiliates
of the Company (persons other than directors and officers) computed at the
NASDAQ closing price of $6.625 per share on March 12, 1999 was approximately
$8,841,000.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for its 1999 Annual Meeting of Shareholders, to be
held on June 3, 1999, is incorporated by reference into Part III of this Form
10-KSB.
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CANTERBURY PARK HOLDING CORPORATION
FORM 10-KSB ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I
<S> <C> <C>
ITEM 1. Description of Business............................................................... 3
ITEM 2. Description of Property............................................................... 10
ITEM 3. Legal Proceedings..................................................................... 12
ITEM 4. Submission of Matters to a Vote of Security Holders................................... 12
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters.............................. 13
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................................ 14
ITEM 7. Financial Statements.................................................................. 19
ITEM 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure......................................................... 34
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act........................................... 34
ITEM 10. Executive Compensation................................................................ 34
ITEM 11. Security Ownership of Certain Beneficial Owners and Management........................ 34
ITEM 12. Certain Relationships and Related Transactions........................................ 34
ITEM 13. Exhibits and Reports on Form 8-K...................................................... 34
SIGNATURES ....................................................................................... 35
EXHIBIT INDEX..................................................................................... 36
</TABLE>
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Item 1. DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT
Canterbury Park Holding Corporation (the "Company") is engaged in the
business of conducting live Thoroughbred and Quarter Horse racing and related
pari-mutuel wagering operations at its facilities in Shakopee, Minnesota (the
"Racetrack"), as well as in conducting "simulcasting", which is pari-mutuel
wagering on races held at out-of-state racetracks that are televised
simultaneously at the Racetrack. The Company also derives revenues from
related services and activities, such as concessions, parking, admissions and
programs, and from other entertainment events held at the Racetrack.
The Company was incorporated under the laws of Minnesota on March 24,
1994 and on March 29, 1994 acquired the Racetrack. On May 6, 1994 the Company
commenced simulcasting operations. In August 1994 the Company conducted a public
offering. With the proceeds from the public offering the Company retired debt
associated with its acquisition of the Racetrack. Since May 6, 1994 the Company
has been principally engaged in conducting its year-round simulcasting
operations, five to seven days per week and live horse racing ("live meets") on
a seasonal basis, generally from late May to mid-August.
(b) BUSINESS OF ISSUER
(i) RACING OPERATIONS
The Company's racing operations consist of year-round pari-mutuel
wagering on simulcast horse races ("simulcasting") and live meets held on a
seasonal basis beginning in May and concluding in August. Thoroughbred and
Quarter Horse racing is conducted during the live meet. The Company also
conducted three-day live harness racing meets over the 1997 and 1998 Labor Day
weekends.
SIMULCASTING.
Simulcasting is the process by which live horse races held at one
facility (the "host track") are transmitted simultaneously to other locations
that allow patrons at each receiving location (the "guest track") to place
wagers on the race being broadcast. Monies are collected at the guest track and
the information with respect to the total amount wagered is electronically
transmitted to the host track. In effect, all of the amounts wagered at the
guest track are combined into the appropriate pools at the host track with the
final odds and payouts determined based upon all the monies in the pools.
Throughout the year the Company offers simulcast wagering from
out-of-state racetracks, generally seven days a week. The Company offers "full
card" simulcast racing (broadcasting of another racetrack's entire daily live
racing program) from a number of racetracks, including Churchill Downs,
Hollywood Park, Santa Anita, Gulfstream Park, Belmont Park and Saratoga
Racecourse. In addition, races of national interest, such as the Kentucky Derby,
Preakness Stakes and 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 which is feasible
to offer at the Racetrack.
Under applicable provisions of federal and state law, the Racetrack
must obtain the consent of the organization which represents the owners and
trainers of the breed of horse which predominately races at the Racetrack with
respect to simulcast operations both as a host and guest track. In Minnesota
such consent must be obtained from the Minnesota Horsemen's Benevolent and
Protective Association (the "MHBPA").
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LIVE RACING.
The Company conducted its first year of live racing in 1995 by
operating 55 days of live horse racing. The Company hosted a 51-day live meet in
1996 and a 56-day live meet, including three days of live harness racing, in
1997. The Company conducted 55 days of live racing in 1998, consisting of a
24-day mixed meet of Thoroughbred and Quarter Horse racing, a 28-day
Thoroughbred only meet, and three days of live harness racing over the Labor Day
weekend. In 1999, the Company plans to conduct 56 days of live racing,
consisting of a 26 days of mixed Thoroughbred and Quarter Horse racing, and a
30-day Thoroughbred only meet. Post times on Thursdays and Fridays will be 6:30
pm and 1:30 pm on Saturdays, Sundays and holidays.
Currently, Minnesota law requires the Racetrack to schedule a minimum
of 125 days of live racing annually, unless the MHBPA agrees to a lesser number
of live racing days. The MHBPA has agreed to waive the 125-day requirement for
years 1995 through 1999 and allow the Company to run a minimum of 50 days of
live racing each year. After 1999, no assurance can be given that the MHBPA will
agree to a shorter live meet than the 125-day statutory minimum.
(ii) SPECIAL EVENTS
While pari-mutuel horse racing is the Company's principal business, the
Company's facilities are capable of being used for multiple purposes. In an
effort to more fully utilize the property and to generate additional revenues,
the Company has, in each year of its operations, expanded the use of the
grandstand, grounds and parking lot for special events and rentals.
From 1996 through 1998, a number of non-horseracing events were held,
including snowmobile races, two major arts and crafts shows per year, trade
shows, concerts, motorcycle races, fund raisers, automobile shows and
competitions and private parties. Lilith Fair, an outdoor music event, came to
Canterbury Park in August of 1997 and 1998, each year drawing over 30,000 people
to the Racetrack. Two additional major concerts were conducted in September of
1998. In 1997 and 1998 Canterbury Park hosted Holiday in Lights during the
holiday season which consisted of a drive-through light display, located in and
around the barn area, and a Santa's Village on the track level of the
grandstand.
To date in 1999, the facility has again hosted two snowmobile races.
Canterbury Park maintains a reputation as one of the premier snowmobile racing
venues in the world.
(iii) SOURCES OF REVENUE
GENERAL.
The Company's revenues are principally derived from pari-mutuel
wagering. 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 amount wagered or "handle," 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 the Racetrack's primary source of
operating revenue. From the takeout, funds are paid to the State of Minnesota
for pari-mutuel taxes, with additional amounts set aside for purses and for the
"Breeders' Fund," which is a fund apportioned by the Minnesota Racing Commission
("Racing Commission") among various purposes related to Minnesota's horse
breeding and horse racing industries. 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" (a wager on one specific horse to finish first); "place" (a wager on one
specific horse to finish first or second); and "show" (a wager on one specific
horse to finish first, second or third). Examples of exotic wagers include:
"daily double" (a wager in which the bettor selects the horses that will win two
consecutive races); "exacta"
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(a wager in which the bettor selects the horses that will finish first and
second, in order); "trifecta" (a wager in which the bettor selects the horses
that will finish first, second and third, in order); and "pick six" (a wager in
which the bettor selects the horses that will finish first in six consecutive
races).
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
Breeders' Fund 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 is calculated as a percentage of
monies wagered (generally 2.50% to 4.50%) and is negotiated with the host track
and must comply with state laws governing the host track.
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 Breeders' Fund.
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. The
Breeders' Fund receives 1% of the handle. The pari-mutuel tax applicable to
wagering on all 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 sets forth the percentage distribution of each
dollar wagered on live races at the Racetrack, as established by the Racing Act,
and the Racetrack's retainage:
<TABLE>
<CAPTION>
LIVE RACING
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STRAIGHT EXOTIC
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<S> <C> <C>
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) .10 .14
Racetrack Retainage (1) 7.50 13.46
Total Takeout 17.00 23.00
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Total Handle 100.00% 100.00%
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</TABLE>
(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.
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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
established 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 Breeders' Fund 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 an 8% expense factor, pari-mutuel taxes, payments to the
Breeders' Fund and host fee payments to the host racetrack.
The following table sets forth the approximate percentage distribution
of each dollar wagered for races simulcast at the Racetrack and the Racetrack's
retainage:
<TABLE>
<CAPTION>
DURING RACING SEASON
--------------------
Not Concurrent
Concurrent with with Outside of
Live Card Live Card Racing Season
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<S> <C> <C> <C>
Returned to Winning Patrons (1) 80.50% 80.50% 80.50%
Minnesota Breeders' Fund 1.00% 1.10% 1.10%
Minnesota Pari-Mutuel Taxes (2) .12 .12 .12
Purse (3) 8.40 7.39 1.70
Host Track Fees (4) 3.50 3.50 3.50
Racetrack Retainage (3) 6.48 7.39 13.08
Total Takeout 19.50 19.50 19.50
------------------ ----------------- ---------------
Total Handle 100.00% 100.00% 100.00%
------------------ ----------------- ---------------
------------------ ----------------- ---------------
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</TABLE>
(1) This amount will depend upon the takeout at the host racetrack. This
percentage will be 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.
(3) Although Minnesota law specifies a minimum, the actual percentage is
determined by agreement between the Racetrack and the MHBPA. Any
additional amounts paid for purses reduce the Racetrack's retainage.
(4) Payments to the host track generally range from 2.5% to 4.5% of total
handle, subject to negotiation with each host track. For purposes of
this table, the host track fee is assumed to be 3.5%.
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OTHER REVENUE
The Company also derives revenue from other activities such as
admissions and parking fees, as well as from the sale of food and beverage,
programs, and other racing publications. The Company offers advertising signage
space similar to that appearing at many sports stadiums. Finally, additional
revenues are derived from use of the facilities for events such as concerts,
holiday displays, trade and craft shows, snowmobile racing, business meetings,
private parties, horse expositions and sales, boat and automobile storage,
community events, and rental of the parking lot for various automobile
activities and vehicle storage.
(iv) COMPETITION
The Company competes with other forms of gaming in the State of
Minnesota, particularly casino-style gambling located on Native American
reservations throughout the State of Minnesota, including a large casino located
approximately three miles from the Racetrack. In addition, the Company competes
against charitable gambling (bingo and pulltabs) and various state lottery
products. Finally, the Company competes with a greyhound racetrack located
approximately 40 miles from the Racetrack at the eastern end of the
Minneapolis-Saint Paul metropolitan area. This greyhound track offers wagering
on live and simulcast dog racing, as well as wagering on simulcasting of
Thoroughbred horse racing.
The Racetrack also competes with other forms of entertainment in the
Minneapolis-Saint Paul metropolitan area, including a wide range of live and
televised professional and collegiate sporting events. Finally, live horse
racing competes with a wide variety of summer attractions, including amusements
parks, sporting events and other local activities.
The Company also competes with racetracks located throughout the United
States in securing the better quality horses to run at the Racetrack. Attracting
the owners and trainers of better quality horses is largely influenced by the
ability to offer large purses. The Company experiences significant competition
for better quality horses from a racetrack located near Des Moines, Iowa which
offered substantially larger purses than the Company in 1997and 1998. This
competition from the Des Moines racetrack is expected to continue in the
foreseeable future.
(v) MARKETING
The Company's primary market is the seven county Minneapolis-Saint Paul
metropolitan area. Current demographic information indicates that approximately
2 million adults, age 21 and older, reside within a 50 mile radius of Shakopee
Minnesota. This information does not include adults ages 18 to 20 years of age
which are also patrons of the Racetrack.
To support its primary business of pari-mutuel horse racing, the
Company maintains year-round marketing efforts which are focused on maintaining
the loyalty of live and simulcast patrons and attracting new customers. Using
newspapers, television, the internet, other print media, radio and direct mail,
the Company concentrates its marketing efforts on communicating the excitement
of wagering on high caliber horse racing from around the country. In addition to
its regular advertising program, the Company conducts numerous special
promotions to increase simulcast patronage.
The 1998 and 1997 advertising campaigns utilized primarily print and
radio advertising to promote live racing by highlighting the attractive,
park-like atmosphere of Canterbury Park, promoting activities for the entire
family, as well as the fun and excitement of live horse racing. In addition, the
development of a customer data base enabled the Company to effectively utilize
direct mail advertising since 1997.
Because wagering on horse racing is more complex than many other forms
of gaming, such as slot machines or the various lottery products, the Company
continues to develop and conduct various educational programs, such as tours of
the Racetrack, wagering classes and contests that it believes will make the
sport of horse racing and pari-mutuel wagering more understandable to the
general public.
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(vi) REGULATION
GENERAL.
The ownership and operation of a horse racetrack in Minnesota is
subject to significant regulation by the Racing Commission under the Racing Act
and the rules adopted by the Racing Commission. The Racing Act provides for the
allocation of each wagering pool to winning bettors, the racetrack, purses, the
State of Minnesota and the Breeders' Fund and empowers the Racing Commission to
license and regulate substantially all aspects of horse racing in the State. The
Racing Commission, among other things, grants operating licenses to racetracks
after an application process and public hearings, licenses all employees of a
racetrack, 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, totalizator contracts
and concessionaire agreements. Decisions by the Racing Commission in regard to
any one or more of the foregoing matters could adversely affect the Company's
operations.
A federal statute, the Interstate Horse Racing Act of 1978, also
provides that a racetrack must obtain the consent of the group representing the
majority of the horsepersons (owners and trainers) of the horses racing at the
racetrack, and the consent of the state agency regulating the racetrack, in
order to transmit simulcast signals of its live races or to receive and use
simulcast signals from other racetracks. The Company has obtained the consent of
the MHBPA for receiving and sending simulcasting signals.
ISSUANCE OF CLASS A AND CLASS B LICENSES TO THE COMPANY.
The Racing Commission issued a Class A License to the Company on April
27, 1994. The Class A License allows the Company to own and operate the
Racetrack. The Class A License is effective until revoked or suspended by the
Racing Commission, or relinquished by the licensee. The fee for a Class A
License is $10,000 per calendar year.
The Racing Commission issued a Class B License to the Company on April
27, 1994. The Class B License 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 Racing Commission. The Class B License is renewable each year by the
Racing Commission after a public hearing (if required by the Racing Commission).
The Company's Class B License was renewed for the 1999 season in December 1998.
The fee for a Class B License is $100 for each assigned race day on which live
racing is actually conducted and $50 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 in the seven county
metropolitan area (the counties of Hennepin, Ramsey, Washington, Scott, Dakota,
Anoka and Carver), except the Racing Commission 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. Therefore, as long as the Company holds the Class
A License, only the Company may own and operate a racetrack in the seven county
metropolitan area where Thoroughbred Horses and Quarter Horses may be raced.
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LIMITATION ON OWNERSHIP AND MANAGEMENT OF AN ENTITY WHICH HOLDS A CLASS
A LICENSE AND/OR CLASS B LICENSE.
The Racing Act requires prior Racing Commission 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 and 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 Racing Commission of
the changes within five days of this occurrence and provide the information
required by the Racing Act.
LOCAL REGULATION.
The Racetrack is subject to state and local laws, regulations,
ordinances and other provisions affecting zoning 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 will, among
other things, be subject to applicable zoning ordinances and require approval by
the City of Shakopee and other authorities and there can be no assurance such
approvals will be obtained.
(vii) EMPLOYEES
At March 12, 1999, the Company had approximately 65 full-time employees
and 150 part-time employees. When the Company commences live racing in May 1999,
the Company expects to employ approximately 120 additional full-time seasonal
employees and approximately 450 additional part-time seasonal employees. The
Company's management believes its employee relations are good.
(viii) EXECUTIVE OFFICERS
The executive officers of the Company, their ages and their positions
with the Company are as follows:
<TABLE>
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
<S> <C> <C>
Randall D. Sampson 40 President, Chief Financial Officer, and
General Manager
Michael J. Garin 43 Vice President of Hospitality
Troy J. Mertens 31 Vice President of Mutuels and Simulcasting
Mark A. Erickson 42 Vice President of Facilities
- -------------------
</TABLE>
Randall D. Sampson has been President and Chief Financial Officer since
the formation of the Company in March 1994 and General Manager since September
1995. Mr. Sampson has been active in horse racing industry associations, serving
on the Board of Directors of the Minnesota Thoroughbred Association from 1989 to
1993. Mr. Sampson has also been a member of the Minnesota Horsemen's Benevolent
and Protective Association, serving as Vice President of the organization from
1993 to 1994, and was a member of the Minnesota Racing Commission Breeders' Fund
Advisory Board from 1991 to 1997. He also serves as a director of the
Thoroughbred Racing Association of North America. Mr. Sampson is the son of
Curtis A. Sampson, the Company's Chairman of the Board who is a holder of
approximately 35% of the Company's common stock.
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Michael J. Garin has been Vice President of Hospitality since May of
1997. He had served as President of Canterbury Park Concessions, Inc. since
April of 1994. From September 1993 to April 1994, Mr. Garin was employed as Food
and Beverage Supervisor of Little Six, Inc.
Troy J. Mertens has been Vice President of Mutuels and Simulcasting
since May 1997, was Director of Mutuel and Simulcast Operations from April 1994
through April 1997, and Assistant General Manager from September 1995 until
April 1997.
Mark A. Erickson has served as Vice President of Facilities since May
1997. He was the Director of Facilities from April 1994 until April 1997. From
May 1992 until employment with the Racetrack, Mr. Erickson served as Maintenance
Supervisor for the Mall of America in Bloomington, Minnesota.
ITEM 2. DESCRIPTION OF PROPERTY
GENERAL.
The Racetrack, which is operated under the name "Canterbury Park," is a
modern facility, generally comparable to other major racetracks located
throughout the country. The Racetrack has a patron capacity of approximately
10,000 within an enclosed grandstand, and a maximum patron capacity of over
30,000 including the 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 600 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 primarily
of a partially developed industrial park and farm land. However, 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 approximately 1.3 million visitors during the spring and
summer; the Renaissance Festival, a seven-weekend late summer attraction
attracting approximately 340,000 visitors, located about five miles from the
Racetrack; and Mystic Lake Casino, located about three miles from the Racetrack,
which draws approximately 5.2 million patrons annually. Approximately 20 miles
from the Racetrack is the Mall of America, the largest enclosed shopping mall in
the United States, which attracts approximately 42.5 million visitors per year.
RACING SURFACES.
The racing surfaces consist of a one-mile oval dirt/limestone track and
a 7/8 mile oval turf track. The dirt track is lighted for night racing. The dirt
track includes a mile and one-quarter front stretch chute, a 6-1/2 furlong
backstretch chute and a quarter horse chute.
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, the mutuels department,
concession and maintenance offices, first aid, mechanical and electrical rooms.
The Track Level includes mutuels windows, restrooms, a variety of concession
stands and other services. A large area of the track level is used as a
simulcast center during live racing and is utilized for banquets and other
events during the off-season. 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 mutuel windows,
restrooms, concession stands and other guest facilities. The Kitchen Level is an
intermediate level located between the Mezzanine and Clubhouse floors; it
contains a full-service kitchen which can support a full dining menu for the
track-side dining terraces on the Clubhouse Level and
10
<PAGE>
to prepare food 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. An additional
feature of the Clubhouse Level is a special club area which includes 225 dining
seats, a party room and a large bar and lounge. The Press Box/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.
OTHER VIEWING AREAS.
In addition to the grandstand, patrons can watch races from the
following outdoor areas: the apron, or standee ramp, between the grandstand and
the racetrack and a large picnic area immediately north of the grandstand. These
areas have concession stands and mutuel windows nearby.
GROUNDS; SADDLING PADDOCK AREA.
The grounds surrounding the grandstand are extensively landscaped.
Located near the main entrance behind the grandstand is a European-style paddock
area where patrons can observe the jockey mounting and the post parade.
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 216 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 half mile training track.
PARKING.
Approximately 7,500 paved parking spaces are available for patron and
employee automobiles at the Racetrack, including parking spaces that are
reserved for physically challenged patrons. The Racetrack also has unpaved areas
available for overflow parking for approximately 5,000 additional automobiles.
Areas are also reserved for bus parking.
INSURANCE.
The Company maintains insurance on its facilities in amounts it
believes are sufficient.
OTHER PROPERTIES.
Approximately 80 acres of the 355 acres owned by the Company are not
necessary for racing operations. This property, adjacent to the Racetrack, is
undeveloped and could be sold in whole or in part, depending upon future
opportunities. The 355 acres includes 30 acres of undeveloped land adjacent to
Canterbury Park which was purchased on August 18, 1997, for investment or future
development. 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
business of horse racing.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
12
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The Company's Common Stock is traded on the NASDAQ Stock Market under
the symbol TRAK. In addition, prior to September 1, 1998, Warrants to purchase
Company common stock and Units (each Unit consisting of one share of common
stock and one warrant to purchase one share of common stock) traded on the
NASDAQ Stock Market under the respective symbols TRAKW and TRAKU. Trading of
Warrants and Units ceased upon the expiration of the Warrants in August 1998.
The table set forth below indicates the high and low trade prices for the Units,
Common Stock and Warrants for the years ended December 31, 1998 and 1997. These
prices indicate interdealer prices without retail markup, markdowns or
commissions.
<TABLE>
<CAPTION>
1998 1997
------------------------------ ------------------------------
High Low High Low
---------- --------- --------- ---------
UNITS
<S> <C> <C> <C> <C>
First Quarter $ 3 3/64 $ 2 5/8 $ 4 1/2 $ 2 3/16
Second Quarter 3 5/8 2 1/2 5 7/8 2 1/2
Third Quarter 3 2 5/8 4 3/4 3 3/8
Fourth Quarter 7 2 3/4
COMMON STOCK
First Quarter 3 3/8 2 1/2 4 5/8 2
Second Quarter 3 1/2 2 3/8 6 2 3/8
Third Quarter 3 3/32 2 5/8 4 5/8 2 3/4
Fourth Quarter 5 2 13/16 6 1/2 2 3/4
WARRANTS
First Quarter 3/8 7/32 13/16 1/16
Second Quarter 7/32 1/16 1 1/4
Third Quarter - - 5/8 1/4
Fourth Quarter 1 1/2 17/64
</TABLE>
(B) HOLDERS
At March 12, 1999, the Company had approximately 349 holders of record
of its common stock. In addition, on that date a depository company held
approximately 1,400,000 shares as nominees for an estimated 1,368 beneficial
holders.
(C) DIVIDENDS
The Company has not paid any dividends on its common stock and does not
anticipate paying any in the foreseeable future. The Company's current loan
arrangements with a commercial bank prohibit the payment of dividends without
the bank's consent.
13
<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Canterbury Park Holding Corporation (the "Company") owns and operates
Canterbury Park (the "Racetrack"), the only pari-mutuel horse racing facility in
the State of Minnesota. The Company's revenues for the years ended December 31,
1998 and 1997 were derived primarily from pari-mutuel take-out on races
simulcast year-round to Canterbury Park from racetracks throughout the country.
In addition the Company earned pari-mutuel take-out during live race meets
featuring thoroughbred, quarter horse and harness racing. During 1998 the
Company conducted 364 days of simulcast racing, including 55 days of live
racing. In 1997 the Company conducted 358 days of simulcast racing including 56
days of live racing. Live race meets in 1998 and 1997 commenced in the month of
May and concluded in September with three days of harness racing over the Labor
Day weekend. During live race meets, the Company televises its races to
out-of-state racetracks around the country. The Company earns additional
pari-mutuel revenue on wagers placed at out-of-state racetracks. In addition to
pari-mutuel revenues, the Company generates revenues from admissions, parking,
publication sales, concession sales, special events, facility rental,
advertising and other sources.
Legislation enacted on April 11, 1996, which became effective July 1,
1996, repealed the State of Minnesota 6% pari-mutuel tax on the first $12
million of pari-mutuel take-out in a twelve-month period and allowed the Company
to retain the proceeds of winning pari-mutuel tickets which were not presented
for payment. This legislation was scheduled to expire on July 1, 1999. The 1998
Omnibus tax bill, signed into law on April 21, 1998, made the 1996 legislation
permanent.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31,
1997
Total operating revenues for the year ended December 31, 1998 were
$19,195,577, an increase of 5.5% compared to total operating revenues of
$18,202,216 for the year ended December 31, 1997. Pari-mutuel revenues increased
3.0% in fiscal year 1998 compared to fiscal year 1997. Discussion of the change
in pari-mutuel revenues follows the Summary of Operating Data below.
Concession revenues increased 6.5% during the year ended December 31,
1998 compared to the year ended December 31, 1997. The increase is due primarily
to increased concession sales during special events hosted by the Racetrack. The
remaining increase is attributable to higher racing attendance in 1998 compared
to 1997.
Other operating revenue increased $478,000 to $873,000 in fiscal year
1998, representing a 121% increase over $395,000 of other operating revenues in
fiscal year 1997. The Company generated approximately $400,000 in 1998 by
leasing underutilized areas of the Racetrack grounds for vehicle storage.
Vehicle storage revenues in fiscal year 1997 were approximately $24,000.
14
<PAGE>
The following table summarizes operating data for the years ended December 31,
1998 and December 31, 1997:
<TABLE>
<CAPTION>
SUMMARY OF OPERATING DATA:
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
<S> <C> <C>
RACING DAYS
Simulcast only days 309 302
Live and simulcast days 55 56
---------------------- -----------------------
TOTAL RACING DAYS 364 358
ATTENDANCE
Simulcast only days 132,000 130,000
Live and simulcast days 193,000 191,000
---------------------- -----------------------
TOTAL ATTENDANCE 325,000 321,000
ON-TRACK HANDLE
Simulcast only days $ 43,819,000 $ 42,182,000
Live and simulcast days
Live racing 12,013,000 11,321,000
Simulcast racing 12,876,000 12,494,000
OUT-OF-STATE LIVE HANDLE 7,985,000 12,635,000
---------------------- -----------------------
TOTAL HANDLE $ 76,693,000 $ 78,632,000
AVERAGE DAILY ATTENDANCE
Simulcast only days 427 430
Live and simulcast days 3,509 3,403
ON-TRACK PER CAPITA WAGERING
Simulcast only days $ 332 $ 324
Live and simulcast days 129 125
ON-TRACK AVERAGE DAILY HANDLE
Simulcast only days $ 141,809 $ 139,675
Live and simulcast days 452,527 425,268
</TABLE>
Total pari-mutuel revenues increased 3.0% to approximately $14,448,000
in 1998 from $14,024,000 in 1997. Total attendance for live and simulcast racing
increased by 1.2% to 325,000 during the twelve months ended December 31, 1998,
from 321,000 during the twelve months ended December 31, 1997. The total
on-track per capita wager for fiscal year 1998 increased 2.8% compared to fiscal
year 1997. Total on-track handle increased approximately 4.1% to $68,708,000 in
1998 from $65,997,000 in 1997. Handle wagered at out-of-state locations,
however, decreased 36.8% or $4,650,000 compared to 1997, due to a switch in 1998
to Saturday afternoon live racing from Saturday evenings in 1997. Although the
change reduced out-of-state live handle (because, given the greater number of
available simulcast signals on Saturday afternoon, there was reduced interest
among out-of-state tracks in carrying the Company's signal) this reduction
was more than offset by an increase in on-track handle because of increased
attendance at the Racetrack for the Saturday afternoon live races.
Pari-mutuel revenues related to simulcast racing increased 4.1% to
$11,394,000 in 1998 from $10,940,000 in 1997. This change was consistent with
the change in total simulcast handle, which increased to $56,695,000 in 1998, up
from $54,676,000 in 1997.
15
<PAGE>
On-track wagering on live races at the Racetrack increased by $
692,000, or 6.1%, to $12,013,000 in 1998 from $11,321,000 in 1997, causing
pari-mutuel revenue to increase by 6.1% to $2,535,000 in 1998 from $2,390,000 in
1997. Higher average daily attendance in 1998 on days when both simulcast and
live racing were conducted, along with a higher per-capita wager on those days
resulted in an increase in average daily handle of $27,259 or 6.4%.
Pari-mutuel revenue from simulcasting the Racetrack's live races to
out-of-state locations totalled approximately $233,000 in 1998 compared to
$360,000 in 1997. The Racetrack receives amounts ranging from 2.50% to 3.00% of
amounts wagered at out-of-state racetracks as a "guest fee". The decrease in
revenues reflects the corresponding decrease in out-of-state handle in 1998
compared to 1997.
Revenues recognized for proceeds from winning pari-mutuel tickets which
were not presented for payment within one year of the end of the respective race
meets were approximately $286,000 in 1998 compared to $333,000 in 1997.
Total operating expenses increased 4.5% to $18,698,000 in 1998 from
$17,898,000 in 1997. An increase of 4.3% in pari-mutuel expenses in fiscal year
1998, compared to fiscal year 1997, is directly related to the increase in
handle. Salary and benefit expenses increased 8.8% in 1998 compared to 1997,
due to additional full-time positions added in 1997 and 1998, additional
employee benefit expenses in 1998 and to an increase in management bonuses in
1998.
Repair and maintenance costs in 1998 increased by $282,000, or 63.5%,
compared to 1997, primarily due to repairs and maintenance of the Racetrack
parking lots during the third quarter of 1998. The Company also upgraded the
facility's valet entrance and made other repairs of facility systems and video
equipment during 1998.
Other operating expenses decreased by approximately $275,000 in fiscal
year 1998, compared to fiscal year 1999. Expense levels in 1997 for legislative
activity were much higher than a normal year due to the Company's efforts to
obtain legislative approval for a casino at the Racetrack. During fiscal year
1997 the Company incurred lobbying and communication expenses of $257,000 and
charged an additional $150,000 to operations, including $86,000 of noncash
expense resulting from the issuance of stock options to consultants, to develop
financial, design and market feasibility studies related to the casino concept.
While this proposal did not succeed in 1997, the Company continued to pursue
legislative changes in 1998, incurring $76,000 of lobbying expenses. The
Company's 1998 legislative efforts resulted in inclusion in the 1998 Omnibus
tax bill of a provision which made permanent a tax reduction on
pari-mutuel revenue which was scheduled to expire in 1999.
Minnesota law requires the Company to allocate a portion of funds
received from wagering on simulcast and live horse races for future payment as
purses for live horse races or other uses of Minnesota's horsepersons'
associations. This purse expense is one of the Company's largest single expense
items. The minimum percentage required by law to be set aside for purses from
simulcasting varies substantially depending on the time of year the simulcasting
is conducted. For the 25-week period beginning in early May, which is the
statutorily established "Racing Season," 50% of net pari-mutuel revenue, before
deducting for purses, is allocated to a fund for the payment of purses during
the live meet. For the remaining 27 weeks of the racing year, November through
April, funds accumulate at the rate of 25% of net pari-mutuel revenue, before
deducting for purses, but after deducting an 8% expense factor. Purse expense as
a percentage of the Company's pari-mutuel commission and breakage revenues was
consistent for 1998 and 1997 at 27.0% each year.
Amounts paid to the Minnesota Breeders' Fund are a function of on-track
handle and the increase from $696,000 in 1997 to $728,000 in 1998 is consistent
with the increase in total on-track handle. Host track fees remained steady at
to 3.45% of simulcast handle in 1998 compared to 3.44% in 1997. The host fee is
calculated as a percentage of monies wagered on out-of-state racetracks
(generally 2.50% to 4.50%) and is negotiated with each host track. The Racetrack
received simulcast signals from over 50 race meets in 1998 and 1997.
16
<PAGE>
Interest expense decreased 28.9% to $118,151 in 1998 compared to
$166,252 in 1997. Interest expense relates primarily to amounts due under line
of credit agreements and to amounts due on advances from the MHBPA. The Company
operated under a line of credit agreement with the Company's Chairman of the
Board until June 11, 1998 when it was replaced with a commercial revolving
credit line with Bremer Bank N.A. The combined average daily balance of the
lines of credit utilized in 1998 was approximately $823,000. The average daily
balance of the line of credit with the Chairman of the Board in 1997 was
approximately $1,190,000. The weighted average rate of interest on the lines of
credit was 8.53% and 9.42% for 1998 and 1997, respectively. Interest charged to
operations under the line of credit with the Chairman of the Board was $43,349
in fiscal year 1998, and $112,137 in fiscal year 1997. Interest charged to
operations in 1998 for the line of credit with Bremer Bank was $26,843. The
average daily balance of amounts due under advances with the MHBPA was
approximately $558,000 in 1998 compared to $662,000 in 1997. The weighted
average rate of interest on the amounts due to the MHBPA was 8.49% for fiscal
year 1998, compared to 8.17% for fiscal year 1997. The interest rate on the line
of credit and the MHBPA advances was 7.75% at December 31, 1998 compared to
8.50% at December 31, 1997. Interest charged to operations on advances with the
MHBPA was $47,416 in fiscal year 1998, compared to $54,108 in fiscal year 1997.
Net income for the year ended December 31, 1998 was $433,747, compared
to net income of $135,788 for the year ended December 31, 1997. Income before
income taxes was $386,619 in 1998 compared to $144,188 in 1997. The Company
recognized an income tax benefit in 1998 of $47,128 and incurred income tax
expense of $8,400 in 1997. The income tax benefit is the net result of a
$208,000 reduction of it's valuation allowance, offset by current income tax
expense of $161,000 for fiscal year 1998. Since acquisition of the Company in
1994, the Company had fully offset any deferred tax assets with a valuation
allowance due to the uncertainty of realization of the benefits in future
periods. At December 31, 1998, management determined that based upon recent and
projected profitability, it was more likely than not that $208,000 of the
deferred tax asset would be utilized in the future and thus reduced it's
valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES:
During the year ended December 31, 1998, cash provided by operating
activities was $1,383,697, which resulted principally from net income of
$433,747, depreciation and amortization of $901,443, an increase in income taxes
payable of $160,75, partially offset by the increase in the deferred tax asset
of $208,000. During the year ended December 31, 1997, cash provided by operating
activities was $1,077,527, which resulted principally from net income of
$135,788, depreciation and amortization of $856,982, and an increase in accounts
payable and accrued expenses of $130,802
For fiscal 1998, net cash used in investing activities was $221,439 for
capital expenditures, partially offset by proceeds from the sale of property and
equipment of $33,091. The Company estimates that it will spend approximately
$300,000 for capital expenditures during fiscal year 1999. For fiscal 1997, net
cash used in investing activities was $1,283,152 which consisted of $935,141 for
the acquisition of a 30 acre tract of undeveloped land adjacent to the
Racetrack, and $395,355 for capital expenditures, primarily consisting of
equipment and building improvements. These cash uses were partially offset by
proceeds from the sale of equipment of $47,344.
During 1998, cash used in financing activities was $1,154,301, which
included the pay off of the Company's line of credit with its Chairman of the
Board of $1,651,942 on June 11, 1998. This net payment was offset by the
proceeds from borrowings under the new commercial revolving credit line of
$608,449. Net payments on the advance from the MHBPA used net cash of $163,159
in 1998. The Company was provided cash of $52,351 in 1998 upon the issuance of
common stock, due primarily to the exercise of options and to the issuance of
common stock pursuant to the Company's employee stock purchase plan. Cash
provided by financing activities was $273,168 for the year ended December 31,
1997, which represents the net proceeds on the Company's line of credit with its
majority shareholder of $42,188, proceeds of $74,597 from the issuance of common
stock and $156,383 net proceeds on the advance with the MHBPA.
17
<PAGE>
Pursuant to an agreement with the MHBPA, the Company transferred into a
trust account or paid directly to the MHBPA, approximately $3,650,000 and
$3,287,000 in purse funds for the years ended December 31, 1998 and 1997,
respectively. Minnesota Statutes specify that amounts transferred into trust are
the property of the trust and not of the Company. Unpaid purse fund obligations
due the MHBPA were $546,414 and $709,573 at December 31, 1998 and 1997,
respectively. The interest rates on any statutory purses accrued but not
transferred into the trust (which are guaranteed by the Company's Chairman of
the Board) were 7.75% and 8.50% at December 31, 1998 and 1997, respectively.
At December 31, 1997 the Company had a $3,000,000 line of credit
arrangement with the Chairman of the Board, of which $1,651,942 was outstanding.
The interest rate for borrowings under the line of credit was the prime rate at
December 31, 1997. This line of credit was paid off on June 11, 1998 and was
replaced by a commercial revolving credit line with Bremer Bank, N.A..
The Company entered into a general credit and security agreement with
Bremer Bank, N.A., a financial institution located in South Saint Paul,
Minnesota, on June 3, 1998. Borrowings under the credit agreement include a
commercial revolving credit line which provides for maximum advances of
$2,250,000 with interest at the prime rate (7.75% at December 31, 1998). The new
lending arrangement also includes a term loan commitment of $750,000.
During 1998 and 1997, the Company hosted a number of special events in
addition to horse racing in an effort to increase its cash flows and attain
profitability in 1998 and 1997. Management believes that funds available under
its bank credit agreement along with funds generated from operations, will be
sufficient to satisfy its liquidity and capital resource requirements during
1999.
In August 1998, 1,437,000 warrants to purchase one share of common
stock at an exercise price of $4.875 per share issued as part of the Company's
1994 initial public offering and 400,000 warrants issued to the Company's
founders in connection with the public offering at an exercise price of $4.00
per share expired unexercised.
Cash flows provided from operations in 1999 are anticipated to be
comparable to cash flows provided by operations in 1998.
OPERATING PLAN:
In 1998 the Company successfully conducted its fourth live race meet in
four years. The Company plans a 56-day live race meet in 1999 consisting of a 26
days of mixed Thoroughbred and Quarter Horse racing and a 30-day Thoroughbred
only meet. The Company competes with racetracks located throughout the United
States in securing the better quality horses to run at the Racetrack. Attracting
the owners and trainers of better quality horses is largely influenced by the
ability to offer large purses. By limiting the number of live racing days and
utilizing purse monies from simulcasting and live race wagering, the Company
continues to offer purses during its live racing season which are comparable to
previous Canterbury Park live race meets. However, the Company experiences stiff
competition for better quality horses from a racetrack located near Des Moines,
Iowa, as well as racetracks in Chicago, Illinois which offer substantially
larger purses.
The Company's ability to operate profitably in 1999 will depend
primarily upon the Racetrack's ability to maintain levels of attendance and
handle for live and simulcast racing at levels similar to previous years. The
Company's revenues in 1998 are also significantly impacted by special event and
facility rental revenues. While the Company plans to continue its emphasis on
special events and maximizing the potential of the entire facility year-round,
there can be no guarantee that 1998 levels will continue into the future. The
Company also needs to maintain operating expenses at levels similar to 1998.
Management intends to continue pursuing legislation for additional
potential sources of revenue. These efforts could result in increased
legislative related expenses in the future.
18
<PAGE>
FACTORS AFFECTING FUTURE PERFORMANCE:
The Company has identified and evaluated its in-house personal computer
systems for year 2000 compliance. These PC based applications are compliant and
are not considered to be critical to the Company's daily operations. The Company
utilizes a racing office administrative network system which is considered to be
obsolete and is in the process of being replaced. The new system will be
functional for the 1999 live race meet beginning May 1999. The estimated cost of
software and hardware replacement for the racing office system is $25,000.
The Company has evaluated the impact that the failure of significant
suppliers to achieve year 2000 readiness would have on its operations. The
Company has a contract with Autotote Systems, Inc. ("Autotote") for totalizator
services, including equipment and computer programs which record and process all
wagers and calculate odds and payoffs which was recently extended through
April 2004. Autotote has assured the Company, in writing, of their commitment
to achieve year 2000 compliance. However, should Autotote fail to remediate
its own year 2000 issue, pari-mutuel wagering would cease at the Racetrack
beginning January 1, 2000. The Company's contingency plan is to enter into a
comparable agreement with another of the industry's tote service providers.
There can be no guarantee that the systems of other companies on which the
Company's systems rely would be timely converted and would not have an
adverse effect on the Company's systems.
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, the Company may comment on anticipated future financial
performance. Such forward looking statements, including statements contained in
this Report on Form 10-KSB, are subject to risks and uncertainties which may
adversely affect future financial performance, including, but not limited to,
fluctuations in attendance at the Racetrack, changes in the level of wagering by
patrons, legislative and regulatory changes, the impact of wagering products
introduced by competitors, higher than expected expenses, and other risks
applicable to the horse racing industry generally.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements of the Company are set forth on
pages 20 through 33 of the Form 10-KSB:
<TABLE>
<CAPTION>
Page
-------------
<S> <C>
Independent Auditors' Report................................................................................ 20
Consolidated Balance Sheets as of December 31, 1998 and 1997 ............................................... 21
Consolidated Statements of Operations for the years ended December 31, 1998 and
December 31, 1997 .......................................................................................... 22
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998 and December 31, 1997 .................................................................... 23
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and
December 31, 1997 .......................................................................................... 24
Notes to Consolidated Financial Statements for the years ended December 31, 1998 and
December 31, 1997 .......................................................................................... 25
</TABLE>
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Canterbury Park Holding Corporation
Shakopee, Minnesota
We have audited the accompanying consolidated balance sheets of Canterbury Park
Holding Corporation and subsidiary (the Company) as of December 31, 1998 and
1997 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide 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 subsidiary as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
March 15, 1999
Minneapolis, Minnesota
20
<PAGE>
<TABLE>
<CAPTION>
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------------
1998 1997
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 372,171 $ 364,214
Accounts receivable 215,296 185,468
Inventory 89,640 76,657
Deposits 20,000 20,000
Prepaid expenses 121,859 106,381
---------------- ----------------
Total current assets 818,966 752,720
PROPERTY AND EQUIPMENT, net (Note 2) 8,386,439 9,061,205
DEFERRED TAX ASSET (Note 3) 208,000
INTANGIBLE ASSETS, net of accumulated amortization of
$20,113 and $14,875, respectively 4,256 9,494
---------------- ----------------
$ 9,417,661 $ 9,823,419
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 760,132 $ 715,062
Accrued wages and payroll taxes 166,898 200,942
Accrued interest 100,367 103,184
Advance from MHBPA (Note 1) 546,414 709,573
Advance from shareholder (Note 6) 1,651,942
Borrowings under credit agreement (Note 6) 608,449
Accrued property taxes 354,022 305,032
Income taxes payable 160,875
Payable to horsepersons 70,805 14,923
---------------- ----------------
Total current liabilities 2,767,962 3,700,658
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
STOCKHOLDERS' EQUITY (Note 4):
Common stock, $.01 par value, 10,000,000 shares authorized, 3,020,167
and 2,998,848, respectively, shares issued and outstanding 30,202 29,989
Additional paid-in capital 8,132,809 8,061,875
Unearned compensation (22,044)
Accumulated deficit (1,513,312) (1,947,059)
---------------- ----------------
Total stockholders' equity 6,649,699 6,122,761
---------------- ----------------
$ 9,417,661 $ 9,823,419
---------------- ----------------
---------------- ----------------
See notes to consolidated financial statements.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
OPERATING REVENUES:
Pari-mutuel $ 14,448,354 $ 14,023,668
Concessions 2,578,262 2,421,538
Admissions and parking 563,091 602,215
Publications 733,075 759,657
Other operating revenue 872,795 395,138
------------------ ------------------
19,195,577 18,202,216
OPERATING EXPENSES:
Pari-mutuel expenses:
Statutory purses 3,828,864 3,689,747
Host track fees 1,953,901 1,880,779
Pari-mutuel taxes 78,020 51,177
Minnesota Breeders' Fund 728,387 696,459
Salaries and benefits 4,703,506 4,321,476
Cost of sales related to concessions 772,290 721,146
Cost of sales related to publications 783,256 856,472
Depreciation and amortization 901,443 856,982
Repairs, maintenance and supplies 725,497 443,851
Property taxes 417,003 309,764
Advertising and marketing 863,213 873,855
Utilities 692,992 671,228
Other operating expenses 2,250,022 2,525,083
------------------ ------------------
18,698,394 17,898,019
NONOPERATING (EXPENSES) REVENUES:
Interest expense (Note 6) (118,151) (166,252)
Other, net 7,587 6,243
------------------ ------------------
(110,564) (160,009)
------------------ ------------------
INCOME BEFORE INCOME TAX EXPENSE 386,619 144,188
Income tax benefit (expense) (Note 3) 47,128 (8,400)
------------------ ------------------
NET INCOME $ 433,747 $ 135,788
------------------ ------------------
------------------ ------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 3,005,164 2,976,961
------------------ ------------------
------------------ ------------------
BASIC NET INCOME PER COMMON SHARE (Note 5) $ .14 $ .05
------------------ ------------------
------------------ ------------------
DILUTED NET INCOME PER COMMON SHARE (Note 5) $ .14 $ .04
------------------ ------------------
------------------ ------------------
See notes to consolidated financial statements.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- ----------------------------------------------------------------------------------------------------------------
Additional Unearned
Number Common Paid-in Compen- Accumulated
of Shares Stock Capital sation Deficit Total
------------- ------------ ------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 2,961,382 $ 29,614 $7,879,551 $(2,082,847) $5,826,318
Exercise of stock options 22,500 225 42,494 42,719
Issuance and amortization of
compensatory stock options 108,102 $ (22,044) 86,058
Shares issued under Employee Stock
Purchase Plan 14,966 150 31,728 31,878
Net income 135,788 135,788
------------- ------------ ------------- ------------ --------------- --------------
BALANCE, DECEMBER 31, 1997 2,998,848 $ 29,989 $8,061,875 $ (22,044) $ (1,947,059) $ 6,122,761
Exercise of stock options 8,775 88 20,276 20,364
Issuance and amortization of
compensatory stock options 18,796 22,044 40,840
Shares issued under Employee Stock
Purchase Plan 12,544 125 31,862 31,987
Net income 433,747 433,747
------------- ------------ ------------- ------------ --------------- --------------
BALANCE, DECEMBER 31, 1998 3,020,167 $ 30,202 $8,132,809 $ 0 $ (1,513,312) $ 6,649,699
------------- ------------ ------------- ------------ --------------- ---------------
------------- ------------ ------------- ------------ --------------- ---------------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 433,747 $ 135,788
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 901,443 856,982
Deferred income taxes (208,000)
Stock options issued for consulting services 40,840 86,058
(Increase) decrease in accounts receivable (29,828) 1,366
Increase in other current assets (28,461) (28,940)
Increase in income taxes payable 160,875
Increase in accounts payable and accrued expenses 11,026 130,802
Decrease in accrued interest (2,817) (46,203)
Increase (decrease) in accrued property taxes 48,990 (65,884)
Increase in payable to horsepersons 55,882 7,558
------------------ -------------------
Net cash provided by operations 1,383,697 1,077,527
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment and other assets (254,530) (395,355)
Additions to land (935,141)
Proceeds from sale of property and equipment 33,091 47,344
------------------ -------------------
Net cash used in investing activities (221,439) (1,283,152)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings under credit agreement 608,449
Net (payments on) proceeds from advance by MHBPA (163,159) 156,383
Proceeds from issuance of common stock 52,351 74,597
Net (payments on) proceeds from advance from shareholder (1,651,942) 42,188
------------------ -------------------
Net cash (used in) provided by financing activities (1,154,301) 273,168
------------------ -------------------
NET INCREASE IN CASH 7,957 67,543
CASH AT BEGINNING OF YEAR 364,214 296,671
------------------ -------------------
CASH AT END OF YEAR $ 372,171 $ 364,214
------------------ -------------------
------------------ -------------------
INTEREST PAID $ 120,968 $ 212,450
------------------ -------------------
------------------ -------------------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Canterbury Park Holding Corporation (the Company) was
incorporated on March 24, 1994. On March 29, 1994 the Company acquired
all the outstanding securities of Jacobs Realty, Inc. (JRI) from Irwin
Jacobs and IMR Fund, L.P. (an investment fund for various pension plans
and trusts). JRI was merged into the Company and the acquisition was
accounted for under the purchase method of accounting whereby the
acquired assets and liabilities have been recorded at the Company's
cost. The primary asset of JRI was Canterbury Downs Racetrack and the
325 acres of surrounding land.
On May 20, 1994, the Company adopted a plan of Reorganization pursuant
to which the sole shareholder of Canterbury Park Concessions, Inc.
(CPC), and majority shareholder of the Company, agreed to exchange his
shares of CPC stock for 198,888 shares of the Company's common stock
concurrent with the closing of a public offering. Pursuant to the Plan
of Reorganization, CPC became a wholly owned subsidiary of the Company
in August 1994 when the Company completed the initial public offering
of its common stock. This reorganization was treated in a manner
similar to a pooling of interests. Net proceeds received by the Company
from the public offering were approximately $4,847,000 which, along
with additional borrowings under the Company's line of credit with the
majority shareholder, were used to pay off the remaining notes payable
from the acquisition of JRI.
The consolidated financial statements include the accounts of the
Company and CPC after elimination of intercompany accounts and
transactions.
OPERATIONS - The Company's revenues are derived primarily from
pari-mutuel wagering on simulcast and live horse races.
BASIS OF ACCOUNTING - The consolidated financial statements have been
prepared assuming that the Company will continue in existence. This
contemplates the realization of assets and settlement of obligations in
the ordinary course of business. The Company has incurred cumulative
operating losses of approximately $1,513,000, and has a working capital
deficit of approximately $1,949,000 at December 31, 1998. During 1998
and 1997, the Company hosted a number of special events in addition to
horse racing in an effort to increase its cash flows and attain
profitability. These additional events, combined with the benefit to
the Company of legislative changes referred to below, have allowed the
Company to achieve profitability in 1996 through 1998. Management
continues to pursue legislation for additional potential sources of
revenue and has secured traditional bank financing. Management believes
that funds available under its bank line of credit along with funds
generated from operations, will be sufficient to satisfy its liquidity
and capital resource requirements during 1999.
ESTIMATES - The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles 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.
DEPRECIATION - Property and equipment are depreciated on a
straight-line basis over the estimated useful lives of the assets,
generally 5 to 39 years.
INTANGIBLE ASSETS - Intangible assets consist of organization and
trademark costs and are amortized on a straight-line basis over 60
months.
25
<PAGE>
UNCASHED WINNING TICKETS - Pari-mutuel tickets which are not cashed
within one year of the end of the respective race meet become the
property of the Company. The Company records revenue associated with
the uncashed winning tickets at the time that, based on historical
experience, management can reasonably estimate the amount of additional
winning tickets from a race meet that will be presented for payment.
PARI-MUTUEL TAXES - The first $12 million of pari-mutuel revenue is
exempt from the 6% pari-mutuel tax. Pari-mutuel taxes are estimated for
each 12 month period from July 1 through June 30, and an estimated
annual effective tax rate is applied to all pari-mutuel commission
revenues.
ADVANCE FROM THE MINNESOTA HORSEMEN'S BENEVOLENT AND PROTECTIVE
ASSOCIATION, INC. (THE "MHBPA") - The Minnesota Pari-Mutuel Horse
Racing Act specifies that the Company is required to segregate a
portion of funds (recorded as statutory purses in the statements of
operations), received from 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 Minnesota
Horsemens Benevolent and Protective Association (the "MHBPA"), the
Company has transferred into a trust account or paid directly to the
MHBPA, approximately $3,650,000 and $3,287,000 for the years ended
December 31, 1998 and 1997, respectively, related to thoroughbred
races. Amounts due to the MHBPA are guaranteed by the Chairman of the
Board. Minnesota Statutes specify that amounts transferred into the
trust account are the property of the trust and not of the Company. The
interest rates on any statutory purses accrued but not transferred into
the trust were 7.75% and 8.50% at December 31, 1998 and 1997,
respectively.
SHORT-TERM BORROWINGS - The weighted average interest rates on
short-term borrowings at December 31, 1998 and 1997 are 7.75% and
8.50%, respectively. The weighted average rates for 1998 and 1997 were
8.51% and 8.97%, respectively.
INCOME TAXES - Prior to the completion of the Company's initial public
offering of its common stock, the Company was taxed as a "small
business corporation" under Subchapter S of the Internal Revenue Code.
As a result, any income tax liability or benefit was being passed
through to the individual shareholders and no income taxes payable or
income tax expenses were recorded in the consolidated financial
statements. Simultaneous with the Company's completion of the public
offering of its common stock, the Company's Subchapter S election was
terminated. A portion of the losses accumulated prior to the public
offering is not available to offset future earnings. The Company
currently accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME
TAXES.
NET INCOME PER SHARE - Effective December 15, 1997, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 128
"Earnings per Share". The Statement requires the Company to present its
net income per share in basic and diluted forms and to restate net
income per share from prior periods to conform with the new statement.
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 and warrants.
IMPAIRMENT OF LONG-LIVED ASSETS - Management of the Company
periodically reviews the carrying value of property and equipment for
potential impairment by comparing the carrying value of these assets
with their related expected future net cash flows. Should the sum of
the related expected future net cash flows be less than the carrying
value, management will determine whether an impairment loss should be
recognized. An impairment loss would be measured by the amount by which
the carrying value of the asset exceeds the fair value of the asset. To
date, management has determined that no impairment of these assets
exists.
26
<PAGE>
RECLASSIFICATION - Certain reclassifications have been made to the 1997
consolidated financial statements to conform to the presentation
adopted in the 1998 consolidated financial statements. The
reclassifications had no effect on stockholders' equity and net income
as previously reported.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the Financial
Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME,
which establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements.
Comprehensive income includes all changes in stockholders' equity
except those resulting from investments by and distributions to owners.
SFAS No. 130 is not currently applicable for the Company because the
Company did not have any items of other comprehensive income in any of
the periods presented.
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, was issued in June 1998. SFAS No. 133 provides a
comprehensive standard for the recognition and measurement of
derivatives and hedging activities. The standard requires all
derivatives to be recorded on the balance sheet at fair value and
establishes special accounting for three types of hedges. SFAS No. 133
is effective for the Company year beginning January 1, 2000. The
Company is currently assessing the impact on the Company's financial
position and results of operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 3,617,865 $ 3,648,851
Buildings and building improvements 2,883,817 2,829,762
Furniture and equipment 5,588,999 5,392,330
--------------------- --------------------
12,090,681 11,870,943
Accumulated depreciation (3,704,242) (2,809,738)
--------------------- --------------------
$ 8,386,439 $ 9,061,205
--------------------- --------------------
</TABLE>
3. INCOME TAXES
A reconciliation between income taxes computed at the statutory federal
income tax rate and the effective tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Federal tax expense computed at statutory rate $ 135,000 $ 50,000
Decrease in valuation allowance (217,000) (155,000)
Nondeductible lobbying expense 27,000 90,000
State expense, net of federal impact 30,000 24,000
Other (22,000) (600)
-------------------- --------------------
$ (47,000) $ 8,400
-------------------- --------------------
</TABLE>
27
<PAGE>
Temporary differences, tax carryforwards and the valuation allowance at
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Operating loss carryforward $ 262,000 $ 491,000
Federal / State AMT Benefit 165,000
Tax depreciation greater than book depreciation (174,000) (247,000)
Organizational and start-up costs 8,000 31,000
Repairs capitalized 10,000 13,000
Other 67,000 59,000
Valuation allowance (130,000) (347,000)
-------------------- --------------------
$ 208,000 $ -
-------------------- --------------------
</TABLE>
The benefit of deferred tax assets was entirely offset by a valuation
allowance at December 31, 1997 because future realization was
uncertain. At December 31, 1998, management determined that based on
recent and projected profitability, it was more likely than not that
$208,000 of the deferred tax asset would be utilized in the future and
thus reduced it's valuation allowance. The Company has federal income
tax net operating loss carryforwards of approximately $633,000 at
December 31, 1998 which expire in 2009 through 2011.
4. STOCKHOLDERS' EQUITY
EMPLOYEE STOCK PURCHASE PLAN:
On April 3, 1995, the Board of Directors adopted the 1995 Employee
Stock Purchase Plan. The plan, which is open to all employees of the
Company working more than 15 hours per week, commenced on April 15,
1995 and will continue for ten years. The plan consists of one-year
phases. The phases commence on October 1 of each year. Under the terms
of the plan, employees may set aside a portion of their payroll
earnings to purchase shares of the Company's common stock at the lower
of 85% of the fair market value of the shares on the commencement date
of each phase or 85% of the fair market value on the termination date
of each phase. The plan provides for the sale of up to 100,000 shares.
The plan issued 12,544 and 14,966 shares in 1998 and 1997,
respectively.
401(k) PLAN:
On June 1, 1998 the Company established a defined contribution savings
plan for employees who had completed one year of service, as defined in
the Plan document. The defined contribution savings plan allows for
employee compensation deferral contributions under Section 401(k) of
the Internal Revenue Code and discretionary contributions by the
Company. Employer contributions charged to operations in 1998 were
approximately $15,000.
STOCK OPTIONS:
The Company has a stock option plan (the Stock Option Plan) which
provides for the granting of awards in the form of stock options,
restricted stock, stock appreciation rights, and deferred stock to key
employees and nonemployees, including directors of and consultants to
the Company and any subsidiary, to purchase up to a maximum of 500,000
shares of common stock. Options that are granted under the plan may be
either options that qualify as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended
(Incentive Stock Options), or those that do not qualify as Incentive
Stock Options (Non-Qualified Stock Options). The plan is administered
by the Board of Directors, or a committee designated by the Board,
which determines the persons who are to receive awards under the plan,
the type of award to be granted, the number of shares subject to each
award and, if an option, the
28
<PAGE>
exercise price of each option. The plan also provides for formula grants of
Non-Qualified Stock Options to nonemployee directors of the Company.
Stock option activity related to the Plan during the years ended December 31,
1998 and 1997 is summarized below:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------ ------------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
---------------- --------------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 263,500 $ 2.47 184,000 $ 2.58
Granted 112,000 2.55 102,000 2.12
Exercised (6,275) 2.05 (21,500) 1.85
Canceled (1,500) 2.50 (1,000) 2.06
---------------- --------------------- ----------------- ---------------------
Outstanding at end of
year 367,725 $ 2.50 263,500 $ 2.47
---------------- --------------------- ----------------- ---------------------
---------------- --------------------- ----------------- ---------------------
Options exercisable at
end of year 313,225 $ 2.49 221,750 $ 2.54
---------------- --------------------- ----------------- ---------------------
---------------- --------------------- ----------------- ---------------------
</TABLE>
In addition to options granted under the plan, in June 1994 the Company
issued options to purchase 73,000 shares of common stock to certain
individuals who were instrumental in assisting the Company commence
operations. During 1998, 2,500 of these options were exercised. The
69,500 options remaining at December 31, 1998 are exercisable at $3.00
per share and expire in August 1999.
In 1997, the Company issued an option to purchase 50,000 shares of
common stock at an exercise price of $3.75 per share, for consulting
services. The option was valued at $88,176, of which $22,044 was
recognized in the 1998 statement of operations and $66,132 was
recognized in 1997. The option expires March 31, 2000.
The Company also issued options in 1998 and 1997 to purchase 15,000 and
12,500 shares of common stock, respectively, to a Board member for
consulting services. The exercise prices of the options are $2.625 and
$3.25 per share, respectively. The options were valued at $18,796 and
$19,926 and were recognized in the 1998 and 1997 statements of
operations, respectively. The option issued in 1998 expires in
September 2001 and the option issued in 1997 expires in November 1999.
In 1994, the Chairman of the Board was granted an option to purchase
51,825 shares at $2.625 per share. This option expires on May 20, 1999.
At December 31, 1998, the weighted average remaining contractual life
of all options was 62 months, and the range of exercise prices was
$1.75 to $4.00.
29
<PAGE>
In 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation." As permitted by SFAS 123, the Company has elected to
continue following the guidance of APB 25 for measurement and
recognition of stock-based transactions with employees. No compensation
cost has been recognized for stock options issued under the Stock
Option Plan because the exercise price of all options granted was at
least equal to the fair value of the common stock at the date of grant.
If compensation cost for the Company's stock option and employee stock
purchase plans had been determined based on the fair value at the grant
dates, consistent with the method provided in SFAS 123, the Company's
net income (loss) and earnings (loss) per share would have been as
follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
<S> <C> <C>
Net Income (Loss):
As reported $ 433,747 $ 135,788
Pro forma 212,052 (71,022)
Basic Earnings (Loss) Per Share:
As reported $ .14 $ .05
Pro forma .07 (.02)
Diluted Earnings (Loss) Per Share"
As reported $ .14 $ .04
Pro forma .07 (.02)
</TABLE>
The fair value of options granted under the Stock Option Plan during
1998 and 1997 were estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions and results:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
<S> <C> <C>
Dividend yield None None
Expected volatility 78% 85%
Risk-free interest rate 5.86% 6.56%
Expected life of option 120 mo. 120 mo.
Fair value of options on grant date $ 245,173 $ 214,931
</TABLE>
WARRANTS:
In 1994, the Company issued warrants to purchase 400,000 shares of
common stock at an exercise price of $4.00 to the Company's founders in
consideration for services performed. The warrants expired in August
1998 unexercised. Also, warrants to purchase 1,437,300 shares of common
stock related to the initial public offering which were exercisable at
$4.88 per share expired in August 1998 unexercised.
In addition to the above, the Company's selling agents have a warrant
to purchase 125,000 units (each unit consisting of one share of common
stock and one warrant to purchase one share of common stock) at an
exercise price of $4.80 per unit which expires in August 1999.
The Company's Articles of Incorporation provide that the Company may
redeem, at fair market value, securities held by any person or entity
whose status as a security holder, in the opinion of the Board of
Directors of the Company, may result in the disapproval, modification,
or nonrenewal of any contract or the loss or nonreinstatement from any
governmental agency of any license or franchise held by the Company or
any of its subsidiaries, which license or franchise is conditioned upon
some or all of the holders of capital stock meeting certain criteria.
30
<PAGE>
<TABLE>
<CAPTION>
5. EARNINGS PER SHARE
Year Ended December 31, 1998 Year Ended December 31,1997
---------------------------------------------- ----------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- --------------- ------------ -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 433,747 $ 135,788
------------- --------------
------------- --------------
BASIC EPS
Income available
to common
stockholders 433,747 3,005,164 $ .14 135,788 2,976,961 $ .05
------------- ------------ -------------- -------------
------------- ------------ -------------- -------------
EFFECT OF DILUTIVE
SECURITIES
Stock options 83,889 114,932
--------------- ----------------
DILUTED EPS
Income available
to common stock-
holders $ 433,747 3,089,053 $ .14 $ 135,788 3,091,893 $ .04
------------- --------------- ------------ -------------- ---------------- ------------
------------- --------------- ------------ -------------- ---------------- ------------
</TABLE>
Options to purchase 211,000 shares of common stock at a weighted
average exercise price of $3.42 per share were outstanding during 1998
but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of
the common shares. The options which expire in an average of 33 months
were still outstanding at the end of year 1998. In addition, the
1,837,400 warrants which expired in August 1998, and 125,000 warrants
which expire in August 1999, were excluded in both years because the
weighted average exercise price of $4.70 was greater than the average
market price of the common shares.
6. LINES OF CREDIT
At December 31, 1997 the Company had a $3,000,000 line of credit
arrangement with the Chairman of the Board, of which $1,651,942 was
outstanding. The interest rate for borrowings under the line of credit
was the prime rate at December 31, 1997. This line of credit was paid
off on June 11, 1998 and was replaced by a commercial revolving credit
line with Bremer Bank, N.A.. Interest charged to operations under the
line of credit with the Chairman of the Board was approximately $43,000
and $112,000 for the periods ended December 31, 1998 and 1997,
respectively.
The Company entered into a general credit and security agreement with
Bremer Bank, N.A., a financial institution located in South Saint Paul,
Minnesota, on June 3, 1998. Borrowings under the credit agreement
include a commercial revolving credit line which provides for maximum
advances of $2,250,000 with interest at the prime rate (7.75% at
December 31, 1998). The new lending arrangement also includes a term
loan commitment of $750,000. Interest charged to operations under this
line of credit was approximately $27,000 for the period ended December
31, 1998. The credit agreement contains certain covenants requiring the
Company to maintain certain financial ratios. The Company was in
compliance with these requirements as of December 31, 1998. The
Company's current loan arrangements with a commercial bank prohibit
the payment of dividends without the bank's consent.
31
<PAGE>
7. OPERATING LEASES AND COMMITMENTS
In May 1994 the Company entered into a five-year totalizator services
agreement with Autotote Systems, Inc. (Autotote). Pursuant to the
agreement, Autotote provides totalizator equipment and computer
programs which record and process all wagers and calculate the odds and
payoffs. For such services, Autotote receives a fee of approximately
.35% of the gross monies wagered. Amounts charged to operations under
this agreement for the years ended December 31, 1998 and 1997 were
approximately $306,000 and $311,000, respectively. During the 1998
and1997 live race meets, Autotote provided uplink services which
enabled the Company to simulcast horse races held at Canterbury Park to
out-of-state racetracks. These services resulted in an amount charged
to operations in 1998 and 1997 of approximately $102,000 and $95,000,
respectively. Effective January 1, 1999, the Company extended the
totalizator services agreement with Autotote through April, 2004. A
director of the Company is the regional sales manager of Autotote.
8. CONTINGENCIES
In connection with the purchase of JRI (note 1), the company entered
into an Earn Out Promissory Note dated March 29, 1994. In accordance
with the Earn Out Note if (i) off-track betting becomes legally
permissible in the State of Minnesota and (ii) the Company begins to
conduct off-track betting with respect to or in connection with its
operations, the Company will be required to pay to the IMR Fund, L.P.
the greater of $700,000 per operating year, as defined, or 20% of the
net pretax profit, as defined for each of five operating years. At 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 recorded as an increase to the
purchase price. 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.
9. RELATED-PARTY TRANSACTIONS
The president/director and two other directors have guaranteed
performance by the Company under a $500,000 bond issued to the
Minnesota Racing Commission.
In 1998 and 1997, the Company paid $40,000 and $50,000, respectively,
to a Board member for advertising and marketing services provided to
the Company. This Board member was also granted 15,000 stock options in
1998 and 12,500 stock options in 1997 (refer to Note 4).
10. OPERATING SEGMENTS
The Company has two reportable operating segments: horse racing and
concessions. The horse racing segment includes simulcast and live
racing operations. The concessions segment provides concessions during
simulcast racing, live racing and special events. The Company's
reportable operating segments are strategic business units that offer
different products and services. They are managed separately because
the segments differ in the nature of the products and services provided
as well as processes to produce those products and services. The horse
racing segment is regulated by the State of Minnesota Racing
Commission.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies.
All depreciation, interest expense and income taxes are recorded in the
horse racing segment and no allocation is made to concessions for
shared facilities. However, the concessions segment pays approximately
25% of gross revenues to the horse racing segment for use of the
facilities.
32
<PAGE>
The following table provides information about the Company's operating
segments (in 000's):
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31,1997
--------------------------------------------- --------------------------------------------
Horse Racing Concessions Total Horse Racing Concessions Total
-------------- -------------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers $16,494 $2,701 $19,195 $15,679 $2,523 $18,202
Intersegment revenues 725 725 592 592
Net interest expense (111) (111) (160) (160)
Depreciation and
amortization 901 901 857 857
Segment income before
income taxes 377 62 439 137 131 268
Segment Assets $9,347 $240 $9,587 $9,705 $249 $9,954
-------------- -------------- ------------- ------------- --------------- -------------
-------------- -------------- ------------- ------------- --------------- -------------
</TABLE>
Included in horse racing segment revenues for the years ended December
31, 1998 and 1997 is approximately $680,000 and $195,000, respectively,
for rental of the racing facility for special events.
The following are reconciliations of reportable segment revenue, income
before income taxes, and assets, to the Company's consolidated totals
(in 000's):
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
REVENUES
Total revenue for reportable segments $19,920 $18,794
Elimination of intersegment revenues (725) (592)
------------------- -------------------
Total consolidated revenues 19,195 18,202
------------------- -------------------
------------------- -------------------
INCOME BEFORE INCOME TAXES
Total segment income before income taxes $439 $268
Elimination of intersegment income before income taxes (53) (124)
------------------- -------------------
Total consolidated income before income taxes 386 144
------------------- -------------------
------------------- -------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------- -------------------
<S> <C> <C>
ASSETS
Total assets for reportable segments $9,587 $9,954
Elimination of intercompany receivables (169) (131)
------------------- -------------------
Total consolidated assets 9,418 9,823
------------------- -------------------
------------------- -------------------
</TABLE>
33
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information required under this item with respect to the directors
will be set forth in a section captioned "Election of Directors"
in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on June 3, 1999 (the "1999 Proxy Statement"),
a definitive copy of which will be filed with the Commission within
120 days of the close of the 1998 fiscal year, which information is
incorporated herein by reference. Information regarding executive
officers is presented under Item 1 herein.
ITEM 10. EXECUTIVE COMPENSATION
Information required under this item will be set forth in a section
entitled "Executive CompensatioCompany's 1999 Proxy Statement which
information is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item will be set forth in a section
entitled "Shareholdings of Principal Shareholders and Management" in
the Company's 1999 Proxy Statement which information is incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item will be set forth in a section
entitled "Certain Transactions" in the Company's 1999 Proxy Statement
which information is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. See Exhibit Index at page 36 which is incorporated herein
by reference. Exhibits that cover management contracts or
compensatory plans or arrangements are marked with an asterisk (*) on
the Exhibit Index.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
fourth quarter of 1998.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 1999 CANTERBURY PARK HOLDING CORPORATION
By /s/ Randall D. Sampson
---------------------------------------------
Randall D. Sampson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the date set forth above.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
CURTIS A. SAMPSON, DALE H. SCHENIAN and RANDALL D. SAMPSON as his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Annual Report on
Form 10-KSB and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ---- ----
<S> <C> <C>
/s/Curtis A. Sampson Chairman of the Board March 31, 1999
- -------------------------------------
Curtis A. Sampson
/s/ Dale H. Schenian Director; Vice Chairman March 31, 1999
- -------------------------------------
Dale H. Schenian
/s/ Randall D. Sampson Chief Executive Officer, President, March 31, 1999
- ------------------------------------- Chief Financial Officer, General
Randall D. Sampson Manager, Treasurer and Director
/s/ Brian C. Barenscheer Director March 31, 1999
- -------------------------------------
Brian C. Barenscheer
/s/ Gibson Carothers Director March 31, 1999
- -------------------------------------
Gibson Carothers
/s/ Terence McWilliams Director March 31, 1999
- -------------------------------------
Terance McWilliams
/s/ Carin Offerman Director March 31, 1999
- -------------------------------------
Carin Offerman
/s/ Judith M. Dahlke
- ------------------------------------- Chief Accounting Officer March 31, 1999
Judith M. Dahlke
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY
Exhibit Index To
Form 10-KSB for the Year Ended December 31, 1998
Regulation S-B Location in Consecutive Numbering
Exhibit Table System as Filed with the Securities
Reference Title of Document and Exchange Commission
- --------------------- -------------------------------------------------- --------------------------------------
<S> <C> <C>
3.1 Articles of Incorporation, as amended. Filed as Exhibit 3.1 to the Forms SB-2
Registration Statement of the Company,
File No. 33-81262C, (the "SB-2
Registration Statement") and
incorporated herein by reference.
3.2 Bylaws, as amended Filed as Exhibit 3.2 to the SB-2
Registration Statement and incorporated
herein by reference.
4.1 Warrant Agreement between the Company and the Filed as Exhibit 4.1 to the SB-2
Warrant Agent Registration Statement and incorporated
herein by reference.
10.1 Plan of Reorganization dated as of May 20, 1994 Filed as Exhibit 10.1 to the SB-2
between Canterbury Park Holding Corporation and Registration Statement and incorporated
Canterbury Park Concessions, Inc. herein by reference.
10.2 Restated Stock Purchase Agreement Filed as Exhibit 10.2 to the SB-2
Registration Statement and incorporated
herein by reference.
10.3 Letter dated April 4, 1994 from the Minnesota Filed as Exhibit 10.3 to the SB-2
Horsemen's Benevolent and Protective Association, Registration Statement and incorporated
Inc. to Minnesota Racing Commission waiving 125 herein by reference.
day racing minimum
10.4 Totalizator Services Agreement dated May 2, 1994 Filed as Exhibit 10.4 to the SB-2
between Autotote Systems, Inc. and Canterbury Registration Statement and incorporated
Park Holding Corporation. herein by reference.
10.5 Stock Option Plan, as amended* Filed as Exhibit 4.1 to the
Registration Statement on Form S-8 of
the Company filed on August 28, 1997
(File No. 333-34509) and incorporated
herein by reference.
10.6 Form of Non-qualified Stock Option Agreement Filed as Exhibit 10.6 to the SB-2
Registration Statement and incorporated
herein by reference.
</TABLE>
* Denotes an exhibit that covers management contracts or compensatory plans or
arrangements.
36
<PAGE>
<TABLE>
<CAPTION>
Regulation S-B Location in Consecutive Numbering
Exhibit Table System as Filed with the Securities
Reference Title of Document and Exchange Commission
- --------------------- -------------------------------------------------- -----------------------------------
<S> <C> <C>
10.7 Curtis A. Sampson Guaranty to HRA Filed as Exhibit 10.7 to the SB-2
Registration Statement and incorporated
herein by reference.
10.8 Form of Founders' Warrants Filed as Exhibit 10.8 to the SB-2
Registration Statement and incorporated
herein by reference.
10.9 Curtis A. Sampson Warrant Filed as Exhibit 10.9 to the SB-2
Registration Statement and incorporated
herein by reference.
10.10 General Credit and Security Agreement dated as of Filed as Exhibit 10.10 herewith at page
June 3, 1998 between Canterbury Park Holding 40.
Corporation and Bremer Bank N.A. (previously
First American Bank, N.A.) This exhibit 10.10
replaces exhibit 10.10 filed previously as an
exhibit to the SB-2 Registration Statement.
10.11 Stock Purchase Savings Plan Filed as Exhibit 10.11 to Form
10-KSB for the fiscal year ended
December 31, 1997 and incorporated
herein by reference.
10.12 Compensatory Employee and Advisor Filed as Exhibit 4.2 to the
Stock Plan Registration Statement on Form S-8 of
the Company filed on August 28, 1997
(File No. 333-34509) and incorporated
herein by reference.
10.13 Stock Option Plan for Non-Employee Consultants Filed as Exhibit 4.3 to the
and Advisors Registration Statement on Form S-8 of
the Company filed on August 28, 1997
(File No. 333-34509) and incorporated
herein by reference.
21 Subsidiary of the Registrant Filed herewith at page 38.
23 Independent Auditors' Consent Filed herewith at page 39.
24 Power of Attorney Included in signature page at
page 35.
</TABLE>
The exhibits referred to in this Exhibit will be supplied to a shareholder at a
charge of $.25 per page upon written request directed to Canterbury Park Holding
Corporation at the executive offices of the Company.
37
<PAGE>
EXHIBIT 10.10
GENERAL CREDIT AND SECURITY AGREEMENT
THIS AGREEMENT, dated as of the 3rd day of June, 1998, between First
American Bank, National Association, a national banking association, having its
mailing address and principal place of business at 633 South Concord Street,
South St. Paul, MN 55075 (herein called "Lender"), and Canterbury Park Holding
Corporation, a Minnesota corporation, having offices at 1100 Canterbury Road,
Shakopee, Minnesota 55379, (herein called "Borrower").
1. AGREEMENT. This Agreement states the terms and conditions under which
Borrower may obtain certain loans from Lender.
2. CERTAIN DEFINITIONS. For purposes of this Agreement, the following
terms shall have the following meanings:
"ADVANCE(S)" shall have the meaning provided in Paragraph
4A(a).
"AFFILIATE" shall include, with respect to any party, any
Person which directly or indirectly controls, is controlled by, or is
under common control with such party and, in addition, in the case of
Borrower, each officer, director or shareholder of Borrower, and each
joint venturer and partner of Borrower.
"ASSIGNMENT OF RENTS" shall mean the Assignment of Leases and
Rents to be made by the Borrower in favor of the Lender covering the
Mortgaged Property and securing the Term Loan, as originally executed
and as it may be amended, modified, supplemented, restated or replaced
from time to time.
"BORROWER" shall have the meaning provided in the preamble
hereto.
"BUSINESS DAY" shall mean any day on which commercial banks in
Minneapolis, Minnesota are open for the transaction of business of the
kind contemplated by this Agreement.
"CASH MANAGEMENT AGREEMENT" shall have the meaning provided in
Paragraph 4A. (b).
"CHANGE OF CONTROL" shall mean the occurrence after the date
of this Agreement of any event where: (a) Curtis A. Sampson, Randall D.
Sampson and Dale Schenian shall cease to respectively own 35%, 5% and
15% of the aggregate voting power of all classes of the Borrower's
stock entitled to vote generally in the election of the Borrower's
directors; or (b) Curtis A. Sampson, Randall D. Sampson and Dale
Schenian, acting
40
<PAGE>
individually or in concert, shall cease to control the election of a
majority of the Borrower's board of directors or the direction of the
Borrower's management policies.
"CHATTEL PAPER" shall have the meaning ascribed to such term
in Article 9 of the Commercial Code.
"CLOSING DATE" shall mean the day specified by Borrower on
which all of the conditions precedent specified in Paragraphs 21 and 23
shall have been satisfied; and, if the Term Loan is then being
obtained, all of the conditions precedent specified in Paragraph 22
shall also have been satisfied.
"COLLATERAL" shall have the meaning provided in Paragraph 3.
"COMMERCIAL CODE" shall mean the Uniform Commercial Code as
enacted in the State of Minnesota, as amended from time to time.
"CONTINGENT OBLIGATIONS" shall mean, with respect to any
Person, all of such Person's liabilities and obligations which are
contingent upon and will not mature unless and until the occurrence of
some event or circumstance and which are not included within the
definition of Liabilities of such Person.
"DEFAULT" shall mean any event which, with the giving of
notice or passage of time, or both, would constitute an Event of
Default.
"DEFAULT RATE" shall mean a fluctuating rate per annum equal
at all times to the sum of the Reference Rate PLUS 2.00% per annum.
"EQUIPMENT" shall have the meaning provided in Paragraph 3(c).
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as the same may from time to time be amended, and the rules
and regulations promulgated thereunder by any governmental agency or
authority, as from time to time in effect.
"ERISA AFFILIATE shall mean, with respect to any Person, any
trade or business (whether or not incorporated) which is a member of a
group of which such Person is a member and which is under common
control within the meaning of Section 414 of the Code, as amended from
time to time, and the regulations promulgated and rulings issued
thereunder.
"ERISA EVENT" shall mean: (a) a Reportable Event described in
Section 4043 of ERISA and the regulations issued thereunder (other than
a Reportable Event not subject to the provision for 30-day notice to
the PBGC under such regulations); (b) the
41
<PAGE>
withdrawal of Borrower or any ERISA Affiliate from a Plan during a plan
year in which it was a "substantial employer" as defined in Section
4001(a)(2) of ERISA; (c) the filing of a notice of intent to terminate
a Plan or the treatment of a Plan amendment as a termination under
Section 4041 of ERISA; (d) the institution of proceedings to terminate
a Plan by the PBGC under Section 4042 of ERISA; or (e) any other event
or condition that might reasonably be expected to constitute grounds
under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Plan.
"EVENT OF DEFAULT" shall have the meaning provided in
Paragraph 20.
"GAAP" shall mean generally accepted accounting principles
consistently applied and maintained throughout the period indicated and
consistent with the audited financial statements delivered to Lender
pursuant to Paragraph 15(h). Whenever any accounting term is used
herein which is not otherwise defined, it shall be interpreted in
accordance with GAAP.
"GENERAL INTANGIBLES" shall have the meaning provided in
Paragraph 3(d).
"INDEMNITY" shall mean the Environmental and ADA Indemnity
Agreement to be made by the Borrower in favor of the Lender, as
originally executed and as amended, modified, restated or replaced from
time to time.
"INDEPENDENT PUBLIC ACCOUNTANTS" shall mean Deloitte & Touche
or any other firm of independent public accountants which is acceptable
to Lender.
"INVENTORY" shall have the meaning provided in Paragraph 3(b).
"LETTERS OF CREDIT" shall have the meaning provided in Section
2C(a).
"LETTER OF CREDIT APPLICATION(S)" shall have the meaning
provided in Section 2C(b).
"LETTER OF CREDIT COMMISSION" shall have the meaning provided
in Section 2.6(e).
"LETTER OF CREDIT COMMITMENT" shall mean, at any date, the
maximum amount of Letter of Credit Obligations which may from time to
time be outstanding hereunder and under the Letter of Credit
Applications, being initially $150,000.00 and, as the context may
require, the agreement of Lender to issue the Letters of Credit for the
account of Borrower subject to the terms and conditions of this
Agreement.
"LETTER OF CREDIT OBLIGATIONS" on any date shall mean the sum
of: (a) the aggregate amount available to be drawn on the Letters of
Credit on such date; PLUS (b) the
42
<PAGE>
aggregate amount owed by Borrower to Lender on such date as a result of
draws on the Letters of Credit for which Borrower has not reimbursed
Lender.
"LETTER OF CREDIT COMMITMENT TERMINATION DATE" shall mean the
Revolving Credit Termination Date.
"LIABILITIES" of any Person shall mean those items which, in
accordance with GAAP, appear as liabilities on a balance sheet.
"LOAN(S)" shall mean the Revolving Credit Loan and the Term
Loan.
"LOAN DOCUMENT(S)" shall mean individually or collectively, as
the case may be, this Agreement, the Notes, the Mortgage, the
Assignment of Rents, the Indemnity Agreement, the Letter of Credit
Applications and any and all other documents executed, delivered or
referred to herein or therein, as originally executed and as amended,
modified or supplemented from time to time.
"MATERIAL ADVERSE OCCURRENCE" shall mean any occurrence of
whatsoever nature (including, without limitation, any adverse
determination in any litigation, arbitration or governmental
investigation or proceeding) which Lender shall determine, in its sole
discretion, could adversely affect the present or prospective financial
condition or operations of Borrower or impair the ability of Borrower
to perform its obligations under this Agreement or any other Loan
Document.
"MATURITY DATE" shall mean, with respect to: (a) the Revolving
Credit Loan, the earliest of (i) March 31, 1999, or (ii) the date upon
which the obligations are declared to be due and payable (or
automatically become due and payable) upon the occurrence of an Event
of Default as provided in Paragraph 20, or (iii) the date upon which
this Agreement terminates as provided in Paragraph 24; or (b) the Term
Loan, the earliest of (i) the day prior to the fifth annual anniversary
date of the closing of the Term Loan or (ii) the date upon which the
obligations are declared to be due and payable (or automatically become
due and payable) upon the occurrence of an Event of Default as provided
in Paragraph 20, or (iii) the date upon which this Agreement terminates
as provided in Paragraph 24.
"MONTHLY PAYMENT DATE" shall mean the first day of each month.
"MORTGAGE" shall mean the Combination Mortgage, Security
Agreement, Assignment of Leases and Rents and Fixture Financing
Statement to be made by the Borrower in favor of the Bank covering the
Mortgaged Property and securing the Term Loan, as originally executed
and as amended, modified, supplemented, restated or replaced from time
to time.
43
<PAGE>
"MORTGAGED PROPERTY" shall have the meaning provided in the
Mortgage.
"MULTIEMPLOYER PLAN" shall mean a "multiemployer plan" as
defined in Section 4001(a)(3) of ERISA to which Borrower is making or
accruing an obligation to make contributions, or has within any of the
preceding three plan years made or accrued an obligation to make
contributions.
"NET INCOME" for any period shall mean net income for such
period, determined in accordance with GAAP excluding, however, (i)
extraordinary gains, and (ii) gains (whether or not extraordinary) from
sales or other dispositions of assets other than the sale of Inventory
in the ordinary course of Borrower's business.
"NOTE(S)" shall mean the Revolving Credit Note and the Term
Note. "OBLIGATIONS" shall have the meaning provided in Paragraph 3.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or
any successor board, authority, agency, officer or official of the
United States administering the principal functions assigned on the
date hereof to the Pension Benefit Guaranty Corporation under ERISA.
"PARTICIPANT" shall mean each Person who purchases a
participation interest from Lender in the obligations.
"PERSON" shall mean any natural person, corporation, firm,
partnership, association, government, governmental agency or any other
entity, whether acting in an individual, fiduciary or other capacity.
"PLAN" shall mean each employee benefit plan or other class of
benefits covered by Title IV of ERISA, in either case whether now in
existence or hereafter instituted, of Borrower or any of its
Subsidiaries.
"QUARTERLY PAYMENT DATE" shall mean the last day of each
March, June, September and December.
"RECEIVABLES" shall have the meaning provided in Paragraph
3(a).
"REFERENCE RATE" shall mean the publicly announced base rate
(or other publicly announced reference rate) charged by Bremer
Financial Corporation; Borrower acknowledges that the Reference Rate
may not be the lowest rate made available by Lender to its customers
and that Lender may lend to its customers at rates that are at, above
or below the Reference Rate.
44
<PAGE>
"REPORTABLE EVENT" shall have the meaning given to that term
in Title IV of ERISA.
"REVOLVING CREDIT COMMITMENT" shall mean $2,250,000.00 and, as
the context may require, the agreement of the Lender to make Advances
to the Borrower up to the Revolving Credit Commitment subject to the
terms and conditions of this Agreement.
"REVOLVING CREDIT LOAN" shall mean, at any date of
determination, the aggregate outstanding principal amount of all
Advances.
"REVOLVING CREDIT NOTE" shall mean promissory note in the form
of EXHIBIT A attached hereto and made a part hereof made by Borrower
payable to the order of Lender to evidence the Advances and each
renewal, replacement or substitute note therefor.
"REVOLVING CREDIT TERMINATION DATE" shall mean the Maturity
Date of the Revolving Credit Loan.
"SECURITY INTEREST" shall mean any lien, pledge, mortgage,
encumbrance, charge or security interest of any kind whatsoever
(including, without limitation, the lien or retained security title of
a conditional vendor) whether arising under a security instrument or as
a matter of law, judicial process or otherwise or the agreement by
Borrower to grant any lien, security interest or pledge, mortgage or
encumber any asset.
"SUBORDINATED DEBT" shall mean indebtedness of Borrower for
borrowed money which is subordinated to the Obligations on terms
satisfactory to Lender in its sole discretion.
"TANGIBLE NET WORTH" shall mean, at any date of determination,
the difference between: (a) the total assets appearing on the
Borrower's balance sheet at such date prepared in accordance with GAAP
after deducting adequate reserves in each case where, in accordance
with GAAP, a reserve is proper; and (b) the total liabilities appearing
on such balance sheet (the "Total Liabilities"); EXCLUDING, HOWEVER,
from the determination of total assets: (i) goodwill, organizational
expenses, research and development expenses, trademarks, trade names,
copyrights, patents, patent applications, licenses and rights in any
thereof, covenants not to compete, training costs and other similar
intangibles; (ii) all deferred charges or unamortized debt discount and
expense other than deferred income taxes; (iii) securities which are
not readily marketable; (iv) any write-up in the book value of any
assets resulting from a re-evaluation thereof subsequent to the date of
Borrower's annual financial statement described in Section 15(h); (v)
amounts due from officers or Affiliates; and (vi) any asset acquired
subsequent to the date of this Agreement which the Lender, in its
reasonable business judgment, determines to be an intangible asset.
45
<PAGE>
"TERM LOAN" shall mean the loan described in Paragraph 4B.
"TERM LOAN COMMITMENT" shall mean $750,000.00 and, as the
context may require, the agreement of the Lender to make the Term Loan
subject to the terms and conditions of this Agreement.
"TERM LOAN COMMITMENT TERMINATION DATE" shall mean the earlier
of: (a) March 31, 1999; or (b) the Maturity Date of the Term Loan.
"TERM NOTE" shall mean promissory note in the form of EXHIBIT
B attached hereto and made a part hereof made by Borrower payable to
the order of Lender to evidence the Term Loans and each renewal,
replacement or substitute note therefor.
"TOTAL USAGE" shall mean, at any date of determination, the
sum of the Revolving Credit Loan and the Letter of Credit Obligations.
3. SECURITY. As security for all present and future sums loaned or
advanced by Lender to Borrower and for all other obligations now or hereafter
chargeable to Borrower's loan account hereunder, and all other obligations and
liabilities of any and every kind of Borrower to Lender, due or to become due,
direct or indirect, absolute or contingent, joint or several, howsoever created,
arising or evidenced, now existing or hereafter at any time created, arising or
incurred including, without limitation, the Loans and the Letter of Credit
Obligations (herein called "Obligations'), Borrower hereby grants to Lender a
security interest in and to the following property:
(a) All Receivables of Borrower now owned or hereafter acquired or
arising, together with all customer lists, original books and records,
ledger and account cards, computer tapes, discs, printouts and records,
whether now in existence or hereafter created. "Receivables" means all
rights of Borrower to the payment of money, whether or not earned and
howsoever evidenced or arising, including (without limitation) all
present and future "Accounts", "Chattel Paper", "Instruments", and
rights to payment which are "General Intangibles" (as those terms are
used in the Commercial Code), all security therefor and all of
Borrower's rights as an unpaid seller of goods (including rescission,
replevin, reclamation and stopping in transit) and all of Borrower's
rights to any goods represented by any of the foregoing including
returned or repossessed goods;
(b) All Inventory of Borrower, whether now owned or hereafter acquired
and wherever located. "Inventory" includes all Goods (as defined in
Article 9 of the Commercial Code) intended for sale or lease or to be
furnished under contracts of service, all raw materials and work in
process therefor, all finished goods thereof, all materials and
supplies of every nature used or usable or consumed or consumable in
connection with the manufacture, packing, shipping, advertising,
selling, leasing or furnishing of
46
<PAGE>
such Goods, and all accessories thereto and all documents of title
therefor evidencing the same;
(c) All Equipment of Borrower, whether now owned or hereafter acquired
and wherever located. "Equipment" includes all of Borrower's Goods
other than Inventory, all replacements and substitutions therefor and
all accessions thereto, and specifically includes, without limitation,
all present and future machinery, equipment, vehicles, manufacturing
equipment, shop equipment, office and record keeping equipment,
furniture, fixtures, parts, tools and all other Goods (except
Inventory) used or acquired for use by Borrower for any business or
enterprise;
(d) All General Intangibles (as defined in Article 9 of the Commercial
Code) of Borrower, whether now owned or hereafter acquired, including
(without limitation) all present and future purchase money security
interests (more fully described in paragraph 16(j) below), domestic and
foreign patents, patent applications, trademarks, trademark
applications, copyrights, trade names, trade secrets, patent and
trademark licenses (whether Borrower is licensor or licensee), shop
drawings, engineering drawings, blueprints, specifications, parts
lists, manuals, operating instructions, customer and supplier lists,
licenses, permits, franchises, the right to use Borrower's corporate
name and the goodwill of Borrower's business; and
(e) All products and proceeds of any and all of the foregoing and all
products and proceeds of any other Collateral (as hereinafter defined)
including the proceeds of any insurance covering any of the Collateral.
All such Receivables, Inventory, Equipment, General Intangibles, products and
proceeds, together with all other assets and properties of Borrower in or on
which Lender is now or hereafter granted a security interest, mortgage, lien or
encumbrance pursuant to this Agreement or otherwise, are hereinafter sometimes
referred to as "Collateral".
4. TERMS OF LENDING; ETC.
1.
4A. ADVANCES.
(a) At the request of Borrower, Lender agrees, subject to the
terms and conditions of this Agreement, to make loans (each such loan
being herein sometimes called individually an "Advance" and
collectively the "Advances") to Borrower from time to time on any
Business Day during the period from the date hereof and ending on the
Revolving Credit Termination Date; PROVIDED, HOWEVER, that Lender shall
not be required to make any Advance if, after giving effect to such
Advance, the Total Usage would exceed the Revolving Credit Commitment.
The amount of each such Advance shall be charged to Borrower's loan
account.
47
<PAGE>
(b) In order to obtain an Advance, Borrower shall give written
or telephonic notice to Lender, by not later than 1:00 p.m.
(Minneapolis time) on the date the requested Advance is to be made
Lender, shall make such Advance by transferring the amount thereof in
immediately available funds for credit to an account (other than a
payroll account) of Borrower at Lender, as specified in such notice;
PROVIDED, HOWEVER, that no request for an Advance shall be required if
such Advance is to be made under that certain Execusweep-Loan Sweep
Agreement dated as of June ___, 1998 (the "Cash Management Agreement")
between Borrower and Lender and each such Advance shall deemed to have
been requested by Borrower under this Agreement. At the request of
Lender, Borrower shall confirm in writing any telephonic notice.
(c) The obligation of Lender to make Advances shall terminate
on the Revolving Credit Termination Date.
(d) Borrower agrees that, on the Maturity Date of the
Revolving Credit Loan, it will repay the entire outstanding principal
balance of the Revolving Credit Loan together with accrued interest
thereon and all accrued fees without presentment or demand for payment,
notice of dishonor, protest or notice of protest, all of which are
hereby waived.
(e) The Advances shall be evidenced by the Revolving Credit
Note made by Borrower payable to the order of Lender; SUBJECT, HOWEVER,
to the provisions of such Note to the effect that the principal amount
payable thereunder at any time shall not exceed the then unpaid
principal amount of the Revolving Credit Loan made by Lender. Borrower
hereby irrevocably authorizes Lender to make or cause to be made, at or
about the time of each Advance made by Lender, an appropriate notation
on the records of Lender, reflecting the principal amount of such
Advance, and Lender shall make or cause to be made, on or about the
time of receipt of payment of any principal of the Revolving Credit
Note, an appropriate notation on its records reflecting such payment.
The aggregate amount of all Advances set forth on the records of Lender
shall be rebuttable presumptive evidence of the principal amount owing
and unpaid on the Revolving Credit Note.
4B. TERM LOAN
(a) At the request of Borrower made prior to the Term Loan
Commitment Termination Date, Lender agrees, subject to the terms and
conditions of this Agreement, to make a term loan (the "Term Loan") to
Borrower in an amount up to the Term Loan Commitment.
(b) In order to obtain the Term Loan, Borrower shall give
written or telephonic notice to Lender, by not later than close of
Lender's business at least ten (10)
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Business Days prior to the date on which Borrower desires that the Term
Loan be made. Such notice shall be accompanied by the documents
described in Paragraph 22(j) and EXHIBIT D attached hereto. On the
requested date but subject to the terms and conditions of this
Agreement, Lender shall make the Term Loan by transferring the amount
thereof in immediately available funds to the Title Company closing
Borrower's acquisition of the Mortgaged Property.
(c) The obligation of Lender to make the Term Loan shall
terminate on the Term Loan Commitment Termination Date.
(d) The Term Loan shall be evidenced by the Term Note made by
Borrower payable to the order of Lender; SUBJECT, HOWEVER, to the
provisions of such Note to the effect that the principal amount payable
thereunder at any time shall not exceed the then unpaid principal
amount of the Term Loan made by Lender. Borrower hereby irrevocably
authorizes Lender to make or cause to be made, at or about the time on
which the Term Loan is made by Lender, an appropriate notation on the
records of Lender, reflecting the principal amount of the Term Loan,
and Lender shall make or cause to be made, on or about the time of
receipt of payment of any principal of the Term Note, an appropriate
notation on its records reflecting such payment. The outstanding
principal amount of the Term Loan set forth on the records of Lender
shall be rebuttable presumptive evidence of the principal amount owing
and unpaid on the Term Note.
4C. LETTERS OF CREDIT
(a) Subject to the terms and conditions of this Agreement,
Lender agrees to issue stand-by letters of credit (the "Letters of
Credit") from time to time on terms acceptable to Lender on any
Business Day during the period from the date hereof and ending on the
Letter of Credit Commitment Termination Date; PROVIDED, HOWEVER, that
Lender shall not be required to issue any Letter of Credit if, after
giving effect to such issuance, either: (i) the Total Usage would
exceed the Revolving Credit Commitment; or (ii) the Letter of Credit
Obligations would exceed the Letter of Credit Commitment.
(b) In order to obtain a Letter of Credit, Borrower shall
appropriately complete, duly execute and deliver to Lender an
application for a Letter of Credit in form acceptable to Lender (the
"Letter of Credit Application(s)") by no later than the close of
Lender's business at least five (5) Business Days prior to the date on
which Borrower desires that the Letter of Credit be issued.
Notwithstanding anything to the contrary set forth in this Agreement or
any other Loan Document, no Letter of Credit shall have an expiry date
later than the Letter of Credit Commitment Termination Date.
(c) The obligation of Lender to issue Letters of Credit shall
terminate on the Letter of Credit Commitment Termination Date.
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(d) Borrower agrees to pay to Lender on demand: (i) the amount
of each draft or other request for payment drawn under any Letter of
Credit (whether drawn before or on its stated expiry date) issued by
Lender; and (ii) interest on all amounts referred to in clause (i)
above from the date of such draw until payment in full at a fluctuating
rate per annum at all times equal to the Reference Rate PLUS 2.00% per
annum.
(e) Borrower agrees to pay to Lender a commission (the "Letter
of Credit Commission") of 1.5% per annum upon the undrawn face amount
of each Letter of Credit issued by Lender outstanding from time to
time. The Letter of Credit Commission for each Letter of Credit shall
be payable in advance: (1) on the date of issuance of such Letter of
Credit for the initial period from the date of issuance through, to and
including the day preceding the immediately following Quarterly Payment
Date; and (2) on each Quarterly Payment Date following such issuance
date for the following quarter (or, any lesser period if the relevant
Letter of Credit is scheduled to expire prior to the end of such
quarter). Borrower further agrees to pay to Lender all reasonable and
customary charges, fees and expenses which Lender may generally assess
to its customers in connection with, and any and all expenses which
Lender may pay or incur in connection with, the issuance, extension,
amendment or payment of any Letter of Credit.
(f) The rights of Lender against Borrower hereunder shall be
in addition to all rights under (and shall control over any conflict
under) any Letter of Credit Application.
5. INTEREST. Borrower agrees to pay interest on the outstanding
principal amount of each Loan at the rates and at the times specified in the
Note evidencing such Loan. Each change in the interest rates due to a change in
the Reference Rate shall take effect simultaneously with the corresponding
change in the Reference Rate. Interest may be charged to Borrower's loan account
as an Advance at Lender's option, whether or not Borrower then has a right to
obtain an Advance pursuant to the terms of this Agreement.
6. SET-OFF; ETC. Upon the occurrence of a Default or an Event of
Default, Lender is hereby authorized at any time and from time to time, without
notice to Borrower (any such notice being expressly waived by Borrower), to set
off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by Lender or any Participant to or for the credit or the account of Borrower,
any amounts held in any account maintained at Lender or any Participant, against
any and all amounts which may be owed to Lender or any Participant by Borrower
whether in connection with this Agreement or otherwise and irrespective of
whether Borrower shall have made any requests under this Agreement.
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7. COLLECTION.
(a) At any time after the occurrence of an Event of Default,
Lender may notify account debtors on the Receivables (the "Customers")
at any time that Receivables have been assigned to Lender and collect
them directly in Lender's own name but unless and until Lender does so
or gives Borrower other instructions, Borrower shall make collection
for Lender at Borrower's sole cost and expense. Following the
occurrence of an Event of Default, Borrower shall deliver to Lender all
full and partial payments arising from the sale or other disposition of
Collateral received by Borrower their original form, except for
endorsement where necessary. Until such payments are so delivered to
Lender, such payments shall be held in trust by Borrower for and as
Lender's property and shall not be commingled with any funds of
Borrower. The net amount received by Lender as proceeds arising from
the sale or other disposition of Collateral will be credited by Lender
to Borrower's loan account (subject to final collection thereof) after
allowing the number of days required by the applicable bank for
collection of checks and other instruments.
8. WARRANTY AS TO COLLATERAL. Borrower warrants that:
(a) All Receivables listed in Borrower's financial statements
or schedules will, when Borrower delivers such financial statements or
the schedules to Lender, be bona fide existing obligations created by
the sale and actual delivery of goods or the rendition of services to
Customers in the ordinary course of business, which Borrower then owns
free of any Security Interest except for the Security Interest in favor
of Lender created by this Agreement and which are then unconditionally
owing to Borrower without defense, offset or counterclaim; and
(b) all Inventory and Equipment is and shall be owned by
Borrower, free of any Security Interest except for the Security
Interest of Lender created by this Agreement or Security Interests
permitted by Paragraph 18(c).
Lender's rights to and security interest in the Collateral will not be impaired
by the ineligibility of any such Collateral for Advances and will continue to be
effective until all Obligations chargeable to Borrower's loan account have been
fully satisfied.
9. POWER OF ATTORNEY. Borrower appoints Lender, or any other person
whom Lender may from time to time designate, as Borrower's attorney with power:
(a) to endorse Borrower's name on any checks, notes, acceptances, drafts or
other forms of payment or security that may come into Lender's possession; (b)
to sign Borrower's name on any invoice or bill of lading relating to any
Receivables, on drafts against Customers, on schedules and confirmatory
assignments of Receivables, on notices of assignment, financing statements and
amendments under the Commercial Code and other public records, on verifications
of accounts and on notices
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to Customers; (c) to notify the post office authorities to change the address
for delivery of Borrower's mail to an address designated by Lender; (d) to
receive, open and dispose of all mail addressed to Borrower; (e) to send
requests for verification of accounts to Customers; and (f) to do all things
necessary to carry out this Agreement; PROVIDED, HOWEVER, that the powers
specified in clauses (c) and (d) above may be exercised only after the
occurrence of an Event of Default. Borrower ratifies and approves all acts of
the attorney taken within the scope of this power of attorney. Neither Lender
nor the attorney will be liable for any acts of commission or omission nor for
any error in judgment or mistake of fact or law. This power, being coupled with
an interest, is irrevocable so long as any Receivable in which Lender has a
security interest or any Obligation remains unpaid. Borrower waives presentment
and protest of all instruments and notice thereof, notice of default and
dishonor and all other notices to which Borrower may otherwise be entitled.
10. LOCATION OF COLLATERAL. Borrower warrants that its chief executive
office is at the address stated in the opening paragraph of this Agreement and
that its books and records concerning Receivables are located there. Borrower's
Inventory, Equipment and other goods are at the location or locations as
designated on SCHEDULE A annexed hereto. Borrower shall immediately notify
Lender if any additional locations for Collateral are subsequently established.
Borrower shall not change the location of its chief executive office, the place
where it keeps its books and records, or the location of any Collateral (except
for sales of Inventory or obsolete Equipment in the ordinary course of business)
until Borrower has obtained the written consent of Lender and all necessary
filings have been made and other actions taken to continue the perfection of
Lender's Security Interest in such new location. Lender's Security Interest
attaches to all the Collateral wherever located, and the failure of Borrower to
inform Lender of the location of any item or items of Collateral shall not
impair Lender's Security Interest therein.
11. OWNERSHIP AND PROTECTION OF COLLATERAL. Borrower warrants,
represents and covenants to Lender that the Collateral is now and, so long as
Borrower is obligated to Lender, will be, owned by Borrower free and clear of
all Security Interests except for the Security Interest in favor of Lender
created by this Agreement and except the Security Interests, if any, permitted
by Paragraph 18(c). Borrower will not sell, lease or otherwise dispose of the
Collateral, or attempt so to do (except for sales in the ordinary course of
business of Inventory or obsolete Equipment) without the prior written consent
of Lender and unless the proceeds of any such sale (including, without
limitation, sales in the ordinary course of business of Inventory or obsolete
Equipment) are deposited in Borrower's "Main Operating Account" described in the
Cash Management Agreement. After the occurrence of a Default or an Event of
Default, Lender will at all times have the right to take physical possession of
any tangible Collateral and to maintain such possession on Borrower's premises
or to remove the same or any part thereof to such other places as Lender may
wish. If Lender exercises Lender's right to take possession of such Collateral,
Borrower shall on Lender's demand, assemble the same and make it available to
Lender at a place reasonably convenient to Lender. Borrower shall at all times
keep the Equipment constituting Collateral in good condition and repair. All
expenses of protecting,
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storing, warehousing, insuring, handling and shipping of the Collateral, all
costs of keeping the Collateral free of any Security Interests prohibited by
this Agreement and of removing the same if they should arise, and any and all
excise, property, sales and use taxes imposed by any state, federal or local
authority on any of the Collateral or in respect of the sale thereof, shall be
borne and paid by Borrower and if Borrower fails to promptly pay any thereof
when due, Lender may, at its option, but shall not be required to, pay the same
and charge Borrower's loan account therefor. Borrower agrees to renew all
insurance required by this Paragraph 11 or Paragraph 13 at least 30 days prior
to its expiration.
12. PERFECTION OF SECURITY INTEREST. Borrower agrees to execute such
financing statements together with any and all other instruments or documents
and take such other action, including delivery, as may be required to create,
evidence, perfect and maintain Lender's Security Interest in the Collateral and
Borrower shall not in any manner do any act or omit to do any act which would in
any manner impair or invalidate Lender's Security Interest in the Collateral or
the perfection thereof.
13. INSURANCE. Borrower shall maintain insurance coverage on any
Collateral including Receivables and other rights to payment with such
companies, against such hazards, and in such amounts as may from time to time be
acceptable to Lender and shall deliver such policies or copies thereof to Lender
with satisfactory lender's loss payable endorsements naming Lender. Each policy
of insurance shall contain a clause requiring the insurer to give not less than
30 days prior written notice to Lender in the event of any anticipated
cancellation of the policy for any reason and a clause that the interest of
Lender shall not be impaired or invalidated by any act or neglect of Borrower
nor by the occupation of the premises wherein such Collateral is located for
purposes more hazardous than are permitted by said policy. Borrower will
maintain, with financially sound and reputable insurers, insurance with respect
to its properties and business against such casualties and contingencies of such
types (which may include, without limitation, public and product liability,
larceny, embezzlement, or other criminal misappropriation insurance) and in such
amounts as may from time to time be required by Lender.
14. BORROWER'S LOAN ACCOUNT. Lender may charge to Borrower's loan
account at any time the amounts of all Obligations (and interest, if
any, thereon) owing by Borrower to Lender, including (without
limitation) loans, Advances, the Term Loan, the Letters of Credit
Obligations, debts, liabilities, obligations acquired by purchase,
assignment or participation and all other obligations, whenever
arising, whether absolute or contingent and whether due or to become
due; also the amount of all costs and expenses and all attorneys' fees
and legal expenses incurred in
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connection with efforts made to enforce payment of such obligations, or
to obtain payment of any Receivables, or the foreclosure of any
Collateral or in the prosecution or defense of any actions or
proceedings relating in any way to this Agreement whether or not suit
is commenced, including reasonable attorneys' fees and legal expenses
incurred in connection with any appeal of a lower court's order or
judgment; and also the amounts of all unpaid taxes and the like, owing
by Borrower to any governmental authority or required to be deposited
by Borrower, which Lender pays or deposits for Borrower's account. All
sums at any time standing to Borrower's credit on Lender's books and
all of Borrower's property at any time in Lender's possession or upon
or in which Lender has a Security Interest, may be held by Lender as
security for all obligations which are chargeable to Borrower's loan
account. Subject to the foregoing, Lender, at Borrower's request, will
remit to Borrower any net balance standing to Borrower's credit on
Lender's books. Lender will account to Borrower monthly and each
monthly accounting will be fully binding on Borrower, unless, within
sixty (60) days thereafter, Borrower gives Lender specific written
notice of exceptions. All debit balances in Borrower's loan account
will bear interest as provided in Paragraph 5 of this Agreement.
15. PARTICIPATIONS. If any Person shall acquire a participation in any
Loan or the Letters of Credit Obligations made to Borrower hereunder, Borrower
hereby grants to any such Person holding a participation, and such Person shall
have and is hereby given a continuing Security Interest in any money, securities
and other property of Borrower in the custody or possession of such Participant,
including the right of set-off as fully as if such Participant had lent directly
to Borrower the amount of such participation.
16. GENERAL REPRESENTATIONS AND WARRANTIES. To induce Lender to make
Advances and the Term Loan hereunder, Borrower makes the following
representations and warranties, all of which shall survive the initial Advance:
1.
(a) Borrower is a corporation duly organized, existing, and in
good standing under the laws of the State of Minnesota, has power to
own its property and to carry on its business as now conducted, and is
duly qualified to do business in all states in which the nature of its
business requires such qualification.
(b) The execution and delivery of this Agreement and the other
Loan Documents and the performance by Borrower of its obligations
hereunder and thereunder do not and will not conflict with any
provision of law, or of the charter or bylaws of Borrower, or of any
agreement binding upon Borrower.
(c) The execution and delivery of this Agreement and the other
Loan Documents have been duly authorized by all necessary official
action by the Board of Directors and shareholders of Borrower; and this
Agreement and the other Loan Documents have in fact been duly executed
and delivered by Borrower and constitute its lawful and binding
obligations, legally enforceable against it in accordance with their
respective terms.
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(d) There is no action, suit or proceeding at law or equity,
or before or by any federal, state, local or other governmental
department, commission, board, bureau, agency or instrumentality,
domestic or foreign, pending or, to the knowledge of Borrower,
threatened against Borrower or the property of Borrower which, if
determined adversely, would be a Material Adverse Occurrence or would
affect the ability of Borrower to perform its obligations under the
Loan Documents; and the Borrower is not in default with respect to any
final judgment, writ, injunction, decree, rule or regulation of any
court or federal, state, local or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or
foreign, where the effect of such default would be a Material Adverse
Occurrence.
(e) The authorization, execution and delivery of this
Agreement, and the payment of the Loans and interest thereon, is not,
and will not be, subject to the jurisdiction, approval or consent of
any federal, state or local regulatory body or administrative agency.
(f) Except as set forth on SCHEDULE B attached hereto, all of
the assets of Borrower are free and clear of Security Interests.
(g) Borrower has filed all federal, state and local tax
returns which, to the knowledge of Borrower, are required to be filed,
and Borrower has paid all taxes shown on such returns and all
assessments which are due. Borrower has made all required withholding
deposits. Federal income tax returns of Borrower have been examined and
approved or adjusted by the applicable taxing authorities or closed by
applicable statutes for any fiscal years prior to and including the
fiscal year ended on December 31, 1991 . Borrower does not have
knowledge of any objections to or claims for additional taxes by
federal, state or local taxing authorities for subsequent years which
would be a Material Adverse Occurrence.
(h) Borrower has furnished to Lender the financial statements
described on SCHEDULE C attached hereto. These statements were prepared
in accordance with GAAP and present fairly the financial condition of
Borrower and its consolidated Subsidiaries. There has been no material
adverse change in the condition of Borrower, financial or otherwise,
since the date of the most recent of such financial statements.
(i) The value of the assets and properties of Borrower at a
fair valuation and at their then present fair salable value is and,
after giving effect to any pending Advance and the application of the
amount advanced, will be materially greater than its total liabilities,
including Contingent Obligations, and Borrower has (and has no reason
to believe that it will not have) capital sufficient to pay its
liabilities, including Contingent Obligations, as they become due.
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(j) Borrower is in compliance with all requirements of law
relating to pollution control and environmental regulations in the
respective jurisdictions where Borrower is presently doing business or
conducting operations.
(k) All amounts obtained pursuant to Advances will be used for
Borrower's working capital purposes and to finance capital expenditures
permitted to made pursuant hereto. The Term Loan will be used to
partially finance Borrower's acquisition of the Mortgaged Property. No
part of any Loan shall be used at any time by Borrower to purchase or
carry margin stock (within the meaning of Regulation U promulgated by
the Board of Governors of the Federal Reserve System) or to extend
credit to others for the purpose of purchasing or carrying any margin
stock. Borrower is not engaged principally, or as one of its important
activities, in the business of extending credit for the purposes of
purchasing or carrying any such margin stock. No part of the proceeds
of any Loan will be used by Borrower for any purpose which violates, or
which is inconsistent with, any regulations promulgated by the Board of
Governors of the Federal Reserve System.
(l) Except for the trademarks, patents, copyrights and
franchise rights listed on SCHEDULE D attached hereto, Borrower is not
the owner of any patent, trademark, copyright or franchise rights.
Borrower is not an "investment company", or an "affiliated person" of,
or a "promoter" or "principal underwriter" for, an "investment
company", as such terms are defined in the Investment Company Act of
1940, as amended. The making of the Loans, the application of the
proceeds and repayment thereof by Borrower and the performance of the
transactions contemplated by this Agreement will not violate any
provision of said Act, or any rule, regulation or order issued by the
Securities and Exchange Commission thereunder.
(m) (i) Each Plan is in compliance in all material respects
with all applicable provisions of ERISA and the Code; (ii) the
aggregate present value of all accrued vested benefits under all Plans
(calculated on the basis of the actuarial assumptions specified in the
most recent actuarial valuation for such Plans) did not exceed as of
the date of the most recent actuarial valuation for such Plans the fair
market value of the assets of such Plans allocable to such benefits;
(iii) Borrower is not aware of any information since the date of such
valuations which would materially affect the information contained
therein; (iv) no Plan which is subject to Part 3 of Subtitle B of Title
I of ERISA or Section 412 of the Code has incurred an accumulated
funding deficiency, as that term is defined in Section 302 of ERISA or
Section 412 of the Code (whether or not waived); (v) no liability to
the PBGC (other than required premiums which have become due and
payable, all of which have been paid) has been incurred with respect to
any Plan, and there has not been any Reportable Event which presents a
material risk of termination of any Plan by the PBGC; and (vi) Borrower
has not engaged in a transaction which would subject it to tax, penalty
or liability for prohibited transactions imposed by ERISA or the
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Code. Borrower does not contribute to any Multiemployer Plan.
(n) The number of shares and classes of the capital stock of
Borrower and the ownership thereof are accurately set forth on SCHEDULE
E attached hereto. Borrower has not: (i) issued any unregistered
securities in violation of the registration requirements of Section 5
of the Securities Act of 1933, as amended, or any other law; or (ii)
violated any rule, regulation or requirement under the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, in either case where the effect of such violation would be a
Material Adverse Occurrence. No proceeds of the Advances will be used
to acquire any security in any transaction which is subject to Section
13(d) or 14(d) of the Securities Exchange Act of 1934, as amended.
(o) Except as set forth on SCHEDULE F attached hereto,
Borrower does not have any Contingent Obligations.
(p) Borrower has conducted a comprehensive review and
assessment of its computer applications and has made inquiry of
Borrower's material suppliers, vendors and customers with respect to
the Year 2000 Problem and, based upon such review, Borrower reasonably
believes that the Year 2000 Problem will not result in a material
adverse change in Borrower's business, condition (financial or
otherwise), operations, properties or prospects, or ability to repay
the Obligations. Year 2000 Problem means the risk that computer
applications used by any Person may be unable to recognize the perform
properly date-sensitive functions involving certain dates prior to and
any date after December 31, 1999.
(q) All factual information heretofore or herewith furnished
by or on behalf of Borrower to Lender for purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
other such factual information hereafter furnished by or on behalf of
Borrower to Lender will be, true and accurate in every material respect
on the date as of which such information is dated or certified and no
such information contains any material misstatement of fact or omits to
state a material fact or any fact necessary to make the statements
contained therein not misleading.
(r) Each representation and warranty shall be deemed to be
restated and reaffirmed to Lender on and as of the date of the making
of each Advance and the Term Loan and of the issuing of each Letter of
Credit, as the case may be, under this Agreement except that any
reference to the financial statements referred to in Paragraph 16(h)
shall be deemed to refer to the financial statements then most recently
delivered to Lender pursuant to Paragraphs 17(a)(i) and (ii).
17. AFFIRMATIVE COVENANTS. Borrower agrees that it will do all of the
following:
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(a) Furnish to Lender in form satisfactory to Lender:
(i) Within 90 days after the end of each fiscal year of
Borrower, a complete audited financial report prepared and certified
without qualification or explanatory language by Independent Public
Accountants on a Consolidated and consolidating basis for Borrower and
any Consolidated Subsidiaries of Borrower; together with a copy of the
management letter or memorandum, if any, delivered by such Independent
Public Accountants to Borrower and Borrower's response thereto. If
Borrower shall fail to supply the report within such time limit, Lender
shall have the right (but not the duty) to employ certified public
accountants acceptable to Lender to prepare such report at Borrower's
expense.
(ii) Within 45 days after the end of each fiscal quarter, a
balance sheet and operating figures as to that quarter and year-to date
prepared in accordance with GAAP on a Consolidated and consolidating
basis for Borrower and any Consolidated Subsidiaries of Borrower and
certified as correct by the chief financial officer or treasurer of
Borrower but subject to adjustments as to inventories or other items to
which an officer of Borrower directs attention in writing.
(iii) With the financial statements described in Paragraph
17(a)(i) and (ii), a compliance certificate in the form attached as
EXHIBIT C certified as true and accurate by the chief financial officer
or treasurer of Borrower.
(iv) By no later than 45 days after the beginning of any of
the Borrower's fiscal years, projections for Borrower's then current
fiscal year consisting of projected month-end balance sheets and
month-end and year-to-date statements of earnings and cash flows, all
in a form acceptable to Lender and certified by Borrower's chief
financial officer or treasurer as having been prepared in good faith
and representing the most probable course of Borrower's business during
such fiscal year.
(v) Immediately upon and in any event within five (5) days
after any officer of Borrower becomes aware of any Default or Event of
Default, a notice describing the nature thereof and what action
Borrower proposes to take with respect thereto
(vi) As soon as available and in event within ten (10) days
after the filing thereof, a copy of each report filed with the
Securities and Exchange Commission.
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(vii) Immediately upon becoming aware of the occurrence, with
respect to any Plan, of any Reportable Event or any "prohibited
transaction" (as defined in Section 4975 of the Code), a notice
specifying the nature thereof and what action the Borrower proposes to
take with respect thereto, and, when received, copies of and notice
from PBGC of intention to terminate or have a trustee appointed for any
Plan.
(viii) From time to time, at Lender's request, any and all
other material, reports, information, or figures required by Lender.
(b) Permit Lender and its representatives access to, and the
right to make copies of, the books, records, and properties of Borrower
at all reasonable times; and permit Lender and its representatives to
discuss Borrower's financial matters with officers of Borrower and with
its independent certified public accountant (and, by this provision,
Borrower authorizes its independent certified public accountant to
participate in such discussions).
(c) Pay when due all taxes, assessments, and other liabilities
against it or its properties except those which are being contested in
good faith and for which an adequate reserve has been established;
Borrower shall make all withholding payments when due.
(d) Promptly notify Lender in writing of any substantial
change in present management of Borrower.
(e) Pay when due all amounts necessary to fund in accordance
with its terms any Plan;
(f) Comply in all material respects with all laws, acts,
rules, regulations and orders of any legislative, administrative or
judicial body or official applicable to Borrower's business operation
or Collateral or any part thereof; PROVIDED, HOWEVER, that Borrower may
contest any such law, act, rule, regulation or order in good faith by
appropriate proceedings so long as (i) Borrower first notifies Lender
of such contest, and (ii) such contest does not, in Lender's sole
discretion, adversely affect Lender's right or priority in the
Collateral or impair Borrower's ability to pay the Obligations when
due.
(g) Promptly notify Lender in writing of: (x) any litigation
which: (i) involves an amount in dispute in excess of $50,000.00 which
is not covered by insurance or, if covered by insurance, the insurer
has failed to accept defense of the litigation or has done so under a
reservation of rights; (ii) relates to the matters which are the
subject of this Agreement; or (iii) if determined adversely to Borrower
would be a Material Adverse Occurrence; and (y) any adverse development
in any litigation described in clause (x) which could cause a Material
Adverse Occurrence.
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(h) Maintain all of Borrower's primary operating accounts at
Lender.
(i) At all times, maintain the ratio of: (i) Borrower's
Liabilities; to (ii) Tangible Net Worth at not greater than 1.15 to
1.0.
(j) Maintain Borrower's Tangible Net Worth at not less than:
(i) $5,000,000.00 at all times other than at its fiscal year-end; or
(ii) $5,500,000.00 at each of its fiscal year-ends.
18. NEGATIVE COVENANTS. Borrower agrees that it will not do any of the
following, without first obtaining Lender's prior written consent:
(a) Purchase or redeem any shares of Borrower's capital stock;
or declare or pay any dividends (other than dividends payable in
capital stock); or make any distribution to stockholders of any assets
of Borrower except that so long as no Default or Event of Default has
occurred and is continuing at the time of any of the following
described payments or would result therefrom, Borrower may pay
dividends payable from Borrower's net income.
(b) Incur or permit to exist any interest-bearing
indebtedness, secured or unsecured, including without limitation,
indebtedness for money borrowed or capitalized leases, except (i)
borrowings under this Agreement; (ii) borrowings, if any, which are
existing on the date of this Agreement and which are disclosed on
SCHEDULE G attached hereto; (iii) borrowing from the Minnesota
Horesman's Benevolent & Protective Association, Inc. so long as the
aggregate outstanding principal amount of such borrowings does not
exceed $750,000.00 at any time and such borrowings are unsecured and do
not have any priority of payment over the Obligations upon the
occurrence of any Default or Event of Default described in Paragraph
20(d), (e), (f), (g) or (h); (iv) capital leases permitted by Paragraph
18(l) and then only so long as the aggregate balance sheet amount, as
determined in accordance with GAAP, does not exceed $250,000.00 at any
time; or (v) purchase money indebtedness incurred in connection with
capital expenditures permitted by Paragraph 18(l)(ii) so long as the
aggregate outstanding principal balance thereof does not exceed
$250,000.00 at any time.
(c) Create or permit to exist any Security Interest on any of
Borrower's assets now owned or hereafter acquired except: (i) those
created in Lender's favor and held by Lender; (ii) liens of current
taxes not delinquent or taxes which are being contested in good faith
for which an adequate reserve has been established; (iii) Security
Interests disclosed on SCHEDULE B attached hereto and in the case of
Security Interests disclosed in Part II of SCHEDULE B, securing only
debt outstanding on the date of this Agreement and disclosed on
SCHEDULE G; PROVIDED, HOWEVER, that Security Interests disclosed in
Part I of
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SCHEDULE B are permitted only so long as: (A) Borrower's title to its
property is not materially adversely affected; (B) its use of such
property in the ordinary course of its business is not materially
interfered with; (C) adequate reserves with respect thereto have been
set aside on the Borrower's books in accordance with GAAP; and (D) in
all events, the Borrower shall pay or cause to be paid all such secured
amounts forthwith upon the commencement of foreclosure of any such
Security Interest; or (iv) security interests created in connection
with purchase money indebtedness incurred in connection with the
capital expenditures permitted by Paragraph 18(l)(ii), but only to the
extent that: (A) such security interest attaches only to the equipment
then being acquired by the Borrower, did not and does not attach to the
Borrower's current assets and does not secure any other indebtedness;
(B) no Default or Event of Default has occurred and is continuing at
the time of the proposed creation of such security interest or would
result therefrom; and/or (C) no portion of the purchase price of the
relevant equipment has been funded by the trade-in or available
proceeds arising from the sale or other disposition of any of the
Borrower's then, or previously, owned equipment.
(d) Effect any recapitalization; or be a party to any merger
or consolidation; or sell, transfer, convey or lease all, or any
substantial part, of its property where "substantial" means property
having an aggregate book value (as measured by Borrower's then most
recent audited financial statements delivered to Lender) of at least
$100,00.00 for any single transaction (or related series of
transactions) or aggregate book value of at least $500,000.00 for all
transactions in any fiscal year ; or sell or assign (except to Lender),
with or without recourse, any Receivables or General Intangibles.
(e) Enter into a new business or purchase or otherwise acquire
any business enterprise or any substantial assets of any person or
entity; or make any loans to any person or entity except for loans and
advances to officers for expenses to be incurred in the ordinary course
of business so long as the aggregate outstanding principal amount
thereof does not exceed $10,000.00 at any time; or purchase any shares
of stock of, or similar investment in, any entity.
(f) Become a guarantor or surety or pledge its credit or its
assets on any undertaking of another.
(g) Make any substantial change in present management or
policy or in its present business or enter into a new business.
(h) Enter into any agreement providing for the leasing by
Borrower of property which has been or is to be sold or transferred by
Borrower to the lessor thereof, or which is substantially similar in
purpose to the property so sold or transferred.
(i) Change its fiscal year.
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(j) (i) Permit or suffer any Plan maintained for employees of
Borrower or any commonly controlled entity to engage in any transaction
which results in a liability of Borrower under Section 409 or 502(i) of
ERISA or Section 4975 of the Code; (ii) permit or suffer any such Plan
to incur any "accumulated funding deficiency" (within the meaning of
Section 302 of ERISA and Section 412 of the Code), whether or not
waived; (iii) terminate, or suffer to be terminated, any Plan covered
by Title IV of ERISA maintained by Borrower or any commonly controlled
entity or permit or suffer to exist a condition under which PBGC may
terminate any such Plan; or (iv) permit to exist the occurrence of any
Reportable Event (as defined in Title IV of ERISA) which represents
termination by the PBGC of any Plan.
(k) Enter into any agreement containing any provision which
would be violated or breached by Borrower under any Loan Document or by
the performance by Borrower of its obligations under any Loan Document.
(l) Make capital expenditures (including without limitation by
way of capitalized leases) except for replacement and repair of
Borrower's existing Equipment or for acquisition of new Equipment
consistent with Borrower's present business practices and then, only so
long as the aggregate amount of all such capital expenditures made
during any of Borrower's fiscal years does not exceed the sum of: (i)
the amount of capital leases permitted by Paragraph 18(b); PLUS (ii) an
aggregate amount of $250,000.00 for other capital expenditures.
19. AVAILABILITY OF COLLATERAL. Intentionally Deleted.
20. DEFAULT AND REMEDIES. It shall be an Event of Default under this
Agreement if:
(a) Borrower fails to make any payment required under this
Agreement or any present or future supplements hereto or under any
other agreement between Borrower and Lender when due, or if payable
upon demand, upon demand and such failure shall remain unremedied for
five (5) days; or
(b) Borrower fails to perform or observe any covenant,
condition or agreement contained in this Agreement or any Loan Document
on its part to be performed (other than those failures covered by other
subparagraphs of this Paragraph) and such default shall continue for a
period of 30 days after written notice thereof from Lender to Borrower;
or
(c) Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower proves to have been
false in a material respect when made; or
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(d) A proceeding seeking an order for relief under the
Bankruptcy Code is commenced by or against Borrower and, if commenced
against Borrower, remains undismissed for 60 days; or
(e) Borrower becomes insolvent or generally fails to pay, or
admit in writing its or his inability to pay, its or his debts as they
become due; or
(f) Borrower applies for, consents to, or acquiesces in, the
appointment of a trustee, receiver or other custodian for it or him or
for any of its or his property, or makes a general assignment for the
benefit of creditors; or, in the absence of such application, consent
or acquiescence, a trustee, receiver or other custodian is appointed
for Borrower or for a substantial part of Borrower's property; or
(g) Any other reorganization, debt arrangement, or other case
or proceeding under any bankruptcy or insolvency law, or any
dissolution or liquidation proceeding is commenced in respect of
Borrower; or
(h) Borrower takes any action to authorize, or in furtherance
of, any of the events described in the foregoing clauses (d) through
(g); or
(i) Any judgments, writs, warrants of attachment, executions
or similar process (not covered by insurance) is issued or levied
against Borrower or any of its assets in excess of an aggregate amount
of $100,00.00 for any or all of such judgments, writs, warrants,
executions or similar process and is not released, vacated or fully
bonded prior to any sale and in any event within 90 days after its
issue or levy; or
(j) Borrower shall fail to comply with Paragraph 13, any of
Paragraphs 17 (a), (i) or (j) or any of Paragraphs 18(a) through (l)
(both inclusive); or
(k) The maturity of any Indebtedness of the Borrower (other
than Indebtedness under this Agreement or the other Loan Documents) in
the aggregate amount of more than $500,000.00 for Borrower shall be
accelerated, or Borrower shall fail to pay any such Indebtedness when
due or, in the case of such Indebtedness payable on demand; or
(l) Any Change of Control shall occur.
Upon the occurrence of any Event of Default described in Paragraphs 20(d), (e),
(f), (g) or (h), all Obligations shall be and become immediately due and payable
without any declaration, notice, presentment, protest, demand or dishonor of any
kind (all of which are hereby waived) and Borrower's ability to obtain any
additional Advance, the Term Loan or any additional Letter of Credit under this
Agreement shall be immediately and automatically terminated. Upon the
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occurrence of any other Event of Default, Lender, without notice to Borrower,
may terminate Borrower's ability to obtain any additional Advance, the Term Loan
or any additional Letter of Credit under this Agreement and may declare all or
any portion of the Obligations to be due and payable, without notice,
presentment, protest or demand or dishonor of any kind (all of which are hereby
waived), whereupon the full unpaid amount of the obligations which shall be so
declared due and payable shall be and become immediately due and payable. Upon
the occurrence of an Event of Default, Lender shall have all the rights and
remedies of a secured party under the Commercial Code and may require Borrower
to assemble the Collateral and make it available to Lender at a place designated
by Lender, and Lender shall have the right to take immediate possession of the
Collateral and may enter any of the premises of Borrower or wherever the
Collateral is located with or without process of law and to keep and store the
same on said premises until sold (and if said premises be the property of
Borrower, Borrower agrees not to charge Lender or a purchaser from Lender for
storage thereof for a period of at least 90 days). Upon the occurrence of an
Event of Default, Lender, without further demand, at any time or times, may sell
and deliver any or all of the Collateral at public or private sale, for cash,
upon credit or otherwise, at such prices and upon such terms as Lender deems
advisable, at its sole discretion. Any requirement under the Commercial Code or
other applicable law of reasonable notice will be met if such notice is mailed
to Borrower at its address set forth in the opening paragraph of this Agreement
at least ten (10) days before the date of sale. Lender may be the purchaser at
any such sale, if it is public. The proceeds of sale will be applied first to
all expenses of retaking, holding, preparing for sale, selling and the like,
including attorneys' fees and legal expenses (whether or not suit is commenced)
including, without limitation, reasonable attorneys' fees and legal expenses
incurred in connection with any appeal of a lower court's order or judgment and
second to the payment (in whatever order Lender elects) of all other obligations
chargeable to Borrower's loan account hereunder. Subject to the provisions of
the Commercial Code, Lender will return any excess to Borrower and Borrower
shall remain liable to Lender for any deficiency. Borrower agrees to give Lender
immediate notice of the existence of any Default or Event of Default.
Borrower agrees that if the Obligations become immediately due and
payable in full at a time when one or more Letters of Credit are outstanding,
the Borrower shall thereupon automatically be obligated to pay to Lender, in
addition to all other amounts owing under this Agreement, the aggregate face
amount of all Letters of Credit then outstanding. The foregoing obligation to
pay in advance for amounts which Lender may later have to pay pursuant to the
Letters of Credit is and shall at all times constitute a part of the
"Obligations". Amounts paid by Borrower pursuant to this paragraph shall be made
directly to an interest-bearing collateral account maintained at Lender for
application to Borrower's reimbursement obligations under Paragraph 4C(d) as
payments are made on the Letters of Credit, with the balance, if any, to be
applied to the other Obligations
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21. CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of Lender
to make the initial Advance is subject to the condition precedent that Lender
shall have received on or before the date of the initial Advance copies of all
of the following, unless waived by Lender:
(a) A favorable opinion of counsel to Borrower in form and
substance satisfactory to Lender;
(b) UCC-1 Financing Statements in a form acceptable to Lender
appropriately completed and duly executed by Borrower;
(c) Recent UCC searches from the filing offices in all states
required by Lender which reflect that no other Person holds a Security
Interest in any Collateral of Borrower, except for Security Interests
permitted by Paragraph 18(c);
(d) The Revolving Credit Note, in form and substance
satisfactory to Lender, appropriately completed and duly executed by
the Borrower;
(e) A certified copy of all documents evidencing any necessary
consent or governmental approvals (if any) with respect to the Loan
Documents or any other documents provided for in this Agreement;
(f) A certificate by the Secretary or any Assistant Secretary
of Borrower certifying as to: (i) attached resolutions of Borrower's
Board of Directors authorizing or ratifying the execution, delivery and
performance of the Loan Documents to which Borrower is a party and any
other documents provided for by this Agreement, (ii) the names of the
officers of Borrower authorized to sign the Loan Documents together
with a sample of the true signature of such officers, and (iii)
attached bylaws of Borrower;
(g) A copy of Borrower's articles of incorporation certified
by the Secretary of State;
(h) Certificates of Good Standing for Borrower issued by its
state of incorporation and by those states requested by Lender;
(i) Evidence of insurance for all insurance required by the
Loan Documents;
(j) An officer certificate, in form and substance satisfactory
to Lender, executed by the President of Borrower; and
(k) Such other approvals, opinions or documents as Lender may
require.
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22. CONDITIONS PRECEDENT TO TERM LOAN. The obligation of Lender to make
the Term Loan is subject to the condition precedent that Lender shall have
received on or before the date on which the Term Loan is to made copies of all
of the following, unless waived by Lender:
(a) A favorable opinion of counsel to Borrower in form and
substance satisfactory to Lender;
(b) The Term Note, in form and substance satisfactory to
Lender, appropriately completed and duly executed by Borrower;
(c) The Mortgage, the Assignment of Rents and the Indemnity,
in each case appropriately completed and duly executed by Borrower;
(d) UCC-1 Financing Statements in a form acceptable to Lender
appropriately completed and duly executed by Borrower;
(c) Recent UCC searches from the filing offices in all states
required by Lender which reflect that no other Person holds a Security
Interest in any Collateral of Borrower, except for Security Interests
permitted by Paragraph 18(c);
(d) A certified copy of all documents evidencing any necessary
consent or governmental approvals (if any) with respect to the Loan
Documents or any other documents provided for in this Agreement;
(e) A certificate by the Secretary or any Assistant Secretary
of Borrower certifying as to: (i) attached resolutions of Borrower's
Board of Directors authorizing or ratifying the execution, delivery and
performance of the Loan Documents to which Borrower is a party and any
other documents provided for by this Agreement, (ii) the names of the
officers of Borrower authorized to sign the Loan Documents together
with a sample of the true signature of such officers, and (iii)
attached bylaws of Borrower;
(f) A copy of Borrower's articles of incorporation certified
by the Secretary of State;
(g) Certificates of Good Standing for Borrower issued by its
state of incorporation and by those states requested by Lender;
(h) Evidence of insurance for all insurance required by the
Loan Documents;
(i) An officer certificate, in form and substance satisfactory
to Lender, executed by the President of Borrower;
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(j) The documents described on EXHIBIT D attached hereto by no
later than ten (10) days prior to the closing date for the Term Loan;
and
(k) Such other approvals, opinions or documents as Lender may
require.
23. CONDITIONS PRECEDENT TO ALL ADVANCES; ETC. The obligation of Lender
to make any Advance (including the initial Advance), the Term Loan or to issue
any Letters of Credit (including the initial Letter of Credit) shall be subject
to the satisfaction of each of the following conditions, unless waived in
writing by Lender:
(a) the representations and warranties of Borrower set forth
in this Agreement are true and correct on the date of such credit
extension (and after giving effect to these then being made);
(b) No Default, no Event of Default and no Material Adverse
Occurrence shall then have occurred and be continuing on the date of
such credit extension or result therefrom;
24. TERMINATION. Subject to automatic termination of Borrower's ability
to obtain additional Advances, the Term Loan or any Letters of Credit under this
Agreement upon the occurrence of any Event of Default specified in Paragraphs
20(d), (e), (f), (g) or (h) and to Lender's right to terminate Borrower's
ability to obtain additional Advances, the Term Loan or any Letters of Credit
under this Agreement upon the occurrence of any other Event of Default, this
Agreement shall have a term ending on March 31, 1999, with respect to the
Revolving Credit Commitment and/or the day prior to the fifth annual anniversary
date of the closing of the Term Loan with respect to the Term Loan. Lender's
rights with respect to outstanding Obligations owing on or prior to the
Termination Date will not be affected by termination and all of said rights
including (without limitation) Lender's Security Interest in the Collateral
existing on such Termination Date or acquired by Borrower thereafter.
25. GRANT OF LICENSE TO USE PATENTS AND TRADEMARKS COLLATERAL. For the
purpose of enabling Lender to exercise rights and remedies under this Agreement,
Borrower hereby grants to Lender and irrevocable, non-exclusive license
(exercisable without payment of royalty or other compensation to Borrower) to
use, license or sublicense any patent or trademark now owned or hereafter
acquired by Borrower and wherever the same may be located, and including in such
license reasonable access to all media in which any of the licensed items may be
recorded or stored and to all computer and automatic machinery software and
programs used for the compilation or printout thereof.
26. MISCELLANEOUS.
(a) The performance or observance of any affirmative or
negative covenant or
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other provision of this Agreement and any supplement hereto may be
waived by Lender in a writing signed by Lender but not otherwise. No
delay on the part of Lender in the exercise of any remedy, power or
right shall operate as a waiver thereof, nor shall any single or
partial exercise of any remedy, power or right preclude other or
further exercise thereof or the exercise of any other remedy, power or
right. Each of the rights and remedies of Lender under this Agreement
will be cumulative and not exclusive of any other right or remedy
which Lender may have hereunder or as allowed by law.
(b) Any notice, demand or consent authorized by this Agreement
to be given to Borrower shall be deemed to be given when transmitted by
telex or telecopier or personally delivered, or three days after being
deposited in the U.S. mail, postage prepaid, or one day after delivery
to Federal Express or other overnight courier service, in each case
addressed to Borrower at its address shown in the opening paragraph of
this Agreement, or at such other address as Borrower may, by written
notice received by Lender, designate as Borrower's address for purposes
of notice hereunder. Any notice or request authorized by this Agreement
to be given to Lender shall be deemed to be given when transmitted by
telex or telecopier or personally delivered, or three days after being
deposited in the U.S. mail, postage prepaid, or one day after delivery
to Federal Express or other overnight courier, in each case addressed
to Lender at its address shown in the opening paragraph of this
Agreement, or at such other address as Lender may, by written notice
received by Borrower, designate as Lender's address for purposes of
notice hereunder; PROVIDED, HOWEVER, that any notice to Lender given
pursuant to Paragraph 4A(b); 4B(b) or 4C(b) shall not be deemed given
until received.
(c) This Agreement, including exhibits and schedules and other
agreements referred to herein, is the entire agreement between the
parties supersedes and rescinds all prior agreements relating to the
subject matter herein, cannot be changed, terminated or amended orally,
and shall be deemed effective as of the date it is accepted by Lender.
(d) Borrower agrees to pay and will reimburse Lender on demand
for all out-of-pocket expenses incurred by Lender arising out of this
transaction including without limitation filing and recording fees and
attorneys' fees and legal expenses (whether or not suit is commenced)
incurred in the protection and perfection of Lender's security interest
in the Collateral, in the enforcement of any of the provisions of this
Agreement or of Lender's rights and remedies hereunder and against the
Collateral, in the defense of any claim or claims made or threatened
against Lender arising out of this transaction or otherwise, including,
without limitation, in each instance, all reasonable attorneys' fees
and legal expenses incurred in connection with any appeal of a lower
court's order or judgment; PROVIDED, HOWEVER, that Lender agrees that
Borrower's obligations to reimburse Lender for its attorneys' fees and
legal expenses incurred in connection with the preparation of this
Agreement and the other Loan Documents shall be limited to the sum of
$2,000.00 plus its out-of-pocket expenses.
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(e) Borrower hereby agrees to indemnify, exonerate and hold
Lender and its officers, directors, employees and agents (the
"Indemnified Parties") free and harmless from and against any and all
actions, causes of action, suits, losses, liabilities and damages, and
expenses in connection therewith including, without limitation,
reasonable attorneys' fees and disbursements (the 'Indemnified
Liabilities"), incurred by the Indemnified Parties or any of them as a
result of, or arising out of, or relating to:
(1) any transaction financed or to be financed
in whole or in part directly or indirectly
with proceeds of any Credit extension
hereunder, or
(2) the execution, delivery, performance or
enforcement of this Agreement or any
document executed pursuant hereto by any of
the Indemnified Parties
except for any such Indemnified Liabilities arising on account of any
Indemnified Party's gross negligence or willful misconduct.
If and to the extent that the foregoing undertaking may be
unenforceable for any reason, Borrower hereby agrees to make the
maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law. The
provisions of this Paragraph shall survive termination of this
Agreement.
(f) This Agreement is made under and shall be governed by and
interpreted in accordance with the internal laws of the State of
Minnesota, except to the extent that the perfection of the Security
Interest hereunder, or the enforcement of any remedies hereunder with
respect to any particular Collateral, shall be governed by the laws of
a jurisdiction other than the State of Minnesota. Captions herein are
for convenience only and shall not be deemed part of this Agreement.
(g) This Agreement shall be binding upon Borrower and Lender
and their respective successors, assigns, heirs, and personal
representatives and shall inure to the benefit of Borrower, Lender and
the successors and assigns of Lender, except that Borrower may not
assign or transfer its rights hereunder without the prior written
consent of Lender, and any assignment or transfer in violation of this
provision shall be null and void. In connection with the actual or
prospective sale by Lender of any interest or participation in the
obligations, Borrower authorizes Lender to furnish any information in
its possession, however acquired, concerning Borrower or any of its
Affiliates to any person or entity.
(h) Borrower hereby irrevocably submits to the jurisdiction of
any Minnesota
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state court or federal court sitting in Minneapolis or St. Paul,
Minnesota, over any action or proceeding arising out of or relating to
the Agreement, and Borrower hereby irrevocably agrees that all claims
in respect of such action or proceeding may be heard and determined in
such Minnesota State or Federal court. Borrower hereby irrevocably
waives, to the fullest extent it may effectively do so, the defense of
an inconvenient forum to the maintenance of such action or proceeding.
Borrower irrevocably consents to the service of copies of the summons
and complaint and any other process which may be served in any such
action or proceeding by the mailing by United States certified mail,
return receipt requested, of copies of such process to Borrower's
address stated in the preamble hereto and addressed to Borrower's
President by title. Borrower agrees that judgment final by appeal, or
expiration of time to appeal without an appeal being taken, in any such
action or proceeding shall be conclusive and may be enforced in any
other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Paragraph shall affect the right of
Lender to serve legal process in any other manner permitted by law or
affect the right of Lender to bring any action or proceeding against
Borrower or its property in the courts of any other jurisdiction.
Borrower agrees that, if it brings any action or proceeding arising out
of or relating to this Agreement, it shall bring such action or
proceeding in Hennepin County or Ramsey County, Minnesota.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
LENDER:
FIRST AMERICAN BANK, NATIONAL ASSOCIATION
By: /S/ ERNEST W. JENSEN
--------------------
Its: SENIOR VICE PRESIDENT
---------------------
BORROWER:
CANTERBURY PARK HOLDING CORPORATION
By: /S/ RANDALL D. SAMPSON
----------------------
Its: PRESIDENT
---------
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REVOLVING CREDIT NOTE
$2,250,000.00 MINNEAPOLIS,
MINNESOTA
JUNE 3, 1998
FOR VALUE RECEIVED, the undersigned, CANTERBURY PARK HOLDING
CORPORATION, a Minnesota corporation (the "Borrower"), promises to pay to the
order of FIRST AMERICAN BANK, NATIONAL ASSOCIATION, a national banking
association (the "Lender"), on the Revolving Credit Termination Date, the
principal sum of Two Million Two Hundred Fifty Thousand and No/100ths Dollars
($2,250,000.00) or, if less, the then aggregate unpaid principal amount of the
Advances as may be borrowed by the Borrower under the Credit Agreement and are
outstanding on the Revolving Credit Termination Date. All Advances and all
payments of principal shall be recorded by the Lender in its records which
records shall be conclusive evidence of the subject matter thereof, absent
manifest error.
The Borrower further promises to pay to the order of the Lender
interest on each Advance from time to time outstanding from the date hereof
until paid in full at a fluctuating annual rate equal to the Reference Rate;
PROVIDED, HOWEVER, that, notwithstanding anything to the contrary contained
herein, upon the occurrence and during the continuance of any Event of Default,
the rate of interest hereunder shall be 2.0% per annum above the Reference Rate.
Interest shall be due and payable on the first day of each calendar month,
starting on April 1, 1998, and at maturity. Interest payable after maturity
shall be payable on demand. The term "Reference Rate" shall mean the publicly
announced base rate (or other publicly announced reference rate) charged by
Bremer Financial Corporation; Borrower acknowledges that the Reference Rate may
not be the lowest rate made available by Lender to its customers and that Lender
may lend to its customers at rates that are at, above or below the Reference
Rate. Each change in the fluctuating interest rate shall take effect
simultaneously with the corresponding change in the Reference Rate.
All payments of principal and interest under this Note shall be made in
lawful money of the United States of America in immediately available funds to
the Lender at the Lender's office at 633 South Concord Street, South St, Paul,
MN 55075, or at such other place as may be designated by the Lender to the
Borrower in writing.
This Note is the Revolving Credit Note referred to in, and evidences
indebtedness incurred under, a General Credit and Security Agreement dated as of
June 3, 1998 (herein, as it may be amended, modified or supplemented from time
to time, called the "Credit Agreement;" capitalized terms not otherwise defined
herein being used herein as therein defined) between the Borrower and the
Lender, to which Credit Agreement reference is made for a statement of the terms
and provisions thereof, including those under which the Borrower is permitted
and required to make prepayments and repayments of principal of such
71
<PAGE>
indebtedness and under which such indebtedness may be declared to be immediately
due and payable.
All parties hereto, whether as makers, endorsers or otherwise,
severally waive presentment, demand, protest and notice of dishonor in
connection with this Note.
This Note is made under and governed by the internal laws of the State
of Minnesota.
CANTERBURY PARK HOLDING CORPORATION
By: /S/ RANDALL D. SAMPSON
----------------------
Its: PRESIDENT
---------
72
<PAGE>
LIST OF EXHIBITS
Exhibit A Form of Revolving Credit Note
Exhibit B Form of Term Note
Exhibit C Form of Compliance Certificate
Exhibit D Term Loan Documents
LIST OF SCHEDULES
Schedule A Locations
Schedule B Existing Security Interests
Schedule C Financial Statements
Schedule D Intellectual Property
Schedule E Shareholders
Schedule F Contingent Obligations
Schedule G Existing Indebtedness
73
<PAGE>
EXHIBIT A
REVOLVING CREDIT NOTE
$2,250,000.00 MINNEAPOLIS, MINNESOTA
JUNE 3, 1998
FOR VALUE RECEIVED, the undersigned, CANTERBURY PARK HOLDING
CORPORATION, a Minnesota corporation (the "Borrower"), promises to pay to the
order of FIRST AMERICAN BANK, NATIONAL ASSOCIATION, a national banking
association (the "Lender"), on the Revolving Credit Termination Date, the
principal sum of Two Million Two Hundred Fifty Thousand and No/100ths Dollars
($2,250,000.00) or, if less, the then aggregate unpaid principal amount of the
Advances as may be borrowed by the Borrower under the Credit Agreement and are
outstanding on the Revolving Credit Termination Date. All Advances and all
payments of principal shall be recorded by the Lender in its records which
records shall be conclusive evidence of the subject matter thereof, absent
manifest error.
The Borrower further promises to pay to the order of the Lender
interest on each Advance from time to time outstanding from the date hereof
until paid in full at a fluctuating annual rate equal to the Reference Rate;
PROVIDED, HOWEVER, that, notwithstanding anything to the contrary contained
herein, upon the occurrence and during the continuance of any Event of Default,
the rate of interest hereunder shall be 2.0% per annum above the Reference Rate.
Interest shall be due and payable on the first day of each calendar month,
starting on April 1, 1998, and at maturity. Interest payable after maturity
shall be payable on demand. The term "Reference Rate" shall mean the publicly
announced base rate (or other publicly announced reference rate) charged by
Bremer Financial Corporation; Borrower acknowledges that the Reference Rate may
not be the lowest rate made available by Lender to its customers and that Lender
may lend to its customers at rates that are at, above or below the Reference
Rate. Each change in the fluctuating interest rate shall take effect
simultaneously with the corresponding change in the Reference Rate.
All payments of principal and interest under this Note shall be made in
lawful money of the United States of America in immediately available funds to
the Lender at the Lender's office at 633 South Concord Street, South St, Paul,
MN 55075, or at such other place as may be designated by the Lender to the
Borrower in writing.
This Note is the Revolving Credit Note referred to in, and evidences
indebtedness incurred under, a General Credit and Security Agreement dated as of
June 3, 1998 (herein, as it may be amended, modified or supplemented from time
to time, called the "Credit Agreement;" capitalized terms not otherwise defined
herein being used herein as therein defined) between the Borrower and the
Lender, to which Credit Agreement reference is made for a statement of the
74
<PAGE>
terms and provisions thereof, including those under which the Borrower is
permitted and required to make prepayments and repayments of principal of such
indebtedness and under which such indebtedness may be declared to be immediately
due and payable.
All parties hereto, whether as makers, endorsers or otherwise,
severally waive presentment, demand, protest and notice of dishonor in
connection with this Note.
This Note is made under and governed by the internal laws of the State
of Minnesota.
CANTERBURY PARK HOLDING CORPORATION
By:________________________________
Its:_______________________________
75
<PAGE>
EXHIBIT B
TERM NOTE
$750,000.00 MINNEAPOLIS, MINNESOTA
___________, 1998
FOR VALUE RECEIVED, the undersigned, CANTERBURY PARK HOLDING
CORPORATION, a Minnesota corporation (the
"Borrower"), promises to pay to the order of
FIRST AMERICAN BANK, NATIONAL ASSOCIATION, a
national banking association (the "Lender"),
the principal sum of Seven Hundred Fifth
Thousand and No/100ths Dollars ($750,000.00)
together with interest accruing on the
unpaid principal balance hereof at a
fluctuating annual rate equal to the
Reference Rate in:
(a) 59 consecutive monthly combined installments of principal and
interest in the initial amount of $ ______, commencing on
_______________, 1998 and continuing through, to and including
_______________ , 2003; PROVIDED, HOWEVER, that, since the
Term Loan accrues interest at a floating rate, the principal
and interest payment will be adjusted on last day of
______________ of each year, commencing ______________, 199_
for the following twelve (12) installments and shall be equal
to the amount necessary to fully amortize the Term Loan
balance on such date accruing interest at the rate in effect
on that date over the remaining portion of a hypothetical 180
month amortization period, commencing on _______________, 199_;
and
(b) All remaining principal and accrued interest are due and
payable on _____________, 200_;
.PROVIDED, HOWEVER, that, notwithstanding anything to the contrary contained
herein, upon the occurrence and during the continuance of any Event of Default.
Interest payable after maturity shall be payable on demand The term "Reference
Rate" shall mean the publicly announced base rate (or other publicly announced
reference rate) charged by Bremer Financial Corporation;
76
<PAGE>
Borrower acknowledges that the Reference Rate may not be the lowest rate made
available by Lender to its customers and that Lender may lend to its customers
at rates that are at, above or below the Reference Rate.. Each change in the
fluctuating interest rate shall take effect simultaneously with the
corresponding change in the Reference Rate.
All payments of principal and interest under this Note shall be made in
lawful money of the United States of America in immediately available funds at
the Lender's office at 633 South Concord Street, South St. Paul, MN 55075, or at
such other place as may be designated by the Lender to the Borrower in writing.
All payments shall be applied first to accrued interest and then to principal.
This Note is the Term Note referred to in, and evidences indebtedness
incurred under, a General Credit and Security Agreement dated as of June 3, 1998
(herein, as it may be amended, modified or supplemented from time to time,
called the "Credit Agreement;" capitalized terms not otherwise defined herein
being used herein as therein defined) between the Borrower and the Lender, to
which Credit Agreement reference is made for a statement of the terms and
provisions thereof, including those under which the Borrower is permitted and
required to make prepayments and repayments of principal of such indebtedness
and under which such indebtedness may be declared to be immediately due and
payable.
All parties hereto, whether as makers, endorsers or otherwise,
severally waive presentment, demand, protest and notice of dishonor in
connection with this Note.
This Note is made under and governed by the internal laws of the State
of Minnesota.
CANTERBURY PARK HOLDING CORPORATION
By:________________________________
Its:_______________________________
77
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
Pursuant to Section 17 (a)(iii) of the General Credit and Security
Agreement dated as of June 3, 1998 (the General Credit and Security Agreement as
it may be amended, modified, supplemented or restated from time to time being
the "Credit Agreement"; the terms defined therein being used herein as therein
defined) by and between the undersigned and FIRST AMERICAN BANK, NATIONAL
ASSOCIATION (the "Bank"), the undersigned certifies to the Lender as follows:
1. The financial statements of the Borrower attached hereto for the
period ending ______________, 19__ (the "Financial Statements") have been
prepared in accordance with GAAP applied on a consistent basis subject only to
non-accrual of bonuses, other variations from GAAP which in the aggregate are
not material, year-end adjustments which in the aggregate are not expected to be
materially adverse and the omission of footnotes.
2. The representations and warranties contained in Section 16 of the
Credit Agreement are true and correct as of the date hereof as though made on
that date except that the representations and warranties set forth in Section
16(h) to the financial statements of the Borrower shall be deemed a reference to
the audited and unaudited financial statements of the Borrower, as the case may
be, then most recently delivered to the Lenders pursuant to Section 17(a)(i) or
(ii), as the case may be.
3. As of _________, 199_, (the "Measurement Date") no Default or Event
of Default has occurred and is continuing [except (DESCRIBE HERE ANY DEFAULT OR
EVENT OF DEFAULT AND THE ACTION WHICH THE UNDERSIGNED PROPOSES TO TAKE WITH
RESPECT THERETO.)].
4. SECTION 17(i). The undersigned's minimum required ratio of
Liabilities to Tangible Net Worth was not less than 1.15 to 1.00 and the
undersigned's actual ratio at such Measurement Date was ________ to 1.00 and was
computed in accordance with the Credit Agreement.
5. SECTION 17(j). The undersigned's minimum required Tangible Net Worth
was not less than $_________ and the undersigned's actual Tangible Net Worth at
such Measurement Date was $________ and was computed in accordance with the
Credit Agreement.
Dated ____________, 19__. CANTERBURY PARK HOLDING CORPORATION
BY __________________________________
Its __________________________________
78
<PAGE>
EXHIBIT D
ADDITIONAL TERM LOAN DOCUMENTS
1. A title insurance commitment in accordance with EXHIBIT D-1 from a
title insurance company acceptable to Lender ("Title Company").
2. Three (3) copies of a current (within thirty (30) days prior to
submission) certified ALTA/ACSM Mortgaged Property TITLE SURVEY of the
Mortgaged Property which also meets the requirements set forth on
EXHIBIT D-2.
3. A written environmental review, audit, assessment or report
("Environmental Audit") addressed to Lender (or if to the Borrower,
accompanies by a reliance letter addressed to the Lender), setting
forth the results of an investigation of the Mortgaged Property,
showing that no hazardous or toxic substance, waste, or material, or
any other pollutant or contaminant (including but not limited to
gasoline, asbestos, urea-formaldehyde and polychlorinated biphenyls),
as those terms are defined or used in any applicable statute,
ordinance, code or regulation ("Pollutant"), is present above, on, in
or under the Mortgaged Property, including an historical investigation
of the uses and ownership of the Mortgaged Property, contacts with
appropriate governmental agencies, soil borings and tests, chemical
tests, and such other tests and analyses (hereafter collectively
referred to as "Tests") as may be requested by Lender, conducted by a
competent environmental engineer or consultant that is acceptable to
Lender and is licensed, bonded and insured in accordance with all
applicable statutes, ordinances, codes and regulations, and all
reports, data and other information produced in connection with the
Tests. Lender shall be notified in advance of the date and time of
conducting any Tests and Lender's representatives shall have the right
to observe such Tests. The Environmental Audit shall also specify
whether or not any environmental assessment, study or statement with
respect to the Mortgaged Property is required by any applicable
federal, state, statute, ordinance or governmental regulation. If such
an assessment, study or statement is so required, Borrower shall
provide a copy thereof to Lender, and, if none is so required, Borrower
shall provide Lender with an appropriate declaration of environmental
nonsignificance relating to the Mortgaged Property.
4. A copy of Borrower's purchase agreement for the Mortgaged Property
certified by Borrower's chief financial officer or treasurer to be a
true, correct and complete copy thereof.
5. A current appraisal of the Mortgaged Property, addressed to Lender,
prepared in substantial conformance with (1) Title XI of the Financial
Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA); (2)
the [OCC APPRAISAL STANDARDS OF 12 CFR, PART 34]; and (3) the Code of
Professional Ethics and Standards of Professional Practice and the
American Institute of Real Estate Appraisers and the
79
<PAGE>
Guidelines for Real Estate Appraisal Policies and Review Procedures
adopted by the Lender supervision offices of the Federal Deposit
Insurance Corporation, the Board of Governors of the Federal Reserve
System and the Office of the Comptroller of the Currency as of December
9, 1987. The appraisal report must also contain a Statement of
Assumptions and Limiting Conditions, as well as a dated and signed
Certification in accordance with Standard Rule 2-3 of the Uniform
Standards of Professional Appraisal Practices of the Appraisal
Foundation, and Supplement Standards of Professional Practice of the
American Institute of Real Estate Appraisers. The appraisal must be
signed by an appraiser acceptable to Lender.
6. Evidence that the Mortgaged Property does not lie in the 100-year flood
plain zone.
EXHIBIT D-1
As a pre-closing requirement, Borrower must submit a title
insurance commitment or preliminary title report, issued by a reputable,
commercial title insurance company acceptable to Bank, agreeing to issue a 1970
ALTA form of loan policy of title insurance ("Policy"), in the amount of the
Term Loan, insuring to Lender and its assigns that:
1. The fee owner of the Mortgaged Property is the Borrower.
2. The Mortgage is a first lien upon the Mortgaged Property
and any improvements thereon or to be erected thereon.
3. The Mortgaged Property is free and clear of all other
liens, charges and encumbrances not approved by Lender.
4. All possible contractor and supplier mechanic's and
materialmen's lien claims, rights of parties in
possession and matters which could be shown by an
adequate survey are unconditionally insured against.
- - The commitment or report should be accompanied by complete copies
of all recorded instruments referred to therein.
- - The commitment or report and Policy shall include these
endorsements.
1. ALTA Form No. 100 (Comprehensive).
2. Zoning.
3. Other endorsements required by Lender.
80
<PAGE>
EXHIBIT D-2
SURVEY REQUIREMENTS
A. BOUNDARY SURVEY
These items are to be included and shown on the Boundary Survey:
1. The complete and correct legal description of the Mortgaged Property as shown
on the title insurance commitment or preliminary title report. (Note: It must be
possible to trace the legal description of the Mortgaged Property on the survey
by following the bearings and dimensions around the boundaries of the Mortgaged
Property.)
2. The location of all recorded easements and of all unrecorded easements
ascertainable by an inspection of the Mortgaged Property, which benefit or
burden the Mortgaged Property. (Note: All recorded easements are to be
identified by a document recording number or other document reference.)
3. All areas affected by any recorded restrictions or access limitations. (Note:
All such areas are to be identified by a document recording number or other
document reference.)
4. The location of all adjoining streets, roads, highways and alleys, with
names, rights-of-way widths and distances from the Mortgaged Property noted. If
none adjoin the Mortgaged Property, then the location of the nearest public
street, road or highway and its distance from the Mortgaged Property.
5. The location of public access to the Mortgaged Property and of all entrance
drives and curb cuts.
6. A directional indicator showing North.
7. The street address of any existing improvements.
8. The dimensions of the Mortgaged Property and the locations of existing
improvements as measured in both directions from property lines.
9. The perimeter dimensions of existing improvements.
10. Interior lot lines, if any.
11. All applicable building setback lines.
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<PAGE>
12. The location of existing connections and on-site utility and service lines
for natural gas, electricity, water, and sanitary and storm sewers.
13. The area of the Mortgaged Property.
14. Any portion of the Mortgaged Property which is located in a flood plain or
in any other flood hazard or flood danger area as designated by any governmental
authority claiming jurisdiction over the Mortgaged Property.
The following certification of surveyor.
"I hereby certify to First American Bank, National Association,
Canterbury Park Holding Corporation and ________________Title
Insurance Company and to their heirs, successors and assigns,
that I have surveyed, on the ground, the property legally
described hereon; that this plat of survey is a true, correct
and accurate drawing and representation of said property and of
the size, location, exterior dimensions and boundaries thereof;
that the street addresses, locations and dimensions of all
buildings, and the locations of all parking areas, of any
buildings or other improvements upon said property, of all
fences thereon, of all recorded and/or visible easements, of all
streets, roads, means of public access, utility lines (from each
building to their points of connection with the public systems)
and rights-of-way which affect, benefit or burden said property,
and of all building setback lines which affect said property are
correctly and accurately shown hereon; that there are no
discrepancies, conflicts, gaps, boundary disputes, shortages in
area, encroachments of improvements over boundary lines from or
onto said property or upon easements, overlapping of
improvements, visible easements, overlapping of easements,
roads, alleys, rights-of-way or building set back lines which
affect said property, except as shown hereon; that there are no
fences, light posts or other improvements appurtenant to said
property which are located within the boundary lines of
adjoining properties, except as shown hereon; that the legal
description of said property, as set out hereon, is correct,
complete and accurate; a guaranty that no portion of said
property is located in a flood plain or in any other flood
hazard or flood danger area, as designated by applicable
governmental authorities, except as shown and identified as such
hereon; and that this plat of survey and the survey on which it
is based were made in accordance with "Minimum Standard Detail
Requirements and Classification for ALTA/ACSM Mortgaged Property
Title Surveys," as jointly established and adopted by ALTA and
ASCM in 1992 and meets the requirements of an Urban Survey, as
defined therein."
Dated this __ day of ____________________, 19__.
---------------------------------
[LICENSED SURVEYOR'S SIGNATURE]
[NAME OF SURVEYOR]
Registration Number:
82
<PAGE>
SCHEDULE A
LOCATIONS
1100 Canterbury Road
Shakopee, MN 55379
SCHEDULE B
EXISTING SECURITY INTERESTS
Part I. General Security Interests.
The following Security Interests are permitted:
(a) Deposits of pledges tosecure payment of workers'
compensation, unemployment insurance, old age pensions or
other social security obligations, in the ordinary course of
business of the Borrower;
(b) Security Interests for taxes, fees, asessments and
governmental charges no delinquent or to the extent that
payments therefor shall not at the time be required to be made
in accordance with the provisions of Paragraph 17(C);
(c) Security Interests of carriers, warehousemen, mechanics
and materialmen, and other like Security Interests arising in
the ordinary course of business, for sums not due or to the
extent that the secured amounts are being contested in good
faith by appropriate proceedings;
(d) Deposits to secure the performance of bids, trade
contracts, leases, statutory obligations and other obligations
of a like nature incurred in the ordinary course of business;
and
(e) Zoning restrictions, easements, licenses, restrictions of
the use of real property or irregularities in title thereto,
which do not materially impari the use of such property in the
operation of Borrower's business or the value of such property
for the purpose of such business.
Part II: Specific Security Interests.
See attached search by U.S. Corporate Services, Inc.
83
<PAGE>
SCHEDULE C
FINANCIAL STATEMENTS
See attached Form 1-KSB for the fiscal year ended December
31, 1997.
See Attached Form 10-QSB for the quarter ended March
31, 1998.
SCHEDULE D
INTELLECTUAL PROPERTY
None.
SCHEDULE E
SHAREHOLDERS
Refer to attached Canterbury Park Holding
Corporation Notice of Annual Meeting of
Shareholders and Proxy Statement dated
April 29, 1998.
SCHEDULE F
CONTINGENT OBLIGATIONS
Refer to Financial Statement Footnote #8 in Form 10-KSB p. 29
(atatched to schedule C) for discussion of the JRI Earn Out
Promissory Note.
84
<PAGE>
SCHEDULE G
EXISTING INDEBTEDNESS
As of Close of Business on June 4, 1998
<TABLE>
<CAPTION>
ACCRUED TOTAL
BALANCE INTEREST INDEBTEDNESS
<S> <C> <C> <C>
CURTIS A. SAMPSON
STATE BANK & TRUST COMPANY
NEW ULM MINNESOTA
LINE OF CREDIT 222541 $760,000.00 $16,308.19 $776,308.19
CURTIS A. SAMPSON
STATE BANK & TRUST COMPANY
NEW ULM MINNESOTA
COMMERCIAL LOAN 218695 134,083.86 794.20 134,878.06
HORSEMEN'S BENEVOLENT &
PROTECTIVE ASSOCIATION 499,269.23 32,146.35 531,415.58
TOTAL EXISTING INDEBTEDNESS $1,393,353.09 $49,248.74 $1,442,601.83
------------- ---------- -------------
</TABLE>
85
<PAGE>
Exhibit 21
SUBSIDIARY OF CANTERBURY PARK HOLDING CORPORATION
JURISDICTION OF
SUBSIDIARIES INCORPORATION
Canterbury Park Concessions, Inc. Minnesota
The subsidiary is 100%-owned directly by Canterbury Park Holding Corporation.
The financial statements of such subsidiary are included in the Consolidated
Financial Statements of Canterbury Park Holding Corporation.
38
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-96582, No. 33-96580 and No. 333-34509 of Canterbury Park Holding Corporation
on Form S-8 and Registration Statement No. 33-81262C on form S-3 of Canterbury
Park Holding Corporation of our report dated March 15, 1999 appearing in this
Annual Report on Form 10-KSB of Canterbury Park Holding Corporation for the year
ended December 31, 1998.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 26, 1999
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 372,171
<SECURITIES> 0
<RECEIVABLES> 215,296
<ALLOWANCES> 1,000
<INVENTORY> 89,640
<CURRENT-ASSETS> 818,966
<PP&E> 12,090,681
<DEPRECIATION> 3,704,242
<TOTAL-ASSETS> 9,417,661
<CURRENT-LIABILITIES> 2,767,962
<BONDS> 0
0
0
<COMMON> 30,202
<OTHER-SE> 6,619,497
<TOTAL-LIABILITY-AND-EQUITY> 9,417,661
<SALES> 3,311,337
<TOTAL-REVENUES> 19,195,577
<CGS> 1,555,546
<TOTAL-COSTS> 18,698,394
<OTHER-EXPENSES> (7,587)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118,151
<INCOME-PRETAX> 386,619
<INCOME-TAX> (47,128)
<INCOME-CONTINUING> 433,747
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 433,747
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
