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| ECP > SEC Filings for ECP > Form 10-Q on 14-May-2004 | All Recent SEC Filings |
14-May-2004
Quarterly Report
General:
Canterbury Park Holding Corporation (the "Company") owns and operates CanterburyPark Racetrack and Card Club in Shakopee, Minnesota. The primary businesses ofthe Company are pari-mutuel horse racing, hosting unbanked card games, and foodand beverage operations.
The Racetrack is the only pari-mutuel horse racing facility in the State ofMinnesota. The Racetrack earns revenues from pari-mutuel take-out on racessimulcast year-round to Canterbury Park from racetracks throughout the countryand from live race meets featuring thoroughbred and quarter horse racing. TheCompany conducts live horse racing at its facility generally from mid-May untilearly September each year. During live race meets, the Company televises itsraces to out-of-state racetracks around the country, and earns additionalpari-mutuel revenue on wagers placed at the out-of-state racetracks.
Canterbury Park's Card Club (the "Card Club") is authorized under Minnesota lawto host "unbanked" card games in which players compete against each other andnot against the house. The Company receives a percentage of the wagers from theplayers as compensation for providing the Card Club facility and services. TheCard Club is open twenty-four hours a day, seven days a week. The MinnesotaRacing Commission is authorized by Minnesota law to regulate Card Club and horseracing operations. The law requires that up to 14% of the gross revenuegenerated by the Card Club be paid to the Racetrack's purse fund and the Stateof Minnesota Breeders' Fund. However, the Company has agreed with the MHBPA topay 15% of Card Club revenues into the purse fund for 2004.
The Company also generates revenues from other activities such as from the saleof food and beverage, programs and other racing publications, and admissions andparking fees. The Company also offers advertising signage space similar to thatappearing at many sports stadiums. Finally, additional revenues are derived froma RV park and the use of the Racetrack facilities for special events such asconcerts, craft shows and snowmobile racing.
Results of Operations for the Three Months Ended March 31, 2004 and March 31,2003:
Total operating revenues increased $2,156,715, or 23.4%, during three monthsended March 31, 2004 compared to the three months ended March 31, 2003.
Pari-mutuel revenue increased $54,102, or 1.7% in the three-month period endedMarch 31, 2004 compared to the same period in 2003. Total wagering handle forthe three month period ended March 31, 2004 was up $205,459 or 1.4%, compared tototal handle during the same quarter a year ago. Total pari-mutuel expensesincluding state pari-mutuel taxes, contributions to the Minnesota Breeders'Fund, statutory purses and host fees were $2,054,827 and $1,692,059 for thequarters ended March 31, 2004 and 2003, respectively. The increase is dueprimarily to an increase in purse expense related to the increased level of CardClub operations.
Card Club revenues increased 40.0% to $6,888,201 for the first three months of2004 compared to $4,918,462 for the same period in 2003. The increase isprimarily due to growing interest in the Card Club's poker games partiallygenerated by the popularity of televised poker tournaments and steady growth inpatrons of the Card Club's Casino Games room.
Concession revenues increased 13.6% to $826,922 for the quarter ended March 31,2004 compared to $728,077 for the first quarter of 2003 primarily due to theincrease in attendance in the Card Club.
Operating expenses in the first quarter of 2004 (excluding pari-mutuel expenses)increased by approximately $971,000, or 16.0%, compared to 2003 primarily due toincreased business in the Card Club, and costs associated with the Company'sregulatory licenses. Salary and benefit costs, increased $610,977, or 17.1%primarily due to increases in health insurance rates along with increased laborrates and hours worked consistent with the increased operating levels. Repairs,maintenance and supplies increased $86,575, or 43.1% compared to 2003, primarilydue to software purchases and chip expenses related to the Card Club. Licensefees and property taxes increased $75,997, or 117.5% due to increased costsrelated to license fees assessed to the Company by the Minnesota RacingCommission. Insurance expense increased $73,211, or 41.6% due to increasedproperty and liability insurance rates.
Income before income taxes increased $825,391, or 56.4%, to $2,289,478 for thethree months ended March 31, 2004, from $1,464,087 for the three months endedMarch 31, 2003. Income tax expense was $1,029,300 and $625,000 for the firstquarter of 2004 and 2003, respectively, resulting in net income of $1,260,178and $839,087, respectively.
Commitments and Contingencies:
There have been no material changes in our outstanding commitments andcontingencies since those reported at December 31, 2003.
Liquidity and Capital Resources:
Cash provided by operating activities for the three months ended March 31, 2004was $3,015,600 and resulted principally from net income of $1,260,178,depreciation and amortization of $285,000, an increase in income taxes payableof $459,300, an increase in accounts payable and accrued wages & payroll taxesof $897,286, an increase in card club accruals of $448,121, offset by anincrease in accounts receivable of $243,714 and an increase in restricted cashof $327,131. During the period January 1, 2003 through March 31, 2003, cashprovided by operating activities was $1,564,722, which resulted principally fromnet income of $839,087, depreciation and amortization of $288,168, an increasein income taxes payable of $601,019, a decrease in accounts receivable of$134,240, offset by an increase in restricted cash of $180,336 and an increasein current assets of $188,861.
Net cash used in investing activities for the first quarter of 2004 of$1,556,258 resulted primarily from building improvements related to therenovation of the club-level facility for $1.1 million, and the acquisitions ofequipment. This compared to $260,485 in the first quarter of 2003, relatedprimarily to the acquisitions of equipment.
Cash provided by financing activities during the first three months of 2004consisted of proceeds received upon the exercise of stock options of $56,400 andnet proceeds from the advance from the Minnesota Horsemen's Benevolent andProtective Association (the "MHBPA") of $24,107. Cash provided by financingactivities during the first three months of 2003 consisted of proceeds receivedupon the exercise of stock options of $13,250, and net proceeds from the advancefrom the MHBPA of $271,212.
The Company is required by statute to segregate a portion of funds received fromrevenues in the Card Club and wagering on simulcast and live horse races forfuture payment as purses for live horse races at the Racetrack or other uses ofMinnesota's horsepersons associations. Pursuant to an agreement with the MHBPA,during the three months ended March 31, 2004 and 2003, the Company transferredinto a trust account for these purposes or paid directly to the MHBPAapproximately $1,075,000 and $550,000 respectively. At March 31, 2004, theCompany had an additional liability to
MHBPA of $127,301. This liability will be paid in 2004, including interestearned at the prime-lending rate, in accordance with the agreement with the
MHBPA.
The Company has a credit agreement with Bremer Bank N. A. that provides arevolving credit line permitting advances of up to $2,250,000 with interest atthe prime rate. The Company had no borrowings under the line of credit at March31, 2004 or December 31, 2003. The credit agreement contains certain covenantsrequiring the Company to maintain certain financial ratios. The Company was incompliance with these requirements at all times throughout the quarter endedMarch 31, 2004.
Unrestricted cash balances at March 31, 2004 were $4,063,409 compared to$2,523,560 at December 31, 2003. The Company believes that funds available inits cash accounts, amounts available under the general credit and securityagreement, along with funds generated from operations, will be sufficient tosatisfy its liquidity and capital resource requirements during 2004 for regularoperations. If the "Racino" as discussed below under "Pending Legislation"receives necessary legislative approval, the Company will require substantialadditional debt and/or equity financing. The Company believes that suchfinancing with reasonable terms can be obtained.
Critical Accounting Policies:
The preparation of consolidated financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesthat effect the amounts reported and disclosed in the consolidated financialstatements. By their nature, these estimates are subject to an inherent degreeof uncertainty. Theses estimates are based on our experience and various otherassumptions that are believed to be reasonable in the circumstances, the resultsof which form the basis for making judgments about the carrying values of assetsand liabilities. On an ongoing basis, we evaluate our estimates. However, actualresults could differ from those estimates.
Our significant accounting policies are included in Note 1 to our consolidatedfinancial statements in our 2003 Annual Report on Form 10-K. We believe thefollowing critical accounting policies affect our more significant judgments andestimates used in the preparation of our consolidated financial statements.
Land, Buildings and Equipment— We have significant capital invested in ourproperty and equipment, which represents approximately 72% of our total assets.We utilize our judgment in various ways including: determining whether anexpenditure is considered a maintenance expense or a capital asset; determiningthe estimated useful lives of assets; and determining if or when an asset hasbeen impaired. Our property and equipment is evaluated for impairment whenevercircumstances indicate that the carrying value of an asset may not berecoverable from the estimated future cash flows expected to result from itsuse. If the sum of the expected future cash flows (undiscounted and withoutinterest charges) is less than the carrying amount, we recognize an impairmentloss. The impairment loss recognized is the amount by which the carrying amountexceeds the fair value and is charged to operations in the period in which suchimpairment is determined by management. We do not believe that any impairmenthas occurred or is likely to occur in the near future.
Regulation-Our business can be materially impacted both positively andnegatively by legislative and regulatory changes, such as those previouslydescribed. Significant negative changes resulting from these activities couldresult in an impairment of our property and equipment in accordance withgenerally accepted accounting standards. Additional information regarding howour business can be impacted by legislative and regulatory changes are includedin Item 1 (vi), and Item 1 (vii), respectively, in our 2003 Annual Report onForm 10-K.
Pending Legislation:
On February 18, 2003 a bill was introduced in the Minnesota Legislature, toallow electronic gaming devices to be operated by the Minnesota State Lottery atthe Racetrack. This concept often referred to as a "Racino", as proposed forCanterbury Park would include 2,000 gaming devices, a 250-room hotel, an Olympicscale horse park and additional restaurant venues. The bill was approved in May2003 by a 71 to 60 margin by the Minnesota House of Representatives. However,on May 29, 2003 the Minnesota Legislature adjourned the first year of itsregular session without taking further action on the Racino legislation. TheMinnesota Legislature reconvened for the second year of its regular session inFebruary 2004, and the Racino legislation is pending in the Minnesota Senatebecause it passed in the Minnesota House of Representatives in 2003. Based onthe success of several Racinos in other states, the Company believes that ifthis legislation becomes law, it will enhance horse racing with increasedpurses, provide growth and development opportunities for the Company, andproduce significant new tax revenues for state and local governments.
In addition, legislation was introduced in 2004 to remove the 50-table limit inthe Card Club imposed by current Minnesota law. Also, the Minnesota House ofRepresentatives Omnibus Tax Bill includes a 5% franchise fee on Card Club grossrevenues. These bills have also passed the Minnesota House, and are pending inthe Minnesota Senate.
The effort to obtain legislative authority for these initiatives has required,and will continue to require, substantial expenditures and there can be noassurance that any bill favorable to the Company's interests will be enactedinto law.
Factors Affecting Future Performance:
From time to time, in reports filed with the Securities and Exchange Commission,in press releases, and in other communications to shareholders or the investingpublic, the Company may make forward-looking statements concerning possible oranticipated future financial performance, business activities or plans which aretypically preceded by the words "believes," "expects," "anticipates," "intends"or similar expressions. For such forward-looking statements, the Company claimsthe protection of the safe harbor for forward-looking statements contained infederal securities laws. Shareholders and the investing public shouldunderstand that such forward-looking statements are subject to risks anduncertainties which could cause actual performance, activities or plans todiffer significantly from those indicated in the forward-looking statements. Such risks and uncertainties include, but are not limited to: materialfluctuations in attendance at the Racetrack, material changes in the level ofwagering by patrons, decline in interest in the unbanked card games offered atthe Card Club, legislative and regulatory changes, the impact of wageringproducts and technologies introduced by competitors; increases in the percentageof revenues allocated for purse fund payments; increases in compensation andemployee benefit costs; the general health of the gaming sector; higher thanexpected expense related to new marketing initiatives; and other factorsdiscussed from time to time in the Company's filings with the Securities andExchange Commission.
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