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CPHC > SEC Filings for CPHC > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for CANTERBURY PARK HOLDING CORP

Form 10-Q for CANTERBURY PARK HOLDING CORP


14-Nov-2012

Quarterly Report


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

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

Overview:

Canterbury Park Holding Corporation (the "Company") owns and operates the Canterbury Park Racetrack and Card Casino in Shakopee, Minnesota (the "Racetrack"). The primary businesses of the Company are simulcast and live pari-mutuel horse racing, hosting unbanked card games, and food and beverage operations.

The Racetrack is the only pari-mutuel thoroughbred and quarter horse racing facility in the State of Minnesota. The Racetrack earns revenues from pari-mutuel take-out on races simulcast year-round to Canterbury Park from racetracks throughout the country and from live race meets featuring thoroughbred and quarter horse racing. Live race meets commence in the month of May and conclude in September. During the live race meet, the Company televises its races to out-of-state racetracks around the country, and earns additional pari-mutuel revenue on wagers placed on its races at the out-of-state racetracks.

The Card Casino at Canterbury Park currently hosts "unbanked" card games in which players compete against each other and not against the house. In addition, changes to the law governing Card Casino operations enable the Company to offer banked games in the future should it so choose. The Card Casino is open twenty-four hours a day, seven days a week. Under Minnesota law, the Company is required to pay up to 14% of gross Card Casino revenues to the Racetrack's purse fund and the State of Minnesota Breeders' Fund.

The Company also generates revenues from other activities such as parking and admission fees and from the sale of food and beverage, programs and other racing publications, and corporate sponsorships. Additional revenues are derived from the use of the Racetrack facilities for special events, such as concerts and craft shows.

Operations Review for the Three andNine Months Ended September 30, 2012 and September 30, 2011:

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


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The following table sets forth a reconciliation of net income, a GAAP financial measure, to EBITDA (defined below), which is a non-GAAP measure, for the nine month periods ended September 30, 2012 and 2011:

Summary of EBITDA Data:


                                              Nine Months Ended September 30,
                                                 2012                 2011
Net income                                 $        568,002    $          92,631
Interest income, net of interest expense             (4,635 )              (3,159 )
Income tax expense                                  534,821              222,511
Depreciation                                      1,318,617            1,412,130
EBITDA                                     $      2,416,805    $       1,724,113

EBITDA as a percentage of net revenues was 6.8% for the first nine months ended September 30, 2012, as compared to 5.6% for the first nine months ended September 30, 2011.

Total net revenues increased $4,557,994, or 14.8%, during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 and increased $2,958,530, or 27.1%, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. These increases are primarily attributable to the state government imposed shutdown of the Company's operations from July 1 to July 20, 2011 because the Minnesota agency regulating gaming at the Racetrack was shut down during that period due to a deadlock that delayed adoption of the State of Minnesota budget for the biennium beginning July 1, 2011. As a result of this shutdown in 2011, the Company was in operation for 20 more days in 2012 than 2011. In addition, the Company's revenues were positively impacted by developments affecting our business that occurred earlier in the year. On May 4, 2012, laws governing our business were amended to allow us to increase the number of tables in our Card Casino, increase poker betting limits and offer unlimited poker tournaments. See "Legislation" below for further information. More significantly, in June, we signed a ten-year Cooperative Marketing Agreement ("CMA") with the Shakopee Mdewakanton Sioux Community ("SMSC") that provides for supplements of purses for horse races during our live meets totaling approximately $75 million. In 2012, SMSC contributed $2.7 million for purse enhancements, which enabled us to offer higher quality horse races and led to increases in attendance beginning in early June. See "Cooperative Marking Agreement" below for further information. For the nine months ended September 30, 2012, pari-mutuel revenues increased 10.0% and Card Casino revenues increased 13.0% as compared to the prior nine month period in the prior year. Primarily as a result of this, pari-mutuel revenues increased 21.6% and Card Casino revenues increased 26.2% for the three months ended September 30, 2012 as compared to the same period in the prior year. See below for a further discussion of revenue.


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Summary of Pari-mutuel Data:


                                                               Nine Months Ended September 30,
                                                                  2012                 2011
Racing Days
Simulcast only                                                            212                  197
Live and Simulcast                                                         62                   56
Total Number of Racing Days                                               274                  253

On-Track Handle
Simulcast racing handle on simulcast only days              $      16,836,000    $      15,820,000
Live and Simulcast days:
Live racing handle                                                 11,406,000            9,605,000
Simulcast racing handle                                             8,688,000            8,077,000
Total On-Track Handle                                              36,930,000           33,502,000

Out-of-State Live Handle                                           16,643,000           12,834,000

Total Handle                                                $      53,573,000    $      46,336,000

On-Track Average Daily Handle
Simulcast only racing days                                  $          79,415    $          80,305
Live and simulcast racing days                              $         324,097    $         315,750

Pari-mutuel revenues increased $768,385, or 10.0%, in the nine-month period ended September 30, 2012 and $636,787, or 21.6%, for the three-month period ended September 30, 2012 compared to the same periods in 2011. Total handle wagered for the first nine months of 2012 was up $7,237,000, or 15.6%, compared to the same period last year. Both the third quarter and nine-month increases are primarily attributable to the state government imposed shutdown of operations that occurred from July 1 to July 20, 2011. During the shutdown in 2011, no simulcast or live meet wagering occurred and, as a result, we ran six more race days for the 2012 live meet compared to 2011. The Company also lost the opportunity to earn revenues simulcasting our live meet signal to other tracks during the shutdown in 2011.

Summary of Card Casino Data:


                               Nine Months Ended September 30,
                                  2012                 2011
Poker Games                 $       7,906,000    $       7,463,000
Table Games                         9,212,000            7,722,000
Total Collection Revenue           17,118,000           15,185,000

Other Revenue                       1,888,000            1,628,000
Total Card Casino Revenue   $      19,006,000    $      16,813,000

Number of Days Offered                    274                  253
Average Revenue per Day     $          69,365    $          66,455


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Total Card Casino revenue increased $2,192,864, or 13.0%, for the first nine months of 2012 and $1,333,386, or 26.2%, for the third quarter of 2012 compared to the same periods in 2011. The primary source of Card Casino revenue is a percentage of the wagers received from the players as compensation for providing the Card Casino facility and services, referred to as the "collection revenue." Other revenue includes fees collected for the administration of tournaments, and amounts earned as reimbursement of the administrative costs of maintaining jackpot funds. Card Casino revenues in the quarter and nine months ended September 30, 2011 were adversely affected by the state government imposed shutdown of Company operations that occurred from July 1 to July 20, 2011. As a result, all Card Casino operations were closed for 20 of the 92 days during the quarter. Primarily reflecting the impact of this closure in 2011, poker collection and table games collection revenues increased $443,405, or 5.9%, and $1,490,094, or 19.3%, respectively, compared to the first nine months of 2011. Similarly, reflecting the impact of the closure in 2011, poker collection and table games collection revenues increased $474,892, or 21.3%, and $693,161, or 29.4%, respectively, for the quarter ended September 30, 2012 as compared to the same period in 2011. Total Card Casino revenues represented 53.6% and 54.4% of net revenues for the nine-month and three-month periods ended September 30, 2012, respectively.

Concession revenues increased $962,375, or 22.9%, and $595,203, or 32.5%, compared to the first nine months and third quarter of 2011, respectively. These increases are primarily attributable to the state government imposed shutdown of operations, discussed above, that occurred from July 1 to July 20, 2011 and the increase in attendance resulting from the higher quality of horse racing we were able to offer pursuant to the CMA discussed above.

Total operating expenses increased $3,771,789, or 12.3%, and $2,272,465, or 20.3%, for the nine-month and three-month periods ended September 30, 2012, respectively, compared to the same period in the prior year. See below for a further discussion of operating expenses.

Summary of Purse and Breeders' Fund Expense:


                                                                                            Minnesota
                                                 Purse Expense                        Breeders' Fund Expense
                                        Nine Months Ended September 30,          Nine Months Ended September 30,
                                           2012                 2011                 2012                2011

Card Casino                          $       2,179,000    $       1,903,000    $        242,000    $        211,000

Simulcast Horse Racing                       1,570,000            1,473,000             288,000             272,000

Live Horse Racing                            1,186,000              976,000             114,000              96,000

                                     $       4,935,000    $       4,352,000    $        644,000    $        579,000

Total expense for statutory purses and the Minnesota Breeders' Fund increased 13.1% to $5,579,085 for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The increase was due primarily to running six more live race days in 2012 as a result of the state government imposed shutdown of operations, discussed above, that occurred from July 1 to July 20, 2011. Both purse and Breeders' Fund expenses are determined by wagering levels on our Card Casino and live and simulcast racing. The state government imposed shutdown resulted in a decrease in both purse and Breeders' Fund expenses for the three and nine-month periods ended September 30, 2011.

Salaries and benefits increased $1,550,282, or 11.7%, in the 2012 nine-month period ended September 30 and $798,541, or 17.2%, in the three-month period ended September 30, 2012 compared to the same period last year. The increases partly reflect reduced expense to the 2011 periods attributable to the state government imposed shutdown that occurred from July 1 to July 20, 2011. During the shutdown, the Company was forced to furlough substantially all of its approximately 1,100 full time and part time employees. In addition, the increases are partially due to supporting increases in all revenue categories during the three and nine-month periods ending September 30, 2012 compared to the same periods in 2011.

Advertising and marketing costs increased $387,600, or 42.6%, and $233,027, or 60.6%, in the nine and three-month periods ended September 30, 2012, respectively, compared to the same periods in 2011. The increases are primarily attributable to the increased radio and billboard expenditures in promoting the Card Casino and Racetrack as a result of more live race days and more days of Card Casino operations compared to 2011 when such expenditures were reduced due to the state government imposed shutdown of operations.


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Other operating expenses increased $724,851, or 12.7%, in the nine-month period ended September 30, 2012 and $406,880, or 19.4%, in the three-month period ended September 30, 2012 compared to the same period last year. The increases are primarily due to increased professional fees associated with negotiating the CMA discussed above, including increases attributable to the fair value of the stock appreciation rights that were granted on June 14, 2012 as part of the CMA. For further information, see "Cooperative Marketing Agreement" below.

Income before income taxes was $1,102,823 for the nine months ended September 30, 2012 compared to income before income taxes of $315,142 for the nine months ended September 30, 2011. After income tax expense of $534,821 for the nine months ended September 30, 2012, the Company reported net income of $568,002 in 2012 compared to net income of $92,631 in 2011. For the quarter ended September 30, 2012, the Company recorded net income before income tax expense of $387,875 compared to a loss before income tax benefit of $298,357 for the quarter ended September 30, 2011. After income tax expense of $185,481, net income in the third quarter of 2012 was $202,034 compared to net income of $230,132 for the third quarter of 2011. The significant level of income tax benefit estimated for the third quarter ending September 30, 2011 was due to a revision to our expected income for 2011 as a result of the state government imposed shutdown of operations. Also, our tax rate is generally greater than the statutory tax rate because the significant lobbying expenses incurred by the Company in its effort to gain approval for legislation that would authorize slot machines to be operated at the Racetrack are not deductible for tax purposes.

Contingencies:

As discussed below under "Cooperative Marketing Agreement", on June 4, 2012, the Company entered into the CMA with the Shakopee Mdewakanton Sioux Community, a federally recognized Indian tribe, that became effective on June 15, 2012. The CMA contains certain covenants which, if breached, would trigger an obligation to repay a specified amount related to such covenant. At this time, management believes that the likelihood that the breach of a covenant will be met and that the Company will be required to pay the specified amount related to such covenant is remote.

Liquidity and Capital Resources:

Cash provided by operating activities for the nine months ended September 30, 2012 was $2,426,475 and was the result of several factors. The Company reported net income of $568,002 and depreciation of $1,318,617. Additionally, the Company experienced an increase in accounts payable and accrued wages and payroll taxes of $1,271,212, caused primarily by a seasonal increase in payables due to the live racing season extending into September. Finally, the Company experienced an increase in Card Casino accruals of $1,132,117 primarily due to the seasonality of the player pool. These items were somewhat offset by an increase in restricted cash of $775,093 and a decrease in due to MHBPA of $703,926, resulting primarily from the payment of purses during the third quarter. Cash provided by operating activities for the nine months ended September 30, 2011 was $922,000 and was the result of several factors. Depreciation during the first nine months of 2011 was $1,412,130, and the Company experienced an increase in accounts payable and accrued wages and payroll taxes of $534,491, caused primarily by a seasonal increase in payables due to the live racing season extending into mid-September. These items were somewhat offset by an increase in restricted cash of $590,734 and a decrease in due to MHBPA of $916,496, resulting primarily from the payment of purses during the third quarter.

Net cash used in investing activities for the first nine months of 2011 was $1,043,216 due to purchasing a variety of fixtures and equipment for operational purposes. Net cash used in investing activities for the first nine months of 2011 was $525,439 due to purchasing a variety of fixtures and equipment for operational purposes.

During the period January 1, 2012 through September 30, 2012, cash used in financing activities consisted of a cash dividend that was declared and paid for $1,035,475, somewhat offset by proceeds and excess tax benefits received upon the exercise of stock options of $253,673. During the period January 1, 2011 through September 30, 2011, cash provided by financing activities consisted of proceeds and excess tax benefits received upon the exercise of stock options of $274,965.


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The Company has a general credit agreement with Bremer Bank, which provides a revolving credit line of up to $3,000,000 until May 5, 2013 with interest at the prime rate but not less than 4.5% per annum. The Company had no borrowings under the line of credit at September 30, 2012 or December 31, 2011. This credit agreement contains covenants requiring the Company to maintain certain financial ratios. The Company was in compliance with these requirements at all times throughout the quarter ended September 30, 2012.

Unrestricted cash balances at September 30, 2012 were $8,870,236 compared to $8,268,779 at December 31, 2011. The Company believes that funds available in its cash accounts, amounts available under the general credit and security agreement, along with funds generated from operations, will be sufficient to satisfy its liquidity and capital resource requirements during 2012 for regular operations.

Critical Accounting Policies and Estimates:

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with generally accepted accounting principles. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are included in Note 1 to our consolidated financial statements in our 2010 Annual Report on Form 10-K. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Property and Equipment - We have significant capital invested in our property and equipment, which represents approximately 61.6% of our total assets at September 30, 2012. We utilize our judgment in various ways including:
determining whether an expenditure is considered a maintenance expense or a capital asset; determining the estimated useful lives of assets; and determining if or when an asset has been impaired or has been disposed. Management periodically reviews the carrying value of property and equipment for potential impairment by comparing the carrying value of these assets with their related expected future net cash flows. If the sum of the related expected future net cash flows is less than the carrying value, we will determine whether an impairment loss should be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. To date, we have determined that no impairment of these assets exists.

Stock Based Compensation - ASC 718, Compensation - Stock Compensation ("ASC 718"), requires recognition of services provided in exchange for a share-based payment based on the grant date fair market value. We utilize our judgment in determining the assumptions used to determine the fair value of options granted using a Black-Scholes model.

Commitments and Contractual Obligations:

On June 4, 2012, the Company entered into a Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community, a federally recognized Indian tribe that expires December 31, 2022. See "Cooperative Marketing Agreement" below.

Legislation:

On May 4, 2012, Minnesota Governor Mark Dayton signed legislation approved by the Minnesota Legislature that amended laws governing the Company's Card Casino. The amendments, which were effective immediately, will increase the Company's flexibility to operate its Card Casino which should lead to increased revenues, as well as increased purses for live races at Canterbury Park's Racetrack.


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As amended, the law authorizes the Company to increase the number of tables in its Card Casino from 50 to 80 and increases the poker bet limit from $60 to $100. It also removes limits on the number of poker tournaments the Company can conduct, as well as limits on the number of tables used in poker tournaments. In addition, it allows Canterbury to conduct "banked" card games, in which customers play against the house, along with the unbanked games it currently conducts. In a separate provision, the amended law establishes a framework for the possible implementation of pari-mutuel simulcasting of horse races conducted at Canterbury and other racetracks to Tribal casinos in Minnesota.

Implementation of the amended law will occur in stages. The Company has increased the number of tables hosting live play from 50 to approximately 60 to accommodate customers during peak periods. Additional expansion, higher betting limits and expanded poker tournaments will be implemented based on market demand. While it will take some time to determine the incremental revenue and purse enhancements from the amended law, management believes it will enable the Company to better meet customer demand and grow Card Casino revenues.

Cooperative Marketing Agreement:

On June 4, 2012, the Company entered into a Cooperative Marketing Agreement (the "Agreement") with the Shakopee Mdewakanton Sioux Community ("SMSC"), a federally recognized Indian tribe. The primary purpose of the Agreement is to increase purses paid during live horse racing at Canterbury Park's Racetrack. SMSC will make purse enhancement payments in order to strengthen Minnesota's horse industry. Under the terms of the Agreement, SMSC contributed $2.7 million for purse enhancements in 2012 and, after 2012, the additional amounts listed below.

In addition, the Company and SMSC have also agreed to partner in joint marketing efforts for their mutual benefit, including events, cooperative poker tournaments, shared and joint promotions, player benefits and signage. Under the agreement, SMSC has agreed to pay the Company an additional $300,000 for 2012 marketing purposes and, after 2012, the additional amounts listed below.

After 2012, under the Agreement, SMSC has agreed to make the following purse enhancement and marketing payments in the years 2013 through 2022:

                    Year   Purse Enhancement   Marketing Payment
                    2013       5,300,000            600,000
                    2014       5,840,000            660,000
                    2015       6,434,000            726,000
                    2016       7,087,400            798,600
                    2017       7,806,140            878,460
                    2018       8,000,000            900,000
                    2019       8,000,000            900,000
                    2020       8,000,000            900,000
                    2021       8,000,000            900,000
                    2022       8,000,000            900,000

The Company will not receive any part of any purse enhancement payment. Therefore, there will be no impact on the Company's financial statements.

The amounts earned from the marketing payments will be recorded as a component of other revenue and the related expenses will be recorded as a component of marketing and advertising expense in the Company's financial statements. For the nine and three-month periods ended September 30, 2012, the Company earned $88,607 in revenues and incurred $88,607 in expenses related to the 2012 marketing payment.


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The Agreement also requires that the Company and Minnesota Horse Associations (as defined in the Agreement) will not promote or lobby the Minnesota legislature for expanded gambling authority and will support SMSC's lobbying efforts against expanding gaming authority. Under the agreement, the Company and SMSC also agree to work together to assist SMSC to implement simulcast horse racing on their property, to the extent allowed by Minnesota's Gaming Compacts, state law and applicable court decisions. . . .

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