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CPHC > SEC Filings for CPHC > Form 10-K on 29-Mar-2013All Recent SEC Filings

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Form 10-K for CANTERBURY PARK HOLDING CORP


29-Mar-2013

Annual Report


Item 7. 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 condition and results of operations and our present business environment. This MD&A is provided as a supplement to - and should be read in conjunction with - our consolidated financial statements and the accompanying notes to the financial statements (the "Notes"). Our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in "Risk Factors" and "Forward-Looking Statements" included elsewhere in this Annual Report.

STRATEGIC OVERVIEW

Canterbury Park Holding Corporation (the "Company") conducts pari-mutuel wagering operations and hosts "unbanked" card games at its Canterbury Park Racetrack and Card Casino facility (the "Racetrack") in Shakopee, Minnesota, which is approximately 25 miles southwest of downtown Minneapolis.

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

Our three largest sources of revenues, Card Casino operations, pari-mutuel operations, and concession sales generate cash revenues. The following summarizes our financial performance for the last five years:

  Financial Performance Summary         2012       2011       20101       2009       2008

  Net Revenues                        $ 45,461   $ 40,586   $  39,920   $ 39,589   $ 46,025

  Operating Expenses                    43,501     39,540      41,197     39,363     45,310

  Income (Loss) Before Income Taxes      1,966      1,053     (1,264)        261        823

  Income Tax (Expense) Benefit            (950 )     (655 )       272       (200 )     (385 )

  Net Income (Loss)                   $  1,016   $    398   $    (992 ) $     61   $    438

1 During fiscal year 2010, the Company incurred a one-time, non-cash loss on disposal of assets in the amount of $909,540 related to remodeling of our card room.

The primary strengths of Canterbury Park are our dedicated and capable staff, our first-class facilities located on 380-acres of land (including approximately 100 acres of underutilized property) and the legal authority to offer our unique gaming products in our market area.

Our management team has extensive knowledge of the horse racing, Card Casino, and concession operations, and our staff has demonstrated a commitment to enhancing the customer experience. Our management team has a good relationship with our workforce and is able to retain qualified personnel as demonstrated by our low turnover rate.

Our facilities are modern by racetrack industry standards, and we have invested heavily in the past few years to update and upgrade them to meet the needs of our customers and horsemen. Our 392-acre site, in a prime location on the edge of the Minneapolis - St. Paul metropolitan area in one of the fastest-growing counties in Minnesota, provides us with great long-term growth and development opportunities, and our Board of Directors regularly considers additional uses for underutilized portions of our property. Our long-term strategic direction is to more fully develop our property as a unique gaming and entertainment destination.


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We have a strong commitment to live racing and have been particularly successful in attracting new customers and providing a quality live racing experience for our horse racing fans as well as the horsemen who enter their horses in live races at Canterbury Park. However, we still face a number of longer-term challenges as we work to improve the results of our pari-mutuel operations, including declines in handle and intense competition for racehorses with tracks that are able to more substantially subsidize their purses with non-horse racing related gaming revenues.

OPERATIONS REVIEW

YEAR ENDED DECEMBER 31, 2012 COMPARED TO YEAR ENDED DECEMBER 31, 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.

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 years ended December 31, 2012 and 2011:

   Summary of EBITDA Data:


                                             Year Ended December 31,
                                               2012           2011
Net income                                 $   1,016,364   $   397,667
Interest income, net of interest expense          (6,702 )      (5,848 )
Income tax expense                               950,112       655,082
Depreciation                                   1,772,760     1,894,277
EBITDA                                     $   3,732,534   $ 2,941,178

EBITDA increased $791,356, or 26.9%, and also increased as a percentage of net revenues to 8.2% from 7.2% for the year ended December 31, 2012 compared to the same period in 2011. This large increase is mainly due to increased net income as discussed below.

Total net operating revenues for the year ended December 31, 2012 were $45.5 million, an increase of $4,874,221, or 12.0%, compared to total operating revenues of $40.6 million for the year ended December 31, 2011. Total Card Casino revenues increased 11.2%, pari-mutuel revenues increased 6.9% and concession revenues increased 19.0% in fiscal 2012 compared to fiscal 2011. These increases are primarily attributable to the state government imposed shutdown of the Company's operations from July 1 to July 20, 2011. The inability of Minnesota's Governor and Legislature to reach agreement on the State's budget forced many state agencies to shut down, including the MRC which regulates Canterbury Park's pari-mutuel and Card Casino gaming operations. The shutdown is described in greater detail below. Our improved results also reflect, however, two additional factors. First, on May 4, 2012, laws governing our Card Casino 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 "2012 Legislation" below for further information. More significantly, in June, we signed a 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. See below for more detailed discussions of revenues.


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SUMMARY OF PARI-MUTUEL OPERATING DATA


                                           Year Ended        Year Ended
Racing Days                               Dec. 31, 2012     Dec. 31, 2011
Simulcast only days                                  302               288
Live and simulcast days                               62                56
Total Racing Days                                    365               344
On-Track Handle
Simulcast handle on non-live race days   $    24,362,000   $    23,954,000
Simulcast handle on live race days             8,688,000         8,077,000
Total simulcast handle                        33,050,000        32,031,000

Live racing handle                            11,406,000         9,605,000
Total On-Track Handle                         44,456,000        41,636,000

Out-of-state Live Handle                      16,643,000        12,834,000
Total Handle                             $    61,099,000   $    54,470,000
On-Track Average Daily Handle
Simulcast only days                      $        81,000   $        83,000
Live and simulcast days                          324,000           316,000

Pari-mutuel revenues include commission and breakage revenues on live on-track and simulcast racing, fees received from out-of-state racetracks for wagering on our live races and proceeds from uncashed winning tickets. Pari-mutuel revenues increased to $10.2 million in 2012 from $9.5 million in 2011, primarily reflecting an increase in on-track live racing handle and out of state live racing handle in 2012 compared to 2011. The primary factors contributing to these increases are discussed in the following paragraphs.

Total handle wagered on simulcast races in 2012 increased $1,019,000, or 3.2%, compared to 2011. The increase is primarily attributable to the lower simulcast handle in 2011 caused by the state government imposed shutdown of our operations from July 1 to July 20, 2011. As a result of the shutdown, we offered 21 more days of simulcast wagering in 2012 as compared to 2011.

On-track live handle increased by $1,801,000, or 18.8%, for the 2012 live meet compared to the live meet in 2011. In addition, wagering at out-of-state tracks on races conducted at the Racetrack during the 2012 live meet increased $3,809,000, or 29.7%, compared to the 2011 meet. The increases partially reflect a favorable comparison to 2011 when our operations were shut down from July 1 to July 20, 2011. During the shutdown, no live meet wagering occurred, and we were forced to run six fewer race days for the 2011 live meet compared to 2012. The Company also lost the opportunity to earn revenues simulcasting our live meet signal to other tracks during the shutdown as well. Additionally, the increase also reflects our highly successful 2012 live meet that stemmed from the $2.7 million in purse supplements under the CMA with SMSC.

Revenues recognized on proceeds from winning pari-mutuel tickets which were not presented for payment within one year of the end of the live meet in which the wagers increased to $237,000 in 2012, up from $202,000 in 2011, primarily due to increases in amounts wagered on both live and simulcast horse races.


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SUMMARY OF CARD CASINO REVENUES


                              Year Ended        Year Ended
                             Dec. 31, 2012     Dec. 31, 2011

Poker Games                 $    10,651,000   $    10,265,000
Table Games                      12,625,000        10,709,000
Total Collection Revenue         23,276,000        20,974,000

Other Revenue                     2,722,000         2,411,000

Total Card Casino Revenue   $    25,998,000   $    23,385,000

Number of Days Offered                  364               344
Average Revenue per Day     $        71,000   $        68,000

The primary source of Card Casino revenue is a percentage of the wagers received from the players as compensation for providing the Card Casino facility and services, referred to as "collection revenue". Other Revenue presented above includes fees collected for the administration of tournaments and amounts earned as reimbursement for the administrative costs of maintaining the jackpot funds. Card Casino revenues represent 57.2% and 57.6% of net revenues for 2012 and 2011, respectively.

Total Card Casino revenue increased $2,614,000, or 11.2%, compared to 2011. The increase in Card Casino revenue is due primarily to the increase in table games revenue of $1,916,000, or 17.9%, in 2012 over 2011. The increase is primarily due to an increase in the number of days of Card Casino operations in 2012 as compared to 2011 when a state government funding impasse closed our operations from July 1 to July 20, 2011.

We expect that competition from NMHI, illegal Internet wagering, and wagering at tribal casinos will continue to challenge our efforts to grow our Card Casino operating revenues in future periods. As a result, we continue to search for opportunities to make Canterbury Park the most attractive alternative when our customers want to wager on card games.

SUMMARY OF CONCESSION REVENUES

Concession revenues increased $960,000, or 19.0%, to $6,002,000 in fiscal year 2012 compared to 2011. The increase is primarily attributable to the state government imposed shutdown of operations 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.

SUMMARY OF OTHER REVENUES

Other revenue increased $646,000, or 22.7%, to $3,494,000 in fiscal year 2012 compared to 2011. This increase was due primarily to an increase in admission revenue resulting from six more live race days in 2012 than 2011 as a result of the government imposed shutdown of operations that occurred from July 1 to July 20, 2011.

OPERATING EXPENSES

Total operating expenses increased approximately $3,961,000, or 10.0%, to $43,501,000 in 2012, from $39,540,000 in 2011. Total operating expenses as a percentage of net revenues decreased to 95.7% from 97.4% in 2011. The primary factors contributing to these increases are discussed in the following paragraphs.


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Total purse expense increased $568,000, or 10.2%, in 2012 compared to 2011 as presented in the table below. As discussed in greater detail in Item 1(c)
(iv) above, Minnesota law requires us to allocate a portion of amounts received from betting in the Card Casino and wagering on simulcast and live horse races for future payment as purses for live horse races and other authorized uses. While most of these amounts were paid into the purse funds for thoroughbred, quarter horse and standardbred races, Minnesota law requires that a portion of such amounts allocated for purses be paid into the MBF. A description of how the purse expense was derived from these three sources and allocated for purse funds and to the MBF is presented below. Increases in Card Casino and pari-mutuel revenues in 2012 compared to 2011 resulted in increases in both purse and MBF expense, as shown in the table below:

                                                  Minnesota Breeders' Fund
                         Purse Expense                    Expense
                      2012          2011           2012             2011

Card Casino        $ 3,060,000   $ 2,730,000   $     340,000    $     303,000

Simulcast Racing     1,901,000     1,873,000         374,000          363,000

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

Total              $ 6,147,000   $ 5,579,000   $     828,000    $     762,000

Under Minnesota law, the Company is required to pay 10% of the first $6 million of gross Card Casino revenues towards purses for live horse racing at the Racetrack. After meeting the $6 million threshold, the Company must pay 14% of gross Card Casino revenues as purse monies. Of funds allocated for purses, the amounts paid are allocated 90% to the purse funds and 10% to the MBF.

The amounts paid to the purse fund for simulcast racing differ depending upon whether the simulcast wagering occurs during the "Racing Season," a statutorily defined 25-week period beginning in early May each year, or outside of the Racing Season. We paid an average of 5.8% of handle to the purse fund in both 2012 and 2011. We pay 5.50% of pari-mutuel simulcast commission revenues to the MBF; consequently, higher revenues result in increased MBF expense.

We also experienced an increase in host fees of $108,000, or 7.6%, in 2012 compared to 2011 primarily as a result of increased wagering in 2012 when compared to 2011 due to the state government imposed shutdown of operations that occurred from July 1 to July 20, 2011. Our 2012 host fee expense also increased because of rate increases imposed by numerous tracks around the country.

Salary and benefit expenses increased by $1,745,000, or 10.0%, for the twelve months ended December 31, 2012 compared to the twelve months ended December 31, 2011. The increase partly reflects reduced expense in 2011 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 year ended December 31, 2012 compared to the same period in 2011.

Advertising expense increased $404,000, or 37.1%, in 2012 compared to 2011. The increase is 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.

Other operating expenses increased $748,000, or 10.3%, in 2012 compared to 2011. The increase is 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.

Income taxes as a percentage of pre-tax income decreased to 48.3% for the year ended December 31, 2012 from 62.2% for the year ended December 31, 2011. The decrease is primarily attributable to the decreased impact of permanent differences in 2012 compared to 2011.

Net income increased $619,000, which resulted in net income for 2012 in the amount of $1,016,000 compared to net income of $398,000 for the year ended December 31, 2011.


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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Our significant accounting policies are included in Note 1 to our consolidated financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Property and Equipment - We have significant capital invested in our property and equipment, which represents approximately 63.4% of our total assets at December 31, 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. 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 undiscounted cash flows. Should the sum of the related expected future net cash flows be 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.

2011 SUSPENSION OF OPERATIONS DUE TO PARTIAL SHUTDOWN OF MINNESOTA STATE GOVERNMENT

Effective at midnight on June 30, 2011, the Company was ordered to suspend all operations because of the inability of Minnesota's Governor and Legislature to reach agreement on the State's budget for the biennium beginning July 1, 2011. The inability to reach an agreement forced many state agencies to immediately shut down because no monies had been appropriated for their operations. The Minnesota Racing Commission ("MRC"), the agency which regulates Canterbury Park's pari-mutuel and Card Casino gaming operations, was one of the many state agencies ordered to close, and, without this regulatory oversight, the Company was directed to cease all operations pending the appropriation of funds for the MRC. A budget agreement was approved on July 20, 2011 which included an appropriation for the MRC, and Canterbury Park resumed all operations on July 21, 2011. The suspension of operations until July 21, 2011 had a material, adverse effect on the Company's results of operations for the year ending December 31, 2011.

2012 LEGISLATION

On May 4, 2012, Minnesota's Governor signed legislation approved by the Minnesota Legislature that amended laws governing the Company's Card Casino. The amendments, which became effective immediately, increased the Company's flexibility to operate its Card Casino, thereby creating opportunities to earn increased revenues and pay increased purses for live races at Canterbury Park's Racetrack.

As amended, the law authorized 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 removed 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.


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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, has offered higher betting limits to accommodate demand, and has expanded poker tournaments as well. Additional expansion will be implemented based on market demand. Currently, the Company has no plans to offer banked games in the near future. While the amount of incremental revenue and purse enhancements that may be available due to flexibility provided under the amended law is not yet fully known, management believes the new law 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 "CMA") with the Shakopee Mdewakanton Sioux Community ("SMSC"), a federally recognized Indian tribe. The primary purpose of the CMA is to increase purses paid during live horse racing at Canterbury Park's Racetrack over a 10 1/2 year term expiring December 31, 2022 in order to strengthen Minnesota's horse industry. Under the terms of the CMA, SMSC contributed $2.7 million for purse enhancements in 2012 and, after 2012, will contribute the additional amounts listed below.

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

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

             Horsemen           Canterbury Park
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 have any financial interest in any part of any purse enhancement payment. Therefore, purse enhancement payments will have 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 year ended December 31, 2012, the Company recorded $112,857 in revenues and incurred $112,857 in expenses related to the 2012 marketing payment. The excess of amounts received over revenues is reflected as deferred revenue which is included in accounts payable on the consolidated balance sheet.

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

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