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CPHC > SEC Filings for CPHC > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for CANTERBURY PARK HOLDING CORP


15-May-2013

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, although recent changes to the law governing Card Casino operations authorize 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 Months Ended March 31, 2013 and March 31, 2012:

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 three month periods ended March 31, 2013 and 2012:

   Summary of EBITDA Data:


                                              Three Months Ended March 31,
                                                2013               2012
Net income                                 $      291,081    $         532,504
Interest income, net of interest expense           (1,101 )             (1,114 )
Income tax expense                                215,648              473,569
Depreciation                                      446,640              473,580
EBITDA                                     $      952,268    $       1,478,539

EBITDA as a percentage of net revenues was 10.4% for the first three months ended March 31, 2013, as compared to 15.4% for the first three months ended March 31, 2012. This large decrease is mainly due to decreased net income.

Total net revenues decreased $464,142, or 4.8%, during the three months ended March 31, 2013 compared to the three months ended March 31, 2012. This decrease is primarily attributable to decreases in pari-mutuel, Card Casino, and concessions revenue of 11.2%, 3.1%, and 9.2%, respectively. The Company feels that the decreases were partially a result of inclement weather in Minnesota and across the United States during the first quarter of 2013 as well as reduced discretionary income caused by an increase in payroll taxes that took effect January 1, 2013. See below for a further discussion of revenue.

   Summary of Pari-mutuel Data:


                               Three Months Ended March 31,
                                 2013               2012
Simulcast racing days                    90                 91

On-track simulcast handle   $     7,289,000    $     8,033,000

Average daily handle        $        81,000    $        88,300

Pari-mutuel revenue decreased $198,873, or 11.2%, in the three-month period ended March 31, 2013 compared to the same periods in 2012. Total handle wagered for the first three months of 2013 was down $745,000, or 9.3%, compared to the same period last year. The decrease is primarily attributable to inclement weather in Minnesota during the first quarter of 2013, which discouraged customers from visiting and wagering at our facility compared to unusually mild weather in the first quarter of 2012. Similar harsh weather in other parts of the United States in the first quarter of 2013 caused the cancellation of a significant number of races at racetracks simulcasting their signal to our racetrack as compared to mild weather during the first quarter of 2012 around the country, when there were minimal cancellations of races at racetracks simulcasting their signal to our racetrack.


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   Summary of Card Casino Data:


                               Three Months Ended March 31,
                                 2013               2012
Poker Games                 $     2,512,000    $     2,776,000
Table Games                       3,145,000          3,111,000
Total Collection Revenue          5,657,000          5,887,000

Other Revenue                       686,000            656,000
Total Card Casino Revenue   $     6,343,000    $     6,543,000

Number of Days Offered                   90                 91
Average Revenue per Day     $        70,500    $        72,000

Total Card Casino revenue decreased $199,790, or 3.1%, for the first three months of 2013 compared to the same period in 2012. 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. Poker collection revenue decreased $263,839, or 9.5%, compared to the first quarter of 2012. The Company believes that the year-over-year decrease in poker revenues is attributable to inclement weather in Minnesota during the first quarter of 2013 compared to unusually mild weather experienced during the first quarter of 2012. Also, the Company believes the reduction in discretionary income resulting from the increase in payroll taxes on January 1, 2013 adversely affected poker revenues. Table games collection revenue increased $33,940, or 1.1% compared to the first three months of 2012. The Company believes this increase was primarily due to an increased awareness of the Company's various table games options which more than offset the adverse impact of inclement weather and reduced discretionary income of our customers in the first quarter. Total Card Casino revenues represented 69.4% and 68.1% of net revenues for the three-month periods ended March 31, 2013 and 2012, respectively.

Concessions revenue decreased $85,368, or 9.2%, for the quarter ended March 31, 2013 compared to the same quarter in 2012. The decrease primarily reflects higher special event attendance in 2012 that drove more concessions sales.

Total operating expenses in the first quarter of 2013 increased $35,189, or 0.4%, compared to the three-month period ended March 31, 2012. See below for a further discussion of operating expenses.

   Summary of Purse and Breeders' Fund Expense:


                                                                                       Minnesota
                                               Purse Expense                    Breeders' Fund Expense
                                        Three Months Ended March 31,         Three Months Ended March 31,
                                          2013               2012                2013               2012

Card Casino                          $       583,253    $       608,427    $          64,806     $    67,603

Simulcast Horse Racing                       281,860            313,304               83,527          92,326

                                     $       865,113    $       921,731    $         148,333     $   159,929

Total expense for statutory purses and the Minnesota Breeders' Fund decreased 6.3% to $1,013,446 for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The decrease was due primarily to decreased pari-mutuel Card Casino revenue. Both purse and Breeders' Fund expenses are determined by wagering levels on our Card Casino and live and simulcast racing. The inclement weather during the first quarter of 2013 resulted in a decrease in both purse and Breeders' Fund expenses for the three-month period ended March 31, 2013 compared to the same period in 2012.


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Salaries and benefits increased $221,415, or 5.3%, compared to the first quarter of 2012. The increase is primarily due to annual increases in salaries and wages.

Utilities increased $39,520, or 17.4%, compared to the first quarter of 2012. The increase is primarily attributable to increased utilities expense due to inclement weather during the first quarter of 2013 as compared to the unusually mild weather in the first quarter of 2012.

Other operating expenses decreased $86,984, or 5.6%, compared to the first quarter of 2012. The decrease is primarily due to decreased lobbying expenditures in the first quarter of 2013 compared to the first quarter of 2012.

Income before income taxes was $506,729, for the three months ended March 31, 2013 compared to $1,006,073 for the three months ended March 31, 2012. Income tax expense was $215,648 for the first quarter of 2013 compared to $473,569 for the first quarter of 2012, resulting in net income of $291,081 and $532,504 for 2013 and 2012, respectively.

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 in the CMA will occur 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 three months ended March 31, 2012 was $1,914,198 and was due to several factors. First, the Company reported net income of $291,081. Additionally, the Company recorded depreciation of $446,640. Restricted cash also decreased $600,653, which was primarily due to the decrease in our player pool. A final factor contributing to the net cash provided by operating activities for the first quarter of 2013 was the increase in accounts payable and accrued wages and payroll taxes of $949,721, due primarily to an increase in deferred revenue related to the $600,000 marketing payment that was received in the first quarter of 2013. This is discussed in greater detail under "Cooperative Marketing Agreement" below. Cash provided by operating activities for the three months ended March 31, 2012 was $2,280,434 and was due to several factors. First, the Company reported net income of $532,504. Additionally, the Company recorded depreciation of $473,580. Card Casino accruals also increased $464,719, which was primarily due to the increase in our player pool related to increased table game activity. A final factor contributing to the net cash provided by operating activities for the first quarter of 2012 was the increase in accounts payable and accrued wages and payroll taxes of $713,525, due primarily to an increase in deferred revenue related to corporate partnerships that run the duration of our live race meet.

Net cash used in investing activities for the first quarter of 2013 of $1,011,251 was used primarily for the purchase of digital signage and customer relationship management equipment at the Racetrack. Net cash used in investing activities for the first quarter of 2012 of $119,772 was used primarily for a variety of equipment purchases.

Net cash provided by financing activities during the first three months of 2013 consisted of proceeds received upon the issuance of common stock relating to ESPP purchases of $15,442, slightly offset by common stock repurchases of $7,509. Net cash provided by financing activities during the first three months of 2012 consisted of purchases of stock through the Employee Stock Purchase Plan and proceeds received upon the exercise of stock options of $80,589 and the related tax benefit of $19,144 from the exercise of those options.


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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, 2014 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 March 31, 2013 or December 31, 2012. 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 March 31, 2013.

The Company's cash and cash equivalent balance at March 31, 2013 was $10,295,863 compared to $9,384,983 at December 31, 2012. 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 for regular operations during 2013.

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 2012 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 63.2% of our total assets at March 31, 2013. 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'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.


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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.

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. However, the Company has no immediate plans to offer banked games. 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 in June of 2012 for purse enhancements in 2012 and also contributed $5.3 million in February of 2013 to be used for purse enhancements. After 2013, the SMSC plans to 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 $300,000 in June of 2012 for marketing purposes and $600,000 in February of 2013, and, after 2013, will pay the additional amounts listed below.

After 2013, SMSC has agreed to make the following purse enhancement and marketing payments in the years 2014 through 2022:

       Horsemen Purse    Canterbury Park
Year    Enhancement     Marketing Payment

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 three months ended March 31, 2013, the Company recorded $13,000 in revenues and incurred $13,000 in expenses related to the 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.


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As part of the CMA, and pursuant to a Stock Appreciation Rights Agreement (the "SAR Agreement") dated June 14, 2012, the Company issued stock appreciation rights to SMSC. The SAR Agreement granted rights to SMSC to benefit from the appreciation in the value of 165,000 shares of Company common stock above $14.30 per share, a price agreed upon by the two parties. Each right represents the right to be paid the appreciation in the value of one share of stock above $14.30. Ten percent of the rights (16,500 rights) vested immediately and the remaining rights vest at the rate of 16,500 per year beginning in January 2013. The SAR Agreement provides for the cash payment of the excess of the fair market value of Canterbury Park Holding Corporation's common stock price on the date of exercise over the grant price. The SAR Agreement and all rights granted expire on December 31, 2022. The liability related to these stock appreciation rights is recorded as a long-term liability and the Company recognizes the income or expense related to the fluctuation in the value of the stock appreciation rights against the revenues recorded relating to the marketing payment due to the nature of the agreement. Any excess expenses will be recognized as a component of other operating expenses. For the quarter ended March 31, 2013, the Company recognized $64,244 of expense related to these stock appreciation rights, of which $13,000 was recorded as an offset to revenue and $51,244 was recorded as other operating expenses. In the future, changes in the fair value of these stock appreciation rights will increase or decrease the stock appreciation rights liability, and the Company will recognize an additional offset to revenue or other operating expense related to these changes.

Forward-Looking Statements:

From time to time, in reports filed with the Securities and Exchange Commission, in press releases, and in other communications to shareholders or the investing public, the Company may make forward-looking statements concerning possible or anticipated future financial performance, business activities or plans which are typically preceded by the words "believes," "expects," "anticipates," "intends" or similar expressions. For such forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in federal securities laws. Shareholders and the investing public should understand that such forward-looking statements are subject to risks and uncertainties which could cause actual performance, activities or plans to differ significantly from those indicated in the forward-looking statements. Such risks and uncertainties include, but are not limited to: fluctuations in attendance at the Racetrack, material changes in the level of wagering by patrons, decline in interest in the card games offered in the Card Casino, legislative and regulatory changes, the impact of wagering products and technologies introduced by competitors; increases in the percentage of revenues allocated for purse fund payments; increase in compensation and employee benefit costs; the economic health of the gaming sector; higher than expected expense related to new marketing initiatives; and other factors discussed under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2012 and in the Company's other filings with the Securities and Exchange Commission.

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