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CPHC > SEC Filings for CPHC > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for CANTERBURY PARK HOLDING CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CANTERBURY PARK HOLDING CORP


14-Aug-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 facility in the State of Minnesota that offers live pari-mutuel thoroughbred and quarter horse racing facility. 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 2012 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 significant revenues from other activities such as food and beverage service, parking and admission fees, the sale of 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 and Six Months Ended June 30, 2013 and June 30, 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 six month periods ended June 30, 2013 and 2012:

   Summary of EBITDA Data:


                       Six Months Ended June 30,
                          2013            2012
Net income           $      484,329    $   365,968
Interest income              (1,672 )       (3,339 )
Income tax expense          355,295        348,980
Depreciation                893,280        884,580
EBITDA               $    1,731,232    $ 1,596,189

EBITDA as a percentage of net revenues was 7.7% for the first six months ended June 30, 2013, slightly better than 7.4% for the first six months ended June 30, 2012.

Total net revenues increased $852,724, or 4.0%, during the six months ended June 30, 2013 compared to the six months ended June 30, 2012 and increased $1,316,866, or 11.0%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The six month improvement was due to increases in pari-mutuel, Card Casino, and concessions revenue of 8.2%, 2.3%, and 1.8%, respectively, when compared to the same period in the prior year. The three month increase represented an increase in pari-mutuel revenues of 19.3%, an increase in Card Casino revenues of 8.0%, and an increase in concessions revenue of 7.5% for the three months ended June 30, 2013 compared to the same period in 2012. See below for a further discussion of revenue.

   Summary of Pari-mutuel Data:


                                                   Six Months Ended June 30,
                                                      2013            2012
Racing Days
Simulcast racing days                                       156            158
Live and Simulcast racing days                               25             24
Total Number of Racing Days                                 181            182

On-Track Handle
Simulcast racing handle on simulcast only days   $   13,571,000   $ 13,853,000
Live and Simulcast days:
Live racing handle                                    4,610,000      4,279,000
Simulcast racing handle                               4,024,000      3,894,000
Total On-Track Handle                                22,205,000     22,026,000

Out-of-State Live Handle                              7,106,000      5,197,000

Total Handle                                     $   29,311,000   $ 27,223,000

On-Track Average Daily Handle
Simulcast only racing days                       $       86,994   $     87,677
Live and simulcast racing days                   $      345,360   $    340,542


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Pari-mutuel revenue increased $397,369, or 8.2%, in the six-month period ended June 30, 2013 compared to the same period in 2012, and increased $596,242, or 19.3%, for the three-month period ended June 30, 2013 compared to the same period in 2012. Total handle wagered for the first half of 2013 was up $2,088,000, or 7.7%, compared to the same period last year. Both the six and three-month increases are primarily attributable to the change in accounting estimate that was made in the second quarter of 2013 regarding the Company's unredeemed pari-mutuel tickets. During the quarter ended June 30, 2013, the Company reevaluated the likelihood of redemption relating to outstanding vouchers and through this assessment, the Company decreased the projected redemption rate. For the six and three months ended June 30, 2013, the change in accounting estimate decreased our liability for outstanding pari-mutuel vouchers and increased Pari-mutuel revenue in our Condensed Consolidated Statements of Operations for the periods by approximately $412,286 (pre-tax difference), increasing Income From Operations by this amount as well. Net Income increased approximately $239,150 (after taking income taxes into account), or by approximately $0.06 earnings per basic and diluted common share. Handle and pari-mutuel revenue increases are also attributable to one additional day of live racing being conducted in the first six months of 2013 compared to 2012 and to purse supplements provided under the Cooperative Marketing Agreement described below which enable the Company to offer higher quality racing and larger fields that create excellent wagering opportunities for our local race fans as well as handicappers around the country.

   Summary of Card Casino Data:


                              Six Months Ended June 30,
                                 2013            2012
Poker Games                 $    4,928,000   $  5,205,000
Table Games                      6,618,000      6,164,000
Total Collection Revenue        11,546,000     11,369,000

Other Revenue                    1,334,000      1,224,000
Total Card Casino Revenue   $   12,880,000   $ 12,593,000

Number of Days Offered                 181            182
Average Revenue per Day     $       71,160   $     69,192

Total Card Casino revenue increased $286,566, or 2.3%, for the first six months of 2013 and also increased $486,356, or 8.0%, for the second quarter of 2013 compared to the same periods 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 during the first six months of 2013 decreased $277,212, or 5.3%, and also slightly decreased $13,373, or 0.6% for the second quarter of 2013 compared to the same periods in 2012. The Company believes that the six month 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. Table games collection revenue increased $453,556, or 7.4%, compared to the first half of 2012 and $419,615, or 13.7%, for the quarter ended June 30 compared to the same period in 2012. The Company believes this increase was primarily due to increased tables being offered as the result of favorable legislation enacted into law in May 2012. This is described in greater detail in Legislationbelow. Total Card Casino revenues represented 57.4% and 49.2% of net revenues for the six-month and three-month periods ended June 30, 2013, respectively. The second quarter percentage is usually lower in every calendar year due to substantially increased revenue from live racing.

Concessions revenue remained relatively flat for the six-month period ended June 30, 2013 when compared to the same period in 2012, increasing $50,126, or 1.8%. However, concessions revenue increased $135,494, or 7.5%, for the quarter ended June 30, 2013 compared to the same quarter in 2012. The increase primarily reflects an additional day of live racing being conducted in the second quarter of 2013 compared to 2012 and is consistent with increased attendance through June 30 at the 2013 live meet and in the Card Casino. Also, the Company experienced higher special event attendance in 2013 that drove more concessions sales.


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Total operating expenses increased $726,381, or 3.5%, and $691,192, or 5.6%, for the six-month and three-month periods ended June 30, 2013, respectively, compared to the same periods 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
                           Six Months Ended June 30,       Six Months Ended June 30,
                              2013            2012             2013            2012

Card Casino              $    1,407,000    $ 1,371,000   $        156,000    $ 152,000

Simulcast Horse Racing          951,000        951,000            197,000      200,000

Live Horse Racing               482,000        429,000             46,000       43,000

                         $    2,840,000    $ 2,751,000   $        399,000    $ 395,000

Due to the increases in pari-mutuel and Card Casino revenues, total expense for statutory purses and the Minnesota Breeders' Fund increased $94,090, or 3.0%, and $162,304, or 7.4%, for the six and three month periods ended June 30, 2013 compared to same periods in 2012. Both purse and Breeders' Fund expenses are determined by wagering levels on our Card Casino and live and simulcast racing.

Salaries and benefits increased $494,872, or 5.3%, in the 2013 six-month period ended June 30, 2013 and $273,457, or 5.3%, in the three-month period ended June 30, 2013 compared to the same periods last year. The increases are partially due to supporting the increased revenue from all revenue categories during the three and six-month periods ending June 30, 2013 compared to the same periods in 2012. Additionally, there were increased salary and benefit costs as compared to the first six months of last year due to annual increases in salaries and wages.

Utilities increased $77,276, or 15.4%, in the 2013 six-month period ended June 30, 2013 and $37,747, or 13.7%, in the three-month period ended June 30, 2013 compared to the same periods last year. The increases are primarily attributable to rising utility rates and increased utilities expense during the first quarter of 2013 due to inclement weather during the first quarter of 2013 as compared to the unusually mild weather in the first quarter of 2012.

Advertising and marketing costs increased $187,523, or 27.6%, in the six-month period ended June 30, 2013 and $202,012, or 41.7%, in the three-month period ended June 30, 2013 compared to the same periods last year. These increases are primarily as a result of increased radio and billboard expenditures promoting the Card Casino and Racetrack and increased expenses related to the Cooperative Marketing Agreement described in greater detail below.

Other operating expenses decreased $191,031, or 4.8%, in the six-month period ended June 30, 2013 and $104,047, or 4.3%, in the three-month period ended June 30, 2013 compared to the same periods last year. The decreases are primarily due to reduced professional fees in 2013 as compared to 2012 that were related to the creation and signing of the Cooperative Marketing Agreement entered into with the Shakopee Mdewakanton Sioux Community.

Income before income taxes was $839,624 for the six months ended June 30, 2013 compared to $714,948 for the six months ended June 30, 2012. After income tax expense of $355,295 for the six months ended June 30, 2013, the Company reported net income of $484,329 in 2013 compared to net income of $365,968 in 2012. For the quarter ended June 30, 2013, the Company recorded income before income tax expense of $332,895 compared to a loss before income tax benefit of $291,125 for the quarter ended June 30, 2012. After income tax expense of $139,647, net income in the second quarter of 2013 was $193,248 compared to a net loss of $166,536 for the second quarter of 2012. The significant level of income taxes estimated for the second quarter and six-month periods ending June 30, 2012 is primarily due to the non-deductibility of lobbying expenses incurred by the Company.


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Contingencies:

As discussed below under "Cooperative Marketing Agreement", on June 4, 2012, the Company entered into the CMA with the Shakopee Mdewakanton Sioux Community 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 six months ended June 30, 2013 was $1,660,494 and was due to several factors. First, the Company reported net income of $484,329. Additionally, the Company recorded depreciation of $893,280. The Company also experienced an increase in accounts payable and accrued wages and payroll taxes of $3,752,147, caused primarily by a seasonal increase of $2,488,500 in horsemen payables. These items were somewhat offset by an increase in other current assets of $734,543, an increase in income taxes receivable of $549,105, and an increase in restricted cash of $1,811,069 (resulting primarily from the increase in horsemen payables of $2,488,500). Cash provided by operating activities for the six months ended June 30, 2012 was $1,765,502 and was due to several factors. First, the Company reported net income of $365,968. Additionally, the Company recorded depreciation of $884,580. The Company also experienced an increase in accounts payable and accrued wages and payroll taxes of $2,899,089, caused primarily by a seasonal increase of $1,425,126 in horsemen payables. These items were somewhat offset by an increase in other current assets of $389,749 and an increase in restricted cash of $1,369,351, resulting primarily from the increase in horsemen payables of $1,425,126.

Net cash used in investing activities for the first six months of 2013 was $3,391,328 and was used primarily for the purchase of technology upgrades and enhancements, including digital signage and customer relationship management equipment, and building improvements. Net cash used in investing activities for the first six months of 2012 was $754,510 and was used primarily for a variety of equipment purchases.

Net cash provided by financing activities during the first six months of 2013 was $27,285, and consisted of proceeds received upon the issuance of common stock relating to ESPP and stock option purchases of $39,113, slightly offset by common stock repurchases of $7,509 and tax expense from the exercise of stock options and issuance of restricted stock. During the period January 1, 2012 through June 30, 2012, cash provided by financing activities consisted of proceeds and excess tax benefits received upon the exercise of stock options of $210,300.

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 June 30, 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 June 30, 2013.

The Company's cash and cash equivalent balance at June 30, 2013 was $7,681,434 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.


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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 63.1% of our total assets at June 30, 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 undiscounted 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 equity instruments 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 that expires December 31, 2022. See "Cooperative Marketing Agreement" below.

Legislation:

In May 2012, the Minnesota law governing the Card Casino was amended in several respects, which 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.

Under the amended law, the Company can conduct card play on up to 80 tables in its Card Casino. It also increased the poker betting limit from $60 to $100. The amended law 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 and 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 established a framework for the possible implementation of pari-mutuel simulcasting of horse races conducted at Canterbury and other racetracks to Tribal casinos in Minnesota.

The amended law is being implemented in stages. The Company has increased the number of tables hosting live play from 50 to approximately 66 to accommodate customers during peak periods, has offered higher betting limits to accommodate demand, and has expanded poker tournaments as well. Additional changes will be implemented based on market demand.

Cooperative Marketing Agreement:

On June 4, 2012, the Company entered into a Cooperative Marketing Agreement (the "CMA") with the Shakopee Mdewakanton Sioux Community ("SMSC"). The primary purpose of the CMA is to increase purses paid during live horse racing at Canterbury Park's Racetrack in order to strengthen Minnesota's horse industry. Under the terms of the CMA, the SMSC paid the horsemen $2.7 million in June of 2012 for purse enhancements in 2012 and $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.


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In addition, the Company and the SMSC have also agreed in the CMA to partner in joint marketing efforts for their mutual benefit, including signage, joint promotions, player benefits, cooperative poker tournaments, and events. Under the CMA, the 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, the 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 six months ended June 30, 2013, the Company recorded $164,572 in revenues and incurred $164,572 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.

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 the SMSC. The SAR Agreement granted rights to the 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 six months ended June 30, 2013, the Company recognized $108,254 of expense related to these stock appreciation rights, of which $108,254 was recorded as an offset to revenue. 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.


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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 . . .

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