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CPHC > SEC Filings for CPHC > Form 10-Q on 14-Nov-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-Nov-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, our financial results and financial condition 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. 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 24 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 operations, 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 Nine Months Ended September 30, 2013 and September 30, 2012:

EBITDA

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 above), which is a non-GAAP measure, for the nine-month periods ended September 30, 2013 and 2012:

Summary of EBITDA Data:

                             Nine Months Ended September 30,
                                2013                 2012
Net income                $         654,832    $         568,002
Interest income                      (2,225 )             (4,635 )
Income tax expense                  460,050              534,821
Depreciation                      1,360,770            1,318,617
EBITDA                    $       2,473,427    $       2,416,805

EBITDA as a percentage of net revenues was 6.7% for the nine months ended September 30, 2013, slightly less than the 6.8% for the nine months ended September 30, 2012.

Revenues

Total net revenues increased $1,250,891 or 3.5%, during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 and increased $398,167, or 2.9%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The nine-month improvement was due to an increase in Pari-mutuel revenues of 10.4%, a decrease in Card Casino revenues of .3%, and an increase in Concessions revenue of 8.1% compared to the same period in the prior year. The three-month increase represented an increase in Pari-mutuel revenues of 13.3%, a decrease in Card Casino revenues of 5.5%, and an increase in concessions revenue of 15.2% for the three months ended September 30, 2013 compared to the same period in 2012. See below for a further discussion of revenue.

Summary of Pari-mutuel Data:


                                                              Nine Months Ended September 30,
                                                                 2013                 2012
Racing Days
Simulcast racing days                                                    204                  212
Live and Simulcast racing days                                            69                   62
Total Number of Racing Days                                              273                  274

On-Track Handle
Simulcast racing handle on simulcast only days             $      16,041,000    $      16,836,000
Live and Simulcast days:
Live racing handle                                                13,299,000           11,406,000
Simulcast racing handle                                            9,758,000            8,688,000
Total On-Track Handle                                             39,098,000           36,930,000

Out-of-State Live Handle                                          24,412,000           16,643,000

Total Handle                                               $      63,510,000    $      53,573,000

On-Track Average Daily Handle
Simulcast only racing days                                 $          78,632    $          79,415
Live and simulcast racing days                             $         334,159    $         324,097


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Pari-mutuel revenues increased $875,111, or 10.4%, in the nine-month period ended September 30, 2013 compared to the same period in 2012, and increased $477,742, or 13.3%, for the three-month period ended September 30, 2013 compared to the same period in 2012. In addition, total handle wagered for the first nine months of 2013 was up $9,937,000, or 18.5%, compared to the same period last year and was up $7,849,000, or 29.8% for the third quarter of 2013 compared to the same period last year. Almost half of the nine-month increase in revenue is 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 nine months ended September 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 period by approximately $412,000 (pre-tax difference), increasing Income from Operations by this amount as well. Net Income increased approximately $239,000 (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 six additional days of live racing being conducted in the third quarter of 2013 compared to 2012. In addition, purse supplements provided under the Cooperative Marketing Agreement described below which enabled the Company to offer higher quality racing and larger fields that created excellent wagering opportunities for our local race fans as well as handicappers around the country.

Summary of Card Casino Data:


                               Nine Months Ended September 30,
                                  2013                 2012
Poker Games                 $       7,320,000    $       7,906,000
Table Games                         9,523,000            9,212,000
Total Collection Revenue           16,843,000           17,118,000

Other Revenue                       2,099,000            1,888,000
Total Card Casino Revenue   $      18,942,000    $      19,006,000

Number of Days Offered                    273                  274
Average Revenue per Day     $          69,385    $          69,365

Total Card Casino revenues slightly decreased by $64,000, or .3%, for the first nine months of 2013 and also decreased $351,141, or 5.5%, for the third 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 nine months of 2013 decreased $586,000, or 7.4%, and also decreased $309,071, or 11.4% for the third quarter of 2013 compared to the same periods in 2012. The Company believes that the nine-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 and a significant increase in competition due to additional midwest poker tournaments. The three-month decrease was compounded by significant road construction in the southwest metro area. Table games collection revenue increased $311,000, or 3.4%, compared to the first nine months of 2012 and slightly decreased $31,996, or 1.0%, for the quarter ended September 30 compared to the same period in 2012. The Company believes the nine-month year-over-year increase was primarily due to an increased number of tables being used for card play during the entire nine-month period pursuant to favorable legislation enacted into law in May 2012. This is described in greater detail in "Legislation"below. In addition, the three-month decrease was due to the increase in tables being offered which was offset by the impact of significant road construction in the southwest metro area. Total Card Casino revenues represented 51.3% and 41.8% of net revenues for the nine-month and three-month periods ended September 30, 2013, respectively. The third quarter percentage is usually lower in every calendar year due to substantially increased revenue from live racing.

Concessions revenues increased $418,670 or 8.1% for the first nine months of 2013 and also increased $368,544 or 15.2% for the third quarter of 2013 compared to the same periods in 2012. The increase primarily reflects seven additional days of live racing being conducted in the first nine months of 2013 compared to 2012 and six additional days of live racing being conducted in the third quarter of 2013 compared to 2012. Also, the Company experienced higher special event attendance in 2013 that generated increased concessions sales.


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Operating Expenses

Total operating expenses increased $1,236,422, or 3.6%, and $510,041, or 3.8%, for the nine-month and three-month periods ended September 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
                                         Nine Months Ended September 30,          Nine Months Ended September 30,
                                            2013                 2012                 2013                2012
Card Casino                           $       2,171,000    $       2,179,000    $        241,000    $        242,000

Simulcast Horse Racing                        1,587,000            1,570,000             289,000             288,000

Live Horse Racing                             1,452,000            1,186,000             133,000             114,000

                                      $       5,210,000    $       4,935,000    $        663,000    $        644,000

Due to the increases in pari-mutuel revenues, total expense for statutory purses and the Minnesota Breeders' Fund increased $294,102, or 5.3%, and $200,013, or 8.2%, for the nine and three-month periods ended September 30, 2013 compared to the same periods in 2012. Both purse and Breeders' Fund expenses are determined by wagering levels in our Card Casino and on live and simulcast racing.

Salaries and benefits increased $690,427, or 4.7%, in the nine-month period ended September 30, 2013 and $195,555, or 3.6%, in the three-month period ended September 30, 2013 compared to the same periods last year. The increases are partially due to supporting the increased revenue during the three and nine-month periods ended September 30, 2013 compared to the same periods in 2012. Additionally, there were increased salary costs as compared to the first nine months of last year due to annual increases in salaries and wages.

Cost of sales increased $159,531 or 5.7% in the nine-month period ended September 30, 2013 and $125,658 or 10.0% in the three-month period ended September 30, 2013 compared to the same periods last year. The increases reflect costs incurred to support increased revenues during the three and nine-month periods ended September 30, 2013 compared to the same periods last year.

Utilities increased $130,909, or 13.6%, in the nine-month period ended September 30, 2013 and $53,643, or 11.7%, in the three-month period ended September 30, 2013 compared to the same periods last year. The increases are primarily attributable to rising utility rates and 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.

Advertising and marketing costs increased $169,257 or 13.0%, in the nine-month period ended September 30, 2013 and decreased $18,266, or 3.0%, in the three-month period ended September 30, 2013 compared to the same periods last year. The nine-month increase is primarily a result of increased upfront expenditures to promote live racing both locally and to simulcast markets around the country, as well as increased expenses related to the SMSC Cooperative Marketing Agreement.

Other operating expenses decreased $279,151 or 4.3%, in the nine-month period ended September 30, 2013 and decreased $88,120, or 3.5%, in the three-month period ended September 30, 2013 compared to the same periods last year. The three-month increase is primarily due to rising insurance costs and an increase in repairs and maintenance.


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Income before income taxes was $1,114,882 for the nine months ended September 30, 2013 compared to $1,102,823 for the nine months ended September 30, 2012. After income tax expense of $460,050 for the nine months ended September 30, 2013, the Company reported net income of $654,832 in 2013 compared to net income of $568,002 in 2012. For the quarter ended September 30, 2013, the Company recorded income before income tax expense of $275,258 compared to $387,875 for the same period last year. After income tax expense of $104,755, net income in the third quarter of 2013 was $170,503 compared to net income of $202,034 for the third quarter of 2012. The significant level of income taxes estimated for the third quarter and nine-month periods ended September 30, 2012 is primarily due to the non-deductibility of lobbying expenses incurred by the Company.

Contingencies:

As further discussed below, the Company entered into a Cooperative Marketing Agreement (CMA) with the Shakopee Mdewakanton Sioux Community (SMSC) 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 nine months ended September 30, 2013 was $1,738,649 and was due to several factors. First, the Company reported net income of $654,832. Additionally, the Company recorded depreciation of $1,360,770. The Company also experienced an increase in accounts payable and accrued wages and payroll taxes of $788,705. These items were somewhat offset by a seasonal increase in accounts receivable of $560,500 and a decrease in due to MHBPA of $1,377,966 resulting primarily from the payment of purses during the third quarter. 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.

Net cash used in investing activities for the first nine months of 2013 was $3,683,413 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 nine months of 2012 was $1,043,216 due to purchasing a variety of fixtures and equipment for operational purposes.

Net cash provided by financing activities during the first nine months of 2013 was $59,543, and consisted of proceeds received upon the issuance of common stock relating to ESPP and stock option purchases of $70,196, slightly offset by common stock repurchases and tax expense from the exercise of stock options and issuance of restricted stock of $10,653. 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.

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 September 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 September 30, 2013.


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The Company's cash and cash equivalent balance at September 30, 2013 was $7,499,762 compared to $9,384,983 at December 31, 2012 primarily reflecting an increase in capital expenditures in the first nine months of 2013 compared to the same period in 2012. The Company believes that funds available in its cash accounts, amounts available under the general credit 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 66.2% of our total assets at September 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 - Accounting guidance 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 the CMA with the SMSC 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, all of which amendments 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.


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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 also expanded the number of poker tournaments it conducts. 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 2012 and $5.3 million in February 2013 for purse enhancements. After 2013, the SMSC plans to contribute the additional amounts listed below.

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 and events. Under the CMA, the SMSC paid the Company $300,000 in June 2012 and $600,000 in February 2013 for marketing purposes. After 2013, the SMSC plans to pay the additional amounts listed below.

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

          Purse Enhancement        Marketing Payments to
Year    Payments to Horsemen          Canterbury Park

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 purse enhancement payments. 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 nine months ended September 30, 2013, the Company recorded $397,344 in revenues and incurred $397,344 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 . . .

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