10-Q 1 cphc124775_10q.htm FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2012

Table of Contents


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

 

(Mark One)

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012.

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.

 

 

 

Commission File Number: 001-31569

(CANTERBURY PARK LOGO)

 

 

 

 

 

CANTERBURY PARK HOLDING CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

 

Minnesota

 

41-1775532

(State or Other Jurisdiction 

 

(I.R.S. Employer

of Incorporation or

 

Identification

Organization)

 

No.)

 

 

 

 

 

1100 Canterbury Road

 

 

Shakopee, MN 55379

 

 

(Address of principal executive offices and zip code)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 

 

 

 

 

 

 

YES

X

 

NO

 

 


Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

 

 

 

 

 

 

 

 

YES

X

 

NO

 


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

 

 

 

 

 

 

 

Large accelerated filer

 

 

Accelerated filer

 

 

Non-accelerated filer

 

 

Smaller reporting company

X


Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

 

 

 

 

 

 

 

 

YES

 

 

NO

X

 

The Company had 4,146,301 shares of common stock, $.01 par value, outstanding as of November 12, 2012.

 

1


Canterbury Park Holding Corporation

INDEX

 

 

 

 

 

 

 

 

 

Page 

PART I.

FINANCIAL INFORMATION 

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the periods Ended September 30, 2012 and 2011

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the periods Ended September 30, 2012 and 2011

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

24

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

24

 

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

25

 

 

 

 

 

 

Item 1A.

Risk Factors

 

25

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

25

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

25

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

25

 

 

 

 

 

 

Item 5.

Other Information

 

25

 

 

 

 

 

 

Item 6.

Exhibits

 

25

 

 

 

 

 

 

Signatures

 

 

26

 

 

 

 

 

 

Certifications

 

27

2


Table of Contents


PART 1 – FINANCIAL INFORMATION

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS 

SEPTEMBER 30, 2012 AND DECEMBER 31, 2011 (Unaudited) 


 

 

 

 

 

 

 

 

 

 

September 30,
2012

 

December 31,
2011

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash

 

$

8,870,236

 

$

8,268,779

 

Restricted cash

 

 

1,921,256

 

 

1,146,163

 

Short-term investments

 

 

202,852

 

 

201,669

 

Accounts receivable, net of allowance of $27,773

 

 

713,466

 

 

540,167

 

Inventory

 

 

206,844

 

 

183,122

 

Prepaid expenses

 

 

777,537

 

 

682,404

 

Deferred income taxes

 

 

491,400

 

 

315,200

 

Income taxes receivable

 

 

233,445

 

 

 

Due from Minnesota horsemen associations

 

 

589,684

 

 

44,372

 

Total current assets

 

 

14,006,720

 

 

11,381,876

 

 

 

 

 

 

 

 

 

LONG-TERM ASSETS

 

 

 

 

 

 

 

Deposits

 

 

26,400

 

 

26,400

 

Land, buildings and equipment, net of accumulated depreciation of $21,614,114 and $20,364,053, respectively

 

 

22,492,635

 

 

22,776,115

 

 

 

$

36,525,755

 

$

34,184,391

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

 

$

3,341,204

 

$

2,432,818

 

Card Casino accruals

 

 

2,446,290

 

 

1,314,173

 

Accrued wages and payroll taxes

 

 

1,131,186

 

 

775,256

 

Due to MHBPA

 

 

 

 

158,616

 

Accrued property taxes

 

 

760,402

 

 

606,252

 

Income taxes payable

 

 

 

 

97,000

 

Payable to horsepersons

 

 

30,945

 

 

17,745

 

Total current liabilities

 

 

7,710,027

 

 

5,401,860

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

Deferred income taxes

 

 

1,219,200

 

 

1,309,000

 

Stock appreciation rights

 

 

183,482

 

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Common stock, $.01 par value, 10,000,000 shares authorized, 4,147,000 and 4,101,701, respectively, shares issued and outstanding

 

 

41,470

 

 

41,017

 

Additional paid-in capital

 

 

16,820,003

 

 

16,413,468

 

Retained earnings

 

 

10,551,573

 

 

11,019,046

 

Total stockholders’ equity

 

 

27,413,046

 

 

27,473,531

 

 

 

$

36,525,755

 

$

34,184,391

 

See notes to condensed consolidated financial statements.

3


Table of Contents



 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

PERIODS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited) 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pari-mutuel

 

$

3,581,235

 

$

2,944,448

 

$

8,452,552

 

$

7,684,167

 

Card Casino

 

 

6,413,018

 

 

5,079,632

 

 

19,006,129

 

 

16,813,265

 

Concessions

 

 

2,429,095

 

 

1,833,892

 

 

5,157,968

 

 

4,195,593

 

Other

 

 

1,514,233

 

 

1,114,378

 

 

2,987,664

 

 

2,352,965

 

Total Revenues

 

 

13,937,581

 

 

10,972,350

 

 

35,604,313

 

 

31,045,990

 

Less: Promotional Allowances

 

 

(61,289

)

 

(54,588

)

 

(155,227

)

 

(154,898

)

Net Revenues

 

 

13,876,292

 

 

10,917,762

 

 

35,449,086

 

 

30,891,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purse expense

 

 

2,184,055

 

 

1,763,588

 

 

4,934,855

 

 

4,351,659

 

Minnesota Breeders’ Fund

 

 

249,582

 

 

203,348

 

 

644,230

 

 

579,363

 

Other pari-mutuel expenses

 

 

335,569

 

 

268,201

 

 

1,157,079

 

 

1,041,483

 

Salaries and benefits

 

 

5,444,389

 

 

4,645,848

 

 

14,806,038

 

 

13,255,756

 

Cost of sales

 

 

1,255,335

 

 

987,386

 

 

2,776,276

 

 

2,367,626

 

Depreciation

 

 

434,037

 

 

474,900

 

 

1,318,617

 

 

1,412,130

 

Utilities

 

 

460,244

 

 

387,382

 

 

963,183

 

 

932,923

 

Advertising and marketing

 

 

617,623

 

 

384,596

 

 

1,297,905

 

 

910,305

 

Other operating expenses

 

 

2,508,879

 

 

2,101,999

 

 

6,452,715

 

 

5,727,864

 

 

 

 

13,489,713

 

 

11,217,248

 

 

34,350,898

 

 

30,579,109

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM OPERATIONS

 

 

386,579

 

 

(299,486

)

 

1,098,188

 

 

311,983

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONOPERATING (EXPENSES) REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

(209

)

 

 

 

(802

)

Other, net

 

 

1,296

 

 

1,338

 

 

4,635

 

 

3,961

 

 

 

 

1,296

 

 

1,129

 

 

4,635

 

 

3,159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

 

 

387,875

 

 

(298,357

)

 

1,102,823

 

 

315,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX (EXPENSE) BENEFIT

 

 

(185,841

)

 

528,489

 

 

(534,821

)

 

(222,511

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

202,034

 

$

230,132

 

$

568,002

 

$

92,631

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

 

 

4,118,880

 

 

4,068,308

 

 

4,124,345

 

 

4,079,089

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF DILUTIVE SHARES OUTSTANDING

 

 

4,150,131

 

 

4,099,736

 

 

4,169,643

 

 

4,136,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC NET INCOME PER COMMON SHARE

 

$

.05

 

$

.06

 

$

.14

 

$

.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DILUTED NET INCOME PER COMMON SHARE

 

$

.05

 

$

.06

 

$

.14

 

$

.02

 

See notes to condensed consolidated financial statements.

4


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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

PERIODS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited) 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

568,002

 

$

92,631

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

1,318,617

 

 

1,412,130

 

Stock-based compensation expense

 

 

153,315

 

 

190,958

 

(Decrease) increase in deferred income taxes

 

 

(266,000

)

 

260,500

 

Tax benefit from exercise of stock options

 

 

(31,265

)

 

(61,300

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Increase in restricted cash

 

 

(775,093

)

 

(590,734

)

Increase in accounts receivable

 

 

(173,299

)

 

(315,769

)

Increase in other current assets

 

 

(118,855

)

 

(143,122

)

Decrease in income taxes payable

 

 

(299,180

)

 

(42,609

)

Increase in accounts payable and accrued wages and payroll taxes

 

 

1,271,212

 

 

534,491

 

Increase in Card Casino accruals

 

 

1,132,117

 

 

330,720

 

Increase in stock appreciation rights

 

 

183,482

 

 

 

Increase in accrued property taxes

 

 

154,150

 

 

164,265

 

Increase in payable to horsepersons

 

 

13,200

 

 

6,335

 

Decrease in due to MHBPA

 

 

(703,928

)

 

(916,496

)

Net cash provided by operating activities

 

 

2,426,475

 

 

922,000

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

Additions to buildings and equipment

 

 

(1,042,033

)

 

(426,839

)

Proceeds from sale of assets

 

 

 

 

1,400

 

Proceeds from redemption of investments

 

 

 

 

29,430

 

Purchase of investments

 

 

(1,183

)

 

(129,430

)

Net cash used in investing activities

 

 

(1,043,216

)

 

(525,439

)

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

Cash dividend paid to shareholders

 

 

(1,035,475

)

 

 

Proceeds from issuance of common stock

 

 

222,408

 

 

213,665

 

Tax benefit from exercise of stock options

 

 

31,265

 

 

61,300

 

Net cash (used in) provided by financing activities

 

 

(781,802

)

 

274,965

 

 

 

 

 

 

 

 

 

Net increase in cash

 

 

601,457

 

 

671,526

 

 

 

 

 

 

 

 

 

Cash at beginning of period

 

 

8,268,779

 

 

5,451,462

 

 

 

 

 

 

 

 

 

Cash at end of period

 

$

8,870,236

 

$

6,122,988

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

Additions to buildings and equipment funded through accounts payable

 

$

22,390

 

$

43,602

 

Proceeds from issuance of common stock funded through shares swapped

 

$

 

$

210,470

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Income taxes paid, net of refunds

 

$

1,100,000

 

$

4,620

 

See notes to condensed consolidated financial statements.

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Table of Contents



 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PERIODS ENDED SEPTEMBER 30, 2012 AND 2011 (Unaudited)


 

 

 

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and, in the opinion of management, contain all adjustments necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (GAAP), the financial position of Canterbury Park Holding Corporation as of September 30, 2012 and December 31, 2011, the results of its operations for the three and nine months ended September 30, 2012 and 2011 and the results of its cash flows for the nine months ended September 30, 2012 and 2011. The condensed consolidated balance sheet as of December 31, 2011 was derived from the audited financial statements. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Results for an interim period are not necessarily indicative of results for a full year.

 

 

 

The complete summary of significant accounting policies is included in the notes to consolidated financial statements in the Company’s 2011 Annual Report on Form 10-K.

 

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

 

 

Business – Canterbury Park Holding Corporation (the “Company”) was incorporated under the laws of Minnesota and acquired land and buildings to conduct pari-mutuel horse racing operations (the “Racetrack”) in March 1994. The Racetrack is located in Shakopee, Minnesota, approximately 25 miles southwest of downtown Minneapolis. In May 1994, we commenced year-round horse racing simulcast operations and hosted the first annual live race meet during the summer of 1995. Our live racing operations are a seasonal business as we host live race meets each year from May until September. We earn additional pari-mutuel revenue by televising our live racing to out-of-state racetracks around the country. Canterbury Park’s Card Casino operates 24 hours a day, seven days a week and is limited by Minnesota State law to a maximum of 80 tables. Prior to May 4, 2012, the Company was limited to a maximum of 50 tables. The Card Casino currently offers a variety of poker and table games. Our three largest sources of revenues, Card Casino operations, pari-mutuel operations and concessions sales, generate cash revenues. We also derive revenues from related services and activities, such as advertising, parking and publication sales and from other entertainment events and activities held at the Racetrack.

 

 

 

Reclassifications – Certain cash flow classifications included in the consolidated financial statements have been reclassified from the prior year’s presentations to conform to the current year presentation.

 

 

 

Revenue Recognition – Our revenues are derived primarily from the operations of a Card Casino, pari-mutuel wagering on simulcast and live horse races, concession sales, and related activities. Collection revenue from Card Casino operations, a set percentage of wagers, is recognized at the time that the wagering process is complete. Pari-mutuel revenues are recognized upon occurrence of the live race that is presented for wagering and after that live race is made official by the respective state’s racing regulatory body. Revenues related to concession and publication sales and parking and admission fees are recognized as revenue when the service has been performed or the product has been delivered. All sales taxes are presented on a net basis and are excluded from revenue.

 

 

 

Estimates – The preparation of the consolidated financial statements in conformity with accounting principles generally accepted 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. Actual results could differ from these estimates. 

 

 

 

Unrestricted Cash – Cash includes all investments with original maturities of three months or less or which are readily convertible into known amounts of cash and are not legally restricted. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. 

6


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Restricted Cash – Restricted cash represents refundable deposits and amounts due to horsemen for purses, stakes and awards, and amounts accumulated in card game progressive jackpot pools, the player pool and poker promotional fund to be used to repay card players in the form of promotions, giveaways, prizes, or by other means. 

 

 

 

Short-term Investments – Securities are classified as held to maturity when the Company has the positive intent and ability to hold them to maturity, and are measured at amortized cost. At September 30, 2012 and December 31, 2011, all investments were classified as held-to-maturity. The Company continually reviews its investments to determine whether a decline in fair value below the cost basis is other than temporary. If the decline in fair value is judged to be other than temporary, the cost basis of the security is written down to fair value and the amount of the write-down is included in earnings. Short-term investments consist of certificates of deposits at September 30, 2012 and December 31, 2011. Amortized cost approximated fair value for both periods. 

 

 

 

Uncashed Winning Tickets – The Company records a liability for winning tickets upon the completion of a race. As winning tickets are redeemed, this liability is reduced for the respective cash payment. We recognize revenue associated with the uncashed winning tickets when the likelihood of the redemption of the winning ticket is remote.

 

 

 

Promotional Allowances – The Company offers certain promotional allowances at no charge to patrons who participate in our player rewards program. The retail value of these promotional items is shown as a deduction from total revenues on the Company’s consolidated statements of operations.

 

 

 

Due to Minnesota Horsemen’s Benevolent and Protective Association, Inc. (“MHBPA”) – The Minnesota Pari-mutuel Horse Racing Act specifies that the Company is required to segregate a portion of funds (recorded as purse expense in the statements of operations), received from Card Casino operations and wagering on simulcast and live horse races, for future payment as purses for live horse races or other uses of the horsepersons’ associations. Pursuant to an agreement with the MHBPA, the Company transferred into a trust account or paid directly to the MHBPA, approximately $2,500,000 and $5,075,000 for the three and nine-month periods ending September 30, 2012, respectively, compared to $2,410,000 and $4,835,000 for the comparable periods in 2011 related to thoroughbred races. Minnesota Statutes specify that amounts transferred into the trust account are the property of the trust and not of the Company.

 

 

 

Impairment of Long-Lived Assets – Management of the Company 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. Should the sum of the related expected future net cash flows be less than the carrying value, management 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. Management has determined that no impairment of these assets exists at September 30, 2012.

 

 

 

Land, Buildings, and Equipment – Land, buildings, equipment, and building improvements are capitalized at a level of $1,000 or greater and are recorded at cost. Repair and maintenance costs are charged to operations when incurred. Furniture, fixtures, and equipment are depreciated using the straight-line method over estimated useful lives ranging from 5 – 7 years, while buildings are depreciated over 15 – 39 years. Building improvements are amortized using the straight-line method over the useful life of the assets.

 

 

 

Card Casino Accruals – Minnesota law allows the Company to collect amounts from patrons to fund progressive jackpot pools in the Card Casino. These amounts, along with amounts earned by the player pool, promotional pools and the outstanding chip liability, are accrued as short-term liabilities at each balance sheet date.

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Income Taxes – Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to reverse. The effective income tax rate for 2012 is higher than the statutory rate primarily due to non-deductible lobbying expenses.

 

 

 

Interest and penalties associated with uncertain income tax positions are presented in income tax expense. During the three months ended September 30, 2012 and 2011, we did not recognize any expense related to interest and penalties. Additionally, we do not have any amounts accrued at September 30, 2012 for the payment of interest and penalties.

 

 

2.

STOCK BASED COMPENSATION 

 

 

 

Stock based compensation is recorded at fair value as of the date of grant and included in the salaries and benefits expense line item on the consolidated statements of operations and amounted to $61,757 and $153,315 for the three and nine-months ended September 30, 2012, respectively, compared to $58,200 and $190,950 for the comparable periods in 2011.

 

 

 

Prior to June 2, 2011, the Company’s Stock Plan provided for annual, automatic grants to each non-employee member of the Board of Directors on the first business day each February of non-qualified stock options to acquire 3,000 shares of common stock. Pursuant to this provision, on February 1, 2011, 15,000 options were granted to five non-employee board members with an exercise price per share equal to the market price on the date of grant of $13.30. The stock options vested over a six-month period and expire in ten years. The compensation cost associated with this grant of Board of Directors options is $93,750 and was recognized as expense over the six-month vesting period.

 

 

 

Pursuant to Board action taken on April 15, 2011 and shareholder approval on June 2, 2011, the Company’s Stock Plan was amended to authorize annual grants of restricted stock or stock options, or both, as determined by the Board, and, pursuant to the amended Stock Plan, on June 2, 2011, 1,000 shares of restricted stock were granted to each of the five non-employee members of the Board of Directors. The restricted stock vested 100% after one year and is subject to restrictions on resale for an additional year. The compensation cost associated with the total grant of 5,000 shares was $73,300 that was recognized as expense over the one-year vesting period. Also pursuant to the amended Stock Plan, on June 7, 2012, 2,364 shares of restricted stock were granted to each of the five non-employee members of the Board of Directors. The restricted stock will vest 100% after one year and will be subject to restrictions on resale for an additional year. The compensation cost associated with the total grant of 11,820 shares is $149,996 that will be recognized as expense over the one-year vesting period.

 

 

 

On September 8, 2011, 54,250 shares of deferred stock awards were granted to employees with a price per share equal to the market price on the date of grant of $9.27. The issuance of these deferred stock awards is contingent upon the Company obtaining legislation authorizing the operation of a Racino at Canterbury Park on or before December 31, 2012 and the Racino opens for business to the public pursuant to such legal authority by December 31, 2014. The Company believes the likelihood of this event to be remote due to the signing of the Cooperative Marketing Agreement as noted in Note 7.

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The number of shares that may be issued pursuant to options and restricted stock granted and the weighted average fair value during the periods presented were: 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2012

 

September 30, 2011

 

 

 

Grant

 

Weighted
Average
Fair Value
Per Share

 

Grant

 

Weighted
Average
Fair Value
Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Board stock options

 

 

 

 

 

 

15,000

 

$

6.25

 

Board restricted stock

 

 

11,820

 

$

12.69

 

 

5,000

 

$

14.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shares

 

 

11,820

 

 

 

 

 

20,000

 

 

 

 


 

 

 

The fair value of stock options granted under the Company’s 1994 Stock Plan during the first nine months of 2011 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results; no stock options were granted during the first nine months of 2012: 


 

 

 

 

 

 

 

2011

 

Expected dividend yield

 

 

0.00

%

Expected weighted-average volatility

 

 

50.0

%

Risk-free interest rate

 

 

2.02

%

Expected term of stock options (in years)

 

 

5.50

 

Fair value of stock options on grant date

 

$

93,750

 


 

 

 

A summary of stock option activity as of September 30, 2012 and changes during the nine months then ended is presented below: 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Options

 

Number of
Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term

 

Aggregate
Grant Date
Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2012

 

 

318,002

 

$

9.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(22,750

)

$

7.07

 

 

 

 

 

 

 

Expired/Forfeited

 

 

(250

)

 

8.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2012

 

 

295,002

 

$

10.10

 

5.6 Years

 

$

2,980,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2012

 

 

266,377

 

$

10.40

 

5.5 Years

 

$

2,769,987

 

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A summary of stock option activity as of September 30, 2011 and changes during the nine months then ended is presented below: 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Options

 

Number of
Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term

 

Aggregate
Grant Date
Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2011

 

 

368,437

 

$

9.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

15,000

 

$

13.30

 

 

 

 

 

 

 

Exercised

 

 

(62,185

)

$

6.82

 

 

 

 

 

 

 

Expired/Forfeited

 

 

(3,250

)

$

7.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2011

 

 

318,002

 

$

9.89

 

 

6.4 Years

 

$

3,143,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2011

 

 

227,877

 

$

10.85

 

 

5.8 Years

 

$

2,471,521

 


 

 

 

Employee Stock Ownership Plan – Prior to 2008, the Company contributed shares of its common stock to its Employee Stock Ownership Plan (the “ESOP”). However, no contributions have been made from January 1, 2008 to date, and the Company has not taken any action to reinstate contributions to the ESOP.

 

 

 

Employee Stock Purchase Plan – On April 3, 1995, the Board of Directors adopted an Employee Stock Purchase Plan (the “ESPP”). Pursuant to Board action taken in September 2011, the ESPP was amended to consist of three-month phases. The plan issued 2,102 shares during the third quarter of 2012. The plan did not issue any shares during the third quarter of 2011. The ESPP has issued a total of 250,364 shares since its inception. Pursuant to Board action taken on June 2, 2012, and effective during the third quarter of 2012, the discount offered to employees as part of the ESPP was raised 5% to 10%.

 

 

 

Stock Appreciation Rights (“SARs”)

 

As part of the Cooperative Marketing Agreement (the “Agreement”) discussed in Note 7, on June 14, 2012, the Company signed a Stock Appreciation Rights Agreement (the “SAR Agreement”) and issued SARs to non-employees. The SAR Agreement granted rights to non-employees 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. SARs have no effect on dilutive shares or shares outstanding as any appreciation of the Company’s common stock value over the grant price is paid in cash and not in common stock. The SAR Agreement and all rights granted expire on December 31, 2022.

 

 

 

The fair value of SARs is revalued (mark-to-market) each reporting period using the Black-Scholes valuation model based on the Company’s period-end stock price. The expected term of the SARs granted is based on the contractual term. Expected volatility is based on the historical volatility of the Company’s stock for the length of time corresponding to the expected term of the SARs. The expected dividend yield is based on the Company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the reporting date for the length of time corresponding to the expected term of the SARs.

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The following weighted-average assumptions were used in calculating the fair value of SARs granted during the nine-month period ended September 30, 2012, using the Black-Scholes valuation model; no SARs were granted during the three and nine-month periods ended September 30, 2011:


 

 

 

 

 

 

 

Three Months
Ended
September 30, 2012

 

Expected dividend yield

 

 

0.00

%

Expected weighted-average volatility

 

 

47.8

%

Risk-free interest rate

 

 

1.65

%

Expected term of SARs (in years)

 

 

10.25

 


 

 

 

There were no exercises during the three and nine-month periods ended September 30, 2012. The total fair value of SARs vested during the three and nine-month periods ended September 30, 2012 was $183,482. This expense was recorded as a component of other pari-mutuel expenses due to the nature of the Agreement. In the future, changes in the fair value of these SARs will also be recorded to this expense.

 

 

 

Changes to the Company’s non-vested SARs during the nine-month period ended September 30, 2012, are as follows:


 

 

 

 

 

 

 

 

 

 

SARs

 

Fair Value (*)

 

Non-vested SARs at December 31, 2011

 

 

 

 

 

Granted

 

 

165,000

 

$

5.24

 

Vested

 

 

(15,000

)

$

5.24

 

Cancellations

 

 

 

 

 

Non-vested SARs at September 30, 2012

 

 

150,000

 

$

5.24

 


 

 

 

*Weighted-average

 

 

3.

EARNINGS PER SHARE COMPUTATIONS 

 

 

 

Basic net income per common share is based on the weighted average number of common shares outstanding during each period. Diluted net income per common share takes into effect the dilutive effect of potential common shares outstanding. The Company’s potential common shares outstanding are stock options. Options to purchase 119,500 shares of common stock at an average price of $14.36 per share were outstanding but not included in the computation of diluted earnings per share for both the three and nine-month periods ending September 30, 2012 and September 30, 2011 because the options were out of the money at September 30, 2012 and September 30, 2011.

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Table of Contents


 

 

 

The following is a reconciliation of the numerator and denominator of the earnings per common share computations for the three and nine-month periods ending September 30, 2012 and 2011:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three
Months
Ended
September 30,
2012

 

Three
Months
Ended
September 30,
2011

 

Nine
Months
Ended
September 30,
2012

 

Nine
Months
Ended
September 30,
2011

 

 

 

 

 

 

 

 

 

 

 

Net income (numerator) amounts used for basic and diluted per share computations:

 

$

202,034

 

$

230,132

 

$

568,002

 

$

92,631

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares (denominator) of common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

4,118,880

 

 

4,068,308

 

 

4,124,345

 

 

4,079,089

 

Plus dilutive effect of stock options

 

 

31,251

 

 

31,428

 

 

45,298

 

 

57,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

4,150,131

 

 

4,099,736

 

 

4,169,643

 

 

4,136,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

.05

 

$

.06

 

$

.14

 

$

.02

 

Diluted

 

 

.05

 

 

.06

 

 

.14

 

 

.02

 


 

 

4.

GENERAL CREDIT AGREEMENT

 

 

 

The Company has a general credit agreement with Bremer Bank, which provides a revolving credit line of up to $3,000,000. On May 6, 2012, the Company signed an amendment with Bremer Bank extending the expiration date from May 8, 2012 to May 5, 2013, while keeping previous provisions intact. The Company had no borrowings under this credit line at September 30, 2012 and December 31, 2011. The credit agreement contains certain covenants requiring the Company to maintain certain financial ratios. The Company was in compliance with these requirements as of September 30, 2012.

 

 

5.

OPERATING SEGMENTS

 

 

 

During the first nine months of 2012 and 2011, the Company had three reportable operating segments: horse racing, Card Casino, and concessions. The horse racing segment primarily represents simulcast and live horse racing operations. The Card Casino segment represents operations of Canterbury Park’s Card Casino, and the concessions segment represents food and beverage operations provided during simulcast and live racing, in the Card Casino, and during special events. The Company’s reportable operating segments are strategic business units that offer different products and services. They are managed separately because the segments differ in the nature of the products and services provided as well as processes to produce those products and services. The Minnesota Racing Commission regulates the horse racing and Card Casino segments.

 

 

 

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the 2011 Annual Report on Form 10-K.

 

 

 

Depreciation, interest expense and income taxes are allocated to the segments but no allocation is made to concessions for shared facilities. However, the concessions segment pays approximately 25% of gross revenues earned on live racing and special event days to the horse racing segment for use of the facilities.

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Table of Contents


 

 

 

The following tables provide information about the Company’s operating segments (in 000’s):


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2012

 

 

 

Horse Racing

 

Card Casino

 

Concessions

 

Total

 

 

Net revenues from external customers

 

$

11,276

 

$

19,006

 

$

5,167

 

$

35,449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intersegment revenues

 

 

459

 

 

 

 

1,142

 

 

1,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

5

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

793

 

 

426

 

 

100

 

 

1,319

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment (loss) income before income taxes

 

 

(1,712

)

 

3,094

 

 

945

 

 

2,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2012

 

Segment Assets

 

$

33,444

 

$

2,460

 

$

12,573

 

$

48,477

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2011

 

 

 

Horse Racing

 

Card Casino

 

Concessions

 

Total

 

 

Net revenues from external customers

 

$

9,873

 

$

16,813

 

$

4,205

 

$

30,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intersegment revenues

 

 

276

 

 

 

 

1,033

 

 

1,309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

3

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

837

 

 

464

 

 

111

 

 

1,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment (loss) income before income taxes

 

 

(1,807

)

 

2,342

 

 

559

 

 

1,094

 

 

 

 

At December 31, 2011

 

Segment Assets

 

$

30,832

 

$

2,838

 

$

11,222

 

$

44,892

 


 

 

 

The following are reconciliations of reportable segment revenue, income before income taxes, and assets, to the Company’s consolidated totals (in 000’s):


 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

Revenues

 

 

 

 

 

 

 

Total net revenue for reportable segments

 

$

37,050

 

$

32,200

 

Elimination of intersegment revenues

 

 

(1,601

)

 

(1,309

)

Total consolidated net revenues

 

$

35,449

 

$

30,891

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

 

 

 

 

Total segment income before income taxes

 

$

2,327

 

$

1,094

 

Elimination of intersegment income before income taxes

 

 

(1,224

)

 

(779

)

Total consolidated income before income taxes

 

$

1,103

 

$

315

 


 

 

 

 

 

 

 

 

 

 

September 30,
2012

 

December 31,
2011

 

Assets

 

 

 

 

 

 

 

Total assets for reportable segments

 

$

48,477

 

$

44,892

 

Elimination of intercompany receivables

 

 

(11,951

)

 

(10,708

)

Total consolidated assets

 

$

36,526

 

$

34,184

 

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6.

COMMITMENTS AND CONTINGENCIES

 

 

 

In accordance with an Earn Out Note, given to the prior owner of the Racetrack as part of the consideration paid by the Company to acquire the Racetrack in 1994, if (i) off-track betting becomes legally permissible in the State of Minnesota and (ii) the Company begins to conduct off-track betting with respect to or in connection with its operations, the Company will be required to pay to the IMR Fund, L.P. the greater of $700,000 per operating year, as defined, or 20% of the net pretax profit, as defined for each of five operating years. At this time, management believes that the likelihood that these two conditions will be met and that the Company will be required to pay these amounts is remote. At the date (if any) that these two conditions are met, the five minimum payments will be discounted back to their present value and the sum of those discounted payments will be capitalized as part of the purchase price in accordance with generally accepted accounting principles. The purchase price will be further increased if payments become due under the “20% of Net Pretax Profit” calculation. The first payment is to be made 90 days after the end of the third operating year in which off-track betting is conducted by the Company. Remaining payments would be made within 90 days of the end of each of the next four operating years.

 

 

 

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

 

 

 

The Company periodically is subject to claims or involved in legal proceedings arising in the normal course of business. At September 30, 2012, management believes that the resolution of any pending claims or legal proceedings will not have a material impact on the consolidated financial statements.

 

 

7.

COOPERATIVE MARKETING AGREEMENT

 

 

 

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

 

 

 

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

 

 

 

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


 

 

 

 

 

 

 

 

Year

 

Purse Enhancement

 

Marketing Payment

 

2013

 

 

5,300,000

 

 

600,000

 

2014

 

 

5,840,000

 

 

660,000

 

2015

 

 

6,434,000

 

 

726,000

 

2016

 

 

7,087,400

 

 

798,600

 

2017

 

 

7,806,140

 

 

878,460

 

2018

 

 

8,000,000

 

 

900,000

 

2019

 

 

8,000,000

 

 

900,000

 

2020

 

 

8,000,000

 

 

900,000

 

2021

 

 

8,000,000

 

 

900,000

 

2022

 

 

8,000,000

 

 

900,000

 

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

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

As part of the Agreement, on June 14, 2012, the Company signed a Stock Appreciation Rights Agreement (the “SAR Agreement”) and 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 will recognize the expense related to these stock appreciation rights as a component of other operating expenses due to the nature of the agreement. For the three and nine-month periods ended September 30, 2012, the Company recognized $66,256 and $183,482, respectively, of expense related to these stock appreciation rights. 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 additional expense or income related to these changes.

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Table of Contents



 

 

ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview:

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

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

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

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

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

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

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

Summary of EBITDA Data:

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

Net income

 

$

568,002

 

$

92,631 

 

Interest income, net of interest expense

 

 

(4,635

)

 

(3,159

)

Income tax expense

 

 

534,821

 

 

222,511 

 

Depreciation

 

 

1,318,617

 

 

1,412,130 

 

EBITDA

 

$

2,416,805

 

$

1,724,113 

 

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

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

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Summary of Pari-mutuel Data: 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

Racing Days

 

 

 

 

 

 

 

Simulcast only

 

 

212

 

 

197

 

Live and Simulcast

 

 

62

 

 

56

 

Total Number of Racing Days

 

 

274

 

 

253

 

 

 

 

 

 

 

 

 

On-Track Handle

 

 

 

 

 

 

 

Simulcast racing handle on simulcast only days

 

$

16,836,000

 

$

15,820,000

 

Live and Simulcast days:

 

 

 

 

 

 

 

Live racing handle

 

 

11,406,000

 

 

9,605,000

 

Simulcast racing handle

 

 

8,688,000

 

 

8,077,000

 

Total On-Track Handle

 

 

36,930,000

 

 

33,502,000

 

 

 

 

 

 

 

 

 

Out-of-State Live Handle

 

 

16,643,000

 

 

12,834,000

 

 

 

 

 

 

 

 

 

Total Handle

 

$

53,573,000

 

$

46,336,000

 

 

 

 

 

 

 

 

 

On-Track Average Daily Handle

 

 

 

 

 

 

 

Simulcast only racing days

 

$

79,415

 

$

80,305

 

Live and simulcast racing days

 

$

324,097

 

$

315,750

 

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

Summary of Card Casino Data:

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

Poker Games

 

$

7,906,000

 

$

7,463,000

 

Table Games

 

 

9,212,000

 

 

7,722,000

 

Total Collection Revenue

 

 

17,118,000

 

 

15,185,000

 

 

 

 

 

 

 

 

 

Other Revenue

 

 

1,888,000

 

 

1,628,000

 

Total Card Casino Revenue

 

$

19,006,000

 

$

16,813,000

 

 

 

 

 

 

 

 

 

Number of Days Offered

 

 

274

 

 

253

 

Average Revenue per Day

 

$

69,365

 

$

66,455

 

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

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

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

Summary of Purse and Breeders’ Fund Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purse Expense
Nine Months Ended September 30,

 

Minnesota
Breeders’ Fund Expense
Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Card Casino

 

$

2,179,000

 

$

1,903,000

 

$

242,000

 

$

211,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Simulcast Horse Racing

 

 

1,570,000

 

 

1,473,000

 

 

288,000

 

 

272,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Live Horse Racing

 

 

1,186,000

 

 

976,000

 

 

114,000

 

 

96,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,935,000

 

$

4,352,000

 

$

644,000

 

$

579,000

 

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

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

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

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

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

Contingencies: 

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

Liquidity and Capital Resources: 

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

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

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

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

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

Critical Accounting Policies and Estimates:

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

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

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

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

Commitments and Contractual Obligations:

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

Legislation:

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

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

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

Cooperative Marketing Agreement:

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

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

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

 

 

 

 

 

Year

 

Purse Enhancement

 

Marketing Payment

2013

 

5,300,000

 

600,000

2014

 

5,840,000

 

660,000

2015

 

6,434,000

 

726,000

2016

 

7,087,400

 

798,600

2017

 

7,806,140

 

878,460

2018

 

8,000,000

 

900,000

2019

 

8,000,000

 

900,000

2020

 

8,000,000

 

900,000

2021

 

8,000,000

 

900,000

2022

 

8,000,000

 

900,000

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

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

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

          As part of the Agreement, on June 14, 2012, the Company signed a Stock Appreciation Rights Agreement (the “SAR Agreement”) and 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 will recognize the expense related to these stock appreciation rights as a component of other operating expenses due to the nature of the agreement. For the three and nine-month periods ended September 30, 2012, the Company recognized $66,256 and $183,482, respectively, of expense related to these stock appreciation rights. 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 additional expense or income 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, 2011 and in the Company’s other filings with the Securities and Exchange Commission.

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ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          Canterbury Park is not required to provide the information requested by this Item as it qualifies as a smaller reporting company.

 

 

 

ITEM 4:

CONTROLS AND PROCEDURES

 

 

(a)

Evaluation of Disclosure Controls and Procedures:

 

 

 

The Company’s Chief Executive Officer, Randall D. Sampson, and Chief Financial Officer, David C. Hansen, have reviewed the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based upon this review, these officers have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that the disclosure controls are also effective to ensure that information required to be disclosed in the Company’s Exchange Act reports is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

 

 

(b)

Changes in Internal Control Over Financial Reporting:

 

 

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934) that occurred during our fiscal quarter ended September 30, 2012 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II
OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

 

 

Not Applicable.

 

 

Item 1A.

Risk Factors

 

 

 

There have been no material changes to the Risk Factors reported under Item 1A in the Form 10-K for the year ended December 31, 2011, and the statement of risk factors presented therein are incorporated by reference herein.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds


 

 

 

 

(a)

Not Applicable.

 

(b)

Not Applicable.

 

(c)

On January 16, 2008, the Company announced that its Board of Directors had authorized a program to repurchase up to an additional 250,000 shares of the Company’s common stock. In addition, on August 24, 2012, the Company announced that its Board of Directors had authorized the repurchase of an additional 100,000 shares of the Company’s common stock. During the first nine months of 2012, the Company did not repurchase any shares of common stock. As of September 30, 2012, the Company may buy back a maximum of 133,457 shares as a result of this repurchase program.


 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

Not Applicable.

 

 

Item 4.

Mine Safety Disclosures

 

 

 

Not Applicable.

 

 

Item 5.

Other Information

 

 

 

Not Applicable.

 

 

Item 6.

Exhibits


 

 

 

 

 

(a)

The following exhibits are included herein:

 

 

 

 

 

 

11

Statement re computation of per share earnings – See Net Income Per Share under Note 1 of Notes to Consolidated Financial Statements under Part 1, Item 1, which is incorporated herein by reference.

 

 

 

 

 

 

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (rules 13a-14 and 15d-14 of the Exchange Act).

 

 

 

 

 

 

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (rules 13a-14 and 15d-14 of the Exchange Act).

 

 

 

 

 

 

32

Certfications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

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SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

Canterbury Park Holding Corporation

 

 

 

Dated: November 14, 2012

 

/s/ Randall D. Sampson

 

 

Randall D. Sampson,

 

 

President, and Chief Executive Officer

 

 

 

Dated: November 14, 2012

 

/s/ David C. Hansen

 

 

David C. Hansen,

 

 

Vice President, and Chief Financial Officer

26