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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 MARCH 31, 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 HOLDING CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

	Minnesota			41-1775532
	(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification 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, or a non-accelerated filer (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 4,116,078 shares of common stock, $.01 par value, outstanding as of May 11, 2012.

 

Canterbury Park Holding Corporation

 

INDEX

 

				Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011		3
		Condensed Consolidated Statements of Operations for the periods ended March 31, 2012 and 2011		4
		Condensed Consolidated Statements of Cash Flows for the periods ended March 31, 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		13
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		18
	Item 4.	Controls and Procedures		18
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings		19
	Item 1A.	Risk Factors		19
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		19
	Item 3.	Defaults Upon Senior Securities		19
	Item 4.	Mine Safety Disclosures		19
	Item 5.	Other Information		19
	Item 6.	Exhibits		19
	Signatures			20
	Certifications

 

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PART I - FINANCIAL INFORMATION

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2012 AND DECEMBER 31, 2011 (Unaudited)

 

		March 31, 2012				December 31, 2011
ASSETS
CURRENT ASSETS
Cash		$	10,529,174			$	8,268,779
Restricted cash			1,379,057				1,146,163
Short-term investments			201,669				201,669
Accounts receivable, net of allowance of $27,773			742,493				540,167
Inventory			202,306				183,122
Prepaid expenses			614,191				682,404
Deferred income taxes			467,100				315,200
Due from Minnesota horsemen associations			—				44,372
Total current assets			14,135,990				11,381,876
LONG-TERM ASSETS
Deposits			26,400				26,400
Land, buildings and equipment, net of accumulated
depreciation of $20,837,633 and $20,364,054, respectively			22,431,678				22,776,115
		$	36,594,068			$	34,184,391
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	2,919,541			$	2,432,818
Card Casino accruals			1,778,892				1,314,173
Accrued wages and payroll taxes			1,011,430				775,256
Due to MHBPA			117,722				158,616
Accrued property taxes			757,425				606,252
Payable to horsepersons			74,384				17,745
Income taxes payable			485,124				97,000
Total current liabilities			7,144,518				5,401,860
DEFERRED INCOME TAXES			1,301,200				1,309,000
COMMITMENTS AND CONTINGENCIES			—				—
STOCKHOLDERS’ EQUITY
Common stock, $.01 par value, 10,000,000 shares authorized,
4,112,031 and 4,101,701 shares issued and outstanding, respectively			41,120				41,017
Additional paid-in capital			16,555,680				16,413,468
Retained earnings			11,551,550				11,019,046
Total stockholders’ equity			28,148,350				27,473,531
		$	36,594,068			$	34,184,391

 

See notes to condensed consolidated financial statements.

 

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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

PERIODS ENDED MARCH 31, 2012 AND 2011 (Unaudited)

 

		Three Months Ended March 31,
		2012				2011
OPERATING REVENUES:
Pari-mutuel		$	1,775,831			$	1,683,750
Card Casino			6,543,073				5,600,802
Concessions			932,794				723,121
Other			397,496				337,509
Total Revenues			9,649,194				8,345,182
Less:  Promotional Allowances			(40,484	)			(37,372	)
Net Revenues			9,608,710				8,307,810
OPERATING EXPENSES:
Purse expense			921,731				805,907
Minnesota Breeders’ Fund			159,929				142,988
Other pari-mutuel expenses			352,824				305,526
Salaries and benefits			4,187,575				3,710,602
Cost of sales			535,044				464,627
Depreciation			473,580				460,500
Utilities			226,810				234,538
Advertising and marketing			195,812				102,548
Other operating expenses			1,550,446				1,443,606
			8,603,751				7,670,842
INCOME FROM OPERATIONS			1,004,959				636,968
NONOPERATING REVENUES (EXPENSES):
Interest expense			—				(6	)
Other, net			1,114				1,359
			1,114				1,353
INCOME BEFORE INCOME TAXES			1,006,073				638,321
INCOME TAX EXPENSE			(473,569	)			(427,766	)
NET INCOME		$	532,504			$	210,555
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING			4,109,121				4,055,399
WEIGHTED AVERAGE NUMBER OF DILUTIVE
SHARES OUTSTANDING			4,160,229				4,113,651
BASIC NET INCOME PER  COMMON SHARE		$	.13			$	.05
DILUTED NET INCOME PER COMMON SHARE		$	.13			$	.05

 

See notes to condensed consolidated financial statements.

 

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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

PERIODS ENDED MARCH 31, 2012 AND 2011 (Unaudited)

 

		Three Months Ended March 31,
		2012				2011
Operating Activities:
Net income		$	532,504			$	210,555
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation			473,580				460,500
Stock-based compensation expense			42,583				55,508
(Decrease) increase in deferred income tax liability			(159,700	)			316,500
Tax benefit from exercise of stock options			19,144				7,100
Changes in operating assets and liabilities:
Increase in restricted cash			(232,894	)			(32,299	)
Increase in accounts receivable			(202,326	)			(74,508	)
Decrease in other current assets			49,029				78,218
Increase in income taxes payable			368,980				97,066
Increase in accounts payable and accrued wages and payroll taxes			713,525				146,755
Increase in Card Casino accruals			464,719				263,456
Increase in accrued property taxes			151,173				147,300
Increase in payable to horsepersons			56,639				24,043
Increase (decrease) in due to MHBPA			3,478				(44,826	)
Net cash provided by operating activities			2,280,434				1,655,368
Investing Activities:
Additions to buildings and equipment			(119,772	)			(62,725	)
Purchase of investments			—				(100,000	)
Net cash used in investing activities			(119,772	)			(162,725	)
Financing Activities
Proceeds from issuance of common stock			80,589				24,066
Tax benefit from exercise of stock options			19,144				7,100
Net cash provided by financing activities			99,733				31,166
Net increase in cash			2,260,395				1,523,809
Cash at beginning of period			8,268,779				5,451,462
Cash at end of period		$	10,529,174			$	6,975,271
Supplemental disclosure of noncash investing activities:
Additions to buildings and equipment funded
through accounts payable		$	38,658			$	66,951
Proceeds from issuance of common stock
funded through shares swapped		$	—			$	165,625
Supplemental disclosure of cash flow information:
Income taxes paid, net of refunds		$	226,000			$	—

 

See notes to condensed consolidated financial statements.

 

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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PERIODS ENDED MARCH 31, 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 March 31, 2012 and December 31, 2011, the results of its operations and its cash flows for the three months ended March 31, 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 early 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. 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.

 

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.

 

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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 March 31, 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 March 31, 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 room 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 $875,000 and $825,000 for the three-month periods ending March 31, 2012 and 2011, respectively, 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 March 31, 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 relating to the Company’s effort to obtain electronic gaming devices at the Racetrack.

 

Interest and penalties associated with uncertain income tax positions are presented in income tax expense. During the three months ended March 31, 2012 and 2011, we did not recognize any expense related to interest and penalties. Additionally, we do not have any amounts accrued at March 31, 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 $42,583 and $55,508 during the three months ended March 31, 2012 and 2011, respectively.

 

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 vest 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 will be 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 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 5,000 shares is $73,300 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 number of shares that may be issued pursuant to options granted and the weighted average fair value during the periods presented were:

 

Three Months Ended

March 31, 2012

March 31, 2011

Grant

Weighted Average Fair Value

Grant

Weighted Average Fair Value

Board stock options

―

$

―

15,000

$

6.25

Total options

―

15,000

 

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The fair value of stock options granted under the Company’s 1994 Stock Plan during the first three months of 2012 and 2011 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results:

 

		2012				2011
Dividend yield			―				0.00	%
Weighted-average volatility			―				50	%
Risk-free interest rate			―				2.02	%
Expected term of stock options in years			―				5.5
Fair value of stock options on grant date			―			$	93,750

 

A summary of stock option activity as of March 31, 2012 and changes during the three 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			(8,750	)			6.86
Expired/Forfeited			―				―
Outstanding at March 31, 2012			309,252			$	9.97				6.1 Years			$	3,083,652
Exercisable at March 31, 2012			249,252			$	10.55				5.7 Years			$	2,630,742

 

A summary of stock option activity as of March 31, 2011 and changes during the three 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			(28,622	)			6.63
Expired/Forfeited			(1,250	)			7.37
Outstanding at March 31, 2011			353,565			$	9.59				6.5 Years			$	3,392,380
Exercisable at March 31, 2011			236,190			$	10.32				5.5 Years			$	2,437,555

 

Employee Stock Ownership Plan – Prior to 2008, the Company contributed shares of its common stock to its Employee Stock Ownership Plan (“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.

 

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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 1,580 shares during the first quarter of 2012. The plan did not issue any shares during the first quarter of 2011. The ESPP has issued a total of 246,166 shares since its inception.

 

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 at March 31, 2012 because the options were out of the money at March 31, 2012. Options to purchase 105,500 shares of common stock at an average price of $14.80 per share were outstanding but not included in the computation of diluted earnings per share at March 31, 2011 because the options were out of the money at March 31, 2011.

 

The following is a reconciliation of the numerator and denominator of the earnings per common share computations for the periods ending March 31, 2012 and 2011:

 

		March 31, 2012				March 31, 2011
Net income (numerator) amounts used for basic and diluted per share computations:		$	532,504			$	210,555
Weighted average shares (denominator) of common stock outstanding:
Basic			4,109,121				4,055,399
Plus dilutive effect of stock options			51,108				58,252
Diluted			4,160,229				4,113,651
Net income per common share:
Basic		$	.13			$	.05
Diluted			.13				.05

 

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 March 31, 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 March 31, 2012. The Company believes that unrestricted funds available in its cash accounts, funds available under this line of credit, along with funds generated from operations, will be sufficient to satisfy its liquidity and capital resource requirements during 2012.

 

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5.

OPERATING SEGMENTS

 

During the first three 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 primarily represents operations of Canterbury Park’s Card Casino, and the concessions segment primarily 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.

 

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

 

		Three Months Ended March 31, 2012
		Horse Racing				Card Casino				Concessions				Total
Net revenues from external customers		$	2,132			$	6,543			$	934			$	9,609
Intersegment revenues			50				―				335				385
Net interest income			1				―				―				1
Depreciation			280				158				36				474
Segment loss (income) before income taxes			(79	)			1,140				73				1,134
		At March 31, 2012
Segment Assets		$	33,341			$	2,683			$	11,441			$	47,465
		Three Months Ended March 31, 2011
		Horse Racing				Card Casino				Concessions				Total
Net revenues from external customers		$	1,982			$	5,601			$	725			$	8,308
Intersegment revenues			25				―				318				343
Net interest income			1				―				―				1
Depreciation			286				135				40				461
Segment (loss) income before income taxes			(75	)			773				(1	)			697
		At December 31, 2011
Segment Assets		$	30,832			$	2,838			$	11,222			$	44,892

 

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

 

		Three Months Ended March 31,
		2012				2011
Revenues
Total net revenue for reportable segments		$	9,994			$	8,651
Elimination of intersegment revenues			(385	)			(343	)
Total consolidated net revenues		$	9,609			$	8,308
Income (loss) before income taxes
Total segment income (loss) before income taxes		$	1,134			$	697
Elimination of intersegment (income) loss before income taxes			(128	)			(59	)
Total consolidated income (loss) before income taxes		$	1,006			$	638
Assets		March 31, 2012				December 31, 2011
Total assets for reportable segments		$	47,465			$	44,892
Elimination of intercompany receivables			(10,871	)			(10,708	)
Total consolidated assets		$	36,594			$	34,184

 

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.

 

The Company periodically is subject to claims or involved in legal proceedings arising in the normal course of business. At March 31, 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.

SUBSEQUENT EVENT

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.

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. Initially, the Company plans to increase the number of tables hosting live play from 50 to 60, the Card Casino’s current capacity, 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.

 

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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 early September. During live race meets, 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 this law governing Card Casino operations will enable us to begin offering banked games in the future. 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, craft shows and other events.

 

Operations Review for the Three Months Ended March 31, 2012 and March 31, 2011:

 

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 periods ended March 31, 2012 and 2011:

 

		March 31, 2012			March 31, 2011
Net income		$	532,504		$	210,555
Other income, net of interest expense			(1,114)			(1,353)
Income tax expense			473,569			427,766
Depreciation			473,580			460,500
EBITDA		$	1,478,539		$	1,097,468

 

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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EBITDA as a percentage of net revenues was 15.4% for the first quarter ended March 31, 2012 compared to 13.2% for the first quarter ended March 31, 2011. This change was due to the increase in net income and related income tax expense as compared to the 2011 first quarter.

 

Total net revenues increased $1,300,900, or 15.7%, during the three months ended March 31, 2012 compared to the three months ended March 31, 2011. The increase is primarily attributable to an increase in Card Casino revenue of 16.8%, an increase in pari-mutuel revenue of 5.5%, and an increase in concessions revenue of 29.0%. See below for a further discussion of revenue.

 

Summary of Pari-mutuel Data:

 

		Three Months Ended March 31,
		2012				2011
Simulcast racing days			91				90
On-track simulcast handle		$	8,033,000			$	7,539,000
Average daily handle		$	88,300			$	83,800

 

Pari-mutuel revenue increased $92,081, or 5.5%, in the three-month period ended March 31, 2012 compared to the same period in 2011. Total handle was approximately $8.0 million, or 6.6%, higher than total handle of $7.5 million during the same quarter a year ago. The increase is primarily attributable to unusually mild weather in the first quarter of 2012 compared to inclement weather during the first quarter of 2011, when Minnesota experienced one of the snowiest winters on record which discouraged customers from coming to the track and wagering. Similar harsh weather in other parts of the United States in the first quarter of 2011 caused the cancellation of a significant number of races at racetracks simulcasting their signal to our racetrack as compared to mild weather experienced during the first quarter of 2012 around the country, resulting in minimal cancellations of races at racetracks simulcasting their signal to our racetrack.

 

Summary of Card Casino Data:

 

		Three Months Ended March 31,
		2012				2011
Poker Games		$	2,776,000			$	2,603,000
Table Games			3,111,000				2,476,000
Total Collection Revenue			5,887,000				5,079,000
Other Revenue			656,000				522,000
Total Card Casino Revenue		$	6,543,000			$	5,601,000
Number of Days Offered			91				90
Average Revenue per Day		$	72,000			$	62,000

 

Total Card Casino revenue increased $942,271, or 16.8%, for the first three months of 2012 compared to the same period 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 room 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 increased $173,695, or 6.7%, compared to the first quarter of 2011. The Company believes that the year-over-year increase is attributable to both the unusually mild weather experienced during the first quarter of 2012 and reduced Internet betting because of a ban on Internet poker that began on April 15, 2011. Table games collection revenue increased $634,450, or 25.6%, compared to the first three months of 2011. The Company believes this increase was primarily due to a strengthening economy that encouraged increased interest in card play and the unusually mild weather described above. Total Card Casino revenues represented 68.1% and 67.4% of net revenues for the three-month periods ended March 31, 2012 and 2011, respectively.

 

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Concession revenues increased $209,673, or 29.0%, for the quarter ended March 31, 2012 compared to the same quarter in 2011. The increase is primarily attributable to the return of snowmobile racing that occurred in January of 2012. Also, the unusually mild weather experienced during the first quarter of 2012 resulted in more concession sales.

 

Total operating expenses in the first quarter of 2012 increased by $932,909, or 12.2%, compared to the three-month period ended March 31, 2011. See below for a further discussion of operating expenses.

 

Summary of Purse and Breeders’ Fund Expense:

 

		Purse Expense								Minnesota Breeders’ Fund Expense
		Three Months Ended March 31,								Three Months Ended March 31,
		2012				2011				2012				2011
Card Casino		$	608,427			$	504,072			$	67,603			$	56,008
Simulcast Racing			313,304				301,835				92,326				86,980
Total		$	921,731			$	805,907			$	159,929			$	142,988

 

Due to the increases in pari-mutuel and Card Casino revenues, total expense for statutory purses and the Minnesota Breeders’ Fund increased 14.0%, to approximately $1,082,000, for the quarter ended March 31, 2012 compared to $949,000 for the quarter ended March 31, 2011.

 

Salary and benefit costs increased $476,973, or 12.9%, compared to the first quarter of 2011. The increase was partially due to supporting the increased revenue from all revenue categories during the first quarter and increased salary and benefit costs as compared to the first quarter of 2011 when a wage freeze was in effect.

 

Cost of sales increased $70,417, or 15.2%, compared to the first quarter of 2011. The increase was due to the increase in concessions revenue and increases in overall food costs that occurred during the first quarter of 2012.

 

Advertising and marketing costs increased $93,264, or 90.9%, compared to the first quarter of 2011 primarily as a result of increased radio and billboard expenditures emphasizing the Card Casino during the first quarter of 2012.

 

Income before income taxes was $1,006,073, for the three months ended March 31, 2012 compared to $638,321 for the three months ended March 31, 2011. Income tax expense was $473,569 for the first quarter of 2012 compared to $427,766 for the first quarter of 2011, resulting in net income of $532,504 and $210,555 for 2012 and 2011, respectively. The effective income tax rate for 2012 is higher than the statutory rate primarily due to non-deductible lobbying expenses incurred to support the Company’s effort to obtain video gaming devices at the Racetrack.

 

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Contingencies:

 

There have been no material changes in the contingencies reported under Item 7 in our Annual Report on Form 10-K for our year ended December 31, 2011 and such information is incorporated herein by reference.

 

Liquidity and Capital Resources:

 

Cash provided by operating activities for the three months ended March 31, 2012 was $2,280,434 and was due to several factors. First, the Company reported net income of $532,504. Additionally, the Company recorded depreciation of $473,580. Card Casino accruals also increased $464,719, which was primarily due to the increase in our player pool related to increased table game activity. A final factor contributing to the net cash provided by operating activities for the first quarter of 2012 was the increase in accounts payable and accrued wages and payroll taxes of $713,525, due primarily to an increase in deferred revenue related to corporate partnerships that run the duration of our live race meet. Cash provided by operating activities for the three months ended March 31, 2011 was $1,655,368 and was due to several factors. First, the Company reported net income of $210,555. Additionally, the Company recorded depreciation of $460,500. Card Casino accruals also increased $263,456, which was primarily due to the increase in our player pool related to increased table game activity. A final factor contributing to the net cash provided by operating activities for the first quarter of 2011 was the increase in deferred income tax liability of $316,500.

 

Net cash used in investing activities for the first quarter of 2012 of $119,772 was used primarily for a variety of equipment purchases. Net cash used in investing activities for the first quarter of 2011 of $162,725 was used primarily for the purchase of short-term investments.

 

Net cash provided by financing activities during the first three months of 2012 consisted of purchases of stock through the Employee Stock Purchase Plan and proceeds received upon the exercise of stock options of $80,589 and the related tax benefit of $19,144 from the exercise of those options. Net cash provided by financing activities during the first three months of 2011 consisted of proceeds received upon the exercise of stock options of $24,066 and the related tax benefit of $7,100 from the exercise of those options.

 

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 March 31, 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 March 31, 2012.

 

Unrestricted cash balances at March 31, 2012 were $10,529,174 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.

 

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Our significant accounting policies are included in Note 1 to our consolidated financial statements in our 2011 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 61.3% of our total assets at March 31, 2012. We utilize our judgment in various ways including: determining whether an expenditure is considered a maintenance expense or a capital asset; determining the estimated useful lives of assets; and determining if or when an asset has been impaired 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. Should the sum of the related expected future net cash flows be less than the carrying value, we will determine whether an impairment loss should be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. We have determined that no impairment of these assets exists at March 31, 2012.

 

Stock Based Employee Compensation – ASC 718, Compensation – Stock Compensation (“ASC 718”), requires recognition of employee 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:

 

There have been no material changes in our outstanding commitments and contractual obligations since those reported at December 31, 2011.

 

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.

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. Initially, the Company plans to increase the number of tables hosting live play from 50 to 60, the Card Casino’s current capacity, 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.

 

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The Company’s efforts to obtain legislative approval for slot machines to be operated at the Racetrack (a business model that is generally called a “Racino”) have required, and will continue to require, substantial expenditures. Due to the inherent uncertainty of the outcome of legislative activities, there can be no assurance that any bills favorable to the Company’s interests will be enacted into law, and it is possible bills adverse to the Company could be enacted.

 

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 unbanked 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.

 

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 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 March 31, 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

 

(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. During the first quarter of 2012, the Company did not repurchase any shares of common stock. As of March 31, 2012, there are 33,457 shares at maximum that the Company may buy back 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 Condensed 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

Certifications 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:  May 15, 2012		/s/ Randall D. Sampson
		Randall D. Sampson, President, and Chief Executive Officer
Dated:  May 15, 2012		/s/ David C. Hansen
		David C. Hansen, Vice President, and Chief Financial Officer