Concession revenues remained relatively unchanged compared to the first quarter of 2010, decreasing $16,777, or 2.3%, for the quarter ended March 31, 2011.
Total operating expenses in the first quarter of 2011 decreased by $907,465, or 10.6%, compared to the three-month period ended March 31, 2010. See below for a further discussion of operating expenses.
Total expense for statutory purses and the Minnesota Breeders’ Fund remained relatively flat at approximately $949,000 for the quarter ended March 31, 2011 compared to $916,000 for the quarter ended March 31, 2010.
Salary and benefit costs decreased $130,114, or 3.4%, compared to the first quarter of 2010. The decrease is primarily due to the fact that increased Card Casino wages were more than offset by reductions in administration and concessions labor. Advertising and marketing costs decreased $60,243, or 37.0%, compared to the first quarter of 2010 primarily as a result of increased advertising expenses leading up to the reopening of the Card Casino in April of 2010.
A loss on disposal of assets in the amount of $909,540 was recorded during the first three months of 2010 and related primarily to the remodeling of our existing card room. There was no loss on disposal of assets during the three-month period ended March 31, 2011.
Other operating expenses increased $232,675 compared to the first quarter of 2010. The increase is primarily due to increased expenditures in support of legislation that would authorize electronic gaming devices at the Racetrack.
Income before income taxes was $638,321, for the three months ended March 31, 2011 compared to loss before income taxes of $786,441 for the three months ended March 31, 2010. Income tax expense was $427,766 for the first quarter of 2011 compared to income tax benefit of $146,800 for the first quarter of 2010, resulting in net income of $210,555 and a net loss of $639,641 for 2011 and 2010, respectively. The effective income tax rate for 2011 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.
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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, 2010 and such information is incorporated herein by reference.
Liquidity and Capital Resources:
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. Cash provided by operating activities for the three months ended March 31, 2010 was $1,234,639 and resulted principally from a net loss of $639,641 that was more than offset by a one-time loss on disposal of assets in the amount of $909,540 relating to the remodel of our card room. Additionally, depreciation of $491,700 and an increase in accounts payable, accrued wages and payroll taxes of $540,777, which was also due to the remodel of our card room, contributed to the net cash provided by operating activities for the first quarter of 2010.
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 used in investing activities for the first quarter of 2010 of $794,931 was used primarily for the remodeling of our card room.
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. Net cash provided by financing activities during the first three months of 2010 consisted solely of proceeds received upon the exercise of stock options of $9,999.
The Company has a general credit agreement with Bremer Bank, which provides a revolving credit line of up to $3,000,000 until May 6, 2012 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, 2011 or December 31, 2010. 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, 2011.
Unrestricted cash balances at March 31, 2011 were $6,975,271 compared to $5,451,462 at December 31, 2010. 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 2011 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 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 69.8% of our total assets at March 31, 2011. 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. To date, we have determined that no impairment of these assets exists.
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, 2010.
Legislation:
The Company is supporting legislation introduced in the 2011 session of the Minnesota Legislature that would authorize slot machines and other video lottery terminals to be operated at the Racetrack (referred to as a Racino). Based on the success of Racinos in several other states, we continue to believe that if a Racino was authorized at the Racetrack on similar terms to legislation approved in other states, it would stimulate economic growth in the horse racing and related agriculture businesses in Minnesota, provide growth and development opportunities that would add jobs at the Racetrack and surrounding community, and provide new revenues for state and local governments facing significant deficit issues. This bill mentioned above, as of the date of this report, is pending further action in the Minnesota Legislature.
The Company’s efforts to obtain legislative approval for 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, 2010 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 |
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Canterbury Park is not required to provide the information requested by this Item as it qualifies as a smaller reporting company. |
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ITEM 4: | CONTROLS AND PROCEDURES |
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(a) | Evaluation of Disclosure Controls and Procedures: |
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| 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. |
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(b) | Changes in Internal Control Over Financial Reporting: |
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| 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, 2011 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
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Item 1. | Legal Proceedings |
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| Not Applicable. |
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Item 1A. | Risk Factors |
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| 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, 2010, and the statement of risk factors presented therein are incorporated by reference herein. |
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Item 2. | Unregistered Sales of EquitySecurities and Use of Proceeds |
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| (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 2011, the Company did not repurchase any shares of common stock. As of March 31, 2011, there are 33,457 shares at maximum that the Company may buy back as a result of this repurchase program. |
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Item 3. | Defaults Upon Senior Securities |
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| Not Applicable. |
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Item 4. | Removed and Reserved |
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Item 5. | Other Information |
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| Not Applicable. |
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Item 6. | Exhibits |
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| (a) | The following exhibits are included herein: |
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| | 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. |
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| | 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). |
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| | 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). |
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| | 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.
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| Canterbury Park Holding Corporation |
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Dated: May 16, 2011 | /s/ Randall D. Sampson |
| Randall D. Sampson, |
| President, and Chief Executive Officer |
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Dated: May 16, 2011 | /s/ David C. Hansen |
| David C. Hansen, |
| Vice President, and Chief Financial Officer |
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