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 “collection revenue.” Other Revenue presented above includes fees collected for the administration of tournaments and amounts earned as reimbursement of the administrative costs of maintaining jackpot funds. Card Casino revenue represented 68.5% and 69.4% of consolidated net revenues for the three-months ended March 31, 2014 and 2013, respectively.
Total Card Casino revenue increased $77,000 or 1.2%, for the first three months of 2014 compared to the same period in 2013. Poker collection revenue decreased $34,000, or 1.4%, compared to the first quarter of 2013. The Company believes that the year-over-year decrease in poker revenue is primarily attributable to the harsh winter weather mentioned above. Table games collection revenue increased $166,000, or 5.3% compared to the first three months of 2013. The Company believes this increase was primarily due to the new variety of games offered which more than offset the adverse affect of the harsh winter weather.
We expect that competition from North Metro Harness Initiative, LLC, illegal Internet wagering, and wagering at tribal casinos will continue to challenge our efforts to grow our Card Casino operating revenues in future periods. As a result, we continue to search for opportunities to make Canterbury Park the most attractive alternative when our customers want to wager on card games.
Concession revenue increased $120,981, or 14.3%, for the quarter ended March 31, 2014 compared to the same quarter in 2013. The increase is primarily due to higher special event attendance in 2014 which drove more concession sales.
Total operating expenses in the first quarter of 2014 increased $42,683, or 0.5%, compared to the three-month period ended March 31, 2013. See below for a further discussion of operating expenses.
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Total expense for statutory purses and the Minnesota Breeders’ Fund decreased 0.5% to $1,008,133 for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Both purse and Breeders’ Fund expenses are determined by wagering levels on our Card Casino and live and simulcast racing. The slight decrease in both purse and Breeders’ Fund expenses for the three-month period ended March 31, 2014 compared to the same period in 2013 was due to inclement weather during the first quarter of 2014 which reduced simulcast revenues approximately 3%.
Salaries and benefits decreased $199,168, or 4.5%, compared to the first quarter of 2013. The decrease is primarily due to a reduction in hours worked and reduction in associated payroll taxes.
Utilities increased $57,153, or 21.5%, compared to the first quarter of 2013. The increase is primarily attributable to one of the coldest winters Minnesota has experienced in decades.
Other operating expenses increased $129,577, or 8.9%, compared to the first quarter of 2013. The increase is primarily due to increased consulting expenditures related to compliance and special events initiatives.
Income before income taxes was $693,468 for the three months ended March 31, 2014 compared to $506,729 for the three months ended March 31, 2013. Income tax expense was $287,461 for the first quarter of 2014 compared to $215,648 for the first quarter of 2013, resulting in net income of $406,007 and $291,081 for 2014 and 2013, respectively.
Recent Changes to Minnesota’s Minimum Wage Law:
Legislation signed by Minnesota’s Governor on April 15, 2014 will increase the minimum wage that must be paid by the Company from $7.25 to $8.00 effective August 1, 2014, with further increases scheduled to $9.00 per hour on August 1, 2015 and to $9.50 per hour on August 1, 2016. In addition, starting January 1, 2018, the minimum wage will increase at the beginning of each year by the rate of inflation up to a maximum increase of up to 2.5% per year. The legislation includes a 90-day training wage of $7.75 for 18- and 19-year-olds and, under certain conditions, for 16- and 17- year olds. Because the Company employs a large number of individuals at an hourly wage equal to or slightly above $7.25 per hour, this legislation will have an adverse effect. While we may be able to mitigate the impact of this increase by raising our prices or reducing our employee count, these measures could themselves have an adverse effect because higher prices and diminished service levels may discourage visits to the Racetrack. Also, to the extent we are not able to implement such cost cutting measures, the increase in the minimum wage will adversely affect our net income.
Contingencies:
As further discussed below under “Cooperative Marketing Agreement”, the Company entered into a Cooperative Marketing Agreement (the “CMA”) with the Shakopee Mdewakanton Sioux Community (“SMSC”) 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 occur and that the Company will be required to pay the specified amount related to such covenant is remote.
Liquidity and Capital Resources:
Cash provided by operating activities for the three months ended March 31, 2014 was $2,240,069 primarily as a result of the following: The Company reported net income of $406,007 and depreciation of $526,620. Card Casino accruals also increased $657,708 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 2014 was the increase in accounts payable and accrued wages and payroll taxes of $290,080, due primarily to an increase in deferred revenue related to the $660,000 marketing payment that was received in the first quarter of 2014. This is discussed in greater detail under “Cooperative Marketing Agreement” below.
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Cash provided by operating activities for the three months ended March 31, 2013 was $1,914,198 primarily as a result of the following: The Company reported net income of $291,081 and depreciation of $446,640. Restricted cash also decreased $600,653, which was primarily due to the decrease in our player pool. A final factor contributing to the net cash provided by operating activities for the first quarter of 2013 was the increase in accounts payable and accrued wages and payroll taxes of $949,721, due primarily to an increase in deferred revenue related to the $600,000 marketing payment that was received in the first quarter of 2013.
Net cash used in investing activities for the first quarter of 2014 of $837,572 was used primarily for a variety of equipment purchases. Net cash used in investing activities for the first quarter of 2013 of $1,011,251 was used primarily for the purchase of digital signage and customer relationship management software at the Racetrack.
Net cash provided by financing activities during the first three months of 2014 consisted of purchases of stock through the Employee Stock Purchase Plan and proceeds received upon the exercise of stock options of $26,904. Net cash provided by financing activities during the first three months of 2013 consisted of proceeds received upon the issuance of common stock relating to the Employee Stock Purchase Plan of $15,442, slightly offset by common stock repurchases of $7,509.
As of March 31, 2014, we had $3,000,000 of capacity under a commercial revolving credit line as part of a general credit and security agreement with Bremer Bank including interest at the prime rate but not less than 4.5% per annum. We had no borrowings under the credit line during the quarter ended March 31, 2014 or the year ended December 31, 2013. The 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, 2014. On May 5, 2014, the Company signed an amendment with Bremer Bank extending the expiration date from May 5, 2014 to May 4, 2015, while keeping previous provisions intact.
The Company’s cash and cash equivalent balance at March 31, 2014 was $10,168,610 compared to $8,739,209 at December 31, 2013. The Company believes that unrestricted funds available in its cash accounts, amounts available under its revolving line of credit, along with funds generated from operations, will be sufficient to satisfy its liquidity and capital resource requirements for regular operations during 2014.
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 2013 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 64.8% of our total assets at March 31, 2014. 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 undiscounted 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.
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Stock-Based Compensation – Accounting guidance requires recognition of services provided in exchange for a share-based payment based on the grant date fair market value. We utilize our judgment in determining the assumptions used to determine the fair value of equity instruments granted using a Black-Scholes model.
Commitments and Contractual Obligations:
On June 4, 2012, the Company entered into the CMA with the SMSC that expires December 31, 2022. See “Cooperative Marketing Agreement” below.
In March 2014, the Company entered into a seven-year agreement with a new totalizator provider. Pursuant to the agreement, the vendor provides totalizator equipment and related software which record and process all wagers and calculate odds and payoffs. Under the new agreement, $221,345 will be charged to operations in the first full year.
Cooperative Marketing Agreement:
On June 4, 2012, the Company entered into the CMA with the SMSC. The primary purpose of the CMA is to increase purses paid during live horse racing at Canterbury Park’s Racetrack in order to strengthen Minnesota’s horse industry. Under the terms of the CMA, the SMSC paid the horsemen $5.3 million in February 2013 and $5.8 million in February 2014 for purse enhancements. After 2014, the SMSC is obligated to contribute the additional amounts listed below for purse enhancements.
The Company and the SMSC have also agreed in the CMA to partner in joint marketing efforts for their mutual benefit, including signage, joint promotions, player benefits and events. Under the CMA, the SMSC paid the Company $600,000 in February 2013 and $660,000 in February 2014 for marketing purposes. After 2014, the SMSC is obligated to pay the additional amounts listed below to be used for mutually agreeable marketing purposes.
Under the CMA, the SMSC has agreed to make the following purse enhancement and marketing payments in 2015 through 2022:
| | | | |
Year | | Purse Enhancement
Payments to Horsemen | | Marketing Payments to
Canterbury Park |
|
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 does not have a financial interest in any part of the purse enhancement payments. Therefore, purse enhancement payments have no impact on the Company’s financial statements.
The amounts earned from the marketing payments are recorded as a component of other revenue and the related expenses are recorded as a component of advertising and marketing expense and depreciation in the Company’s consolidated statements of operations. For the three months ended March 31, 2014, the Company recorded $59,035 in other revenue and incurred $6,253 in advertising and marketing expense and $52,782 in depreciation related to the SMSC marketing payment. For the three months ended March 31, 2013, the Company recorded $13,000 in other revenue and incurred $13,000 in advertising and marketing expense related to the SMSC marketing payment. The excess of amounts received over revenues is reflected as deferred revenue which is included in accounts payable on the consolidated balance sheets.
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Under the CMA, the Company agreed it would not promote or lobby the Minnesota legislature for expanded gambling authority and will support the SMSC’s lobbying efforts against expanding gambling authority.
As part of the CMA and pursuant to a related SAR Agreement dated June 14, 2012, the Company issued stock appreciation rights to the SMSC. The SAR Agreement granted rights to the SMSC to benefit from the appreciation in the value of 165,000 shares of Company common stock above $14.30 per share, a price agreed upon by the two parties. Each right represents the right to be paid the appreciation in the value of one share of stock above $14.30. Ten percent of the rights (16,500 rights) vested immediately and the remaining rights vest at the rate of 16,500 per year beginning in January 2013. As of March 31, 2014, 49,500 rights had vested. The SAR Agreement provides for the cash payment of the excess of the fair market value of Canterbury Park Holding Corporation’s common stock price on the date of exercise over the grant price. The SAR Agreement and all rights granted expire on December 31, 2022. The liability related to these stock appreciation rights is recorded as a long-term liability and the Company recognizes the income or expense related to the fluctuation in the value of the stock appreciation rights against the revenues recorded relating to the marketing payment due to the nature of the CMA. Any excess expenses will be recognized as a component of other operating expenses. For the quarter ended March 31, 2014, the Company recognized $90,646 of expense related to these stock appreciation rights, of which $59,035 was recorded as an offset to other revenue and $31,611 was recorded as other operating expenses. For the quarter ended March 31, 2013, the Company recognized $64,244 of expense related to these stock appreciation rights, of which $13,000 was recorded as an offset to other revenue and $51,244 was recorded as other operating expenses. In the future, changes in the fair value of these stock appreciation rights will increase or decrease the stock appreciation rights liability, and the Company will recognize an additional offset to other revenue and/or other operating expenses 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, we may make forward-looking statements concerning possible or anticipated future financial performance, prospective business activities or plans which are typically preceded by words such as “believes,” “expects,” “anticipates,” “intends” or similar expressions. For such forward-looking statements, we claim 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 affect our actual results and cause actual results to differ materially from those indicated in the forward-looking statements. Such risks and uncertainties include, but are not limited to: material fluctuations in attendance at the Racetrack, decline in interest in wagering on horse races at the Racetrack, at other tracks, or on unbanked card games offered at the Card Casino, competition from other venues offering unbanked card games or other forms of wagering, competition from other sports and entertainment options, increases in compensation and employee benefit costs, increases in the percentage of revenues allocated for purse fund payments, higher than expected expense related to new marketing initiatives, the impact of wagering products and technologies introduced by competitors, legislative and regulatory decisions and changes, the general health of the gaming sector, and other factors that are beyond our ability to control or predict.
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| |
ITEM 3: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Canterbury Park Holding Corporation 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 the Securities Exchange Act of 1934, as amended (“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 Securities and Exchange Commission 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 have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred during our fiscal quarter ended March 31, 2014 that have materially affected, or are 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, 2013, and the 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 December 17, 2007, the Company’s Board of Directors adopted a plan that authorized the repurchase of up to 250,000 shares of the Company’s common stock pursuant to Exchange Act Rule 12b-18 in open market transactions or block purchases of privately negotiated transactions (the “2008 Stock Repurchase Plan”). From its adoption until August 13, 2012, the Company repurchased 216,543 shares under the 2008 Stock Repurchase Plan and, on such date, authorized the repurchase of an additional 100,000 shares of the Company’s common stock. The Company did not repurchase any shares during the first quarter of 2014. The maximum number of shares that may yet be purchased under the above authorizations is 128,781 as of March 31, 2014. |
| | |
Item 3. | Defaults Upon Senior Securities |
| | |
| Not Applicable. |
| | |
Item 4. | Mine Safety Disclosures |
| | |
| Not Applicable. |
| | |
Item 5. | Other Information |
| | |
| Not Applicable. |
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| | | |
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 the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 32 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 99.1 | Press release dated May 14, 2014 announcing 2014 first quarter financial results |
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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 |
| |
Date: May 15, 2014 | /s/ Randall D. Sampson |
| Randall D. Sampson |
| President and Chief Executive Officer |
| |
Date: May 15, 2014 | /s/ David C. Hansen |
| David C. Hansen |
| Vice President and Chief Financial Officer |
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