U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
ý | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005. |
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o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE TRANSITION PERIOD FROM TO . |
Commission File Number 001-31569
Canterbury Park Holding Corporation
(Exact name of business issuer as specified in its charter)
Minnesota | 41-1775532 |
(State or other jurisdiction
of incorporation or organization) | (IRS Employer Identification No.) |
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1100 Canterbury Road, Shakopee, Minnesota | 55379 |
(Address of principal executive offices) | (Zip Code) |
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(952) 445-7223 |
(Issuer’s Telephone Number) |
Indicate by check mark whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ý NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. YES o NO ý
The Company had 3,901,369 shares of common stock, $.01 par value per share, outstanding as of August 9, 2005.
Canterbury Park Holding Corporation
INDEX
2
Part I — Financial Information
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004
| | (Unaudited)
June 30,
2005 | | December 31,
2004 | |
ASSETS | | | | | |
| | | | | |
CURRENT ASSETS | | | | | |
Cash | | $ | 5,251,032 | | $ | 4,178,544 | |
Restricted Cash | | 4,175,093 | | 1,746,599 | |
Accounts receivable | | 605,876 | | 750,612 | |
Inventory | | 278,693 | | 134,653 | |
Deposits | | 20,000 | | 20,000 | |
Prepaid expenses | | 697,956 | | 850,881 | |
Income tax refund receivable | | 153,715 | | | |
Deferred Income Taxes | | 257,600 | | 103,000 | |
Total current assets | | 11,439,965 | | 7,784,289 | |
| | | | | |
LAND, BUILDING AND EQUIPMENT, net of accumulated depreciation of $10,517,850 and $9,869,193, respectively | | 22,513,244 | | 20,438,532 | |
| | | | | |
| | $ | 33,953,209 | | $ | 28,222,821 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
| | | | | |
CURRENT LIABILITIES | | | | | |
Accounts payable | | $ | 5,877,337 | | $ | 2,129,405 | |
Card club accruals | | 1,617,097 | | 1,736,746 | |
Accrued wages and payroll taxes | | 1,788,089 | | 1,799,419 | |
Accrued interest | | 6,211 | | 229 | |
Due to MHBPA | | 338,519 | | 131,146 | |
Accrued property taxes | | 293,229 | | 282,119 | |
Cash dividend payable | | 973,717 | | | |
Income taxes payable | | | | 17,486 | |
Payable to horsepersons | | 413,678 | | 414,621 | |
Total current liabilities | | 11,307,877 | | 6,511,171 | |
| | | | | |
DEFERRED INCOME TAXES | | 682,900 | | 716,000 | |
| | | | | |
COMMITMENTS AND CONTINGENCIES (Note 4) | | | | | |
| | | | | |
STOCKHOLDERS’ EQUITY | | | | | |
Common stock, $.01 par value, 10,000,000 shares authorized, 3,895,369 and 3,835,669, respectively, shares issued and outstanding | | 38,954 | | 38,357 | |
Additional paid-in capital | | 13,169,136 | | 12,763,811 | |
Accumulated earnings | | 8,754,342 | | 8,193,482 | |
Total stockholders’ equity | | 21,962,432 | | 20,995,650 | |
| | $ | 33,953,209 | | $ | 28,222,821 | |
| | | | | | | | | | | |
See notes to consolidated financial statements.
3
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIODS ENDED JUNE 30, 2005 AND 2004 (Unaudited)
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
OPERATING REVENUES: | | | | | | | | | |
Pari-mutuel | | $ | 4,861,902 | | $ | 5,128,225 | | $ | 7,777,188 | | $ | 8,307,954 | |
Card Club | | 7,273,912 | | 6,788,541 | | 14,710,912 | | 13,676,742 | |
Concessions | | 1,804,959 | | 1,612,092 | | 2,684,525 | | 2,439,014 | |
Admissions and parking | | 228,171 | | 189,379 | | 254,341 | | 228,097 | |
Publications | | 186,746 | | 196,799 | | 300,585 | | 304,840 | |
Other operating revenue | | 551,229 | | 507,613 | | 901,923 | | 851,967 | |
| | 14,906,919 | | 14,422,649 | | 26,629,474 | | 25,808,614 | |
| | | | | | | | | |
OPERATING EXPENSES: | | | | | | | | | |
Statutory purses | | 2,450,693 | | 2,472,686 | | 3,745,230 | | 3,687,256 | |
Minnesota breeders’ fund | | 355,279 | | 356,735 | | 620,953 | | 626,172 | |
Host track fees | | 631,909 | | 695,307 | | 1,113,695 | | 1,215,145 | |
Pari-mutuel taxes | | 58,684 | | 73,615 | | 104,875 | | 124,597 | |
Salaries and benefits | | 5,752,024 | | 5,380,013 | | 10,399,920 | | 9,557,866 | |
Cost of concessions andpublication sales | | 1,023,337 | | 890,707 | | 1,634,506 | | 1,461,935 | |
Depreciation and amortization | | 398,250 | | 311,000 | | 740,250 | | 596,000 | |
Utilities | | 286,925 | | 274,442 | | 547,572 | | 518,026 | |
Repairs, maintenance and supplies | | 457,639 | | 527,300 | | 686,721 | | 814,583 | |
License fees and property taxes | | 161,494 | | 154,492 | | 309,190 | | 295,186 | |
Advertising and marketing | | 830,717 | | 844,510 | | 1,157,997 | | 1,212,818 | |
Insurance | | 317,520 | | 306,047 | | 621,801 | | 555,356 | |
Other operating expenses | | 1,275,831 | | 1,107,858 | | 2,112,967 | | 1,835,509 | |
| | 14,000,302 | | 13,394,712 | | 23,795,677 | | 22,500,449 | |
NONOPERATING (EXPENSES)REVENUES: | | | | | | | | | |
Interest expense | | (5,151 | ) | (5,087 | ) | (6,740 | ) | (6,433 | ) |
Other, net | | 29,981 | | 12,229 | | 48,938 | | 22,834 | |
| | 24,830 | | 7,151 | | 42,198 | | 16,401 | |
| | | | | | | | | |
INCOME BEFORE INCOME TAXEXPENSE | | 931,447 | | 1,035,088 | | 2,875,995 | | 3,324,566 | |
| | | | | | | | | |
INCOME TAX EXPENSE (Note 1) BENEFIBENEFITEXPENSE) (Note 1) | | (477,298 | ) | (454,228 | ) | (1,341,418 | ) | (1,483,528 | ) |
| | | | | | | | | |
NET INCOME | | $ | 454,149 | | $ | 580,860 | | $ | 1,534,577 | | $ | 1,841,038 | |
| | | | | | | | | |
BASIC NET INCOME PER COMMON SHARE (Note 1) | | $ | .12 | | $ | .15 | | $ | .40 | | $ | .49 | |
| | | | | | | | | |
DILUTED NET INCOME PER COMMON SHARE (Note 1) | | $ | .11 | | $ | .14 | | $ | .37 | | $ | .44 | |
| | | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
4
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED JUNE 30, 2005 AND 2004 (Unaudited)
| | Six Months Ended June 30, | |
| | 2005 | | 2004 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net Income | | $ | 1,534,577 | | $ | 1,841,038 | |
Adjustments to reconcile net income to net cash provided by operations: | | | | | |
Depreciation and amortization | | 740,250 | | 596,000 | |
Tax benefit from exercise of stock options | | 116,600 | | 335,900 | |
Increase in deferred income taxes | | (187,700 | ) | (107,000 | ) |
Decrease (increase) in accounts receivable | | 144,736 | | (127,488 | ) |
Decrease (increase) in other current assets | | 8,885 | | (302,415 | ) |
Decrease in income taxes payable | | (171,201 | ) | (21,319 | ) |
Increase in accounts payable and accrued wages &payroll taxes | | 3,736,602 | | 3,369,363 | |
(Decrease) increase in card club accruals | | (119,649 | ) | 195,995 | |
Increase in accrued interest | | 5,982 | | 3,930 | |
Increase (decrease) in accrued property taxes | | 11,110 | | (3,653 | ) |
(Decrease) increase in payable to horsepersons | | (943 | ) | 67,544 | |
Increase (decrease) in due to MHBPA | | 207,373 | | (3,789 | ) |
Net cash provided by operations | | 6,026,622 | | 5,844,106 | |
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Additions to land, building and equipment | | (2,814,962 | ) | (2,949,312 | ) |
Increase in restricted cash | | (2,428,494 | ) | (2,467,236 | ) |
Net cash used in investing activities | | (5,243,456 | ) | (5,416,548 | ) |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Proceeds from issuance of common stock | | 289,322 | | 265,461 | |
Net cash provided by financing activities | | 289,322 | | 265,461 | |
| | | | | |
NET INCREASE IN CASH | | 1,072,488 | | 693,019 | |
| | | | | |
CASH AT BEGINNING OF PERIOD | | 4,178,544 | | 2,523,560 | |
| | | | | |
CASH AT END OF PERIOD | | $ | 5,251,032 | | $ | 3,216,579 | |
| | | | | |
INTEREST PAID | | $ | 0 | | $ | 0 | |
| | | | | |
INCOME TAXES PAID | | $ | 1,585,000 | | $ | 1,265,000 | |
| | | | | |
DIVIDEND DECLARED | | $ | 973,717 | | $ | 947,129 | |
| | | | | | | | | | |
See notes to consolidated financial statements.
5
CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED JUNE 30, 2005 AND 2004
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is included in the notes to consolidated financial statements in the 2004 Annual Report on form 10-K.
Unaudited Financial Statements - The consolidated balance sheet as of June 30, 2005, the consolidated statements of operations for the three and six months ended June 30, 2005 and 2004, the consolidated statements of cash flows for the six months ended June 30, 2005 and 2004, and the related information contained in these notes have been prepared by management without audit. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of financial position and results of operations for such periods have been made. Results for an interim period should not be considered as indicative of results for a full year.
Reclassifications — In our consolidated statement of cash flows for the six months ended June 30, 2005, we changed the classification of changes in restricted cash balances to present such changes as an investing activity. We previously presented such changes as an operating activity. In the accompanying consolidated statements of cash flows for the six months ended June 30, 2004, we reclassified changes in restricted cash balances to be consistent with our 2005 presentation which resulted in a $2,467,236 increase in cash used in investing activities and a corresponding increase in cash flows provided by operations from the amounts previously reported.
Restricted Cash — Restricted cash represents refundable deposits and amounts due to horsemen for purses, stakes and awards, and amounts accumulated in the Player Pool and jackpot pools to be used to repay card club players in the form of promotions, giveaways, prizes, or by other means.
Income Taxes - Income tax expense is computed by applying the estimated annual effective tax rate to the year-to-date income.
Net Income Per Share - Basic net income per common share is based on the weighted average number of common shares outstanding during each year. The weighted average number of common shares outstanding for the three and six-month periods ended June 30, 2005 were 3,892,153 and 3,884,318, respectively. The weighted average number of common shares outstanding for the three and six-month periods ended June 30, 2004 were 3,764,585 and 3,746,289, respectively. Diluted net income per common share takes into effect the dilutive effect of potential common shares outstanding. The Company’s only potential common shares outstanding are stock options. After considering the dilutive effect of stock options outstanding, the weighted average shares used to calculate diluted earnings per share for the three and six-month periods ended June 30, 2005 were 4,235,928 and 4,184,009, respectively. The weighted average shares used to calculate diluted earnings per share for the three and six-month periods ended June 30, 2004 were 4,177,286 and 4,162,752, respectively.
Fair values of Financial Instruments — Due to the current classification of all financial instruments of the Company, given the short-term nature of the related account balances, carrying amounts reported in the consolidated balance sheets approximates fair value.
Stock Based Employee Compensation - At June 30, 2005, the Company has a stock option plan which provides for the granting of awards in the form of stock options, restricted stock, stock appreciation rights, and deferred stock to key employees and non-employees, including directors of and consultants to the Company and any subsidiary, to purchase up to a maximum of 1,450,000
6
shares of common stock. The Company accounts for that plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Stock Based Employee Compensation Table:
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
Net Income: | | | | | | | | | |
As reported | | $ | 454,149 | | $ | 580,860 | | $ | 1,534,577 | | $ | 1,841,038 | |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | (328,010 | ) | (148,716 | ) | (373,069 | ) | (264,499 | ) |
| | | | | | | | | |
Pro forma net income | | $ | 126,139 | | $ | 432,144 | | $ | 1,161,508 | | $ | 1,576,539 | |
| | | | | | | | | |
Earnings Per Share: | | | | | | | | | |
Basic - as reported | | $ | .12 | | $ | .15 | | $ | .40 | | $ | .49 | |
| | | | | | | | | |
Basic - pro forma | | $ | .03 | | $ | .12 | | $ | .30 | | $ | .42 | |
| | | | | | | | | |
Diluted - as reported | | $ | .11 | | $ | .14 | | $ | .37 | | $ | .44 | |
| | | | | | | | | |
Diluted - pro forma | | $ | .03 | | $ | .10 | | $ | .28 | | $ | .38 | |
| | | | | | | | | | | | | | | | | |
2. BORROWINGS UNDER CREDIT AGREEMENT
Borrowings under the Company’s credit agreement with Bremer Bank include a commercial revolving credit line, which provides for maximum advances of $2,250,000 with interest at the prime rate. The Company had no borrowings under this credit line at June 30, 2005. The credit agreement contains certain covenants requiring the Company to maintain certain financial ratios. The Company was in compliance with these requirements as of June 30, 2005. Management believes that funds available under this line of credit, along with funds generated from card club and simulcast operations, will be sufficient to satisfy its liquidity and capital resource requirements during 2005.
3. OPERATING SEGMENTS
During the first six months of 2005 and 2004, the Company had three reportable operating segments: horse racing, card club and concessions. The card club segment primarily represents operations of the Canterbury Card Club. The horseracing segment primarily represents simulcast and live horse racing operations, and the concessions segment primarily represents concessions provided during simulcast and live racing, in the card club, 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
7
as well as processes to produce those products and services. The horse racing and card club segments are regulated by the State of Minnesota Racing Commission.
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the 2004 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):
| | Six Months Ended June 30, 2005 | |
| | Card Club | | Horse Racing | | Concessions | | Total | |
Revenues from external customers | | $ | 14,711 | | $ | 9,233 | | $ | 2,685 | | $ | 26,629 | |
| | | | | | | | | |
Intersegment revenues | | | | 152 | | 958 | | 1,110 | |
| | | | | | | | | |
Net interest income | | | | 42 | | | | | |
| | | | | | | | | |
Depreciation and amortization | | 270 | | 470 | | | | 740 | |
| | | | | | | | | |
Segment income before income taxes | | 2,772 | | 132 | | 486 | | 3,390 | |
| | | | | | | | | |
Segment Assets | | $ | 3,610 | | $ | 30,117 | | $ | 3,495 | | $ | 37,222 | |
| | Six Months Ended June 30, 2004 | |
| | Card Club | | Horse Racing | | Concessions | | Total | |
Revenues from external customers | | $ | 13,677 | | $ | 9,678 | | $ | 2,454 | | $ | 25,809 | |
| | | | | | | | | |
Intersegment revenues | | | | 151 | | 905 | | 1,056 | |
| | | | | | | | | |
Net interest income | | | | 16 | | | | 16 | |
| | | | | | | | | |
Depreciation and amortization | | 242 | | 354 | | | | 596 | |
| | | | | | | | | |
Segment income before income taxes | | 2,848 | | 423 | | 473 | | 3,744 | |
| | | | | | | | | | | | | |
| | Twelve Months Ended December 31, 2004 | |
Segment Assets | | $ | 3,688 | | $ | 24,397 | | $ | 3,164 | | $ | 31,249 | |
| | | | | | | | | | | | | |
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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):
| | Six Months Ended June 30, | |
| | 2005 | | 2004 | |
Revenues | | | | | |
Total revenue for reportable segments | | $ | 27,739 | | $ | 26,865 | |
Elimination of intersegment revenues | | (1,110 | ) | (1,056 | ) |
Total consolidated revenues | | $ | 26,629 | | $ | 25,809 | |
| | | | | |
Income before income taxes | | | | | |
Total segment income before income taxes | | $ | 3,390 | | $ | 3,744 | |
Elimination of intersegment income before income taxes | | (514 | ) | (419 | ) |
Total consolidated income before income taxes | | $ | 2,876 | | $ | 3,325 | |
| | June 30, 2005 | | December 31, 2004 | |
Assets | | | | | |
Total assets for reportable segments | | $ | 37,222 | | $ | 31,249 | |
Elimination of intercompany receivables | | (3,269 | ) | (3,026 | ) |
Total consolidated assets | | $ | 33,953 | | $ | 28,223 | |
4. 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 the next 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. In the event these conditions are met and the subsequent payments made, they will be capitalized as part of the purchase price in accordance with generally accepted accounting principles.
The Company is periodically involved in various legal actions arising in the normal course of business. At June 30, 2005, management believes that the resolution of any legal actions outstanding will not have a material impact on the consolidated financial statements.
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ITEM 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
General
Canterbury Park Holding Corporation (the “Company”) owns and operates the Canterbury Park Racetrack and Card Club in Shakopee, Minnesota. 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 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. The Company conducts live horse racing at its facility generally from mid-May until early September each year. 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 at the out-of-state racetracks.
Canterbury Park’s Card Club (the “Card Club”) hosts “unbanked” card games in which players compete against each other and not against the house. The Card Club is open twenty-four hours a day, seven days a week. Under Minnesota law, the Company is required to pay up to 14% of the gross Card Club revenues to the Racetrack’s purse fund and the State of Minnesota Breeders’ Fund. However, the Company has agreed with the Minnesota Horseman’s Benevolent and Protective Association (“MHBPA”) to pay 15% of Card Club revenues into the purse fund for 2005 and 2004.
The Company also generates revenues from other activities such as admission and parking fees and from the sale of food and beverage, programs and other racing publications, and corporate sponsorships. Additional revenues are derived from an RV park and the use of the Racetrack facilities for special events such as concerts, craft shows and snowmobile racing.
Results of Operations for the Three and Six Months Ended June 30, 2005 and June 30, 2004
Total operating revenues increased approximately $821,000 or 3.2% during the six months ended June 30, 2005 compared to the six months ended June 30, 2004, and increased approximately $484,000 or 3.4% for the three months ended June 30, 2005 compared to the three months ended June 30, 2004.
Pari-mutuel revenues decreased approximately $531,000 or 6.4% in the six-month period ended June 30, 2005 compared to the same period in 2004, and decreased approximately $266,000 or 5.2% for the three-month period ended June 30, 2005 compared to the same period in 2004. Total handle for the six months ended June 30, 2005 was down $2,721,000 or 6.2% compared to total handle during the six-month period in 2004. Total handle wagered on simulcast races year-to-date in 2005 is down $3,347,000 or 10.1% compared to last year, primarily due to the overall industry decline in pari-mutuel wagering, the lack of a Triple Crown contender in the Belmont Stakes, and growing competition from internet wagering on simulcast races. However, on-track live handle increased by $784,000 or 12.5% compared to the same period in 2004 primarily due to two additional days of live racing and increased
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attendance. Finally, out-of-state handle on live races decreased $159,000 or 3.7% compared to the same period last year due to a decline in simulcast outlets, primarily because the Racetrack excluded selected internet wagering and off-shore entities. For further information, see the “Summary of Pari-mutuel Data” below.
| | Six Months Ended June 30, | |
Summary of Pari-mutuel Data: | | 2005 | | 2004 | |
| | | | | |
Racing Days | | | | | |
Simulcast only days | | 153 | | 156 | |
Live and simulcast days | | 28 | | 26 | |
Total Racing Days | | 181 | | 182 | |
| | | | | |
On-Track Handle | | | | | |
Simulcast only days | | $ | 21,884,000 | | $ | 25,591,000 | |
Live and simulcast days | | | | | |
Live racing | | 7,072,000 | | 6,288,000 | |
Simulcast racing | | 7,854,000 | | 7,494,000 | |
Out-of-state Live Handle | | 4,175,000 | | 4,334,000 | |
Total Handle | | $ | 40,985,000 | | $ | 43,707,000 | |
| | | | | |
On-Track Average Daily Handle | | | | | |
Simulcast only days | | $ | 143,033 | | $ | 164,045 | |
Live and simulcast days | | 533,071 | | 530,077 | |
Total Card Club revenue increased 7.6% to $14,711,000 for the first six months of 2005 compared to $13,677,000 for the same period in 2004. The primary source of Card Club revenue is a percentage of the wagers from the players as compensation for providing the Card Club facility and services, referred to as the “collection revenue”. The Company also receives a specified percentage of the jackpot fund collection as reimbursement for administrative costs of maintaining the jackpot funds, and collects fees for administering tournaments, which represents “other revenue”. The increase in revenue is due primarily to growth in the Card Club’s poker games. Poker collection revenue grew $1.3 million or 17.7% compared to the first half of 2004 and continues to be fueled by the popularity of televised poker tournaments. This increase was partially offset by a $288,000, or 5%, decrease in Casino Games compared to the first six months of 2004. This decrease is partially due to new competition from Native American casinos, which have expanded their gaming options to include many of the same unbanked card games as those offered at Canterbury Park. Card Club revenues represented 55.2% and 48.8% of total revenues for the six-month and three-month periods ended June 30, 2005, respectively. For further information, see the “Summary of Card Club Data” below.
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| | Six Months Ended June 30, | |
| | 2005 | | 2004 | |
Summary of Card Club Data: | | | | | |
Poker Games | | $ | 9,006,000 | | $ | 7,653,000 | |
Casino Games | | 5,381,000 | | 5,670,000 | |
Total Collection Revenue | | 14,387,000 | | 13,323,000 | |
| | | | | |
Other Revenue | | 324,000 | | 354,000 | |
Total Card Club Revenue | | $ | 14,711,000 | | $ | 13,677,000 | |
| | | | | |
Number of Days Offered | | 181 | | 182 | |
Average Revenue per Day | | $ | 81,276 | | $ | 75,147 | |
Concession sales for the six-month and three-month periods ended June 30, 2005 increased 10.1% and 12.0%, respectively, compared to the same periods in 2004. The increase is primarily due to increased patronage in the Card Club.
Other operating revenues for the six-month and three-month periods ended June 30, 2005 increased approximately $50,000 or 5.9% and $44,000 or 8.6%, respectively, compared to the same periods in 2004. The increase is primarily due to increased cash services fees and revenues from in-house photography related to live racing.
Total operating expenses increased approximately $1.3 million or 5.8% during the six-month period ended June 30, 2005 compared to the six-month period ended June 30, 2004, and $606,000 or 4.5% during the three months ended June 30, 2005 compared to the three-month period ended June 30, 2004.
Statutory purses and Minnesota breeders’ fund expenses have increased approximately $53,000 or 1.2% and decreased $23,000 or 1.0%, respectively, during the six and three month periods of 2005 compared to 2004, due primarily to increased payments to the purse fund from Card Club revenues, offset by decreased purse liability associated with the decrease in simulcast wagering. Salaries and benefits increased approximately $842,000 or 8.8% in the six-month period and approximately $372,000 or 6.9% in the three-month period compared to the same periods last year primarily due to an increase of approximately 8.5% in total hours worked caused by higher levels of operations in the Card Club and concessions, an overall increase in salary and wage rates, and a 14% increase in group medical costs caused by increases in the number of participants and premium rates. Cost of sales expense increased approximately $173,000 or 11.8% in the six-month period and $133,000 or 14.9% in the three-month period compared to the same periods last year primarily due to the increase in associated revenues for concessions. Depreciation increased $144,000 or 24.2% in the six- month period and $87,000 or 28.1% in the three-month period compared to the same periods last year due to the completion of several facilities improvements related to live racing. Repairs, maintenance and supplies decreased approximately $128,000 or 15.7% in the six-month period and $70,000 or 13.2% in the three-month period compared to the same periods last year primarily due to additional chip expenses incurred in 2004. Other operating expenses increased approximately $277,000 or 15.1% in the six-month period and $168,000 or 15.2% in the three-month period compared to the same periods in 2004 due to the cost of consultants hired to assist with implementation of the Sarbanes-Oxley act of 2002, and professional fees related to the Company’s legislative efforts for additional gaming authorizations. Total operating
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expenses as a percentage of total operating revenues were 89.4% for the six-month period ended June 30, 2005 compared to 87.2% for 2004 as the volume increase in revenues was insufficient to cover the additional expenses, in particular the other operating expenses related to regulatory and legislative initiatives.
Income before income taxes was $2,876,000 for the six months ended June 30, 2005 compared to $3,325,000 for the six months ended June 30, 2004. After income tax expense of $1,341,000 for the six months ended June 30, 2005, net income was $1,535,000 in 2005 compared to $1,841,000 in 2004. Income before income taxes for the quarter ended June 30, 2005 was $931,000 compared to $1,035,000 for the quarter ended June 30, 2004. After income tax expense of $477,000 in the second quarter of 2005, net income was $454,000 compared to $581,000 for the second quarter of 2004.
Commitments and Contingencies
�� On June 2, 2005 the Company’s Board of Directors declared a special cash dividend of $.25 per share of common stock payable on July 8, 2005 to shareholders of record on June 25, 2005. The Company has not adopted any policies regarding dividend payments and there can be no assurance that any dividend will be paid in the future.
There have been no additional material changes in our outstanding commitments and contingencies since those reported at December 31, 2004.
Liquidity and Capital Resources
During the period January 1, 2005 through June 30, 2005, cash provided by operating activities was $6,026,622, which resulted primarily from net income of $1,534,577; depreciation and amortization of $740,250; an increase in accounts payable and accrued wages and payroll taxes of $3,736,602, caused by a seasonal increase of $2.3 million in horsemen payables, a $1.1 million increase in trade accounts payable, and a $263,000 increase in deferred revenues for corporate sponsorships; an increase in MHBPA payables of $207,373; and an increase in accounts receivable of $144,736. These items were partially offset by an $115,000 decrease in the card club’s jackpot pools and player pool caused by timing differences due to jackpots, prizes and giveaways paid to the players; and an increase in deferred taxes of $187,700. Pursuant to an agreement with the MHBPA, during the six months ended June 30, 2005 and 2004, the Company transferred into a trust account or paid directly to the MHBPA approximately $3,150,000 and $3,275,000, respectively. At June 30, 2005, the Company had an additional liability to the MHBPA of $338,519. This liability will be paid in 2005, including interest earned.
Net cash used in investing activities for the first six months of 2005 of $5,243,456 resulted primarily from improvements to the backside barns and facilities related to live racing and an increase in restricted cash of $2,428,494 due to a $2.3 million seasonal increase in purses payable for horsemen. During the six-month period ended June 30, 2004, net cash used for investing activities was $5,416,548 related primarily to building improvements related to the renovation of the club-level of the Racetrack’s grandstand facility for approximately $1.5 million, the acquisition of equipment and an increase in restricted cash of $2,467,236 due to a $2.2 million seasonal increase in purses payable for horsemen.
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During the period January 1, 2005 through June 30, 2005, cash provided by financing activities was $289,322 resulting from the exercise of stock options. During the period January 1, 2004 through June 30, 2004, cash provided by financing activities was $265,461 representing the exercise of stock options.
The Company has renewed a general credit agreement with Bremer Bank, which provides a revolving credit line of up to $2,250,000 with interest at the prime rate until April 20, 2007. The Company had no borrowings under the line of credit at June 30, 2005 or December 31, 2004. The credit agreement contains certain covenants requiring the Company to maintain certain financial ratios. The Company was in compliance with these requirements at all times throughout the quarter ended June 30, 2005.
Unrestricted cash balances at June 30, 2005 were $5,251,032 compared to $4,178,544 at December 31, 2004. The Company believes that the 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 2005 for regular operations.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates that effect the amounts reported and disclosed in the consolidated financial statements. By their nature, these estimates are subject to an inherent degree of uncertainty. These estimates are based on our experience and various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. On an ongoing basis, we evaluate our estimates. However, actual results could differ from those estimates.
Our significant accounting policies are included in Note 1 to our consolidated financial statements in our 2004 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.
Land, Buildings and Equipment - We have significant capital invested in our property and equipment, which represents approximately 66% of our total assets. 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. Our property and equipment is evaluated for impairment whenever circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, we recognize an impairment loss. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value and is charged to operations in the period in which such impairment is determined by management. We do not believe that any impairment has occurred or is likely to occur in the near future.
Regulation - Our business can be materially impacted both positively and negatively by legislative and regulatory changes, such as those described below. Significant negative
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changes resulting from these activities could result in an impairment of our property and equipment in accordance with generally accepted accounting standards. Additional information regarding how our business can be impacted by legislative and regulatory changes are included in Item 1 (vi), and Item 1 (vii), respectively, in our 2004 Annual Report on Form 10-K.
Legislation:
On March 10, 2005, a bill was introduced in the Minnesota Legislature, to allow electronic gaming devices to be operated by the Minnesota State Lottery at the Racetrack. This concept, often referred to as a “Racino”, as proposed for Canterbury Park would include 3,000 gaming devices, a 250-room hotel, an Olympic scale horse park and additional restaurant venues. Legislation was also introduced in the 2005 session to remove the 50-table limit in the card room defined by current Minnesota Law, and to impose a gaming tax on card room revenues. However, on July 13, 2005 the Minnesota Legislature adjourned without taking further action on any of these bills.
Legislation has been enacted in Minnesota to raise the minimum wage from $5.15 to $6.15 an hour. Minnesota will join 15 other states with higher minimums than those set by the Federal government. This legislation became effective August 1, 2005 and management believes it will have an adverse affect on future results of operations. In addition, the Minnesota Legislature passed a law authorizing social Texas Hold’em tournaments in bars and restaurants. Under this new law, bars and restaurants cannot charge an entry fee for participating in a tournament or award total prizes more than $200. Management is unable to determine what effect this legislation may have on the Company’s card club operations.
The Minnesota Legislature will reconvene in March 2006, and the Racino legislation will be pending in the Minnesota House. Based on the success of several Racinos in other states, the Company believes that if this legislation becomes law, it will enhance horse racing with increased purses, provide growth and development opportunities for the Company, and produce significant new tax revenues for state and local governments. The effort to obtain legislative authority for these initiatives has required, and will continue to require, substantial expenditures and there can be no assurance that any bill favorable to the Company’s interests will be enacted into law.
Factors Affecting Future Performance:
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
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patrons, decline in interest in the unbanked card games offered at the Card Club, 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 general health of the gaming sector; higher than expected expense related to new marketing initiatives; and other factors discussed from time to time in the Company’s filings with the Securities and Exchange Commission.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on borrowings under our commercial revolving credit line that bears interest at the prime rate. At June 30, 2005 we have no debt borrowings under our credit facility.
We have no derivative financial instruments or derivative commodity instruments in our cash and cash equivalents and marketable securities. We invest cash and cash equivalents in investment grade, highly liquid investments, consisting of money market instruments, bank certificates of deposit, and short-term government and corporate bonds.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures:
Management, with the participation of the Company’s principal executive officer, Randall D. Sampson, and principal financial officer, David C. Hansen, has evaluated the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Management has concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that the disclosure controls are also effective to ensure that information required to be disclosed in the Company’s Exchange Act reports is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting:
There have been no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on June 2, 2005. Shareholders elected or reelected the following directors for a one year term: Patrick R. Cruzen, Burton F. Dahlberg, Carin J. Offerman, Curtis A. Sampson, Randall D. Sampson, and Dale H. Schenian. Not less than 3,441,148 shares were voted in favor of each of the directors (approximately 93.12% of all shares present and voting).
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
11 Statement re computation of per share earnings — See Net Income Per Share under Note 1 of Notes to Consolidated Financial Statements under Part 1, Item 1, which is incorporated herein by reference.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (rules 13a-14 and 15d-14 of the Exchange Act).
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (rules 13a-14 and 15d-14 of the Exchange Act).
32 Certfications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Canterbury Park Holding Corporation |
| |
Dated: August 15, 2005 | /s/ Randall D. Sampson |
| Randall D. Sampson, |
| President, and Chief Executive Officer |
| |
| |
Dated: August 15, 2005 | /s/ David C. Hansen |
| David C. Hansen, |
| Vice President, and Chief Financial Officer |
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