U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

 

 

 

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 3,678,473 shares of common stock, $.01 par value per share, outstanding as of August 6, 2003.

 

 

Canterbury Park Holding Corporation

 

INDEX

 

PART 1.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002
		Consolidated Statements of Operations for the periods ended June 30, 2003 and 2002
		Consolidated Statements of Cash Flows for the periods ended June 30, 2003 and 2002
		Notes to Consolidated Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 2.	Changes in Securities and Use of Proceeds
	Item 3.	Defaults Upon Senior Securities
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits and Report on Form 8-K
	Signatures

 

2

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002

 

		June 30, 2003			December 31, 2002
ASSETS
CURRENT ASSETS
Cash		$	6,407,737		$	3,408,869
Accounts receivable		230,549			305,581
Inventory		164,066			125,585
Deposits		20,000			20,000
Prepaid expenses		901,911			302,192
Income taxes receivable					316,671
Total current assets		7,724,263			4,478,898
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $8,151,412 and $7,573,572, respectively		15,010,110			14,551,014
		$	22,734,373		$	19,029,912
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	3,705,652		$	1,535,824
Card club accruals		1,087,939			1,492,663
Accrued wages and payroll taxes		1,114,513			984,374
Accrued interest		3,748
Advance from MHBPA		132,538			179,346
Accrued property taxes		226,167			228,890
Cash dividend payable		551,696
Income taxes payable		172,448
Payable to horsepersons		356,608			355,576
Deferred tax liability		276,000			346,000
Total current liabilities		$	7,627,309		$	5,122,673
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS’ EQUITY
Common stock, $.01 par value, 10,000,000 shares authorized, 3,677,973 and 3,638,473, respectively, shares issued and outstanding		36,780			36,385
Additional paid-in capital		11,229,472			10,910,985
Accumulated earnings		3,840,812			2,959,869
Total stockholders’ equity		15,107,064			13,907,239
		$	22,734,373		$	19,029,912

 

See notes to consolidated financial statements.

 

3

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS
PERIODS ENDED JUNE 30, 2003 AND 2002

 

		Three Months Ended June 30						Six Months Ended June 30
		2003			2002			2003			2002
OPERATING REVENUES:
Pari-mutuel		$	5,127,669		$	5,065,234		$	8,253,296		$	8,405,518
Card Club		5,730,588			4,552,300			10,649,050			9,094,076
Concessions		1,459,847			1,359,852			2,186,898			2,141,667
Admissions and parking		217,621			231,956			242,807			263,915
Programs and racing forms		201,496			207,423			332,005			341,499
Other operating revenue		391,162			513,984			693,577			631,297
		13,128,383			11,930,749			22,357,633			20,877,972
OPERATING EXPENSES:
Pari-mutuel expenses
Statutory purses		2,294,137			2,106,716			3,191,124			2,976,912
Host track fees		643,664			639,787			1,163,975			1,194,445
Pari-mutuel taxes		68,308			83,643			110,905			136,163
Minnesota breeders’ fund		335,367			315,958			567,531			555,664
Salaries and benefits		4,709,949			4,228,736			8,276,826			7,649,285
Cost of concession sales		574,810			544,721			902,779			862,317
Cost of publication sales		228,235			271,075			396,302			419,813
Depreciation and amortization		291,172			276,230			579,340			566,388
Utilities		298,027			234,925			545,783			423,750
Repairs, maintenance and supplies		464,983			415,658			665,692			716,031
Property taxes		55,440			54,510			110,692			109,020
Advertising and marketing		791,082			735,985			1,156,668			1,001,429
Other operating expenses		1,349,935			995,601			2,209,414			1,659,445
		12,105,109			10,903,545			19,877,031			18,270,662
NONOPERATING (EXPENSES) REVENUES:
Interest expense		(2,423		)	(4,229		)	(4,585		)	(9,889		)
Other, net		11,437			8,558			20,358			15,511
		9,014			4,331			15,773			5,622
INCOME BEFORE INCOME TAX EXPENSE		1,032,288			1,031,533			2,496,375			2,612,932
INCOME TAX EXPENSE (Note 1)		(438,736		)	(418,528		)	(1,063,736		)	(1,068,889		)
NET INCOME		$	593,552		$	613,005		$	1,432,639		$	1,544,043
BASIC NET INCOME PER COMMON SHARE  (Note 1)		$	.16		$	.17		$	.39		$	.43
DILUTED NET INCOME PER COMMON SHARE (Note 1)		$	.15		$	.16		$	.36		$	.40

 

See notes to consolidated financial statements.

 

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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED JUNE 30, 2003 AND 2002

 

		Six Months Ended June 30, 2003			Six Months Ended June 30, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	1,432,639		$	1,544,043
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		579,340			566,388
Gain on disposal of real estate					(258,074		)
Decrease in accounts receivable		75,032			7,824
Increase in other current assets		(638,200		)	(442,176		)
Increase in accounts payable and accrued expenses		1,896,275			2,257,678
Deferred income taxes		76,136			174,200
Increase (decrease) in income taxes payable		489,119			(67,661		)
Increase (decrease) in accrued interest		3,748			(9,960		)
Decrease in accrued property taxes		(2,723		)	(8,160		)
Net cash provided by operations		3,911,366			3,764,102
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate property addition					(1,022,733		)
Property and equipment additions		(1,038,436		)	(1,233,673		)
Proceeds on disposal of real estate					422,663
Net cash used in investing activities		(1,038,436		)	(1,833,743		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		172,746			256,401
Payment on advance from MHBPA, net		(46,808		)	(210,724		)
Net cash provided by financing activities		125,938			45,677
NET INCREASE IN CASH		2,998,868			1,976,036
CASH AT BEGINNING OF PERIOD		3,408,869			3,088,844
CASH AT END OF PERIOD		$	6,407,737		$	5,064,880
INTEREST PAID		$	0		$	19,849
INCOME TAXES PAID		$	510,000		$	965,000
DIVIDEND DECLARED		$	551,696		$	896,394

 

See notes to consolidated financial statements.

 

5

 

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED JUNE 30, 2003 AND 2002

 

1.               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The summary of significant accounting policies is included in the notes to consolidated financial statements in the 2002 Annual Report on form 10-K.

 

Income Taxes - Income tax expense is computed by applying the estimated annual effective tax rate to the year-to-date income.

 

Unaudited Financial Statements - The consolidated balance sheet as of June 30, 2003, the consolidated statements of operations for the three and six months ended June 30, 2003 and 2002, the consolidated statements of cash flows for the six months ended June 30, 2003 and 2002, and the related information contained in these notes have been prepared by management without audit.  In the opinion of management, all accruals (consisting only of normal recurring accruals) 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.

 

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, 2003 were 3,669,973 and 3,654,597, respectively.  The weighted average number of common shares outstanding for the three and six-month periods ended June 30, 2002 were 3,571,507 and 3,554,479, 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, 2003 were 4,046,696 and 4,034,935, respectively.  The weighted average shares used to calculate diluted earnings per share for the three and six-month periods ended June 30, 2002 were 3,896,706 and 3,858,146, respectively.

 

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 until April 20, 2005.  The Company had no borrowings under this credit line at June 30, 2003.  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, 2003.  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 2003.

 

3.               OPERATING SEGMENTS

 

During the first six months of 2003 and 2002, the Company had three reportable operating segments:  horse racing, card club and concessions.  The card club segment includes operations of the Canterbury Card Club.  The horseracing segment includes simulcast and live horse racing operations, and the concessions segment provides concessions 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 as well as processes to produce those

 

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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.  Prior years are restated to be consistent with the revised current year allocation method. In addition, the 2002 horse-racing segment reflects the $258,074 gain on sale of five acres of real estate.

 

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, 2003
		Horse Racing			Card Club			Concessions			Total
Revenues from external customers		$	9,518		$	10,649		$	2,191		$	22,358
Intersegment revenues		143						718			861
Net interest expense		(16		)							(16		)
Depreciation and amortization		329			250						579
Segment income before income taxes		528			1,968			367			2,863
Segment Assets		$	18,938		$	3,770		$	1,331		$	24,039

 

		Six Months Ended June 30, 2002
		Horse Racing			Card Club			Concessions			Total
Revenues from external customers		$	9,641		$	9,094		$	2,143		$	20,878
Intersegment revenues		173						577			750
Net interest expense		10									10
Depreciation and amortization		280			286						566
Segment income before income taxes		1,037			1,576			323			2,936
		Twelve Months Ended December 31, 2002
Segment Assets		$	14,883		$	4,003		$	1,116		$	20,002

 

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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, 2003			Six Months Ended June 30, 2002
Revenues
Total revenue for reportable segments		$	23,219		$	21,628
Elimination of intersegment revenues		(861		)	(750		)
Total consolidated revenues		22,358			20,878
Income before income taxes
Total segment income before income taxes		$	2,863		$	2,936
Elimination of intersegment income before  income taxes		(367		)	(323		)
Total consolidated income before income taxes		2,496			2,613

 

		June 30, 2003			December 31, 2002
Assets
Total assets for reportable segments		$	24,039		$	20,002
Elimination of intercompany receivables		(1,305		)	(972		)
Total consolidated assets		22,734			19,030

 

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 five operating years.  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 recorded as an increase to the purchase price.  The purchase price will be further increased if payments become due under the 20% of Net Pre-Tax 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 is periodically involved in various legal actions arising in the normal course of business.  At June 30, 2003, management believes that the resolution of any legal actions outstanding will not have a material impact on the consolidated financial statements.

 

The Minnesota Department of Labor and Industry (DOL&I) is conducting an audit for the period April 10, 1999 through April 10, 2001 regarding compliance with the tip law sections of the Minnesota Fair Labor Standards Act.  At June 30, 2003, the Company has received no communications from the DOL&I regarding the disposition of their audit.  Management believes that the Company’s practices regarding tips are consistent with the requirements of Minnesota law.

 

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5.               STOCK BASED EMPLOYEE COMPENSATION

 

At June 30, 2003, 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 1,150,000 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.

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2003			2002			2003			2002
Net Income:
As reported		$	593,552		$	613,005		$	1,432,639		$	1,544,043
Deduct:  Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(86,822		)	(32,525		)	(140,662		)	(104,744		)
Pro forma net income		506,730			580,480			1,291,977			1,439,299
Earnings Per Share:
Basic - as reported		$	.16		$	.17		$	.39		$	.43
Basic - pro forma		$	.14		$	.16		$	.35		$	.40
Diluted - as reported		$	.15		$	.16		$	.36		$	.40
Diluted - pro forma		$	.13		$	.15		$	.32		$	.37

 

6.               CURRENT ACCOUNTING PRONOUNCEMENTS

 

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation.  SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirement of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements of the effects of stock-based compensation. The transition guidance and annual and interim disclosure provisions of SFAS No. 148 became effective for the Company on January 1, 2003. The Company has elected to continue to apply Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for stock option plans, as permitted under SFAS No. 123 and SFAS No. 148. Accordingly, no compensation cost has been recognized for its stock option plan upon adoption of SFAS No. 148.

 

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ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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.  Live race meets commence in the month of May and conclude in 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 at the out-of-state racetracks.

 

The Canterbury Card Club (the “Card Club”) is the only facility in the State of Minnesota given the legislative authority to host unbanked card games in which players compete against each other and not against the house.  The Company receives a percentage of the wagers from the players as compensation for providing the Card Club facility and services.  The Card Club is a separate area of approximately 16,000 square feet, constructed within the Racetrack grandstand facility, in which the Company operates 50 tables, the maximum allowed by Minnesota law.  The Card Club is open twenty-four hours a day, seven days a week.  The Minnesota Racing Commission is authorized by Minnesota law to regulate Card Club operations.  The law requires that up to 14% of the gross revenue generated by the Card Club be paid to the Racetrack’s purse fund and the State of Minnesota Breeders’ Fund.

 

In December 2002, the Company acquired a recreational vehicle (RV) park, located on approximately 29 acres, adjacent to the Minnesota River, approximately two miles from the Racetrack.  The RV Park has 68 independent sites and 40 dependent sites, an indoor swimming pool, laundry facilities, game room and mini store.  The sites are rented to horsemen participating in Canterbury’s racing operations, seasonal employees, and the general public.

 

The Company also generates revenues from concessions, admissions, parking, publication sales, facilities rental for special events, vehicle storage, advertising and other sources.

 

Results of Operations for the Three and Six Months Ended June 30, 2003 and June 30, 2002

 

Total operating revenues increased approximately $1.5 million or 7.1% during the six months ended June 30, 2003 compared to the six months ended June 30, 2002, and increased approximately $1.2 million or 10% for the three months ended June 30, 2003 compared to the three months ended June 30, 2002.

 

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Pari-mutuel revenues decreased $152,222 or 1.8% in the six month period ended June 30, 2003 compared to the same period in 2002. Total handle for the six months ended June 30, 2003 was down $1.1 million or 2.5% compared to total handle during the six-month period in 2002. Total handle wagered on simulcast races year-to-date in 2003 is down $1.3 million or 3.9% compared to year-to-date June 30, 2002 primarily due to the cancellation of nearly 100 racing programs in the first quarter caused by severe winter weather at other racetracks.  However, on-track live handle increased by $446,000 or 6.9% compared to the same period in 2002 due to favorable weather and increased popularity of our promotions.  Finally, out-of-state live handle decreased $233,000 or 5.4% compared to the same period last year due to the reduction of in the number of simulcast outlets.  See the “Summary of Operating Data” below.

 

Summary of Operating Data:		Six Months Ended June 30, 2003			Six Months Ended June 30, 2002
Racing Days
Simulcast only days		155			155
Live and simulcast days		26			26
Total Racing Days		181			181
On-Track Handle
Simulcast only days		$	25,476,000		$	26,720,000
Live and simulcast days
Live racing		6,900,000			6,454,000
Simulcast racing		6,850,000			6,933,000
Out-of-state Live Handle		4,078,000			4,311,000
Total Handle		$	43,304,000		$	44,418,000
On-Track Average Daily Handle
Simulcast only days		$	164,361		$	172,387
Live and simulcast days		528,846			514,885

 

Card Club revenues were $10.6 and $5.7 million for the six-month and three-month periods ended June 30, 2003, representing increases of 17.1% and 25.9%, respectively, compared to the same periods in 2002.  Management believes the year-to-date increase is primarily due to the increased awareness of the Casino Games room and the renewed popularity of the Poker games.  Card Club revenues represented 47.6% and 43.7% of total revenues for the six-month and three-month periods ended June 30, 2003, respectively.  The Shakopee Valley News reported that Mystic Lake Casino Hotel, Prior Lake, MN will expand it’s gaming options beginning in August, to offer some of the same “unbanked” card games that are currently offered at Canterbury Park’s Card Club.  The June 25^th media report indicated that 12 of the 88 table games at Mystic Lake, which is located 4 miles south of the Racetrack, will be converted from blackjack to various versions of poker based card games including Pal Gow Poker, Three Card Poker, Caribbean Stud, and Let it Ride.  These new games at Mystic Lake will directly compete with the card room games that have been operating at Canterbury Park since the opening of the Card Club in April 2000.  At this point, management is unable to predict whether the addition of these unbanked card games to Mystic Lake’s existing gaming will have a material adverse affect on Card Club operations.

 

Concession sales for the six-month and three-month periods ended June 30, 2002 increased 2.1% and 7.4%, respectively, compared to the same periods in 2002.  The increase is primarily due to the increased traffic in the Card Club and increased live racing attendance in 2003.

 

Other operating revenues for the six-month and three-month periods ended June 30, 2003 increased $31,678 and decreased $143,084, respectively, compared to the same periods in 2002.  The decrease for the three month period reflects a $258,074 gain on sale of five acres of real estate realized in the second quarter of 2002.

 

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Operating expenses (excluding pari-mutuel expenses) increased 10.7% during the six month period ended June 30, 2003 compared to the six month period ended June 30, 2002, and 13% during the three months ended June 30, 2003 compared to the three month period ended June 30, 2002.  Salaries and benefits increased approximately $628,000 or 8.2% in the six-month period and $481,000 or 11.4% in the three-month period compared to the same periods last year primarily associated with the increase level of operations.  Other operating expenses increased approximately $550,000 or 33.1% in the six-month period and $354,000 or 35.6% in the three-month period compared to 2002 primarily due to rising insurance costs and professional fees related to the Company’s legislative efforts for additional gaming authorizations.  Advertising and marketing increased approximately $155,000 or 15.5% in the six month period and $55,000 or 7.5% in the three-month period compared to the same periods last year due primarily to increased participation in the patron loyalty program.  Utilities expense increased approximately $122,000 or 28.8% and approximately $63,000 or 26.9% for the same periods in 2002 due to rate increases experienced during the past twelve months.

 

Pari-mutuel expenses have increased 3.5% and 6.2%, respectively, during the six and three month periods of 2003 compared to 2002, due primarily to increased payments to the purse fund from Card Club revenues.  Effective January 1, 2002, the Company agreed with the Minnesota Horseman’s Benevolent and Protective Association (the “MHBPA”) to pay 14% of all Card Club gross revenues as purse monies.  Therefore, the effective rates are the same from 2003 compared to 2002, however the increased volume of Card Club revenues has resulted in the increase to the related purse expense.

 

Income before income taxes was $2,496,375 for the six months ended June 30, 2003 compared to $2,612,932 for the six months ended June 30, 2002.  After income tax expense of $1,063,736 for the six months ended June 30, 2003, net income was $1,432,639 in 2003 compared to $1,544,043 in 2002.  Income before income taxes for the quarter ended June 30, 2003 was $1,032,288 compared to $1,031,533 for the quarter ended June 30, 2002.  After income tax expense of $438,736 in the second quarter of 2003, net income was $593,552 compared to $613,005 for the second quarter of 2002.

 

Commitments and Contingencies

 

On June 5, 2003 at the Annual Meeting, the Company’s Board of Directors declared a special cash dividend of $.15 per share of common stock payable on July 11, 2003 to shareholders of record on June 27, 2003.  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, 2002.

 

Liquidity and Capital Resources

 

During the period January 1, 2003 through June 30, 2003, cash provided by operating activities was $3,911,366, which resulted principally from an increase in accounts payable and accrued expenses of $1,896,275, net income of $1,432,639 and depreciation and amortization of $579,340. These items were partially offset by an increase in other current assets of $638,200.  The significant increase in accounts payable and accrued expenses is due primarily to increases in amounts payable related to the live race meet.

 

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Net cash used in investing activities for the first six months of 2003 was approximately $1 million, primarily for building improvements.  During the six-month period ended June 30, 2002, net cash used for investment purposes was approximately $1.8 million resulting primarily from the purchase of 12 acres of land just south of the main parking lot for approximately $1 million, and acquisitions of equipment for $1.2 million, offset by the proceeds on disposal of real estate of $422,663.

 

During the period January 1, 2003 through June 30, 2003, cash provided by financing activities was $125,938, representing $172,746 from the exercise of stock options, which was partially offset by net payments to the MHBPA of $46,808.  During the period January 1, 2002 through June 30, 2002, cash provided by financing activities was $45,677 representing $256,401 from the exercise of stock options, which were partially offset by net payments to the MHBPA of $210,724.

 

The Company is required by statute to segregate a portion of funds received from revenues in the Card Club and wagering on simulcast and live horse races for future payment as purses for live horse races at the Racetrack or other uses of Minnesota’s thoroughbred and quarter horse associations.  Pursuant to an agreement with the MHBPA, during the six months ended June 30, 2003 and 2002, the Company transferred into a trust account for these purposes or paid directly to the MHBPA approximately $2,875,000 and $2,850,000, respectively.  At June 30, 2003, the Company had an additional liability to the MHBPA of $132,538.  This liability will be paid in 2003, including interest earned at the prime-lending rate, in accordance with the agreement with the MHBPA.

 

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, 2005.  The Company had no borrowings under the line of credit at June 30, 2003 or December 31, 2002.  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, 2003.

 

Cash balances at June 30, 2003 were $6,407,737 compared to $3,408,869 at December 31, 2002. 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 2003 for regular operations.

 

Critical Accounting Policies

 

In preparing the financial statements, we follow accounting principles generally accepted in the United States of America, which in many cases require us to make assumptions, estimates and judgments that affect the amounts reported.  Many of these policies are relatively straightforward.  There are, however, a few policies that are critical because they are important in determining the financial condition and results of operations and they can be difficult to apply.  We believe that the most critical accounting policies applied in the preparation of our financial statements relate to: a) accounting for contingencies, under which we accrue a loss when it is probable that a liability has been incurred and the amount can be reasonably measured; and b) measuring long-term assets for impairment.  An impairment loss would be measured by the

 

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amount by which the carrying value of the asset exceeds the fair value of the asset.  To date, management has determined that no impairment of these assets exists.

 

The difficulty in applying these policies arises from the assumptions, estimates and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions.  As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated.  We base our assumptions, estimates and judgments on a combination of historical experience and other reasonable factors.

 

Legislation:

 

On February 18, 2003, a bill was introduced in the Minnesota Legislature, which seeks authority for the Minnesota State Lottery to operate electronic gaming devices at the  Racetrack.  Often referred to as “Racinos”, this concept at Canterbury Park would include 2,000 gaming devices, a 250-room hotel, an Olympic scale horse park and additional restaurant venues.  The bill was approved by a 71 to 60 margin by the Minnesota House of Representatives and still requires a number of further approvals in the Minnesota Legislature.  On May 29, 2003 the Minnesota Legislature adjourned without taking further action on this proposed legislation.  However, the Minnesota Legislature is set to reconvene for the second year of its regular session in February 2004.  The Racino legislation will begin next session awaiting action in the Minnesota Senate having already passed the Minnesota House of Representatives.  Based on the success of several Racinos in other states, the Company feels 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 electronic gaming devices has required and will continue to require substantial expenditures and there can be no assurance that this bill or any similar bill 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, changes in the level of wagering by patrons, continued 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; fluctuations in purse fund payments; upward pressure on salary and benefit expense; 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.

 

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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, 2003 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:

 

The Company’s Chief Executive Officer, Randall D. Sampson, and Chief Financial Officer, David C. Hansen, have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based upon that review, they have concluded that these controls and procedures are effective in ensuring that material information related to the Company is made known to them by others within the Company.

 

(b)                                 Changes in Internal Control Over Financial Reporting:

 

There have been no significant 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.            Changes in 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 5, 2003.  Shareholders reelected the following directors for a one year term:  Brian C. Barenscheer, Patrick R. Cruzen, Carin J. Offerman, Curtis A. Sampson, Randall D. Sampson, and Dale H. Schenian.  Not less than 3,350,582 shares were voted in favor of each of the directors (approximately 92% of all outstanding shares) and holders of no more than 2,275 shares withheld authority to vote for such directors.

 

Item 5.            Other Information

 

Not Applicable

 

Item 6.            Exhibits and Reports on Form 8-K

 

(a)                                  The following exhibits are included herein:

 

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).

 

(b)                                 Reports on Form 8-K

 

On August 14, 2003 the Company filed a current report on Form 8-K with the Securities and Exchange Commission, reporting under Item 12 the results for the second quarter ended June 30, 2003.

 

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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 14, 2003	/s/ Randall D. Sampson
		Randall D. Sampson,
		President, and Chief Executive Officer
Dated:	August 14, 2003	/s/ David C. Hansen
		David C. Hansen,
		Vice President, and Chief Financial Officer

 

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