Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****      QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**FOR THEQUARTERLY PERIOD ENDED JUNE 30, 2010.**

 

**OR**

 

**o****         TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**FOR THETRANSITION PERIOD FROM           TO          .**

 

**Commission FileNumber:  001-31569**

 

****

 

**CANTERBURYPARK HOLDING CORPORATION**

(Exact Name of Registrant asSpecified in Its Charter)

 

| **Minnesota**                                                     | ** ** | **41-1775532**                        |
|-------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction  of Incorporation or  Organization) |       | (I.R.S. Employer  Identification No.) |

 

**1100 Canterbury Road**

**Shakopee,MN  55379**

(Address of principalexecutive offices and zip code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  YES  x  NO  o

 

Indicate by check mark whether the Registrant has submittedelectronically and posted on its corporate Website, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe Registrant was required to submit and post such files).  YES  o  NO  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company (as defined in ExchangeAct Rule 12b-2).

 

| Large accelerated filer o |   | Accelerated filer o         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-accelerated filer o   |   | Smaller reporting company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  YES  o  NO  x

 

The Company had 4,037,615 shares of common stock, $.01 par value,outstanding as of August 12, 2010.

 

 

 

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Canterbury Park HoldingCorporation

 

**INDEX**

 
| ** **        | **Page**                   |
|-------------------|----------------------------|
|              |                       |
| **PART I.**  | **FINANCIAL  INFORMATION** |   |
|              |                       |   |   |
|              | Item 1.                    | Financial Statements |   |
|              |                       |   |   |
|              |                       | Condensed Consolidated Balance Sheets as of  June 30, 2010 and December 31, 2009 | 3 |
|              |                       |   |   |
|              |                       | Condensed Consolidated Statements of Operations for  the periods Ended June 30, 2010 and 2009 | 4 |
|              |                       |   |   |
|              |                       | Condensed Consolidated Statements of Cash Flows for  the periods Ended June 30, 2010 and 2009 | 5 |
|              |                       |   |   |
|              |                       | Notes to Condensed Consolidated Financial Statements | 6 |
|              |                       |   |   |
|              | Item 2.                    | Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 13 |
|              |                       |   |   |
|              | Item  3.                   | Quantitative  and Qualitative Disclosures about Market Risk | 19 |
|              |                       |   |   |
|              | Item 4.                    | Controls  and Procedures | 19 |
|              |                       |   |   |
| **PART II.** | **OTHER  INFORMATION**     |   |
|              |                       |   |   |
|              | Item 1.                    | Legal  Proceedings | 20 |
|              |                       |   |   |
|              | Item 1A.                   | Risk Factors | 20 |
|              |                       |   |   |
|              | Item  2.                   | Unregistered  Sales of Equity Securities and Use of Proceeds | 20 |
|              |                       |   |   |
|              | Item  3.                   | Defaults  Upon Senior Securities | 20 |
|              |                       |   |   |
|              | Item 4.                    | Removed and  Reserved | 20 |
|              |                       |   |   |
|              | Item 5.                    | Other  Information | 20 |
|              |                       |   |   |
|              | Item 6.                    | Exhibits | 20 |
|              |                       |   |   |
|              | Signatures                 | 21 |
|              |                       |   |
|              | Certifications             | 22 |

 

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**PART 1 - FINANCIAL INFORMATION**

 

**CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**JUNE 30, 2010 AND DECEMBER 31, 2009 (Unaudited)**

 
| ** **                                                                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                         | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                         |       |              |       |                  |       |
| CURRENT  ASSETS                                                                                                                    |       |              |       |                  |       |
| Cash                                                                                                                               |       | $                 | 4,335,065  |                  | $          | 4,741,197 |   |
| Restricted  cash                                                                                                                   |       | 2,807,730         |       | 949,994               |       |
| Short-term  investments                                                                                                            |       | 373,911           |       | 365,894               |       |
| Accounts  receivable, net of allowance of $6,500                                                                                   |       | 504,774           |       | 405,192               |       |
| Inventory                                                                                                                          |       | 367,797           |       | 178,512               |       |
| Prepaid  expenses                                                                                                                  |       | 606,723           |       | 465,084               |       |
| Income  taxes receivable                                                                                                           |       | —            |       | 168,979               |       |
| Deferred  income taxes                                                                                                             |       | 425,542           |       | 296,500               |       |
| Due  from Minnesota horsemen associations                                                                                          |       | 34,676            |       | 32,353                |       |
| Total  current assets                                                                                                              |       | 9,456,218         |       | 7,603,705             |       |
|                                                                                                                               |       |              |       |                  |       |
| LONG-TERM  ASSETS                                                                                                                  |       |              |       |                  |       |
| Deposits                                                                                                                           |       | 20,000            |       | 20,000                |       |
| Deferred  income taxes                                                                                                             |       | 537,000           |       | 28,850                |       |
| Long-term  investments                                                                                                             |       | 250,000           |       | 250,000               |       |
| Land,  buildings and equipment, net of accumulated depreciation of $18,051,128 and  $18,623,780, respectively                      |       | 24,635,841        |       | 23,849,672            |       |
|                                                                                                                               |       | $                 | 34,899,059 |                  | $          | 31,752,227 |   |
|                                                                                                                               |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                      |       |              |       |                  |       |
|                                                                                                                               |       |              |       |                  |       |
| CURRENT  LIABILITIES                                                                                                               |       |              |       |                  |       |
| Accounts  payable                                                                                                                  |       | $                 | 4,595,209  |                  | $          | 2,061,658 |   |
| Card  Casino accruals                                                                                                              |       | 1,542,864         |       | 1,175,383             |       |
| Accrued  wages and payroll taxes                                                                                                   |       | 1,504,446         |       | 635,182               |       |
| Due  to MHBPA                                                                                                                      |       | 146,151           |       | 35,422                |       |
| Accrued  property taxes                                                                                                            |       | 509,566           |       | 511,136               |       |
| Income  taxes payable                                                                                                              |       | 138,822           |       | —                |       |
| Payable  to horsepersons                                                                                                           |       | 42,057            |       | 31,444                |       |
| Total  current liabilities                                                                                                         |       | 8,479,115         |       | 4,450,225             |       |
|                                                                                                                               |       |              |       |                  |       |
| COMMITMENTS  AND CONTINGENCIES (Note 6)                                                                                            |       | —            |       | —                |       |
|                                                                                                                               |       |              |       |                  |       |
| STOCKHOLDERS’  EQUITY                                                                                                         |       |              |       |                  |       |
| Common  stock, $.01 par value, 10,000,000 shares authorized, 4,037,615 and 4,021,702,  respectively, shares issued and outstanding |       | 40,376            |       | 40,217                |       |
| Additional  paid-in capital                                                                                                        |       | 15,786,240        |       | 15,648,200            |       |
| Retained  earnings                                                                                                                 |       | 10,593,328        |       | 11,613,585            |       |
| Total  stockholders’ equity                                                                                                   |       | 26,419,944        |       | 27,302,002            |       |
|                                                                                                                               |       | $                 | 34,899,059 |                  | $          | 31,752,227 |   |

 

Seenotes to condensed consolidated financial statements.

 

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**CANTERBURYPARK HOLDING CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**PERIODSENDED JUNE 30, 2010 AND 2009 (Unaudited)**

 
| ** **                                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                              | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| OPERATING  REVENUES:                                    |       |                                 |       |                               |       |   |   |   |   |
| Pari-mutuel                                             |       | $                                    | 3,124,218  |                               | $          | 3,508,009 |   | $ | 4,945,249 |   | $ | 5,514,721 |   |
| Card  Casino                                            |       | 5,989,675                            |       | 5,110,371                          |       | 10,927,083 |   | 10,214,599 |   |
| Concessions                                             |       | 1,624,298                            |       | 1,688,373                          |       | 2,364,196 |   | 2,474,705 |   |
| Other                                                   |       | 758,800                              |       | 919,858                            |       | 1,080,812 |   | 1,265,073 |   |
| Total  Revenues                                         |       | 11,496,991                           |       | 11,226,611                         |       | 19,317,340 |   | 19,469,098 |   |
| Less:  Promotional Allowances                           |       | (43,112                              | )          | (52,020                            | )          | (74,848 | ) | (82,985 | ) |
| Net  Revenues                                           |       | 11,453,879                           |       | 11,174,591                         |       | 19,242,492 |   | 19,386,113 |   |
|                                                    |       |                                 |       |                               |       |   |   |   |   |
| OPERATING  EXPENSES:                                    |       |                                 |       |                               |       |   |   |   |   |
| Purse  expense                                          |       | 1,756,750                            |       | 1,808,177                          |       | 2,529,374 |   | 2,559,703 |   |
| Minnesota  Breeders’ Fund                          |       | 227,242                              |       | 239,993                            |       | 370,169 |   | 394,882 |   |
| Other  pari-mutuel expenses                             |       | 450,441                              |       | 488,896                            |       | 769,514 |   | 833,853 |   |
| Salaries  and benefits                                  |       | 5,160,576                            |       | 4,775,900                          |       | 9,001,292 |   | 8,475,290 |   |
| Cost  of sales                                          |       | 938,816                              |       | 900,121                            |       | 1,422,896 |   | 1,378,160 |   |
| Depreciation                                            |       | 496,275                              |       | 496,140                            |       | 987,975 |   | 1,078,290 |   |
| Loss  on disposal of assets                             |       | —                               |       | —                             |       | 909,540 |   | — |   |
| Utilities                                               |       | 283,121                              |       | 262,335                            |       | 527,046 |   | 517,592 |   |
| Advertising  and marketing                              |       | 545,645                              |       | 547,825                            |       | 708,436 |   | 663,075 |   |
| Other                                                   |       | 2,130,553                            |       | 1,949,921                          |       | 3,341,484 |   | 3,201,498 |   |
|                                                    |       | 11,989,419                           |       | 11,469,308                         |       | 20,567,726 |   | 19,102,343 |   |
| NONOPERATING  (EXPENSES) REVENUES:                      |       |                                 |       |                               |       |   |   |   |   |
| Interest  expense                                       |       | (2,562                               | )          | (2,981                             | )          | (3,844 | ) | (4,435 | ) |
| Other,  net                                             |       | 3,733                                |       | 10,499                             |       | 8,268 |   | 12,240 |   |
|                                                    |       | 1,171                                |       | 7,518                              |       | 4,424 |   | 7,805 |   |
|                                                    |       |                                 |       |                               |       |   |   |   |   |
| (LOSS)  INCOME BEFORE INCOME TAX BENEFIT (EXPENSE)      |       | (534,369                             | )          | (287,199                           | )          | (1,320,810 | ) | 291,575 |   |
|                                                    |       |                                 |       |                               |       |   |   |   |   |
| INCOME  TAX BENEFIT (EXPENSE) (Note 1)                  |       | 153,400                              |       | 114,100                            |       | 300,200 |   | (147,900 | ) |
|                                                    |       |                                 |       |                               |       |   |   |   |   |
| NET  (LOSS) INCOME                                      |       | $                                    | (380,969   | )                                  | $          | (173,099 | ) | $ | (1,020,610 | ) | $ | 143,675 |   |
|                                                    |       |                                 |       |                               |       |   |   |   |   |
| WEIGHTED  AVERAGE NUMBER OF COMMON SHARES OUTSTANDING   |       | 4,035,993                            |       | 3,956,583                          |       | 4,034,320 |   | 3,952,280 |   |
|                                                    |       |                                 |       |                               |       |   |   |   |   |
| WEIGHTED  AVERAGE NUMBER OF DILUTIVE SHARES OUTSTANDING |       | 4,035,993                            |       | 3,956,583                          |       | 4,034,320 |   | 3,962,297 |   |
|                                                    |       |                                 |       |                               |       |   |   |   |   |
| BASIC  NET (LOSS) INCOME PER COMMON SHARE (Note 1)      |       | $                                    | (.09       | )                                  | $          | (.04 | ) | $ | (.25 | ) | $ | .04 |   |
|                                                    |       |                                 |       |                               |       |   |   |   |   |
| DILUTED  NET (LOSS) INCOME PER COMMON SHARE (Note 1)    |       | $                                    | (.09       | )                                  | $          | (.04 | ) | $ | (.25 | ) | $ | .04 |   |

 

Seenotes to condensed consolidated financial statements.

 

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**CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**PERIODS ENDED JUNE 30, 2010 AND 2009 (Unaudited)**

 
| ** **                                                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                      | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Operating Activities:**                                                       |       |                               |       |   |   |
| Net  (loss) income                                                              |       | $                                  | (1,020,610 | ) | $ | 143,675 |   |
| Adjustments  to reconcile net (loss) income to net cash provided by operations: |       |                               |       |   |   |
| Depreciation                                                                    |       | 987,975                            |       | 1,078,290 |   |
| Loss  on disposal of assets                                                     |       | 909,540                            |       | — |   |
| Stock-based  compensation expense                                               |       | 102,052                            |       | 69,511 |   |
| Increase  in deferred income taxes                                              |       | (634,732                           | )          | (247,864 | ) |
| Increase  in restricted cash                                                    |       | (1,857,736                         | )          | (1,844,417 | ) |
| Increase  in accounts receivable                                                |       | (99,582                            | )          | (453,133 | ) |
| Increase  in other current assets                                               |       | (330,924                           | )          | (365,511 | ) |
| Decrease  in income taxes receivable                                            |       | 307,801                            |       | 395,763 |   |
| Increase  in accounts payable and accrued wages and payroll taxes               |       | 3,303,004                          |       | 3,463,967 |   |
| Increase  in Card Casino accruals                                               |       | 367,481                            |       | 69,214 |   |
| (Decrease)  increase in accrued property taxes                                  |       | (1,570                             | )          | 8,394 |   |
| Increase  (decrease) in payable to horsepersons                                 |       | 10,613                             |       | (15,287 | ) |
| Increase  in due to MHBPA                                                       |       | 108,406                            |       | 106,485 |   |
| Net  cash provided by operations                                                |       | 2,151,718                          |       | 2,409,087 |   |
|                                                                            |       |                               |       |   |   |
| **Investing Activities:**                                                       |       |                               |       |   |   |
| Additions  to buildings and equipment                                           |       | (2,585,198                         | )          | (625,226 | ) |
| Proceeds  from redemption of investments                                        |       | 20,476                             |       | 57,471 |   |
| Purchase  of investments                                                        |       | (28,493                            | )          | (57,615 | ) |
| Net  cash used in investing activities                                          |       | (2,593,215                         | )          | (625,370 | ) |
|                                                                            |       |                               |       |   |   |
| **Financing Activities**                                                        |       |                               |       |   |   |
| Proceeds  from issuance of common stock                                         |       | 34,499                             |       | 245,495 |   |
| Excess  tax benefit from exercise of stock options                              |       | 866                                |       | — |   |
| Net  cash provided by financing activities                                      |       | 35,365                             |       | 245,495 |   |
|                                                                            |       |                               |       |   |   |
| Net  (decrease) increase in cash                                                |       | (406,132                           | )          | 2,029,212 |   |
|                                                                            |       |                               |       |   |   |
| Cash  at beginning of period                                                    |       | 4,741,197                          |       | 3,745,731 |   |
|                                                                            |       |                               |       |   |   |
| Cash  at end of period                                                          |       | $                                  | 4,335,065  |   | $ | 5,774,943 |   |
|                                                                            |       |                               |       |   |   |
| Supplemental  disclosure of noncash investing activities:                       |       |                               |       |   |   |
| Additions  to buildings and equipment funded through accounts payable           |       | $                                  | 111,298    |   | $ | 69,213 |   |
| Proceeds  from issuance of common stock funded through shares swapped           |       | $                                  | 251,530    |   | $ | 15,880 |   |
|                                                                            |       |                               |       |   |   |
| Supplemental  disclosure of cash flow information:                              |       |                               |       |   |   |
| Income  taxes paid, net of refunds                                              |       | $                                  | 33,000     |   | $ | — |   |

 

Seenotes to condensed consolidated financial statements.

 

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**CANTERBURYPARK HOLDING CORPORATION AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**PERIODS ENDED JUNE 30, 2010 AND2009 (Unaudited)**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared pursuant to the rules and regulations of the Securitiesand Exchange Commission and in the opinion of management, contain alladjustments necessary to present fairly, in accordance with accountingprinciples generally accepted in the United States of America (GAAP), thefinancial position of Canterbury Park Holding Corporation as of June 30,2010 and December 31, 2009; the results of its operations for the threeand six months ended June 30, 2010 and 2009; and its cash flows for thesix months ended June 30, 2010 and 2009. The condensed consolidated balance sheet as of December 31, 2009was derived from the audited financial statements.  All adjustments are of a normal, recurringnature, except as otherwise disclosed. Results for an interim period are not necessarily indicative of resultsfor a full year.

 

The complete summary of significant accounting policies is included inthe notes to consolidated financial statements in the 2009 Annual Report on Form 10-K.

 

1.               SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

 

*Business* — Canterbury Park HoldingCorporation (the “Company”) was incorporated under the laws of Minnesota andacquired land and buildings to conduct pari-mutuel horse racing operations (the“Racetrack”) in March 1994.  TheRacetrack is located in Shakopee, Minnesota, approximately 25 miles southwestof downtown Minneapolis.  In May 1994,we commenced year-round horse racing simulcast operations and hosted the firstannual live race meet during the summer of 1995.  Our live racing operations are a seasonalbusiness as we host live race meets each year from May until August.  We earn additional pari-mutuel revenue bytelevising our live racing to out-of-state racetracks around the country.  The Company began hosting unbanked card gamesin 2000.  This segment, now called theCanterbury Park Card Casino, operates 24 hours a day, seven days a week.  The Card Casino is limited by Minnesota Statelaw to hosting unbanked card games at a maximum of 50 tables at any onetime.  The Card Casino currently offers avariety of poker and table games.  Ourthree largest sources of revenues, Card Casino operations, pari-mutueloperations and concessions sales, generate cash revenues.  We also derive revenues from related servicesand activities, such as advertising, parking and publication sales and fromother entertainment events and activities held at the Racetrack.

 

*Presentation —*The Condensed Consolidated Statement ofOperations and Condensed Consolidated Statement of Cash Flows from theprior-period have been conformed to the 2010 presentation.  Thispresentation change had no effect on net income, earnings per share, orstockholders’ equity.

 

*Revenue Recognition —*Our revenues are derived primarily from the operations of a Card Casino,pari-mutuel wagering on simulcast and live horse races, concession sales, andrelated activities.  Collection revenuefrom Card Casino operations is recognized at the time that the wagering processis complete.  Pari-mutuel revenues arerecognized upon occurrence of the live race that is presented for wagering andafter that live race is made official by the respective state’s racingregulatory body.  Revenues related toconcession sales are recognized as revenue when the service has been performedor the product has been delivered.

 

*Estimates* — Thepreparation of the condensed consolidated financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the condensed consolidated financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.

 

*Short-term Investments* — Short-terminvestments consist of certificates of deposit held by the Company.  The maturity dates of these investments varybut are less than one year in length.

 

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*Restricted Cash* — Restricted cashrepresents refundable deposits and amounts due to horsemen for purses, stakesand awards, and amounts accumulated in the player pool and jackpot pools to beused to repay Card Casino players in the form of promotions, giveaways, prizes,or by other means.

 

*Income Taxes*— Income tax expense is computed by applyingthe estimated annual effective tax rate to the year-to-date income.  Income taxes are accounted for under theasset and liability method.  Deferred taxassets and liabilities are recognized for the estimated future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities aremeasured using enacted tax rates in effect for the year in which thosetemporary differences are expected to reverse.

 

The Company and itsconsolidated subsidiaries file income tax returns in the United States (“U.S.”)federal jurisdiction.  The Company is nolonger subject to U.S. federal examinations by tax authorities for years priorto 2007 or by State of Minnesota tax authorities for years prior to 2003.  We do not believe there will be any materialchanges in our unrecognized tax positions over the next twelve months.

 

*Net Income (Loss) Per Share*— Basic net income (loss) per common share is based on the weightedaverage number of common shares outstanding during each period.  The weighted average number of common sharesoutstanding for the three and six-month period ended June 30, 2010 were4,035,993 and 4,034,320, respectively.  Theweighted average number of common shares outstanding for the three andsix-month period ended June 30, 2009 were 3,956,583 and 3,952,280,respectively.  Diluted net income percommon share takes into effect the dilutive effect of potential common sharesoutstanding.  The Company’s potentialcommon shares outstanding are stock options. After considering the dilutive effect of stock options outstanding, theweighted average shares used to calculate diluted earnings per share for thethree and six-month periods ended June 30, 2010 were 4,035,993 and4,034,320, respectively.  Weightedaverage shares of 126 and 8,296 were considered anti-dilutive and excluded fromthe computation of common equivalent shares for the three and six-month periodended June 30, 2010, as the Company reported a net loss for thoseperiods.  The weighted average sharesused to calculate diluted earnings per share for the three and six-monthperiods ended June 30, 2009 were 3,956,583 and 3,962,297,respectively.  Weighted average shares of74 were considered anti-dilutive and excluded from the computation of commonequivalent shares for the three months ended June 30, 2009, as the Companyreported a net loss for that period.

 

*Recent Accounting Pronouncements —*In January 2010,the FASB issued Accounting Standards Update No. 2010-06 (“ASU 2010-06”) — “FairValue Measurements and Disclosures.”  ASU2010-06 amends Accounting Standards Codification (“ASC”) 820-10, “Fair ValueMeasurements and Disclosures”, and requires new disclosures surrounding certainfair value measurements.  ASU 2010-06 waseffective for the first interim or annual reporting period beginning on orafter December 15, 2009, except for certain disclosures about purchases,sales, issuances and settlements in the rollforward of activity in Level 3 fairvalue measurements, which are effective for the first interim and annualreporting periods beginning on or after December 15, 2010. The adoption ofASU 2010-06 did not have a material effect on the Company’s consolidatedfinancial statements.

 

In April 2010, the FASBissued Accounting Standards Update No. 2010-16 (“ASU 2010-16”) “Entertainment—Casinos (Topic 924): Accrualsfor Casino Jackpot Liabilities.” ASU 2010-16 codifies the consensus reached in Emerging Issues Task ForceIssue No. 09-F, “Casino Base Jackpot Liabilities.”  ASU 2010-16 amends the ASC to clarify that anentity should not accrue jackpot liabilities, or portions thereof, before ajackpot is won if the entity can avoid paying the jackpot. Jackpots should beaccrued and charged to revenue when an entity has the obligation to pay thejackpot. The guidance in this ASU applies to both base and progressivejackpots. The amendments in this ASU are effective for fiscal years, andinterim periods within those fiscal years, beginning on or afterDecember 15, 2010. The amendments should be applied by recording acumulative-effect adjustment to opening retained earnings in the period ofadoption. We are currently evaluating the requirements of ASU 2010-16 and havenot yet determined the impact on our consolidated financial statements.

 

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2.               STOCK BASED COMPENSATION

 

Stock based compensation isrecorded at fair value as of the date of grant and included in the salaries andbenefits expense line item on the consolidated statements of operations andamounted to $102,052 and $69,511 during the six months ended June 30, 2010and 2009, respectively.

 

Each non-employee member ofthe Board of Directors receives an annual recurring grant of 3,000non-qualified stock options on the first business day in February.  On February 1, 2010, 15,000 options weregranted to the five non-employee board members with an exercise price per shareequal to the market price on the date of grant of $7.05.  The stock options vested over a six-monthperiod and expire in ten years.  The compensation cost associated with thisgrant of Board of Director options is $45,450 and will be recognized as expenseover the six-month vesting period.  OnFebruary 2, 2009, 15,000 options were granted to the five non-employeeboard members with an exercise price per share equal to the market price on thedate of grant of $6.66.

 

In addition, on February 25,2010, 86,500 options were granted to employees with an exercise price per shareequal to the market price on the date of grant of $8.28.  The stock options vest over a 42-month periodand expire in ten years.  Thecompensation cost associated with this grant of employee options is $282,355 tobe recognized as expense over the 42-month vesting period.  On April 23, 2009, 100,000 options weregranted to employees with an exercise price per share equal to the market priceon the date of grant of $6.00.

 

The number of shares grantedand the weighted average fair value per share during the periods presentedwere:

 
| ** **              | ** ** | **Six  Months Ended**   | ** ** |
|-------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
| ** **              | ** ** | ** **              | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **              | ** ** | ** **              | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **              | ** ** | ** **              | ** ** | **Fair  Value** | ** ** | ** ** | ** ** | **Fair  Value** | ** ** |
| ** **              | ** ** | **Grant**               | ** ** | **Per  Share** | ** ** | **Grant** | ** ** | **Per  Share** | ** ** |
|                    |       |                    |       |   |   |   |   |   |   |
| Board  stock options    |       | 15,000                  |       | $ | 3.03 |   | 15,000 |   | $ | 1.26 |   |
| Employee  stock options |       | 86,500                  |       | $ | 3.79 |   | 100,000 |   | $ | 1.07 |   |
|                    |       |                    |       |   |   |   |   |   |   |
| Total  shares           |       | 101,500                 |       |   |   | 115,000 |   |   |   |

 

The fair value of stockoptions granted under the Company’s 1994 Stock Plan during the first six monthsof 2010 and 2009 were estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted average assumptions andresults:

 
| ** **                                 | ** ** | **2010** | ** ** | **2009** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Dividend yield                             |       | 0.00     | %          | 4.12     | %          |
| Weighted-average  volatility               |       | 43       | %          | 26       | %          |
| Risk-free interest rate                    |       | 2.66     | %          | 2.93     | %          |
| Expected term of stock  options in years   |       | 6.0      |       | 6.3      |       |
| Fair value of stock  options on grant date |       | $        | 327,805    |     | $          | 111,455 |   |
|                                            |            |          |            |          |            |  |  |

 

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A summary of stock optionactivity as of June 30, 2010 and changes during the six months then endedis presented below:

 
| ** **                           | ** ** | ** **     | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **      | ** ** |
|--------------------------------------|------------|----------------|------------|--------------|------------|-----------------|------------|-----------------|------------|
| ** **                           | ** ** | ** **     | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **      | ** ** |
| ** **                           | ** ** | ** **     | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**   | ** ** |
| ** **                           | ** ** | **Number  of** | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Grant  Date** | ** ** |
| **Stock Options**                    | ** ** | **Shares**     | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Fair  Value** | ** ** |
|                                 |       |           |       |         |       |            |       |            |       |
| Outstanding  at January 1, 2010 |       | 403,244        |       | $            | 10.15      |            |       |            |       |   |
|                                 |       |           |       |         |       |            |       |            |       |
| Granted                              |       | 101,500        |       | $            | 8.10       |            |       |            |       |   |
| Exercised                            |       | (50,369        | )          | $            | 5.68       |            |       |            |       |   |
| Expired/Forfeited                    |       | (75,000        | )          | $            | 15.57      |            |       |            |       |   |
|                                 |       |           |       |         |       |            |       |            |       |
| Outstanding  at June 30, 2010   |       | 379,375        |       | $            | 9.10       |            | 6.5  Years |            | $          | 3,454,094 |   |
|                                 |       |           |       |         |       |            |       |            |       |
| Exercisable  at June 30, 2010   |       | 216,000        |       | $            | 10.47      |            | 4.4  Years |            | $          | 2,260,874 |   |

 

A summary of stock optionactivity as of June 30, 2009 and changes during the six months then endedis presented below:

 
| ** **                           | ** ** | ** **     | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **      | ** ** |
|--------------------------------------|------------|----------------|------------|--------------|------------|-----------------|------------|-----------------|------------|
| ** **                           | ** ** | ** **     | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **      | ** ** |
| ** **                           | ** ** | ** **     | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**   | ** ** |
| ** **                           | ** ** | **Number  of** | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Grant  Date** | ** ** |
| **Stock Options**                    | ** ** | **Shares**     | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Fair  Value** | ** ** |
|                                 |       |           |       |         |       |            |       |            |       |
| Outstanding  at January 1, 2009 |       | 470,000        |       | $            | 11.12      |            |       |            |       |   |
|                                 |       |           |       |         |       |            |       |            |       |
| Granted                              |       | 115,000        |       | $            | 6.09       |            |       |            |       |   |
| Exercised                            |       | (59,000        | )          | $            | 4.43       |            |       |            |       |   |
| Expired/Forfeited                    |       | (85,000        | )          | $            | 15.57      |            |       |            |       |   |
|                                 |       |           |       |         |       |            |       |            |       |
| Outstanding  at June 30, 2009   |       | 441,000        |       | $            | 9.85       |            | 4.6  Years |            | $          | 4,342,630 |   |
|                                 |       |           |       |         |       |            |       |            |       |
| Exercisable  at June 30, 2009   |       | 322,250        |       | $            | 11.13      |            | 2.7  Years |            | $          | 3,588,168 |   |

 

*EmployeeStock Ownership Plan* — Prior to 2008, the Company contributed shares ofits common stock to its Employee Stock Ownership Plan (“ESOP”).  However, on October 24, 2008, theCompany announced it would not contribute shares to the ESOP for fiscal2008.  Since then, the Company has nottaken any action to reinstate contributions to the ESOP.

 

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3.     FAIR VALUE

 

ASC 820 defines fair valueas the exchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants on themeasurement date.  ASC 820 alsoestablishes a fair value hierarchy which requires an entity to maximize the useof observable inputs and minimize the use of unobservable inputs when measuringfair value.  The standard describes threelevels of inputs that may be used to measure fair value:

 

*Level 1* — Quotedprices in active markets for identical assets or liabilities.

 

*Level 2* — Observableinputs other than Level 1 prices such as quoted prices for similar assets orliabilities; quoted prices in markets that are not active; or other inputs thatare observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.

 

*Level 3* — Unobservableinputs that are supported by little or no market activity and that aresignificant to the fair value of the assets or liabilities.

 

TheCompany utilizes the market approach to measure fair value for its financialassets and liabilities.  The market approach uses prices and otherrelevant information generated by market transactions involving identical orcomparable assets or liabilities.

 

Assets and liabilities measured at fair value on a recurring basis for June 30,2010 and December 31, 2009 are summarized below:

 
| ** **                                        | ** ** | **Fair Value Measurements as of  June 30, 2010** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------|------------|
| **Description**                                   | ** ** | **Total**                                             | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                              |       |                                                  |       |   |   |   |   |   |   |
| Short-term investments  (Certificates of Deposit) |       | $                                                     | 373,911    |   | $ | — |   | $ | 373,911 |   | $ | — |   |
| Long-term investments  (Certificates of Deposit)  |       | $                                                     | 250,000    |   | $ | — |   | $ | 250,000 |   | $ | — |   |
|                                              |       |                                                  |       |   |   |   |   |   |   |
| Total                                             |       | $                                                     | 623,911    |   | $ | — |   | $ | 623,911 |   | $ | — |   |

 
| ** **                                        | ** ** | **Fair Value Measurements as of  December 31, 2009** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Description**                                   | ** ** | **Total**                                                 | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                              |       |                                                      |       |   |   |   |   |   |   |
| Short-term investments  (Certificates of Deposit) |       | $                                                         | 365,894    |   | $ | — |   | $ | 365,894 |   | $ | — |   |
| Long-term investments  (Certificates of Deposit)  |       | $                                                         | 250,000    |   | $ | — |   | $ | 250,000 |   | $ | — |   |
|                                              |       |                                                      |       |   |   |   |   |   |   |
| Total                                             |       | $                                                         | 615,894    |   | $ | — |   | $ | 615,894 |   | $ | — |   |

 

4.     GENERAL CREDIT AGREEMENT

 

The Company has a generalcredit agreement with Bremer Bank, which provides a revolving credit line.  On May 8, 2010, the Company signed anamendment with Bremer Bank extending the expiration date from June 30,2010 to May 8, 2011, while keeping previous provisions intact.  The Company had no borrowings under thiscredit line at June 30, 2010 and December 31, 2009.  The credit agreement contains certaincovenants requiring the Company to maintain certain financial ratios.  The Company was in compliance with these requirementsas of June 30, 2010.  The Companybelieves that unrestricted funds available in its cash accounts, fundsavailable under this line of credit, along with funds generated fromoperations, will be sufficient to satisfy its liquidity and capital resourcerequirements during 2010.

 

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5.     OPERATING SEGMENTS

 

During the first six monthsof 2010 and 2009, the Company had three reportable operating segments:  horse racing, Card Casino, andconcessions.  The horse racing segmentprimarily represents simulcast and live horse racing operations.  The Card Casino segment primarily representsoperations of Canterbury Park’s Card Casino, and the concessions segmentprimarily represents food and beverage operations provided during simulcast andlive racing, in the Card Casino, and during special events.  The Company’s reportable operating segmentsare strategic business units that offer different products and services.  They are managed separately because thesegments differ in the nature of the products and services provided as well asprocesses to produce those products and services.  The Minnesota Racing Commission (“MRC”)regulates the horse racing and Card Casino segments.

 

The accounting policies ofthe operating segments are the same as those described in the summary ofsignificant accounting policies in the 2009 Annual Report on Form 10-K.

 

Depreciation, interest expenseand income taxes are allocated to the segments but no allocation is made toconcessions for shared facilities. However, the concessions segment pays approximately 25% of grossrevenues earned on live racing and special event days to the horse racing segmentfor use of the facilities.

 

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

 
| ** **                                                                         | ** ** | **Six Months Ended June 30, 2010** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                         | ** ** | **Horse Racing**                   | ** ** | **Card Casino** | ** ** | **Concessions** | ** ** | **Total** | ** ** |
|                                                                               |       |                                    |       |   |   |   |   |   |   |
| Net  revenues from external customers                                              |       | $                                       | 5,950      |   | $ | 10,927 |   | $ | 2,365 |   | $ | 19,242 |   |
|                                                                               |       |                                    |       |   |   |   |   |   |   |
| Intersegment  revenues                                                             |       | 275                                     |       | — |   | 713 |   | 988 |   |
|                                                                               |       |                                    |       |   |   |   |   |   |   |
| Net  interest income                                                               |       | 4                                       |       | — |   | — |   | 4 |   |
|                                                                               |       |                                    |       |   |   |   |   |   |   |
| Depreciation                                                                       |       | 594                                     |       | 320 |   | 74 |   | 988 |   |
|                                                                               |       |                                    |       |   |   |   |   |   |   |
| Segment  (loss) income before income taxes                                         |       | (1,256                                  | )          | 71 |   | (4 | ) | (1,189 | ) |
|                                                                               |       |                                    |       |   |   |   |   |   |   |
| Segment  (loss) income before income taxes and one-time loss on disposal of assets |       | (1,256                                  | )          | 981 |   | (4 | ) | (279 | ) |
|                                                                                    |            |                                         |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **      | ** ** | **At June 30, 2010** | ** ** |
|-----------------|------------|---------------------------|------------|
|            |       |                      |       |   |   |   |   |   |   |
| Segment  Assets |       | $                         | 32,492     |   | $ | 1,628 |   | $ | 10,057 |   | $ | 44,177 |   |
|                 |            |                           |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                 | ** ** | **Six Months Ended June 30, 2009** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **Horse  Racing**                       | ** ** | **Card  Casino** | ** ** | **Concessions** | ** ** | **Total** | ** ** |
|                                       |       |                                    |       |   |   |   |   |   |   |
| Net  revenues from external customers      |       | $                                       | 6,693      |   | $ | 10,215 |   | $ | 2,478 |   | $ | 19,386 |   |
|                                       |       |                                    |       |   |   |   |   |   |   |
| Intersegment  revenues                     |       | 304                                     |       | — |   | 686 |   | 990 |   |
|                                       |       |                                    |       |   |   |   |   |   |   |
| Net  interest income                       |       | 8                                       |       | — |   | — |   | 8 |   |
|                                       |       |                                    |       |   |   |   |   |   |   |
| Depreciation                               |       | 675                                     |       | 322 |   | 81 |   | 1,078 |   |
|                                       |       |                                    |       |   |   |   |   |   |   |
| Segment  (loss) income before income taxes |       | (810                                    | )          | 1,252 |   | 252 |   | 694 |   |
|                                            |            |                                         |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **      | ** ** | **At December 31, 2009** | ** ** |
|-----------------|------------|-------------------------------|------------|
|            |       |                          |       |   |   |   |   |   |   |
| Segment  Assets |       | $                             | 28,279     |   | $ | 2,841 |   | $ | 9,636 |   | $ | 40,756 |   |
|                 |            |                               |            |  |  |  |  |  |  |  |  |  |  |

 

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The following arereconciliations of reportable segment revenue, income before income taxes, andassets, to the Company’s consolidated totals (in 000’s):

 
| ** **                                              | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                              | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Revenues                                                |       |                               |       |   |   |
| Total  net revenue for reportable segments              |       | $                                  | 20,230     |   | $ | 20,376 |   |
| Elimination  of intersegment revenues                   |       | (988                               | )          | (990 | ) |
| Total  consolidated net revenues                        |       | $                                  | 19,242     |   | $ | 19,386 |   |
|                                                    |       |                               |       |   |   |
| (Loss)  income before income taxes                      |       |                               |       |   |   |
| Total  segment (loss) income before income taxes        |       | $                                  | (1,189     | ) | $ | 694 |   |
| Elimination  of intersegment income before income taxes |       | (132                               | )          | (402 | ) |
| Total  consolidated (loss) income before income taxes   |       | $                                  | (1,321     | ) | $ | 292 |   |

 
| ** **                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Assets                                   | ** ** | ** **        | ** ** | ** **            | ** ** |
| Total  assets for reportable segments    |       | $                 | 44,177     |                  | $          | 40,756 |   |
| Elimination  of intercompany receivables |       | (9,278            | )          | (9,004                | )          |
| Total  consolidated assets               |       | $                 | 34,899     |                  | $          | 31,752 |   |

 

6.     COMMITMENTS AND CONTINGENCIES

 

In accordance with an EarnOut Note, given to the prior owner of the Racetrack as part of theconsideration paid by the Company to acquire the Racetrack in 1994, if (i) off-trackbetting becomes legally permissible in the State of Minnesota and (ii) theCompany begins to conduct off-track betting with respect to or in connectionwith 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 netpretax profit, as defined for each of five operating years.  At this time, management believes that thelikelihood that these two conditions will be met, and that the Company will berequired to pay these amounts is remote. At the date (if any) that these two conditions are met, the five minimumpayments will be discounted back to their present value and the sum of thosediscounted payments will be capitalized as part of the purchase price inaccordance with generally accepted accounting principles.  The purchase price will be further increasedif payments become due under the “20% of Net Pretax Profit” calculation.  The first payment is to be made 90 days afterthe end of the third operating year in which off-track betting is conducted bythe Company.  Remaining payments would bemade within 90 days of the end of each of the next four operating years.

 

The Company periodically issubject to claims or involved in legal proceedings arising in the normal courseof business.  At June 30, 2010,management believes that the resolution of any pending claims or legal proceedingswill not have a material impact on the consolidated financial statements.

 

7.     LOSS ON DISPOSAL OF ASSETS

 

In January 2010, and inaccordance with Minnesota Statute 240, the Company obtained approval from theMRC to remodel its existing card room.  Constructionand architectural contracts with various firms were signed shortly thereafter,and the card room was moved to a temporary location on the mezzanine level on January 25,2010.  The Company used cash on hand tofund the project and avoided drawing on its line of credit.  As part of the remodeling project, theCompany disposed of assets during the first quarter of 2010 with an originalcost of $2,354,619 and associated accumulated depreciation of $1,445,079,resulting in a loss on disposal of $909,540. The remodeling project was completed during the second quarter of 2010and on April 14, 2010, Canterbury Park opened its new Card Casino.

 

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| **ITEM 2:** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL  CONDITION AND RESULTS OF OPERATIONS** |   |
|-------------|--------------------------------------------------------------------------------------------------|--------|

 

The following Management’s Discussion and Analysis of Financial Conditionand Results of Operations (“MD&A”) is intended to help the readerunderstand Canterbury Park Holding Corporation, our operations, financialresults, and present business environment. This MD&A is provided as a supplement to — and should be read inconjunction with — our condensed consolidated financial statements and theaccompanying notes to the financial statements (the “Notes”).

 

**Overview:**

 

Canterbury Park Holding Corporation (the “Company”) owns and operatesthe Canterbury Park Racetrack and Card Casino in Shakopee, Minnesota (the “Racetrack”).  The primary businesses of the Company aresimulcast and live pari-mutuel horse racing, hosting unbanked card games, andfood and beverage operations.

 

The Racetrack is the only pari-mutuel thoroughbred and quarter horseracing facility in the State of Minnesota. The Racetrack earns revenues from pari-mutuel take-out on racessimulcast year-round to Canterbury Park from racetracks throughout the countryand from live race meets featuring thoroughbred and quarter horse racing.  Live race meets commence in the month of May andconclude in August.  During live racemeets, the Company televises its races to out-of-state racetracks around thecountry, and earns additional pari-mutuel revenue on wagers placed on races atthe out-of-state racetracks.

 

Canterbury Park’s Card Casino (the “Card Casino”) hosts “unbanked” cardgames in which players compete against each other and not against thehouse.  The Card Casino is opentwenty-four hours a day, seven days a week. Under Minnesota law, the Company is required to pay up to 14% of thegross Card Casino revenues to the Racetrack’s purse fund and the State ofMinnesota Breeders’ Fund.

 

The Company also generates revenues from concessions, as well as fromother activities such as parking fees, program and other racing publicationsales, and corporate sponsorships. Additional revenues are derived from the use of the Racetrack facilitiesfor special events such as concerts, craft shows and snowmobile racing.

 

**Operations Review for the****Three and****Six Months Ended June 30,2010 and June 30, 2009:**

 

The following table sets forth a reconciliation of net income, a GAAPfinancial measure, to EBITDA and Adjusted EBITDA, which are non-GAAP measures,for the periods ended June 30, 2010 and 2009:

 
| ** **                                | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2010**          | ** ** | **2009**          | ** ** |
| Net (loss) income                         |       | $                 | (1,020,610 | )                 | $          | 143,675 |   |
| Interest income, net of  interest expense |       | (4,424            | )          | (7,805            | )          |
| Income tax (benefit)  expense             |       | (300,200          | )          | 147,900           |       |
| Depreciation                              |       | 987,975           |       | 1,078,290         |       |
| EBITDA                                    |       | $                 | (337,259   | )                 | $          | 1,362,060 |   |
| Loss on disposal of assets                |       | 909,540           |       | —            |       |
| Adjusted EBITDA                           |       | $                 | 572,281    |              | $          | 1,362,060 |   |

 

EBITDA represents earnings before interest income, income tax expense,and depreciation and amortization. EBITDA is not a measure of performance or liquidity calculated inaccordance with generally accepted accounting principles (“GAAP”), and shouldnot be considered an alternative to, or more meaningful than, net income as anindicator of our operating performance, or cash flows from operating activitiesas a measure of liquidity.  EBITDA hasbeen presented as a supplemental disclosure because it is a widely used measureof performance and basis for valuation of companies in our industry.  Moreover, other companies that provide EBITDAinformation may calculate EBITDA differently than we do.  Adjusted EBITDA is calculated as 

 

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EBITDA with the addition of material, one-time non-cash expenses.  During the six months ended June 30,2010, this included the loss on disposal of assets during the remodel of ourcard room.

 

Adjusted EBITDA as a percentage of net revenues declined significantlyto 3.0% for the first six months ended June 30, 2010 compared to 7.0% forthe first six months ended June 30, 2009.

 

Total net revenues decreased $143,621, or 0.7%, during the six monthsended June 30, 2010 compared to the six months ended June 30, 2009,and increased $279,288, or 2.5%, for the three months ended June 30, 2010compared to the three months ended June 30, 2009. The six-month variance wasdue primarily to a reduction of 10.3% in pari-mutuel revenues and an increasein Card Casino revenues of 7.0% for the six months ended June 30, 2010compared to the same period in the prior year. The three-month variance was dueprimarily to a reduction of 10.9% in pari-mutuel revenues and an increase inCard Casino revenues of 17.2% for the three months ended June 30, 2010 comparedto the same period in the prior year.

 

Pari-mutuel revenues decreased $569,472, or 10.3%, in the six-monthperiod ended June 30, 2010 compared to the same period in 2009, anddecreased $383,791, or 10.9%, for the three-month period ended June 30,2010 compared to the same period in 2009. Total handle wagered for the first half of 2010 was down $3.2 million,or 10.9%, compared to the same period last year.  The decrease is attributable to the economicrecession that has adversely impacted discretionary spending onentertainment.  In addition, inclementweather during the first half of 2010 resulted in the cancellation of asignificant number of races at racetracks simulcasting their signal to ourracetrack.  Severe weather also resultedin the cancellation of one of the Company’s live race days, further adverselyimpacting handle wagered.  Finally, theCompany believes that an increasing number of Minnesota residents areunlawfully wagering on horse races over the Internet.  See the “Summary of Pari-mutuel Data” below.

 
| ** **                                      | ** ** | **Six Months Ended June 30,** | ** **     |
|-------------------------------------------------|------------|------------------------------------|----------------|
| ** **                                      | ** ** | **2010**                           | ** **     | **2009** | ** ** |
| **Summary of Pari-mutuel Data:**                |       |                               |           |   |   |
| ** **                                      |       |                               |           |   |   |
| Racing  Days                                    |       |                               |           |   |   |
| Simulcast  only                                 |       | 156                                |           | 155 |   |
| Live  and Simulcast                             |       | 25                                 |           | 26 |   |
| **Total Number of Racing Days**                 | ** ** | **181**                            | ** **     | **181** | ** ** |
| ** **                                      | ** ** | ** **                         | ** **     | ** ** | ** ** |
| On-Track  Handle                                |       |                               |           |   |   |
| Simulcast  racing handle on simulcast only days |       | $                                  | 14,114,000     |   | $ | 15,365,000 |   |
| Live  and Simulcast days:                       |       |                               |           |   |   |
| Live  racing handle                             |       | 3,942,000                          |           | 4,871,000 |   |
| Simulcast  racing handle                        |       | 4,044,000                          |           | 4,970,000 |   |
| Total  On-Track Handle                          |       | 22,100,000                         |           | 25,206,000 |   |
|                                            |       |                               |           |   |   |
| Out-of-State  Live Handle                       |       | 4,281,000                          |           | 4,392,000 |   |
|                                            |       |                               |           |   |   |
| **Total Handle**                                | ** ** | **$**                              | **26,381,000** | ** ** | **$** | **29,598,000** | ** ** |
|                                            |       |                               |           |   |   |
| On-Track  Average Daily Handle                  |       |                               |           |   |   |
| Simulcast  only racing days                     |       | $                                  | 90,474         |   | $ | 99,129 |   |
| Live  and simulcast racing days                 |       | $                                  | 319,440        |   | $ | 378,500 |   |

 

Total Card Casino revenue increased $712,484, or 7.0%, for the firstsix months of 2010 and $879,304, or 17.2%, for the second quarter of 2010compared to the same periods in 2009. The primary source of Card Casino revenue is a percentage of the wagersreceived from the players as compensation for providing the Card Casinofacility and services, referred to as the “collection revenue.”  Other revenue includes fees collected for theadministration of tournaments, and amounts earned as reimbursement of theadministrative costs of maintaining jackpot funds.  Poker collection revenue fell $328,457, or5.5%, compared to the first six months of 2009, but increased $112,351, or4.0%, for the quarter ended June 30 compared to

 

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the same period in 2009.  Inaddition, Table Games collection revenue increased $861,033, or 24.8%, comparedto the first half of 2009 and $672,675, or 36.0%, for the quarter ended June 30compared to the same period in 2009.  Theincreases in the second quarter are largely due to the opening of the Company’snew Card Casino on April 14, 2010. While the continued economic recession and unlawful wagering on pokerover the Internet continues to adversely affect Card Casino revenues, theCompany believes these factors were more than offset by the new Card Casinothat has provided both an exciting and an inviting atmosphere and sparked anincrease in gaming play by patrons.  Total Card Casino revenues represented 56.8%and 52.3% of net revenues for the six-month and three-month periods ended June 30,2010, respectively.  The three-monthpercentage is usually lower in the second quarter of any calendar year due tosubstantially increased revenue from live racing.  See the “Summary of Card Casino Data” below:

 
| ** **                       | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------|------------|------------------------------------|------------|
| ** **                       | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Summary of Card Casino Data:** |       |                               |       |   |   |
|                             |       |                               |       |   |   |
| Poker  Games                     |       | $                                  | 5,669,000  |   | $ | 5,998,000 |   |
| Table  Games                     |       | 4,327,000                          |       | 3,466,000 |   |
| Total  Collection Revenue        |       | 9,996,000                          |       | 9,464,000 |   |
|                             |       |                               |       |   |   |
| Other  Revenue                   |       | 931,000                            |       | 751,000 |   |
| Total  Card Casino Revenue       |       | $                                  | 10,927,000 |   | $ | 10,215,000 |   |
|                             |       |                               |       |   |   |
| Number  of Days Offered          |       | 181                                |       | 181 |   |
| Average  Revenue per Day         |       | $                                  | 60,370     |   | $ | 56,436 |   |

 

Concessions revenues decreased $110,509, or 4.5%, and $64,075, or 3.8%,for the six-month and three-month periods ended June 30, 2010,respectively, compared to the same period in the prior year.  The decrease is primarily attributable todiscounted prices in the temporary card room location due to our remodelingproject which was completed on April 14, 2010.  In addition, the cancellation of one of ourlive racing days due to weather resulted in lower concession sales for that daycompared to the same day in 2009.

 

Total operating expenses increased $1,465,383, or 7.7%, and $520,111,or 4.5%, for the six-month and three-month periods ended June 30, 2010,respectively, compared to the same period in the prior year.  Factors contributing to these increases arediscussed in greater detail below.

 

Total expense for statutory purses and the Minnesota Breeders’ Funddecreased 1.9% to $2,899,543 for the first six months ended June 30, 2010compared to the first six months ended June 30, 2009.  The decrease was due primarily to a reductionin racing purse and breeders’ fund expenses due to lower live and simulcastrevenues in the first half of 2010 compared to the first half of 2009.

 

The following table provides additional information regarding purse andBreeders’ Fund Expense:

 
| ** **              | ** ** | ** **                         | ** ** | ** **                         | ** ** | **Minnesota** | ** ** |
|-------------------------|------------|------------------------------------|------------|------------------------------------|------------|---------------|------------|
| ** **              | ** ** | **Purse Expense**                  | ** ** | **Breeders’ Fund Expense**    | ** ** |
| ** **              | ** ** | **Six Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **              | ** ** | **2010**                           | ** ** | **2009**                           | ** ** | **2010**      | ** ** | **2009** | ** ** |
|                    |       |                               |       |                               |       |          |       |   |   |
| Card  Casino            |       | $                                  | 1,164,000  |                               | $          | 1,071,000     |       | $ | 126,000 |   | $ | 119,000 |   |
|                    |       |                               |       |                               |       |          |       |   |   |
| Simulcast  Horse Racing |       | 978,000                            |       | 1,032,000                          |       | 205,000       |       | 227,000 |   |
|                    |       |                               |       |                               |       |          |       |   |   |
| Live  Horse Racing      |       | 387,000                            |       | 457,000                            |       | 39,000        |       | 49,000 |   |
|                    |       |                               |       |                               |       |          |       |   |   |
|                    |       | $                                  | 2,529,000  |                               | $          | 2,560,000     |       | $ | 370,000 |   | $ | 395,000 |   |

 

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Salaries and benefits increased $526,002, or 6.2%, in the 2010six-month period ended June 30 and $384,676, or 8.1%, in the three-monthperiod ended June 30, 2010 compared to the same periods last year.  The increase is primarily due to an increasein the Federal minimum wage which became effective after the 2009 secondquarter, an increase in hours worked to support the growth in Card Casinorevenues, and an increase in the state unemployment tax rate.

 

Loss on disposal of assets in the amount of $909,540 were recordedduring the first quarter of 2010 and related to the remodeling of our existingcard room.  There was no loss on disposalof assets during the six-month period ended June 30, 2009.

 

Other operating expenses increased $139,986, or 4.4%, in the 2010six-month period ended June 30 and $180,632, or 9.3%, in the three-monthperiod ended June 30, 2010 compared to the same periods last year.  The increase is primarily due to increasedexpenditures in support of legislation that would authorize electronic gamingdevices at the Racetrack.

 

Loss before income taxes was $1,320,810 for the six months ended June 30,2010 compared to income before income taxes of $291,575 for the six monthsended June 30, 2009.  After an incometax benefit of $300,200 for the six months ended June 30, 2010, net losswas $1,020,610 in 2010 compared to net income of $143,675 in 2009.  For the quarter ended June 30, 2010, theCompany recorded a $534,369 loss before income tax benefit compared to a lossbefore income tax benefit of $287,199 for the quarter ended June 30, 2009,a decrease of $247,170 or 86.1%.  Afteran income tax benefit of $153,400 in the second quarter of 2010, net loss was$380,969 compared to a net loss of $173,099 for the second quarter of 2009, adecrease of $207,870 or 120.1%.

 

**Contingencies:**

 

There have been no material changes in the contingencies reported underItem 7 in our Annual Report on Form 10-K for our year ended December 31,2009 and such information is incorporated herein by reference.

 

**Liquidity and Capital Resources:**

 

Cash provided by operating activities during the period January 1,2010 through June 30, 2010 was $2,151,718 and was the result of severalfactors.  During the first quarter of2010, the Company incurred a one-time loss on disposal of assets in the amountof $909,540 relating to the remodel of our card room.  In addition, depreciation during the firstsix months of 2010 was $987,975, and the Company experienced an increase inaccounts payable and accrued wages and payroll taxes of $3,303,004, causedprimarily by a seasonal increase of $1.73 million in horsemen payables.  These items were somewhat offset by a netloss of $1,020,610 and an increase in restricted cash of $1,857,736, resultingprimarily from the increase in horsemen payables of $1.73 million.  Cash provided by operating activities duringthe period January 1, 2009 through June 30, 2009 was $2,409,087,resulting primarily from net income of $143,675, depreciation of $1,078,290,and an increase in accounts payable and accrued wages and payroll taxes of$3,463,967, caused primarily by a seasonal increase of $1.66 million inhorsemen payables, a $617,000 increase in trade accounts payable, and a$240,000 increase in deferred revenues for corporate sponsorships.  These items were partially offset by anincrease in restricted cash of $1,844,417, resulting primarily from theincrease in horsemen payables of $1.66 million. Pursuant to an agreement with the MHBPA, during the six months ended June 30,2010 and 2009, the Company transferred into a trust account or paid directly tothe MHBPA approximately $2,225,000 and $2,200,000, respectively.

 

Net cash used in investing activities for the first six months of 2010was $2,593,215 due primarily to costs to remodel our card room totalingapproximately $2,271,000.  Net cash usedin investing activities for the first six months of 2009 of $625,370 wasprimarily due to upgrades to our grandstand totaling approximately $243,000 andthe purchase of equipment for our backside operations totaling approximately$161,000.

 

During the period January 1, 2010 through June 30, 2010, cashprovided by financing activities consisted of proceeds and excess tax benefitsreceived upon the exercise of stock options of $35,365.  During

 

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the period January 1, 2009 through June 30, 2009, cashprovided by financing activities consisted solely of proceeds received upon theexercise of stock options of $245,495.

 

The Company has a general credit agreement with Bremer Bank, whichprovides a revolving credit line of up to $3,000,000 until May 8, 2011with interest at the prime rate but not less than 4.5% per annum.  The Company had no borrowings under the lineof credit at June 30, 2010 or December 31, 2009.  The credit agreement contains covenantsrequiring the Company to maintain certain financial ratios.  The Company was in compliance with theserequirements at all times throughout the quarter ended June 30, 2010.

 

Unrestricted cash balances at June 30, 2010 were $4,335,065compared to $4,741,197 at December 31, 2009. The Company believes thatfunds available in its cash accounts, amounts available under the generalcredit and security agreement, along with funds generated from operations, willbe sufficient to satisfy the liquidity and capital resource requirements of itsbusiness operations during 2010.

 

**Critical Accounting Policies and Estimates:**

 

Thepreparation of consolidated financial statements in conformity with generallyaccepted accounting principles in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amountsof revenues and expenses during the reporting period.  We base our assumptions, estimates andjudgments on historical experience, current trends and other factors thatmanagement believes to be relevant at the time the consolidated financialstatements are prepared.  On a regularbasis, management reviews the accounting policies, assumptions, estimates andjudgments to ensure that our financial statements are presented fairly and inaccordance with generally accepted accounting principles.  However, because future events and theireffects cannot be determined with certainty, actual results could differ fromour assumptions and estimates, and such differences could be material.

 

Our significant accounting policies are included in Note 1 to ourconsolidated financial statements in our 2009 Annual Report on Form 10-K.We believe the following critical accounting policies affect our moresignificant judgments and estimates used in the preparation of our consolidatedfinancial statements.

 

*Property and Equipment -*We havesignificant capital invested in our property and equipment, which representsapproximately 71.2% of our total assets at June 30, 2010.  We utilize our judgment in various waysincluding: determining whether an expenditure is considered a maintenanceexpense or a capital asset; determining the estimated useful lives of assets;and determining if or when an asset has been impaired or has beendisposed.  Management periodicallyreviews the carrying value of property and equipment for potential impairmentby comparing the carrying value of these assets with their related expectedfuture net cash flows.  Should the sum ofthe related expected future net cash flows be less than the carrying value, wewill determine whether an impairment loss should be recognized.  An impairment loss would be measured by theamount by which the carrying value of the asset exceeds the fair value of theasset.  To date, we have determined thatno impairment of these assets exists.

 

*StockBased Employee Compensation* — ASC 718, Compensation —Stock Compensation (“ASC 718”), requires recognition of employee servicesprovided in exchange for a share-based payment based on the grant date fairmarket value.  We utilize our judgment indetermining the assumptions used to determine the fair value of options grantedusing a Black-Scholes model.

 

**Commitments and Contractual Obligations:**

 

There have been no material changes in our outstanding commitments andcontractual obligations since those reported at December 31, 2009.

 

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**Legislation:**

 

As discussed in our previous filings with the SEC, the Companysupported legislation that would authorize electronic gaming devices at theRacetrack (referred to as a “Racino”) during the 2010 session of the MinnesotaLegislature.  However, the MinnesotaLegislature adjourned without taking action on the proposed Racinolegislation.  Based on the success ofRacinos in several other states, we continue to believe that if a Racino wasauthorized at the Racetrack on similar terms to legislation approved in otherstates, it would stimulate economic growth in the horse racing and relatedagriculture businesses in Minnesota, provide growth and developmentopportunities that would add jobs at the Racetrack, and provide new tax revenuesfor state and local governments facing significant deficit issues.

 

The effort to obtain legislative authorityfor initiatives favorable to the Company has required, and will continue torequire, substantial expenditures.   Dueto the inherent uncertainty of the outcome of legislative activities, there canbe no assurance that any bills favorable to the Company’s interests will beenacted into law, and it is possible bills adverse to the Company could beenacted.

 

**Forward-Looking Statements:**

 

From time to time, inreports filed with the Securities and Exchange Commission, in press releases,and in other communications to shareholders or the investing public, theCompany may make forward-looking statements concerning possible or anticipatedfuture financial performance, business activities or plans which are typicallypreceded by the words “believes,” “expects,” “anticipates,” “intends” orsimilar expressions.  For suchforward-looking statements, the Company claims the protection of the safeharbor for forward-looking statements contained in federal securitieslaws.  Shareholders and the investingpublic should understand that such forward-looking statements are subject torisks and uncertainties which could cause actual performance, activities orplans to differ significantly from those indicated in the forward-lookingstatements.  Such risks and uncertaintiesinclude, but are not limited to: fluctuations in attendance at the Racetrack,material changes in the level of wagering by patrons, decline in interest inthe unbanked card games offered in the Card Casino, legislative and regulatorychanges, the impact of wagering products and technologies introduced bycompetitors; increases in the percentage of revenues allocated for purse fundpayments; increase in compensation and employee benefit costs; the economichealth of the gaming sector; higher than expected expense related to newmarketing initiatives; and other factors discussed under Item 1A in our AnnualReport on Form 10-K for the year ended December 31, 2009 and in theCompany’s other filings with the Securities and Exchange Commission.

 

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**ITEM 3:     QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Canterbury Park is notrequired to provide the information requested by this Item as it qualifies as asmaller reporting company.

 

**ITEM 4:     CONTROLSAND PROCEDURES**

 

(a)           Evaluation ofDisclosure Controls and Procedures:

 

The Company’s Chief Executive Officer, Randall D. Sampson, and ChiefFinancial Officer, David C. Hansen, have reviewed the Company’s disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-15(b) as ofthe end of the period covered by this report. Based upon this review, these officers have concluded that the Company’sdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed in the reports that the Company files under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the rules and forms of the SEC and that thedisclosure controls are also effective to ensure that information required tobe disclosed in the Company’s Exchange Act reports is accumulated andcommunicated to management, including the chief executive officer and chieffinancial officer, to allow timely decisions regarding required disclosure.

 

(b)           Changes in Internal ControlOver Financial Reporting:

 

There has been no change in our internal control over financialreporting (as defined in Rules 13a-15(f) under the SecuritiesExchange Act of 1934) that occurred during our fiscal quarter ended June 30,2010 that have materially affected, or is reasonably likely to materially affect,our internal control over financial reporting.

 

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**PART II**

**OTHER INFORMATION**

 

Item 1.                    **LegalProceedings**

 

NotApplicable.

 

Item 1A.                 **Risk Factors**

 

Therehave been no material changes to the Risk Factors reported under Item 1A in theForm 10-K for the year ended December 31, 2009, and the statement ofrisk factors presented therein are incorporated by reference herein.

 

Item2.                                                         **Unregistered Sales of Equity****Securitiesand Use of Proceeds**

 

(a)         Not Applicable.

(b)         Not Applicable.

(c)          On January 16,2008, the Company announced that its Board of Directors had authorized aprogram to repurchase up to an additional 250,000 shares of the Company’scommon stock.  During the first sixmonths of 2010, the Company did not repurchase any shares of common stock.  As of June 30, 2010, there are 33,457shares at maximum that the Company may buy back as a result of this repurchase program.

 

Item 3.                    **DefaultsUpon Senior Securities**

 

Not Applicable.

 

Item 4.                    **Removedand Reserved**

 

Item 5.                    **OtherInformation**

 

Not Applicable.

 

Item 6.                    **Exhibits**

 

(a)                                 The followingexhibits are included herein:

 

11                                  Statement recomputation of per share earnings — See Net Income Per Share under Note 1 ofNotes to Consolidated Financial Statements under Part 1, Item 1,which is incorporated herein by reference.

 

31.1                        Certificationof Chief Executive Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002 (rules 13a-14 and 15d-14 of the Exchange Act).

 

31.2                        Certificationof Chief Financial Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002 (rules 13a-14 and 15d-14 of the Exchange Act).

 

32                                  Certficationspursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.1350).

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                        | **Canterbury Park Holding Corporation**     |
|-----------------------------|---------------------------------------------|
|                        | ** **                                  |
| Dated: August 16, 2010 | /s/ Randall D. Sampson                      |
|                        | Randall D. Sampson,                         |
|                        | President, and Chief Executive Officer      |
|                        |                                        |
| Dated: August 16, 2010 | /s/ David C. Hansen                         |
|                        | David C. Hansen,                            |
|                        | Vice President, and Chief Financial Officer |

 

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