**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark One)** |       |                                                                                                                                                                                                                                |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **x******      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY  PERIOD ENDED SEPTEMBER 30, 2007.**                                                                               |
|           |       |                                                                                                                                                                                                                                |
| **OR**         |
|           |       |                                                                                                                                                                                                                                |
| **o**          | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION  PERIOD FROM          TO         .** |
|                |            |                                                                                                                                                                                                                                     |  |

 

**CommissionFile Number:  001-31569**

 

 

**CANTERBURYPARK HOLDING CORPORATION**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Minnesota**                                          | ** ** | **41-1775532**       |
|--------------------------------------------------------|------------|----------------------|
| (State or Other  Jurisdiction                          |       | (I.R.S. Employer     |
| of Incorporation  or Organization)                     |       | Identification  No.) |
|                                                   |       |                 |
| **1100  Canterbury Road**                              |
| **Shakopee,  MN 55379**                                |
| (Address of  principal executive offices and zip code) |

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.
|   |   | YES |   | o |   | NO |   | x |
|--------|--------|-----|--------|---|--------|----|--------|---|

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.
|   |   | YES |   | o |   | NO |   | x |
|--------|--------|-----|--------|---|--------|----|--------|---|

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.
|   |   | YES |   | x |   | NO |   | o |
|--------|--------|-----|--------|---|--------|----|--------|---|

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule12b-2). 
|   |   | Large accelerated filer |   | o |   | Accelerated filer |   | o |   | Non-accelerated filer |   | x |
|--------|--------|-------------------------|--------|---|--------|-------------------|--------|---|--------|-----------------------|--------|---|

 

Indicateby check mark whether the registrant is a shell company (as defined in ExchangeAct Rule 12b-2). 
|   |   | YES |   | o |   | NO |   | x |
|--------|--------|-----|--------|---|--------|----|--------|---|

 

TheCompany had 4,099,476 shares of common stock, $.01 par value, outstanding as ofNovember 2, 2007.

 

 

----

 

Canterbury ParkHolding Corporation

 

#### **INDEX**

#### ** **

| **PART I.**  | **FINANCIAL  INFORMATION** | ** **                                                                                  |
|--------------|----------------------------|---------------------------------------------------------------------------------------------|
| ** **   | ** **                 | ** **                                                                                  |
|         | Item 1.                    | Financial Statements                                                                        |   |
|         |                       |                                                                                        |   |
|         |                       | Consolidated  Balance Sheets as of September 30, 2007 and December 31, 2006                 |   |
|         |                       |                                                                                        |   |
|         |                       | Consolidated  Statements of Operations for the periods ended September 30, 2007 and 2006    |   |
|         |                       |                                                                                        |   |
|         |                       | Consolidated  Statements of Cash Flows for the periods ended September 30, 2007 and 2006    |   |
|         |                       |                                                                                        |   |
|         |                       | Notes  to Consolidated Financial Statements                                                 |   |
|         |                       |                                                                                        |   |
|         | Item 2.                    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|         |                       |                                                                                        |   |
|         | Item 3.                    | Quantitative  and Qualitative Disclosures about Market Risk                                 |   |
|         |                       |                                                                                        |   |
|         | Item 4.                    | Controls and  Procedures                                                                    |   |
|         |                       |                                                                                        |   |
| **PART II.** | **OTHER INFORMATION**      |                                                                                        |
|         |                       |                                                                                        |   |
|         | Item 1.                    | Legal Proceedings                                                                           |   |
|         |                       |                                                                                        |   |
|         | Item  1A.                  | Risk Factors                                                                                |   |
|         |                       |                                                                                        |   |
|         | Item 2.                    | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   |
|         |                       |                                                                                        |   |
|         | Item 3.                    | Defaults Upon  Senior Securities                                                            |   |
|         |                       |                                                                                        |   |
|         | Item 4.                    | Submission of  Matters to a Vote of Security Holders                                        |   |
|         |                       |                                                                                        |   |
|         | Item 5.                    | Other Information                                                                           |   |
|         |                       |                                                                                        |   |
|         | Item  6.                   | Exhibits                                                                                    |   |
|         |                       |                                                                                        |   |
|         | Signatures                 |                                                                                        |
|         |                       |                                                                                        |   |
|         | Exhibits                   |                                                                                        |   |
|              |                            |                                                                                             |  |  |

 

2

----

 

**PART 1 - FINANCIAL INFORMATION**

** **

**CANTERBURYPARK HOLDING CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**SEPTEMBER 30, 2007 AND DECEMBER 31,2006 (Unaudited)**

 
| ** **                                                                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                         | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                         |       |                   |       |                  |       |
| CURRENT ASSETS                                                                                                                     |       |                   |       |                  |       |
| Cash                                                                                                                               |       | $                      | 5,626,025  |                  | $          | 5,745,556 |   |
| Restricted cash                                                                                                                    |       | 1,889,335              |       | 1,915,057             |       |
| Short-term  investments                                                                                                            |       | 107,283                |       | 78,231                |       |
| Accounts  receivable, net of allowance of $43,400 and $38,600                                                                      |       | 838,821                |       | 559,146               |       |
| Inventory                                                                                                                          |       | 159,640                |       | 159,918               |       |
| Prepaid expenses                                                                                                                   |       | 734,329                |       | 733,979               |       |
| Income taxes  recievable                                                                                                           |       | 116,203                |       |                  |       |
| Deferred income  taxes                                                                                                             |       | 328,100                |       | 235,200               |       |
| Due from MHBPA                                                                                                                     |       | 574,467                |       |                  |       |
| Total current assets                                                                                                               |       | 10,374,203             |       | 9,427,087             |       |
|                                                                                                                               |       |                   |       |                  |       |
| LONG-TERM ASSETS                                                                                                                   |       |                   |       |                  |       |
| Deposits                                                                                                                           |       | 20,000                 |       | 20,000                |       |
| Land, buildings  and equipment, net of accumulated depreciation of $14,094,832 and  $13,082,181, respectively                      |       | 25,171,120             |       | 24,903,946            |       |
|                                                                                                                               |       | $                      | 35,565,323 |                  | $          | 34,351,033 |   |
|                                                                                                                               |       |                   |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                     |       |                   |       |                  |       |
|                                                                                                                               |       |                   |       |                  |       |
| CURRENT  LIABILITIES                                                                                                               |       |                   |       |                  |       |
| Accounts payable                                                                                                                   |       | $                      | 2,647,762  |                  | $          | 2,032,953 |   |
| Card club  accruals                                                                                                                |       | 2,083,189              |       | 2,073,363             |       |
| Accrued wages  and payroll taxes                                                                                                   |       | 1,539,317              |       | 1,866,633             |       |
| Accrued interest  payable                                                                                                          |       | 7,360                  |       | 7,303                 |       |
| Due to MHBPA                                                                                                                       |       |                   |       | 140,281               |       |
| Accrued property  taxes                                                                                                            |       | 611,281                |       | 457,331               |       |
| Income taxes  payable                                                                                                              |       |                   |       | 105,918               |       |
| Payable to  horsepersons                                                                                                           |       | 69,240                 |       | 346,779               |       |
| Total current  liabilities                                                                                                         |       | 6,958,149              |       | 7,030,561             |       |
|                                                                                                                               |       |                   |       |                  |       |
| DEFERRED INCOME  TAXES                                                                                                             |       | 324,300                |       | 460,900               |       |
|                                                                                                                               |       |                   |       |                  |       |
| COMMITMENTS AND  CONTINGENCIES (Note 5)                                                                                            |       |                   |       |                  |       |
|                                                                                                                               |       |                   |       |                  |       |
| STOCKHOLDERS’  EQUITY                                                                                                         |       |                   |       |                  |       |
| Common stock,  $.01 par value, 10,000,000 shares authorized, 4,115,951 and 4,050,782,  respectively, shares issued and outstanding |       | 41,161                 |       | 40,508                |       |
| Additional  paid-in capital                                                                                                        |       | 15,416,738             |       | 14,914,328            |       |
| Accumulated  earnings                                                                                                              |       | 12,824,975             |       | 11,904,736            |       |
| Total  stockholders’ equity                                                                                                   |       | 28,282,874             |       | 26,859,572            |       |
|                                                                                                                               |       | $                      | 35,565,323 |                  | $          | 34,351,033 |   |

 

 

Seenotes to consolidated financial statements.

 

3

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**CANTERBURYPARK HOLDING CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**PERIODS ENDED SEPTEMBER 30, 2007 AND2006 (Unaudited)**

 
| ** **                                    | ** ** | **Three Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| OPERATING  REVENUES:                          |       |                                                 |       |                                                |       |   |   |   |   |
| Pari-mutuel                                   |       | $                                                    | 5,122,305  |                                                | $          | 5,582,723 |   | $ | 12,559,858 |   | $ | 13,439,036 |   |
| Card Club                                     |       | 6,981,774                                            |       | 7,267,860                                           |       | 21,553,965 |   | 22,242,520 |   |
| Concessions                                   |       | 2,380,086                                            |       | 2,323,305                                           |       | 5,207,151 |   | 5,046,333 |   |
| Admissions and  parking                       |       | 349,919                                              |       | 319,031                                             |       | 704,250 |   | 641,669 |   |
| Publications                                  |       | 140,296                                              |       | 142,935                                             |       | 378,965 |   | 386,718 |   |
| Other                                         |       | 627,106                                              |       | 773,874                                             |       | 1,425,214 |   | 1,720,864 |   |
| Total Revenues                                |       | 15,601,486                                           |       | 16,409,728                                          |       | 41,829,403 |   | 43,477,140 |   |
| Less:  Promotional Allowances            |       | (78,855                                              | )          | (96,035                                             | )          | (212,160 | ) | (221,285 | ) |
| Net Revenues                                  |       | 15,522,631                                           |       | 16,313,693                                          |       | 41,617,243 |   | 43,255,855 |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| OPERATING  EXPENSES:                          |       |                                                 |       |                                                |       |   |   |   |   |
| Purse expense                                 |       | 2,918,841                                            |       | 3,194,133                                           |       | 6,831,031 |   | 7,097,685 |   |
| Minnesota  Breeders’ Fund                |       | 343,597                                              |       | 367,062                                             |       | 940,197 |   | 994,173 |   |
| Host track fees                               |       | 474,974                                              |       | 496,638                                             |       | 1,541,475 |   | 1,627,584 |   |
| Pari-mutuel  taxes                            |       | 44,412                                               |       | 57,285                                              |       | 106,320 |   | 163,796 |   |
| Salaries and  benefits                        |       | 5,911,853                                            |       | 6,169,663                                           |       | 16,776,767 |   | 17,174,495 |   |
| Cost of  concessions and publication sales    |       | 1,221,852                                            |       | 1,229,624                                           |       | 2,824,175 |   | 2,803,067 |   |
| Depreciation                                  |       | 509,400                                              |       | 477,825                                             |       | 1,471,690 |   | 1,347,475 |   |
| Utilities                                     |       | 504,754                                              |       | 468,481                                             |       | 1,207,227 |   | 1,102,814 |   |
| Repairs,  maintenance and supplies            |       | 296,000                                              |       | 357,210                                             |       | 846,462 |   | 1,088,239 |   |
| License fees and  property taxes              |       | 219,353                                              |       | 206,395                                             |       | 631,174 |   | 590,800 |   |
| Advertising and  marketing                    |       | 674,665                                              |       | 781,823                                             |       | 1,336,434 |   | 1,696,333 |   |
| Insurance                                     |       | 281,805                                              |       | 332,335                                             |       | 831,708 |   | 876,994 |   |
| Other                                         |       | 1,232,210                                            |       | 1,354,368                                           |       | 3,130,250 |   | 3,347,866 |   |
|                                          |       | 14,633,716                                           |       | 15,492,842                                          |       | 38,474,910 |   | 39,911,321 |   |
| NONOPERATING  (EXPENSES) REVENUES:            |       |                                                 |       |                                                |       |   |   |   |   |
| Interest expense                              |       | (892                                                 | )          | (1,850                                              | )          | (10,805 | ) | (9,618 | ) |
| Other, net                                    |       | 98,769                                               |       | 91,723                                              |       | 262,434 |   | 218,822 |   |
|                                          |       | 97,877                                               |       | 89,873                                              |       | 251,629 |   | 209,204 |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| INCOME BEFORE  INCOME TAX EXPENSE             |       | 986,792                                              |       | 910,724                                             |       | 3,393,962 |   | 3,553,738 |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| INCOME TAX  EXPENSE (Note 1)                  |       | (396,800                                             | )          | (386,291                                            | )          | (1,408,600 | ) | (1,521,300 | ) |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| NET INCOME                                    |       | $                                                    | 589,992    |                                                | $          | 524,433 |   | $ | 1,985,362 |   | $ | 2,032,438 |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| BASIC NET INCOME  PER COMMON SHARE (Note 1)   |       | $                                                    | .14        |                                                | $          | .13 |   | $ | .49 |   | $ | .51 |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| DILUTED NET  INCOME PER COMMON SHARE (Note 1) |       | $                                                    | .14        |                                                | $          | .12 |   | $ | .47 |   | $ | .48 |   |

 

Seenotes to consolidated financial statements.

 

4

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** **

**CANTERBURYPARK HOLDING CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**PERIODSENDED SEPTEMBER 30, 2007 AND 2006 (Unaudited)**

 
| ** **                                                               | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                               | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| **Operating  Activities:**                                               |       |                                                    |       |   |   |
| Net Income                                                               |       | $                                                       | 1,985,362  |   | $ | 2,032,438 |   |
| Adjustments to  reconcile net income to net cash provided by operations: |       |                                                    |       |   |   |
| Depreciation                                                             |       | 1,471,690                                               |       | 1,347,475 |   |
| Stock-based  compensation expense                                        |       | 185,434                                                 |       | 192,950 |   |
| Excess tax  benefit from exercise of stock options                       |       | (64,423                                                 | )          | (73,252 | ) |
| Loss (gain) on  sale of property and equipment                           |       | 6,323                                                   |       | (52,855 | ) |
| Decrease in  deferred income taxes                                       |       | (139,279                                                | )          | (64,800 | ) |
| Decrease  (increase) in restricted cash                                  |       | 25,722                                                  |       | (191,311 | ) |
| Increase in  accounts receivable                                         |       | (279,675                                                | )          | (314,869 | ) |
| Increase in  other current assets                                        |       | (72                                                     | )          | (228,645 | ) |
| Decrease in  income taxes payable                                        |       | (222,121                                                | )          | (294,590 | ) |
| Increase in  accounts payable, accrued wages and payroll taxes           |       | 331,910                                                 |       | 705,468 |   |
| Increase in card  club accruals                                          |       | 9,826                                                   |       | 117,484 |   |
| Increase  (decrease) in accrued interest                                 |       | 57                                                      |       | (350 | ) |
| Increase in  accrued property taxes                                      |       | 153,950                                                 |       | 135,353 |   |
| Decrease in  payable to horsepersons                                     |       | (277,539                                                | )          | (185,179 | ) |
| Decrease in due  to MHBPA                                                |       | (714,748                                                | )          | (702,638 | ) |
| Net cash  provided by operations                                         |       | 2,472,417                                               |       | 2,422,679 |   |
|                                                                     |       |                                                    |       |   |   |
| **Investing  Activities:**                                               |       |                                                    |       |   |   |
| Additions to  buildings and equipment                                    |       | (1,794,576                                              | )          | (2,668,773 | ) |
| Proceeds from  sale of equipment                                         |       | 4,975                                                   |       | 52,855 |   |
| Increase in  short-term investments                                      |       | (29,052                                                 | )          | (77,292 | ) |
| Net cash used in  investing activities                                   |       | (1,818,653                                              | )          | (2,693,210 | ) |
|                                                                     |       |                                                    |       |   |   |
| **Financing  Activities**                                                |       |                                                    |       |   |   |
| Proceeds from  issuance of common stock                                  |       | 244,931                                                 |       | 359,700 |   |
| Common stock  repurchase                                                 |       | (54,954                                                 | )          |   |   |
| Cash dividend  paid to shareholders                                      |       | (1,027,695                                              | )          | (1,010,796 | ) |
| Excess tax  benefit from exercise of stock options                       |       | 64,423                                                  |       | 73,252 |   |
| Net cash used in  financing activities                                   |       | (773,295                                                | )          | (577,844 | ) |
|                                                                     |       |                                                    |       |   |   |
| Net decrease in  cash                                                    |       | (119,531                                                | )          | (848,375 | ) |
|                                                                     |       |                                                    |       |   |   |
| Cash at  beginning of period                                             |       | 5,745,556                                               |       | 4,914,366 |   |
|                                                                     |       |                                                    |       |   |   |
| Cash at end of  period                                                   |       | $                                                       | 5,626,025  |   | $ | 4,065,991 |   |
|                                                                     |       |                                                    |       |   |   |
| Supplemental  disclosures:                                               |       |                                                    |       |   |   |
| Additions to  buildings and equipment funded through accounts payable    |       | $                                                       | 42,931     |   | $ | 197,950 |   |
|                                                                     |       |                                                    |       |   |   |
| Income taxes  paid, net of refunds                                       |       | $                                                       | 1,770,000  |   | $ | 1,825,000 |   |

 

Seenotes to consolidated financial statements.

 

5

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###### **CANTERBURY PARK HOLDINGCORPORATION AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**PERIODS ENDED SEPTEMBER 30, 2007AND 2006 (Unaudited)**

 

1.               SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

 

The summary ofsignificant accounting policies is included in the notes to consolidatedfinancial statements in the 2006 Annual Report on form 10-K.

 

*UnauditedFinancial Statements* - The consolidated balance sheet as ofSeptember 30, 2007 the consolidated statements of operations for the three andnine months ended September 30, 2007 and 2006, the consolidated statements ofcash flows for the nine months ended September 30, 2007 and 2006, and therelated information contained in these notes have been prepared by managementwithout audit. In the opinion of management, all adjustments (consisting onlyof normal recurring adjustments) which are necessary for a fair presentation offinancial position and results of operations for such periods have been made. Resultsfor an interim period should not be considered as indicative of results for afull year.

 

*RevenueRecognition -*Ourrevenues are derived primarily from the operations of a Card Club, pari-mutuelwagering on simulcast and live horse races, concession sales and relatedactivities. Collection revenue from Card Club operations and pari-mutuelcommission and fee revenues are recognized at the time that the wageringprocess is complete. Revenues related to concession and publication sales, andparking and admission fees are recognized as revenue when the service has beenperformed or the product has been delivered.

 

*Estimates*- The preparation of the consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from these estimates.

 

*Reclassifications*– Certain prior year numbers have been reclassified to be consistent withcurrent period presentation. These reclassifications had no effect on netearnings or stockholders’ equity.

 

The Company hasreclassified promotional allowances from advertising and marketing expense tonet revenues as of December 31, 2006. Prior periods were reclassified to beconsistent with current period presentation.

 

*RestrictedCash* – Restricted cash represents refundable deposits andamounts due to horsemen for purses, stakes and awards, and amounts accumulatedin the Player Pool and jackpot pools to be used to repay card club players inthe form of promotions, giveaways, prizes, or by other means.

 

*IncomeTaxes*- Income tax expense is computed by applying theestimated annual effective tax rate to the year-to-date income. Income taxesare accounted for under the asset and liability method. Deferred tax assets andliabilities 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 taxassets and liabilities are measured using enacted tax rates in effect for theyear in which those temporary differences are expected to reverse.

 

The Company adopted theprovisions of FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes – an interpretation of FASB No. 109,*(“FIN48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith FASB Statement 109, *Accounting forIncome Taxes,*and prescribes a recognition threshold and measurementprocess for financial statement recognition and measurement of a tax positiontaken or expected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. Based on our evaluation, we have concludedthat there are no significant unrecognized tax benefits.

 

6

----

 

The Company and itsconsolidated subsidiaries file income tax returns in the United States (“U.S.”)federal jurisdiction. The Company is no longer subject to U.S. federalexaminations by tax authorities for years prior to 2004 or by State ofMinnesota tax authorities for years prior to 2003. We do not believe there willbe any material changes in our unrecognized tax positions over the next twelvemonths.

 

*NetIncome Per Share*-Basic net income per common share is based on the weighted average number ofcommon shares outstanding during each period. The weighted average number ofcommon shares outstanding for the three and nine-month periods ended September30, 2007 were 4,071,570 and 4,064,435, respectively. The weighted averagenumber of common shares outstanding for the three and nine-month periods endedSeptember 30, 2006 were 4,014,617 and 3,991,308, respectively. Diluted netincome per common share takes into effect the dilutive effect of potentialcommon shares outstanding. The Company’s potential common shares outstandingare stock options and shares of unvested (“restricted”) stock. Afterconsidering the dilutive effect of stock options outstanding, the weightedaverage shares used to calculate diluted earnings per share for the three andnine-month periods ended September 30, 2007 were 4,205,514 and 4,236,214,respectively. The weighted average shares used to calculate diluted earningsper share for the three and nine-month periods ended September 30, 2006 were4,199,268 and 4,263,383, respectively.

 

*Fairvalues of Financial Instruments*– Due to the current classification of all financial instruments of theCompany, given the short-term nature of the related account balances, carryingamounts reported in the consolidated balance sheets approximate fair value.

 

*EmployeeTermination Benefits*– Management of the Company iscontinually re-evaluating the Company’s operating costs against its long-termstrategic goals.

 

During the first quarterof 2007, the Company created a voluntary retirement incentive program, whichprovided eligible employees the opportunity to voluntarily resign theiremployment in exchange for severance pay and other specified benefits. Eligibleemployees could elect to participate in this voluntary program during theperiod from January 11, 2007 through February 25, 2007. In accordance with SFAS88, *Employers Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and for Termination Benefits,*theCompany has recognized a liability and a charge to income of approximately$182,000 associated with this special termination benefit. In addition, theCompany incurred $64,000 in severance costs related to the involuntarytermination of salaried and hourly personnel during the first quarter of 2007. Nochanges to the liability and no additional expense was incurred during thethird quarter of 2007.

 

*NewAccounting Pronouncements –*In February 2007, the FASB issuedSFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – Including an amendment of FASBStatement No. 115*. SFAS No. 159 permits entities to choose tomeasure eligible items at fair value at specified election dates and reportunrealized gains and losses on items for which the fair value option has beenelected in earnings at each subsequent reporting date. SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007. The Company isevaluating the impact the adoption of SFAS No. 159 will have on itsconsolidated results of operations and financial condition.

 

In September 2006, theFASB issued SFAS No. 157, *Fair ValueMeasurements,* which defines fair value, establishes a framework formeasuring fair value, and expands disclosures about fair value measurements.The provisions of SFAS No. 157 are effective for fiscal years beginning afterNovember 15, 2007. The Company is evaluating the impact the adoption of SFASNo. 157 will have on its consolidated results of operations and financialcondition.

 

In March 2007, the FASBratified the Emerging Issues Task Force (“EITF”) Issue No. 06-11, *Accounting for Income Tax Benefits of Dividends onShare Based Payment Awards (“EITF 06-11”).*EITF 06-11 requirescompanies to recognize the income tax benefit realized from dividends or dividendequivalents that are charged to retained earnings and paid to employees fornonvested equity-classified employee share-based awards as an increase toadditional paid-in capital. EITF 06-11 is effective for fiscal years beginningafter

 

7

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September 15, 2007. TheCompany is evaluating the impact the adoption of EITF 06-11 will have on itsconsolidated results of operations and financial condition.

 

2.               STOCK BASEDCOMPENSATION

 

Effective January 1, 2006,we adopted FASB Statement No.123(R), *ShareBased Payment* (“SFAS 123R”), applying the modified prospectivetransition method. Prior to adopting SFAS 123R, we accounted for stock-basedcompensation in accordance with Accounting Principles Board Opinion No.25, *Accounting for Stock Issued to Employees*. Werecognized $185,434 and $192,950 in stock-based compensation expense insalaries and benefits expense line item on the consolidated statements ofoperations during the nine-months ended September 30, 2007 and 2006,respectively.

 

Our annual grant ofstock-based compensation generally takes place during the first quarter of eachfiscal year. Each non-employee member of the Board of Directors receives anannual recurring grant of 3,000 non-qualified stock options on the firstbusiness day in February. On February 1, 2007 15,000 options were granted tothe five non-employee board members with an exercise price equal to the marketprice on the date of grant of $13.76. The stock options vest over a six-monthperiod and expire in ten years. The compensation cost associated with thisgrant of Board of Director options is $58,400 to be recognized as expense overthe six-month vesting period. On February 1, 2006, 15,000 options weregranted to the five non-employee board members with an exercise price equal tothe market price on the date of grant of $14.30. In addition, on February 9,2006 we granted 15,000 incentive stock options to two executive officers of theCompany and 41,000 shares of restricted stock to key management-levelemployees. The exercise price of these incentive stock options and the value ofthe restricted shares was the market value on the date of grant of $14.55.Grants of stock options and restricted stock to employees did not occur in2007.

 

The number of sharesgranted and the weighted average fair value per share during the periodspresented were:

 
| ** **       | ** ** | **Nine Months Ended** | ** ** |
|------------------|------------|---------------------------------|------------|
| ** **       | ** ** | **Sept. 30, 2007**    | ** ** | **Sept. 30, 2006** | ** ** |
| ** **       | ** ** | ** **                      | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **       | ** ** | ** **                      | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **       | ** ** | ** **                      | ** ** | **Fair Value** | ** ** | ** ** | ** ** | **Fair Value** | ** ** |
| ** **       | ** ** | **Grant**                       | ** ** | **Per Share** | ** ** | **Grant** | ** ** | **Per Share** | ** ** |
|             |       |                            |       |   |   |   |   |   |   |
| Stock options    |       | 15,000                          |       | $ | 3.89 |   | 30,000 |   | $ | 4.51 |   |
| Restricted stock |       | —                          |       |   |   | 41,000 |   | $ | 14.55 |   |
|             |       |                            |       |   |   |   |   |   |   |
| Total shares     |       | 15,000                          |       |   |   | 71,000 |   |   |   |
|                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

The fair value of stockoptions granted under the Plan during first nine months of 2007 were estimatedon the date of grant using the Black-Scholes option-pricing model with thefollowing weighted average assumptions and results:

 
| ** **                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Dividend yield                             |       | 1.82     | %          | 1.74     | %          |
| Weighted-average  volatility               |       | 22       | %          | 25       | %          |
| Risk-free  interest rate                   |       | 4.86     | %          | 4.50     | %          |
| Expected term of  stock options in years   |       | 7.2      |       | 8.6      |       |
| Fair value of  stock options on grant date |       | $        | 58,400     |     | $          | 135,300 |   |
|                                            |            |          |            |          |            |  |  |

 

A summary of stock optionactivity as of September 30, 2007 and changes during the nine months then endedis presented below:

 

8

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| ** **                         | ** ** | ** **         | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **          | ** ** |
|------------------------------------|------------|--------------------|------------|--------------|------------|-----------------|------------|---------------------|------------|
| ** **                         | ** ** | ** **         | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **          | ** ** |
| ** **                         | ** ** | ** **         | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**       | ** ** |
| ** **                         | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Grant Date** | ** ** |
| **Stock Options**             | ** ** | **Shares**         | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Fair Value** | ** ** |
|                               |       |               |       |         |       |            |       |                |       |
| Outstanding at  January 1, 2007    |       | 666,550            |       | $            | 10.12      |            |       |                |       |   |
|                               |       |               |       |         |       |            |       |                |       |
| Granted                            |       | 15,000             |       | $            | 13.67      |            |       |                |       |   |
| Exercised                          |       | (69,650            | )          | $            | 3.52       |            |       |                |       |   |
|                               |       |               |       |         |       |            |       |                |       |
| Outstanding at  September 30, 2007 |       | 611,900            |       | $            | 10.95      |            | 2.7 Years  |                | $          | 3,216,000 |   |
|                               |       |               |       |         |       |            |       |                |       |
| Exercisable at  September 30, 2007 |       | 600,650            |       | $            | 10.89      |            | 2.6 Years  |                | $          | 3,160,000 |   |

 

3.               BORROWINGS UNDERCREDIT AGREEMENT

 

Borrowings under theCompany’s credit agreement with Bremer Bank include a commercial revolvingcredit line, which provides for maximum advances of $2,250,000 with interest atthe prime rate. The Company had no borrowings under this credit line atSeptember 30, 2007. The credit agreement contains certain covenants requiringthe Company to maintain certain financial ratios. The Company was in compliancewith these requirements as of September 30, 2007. Management believes thatfunds available under this line of credit, along with funds generated from cardclub and simulcast operations, will be sufficient to satisfy its liquidity andcapital resource requirements during 2007.

 

4.               OPERATINGSEGMENTS

 

During the first ninemonths of 2007 and 2006, the Company had three reportable operatingsegments:  horse racing, card club andconcessions. The horseracing segment primarily represents simulcast and livehorse racing operations, the card club segment primarily represents operationsof the Card Club and the concessions segment primarily represents concessionsprovided during simulcast and live racing, in the Card Club, and during specialevents. The Company’s reportable operating segments are strategic businessunits that offer different products and services. They are managed separatelybecause the segments differ in the nature of the products and services providedas well as processes to produce those products and services. The horse racingand card club segments are regulated by the Minnesota Racing Commission.

 

The accounting policiesof the operating segments are the same as those described in the summary ofsignificant accounting policies in the 2006 Annual Report on Form 10-K.

 

9

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Depreciation, interestexpense and income taxes are allocated to the segments but no allocation ismade to concessions for shared facilities. However, the concessions segmentpays approximately 25% of gross revenues earned on live racing and specialevent days to the horse racing segment for use of the facilities.

 

The following tablesprovide information about the Company’s operating segments (in 000’s):

 
| ** **                            | ** ** | **Nine Months Ended September 30, 2007** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Horse Racing**                                             | ** ** | **Card Club** | ** ** | **Concessions** | ** ** | **Total** | ** ** |
|                                  |       |                                                              |       |   |   |   |   |   |   |
| Net revenues  from external customers |       | $                                                                 | 14,817     |   | $ | 21,554 |   | $ | 5,246 |   | $ | 41,617 |   |
|                                  |       |                                                              |       |   |   |   |   |   |   |
| Intersegment  revenues                |       | $                                                                 | 630        |   |   |   | $ | 1,548 |   | $ | 2,178 |   |
|                                  |       |                                                              |       |   |   |   |   |   |   |
| Net interest  income                  |       | $                                                                 | 252        |   |   |   |   |   | $ | 252 |   |
|                                  |       |                                                              |       |   |   |   |   |   |   |
| Depreciation                          |       | $                                                                 | 916        |   | $ | 452 |   | $ | 103 |   | $ | 1,471 |   |
|                                  |       |                                                              |       |   |   |   |   |   |   |
| Segment income  before income taxes   |       | $                                                                 | (443       | ) | $ | 3,851 |   | $ | 1,399 |   | $ | 4,807 |   |
|                                  |       |                                                              |       |   |   |   |   |   |   |
| Segment Assets                        |       | $                                                                 | 31,279     |   | $ | 3,463 |   | $ | 7,585 |   | $ | 42,327 |   |

 
| ** **                            | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Horse Racing**                                             | ** ** | **Card Club** | ** ** | **Concessions** | ** ** | **Total** | ** ** |
|                                  |       |                                                              |       |   |   |   |   |   |   |
| Net revenues  from external customers |       | $                                                                 | 16,133     |   | $ | 22,242 |   | $ | 5,102 |   | $ | 43,477 |   |
|                                  |       |                                                              |       |   |   |   |   |   |   |
| Intersegment  revenues                |       | $                                                                 | 603        |   |   |   | $ | 1,705 |   | $ | 2,308 |   |
|                                  |       |                                                              |       |   |   |   |   |   |   |
| Net interest  income                  |       | $                                                                 | 209        |   |   |   |   |   | $ | 209 |   |
|                                  |       |                                                              |       |   |   |   |   |   |   |
| Depreciation                          |       | $                                                                 | 823        |   | $ | 433 |   | $ | 91 |   | $ | 1,347 |   |
|                                  |       |                                                              |       |   |   |   |   |   |   |
| Segment income  before income taxes   |       | $                                                                 | (636       | ) | $ | 4,178 |   | $ | 1,235 |   | $ | 4,777 |   |

 
| ** **     | ** ** | **At December 31, 2006** | ** ** |
|----------------|------------|-----------------------------------------|------------|
|           |       |                                    |       |   |   |   |   |   |   |
| Segment Assets |       | $                                       | 29,867     |   | $ | 3,676 |   | $ | 6,258 |   | $ | 39,801 |   |
|                |            |                                         |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

10

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| ** **                                              | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                              | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Revenues                                                |       |                                                    |       |   |   |
| Total revenue  for reportable segments                  |       | $                                                       | 43,795     |   | $ | 45,785 |   |
| Elimination of  intersegment revenues                   |       | (2,178                                                  | )          | (2,308 | ) |
| Total  consolidated net revenues                        |       | $                                                       | 41,617     |   | $ | 43,477 |   |
|                                                    |       |                                                    |       |   |   |
| Income before  income taxes                             |       |                                                    |       |   |   |
| Total segment  income before income taxes               |       | $                                                       | 4,807      |   | $ | 4,777 |   |
| Elimination of  intersegment income before income taxes |       | (1,413                                                  | )          | (1,223 | ) |
| Total  consolidated income before income taxes          |       | $                                                       | 3,394      |   | $ | 3,554 |   |

 
| ** **                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| Assets                                   | ** ** | ** **             | ** ** | ** **            | ** ** |
| Total assets for  reportable segments    |       | $                      | 42,327     |                  | $          | 39,801 |   |
| Elimination of  intercompany receivables |       | (6,762                 | )          | (5,450                | )          |
| Total  consolidated assets               |       | $                      | 35,565     |                  | $          | 34,351 |   |

 

5.               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-track betting becomes legally permissible in the State of Minnesota and(ii) the Company begins to conduct off-track betting with respect to or inconnection with its operations, the Company will be required to pay to the IMRFund, L.P. the greater of $700,000 per operating year, as defined, or 20% ofthe net pretax profit, as defined for each of five operating years. At thistime, management believes that the likelihood that these two conditions will bemet, and that the Company will be required to pay these amounts is remote. Atthe date (if any) that these two conditions are met, the five minimum paymentswill be discounted back to their present value and the sum of those discountedpayments will be capitalized as part of the purchase price in accordance withgenerally accepted accounting principles. The purchase price will be furtherincreased if payments become due under the “20% of Net Pretax Profit”calculation. The first payment is to be made 90 days after the end of the thirdoperating year in which off-track betting is conducted by the Company. Remainingpayments would be made within 90 days of the end of each of the next fouroperating years.

 

The Company isperiodically involved in various legal actions arising in the normal course ofbusiness. At September 30, 2007, management believes that the resolution of anylegal actions outstanding will not have a material impact on the consolidatedfinancial statements.

 

11

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

** **

The following Management’sDiscussion and Analysis of Financial Condition and Results of Operations (“MD&A”)is intended to help the reader understand Canterbury Park Holding Corporation,our operations and our present business environment. This MD&A is providedas a supplement to – and should be read in conjunction with – our consolidatedfinancial statements and the accompanying notes to the financial statements(the “Notes”).

 

**Overview:**

 

Canterbury Park HoldingCorporation (the “Company”) owns and operates the Canterbury Park Racetrack andCard Club in Shakopee, Minnesota. 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 onlypari-mutuel horse racing facility in the State of Minnesota. The Racetrackearns revenues from pari-mutuel take-out on races simulcast year-round toCanterbury Park from racetracks throughout the country and from live race meetsfeaturing thoroughbred and quarter horse racing. Live race meets commence in themonth of May and conclude in September. During live race meets, the Companytelevises its races to out-of-state racetracks around the country, and earnsadditional pari-mutuel revenue on wagers placed at the out-of-state racetracks.

 

 Canterbury Park’s Card Club (the “Card Club”)hosts “unbanked” card games in which players compete against each other and notagainst the house. The Card Club is open twenty-four hours a day, seven days aweek. Under Minnesota law, the Company is required to pay up to 14% of grossCard Club revenues to the Racetrack’s purse fund and the State of MinnesotaBreeders’ Fund. However, the Company has agreed with the Minnesota Horsemen’sBenevolent and Protective Association (“MHBPA”) to pay 15% of Card Clubrevenues into the purse fund for 2007 and 2006.

 

The Company alsogenerates revenues from other activities such as admission and parking fees;the sale of food and beverage, programs, and other racing publications; andcorporate sponsorships. Additional revenues are derived from an RV park and theuse of the Racetrack facilities for special events such as craft shows andsnowmobile racing.

 

**Operations Review for the Threeand Nine Months Ended September 30, 2007 and September 30, 2006:**

 

Total net revenuesdecreased approximately $1,639,000, or 3.8%, during the nine months endedSeptember 30, 2007 compared to the nine months ended September 30, 2006. Thedecrease is due primarily to reductions of 6.5% and 3.1% in pari-mutuel andCard Club revenues, respectively, along with a decrease of 17.1% in otherrevenues. These decreases are partially offset by an increase of 3.2% inconcession revenues. Net revenues decreased approximately $791,000, or 4.8%,for the three months ended September 30, 2007 compared to the three monthsended September 30, 2006.

 

Pari-mutuel revenues were$879,000 lower in the nine-month period ended September 30, 2007 compared tothe same period in 2006, and decreased approximately $460,000, or 8.2%, for thethree-month period ended September 30, 2007 compared to the same period in2006. Total on-track handle for the nine months and three months endedSeptember 30, 2007 was down $4.3 million and $1.9 million respectively,compared to the same nine-month and three-month periods in 2006, primarily dueto lower wagering on simulcast races, but also due to lower on-track liveracing handle.

 

Total handle wagered onsimulcast races for the first nine months of 2007 is down $2.8 million, or6.4%, compared to the same period last year. Inclement weather at East Coasttracks during the first quarter of 2007 resulted in the cancellation of asignificant number of simulcast races during that period. Simulcast

 

12

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handle was down $539,000,or 3.9%, in the third quarter of 2007 compared to the third quarter of 2006. TheCompany believes this decline represents growing competition from internetwagering on simulcast races and is continuously looking for ways to makeCanterbury Park the most attractive alternative when our customers want towager on horseracing.

 

On-track live handledecreased by $1.5 million or 8.9% for the 2007 racing season compared to thesame period in 2006 despite the same number of live race days. The decline wasprimarily due to two factors. The number of live races conducted in 2007 wasreduced by 28 races, or 4.1% compared to 2006 in an attempt to better managepurse funds. In addition, the nationally recognized Claiming Crown, our largestlive racing handle day in 2006 was moved to another venue in 2007. For furtherinformation, see “Summary of Pari-mutuel Data” below.

 
| ** **                                      | ** ** | **Nine Months Ended Sept. 30,** | ** **     |
|-------------------------------------------------|------------|-----------------------------------------------------|----------------|
| **Summary of Pari-mutuel Data:** | ** ** | **2007**                                            | ** **     | **2006** | ** ** |
|                                            |       |                                                |           |   |   |
| Racing Days                                     |       |                                                |           |   |   |
| Simulcast only                                  |       | 205                                                 |           | 205 |   |
| Live and  Simulcast                             |       | 68                                                  |           | 68 |   |
| **Total  Number of Racing Days**                | ** ** | **273**                                             | ** **     | **273** | ** ** |
| ** **                                      | ** ** | ** **                                          | ** **     | ** ** | ** ** |
| On-Track Handle                                 |       |                                                |           |   |   |
| Simulcast racing  handle on simulcast only days |       | $                                                   | 25,565,000     |   | $ | 27,553,000 |   |
| Live and  Simulcast days:                       |       |                                                |           |   |   |
| Live racing  handle                             |       | 15,375,000                                          |           | 16,877,000 |   |
| Simulcast racing  handle                        |       | 15,912,000                                          |           | 16,772,000 |   |
| Total On-Track  Handle                          |       | 56,852,000                                          |           | 61,202,000 |   |
|                                            |       |                                                |           |   |   |
| Out-of-State  Live Handle                       |       | 19,572,000                                          |           | 19,246,000 |   |
|                                            |       |                                                |           |   |   |
| **Total  Handle**                               | ** ** | **$**                                               | **76,424,000** | ** ** | **$** | **80,448,000** | ** ** |
|                                            |       |                                                |           |   |   |
| On-Track Average  Daily Handle                  |       |                                                |           |   |   |
| Simulcast only  racing days                     |       | $                                                   | 124,707        |   | $ | 134,405 |   |
| Live and  simulcast racing days                 |       | $                                                   | 460,103        |   | $ | 494,838 |   |

 

Total Card Club revenuedecreased $689,000 for the first nine months of 2007 and $286,000 or 3.9% forthe third quarter of 2007compared to the same periods in 2006. The primarysource of Card Club revenue is a percentage of the wagers received from theplayers as compensation for providing the Card Club facility and services,referred to as “collection revenue”. The Company also receives a specifiedpercentage of the jackpot funds collection as reimbursement for administrativecosts of maintaining the jackpot funds, and collects fees for administeringtournaments, which represents “other revenue”. The decrease in revenue is dueprimarily to lower patronage in the poker room, but the Company alsoexperienced a reduction in Casino Games revenue during the nine-month periodended September 30, 2007 compared to the same period last year. The Card Clubis experiencing growing competition from online poker websites and NativeAmerican owned casinos, which have expanded their gaming options to includemany of the same unbanked card games as those offered at the Card Club. CardClub revenues represented 51.8% and 45.0% of net revenues for the nine-monthand three-month periods ended September 30, 2007, respectively. For furtherinformation, see the “Summary of Card Club Data” below:

 

13

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| ** **                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Summary of Card Club Data:** | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
|                                               |       |                                                    |       |   |   |
| Poker Games                                        |       | $                                                       | 13,169,000 |   | $ | 13,657,000 |   |
| Casino Games                                       |       | 7,607,000                                               |       | 8,061,000 |   |
| Total Collection  Revenue                          |       | 20,776,000                                              |       | 21,718,000 |   |
|                                               |       |                                                    |       |   |   |
| Other Revenue                                      |       | 778,000                                                 |       | 525,000 |   |
| Total Card Club  Revenue                           |       | $                                                       | 21,554,000 |   | $ | 22,243,000 |   |
|                                               |       |                                                    |       |   |   |
| Number of Days  Offered                            |       | 273                                                     |       | 273 |   |
| Average Revenue  per Day                           |       | $                                                       | 78,952     |   | $ | 81,476 |   |

 

Concessions revenuesincreased $161,000, or 3.2%, and $57,000, or 2.4%, for the nine-month andthree-month periods ended September 30, 2007, respectively, compared to theprior year. The increase is primarily attributable to increased food andbeverage sales during live racing resulting from increased attendance andlarger group sales business during the third quarter of 2007 compared to thesame period in 2006.

 

Total operating expensesdecreased approximately $1,436,000, or 3.6%, during the nine-month period endedSeptember 30, 2007 compared to the nine-month period ended September 30, 2006,and $859,000, or 5.5%, during the three months ended September 30, 2007compared to the three-month period ended September 30, 2006.

 

Total purse expensedecreased approximately $267,000 or 3.8% and $275,000 or 8.6%, respectively,for the nine and three-month periods of 2007 compared to 2006. Card Club purseexpense decreased $92,000 or 3.1%, which is in line with the decline in CardClub revenues. Live racing purses decreased $191,000 or 11.3% due to thedecline in live racing handle and the absence of the Claiming Crown in 2007.Simulcast purse expense increased $16,000, or .7% in spite of the reduction insimulcast handle, due to an increase in the statutory purse rate forout-of-season simulcast racing. Minnesota Breeders Fund expense decreased$54,000 in the nine months ended September 30, 2007 compared to 2006 due tolower revenues in the Card Club and lower wagering on pari-mutuel racing in2007. Fluctuations in the related revenue categories are discussed above.

 
| ** **              | ** ** | ** **                                          | ** ** | ** **                                          | ** ** | **Minnesota** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------|------------|
| ** **              | ** ** | **Purse Expense**                              | ** ** | **Breeders’ Fund Expense**           | ** ** |
| ** **              | ** ** | **Nine Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
| ** **              | ** ** | **2007**                                            | ** ** | **2006**                                            | ** ** | **2007**      | ** ** | **2006** | ** ** |
|                    |       |                                                |       |                                                |       |          |       |   |   |
| Card Club               |       | $                                                   | 2,910,000  |                                                | $          | 3,002,000     |       | $ | 323,000 |   | $ | 333,000 |   |
|                    |       |                                                |       |                                                |       |          |       |   |   |
| Simulcast Horse  Racing |       | 2,416,000                                           |       | 2,400,000                                           |       | 463,000       |       | 492,000 |   |
|                    |       |                                                |       |                                                |       |          |       |   |   |
| Live Horse  Racing      |       | 1,505,000                                           |       | 1,696,000                                           |       | 154,000       |       | 169,000 |   |
|                    |       |                                                |       |                                                |       |          |       |   |   |
|                    |       | $                                                   | 6,831,000  |                                                | $          | 7,098,000     |       | $ | 940,000 |   | $ | 994,000 |   |

 

Salaries and benefitsdecreased approximately $398,000, or 2.3%, in the 2007 nine-month period andapproximately $258,000, or 4.2%, in the three-month period ended September 30,2007 compared to the same periods last year. The decreases are due to theCompany’s proactive efforts to reduce labor costs and reductions of directlabor costs in the pari-mutuel and Card Club operations because of lowerpatronage in 2007 compared to 2006. Depreciation expense increased $124,000, or9.2%, during the first nine-months of 2007 compared to 2006, and $32,000, or6.6%, for the third quarter compared to the third quarter last year due tocontinued investments in the stable area and grandstand during 2006 and into2007. Utilities expense

 

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increased $104,000, or9.5%, and $36,000, or 7.7%, for the nine-month and three-month periods endedSeptember 30, 2007, respectively, due to continuous increases in energy costsfor electricity and natural gas in 2007 compared to the same period in 2006. Repairs,maintenance and supplies expense decreased $242,000, or 22.2%, and $61,000, or17.1%, in the nine-month and three-month periods ended September 30, 2007compared to the same periods in 2006, reflecting the results of expensereduction initiatives including improved supply chain management. Advertisingand marketing expenses have decreased by $360,000 or 21.2% during the firstnine months of 2007 compared to 2006 and $107,000, or 13.7%, for the threemonths ended September 30, 2007 compared to the same period in 2006 dueprimarily to a reduction in advertising agency fees and advertising productionexpenses.

 

Total operating expensesas a percentage of total net revenues remained relatively unchanged at 92.4%for the nine-month period ended September 30, 2007 compared to 92.3% for thesame period in 2006.

 

Income before incometaxes was $3,393,962 for the nine months ended September 30, 2007 compared to$3,553,738 for the nine months ended September 30, 2006. After income taxexpense of $1,408,600 for the nine months ended September 30, 2007, net incomewas $1,985,362 in 2007 compared to $2,032,438 in 2006, a decrease of $47,076 or2.3%. Income before income taxes for the quarter ended September 30, 2007 was$986,792 compared to $910,724 for the quarter ended September 30, 2006. Afterincome tax expense of $396,800 in the third quarter of 2007, net income was$589,992 compared to $524,433 for the third quarter of 2006, an increase of$65,559 or 12.5%. The effective income tax rate year-to-date in 2007 is 41.5%compared to 42.8% for the year-to-date period in 2006.

 

#### **Contingencies:**

#### ** **

There have been nomaterial changes in our contingencies since those reported at December 31,2006.

 

**Liquidity and Capital Resources:**

 

Cash provided byoperating activities during the period January 1, 2007 through September 30,2007 was $2,472,417, resulting primarily from net income of $1,985,362,depreciation of $1,471,690, and an increase in accounts payable and accruedwages and payroll taxes of $331,910, primarily caused by a $264,000 increase intrade accounts payable and a $142,000 increase in amounts payable toout-of-state tracks for settlements, these items are partially offset by andecrease in due to MHBPA of $714,748 resulting primarily from purseoverpayments. Cash provided by operating activities during the period January1, 2006 through September 30, 2006 was $2,422,679, resulting primarily from netincome of $2,032,438; depreciation of $1,347,475; and an increase in accountspayable and accrued wages and payroll taxes of $705,468, consisting of a$241,000 increase in trade accounts payable, a $156,000 increase in deferredrevenues for corporate sponsorships, a $313,000 increase in amounts payable toout-of-state tracks for settlements.

 

Pursuant to an agreementwith the MHBPA, during the nine months ended September 30, 2007 and 2006, theCompany transferred into a trust account or paid directly to the MHBPAapproximately $6,850,000 and $7,025,000, respectively. At September 30, 2007,the MHBPA owed the Company $574,467 resulting from purse overpayments by thehorsemen during the live race meet that ended September 3, 2007. Thisreceivable will be collected in the fourth quarter of 2007.

 

Net cash used ininvesting activities for the first nine months of 2007 of $1,818,653 resultedprimarily from the acquisition of equipment for food and beverage operations of$227,000, a poker room management system of $295,000, upgrades to thegrandstand building of $402,000, and upgrades to our surveillance systems of$430,000. During the nine-month period ended September 30, 2006, net cash usedfor investing activities was $2,693,210 related primarily to improvements tothe backside barns and facilities related to live racing.

 

During the period January1, 2007 through September 30, 2007, cash used in financing activities was$773,295 resulting from a $.25 per share cash dividend paid to shareholders of$1,027,695. In addition,

 

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pursuant to a Stock RepurchasePlan approved in November 2006, the Company repurchased 4,381 shares of commonstock for a total price of $54,954. These outflows were partially offset by thereceipt of $244,931 from the exercise of stock options. During the periodJanuary 1, 2006 through September 30, 2006, cash used in financing activitieswas $577,844 resulting from a $.25 per share cash dividend paid to shareholdersof $1,010,796, partially offset by the receipt of $359,700 from the exercise ofstock options.

 

The Company has renewed ageneral credit agreement with Bremer Bank, which provides a revolving creditline of up to $2,250,000 with interest at the prime rate until April 20, 2009. TheCompany had no borrowings under the line of credit at September 30, 2007 orDecember 31, 2006. The credit agreement contains certain covenants requiringthe Company to maintain certain financial ratios. The Company was in compliancewith these requirements at all times throughout the quarter ended September 30,2007.

 

Unrestricted cash balancesat September 30, 2007 were $5,626,025 compared to $5,745,556 at December 31,2006. The Company believes that the funds available in its cash accounts,amounts available under the general credit and security agreement, along withfunds generated from operations, will be sufficient to satisfy its liquidityand capital resource requirements for regular operations for the foreseeablefuture.

 

##### **CriticalAccounting Policies and Estimates:**

 

Thepreparation of consolidated financial statements in conformity with generallyaccepted accounting principles requires management to make estimates thateffect the amounts reported and disclosed in the consolidated financialstatements. By their nature, these estimates are subject to an inherent degreeof uncertainty. These estimates are based on our experience and various otherassumptions that are believed to be reasonable in the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities. On an ongoing basis, we evaluate our estimates.However, actual results could differ from those estimates.

 

Oursignificant accounting policies are included in Note 1 to our consolidatedfinancial statements in our 2006 Annual Report on Form 10-K. We believe thefollowing critical accounting policies affect our more significant judgmentsand estimates used in the preparation of our consolidated financial statements.

 

*Land, Buildings and Equipment* - We havesignificant capital invested in our property and equipment, which representsapproximately 70.8% of our total assets. We utilize our judgment in variousways including: 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. Our property andequipment is evaluated for impairment whenever circumstances indicate that thecarrying value of an asset may not be recoverable from the estimated futurecash flows expected to result from its use. If the sum of the expected futurecash flows (undiscounted and without interest charges) is less than thecarrying amount, we recognize an impairment loss. The impairment lossrecognized is the amount by which the carrying amount exceeds the fair value andis charged to operations in the period in which such impairment is determinedby management. We do not believe that any impairment has occurred or is likelyto occur in the near future.

 

*Regulation-*Our business can be materially impacted both positively andnegatively by legislative and regulatory changes, such as those described below.Significant negative changes resulting from these activities could result in animpairment of our property and equipment in accordance with generally acceptedaccounting standards. Additional information regarding how our business can beimpacted by legislative and regulatory changes are included in Item 1 (vi), andItem 1 (vii), respectively, in our 2006 Annual Report on Form 10-K.

 

##### **Commitmentsand Contractual Obligations:**

 

Therehave been no additional material changes in our outstanding commitments andcontingencies since those reported at December 31, 2006.

 

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**Legislation:**

 

The Company did notpropose or support any legislation during the 2007 biannual session of theMinnesota Legislature to pursue our Racino proposal that has been discussed inour previous flings with the SEC, mainly because the composition of theMinnesota Legislature following the November 2006 elections was viewed asunlikely to favorably entertain our Racino proposal. Based on the success ofseveral Racinos in other states, we continue to believe that if a Racino wasauthorized at the Racetrack, it would enhance horseracing with increasedpurses, provide growth and development opportunities for the Company, andprovide significant new tax revenues for state and local governments.

 

In May 2007 a bill passedin the Minnesota Legislature severely restrict smoking in all public places inMinnesota, including at the Racetrack, effective October 1, 2007. Minnesota’stribal casinos are not covered by this legislation and will continue to offervarious gaming alternatives, including card games, in an environment thatallows smoking. Therefore, the Company anticipates revenues and profits will beadversely affected to the extent that current and potential Racetrack customerswho smoke decide to patronize tribal casinos, where smoking is permitted.

 

**Forward-Looking Statements:**

 

Fromtime to time, in reports filed with the Securities and Exchange Commission, inpress releases, and in other communications to shareholders or the investingpublic, the Company may make forward-looking statements concerning possible oranticipated future financial performance, business activities or plans whichare typically preceded by the words “believes,” “expects,” “anticipates,” “intends”or similar expressions. For such forward-looking statements, the Company claimsthe protection of the safe harbor for forward-looking statements contained infederal securities laws. Shareholders and the investing public shouldunderstand that such forward-looking statements are subject to risks anduncertainties which could cause actual performance, activities or plans todiffer significantly from those indicated in the forward-looking statements. Suchrisks and uncertainties include, but are not limited to: fluctuations inattendance at the Racetrack, material changes in the level of wagering bypatrons, decline in interest in the unbanked card games offered at the CardClub, legislative and regulatory changes, the impact of wagering products andtechnologies introduced by competitors; increases in the percentage of revenuesallocated for purse fund payments; increase in compensation and employee benefitcosts; the general health of the gaming sector; higher than expected expenserelated to new marketing initiatives; and other factors discussed from time totime in the Company’s filings with the Securities and Exchange Commission,including risk factors described in the Company’s Report on Form 10-K for the2006 fiscal year.

 

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**ITEM 3:****                           ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Weare exposed to market risk from changes in interest rates on borrowings underour commercial revolving credit line that bears interest at the prime rate. AtSeptember 30, 2007 we have no debt borrowings under our credit facility.

 

Wehave no derivative financial instruments or derivative commodity instruments inour cash and cash equivalents and marketable securities. We invest cash andcash equivalents in investment grade, highly liquid investments, consisting ofmoney market instruments, bank certificates of deposit, and short-termgovernment and corporate bonds.

 

**ITEM 4:****                           ****CONTROLS AND PROCEDURES**

 

(a)                                  Evaluation of Disclosure Controls and Procedures:

 

Management, with theparticipation of the Company’s principal executive officer, Randall D. Sampson,and principal financial officer, David C. Hansen, has evaluated theeffectiveness of the design and operation of the disclosure controls andprocedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of1934, as of the end of the period covered by this report. Management hasconcluded that the Company’s disclosure controls and procedures are effectiveto ensure that information required to be disclosed in the reports that theCompany files under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the rules and forms of the SECand that the disclosure controls are also effective to ensure that informationrequired to be disclosed in the Company’s Exchange Act reports is accumulatedand communicated to management, including the principal executive officer andprincipal financial officer, to allow timely decisions regarding requireddisclosure.

 

(b)                                 Changes in Internal Control Over Financial Reporting:

 

There have been no changes in internal control overfinancial reporting that occurred during the fiscal quarter covered by thisreport that have materially affected, or are reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting.

 

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**PART II**

**OTHERINFORMATION**

 

Item 1.                    **Legal Proceedings**

 

Not Applicable

 

Item 1A.                 **Risk Factors**

 

There have been nomaterial changes to the Risk Factors since those reported in the         Form 10-K for the year ended December31, 2006.

 

Item 2.                    **Unregistered Sales of Equity****Securities and Use of Proceeds**

 

Not Applicable.

 

Item 3.                    **Defaults Upon Senior Securities**

 

Not Applicable.

 

Item 4.                    **Submission of Matters to a Vote of Security Holders**

 

Not Applicable.

 

Item 5.                    **Other Information**

 

Not Applicable

 

Item 6.                    **Exhibits**

 

(a)                                  Thefollowing exhibits are included herein:

 

11                                   Statementre computation of per share earnings – See Net Income Per Share under Note 1 ofNotes to Consolidated Financial Statements under Part 1, Item 1, which isincorporated herein by reference.

 

31.1                          Certificationof Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002 (rules 13a-14 and 15d-14 of the Exchange Act).

 

31.2                          Certificationof Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002 (rules 13a-14 and 15d-14 of the Exchange Act).

 

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

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                      | **Canterbury  Park Holding Corporation**     |
|---------------------------|----------------------------------------------|
|                      |                                         |
| Dated: November 14,  2007 |  /s/ Randall D.  Sampson                |   |
|                      | Randall D. Sampson,                          |
|                      | President, and Chief  Executive Officer      |
|                      |                                         |
| Dated: November 14,  2007 |  /s/ David C.  Hansen                   |   |
|                      | David C. Hansen,                             |
|                      | Vice President, and  Chief Financial Officer |

 

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