**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|
|       | **FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006.**                                           |

 

**OR**

 
| **o**  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                             |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|   | **FOR THE TRANSITION PERIOD FROM           TO         .** |

 

**Commission File Number: 001-31569**

 

 

**CANTERBURYPARK HOLDING CORPORATION**

(Exact Name of Registrantas Specified in Its Charter)

 

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

 

**1100Canterbury Road**

**Shakopee,MN 55379**

(Address ofprincipal 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          ý

 

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          ý

 

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         ý            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 | ý |
|--------------------------|---|--------------------|---|------------------------|--------|

 

Indicateby check mark whether the registrant is a shell company (as defined in ExchangeAct Rule 12b-2).

 

YES         o            NO          ý

 

The Company had 4,027,185 shares of common stock, $.01 par value,outstanding as of May 12, 2006.

 

 

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**CANTERBURY PARK HOLDINGCORPORATION**

**INDEX**

 
| **PART  1.** | **FINANCIAL  INFORMATION** | ** **                                                                                  |
|--------------|----------------------------|---------------------------------------------------------------------------------------------|
|         |                       |                                                                                        |
|         | Item 1.                    | Financial Statements                                                                        |   |
|         |                       |                                                                                        |   |
|         |                       | Consolidated Balance Sheets as of March 31, 2006 and  December 31, 2005                     |   |
|         |                       |                                                                                        |   |
|         |                       | Consolidated Statements of Operations for the periods  ended March 31, 2006 and 2005        |   |
|         |                       |                                                                                        |   |
|         |                       | Consolidated Statements of Cash Flows for the periods  ended March 31, 2006 and 2005        |   |
|         |                       |                                                                                        |   |
|         |                       | Notes to Consolidated Financial Statements                                                  |   |
|         |                       |                                                                                        |   |
|         | Item  2.                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|         |                       |                                                                                        |   |
|         | Item  3.                   | Quantitative  and Qualitative Disclosure 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

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**PARTI – FINANCIAL INFORMATION**

 

**CANTERBURY PARK HOLDINGCORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**MARCH 31, 2006 AND DECEMBER 31,2005**

 
| ** **                                                                                                                         | ** ** | **(Unaudited)  March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                         |       |                                  |       |                        |       |
|                                                                                                                               |       |                                  |       |                        |       |
| CURRENT ASSETS                                                                                                                     |       |                                  |       |                        |       |
| Cash                                                                                                                               |       | $                                     | 5,709,676  |                        | $          | 4,914,366 |   |
| Restricted cash                                                                                                                    |       | 2,197,761                             |       | 1,988,982                   |       |
| Short-term  investments                                                                                                            |       | 100,447                               |       |                        |       |
| Accounts  receivable, net of allowance of $68,600 and $82,600                                                                      |       | 694,305                               |       | 696,857                     |       |
| Inventory                                                                                                                          |       | 158,066                               |       | 158,470                     |       |
| Prepaid expenses                                                                                                                   |       | 633,425                               |       | 763,976                     |       |
| Deferred income  taxes                                                                                                             |       | 316,900                               |       | 203,400                     |       |
| Total current  assets                                                                                                              |       | 9,810,580                             |       | 8,726,051                   |       |
|                                                                                                                               |       |                                  |       |                        |       |
| LONG-TERM ASSETS                                                                                                                   |       |                                  |       |                        |       |
| Deposits                                                                                                                           |       | 20,000                                |       | 20,000                      |       |
| Land, buildings  and equipment, net of accumulated depreciation of $11,693,978 and  $11,428,154, respectively                      |       | 23,304,777                            |       | 22,694,438                  |       |
|                                                                                                                               |       | $                                     | 33,135,357 |                        | $          | 31,440,489 |   |
|                                                                                                                               |       |                                  |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                     |       |                                  |       |                        |       |
|                                                                                                                               |       |                                  |       |                        |       |
| CURRENT  LIABILITIES                                                                                                               |       |                                  |       |                        |       |
| Accounts payable                                                                                                                   |       | $                                     | 2,340,251  |                        | $          | 1,882,923 |   |
| Card club  accruals                                                                                                                |       | 2,030,424                             |       | 2,122,333                   |       |
| Accrued wages  and payroll taxes                                                                                                   |       | 1,043,648                             |       | 1,546,155                   |       |
| Accrued interest  payable                                                                                                          |       | 9,765                                 |       | 7,303                       |       |
| Due to MHBPA                                                                                                                       |       | 130,938                               |       | 94,853                      |       |
| Accrued property  taxes                                                                                                            |       | 516,607                               |       | 403,357                     |       |
| Income taxes  payable                                                                                                              |       | 390,353                               |       | 66,108                      |       |
| Payable to  horsepersons                                                                                                           |       | 497,727                               |       | 366,266                     |       |
| Total current  liabilities                                                                                                         |       | 6,959,713                             |       | 6,489,298                   |       |
|                                                                                                                               |       |                                  |       |                        |       |
| DEFERRED INCOME  TAXES                                                                                                             |       | 553,900                               |       | 593,100                     |       |
|                                                                                                                               |       |                                  |       |                        |       |
| COMMITMENTS AND  CONTINGENCIES (Note 4)                                                                                            |       |                                  |       |                        |       |
|                                                                                                                               |       |                                  |       |                        |       |
| STOCKHOLDERS’  EQUITY                                                                                                         |       |                                  |       |                        |       |
| Common stock,  $.01 par value, 10,000,000 shares authorized, 4,016,185 and 3,959,885,  respectively, shares issued and outstanding |       | 40,162                                |       | 39,599                      |       |
| Additional  paid-in capital                                                                                                        |       | 14,145,691                            |       | 14,045,248                  |       |
| Accumulated  earnings                                                                                                              |       | 11,435,891                            |       | 10,273,244                  |       |
| Total  stockholders’ equity                                                                                                   |       | 25,621,744                            |       | 24,358,091                  |       |
|                                                                                                                               |       | $                                     | 33,135,357 |                        | $          | 31,440,489 |   |

 

See notes to consolidatedfinancial statements.

 

3

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**CANTERBURY PARK HOLDINGCORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**PERIODS ENDED MARCH 31, 2006 AND2005**(Unaudited)

 
| ** **                                    | ** ** | **Three Months  Ended  March 31, 2006** | ** ** | **Three Months  Ended  March 31, 2005** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                          |       |                                                   |       |                                                   |       |
| OPERATING  REVENUES:                          |       |                                                   |       |                                                   |       |
| Pari-mutuel                                   |       | $                                                      | 3,012,798  |                                                   | $          | 2,915,286 |   |
| Card Club                                     |       | 7,771,467                                              |       | 7,437,000                                              |       |
| Concessions                                   |       | 877,180                                                |       | 879,566                                                |       |
| Admissions and  parking                       |       | 31,339                                                 |       | 26,170                                                 |       |
| Publications                                  |       | 99,103                                                 |       | 113,839                                                |       |
| Other operating  revenue                      |       | 362,880                                                |       | 350,694                                                |       |
|                                          |       | 12,154,767                                             |       | 11,722,555                                             |       |
|                                          |       |                                                   |       |                                                   |       |
| OPERATING  EXPENSES:                          |       |                                                   |       |                                                   |       |
| Statutory purses                              |       | 1,342,546                                              |       | 1,294,537                                              |       |
| Minnesota  breeders’ fund                |       | 276,843                                                |       | 265,674                                                |       |
| Host track fees                               |       | 497,787                                                |       | 481,786                                                |       |
| Pari-mutuel  taxes                            |       | 44,804                                                 |       | 46,191                                                 |       |
| Salaries and  benefits                        |       | 5,005,753                                              |       | 4,647,896                                              |       |
| Cost of  concessions and publication sales    |       | 591,446                                                |       | 611,169                                                |       |
| Depreciation                                  |       | 430,825                                                |       | 342,000                                                |       |
| Utilities                                     |       | 307,347                                                |       | 260,647                                                |       |
| Repairs,  maintenance and supplies            |       | 242,544                                                |       | 229,082                                                |       |
| License fees and  property taxes              |       | 184,805                                                |       | 147,696                                                |       |
| Advertising and  marketing                    |       | 225,092                                                |       | 327,280                                                |       |
| Insurance                                     |       | 229,794                                                |       | 304,281                                                |       |
| Other operating  expenses                     |       | 789,118                                                |       | 837,136                                                |       |
|                                          |       | 10,168,704                                             |       | 9,795,375                                              |       |
|                                          |       |                                                   |       |                                                   |       |
| NONOPERATING  (EXPENSES) REVENUES:            |       |                                                   |       |                                                   |       |
| Interest expense                              |       | (2,296                                                 | )          | (1,589                                                 | )          |
| Other                                         |       | 55,380                                                 |       | 18,957                                                 |       |
|                                          |       | 53,084                                                 |       | 17,368                                                 |       |
|                                          |       |                                                   |       |                                                   |       |
| INCOME BEFORE  INCOME TAX EXPENSE             |       | 2,039,147                                              |       | 1,944,548                                              |       |
|                                          |       |                                                   |       |                                                   |       |
| INCOME TAX  EXPENSE (Note 1)                  |       | (876,500                                               | )          | (864,120                                               | )          |
|                                          |       |                                                   |       |                                                   |       |
| NET INCOME                                    |       | $                                                      | 1,162,647  |                                                   | $          | 1,080,428 |   |
|                                          |       |                                                   |       |                                                   |       |
| BASIC NET INCOME  PER COMMON SHARE (Note 1)   |       | $                                                      | .29        |                                                   | $          | .28 |   |
|                                          |       |                                                   |       |                                                   |       |
| DILUTED NET  INCOME PER COMMON SHARE (Note 1) |       | $                                                      | .26        |                                                   | $          | .26 |   |

 

See notes to consolidatedfinancial statements.

 

4

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**CANTERBURY PARK HOLDINGCORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**PERIODS ENDED MARCH 31, 2006 AND2005******(Unaudited)

 
| ** **                                                                  | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Operating  Activities:**                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                  |       | $          | 1,162,647  |       | $          | 1,080,428 |   |
| Adjustments to  reconcile net income to net cash provided by operations:    |       |       |       |       |       |
| Depreciation                                                                |       | 430,825    |       | 342,000    |       |
| Stock-based  compensation expense                                           |       | 43,483     |       |       |       |
| Tax benefit from  exercise of stock options                                 |       | 24,300     |       | 100,900    |       |
| Excess tax benefit  from exercise of stock options                          |       | (18,907    | )          |       |       |
| Gain on sale of  property & equipment                                   |       | (30,760    | )          |       |       |
| Decrease in  deferred income taxes                                          |       | (152,700   | )          | (127,700   | )          |
| Decrease in  accounts receivable                                            |       | 2,552      |       | 189,841    |       |
| Decrease in  other current assets                                           |       | 130,955    |       | 191,353    |       |
| Increase in  income taxes payable                                           |       | 324,245    |       | 267,201    |       |
| Decrease in  accounts payable and accrued wages and payroll taxes           |       | (294,374   | )          | (109,177   | )          |
| (Decrease)  increase in card club accruals                                  |       | (91,909    | )          | 29,415     |       |
| Increase in  accrued interest                                               |       | 2,462      |       | 1,428      |       |
| Increase in  accrued property taxes                                         |       | 113,250    |       | 75,794     |       |
| Increase in  payable to horsepersons                                        |       | 131,461    |       | 132,874    |       |
| Increase in due  to MHBPA                                                   |       | 36,085     |       | 61,663     |       |
| Net cash  provided by operations                                            |       | 1,813,615  |       | 2,236,020  |       |
|                                                                        |       |       |       |       |       |
| **Investing  Activities:**                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Additions to  land, buildings and equipment                                 |       | (791,969   | )          | (956,980   | )          |
| Proceeds from  sale of equipment                                            |       | 30,760     |       |       |       |
| (Increase)  decrease in restricted cash                                     |       | (208,779   | )          | 42,921     |       |
| Increase in  short-term investments                                         |       | (100,447   | )          |       |       |
| Net cash used in  investing activities                                      |       | (1,070,435 | )          | (914,059   | )          |
|                                                                        |       |       |       |       |       |
| **Financing  Activities:**                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from  issuance of common stock                                     |       | 33,223     |       | 250,373    |       |
| Excess tax  benefit from exercise of stock options                          |       | 18,907     |       |       |       |
| Net cash  provided by financing activities                                  |       | 52,130     |       | 250,373    |       |
|                                                                        |       |       |       |       |       |
| Net increase in  cash                                                       |       | 795,310    |       | 1,572,334  |       |
|                                                                        |       |       |       |       |       |
| Cash at  beginning of year                                                  |       | 4,914,366  |       | 4,178,544  |       |
|                                                                        |       |       |       |       |       |
| Cash at end of  year                                                        |       | $          | 5,709,676  |       | $          | 5,750,878 |   |
|                                                                        |       |       |       |       |       |
| **Supplemental  disclosure of noncash investing activities:**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Additions to  land, buildings and equipment funded through accounts payable |       | $          | 249,195    |       | $          | 226,210 |   |
|                                                                        |       |       |       |       |       |
| **Supplemental  disclosure of cash flow information:**                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income taxes,  net of refunds                                               |       | $          | 625,000    |       | $          | 625,000 |   |

 

See notes to consolidatedfinancial statements.

 

5

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**CANTERBURY PARK HOLDING CORPORATION ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**PERIODS ENDED MARCH 31, 2006 AND2005**(Unaudited)

 

1.     SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

The summary ofsignificant accounting policies is included in the notes to consolidatedfinancial statements in the 2005 Annual Report on Form 10-K.

 

*UnauditedFinancial Statements* - The consolidated balance sheet as ofMarch 31, 2006, the consolidated statements of operations for the three monthsended March 31, 2006 and 2005, the consolidated statements of cash flows forthe three months ended March 31, 2006 and 2005, and the related informationcontained in these notes have been prepared by management without audit. In theopinion of management, all accruals (consisting of normal recurring accruals)which are necessary for a fair presentation of financial position and resultsof operations for such periods have been made. Results for an interim periodshould not be considered as indicative of results for a full year.

 

*RevenueRecognition -*Ourrevenues are derived primarily from the operations of a Card Club, pari-mutuelwagering on simulcast and live horse races, concession sales and related activities.Collection revenue from Card Club operations and pari-mutuel commission and feerevenues are recognized at the time that the wagering process is complete. Revenuesrelated to wagering activities including 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 and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould 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. In our consolidated statement of cash flowswe changed the classification of changes in restricted cash balances to presentsuch changes as an investing activity. We previously presented such changes asan operating activity. In the accompanying consolidated statements of cash flows for the period ended March 31, 2005 wereclassified changes in restricted cash balances to be consistent with our 2006presentation which resulted in a decrease of $42,921 in cash used by investingactivities and a corresponding decrease in cash flows provided by operationsfrom the amounts previously reported. In addition, we reclassified acquisitionsof land, building and equipment funded through accounts payable at March 31,2005 to a noncash investing activity to be consistent with our 2006presentation. In the accompanying consolidated statement of cash flows for theperiod ended March 31, 2005 we reclassified $226,210 to a noncash investingactivity. These acquisitions were previously presented as increases inaccounts payable under operating activities and additions to land, buildingsand equipment under investing activities and resulted in decreases in theseitems from amounts previously reported.

 

*RestrictedCash* – Restricted cash represents refundable deposits andamounts due to horsepersons for purses, stakes and awards, and amountsaccumulated in the Player Pool to be used to repay players in the form ofpromotions, giveaways, prizes, or by other means.

 

6

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*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.

 

*NetIncome Per Share –*Basic net income per common share is basedon the weighted average number of common shares outstanding during each period.The weighted average number of common shares outstanding for the three monthsended March 31, 2006 and March 31, 2005 were 3,951,922 and 3,876,397,respectively. Diluted net income per common share takes into effect thedilutive effect of potential common shares outstanding. The Company’s onlypotential common shares outstanding are stock options. After considering thedilutive effect of stock options outstanding, the weighted average shares usedto calculate diluted earnings per share for the three months ended March 31,2006 and 2005 were 4,415,166 and 4,216,094, respectively.

 

*FairValues of Financial Instruments* – Due to the currentclassification of all financial instruments of the Company, given theshort-term nature of the related account balances, carrying amounts reported inthe consolidated balance sheets approximate fair value.

 

*StockBased Employee Compensation* - In December 2004, the FinancialAccounting Standards Board (FASB) revised SFAS No.123, Share Based Payment(SFAS No. 123R). This Statement supercedes APB Opinion No. 25, which resultedin no stock-based employee compensation cost related to stock options if theoptions granted had an exercise price equal to the market value of theunderlying common stock on the date of grant. SFAS No. 123R requiresrecognition of employee services provided in exchange for a share-based paymentbased on the grant date fair market value. In April 2005 the effective date ofSFAS No. 123R was deferred to the fiscal year beginning after June 15, 2005. Consequently,the Company adopted SFAS No. 123R as of January 1, 2006. As of the effectivedate, this Statement applies to all new awards issued as well as awardsmodified, repurchased, or cancelled. Additionally, for stock-based awardsissued prior to the effective date, compensation cost attributable to futureservices will be recognized as the remaining service is rendered. The Companyelected to apply the modified prospective method of adoption of SFAS No.123R.

 

The Company has an equitybased compensation plan, the 1994 Stock Plan which provides for the granting ofawards in the form of stock options, restricted stock, stock appreciationrights, and deferred stock to key employees and non-employees, includingdirectors of and consultants to the Company and any subsidiary, to purchase upto a maximum of 1,450,000 shares of common stock. During the first quarter of2006 the Company issued non-qualified options to the members of the Board ofDirectors, granted incentive stock options to two executive officers and issuedshares of common stock that were restricted in regard to ownership anddisposition rights (herein referred to as “restricted stock”) to key managementlevel employees.

 

SFAS123(R) requires the use of a fair value based measurement method when grantingstock options. The Company selected the Black-Scholes method to measurethe compensation cost for stock options. The Black-Scholes method requires theuse of significant assumptions to estimate the fair value of the stock optionawards. The expected term of the board of director options is equivalent to thehistorical exercise experience for these options. The expected term of the keyemployee options was the term of the option as the individuals have exhibited apattern of exercising options at or near the expiration date. The expectedvolatility was calculated primarily with reliance on historical volatilityrates. The Company has no reason to believe that future volatility of theshare price over the expected option term is likely to differ from its past. TheCompany assumed a dividend yield equivalent to historical dividend rates overthe vesting period. The risk-free rate utilized in the Black-Scholescalculations was the U.S. Constant Maturity Treasury Security for the periodequivalent to the term of the option.

 

7

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The fair value of options granted under the Planduring the first quarter of 2006 were estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted averageassumptions and results:

 
| Dividend yield                       |   | 1.74 | %      |
|--------------------------------------|--------|------|--------|
| Weighted-average  volatility         |   | 25   | %      |
| Risk-free  interest rate             |   | 4.50 | %      |
| Expected term of  options in years   |   | 8.6  |   |
| Fair value of  options on grant date |   | $    | 89,400 |   |
|                                      |        |      |        |  |

 

A summary of option activityunder the Plan as of March 31, 2006 and changes during the quarter then endedis presented below:

 
| **Options**                            | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Terms** | ** ** | **Aggregate  Grant-Date  Fair Value** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------|------------|
|                                   |       |       |       |                                       |       |                                                 |       |                                       |       |
| Outstanding at January  1, 2006        |       | 721,950    |       | $                                          | 9.35       |                                                 |       |                                       |       |   |
|                                   |       |       |       |                                       |       |                                                 |       |                                       |       |
| Granted                                |       | 30,000     |       | 14.43                                      |       |                                                 |       |                                       |       |
| Exercised                              |       | (15,300    | )          | 2.14                                       |       |                                                 |       |                                       |       |
|                                   |       |       |       |                                       |       |                                                 |       |                                       |       |
| Outstanding at March  31, 2006         |       | 736,650    |       | $                                          | 9.71       |                                                 | 3.5        |                                       | $          | 3,441,000 |   |
|                                   |       |       |       |                                       |       |                                                 |       |                                       |       |
| Options  exercisable at March 31, 2006 |       | 706,650    |       | $                                          | 9.51       |                                                 | 3.3        |                                       | $          | 3,374,000 |   |

 

Each member of the Boardof Directors receives an annual recurring grant of 3,000 non-qualified stockoptions. On February 1, 2006 15,000 options were granted to the five boardmembers with an exercise price equal to the market price on the date of grantof $14.30. The stock options vest over a six- month period and expire in tenyears. The Company granted 15,000 incentive stock options to two executiveofficers of the company on February 9, 2006. The exercise price of theseincentive stock options was the market value on the date of grant of $14.55. Thestock options vest ratably over a four-year period and expire in ten years. Sharesof restricted stock were granted to key management -level employees on February9, 2006. The Company granted 41,000 shares of restricted stock that vest 100%after four years. Employees who terminate employment prior to the vesting dateforfeit their right to the shares.

 

The compensation cost associated with the Board ofDirector options is $15,300 to be recognized as expense over the six-monthvesting period. The compensation cost associated with the employee stock optiongrant is $74,100 to be recognized ratably over the four-year vesting period. Thecompensation cost associated with the restricted stock grant was calculated asthe market price on the date of grant of $14.55 for the 41,000 shares (reducedby estimated forfeitures) of $589,275. This expense will be recognized ratablyover the four-year vesting period. The Company also recognized $7,807 relatedto a grant of employee stock options in 2004 which vested in February of 2006. Inaccordance with the modified prospective method, the total compensation costrelated to share based awards included in salaries and benefits expense for thefirst quarter of 2006 was $43,500.

 

8

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A summary of the statusof the Company’s restricted stock as of March 31, 2006, and changes during thequarter ended March 31, 2006, is presented below:

 

**Restricted Stock:**

 
| ** **                                     | ** ** | **March 31, 2006** | ** ** | **Weighted-Average  Grant-date  Fair Value** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|---------------------------------------------------|------------|
| Nonvested  restricted stock at January 1, 2006 |       | 0                            |       | 0                                                 |       |
| Granted                                        |       | 41,000                       |       | $                                                 | 14.55      |   |
| Vested                                         |       | 0                            |       | 0                                                 |       |
| Forfeited                                      |       | 0                            |       | 0                                                 |       |
| Nonvested  restricted stock at March 31, 2006  |       | 41,000                       |       | $                                                 | 14.55      |   |
|                                           |       |                         |       |                                              |       |

 

As of March 31, 2006,there was $564,722 of total unrecognized compensation cost related torestricted stock compensation arrangements granted under the Plan. That cost isexpected to be recognized over a period of 3.75 years.

 

The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation,*tostock-based employee compensation to periods prior to January 1, 2006.

 

**StockBased Employee Compensation:**

 
| ** **                                                                                                                               | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Net Income:                                                                                                                              |       |                                                       |       |
| As reported                                                                                                                              |       | $                                                          | 1,080,428  |   |
| Deduct: Pro  forma stock-based compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (45,059                                                    | )          |
| Pro forma net  income                                                                                                                    |       | $                                                          | 1,035,369  |   |
|                                                                                                                                     |       |                                                       |       |
| Earnings Per  Share:                                                                                                                     |       |                                                       |       |
| Basic – as  reported                                                                                                                |       | $                                                          | .28        |   |
|                                                                                                                                     |       |                                                       |       |
| Basic - pro  forma                                                                                                                       |       | $                                                          | .27        |   |
|                                                                                                                                     |       |                                                       |       |
| Diluted - as  reported                                                                                                                   |       | $                                                          | .26        |   |
|                                                                                                                                     |       |                                                       |       |
| Diluted – pro  forma                                                                                                                |       | $                                                          | .25        |   |

 

2.     BORROWINGSUNDER CREDIT AGREEMENT

 

The Company has a creditagreement with Bremer Bank N.A. that provides for a revolving credit linepermitting advances of up to $2,250,000 with interest at the prime rate. TheCompany had no borrowings under this credit line at March 31, 2006 or December31, 2005. The credit agreement contains certain covenants requiring the Companyto maintain certain financial ratios. The Company was in compliance with theserequirements at all times throughout the quarter ended March 31, 2006. Managementbelieves that funds available under this line of credit, along with fundsgenerated from card club and simulcast operations, will be sufficient tosatisfy its liquidity and capital resource requirements during 2006.

 

9

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3.     OPERATINGSEGMENTS

 

During the first threemonths of 2006 and 2005, the Company had three reportable operating segments: cardclub, horse racing and concessions. The card club segment primarily representsoperations of the Canterbury Card Club. The horseracing segment primarilyrepresents simulcast and live racing operations, and the concessions segmentprimarily represents concessions provided during simulcast and live racing, inthe card club and during special events. The Company’s reportable operatingsegments are strategic business units that offer different products andservices. They are managed separately because the segments differ in the natureof the products and services provided as well as processes to produce thoseproducts and services. The horse racing and card club segments are regulated bythe State of Minnesota Racing Commission.

 

The accounting policiesof the operating segments are the same as those described in the summary ofsignificant accounting policies in the 2005 Annual Report on Form 10-K.

 

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 tableprovides information about the Company’s operating segments (in 000’s):

 
| ** **                          | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                          | ** ** | **Card Club**                                             | ** ** | **Horse  Racing** | ** ** | **Concessions** | ** ** | **Total** | ** ** |
|                                |       |                                                           |       |   |   |   |   |   |   |
| Revenues from  external customers   |       | $                                                              | 7,772      |   | $ | 3,506 |   | $ | 877 |   | $ | 12,155 |   |
| Intersegment  revenues              |       |                                                           |       | 16 |   | 512 |   | 528 |   |
| Net Interest  income                |       |                                                           |       | 53 |   |   |   | 53 |   |
| Depreciation and  amortization      |       | 141                                                            |       | 262 |   | 28 |   | 431 |   |
| Segment income  before income taxes |       | 1,419                                                          |       | 592 |   | 113 |   | 2,124 |   |
| Segment Assets                      |       | $                                                              | 3,423      |   | $ | 29,051 |   | $ | 4,817 |   | $ | 37,291 |   |

 
| ** **                          | ** ** | **Three Months Ended March 31, 2005** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                          | ** ** | **Card Club**                                             | ** ** | **Horse  Racing** | ** ** | **Concessions** | ** ** | **Total** | ** ** |
|                                |       |                                                           |       |   |   |   |   |   |   |
| Revenues from  external customers   |       | $                                                              | 7,437      |   | $ | 3,406 |   | $ | 880 |   | $ | 11,723 |   |
| Intersegment  revenues              |       |                                                           |       | 13 |   | 481 |   | 494 |   |
| Net Interest  income                |       |                                                           |       | 17 |   |   |   | 17 |   |
| Depreciation and  amortization      |       | 132                                                            |       | 186 |   | 24 |   | 342 |   |
| Segment income  before income taxes |       | 1,372                                                          |       | 550 |   | 105 |   | 2,027 |   |
|                                     |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **     | ** ** | **At December 31, 2005** | ** ** |
|----------------|------------|--------------------------|------------|
| ** **     | ** ** | ** **               | ** ** |
| Segment Assets |       | $                        | 3,493      |   | $ | 27,191 |   | $ | 4,821 |   | $ | 35,505 |   |
|                |            |                          |            |  |  |  |  |  |  |  |  |  |  |

 

10

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

 
| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Revenues:                                               |       |                                                 |       |   |   |
| Total revenue  for reportable segments                  |       | $                                                    | 12,683     |   | $ | 12,217 |   |
| Elimination of  intersegment revenues                   |       | (528                                                 | )          | (494 | ) |
| Total  consolidated revenues                            |       | $                                                    | 12,155     |   | $ | 11,723 |   |
|                                                    |       |                                                 |       |   |   |
| Income before  income taxes:                            |       |                                                 |       |   |   |
| Total segment  income before income taxes               |       | $                                                    | 2,124      |   | $ | 2,027 |   |
| Elimination of  intersegment income before income taxes |       | (85                                                  | )          | (82 | ) |
| Total  consolidated income before income taxes          |       | $                                                    | 2,039      |   | $ | 1,945 |   |

 
| ** **                               | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Assets:                                  |       |                     |       |                        |       |
| Total assets for  reportable segments    |       | $                        | 37,291     |                        | $          | 35,505 |   |
| Elimination of  intercompany receivables |       | (4,156                   | )          | (4,065                      | )          |
| Total  consolidated assets               |       | $                        | 33,135     |                        | $          | 31,440 |   |

 

4.     CONTINGENCIES

 

In accordance with anEarn Out 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 March 31, 2006, 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’SDISCUSSION 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. MD&A is provided as asupplement to – and should be read in conjunction with – our consolidatedfinancial statements and the accompanying notes to the financial statements(the “Notes”). This MD&A is divided into the following sections:

 

•      *Overview*

 

•      *Operations Review* – an analysis of ourCompany’s consolidated results of operations for the three months presented inour consolidated financial statements.

 

•      *Contingencies*

 

•      *Liquidity and Capital Resources*– ananalysis of the sources and uses of cash.

 

•      *Critical Accounting Policies and Estimates*

 

•      *Commitments and Contractual Obligations*

 

•      *Legislation*

 

•      *Forward-Looking Statements*– cautionaryinformation about forward-looking statements and a description of certain risksand uncertainties that could cause our actual results to differ materially fromthe Company’s historical results or our current expectations of projections.

 

**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 inthe month 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 thegross Card 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 2006 and 2005.

 

The Company alsogenerates revenues from other activities such as admission and parking fees andfrom 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 concerts, craftshows and snowmobile racing.

 

12

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**Operations Review for the ThreeMonths Ended March 31, 2006 and March 31, 2005:**

 

Total operating revenuesincreased $432,212, or 3.7%, during three months ended March 31, 2006 comparedto the three months ended March 31, 2005. The increase is due primarily toincreases in Card Club revenue and pari-mutuel revenue, offset by a slightdecrease in concessions revenue.

 

Pari-mutuel revenueincreased $97,512, or 3.3% in the three-month period ended March 31, 2006compared to the same period in 2005. Total handle was approximately $14.2million or 3.8%, higher than total handle of $13.7 million during the samequarter a year ago. The increase is primarily attributable to persistent poorweather conditions experienced in the east during the first quarter of 2005,which resulted in the cancellation of a significant number of races. However,this increase was partially offset by growing competition from Internet wageringon simulcast racing. The Company continues to look for ways to make CanterburyPark the most attractive alternative when our customers want to wager onhorseracing. A number of promotions and initiatives to encourage on-trackwagering have recently been implemented. See the “Summary of Pari-Mutuel Data”below.

 

| ** **                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|
| **Summary of Pari-Mutuel Data:** | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                                            |       |                                                 |       |   |   |
| Simulcast racing  days                          |       | 90                                                   |       | 90 |   |
| ** **                                      | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| On-track  simulcast handle                      |       | $                                                    | 14,222,000 |   | $ | 13,703,000 |   |
| ** **                                      | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Average daily  handle                           |       | $                                                    | 158,000    |   | $ | 152,000 |   |

 

Total Card Club revenueincreased 4.5% to $7.8 million for the first three months of 2006 compared to$7.4 million for the same period in 2005. The primary source of Card Clubrevenue is a percentage of the wagers received from the players as compensationfor providing the Card Club facility and services, referred to as the “collectionrevenue”. Other revenue includes fees collected for the administration oftournaments, and amounts earned as reimbursement of the administrative costs ofmaintaining jackpot funds. The increase in revenue is due primarily to growthin the Card Club’s poker games. Poker collection revenue grew $356,000 or 7.9%compared to the first quarter of 2005 and continues to be fueled by thepopularity of televised poker tournaments, and three additional poker tables. Thisincrease was partly offset by a $29,000 or 1.1% decrease in Casino Gamescollection revenue compared to the first three months of 2005. This decrease isprimarily due to the reduction of three tables in the Casino Games room. TotalCard Club revenues represented 63.9% and 63.4% of total revenues for thethree-month periods ended March 31, 2006 and 2005, respectively. See the “Summaryof Card Club Data” below.

 

| ** **                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|
| **Summary of Card Club Data:** | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                                               |       |                                                 |       |   |   |
| Poker Games                                        |       | $                                                    | 4,872,000  |   | $ | 4,516,000 |   |
| Casino Games                                       |       | 2,725,000                                            |       | 2,754,000 |   |
| Total Collection  Revenue                          |       | 7,597,000                                            |       | 7,270,000 |   |
|                                               |       |                                                 |       |   |   |
| Other Revenue                                      |       | 175,000                                              |       | 167,000 |   |
| Total Card Club  Revenue                           |       | $                                                    | 7,772,000  |   | $ | 7,437,000 |   |
|                                               |       |                                                 |       |   |   |
| Number of Days  Offered                            |       | 90                                                   |       | 90 |   |
| Average Revenue  per Day                           |       | $                                                    | 86,000     |   | $ | 83,000 |   |

 

13

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Concession revenuesdecreased slightly to $877,180 for the quarter ended March 31, 2006 compared to$879,566 for the first quarter of 2005. Sales volumes were relatively unchangedin both the card room and simulcast clubhouse.

 

Total operating expenses in the first quarter of 2006increased by approximately $373,329, or 3.8%, compared to the three-monthperiod ended March 31, 2005. However, total operating expenses as a percentageof revenues remained steady at 83.7% for the first three months of 2006,compared to 83.6% for the same period in 2005.

 

Total expense for statutorypurses and Minnesota breeders’ fund increased $59,178, or 3.8%, for the quarterended March 31, 2006 compared to the quarter ended March 31, 2005. The increasewas primarily due to higher Card Club collection revenues in the first quarterof 2006, and an increase in simulcast handle during the first quarter of 2006. Referto the table below.

 
| ** **       | ** ** | **Purse Expense**                               | ** ** | **Minnesota Breeders’ Fund  Expense** | ** ** |
|------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **       | ** ** | **Three Months Ended March 31,** | ** ** | **Three Months Ended March 31,** | ** ** |
| ** **       | ** ** | **2006**                                             | ** ** | **2005**                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Card Club        |       | $                                                    | 1,049,148  |                                                 | $          | 1,003,995 |   | $ | 116,572 |   | $ | 111,555 |   |
|             |       |                                                 |       |                                                 |       |   |   |   |   |
| Simulcast Racing |       | 293,398                                              |       | 290,542                                              |       | 160,271 |   | 154,119 |   |
|             |       |                                                 |       |                                                 |       |   |   |   |   |
| Total            |       | $                                                    | 1,342,546  |                                                 | $          | 1,294,537 |   | $ | 276,843 |   | $ | 265,674 |   |

 

Salary and benefit costsincreased $357,857, or 7.7%, compared to the first quarter of 2005. Theincrease is due to several factors including an estimated 3% increase ingeneral wages which resulted in an increase of $91,000 for the quarter; theimpact of the minimum wage increase of $1 effective August 2005 which resultedin an estimated increase of $80,000 in hourly labor costs for the quarter; anincrease of $76,000 related to enhanced benefits such as 401k match, and ESOPaccrual; and a $44,000 expense related to the adoption of SFAS 123(R). Depreciationincreased $88,825 or 26% compared to the same period in 2005 due to significantimprovements to the facility during 2005. Advertising and marketing expensedecreased $102,188 or 31% due to the timing of print and television relatedproduction expense.

 

Income before incometaxes increased $94,599, or 4.9%, to $2,039,147 for the three months endedMarch 31, 2006, from $1,944,548 for the three months ended March 31, 2005. Incometax expense was $876,500 and $864,120 for the first quarters of 2006 and 2005,respectively, resulting in net income of $1,162,647 and $1,080,428,respectively.

 

**Contingencies:**

 

There have been nomaterial changes in our contingencies since those reported at December 31,2005.

 

**Liquidityand Capital Resources:**

 

Cash provided byoperating activities for the three months ended March 31, 2006 was $1,770,132and resulted principally from net income of $1,162,647, depreciation of$430,825, an increase in income taxes payable of $324,245, and a decrease inaccounts payable and accrued wages of $294,374. Cash provided by operatingactivities for the three months ended March 31, 2005 was $2,236,020 andresulted principally from net income of $1,080,428, depreciation of $342,000,an increase in income taxes payable of $267,201, a decrease in accounts receivableof $189,841 due to the timing of payments and receipts on wagering imbalanceswith out-of-state racetracks, and a decrease in other current assets of$191,353 resulting from a reduction in prepaid expenses. Pursuant to anagreement with the Minnesota

 

14

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Horsemen’s Benevolent and Protective Association (MHBPA), during thethree months ended March 31, 2006 and 2005, the Company transferred into atrust account for these purposes or paid directly to the MHBPA approximately$1,175,000 and $1,100,000, respectively. At March 31, 2006 the company had anadditional liability to the MHBPA of $130,938. This liability will be paid in2006 together with interest at the prime-lending rate.

 

Net cash used ininvesting activities for the first quarter of 2006 of $1,070,435 was usedprimarily for additions to land, building and equipment including improvementsto the backside barns and expansion of the Card Club lounge. Net cash used ininvesting activities was $914,059 in the first quarter of 2005 and relatedprimarily to improvements to the backside barns and facilities related to liveracing. In addition, during the first three months of 2006 restricted cashincreased $208,779 primarily due to increases in liabilities to horsepersonsfor purse funds.

 

Cash provided byfinancing activities during the first three months of 2006 consisted ofproceeds received upon the exercise of stock options of $33,223, and excess taxbenefits from the exercise of stock options during the quarter of $18,907. Cashprovided by financing activities during the first three months of 2005consisted of proceeds received upon the exercise of stock options of $250,373.

 

The Company has a credit agreement withBremer Bank N. A. that provides a revolving credit line permitting advances ofup to $2,250,000 with interest at the prime rate. The Company had no borrowingsunder the line of credit at March 31, 2006 or December 31, 2005. The creditagreement contains certain covenants requiring the Company to maintain certainfinancial ratios. The Company was in compliance with these requirements at alltimes throughout the quarter ended March 31, 2006.

 

Unrestricted cashbalances at March 31, 2006 were $5,709,676 compared to $4,914,366 at December31, 2005. The Company believes that 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 during 2006 for regular operations. If theRacino discussed below under “Legislation” receives necessary legislativeapproval, the Company will require substantial additional debt and/or equityfinancing. The Company believes that such financing with reasonable terms canbe obtained.

 

**CriticalAccounting Policies and Estimates:**

 

The preparation of consolidated financial statementsin conformity with generally accepted accounting principles requires managementto make estimates that effect the amounts reported and disclosed in theconsolidated financial statements. By their nature, these estimates are subjectto an inherent degree of uncertainty. These estimates are based on ourexperience and various other assumptions that are believed to be reasonable inthe circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities. On an ongoing basis, weevaluate our estimates. However, actual results could differ from thoseestimates.

 

Our significant accounting policies are included inNote 1 to our consolidated financial statements in our 2005 Annual Report onForm 10-K. We believe the following critical accounting policies represent ourmore significant judgments and estimates used in the preparation of ourconsolidated financial statements.

 

*Land, Buildings and Equipment*- We have significant capital invested in our property and equipment, whichrepresents approximately 70.3% of our total assets. We utilize our judgment invarious ways including: determining whether an expenditure is considered amaintenance expense or a capital asset; determining the estimated useful livesof assets; and determining if or when an asset has been impaired. Our propertyand equipment is evaluated for impairment whenever circumstances indicate thatthe carrying 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 the carryingamount, we recognize an impairment loss. The impairment loss

 

15

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recognized is theamount by which the carrying amount exceeds the fair value and is charged tooperations in the period in which such impairment is determined by management.We do not believe that any impairment has occurred or is likely to occur in thenear future.

 

*Regulation -*Ourbusiness can be materially impacted both positively and negatively bylegislative and regulatory changes, such as those described below. Significantnegative changes resulting from these activities could result in an impairmentof our property and equipment in accordance with generally accepted accountingstandards. Additional information regarding how our business can be impacted bylegislative and regulatory changes are included in Item 1 (vi), and Item 1(vii), respectively, in our 2005 Annual Report on Form 10-K, which informationis incorporated herein by reference.

 

**Commitmentsand Contractual Obligations:**

 

There have been nomaterial changes in our commitments and contractual obligations since thosereported at December 31, 2005.

 

**Legislation:**

 

OnMarch 10, 2006, a bill was introduced in the Minnesota Legislature, that, ifpassed, would place a proposed amendment of the Minnesota Constitution on theNovember 2006 ballot to establish a framework for authorizing electronic gamingdevices and banked card games at the Racetrack. This concept, often referred toas a “Racino”, as proposed for Canterbury Park would include approximately3,000 gaming devices, 40 table games, a 250-room hotel, an Olympic scale horsepark and additional restaurant venues. Based on the success of several Racinosin other states, the Company believes if the proposed constitutional amendmentwas approved and a Racino was authorized at the Racetrack, the Racino wouldenhance horse racing with increased purses, provide growth and developmentopportunities for the Company, and produce significant new tax revenues forstate and local governments.

 

Legislationhas also been introduced to remove the 50-table limit currently imposed byMinnesota law and allow Canterbury Park to offer “banked” games in the CardClub. Similar bills were pursued in the 2005 Minnesota Legislature, however noaction was taken prior to adjournment on July 13, 2005.

 

Theeffort to obtain legislative authority for initiatives favorable to the Companyhas required, and will continue to require, substantial expenditures. Due tothe inherent uncertainty of the outcome of legislative activities, there can beno assurance that any bills favorable to the Company’s interests will beenacted into law, and it is possible bills adverse to the Company could beenacted.

 

**Forward-LookingStatements:**

 

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: material fluctuationsin attendance at the Racetrack, material changes in the level of wagering bypatrons, decline in interest in the unbanked card games offered at the CardClub, competition from other venues offering unbanked card games, legislativeand regulatory changes, the impact of wagering products and technologiesintroduced by competitors; increases in the percentage of revenues allocatedfor purse fund payments; increases in compensation and employee benefit costs;the general health of the gaming sector; higher

 

16

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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.

 

**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. AtMarch 31, 2006 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, overnight investmentsin commercial paper, and short term government and corporate bonds.

 

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

 

(a)           Evaluationof Disclosure Controls and Procedures:

 

Management, with the participation of the Company’sprincipal executive officer, Randall D. Sampson, and principal financialofficer, David C. Hansen, has evaluated the effectiveness of the design andoperation of the disclosure controls and procedures, as defined in Rules13a-15(e) under the Securities Exchange Act of 1934, as of the end of theperiod covered by this report. Management has concluded that the Company’sdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed in the reports that the Company files under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the rules and forms of the SEC and that the disclosurecontrols are also effective to ensure that information required to be disclosedin the Company’s Exchange Act reports is accumulated and communicated tomanagement, including the principal executive officer and principal financialofficer, to allow timely decisions regarding required disclosure.

 

(b)           Changesin Internal Control Over Financial Reporting:

 

There have been no changes in internal controlover financial reporting that occurred during the fiscal quarter covered bythis report that have materially affected, or are reasonably likely tomaterially affect, the registrant’s internal control over financial reporting.

 

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**PART II**

 

**OTHERINFORMATION**

 

**Item 1.****            LegalProceedings**

 

Not applicable

 

**Item 1A.**         RiskFactors

 

There have been nomaterial changes to the Risk Factors since those reported in the Form 10-K forthe year ended December 31, 2005.

 

**Item2.**            Unregistered Sales ofEquity Securities and Use of Proceeds

** **

Not applicable

 

**Item3.**            Defaults Upon SeniorSecurities

** **

Not applicable

 

**Item4.**            Submission of Mattersto a Vote of Security Holders

** **

Not applicable

 

**Item 5.**            OtherInformation

** **

Not applicable

 

**Item 6.**            Exhibits

** **

(a)   Thefollowing exhibits are included herein:

 

11       Statementre computation of per share earnings - See *NetIncome Per Share* under Note 1 of Notes to Consolidated FinancialStatements under Part 1, Item 1, which is incorporated 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. Section1350).

 

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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: May 15, 2006 |   /s/ Randall  D. Sampson             |
|                | Randall D. Sampson,                        |
|                | President and Chief Executive Officer      |
|                |                                       |
| Dated: May 15, 2006 |   /s/ David C.  Hansen                |
|                | David C. Hansen,                           |
|                | Vice President and Chief Financial Officer |

 

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