**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

** **

**FORM 10-Q**

** **

**(Mark One)**
| **ý** | ** ** | **QUARTERLY REPORT UNDER SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                        |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                              |
| ** ** | ** ** | **FOR THE QUARTERLY PERIOD ENDED  SEPTEMBER 30, 2005.**                                                                                                                                                                            |
| ** ** | ** ** | ** **                                                                                                                                                                                                                              |
| **o**      | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                       |
| ** ** | ** ** | ** **                                                                                                                                                                                                                              |
| ** ** | ** ** | **FOR THE  TRANSITION PERIOD  FROM                TO                .** |

 

**CommissionFile Number 001-31569**

 

 

### **Canterbury Park Holding Corporation**

(Exact name of registrant asspecified in its charter)

 
| **Minnesota**                                  | ** ** | **41-1775532**       |
|------------------------------------------------|------------|----------------------|
| (State or  other jurisdiction of               |       | (IRS  Employer       |
| incorporation  or organization)                |       | Identification  No.) |
|                                           |       |                 |
| **1100  Canterbury Road, Shakopee, Minnesota** | ** ** | **55379**            |
| (Address of  principal executive offices)      |       | (Zip Code)           |
|                                           |       |                 |
| **(952)  445-7223**                            |
| (Registrant’s  Telephone Number)          |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  YES  ý   NO  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).  YES  o   NO  ý

 

Indicate bycheck mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  YES  o   NO  ý

 

The Company had 3,910,569 shares of common stock, $.01 par value pershare, outstanding as of November 1, 2005.

 

 

----

 

Canterbury Park HoldingCorporation

 

#### **INDEX**

#### ** **

| ** **        | ** **                 | **Page**                                                                                      |
|-------------------|----------------------------|-----------------------------------------------------------------------------------------------|
| **PART I.**  | **FINANCIAL  INFORMATION** | ** **                                                                                    |
|              |                       |                                                                                          |   |
|              | Item 1.                    | Financial Statements                                                                          |   |
|              |                       |                                                                                          |   |
|              |                       | Consolidated Balance Sheets as of September 30, 2005 and  December 31, 2004         | 3 |
|              |                       |                                                                                          |   |
|              |                       | Consolidated Statements of Operations for the periods ended  September 30, 2005 and 2004 | 4 |
|              |                       |                                                                                          |   |
|              |                       | Consolidated Statements of Cash Flows for the periods ended  September 30, 2005 and 2004 | 5 |
|              |                       |                                                                                          |   |
|              |                       | Notes to Consolidated Financial Statements                                                    | 6 |
|              |                       |                                                                                          |   |
|              | Item  2.                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations   | 10 |
|              |                       |                                                                                          |   |
|              | Item 3.                    | Quantitative and Qualitative Disclosures  about Market Risk                                   | 18 |
|              |                       |                                                                                          |   |
|              | Item 4.                    | Controls and Procedures                                                                       | 18 |
|              |                       |                                                                                          |   |
| **PART II.** | **OTHER INFORMATION**      |                                                                                          |
|              |                       |                                                                                          |   |
|              | Item  1.                   | Legal  Proceedings                                                                            | 19 |
|              |                       |                                                                                          |   |
|              | Item  2.                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                  | 19 |
|              |                       |                                                                                          |   |
|              | Item  3.                   | Defaults  Upon Senior Securities                                                              | 19 |
|              |                       |                                                                                          |   |
|              | Item  4.                   | Submission  of Matters to a Vote of Security Holders                                          | 19 |
|              |                       |                                                                                          |   |
|              | Item  5.                   | Other  Information                                                                            | 19 |
|              |                       |                                                                                          |   |
|              | Item  6.                   | Exhibits                                                                                      | 19 |
|              |                       |                                                                                          |   |
|              | Signatures                 |                                                                                          | 20 |
|              |                       |                                                                                          |   |
|              | Exhibits                   |                                                                                          | 21 |

 

2

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**PART I.  FINANCIALINFORMATION**

 

###### **CANTERBURYPARK HOLDING CORPORATION AND SUBSIDIARIES**

###### ** **

**CONSOLIDATED BALANCE SHEETS**

**SEPTEMBER 30, 2005 AND DECEMBER 31,2004**

 
| ** **                                                                                                                        | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                        | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| **ASSETS**                                                                                                                        |       |                         |       |                        |       |
|                                                                                                                              |       |                         |       |                        |       |
| CURRENT ASSETS                                                                                                                    |       |                         |       |                        |       |
| Cash                                                                                                                              |       | $                            | 3,911,464  |                        | $          | 4,178,544 |   |
| Restricted cash                                                                                                                   |       | 1,370,601                    |       | 1,746,599                   |       |
| Accounts receivable                                                                                                               |       | 791,599                      |       | 750,612                     |       |
| Inventory                                                                                                                         |       | 171,135                      |       | 134,653                     |       |
| Deposits                                                                                                                          |       | 20,000                       |       | 20,000                      |       |
| Advance to MHBPA                                                                                                                  |       | 163,055                      |       | —                      |       |
| Prepaid expenses                                                                                                                  |       | 1,076,459                    |       | 850,881                     |       |
| Income taxes receivable                                                                                                           |       | 31,514                       |       | —                      |       |
| Deferred income taxes                                                                                                             |       | 201,300                      |       | 103,000                     |       |
| Total current assets                                                                                                              |       | 7,737,127                    |       | 7,784,289                   |       |
|                                                                                                                              |       |                         |       |                        |       |
| LAND, BUILDING, AND EQUIPMENT, net of  accumulated depreciation of $10,938,677 and $9,869,193, respectively                       |       | 22,360,115                   |       | 20,438,532                  |       |
|                                                                                                                              |       |                         |       |                        |       |
|                                                                                                                              |       | $                            | 30,097,242 |                        | $          | 28,222,821 |   |
|                                                                                                                              |       |                         |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                     |       |                         |       |                        |       |
|                                                                                                                              |       |                         |       |                        |       |
| CURRENT LIABILITIES                                                                                                               |       |                         |       |                        |       |
| Accounts payable                                                                                                                  |       | $                            | 2,737,046  |                        | $          | 2,129,405 |   |
| Card club accruals                                                                                                                |       | 1,750,961                    |       | 1,736,746                   |       |
| Accrued wages and payroll taxes                                                                                                   |       | 1,600,003                    |       | 1,799,419                   |       |
| Accrued interest payable                                                                                                          |       | 3,782                        |       | 229                         |       |
| Due to MHBPA                                                                                                                      |       | —                       |       | 131,146                     |       |
| Accrued property taxes                                                                                                            |       | 369,023                      |       | 282,119                     |       |
| Income taxes payable                                                                                                              |       | —                       |       | 17,486                      |       |
| Payable to horsepersons                                                                                                           |       | 220,467                      |       | 414,621                     |       |
| Total current liabilities                                                                                                         |       | 6,681,282                    |       | 6,511,171                   |       |
|                                                                                                                              |       |                         |       |                        |       |
| DEFERRED INCOME TAXES                                                                                                             |       | 642,300                      |       | 716,000                     |       |
|                                                                                                                              |       |                         |       |                        |       |
| COMMITMENTS AND CONTINGENCIES (Note 4)                                                                                            |       |                         |       |                        |       |
|                                                                                                                              |       |                         |       |                        |       |
| STOCKHOLDERS’ EQUITY                                                                                                         |       |                         |       |                        |       |
| Common stock, $.01 par value, 10,000,000  shares authorized, 3,910,569 and 3,835,669, respectively, shares issued and outstanding |       | 39,106                       |       | 38,357                      |       |
| Additional paid-in capital                                                                                                        |       | 13,291,840                   |       | 12,763,811                  |       |
| Accumulated earnings                                                                                                              |       | 9,442,714                    |       | 8,193,482                   |       |
| Total stockholders’ equity                                                                                                   |       | 22,773,660                   |       | 20,995,650                  |       |
|                                                                                                                              |       | $                            | 30,097,242 |                        | $          | 28,222,821 |   |

 

See notes to consolidatedfinancial statements.

 

3

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**CANTERBURYPARK HOLDING CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**PERIODS ENDED SEPTEMBER 30, 2005 AND 2004 (Unaudited)**

 
| ** **                                    | ** ** | **Three Months Ended Sept 30,** | ** ** | **Nine Months Ended Sept 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **2005**                        | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| OPERATING  REVENUES:                          |       |                            |       |                           |       |   |   |   |   |
| Pari-mutuel                                   |       | $                               | 5,687,055  |                           | $          | 6,275,927 |   | $ | 13,464,243 |   | $ | 14,583,881 |   |
| Card Club                                     |       | 7,389,380                       |       | 7,659,464                      |       | 22,100,292 |   | 21,336,206 |   |
| Concessions                                   |       | 2,216,992                       |       | 2,137,388                      |       | 4,901,517 |   | 4,576,402 |   |
| Admissions and parking                        |       | 296,518                         |       | 284,736                        |       | 550,859 |   | 512,833 |   |
| Publications                                  |       | 183,340                         |       | 207,061                        |       | 483,925 |   | 511,901 |   |
| Other operating revenue                       |       | 712,182                         |       | 715,228                        |       | 1,614,105 |   | 1,567,195 |   |
|                                          |       | 16,485,467                      |       | 17,279,804                     |       | 43,114,941 |   | 43,088,418 |   |
|                                          |       |                            |       |                           |       |   |   |   |   |
| OPERATING  EXPENSES:                          |       |                            |       |                           |       |   |   |   |   |
| Statutory purses                              |       | 3,282,390                       |       | 3,456,172                      |       | 7,027,620 |   | 7,143,428 |   |
| Minnesota breeders’ fund                 |       | 380,282                         |       | 403,320                        |       | 1,001,235 |   | 1,029,492 |   |
| Host track fees                               |       | 524,036                         |       | 564,047                        |       | 1,637,731 |   | 1,779,192 |   |
| Pari-mutuel taxes                             |       | 72,353                          |       | 91,838                         |       | 177,228 |   | 216,435 |   |
| Salaries and benefits                         |       | 5,931,916                       |       | 5,904,160                      |       | 16,331,836 |   | 15,462,026 |   |
| Cost of concessions and publication sales     |       | 1,118,474                       |       | 1,081,772                      |       | 2,752,980 |   | 2,543,707 |   |
| Depreciation                                  |       | 443,100                         |       | 333,750                        |       | 1,183,350 |   | 929,750 |   |
| Utilities                                     |       | 434,861                         |       | 413,715                        |       | 982,433 |   | 931,741 |   |
| Repairs, maintenance and supplies             |       | 464,542                         |       | 391,923                        |       | 1,151,263 |   | 1,206,506 |   |
| License fees and property taxes               |       | 169,440                         |       | 162,689                        |       | 478,630 |   | 457,875 |   |
| Advertising and marketing                     |       | 889,733                         |       | 930,403                        |       | 2,047,730 |   | 2,143,221 |   |
| Insurance                                     |       | 325,474                         |       | 295,227                        |       | 947,275 |   | 850,583 |   |
| Other operating expenses                      |       | 1,294,837                       |       | 1,364,100                      |       | 3,407,804 |   | 3,199,609 |   |
|                                          |       | 15,331,438                      |       | 15,393,116                     |       | 39,127,115 |   | 37,893,565 |   |
|                                          |       |                            |       |                           |       |   |   |   |   |
| NONOPERATING  (EXPENSES) REVENUES:            |       |                            |       |                           |       |   |   |   |   |
| Interest expense                              |       | (2,958                          | )          | (1,567                         | )          | (9,698 | ) | (8,000 | ) |
| Other, net                                    |       | 37,503                          |       | 8,990                          |       | 86,441 |   | 31,824 |   |
|                                          |       | 34,545                          |       | 7,423                          |       | 76,743 |   | 23,824 |   |
|                                          |       |                            |       |                           |       |   |   |   |   |
| INCOME  BEFORE INCOME TAX EXPENSE             |       | 1,188,574                       |       | 1,894,111                      |       | 4,064,569 |   | 5,218,677 |   |
|                                          |       |                            |       |                           |       |   |   |   |   |
| INCOME TAX  EXPENSE (Note 1)                  |       | (500,202                        | )          | (829,907                       | )          | (1,841,620 | ) | (2,313,435 | ) |
|                                          |       |                            |       |                           |       |   |   |   |   |
| NET INCOME                                    |       | $                               | 688,372    |                           | $          | 1,064,204 |   | $ | 2,222,949 |   | $ | 2,905,242 |   |
|                                          |       |                            |       |                           |       |   |   |   |   |
| BASIC NET INCOME PER COMMON SHARE (Note 1)    |       | $                               | .18        |                           | $          | .28 |   | $ | .57 |   | $ | .77 |   |
|                                          |       |                            |       |                           |       |   |   |   |   |
| DILUTED NET INCOME PER COMMON SHARE (Note  1) |       | $                               | .16        |                           | $          | .26 |   | $ | .53 |   | $ | .70 |   |

 

Seenotes to consolidated financial statements.

 

4

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**CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**PERIODS ENDED SEPTEMBER 30,2005 AND 2004 (Unaudited)**

 
| ** **                                                               | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                                     |       |                                     |       |   |   |
| CASH FLOWS  FROM OPERATING ACTIVITIES:                                   |       |                                     |       |   |   |
| Net Income                                                               |       | $                                        | 2,222,949  |   | $ | 2,905,242 |   |
| Adjustments to reconcile net income to net  cash provided by operations: |       |                                     |       |   |   |
| Depreciation                                                             |       | 1,183,350                                |       | 929,750 |   |
| Tax benefit from exercise of stock options                               |       | 27,301                                   |       | 335,900 |   |
| Decrease in deferred income taxes                                        |       | (172,000                                 | )          | (34,000 | ) |
| Increase in accounts receivable                                          |       | (40,987                                  | )          | (261,580 | ) |
| Increase in other current assets                                         |       | (262,060                                 | )          | (281,718 | ) |
| Decrease in income taxes payable                                         |       | (49,000                                  | )          | 195,588 |   |
| Increase in accounts payable and accrued  wages & payroll taxes |       | 408,225                                  |       | 1,623,831 |   |
| Increase in card club accruals                                           |       | 14,215                                   |       | 1,057,959 |   |
| Increase in accrued interest                                             |       | 3,553                                    |       | 4,754 |   |
| Increase in accrued property taxes                                       |       | 86,904                                   |       | 65,139 |   |
| Decrease in payable to horsepersons                                      |       | (194,154                                 | )          | (59,126 | ) |
| Decrease in due to MHBPA                                                 |       | (294,201                                 | )          | (65,946 | ) |
| Net cash provided by operations                                          |       | 2,934,095                                |       | 6,415,793 |   |
|                                                                     |       |                                     |       |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                                   |       |                                     |       |   |   |
| Additions to land, building and equipment                                |       | (3,104,933                               | )          | (3,260,894 | ) |
| Decrease (increase) in restricted cash                                   |       | 375,998                                  |       | (780,134 | ) |
| Net cash used in investing activities                                    |       | (2,728,935                               | )          | (4,041,028 | ) |
|                                                                     |       |                                     |       |   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES:                                   |       |                                     |       |   |   |
| Proceeds from issuance of common stock                                   |       | 501,477                                  |       | 265,461 |   |
| Cash dividend to shareholders                                            |       | (973,717                                 | )          | (947,129 | ) |
| Net cash used in financing activities                                    |       | (472,240                                 | )          | (681,668 | ) |
|                                                                     |       |                                     |       |   |   |
| NET INCREASE  IN CASH                                                    |       | (267,080                                 | )          | 1,693,097 |   |
|                                                                     |       |                                     |       |   |   |
| CASH AT  BEGINNING OF PERIOD                                             |       | 4,178,544                                |       | 2,523,560 |   |
|                                                                     |       |                                     |       |   |   |
| CASH AT END  OF PERIOD                                                   |       | $                                        | 3,911,464  |   | $ | 4,216,657 |   |
|                                                                     |       |                                     |       |   |   |
| INTEREST  PAID                                                           |       | $                                        | 0          |   | $ | 0 |   |
|                                                                     |       |                                     |       |   |   |
| INCOME TAXES  PAID                                                       |       | $                                        | 1,920,000  |   | $ | 1,805,000 |   |

 

See notes to consolidatedfinancial statements.

 

5

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**CANTERBURYPARK HOLDING CORPORATION AND SUBSIDIARIES**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**PERIODS ENDED SEPTEMBER 30, 2005 AND 2004**

 

1.               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The summary of significant accounting policies isincluded in the notes to consolidated financial statements in the 2004 AnnualReport on Form 10-K.

 

*Unaudited Financial Statements* - The consolidated balance sheet as ofSeptember 30, 2005, the consolidated statements of operations for thethree and nine months ended September 30, 2005 and 2004, the consolidatedstatements of cash flows for the nine months ended September 30, 2005 and2004, and the related information contained in these notes have been preparedby management without audit.  In theopinion of management, all accruals (consisting only of normal recurringaccruals) which are necessary for a fair presentation of financial position andresults of operations for such periods have been made.  Results for an interim period should not beconsidered as indicative of results for a full year.

 

*Reclassifications*– In our consolidated statement of cash flowsfor the nine months ended September 30, 2005, we changed theclassification of changes in restricted cash balances to present such changesas an investing activity.  We previouslypresented such changes as an operating activity.  In the accompanying consolidated statementsof cash flows for the nine months ended September 30, 2004, wereclassified changes in restricted cash balances to be consistent with our 2005presentation which resulted in a $780,134 increase in cash used in investing activitiesand a corresponding increase in cash flows provided by operations from theamounts previously reported.

 

*Restricted Cash –*Restricted cash represents refundabledeposits and amounts due to horsepersons for purses, stakes and awards, andamounts accumulated in the Player Pool to be used to repay players in the formof promotions, giveaways, and prizes or by other means.

* *

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

 

*Net Income Per Share*– Basic net income per common share is basedon the weighted average number of common shares outstanding during eachyear.  The weighted average number ofcommon shares outstanding for the three and nine-month periods endedSeptember 30, 2005 were 3,902,260 and 3,890,365, respectively.  The weighted average number of common sharesoutstanding for the three and nine-month periods ended September 30, 2004were 3,788,517 and 3,760,468, respectively. Diluted net income per common share takes into effect the dilutiveeffect of potential common shares outstanding. The Company’s only potential common shares outstanding are stockoptions.  After considering the dilutiveeffect of stock options outstanding, the weighted average shares used to calculatediluted earnings per share for the three and nine-month periods endedSeptember 30, 2005 were 4,202,457 and 4,185,335 respectively.  The weighted average shares used to calculatediluted earnings per share for the three and nine-month periods endedSeptember 30, 2004 were 4,142,184 and 4,130,445, respectively.

 

*Fair Values of FinancialInstruments* – Due tothe current classification of all financial instruments of the Company, giventhe short-term nature of the related account balances, carrying amountsreported in the consolidated balance sheets approximate fair value.

 

6

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*Stock Based Employee Compensation*- At September 30, 2005, the Company hasa stock option plan which provides for the granting of awards in the form ofstock options, restricted stock, stock appreciation rights, and deferred stockto key employees and non-employees, including directors of and consultants tothe Company and any subsidiary, to purchase up to a maximum of 1,450,000 sharesof common stock.  The Company accountsfor that plan under the recognition and measurement principles of APB OpinionNo. 25, *Accounting for Stock Issued toEmployees,* and related interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under the plan had an exerciseprice equal to the market value of the underlying common stock on the date ofgrant.  The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation,*tostock-based employee compensation.

 

***Stock BasedEmployee Compensation Table:***

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                                    | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Income:                                                                                                                                   |       |                   |       |                   |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                      | 688,372    |                   | $          | 1,064,204 |   | $ | 2,222,949 |   | $ | 2,905,242 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (47,844                | )          | (104,169               | )          | (454,261 | ) | (354,034 | ) |
|                                                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Pro forma net income                                                                                                                          |       | $                      | 640,528    |                   | $          | 960,035 |   | $ | 1,768,688 |   | $ | 2,551,208 |   |
|                                                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Earnings Per  Share:                                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Basic - as reported                                                                                                                           |       | $                      | .18        |                   | $          | .28 |   | $ | .57 |   | $ | .77 |   |
|                                                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Basic - pro forma                                                                                                                             |       | $                      | .16        |                   | $          | .25 |   | $ | .46 |   | $ | .68 |   |
|                                                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Diluted - as reported                                                                                                                         |       | $                      | .16        |                   | $          | .26 |   | $ | .53 |   | $ | .70 |   |
|                                                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Diluted - pro forma                                                                                                                           |       | $                      | .15        |                   | $          | .23 |   | $ | .42 |   | $ | .62 |   |

 

2.               BORROWINGS UNDER CREDIT AGREEMENT

 

Borrowings under the Company’s credit agreement withBremer Bank include a commercial revolving credit line, which provides formaximum advances of $2,250,000 with interest at the prime rate.  The Company had no borrowings under thiscredit line at September 30, 2005.  The credit agreement contains certaincovenants requiring the Company to maintain certain financial ratios.  The Company was in compliance with theserequirements as of September 30, 2005. Management believes that funds available under this line of credit,along with funds generated from card club and simulcast operations, will besufficient to satisfy its liquidity and capital resource requirements during2005.

 

7

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3.     OPERATING SEGMENTS

 

During the first nine months of 2005 and 2004, theCompany had three reportable operating segments:  horse racing, card club and concessions.  The card club segment primarily representsoperations of the Canterbury Card Club. The horseracing segment primarily represents simulcast and live horseracing operations, and the concessions segment primarily represents food andbeverage provided during the simulcast and live racing, in the card club, andduring special events.  The Company’s reportableoperating segments are strategic business units that offer different productsand services.  They are managedseparately because the segments differ in the nature of the products andservices provided as well as processes to produce those products andservices.  The horse racing and card clubsegments are regulated by the State of Minnesota Racing Commission.

 

The accounting policies of the operating segmentsare the same as those described in the summary of significant accountingpolicies included in the 2004 Annual Report on Form 10-K.

 

Depreciation, interest expense and income taxes areallocated to the segments but no allocation is made to concessions for sharedfacilities.  However, the concessionssegment pays approximately 25% of gross revenues earned on live racing andspecial event days to the horse racing segment for use of the facilities.

 

The following tables provide information about theCompany’s operating segments (in 000’s):

 
| ** **                          | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **Card Club**                                 | ** ** | **Horse Racing** | ** ** | **Concessions** | ** ** | **Total** | ** ** |
| Revenues from  external customers   |       | $                                             | 22,100     |   | $ | 16,110 |   | $ | 4,905 |   | $ | 43,115 |   |
|                                |       |                                          |       |   |   |   |   |   |   |
| Intersegment  revenues              |       | —                                        |       | 320 |   | 1,497 |   | 1,817 |   |
|                                |       |                                          |       |   |   |   |   |   |   |
| Net interest  income                |       | —                                        |       | 77 |   | — |   | 77 |   |
|                                |       |                                          |       |   |   |   |   |   |   |
| Depreciation                        |       | 411                                           |       | 772 |   | — |   | 1,183 |   |
|                                |       |                                          |       |   |   |   |   |   |   |
| Segment  income before income taxes |       | 4,616                                         |       | (519 | ) | 1,236 |   | 5,333 |   |
|                                |       |                                          |       |   |   |   |   |   |   |
| Segment  Assets                     |       | $                                             | 3,479      |   | $ | 26,570 |   | $ | 4,046 |   | $ | 34,095 |   |

 
| ** **                          | ** ** | **Nine Months Ended September 30, 2004** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **Card Club**                                 | ** ** | **Horse Racing** | ** ** | **Concessions** | ** ** | **Total** | ** ** |
| Revenues  from external customers   |       | $                                             | 21,336     |   | $ | 17,105 |   | $ | 4,647 |   | $ | 43,088 |   |
|                                |       |                                          |       |   |   |   |   |   |   |
| Intersegment  revenues              |       | —                                        |       | 341 |   | 1,433 |   | 1,774 |   |
|                                |       |                                          |       |   |   |   |   |   |   |
| Net interest  income                |       | —                                        |       | 24 |   | — |   | 24 |   |
|                                |       |                                          |       |   |   |   |   |   |   |
| Depreciation                        |       | 374                                           |       | 556 |   | — |   | 930 |   |
|                                |       |                                          |       |   |   |   |   |   |   |
| Segment  income before income taxes |       | 4,966                                         |       | 243 |   | 1,135 |   | 6,344 |   |
|                                     |            |                                               |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **      | ** ** | **Twelve Months Ended December 31, 2004** | ** ** |
|-----------------|------------|------------------------------------------------|------------|
|            |       |                                           |       |   |   |   |   |   |   |
| Segment  Assets |       | $                                              | 3,688      |   | $ | 24,397 |   | $ | 3,164 |   | $ | 31,249 |   |
|                 |            |                                                |            |  |  |  |  |  |  |  |  |  |  |

 

8

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The following are reconciliations of reportablesegment revenue, income before income taxes, and assets, to the Company’sconsolidated totals (in 000’s):

 
| ** **                                              | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Revenues                                                | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Total  revenue for reportable segments                  |       | $                                        | 44,932     |   | $ | 44,862 |   |
| Elimination  of intersegment revenues                   |       | (1,817                                   | )          | (1,774 | ) |
| Total consolidated revenues                             |       | $                                        | 43,115     |   | $ | 43,088 |   |
|                                                    |       |                                     |       |   |   |
| Income before income taxes                              |       |                                     |       |   |   |
| Total segment income before income taxes                |       | $                                        | 5,333      |   | $ | 6,344 |   |
| Elimination  of intersegment income before income taxes |       | (1,268                                   | )          | (1,125 | ) |
| Total consolidated income before income  taxes          |       | $                                        | 4,065      |   | $ | 5,219 |   |

 
| ** **                               | ** ** | **September 30  2005** | ** ** | **December 31  2004** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Assets                                   | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| Total assets  for reportable segments    |       | $                           | 34,095     |                       | $          | 31,249 |   |
| Elimination  of intercompany receivables |       | (3,998                      | )          | (3,026                     | )          |
| Total consolidated assets                |       | $                           | 30,097     |                       | $          | 28,223 |   |

 

4.     CONTINGENCIES

 

In accordance with an Earn Out Note, given to theprior owner of the racetrack as part of the consideration paid by the Companyto acquire the racetrack in 1994, if (i) off-track betting becomes legallypermissible in the State of Minnesota and (ii) the Company begins toconduct off-track betting with respect to or in connection with its operations,the Company will be required to pay to the IMR Fund, L.P. the greater of $700,000per operating year, as defined, or 20% of the net pretax profit, as defined,for each of five operating years.  Atthis time, management believes that the likelihood that these two conditionswill be met, and that the Company will be required to pay these amounts, isremote.  In the event these conditionsare met and the subsequent payments made, they will be capitalized a part ofthe purchase price in accordance with generally accepted accounting principles.

 

The Company is periodically involved in variouslegal actions arising in the normal course of business.  At September 30, 2005, managementbelieves that the resolution of any legal actions outstanding will not have amaterial impact on the consolidated financial statements.

 

9

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

 

##### **General**

 

Canterbury Park Holding Corporation (the “Company”)owns and operates the Canterbury Park Racetrack and Card Club in Shakopee,Minnesota.  The primary businesses of theCompany are simulcast and live pari-mutuel horse racing, hosting unbanked cardgames, and food and beverage operations.

 

The Racetrack is the only pari-mutuel horseracing facility in the State of Minnesota. The Racetrack earns revenues from pari-mutuel take-out on racessimulcast year-round to Canterbury Park from racetracks throughout the countryand from live race meets featuring thoroughbred and quarter horse racing.  Live race meets commence in the month of May andconclude in September each year. During live race meets, the Company televises its races to out-of-stateracetracks around the country, and earns additional pari-mutuel revenue onwagers 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 opentwenty-four hours a day, seven days a week. 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 hasagreed with the Minnesota Horsemen’s Benevolent and Protective Association (the“MHBPA”) to pay 15% of Card Club revenues into the purse fund for 2005 and2004.

 

The Company also generates revenues fromother activities such as admission and parking fees, sales of food and beverageand programs and other racing publications, and corporate sponsorships.Additional revenues are derived from an RV park and the use of the Racetrackfacilities for special events such as concerts, craft shows and snowmobileracing.

 

**Results of Operations for the****Three and****Nine****Months Ended September 30,2005 and September 30, 2004**

 

Total operating revenues remained relativelyunchanged at $43.1 million for the nine months ended September 30, 2005compared to the nine months ended September 30, 2004, and decreasedapproximately $794,000 or 4.6% for the three months ended September 30,2005 compared to the three months ended September 30, 2004.

 

Pari-mutuel revenues decreased approximately$1.1 million or 7.7% in the nine month period ended September 30, 2005compared to the same period in 2004, reflecting the decrease in total handlefor the nine months ended September 30, 2005 of $8.2 million or 9.7%,compared to the nine-month period in 2004. The Company experienced lower levelsof wagering in all pari-mutuel categories during the three and nine-monthperiods ended September 30, 2005 (refer to the Summary of Pari-Mutuel Databelow). Total handle wagered on simulcast races year-to-date in 2005 decreased$4.5 million or 9.1% compared to year-to-date through September 30,2004.  In addition, on-track live handledecreased by $399,000 or 2.2% compared to the same period in 2004 despite oneadditional live racing day in 2005. Finally,

 

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out-of-state live handle decreased $3.3 million, or 18.8%, in the firstnine months of 2005 compared to the same period last year, due primarily tolower wagering at out-of-state racetracks on the nationally recognized ClaimingCrown racing event.  In addition, theCompany discontinued accepting wagers on Canterbury’s live race meet fromselected Internet wagering and offshore entities due to questions about theregulation of these entities.

 

The reduction in simulcast handle can beprimarily attributed to overall industry as well a number of other factorsincluding significant growth in the accessibility of internet pari-mutuelwagering, the lack of a Triple Crown contender in the Belmont Stakes, and majorconstruction projects in 2005 on freeways leading to Canterbury Park.   There is also a shift in simulcast handlefrom days when only simulcasting is offered (see table below) to days when bothlive and simulcast racing are offered, due to the live meet starting one weekearlier on Kentucky Derby day, May 7th, in 2005 compared to May 14thin 2004.  The Kentucky Derby simulcasthandle of $1.4 million in 2005 included in the table below in simulcast handle forlive and simulcast days, compares to 2004 $1.5 million Kentucky Derby simulcasthandle which is included in simulcast handle for simulcast only days.  The Company continues to look for ways tomake Canterbury Park the most attractive alternative when our customers want towager on horseracing.  A number ofpromotions and initiatives to encourage on-track simulcast wagering haverecently been implemented.

 

 
| ** **                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------|------------|
| **Summary of Pari-mutuel Data:**  | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                        | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **Racing Days**                   | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Simulcast  only days              |       | 205                                      |       | 207 |   |
| Live and  simulcast days          |       | 68                                       |       | 67 |   |
| Total Racing  Days                |       | 273                                      |       | 274 |   |
| ** **                        | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **On-Track Handle**               | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Simulcast  only days              |       |                                     |       |   |   |
| Simulcast  handle                 |       | $                                        | 27,375,000 |   | $ | 31,492,000 |   |
| Live and  simulcast days          |       |                                     |       |   |   |
| Live handle                       |       | 17,591,000                               |       | 17,990,000 |   |
| Simulcast  handle                 |       | 17,287,000                               |       | 17,657,000 |   |
|                              |       |                                     |       |   |   |
| **Out-of-state Live Handle**      |       | 14,180,000                               |       | 17,473,000 |   |
|                              |       |                                     |       |   |   |
| **Total  Handle**                 |       | $                                        | 76,433,000 |   | $ | 84,612,000 |   |
| ** **                        | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **On-Track Average Daily Handle** | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Simulcast  only days              |       | $                                        | 133,537    |   | $ | 152,135 |   |
| Live and  simulcast days          |       | $                                        | 512,912    |   | $ | 532,045 |   |

 

Total Card Club revenue increased $764,000 or3.6% and decreased $270,000 or 3.5% for the nine and three-month periods ended September 30,2005, respectively, compared to the same periods in 2004.  The primary source of Card Club revenue is apercentage of the wagers received from the players as compensation forproviding the Card Club facility and services, referred to as “collectionrevenue”.  Other Revenue includes feescollected for the

 

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administration of tournaments, and amounts earned as reimbursement ofthe administrative costs of maintaining the jackpot funds.

 

The increase in year-to-date Card Clubrevenue is due primarily to growth of $1.6 million or 13.4% in poker revenue,partially offset by reductions of $677,000 or 7.8% in casino games and $164,000or 2.5% in other revenues.  The decreasein the third quarter is composed of decreases in casino games revenue of$388,000 or 12.7% and other revenue of $133,000 or 45.1% partially offset by anincrease in poker revenue of $251,000 or 5.8%. The popularity of Texas Hold’Em and televised poker tournamentscontinues to fuel growth in the Company’s poker business.  However, the Company experienced asignificant increase in competition in 2005 from local Native American casinos,which have expanded their casino games offerings to include the same unbankedcard games offered at the Card Club. Other revenue decreased during the nineand three-month periods ended September 30, 2005 compared to the sameperiods in 2004 due to timing of tournament fee revenue from the Fall ClassicPoker Tournament which was held in October 2005, compared to September of2004.

 

Card Club revenues represented 51.3% and44.8% of total revenues for the nine-month and three-month periods ended September 30,2005, respectively. This compares to 49.5% and 44.3% for the nine-month andthree-month periods ended September 20, 2004.  The percentages for the three-month periodare lower due to increased pari-mutuel revenues in the third quarter due to thelive race meet.  The increase inpercentages for the nine-month periods is due to decreasing overall pari-mutuelrevenue year-to-date.  See the “Summaryof Card Club Data” below.

 
| ** **                     | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------|------------|------------------------------------------|------------|
| **Summary of Card Club Data:** | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                           |       |                                     |       |   |   |
| Poker Games                    |       | $                                        | 13,575,000 |   | $ | 11,970,000 |   |
| Casino Games                   |       | 8,039,000                                |       | 8,716,000 |   |
| Total  Collection Revenue      |       | 21,614,000                               |       | 20,686,000 |   |
|                           |       |                                     |       |   |   |
| Other  Revenue                 |       | 486,000                                  |       | 650,000 |   |
| Total Card  Club Revenue       |       | $                                        | 22,100,000 |   | $ | 21,336,000 |   |
|                           |       |                                     |       |   |   |
| Number of  Days Offered        |       | 273                                      |       | 274 |   |
| Average  Revenue per Day       |       | $                                        | 80,952     |   | $ | 77,869 |   |

 

Concession sales for the nine-month andthree-month periods ended September 30, 2005 increased 7.1% and 3.7%,respectively, compared to the same periods in 2004.  The year-to-date increase is due primarily toincreases in revenues for group sales and concession sales during the live racemeet.  The increase for the third quarteris primarily due to a growth in Group Sales revenues, offset by a decrease inrevenues in the Card Club due partly to the timing of the Fall Classic PokerTournament.

 

Revenue from publication sales decreased11.5% and 5.5% for the third quarter and year-to-date 2005, compared to thesame periods in 2004.  The decrease isdirectly attributable to fewer simulcast patrons in 2005.

 

Operating expenses increased $1.2 million or3.3% during the nine month period ended September 30, 2005 compared to thenine month period ended September 30, 2004, and

 

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decreased $62,000 or .4% during the three months ended September 30,2005 compared to the three month period ended September 30, 2004.  However, total operating expenses as apercentage of total operating revenues increased to 90.8% for the nine-monthperiod ended September 30, 2005 from 87.9% for 2004.  This is primarily attributable to a reductionin revenues in 2005, accompanied by increases in fixed operating expenses suchas depreciation, insurance and regulatory costs.

 

The total of statutory purse and Minnesotabreeders’ fund expenses has decreased approximately $144,000 or 1.8% and$197,000 or 5.1%, respectively, during the nine and three month periods of 2005compared to 2004.  Pari-mutuel relatedpurse and breeder’s fund expense decreased $356,000 or 7.0% and $201,000 or7.3%, respectively, during the nine and three month periods of 2005 compared to2004.  These decreases are due to lowerlevels of pari-mutuel wagering in the nine and three-month periods.  Host fees and pari-mutuel taxes havedecreased due to the lower wagering levels as well.  This decrease is partly offset by an increasein total Card Club statutory purse and breeders’ fund expense of $212,000 or6.8% and $4,000 or .4% for the nine and three-month periods ended September 30,2005 due to higher Card Club revenues in the corresponding 2005 periods.

 

Salaries and benefits increased approximately$870,000 or 5.6%, in the nine-month period ended September 30, 2005 and$28,000, or .5%, in the three-month period compared to the same periods lastyear.  The year-to-date increase includesan increase of $168,000 in insurance and benefit costs related to higherpremium rates and greater participation than in 2004; an increase in laborrelated to concessions sales of $123,000 primarily due to increased revenues;an increase in direct Card Club labor of $314,000 primarily attributable tohigher revenues, and a $112,000 increase in labor supporting live racingresulting from the live meet starting a week earlier than in 2004.  Concessions and Card Club labor were alsoimpacted by the minimum wage increase of $1.00 effective August 1, 2005,which resulted in an increase of approximately $60,000 in hourly labor costs inthe third quarter of 2005.  While allcategories of pari-mutuel revenues decreased in the third quarter andyear-to-date in 2005, there is only a minimal decrease in labor costs asout-of-state wagers require no on-track hourly labor and there is only minimalvariable labor associated with simulcast racing on a non-live race day.

 

Cost of sales expense increased approximately$209,000 or 8.2% in the nine-month period and $37,000 or 3.4% in thethree-month period compared to the same periods in 2004, due primarily toincreases in the cost of concession sales due to increases in food and beveragerevenues and complimentary beverages provided in the Card Club, and to higherproduction costs for the live race program due to higher attendance during the2005 live race meet compared to 2004.

 

Depreciation expense increased $254,000 or27.3% and $109,000 or 32.8% for the nine and three-month periods ended September 30,2005, respectively, compared to the same periods in 2004.  This increase is primarily attributable tothe simulcast area remodeling in 2004 as well as to improvements to the stablearea and training facilities between the end of the 2004 and beginning of the2005 live race meets.

 

Utilities expenses increased for thenine-month and three-month periods in 2005 due primarily to an increase inelectric rates and increased electric usage. Repairs, maintenance and supplies expense decreased approximately$55,000 or 4.6% for the first nine months of 2005 compared to the same periodin 2004, and increased $73,000 or 18.5% in the third quarter of 2005 comparedto the third quarter of 2004.  Thefluctuations are due to the timing of

 

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purchases of replacement chips for the Card Club as well as timing ofnormal recurring maintenance and supply items. Advertising and marketing expenses decreased approximately $95,000 or4.5% in the nine-month period and $41,000 or 4.4% in the three-month periodcompared to the same periods last year due primarily to decreased participationin the patron loyalty program.  Insuranceexpense increased approximately $97,000 or 11.4% for the nine-month period and$30,000 or 10.2% for the three-month period compared to the same periods in2003 due to increased premiums for workers compensation and general liabilityinsurance. Other operating expenses increased approximately $208,000 or 6.5% inthe nine-month period compared to 2004 primarily due to increases in consultingfees, the cost of services related to the regulation of our live race meet, andpersonnel expenses.  Other operatingexpenses decreased $69,000, or 5.1%, in the three-month period ended September 30,2005 compared to the prior year primarily due to a provision for bad debts inthe third quarter of 2004 for $50,000 which did not recur, and to a reductionin professional fees of approximately $42,000.

 

Income before income taxes was $4,064,569 forthe nine months ended September 30, 2005 compared to $5,218,677 for thenine months ended September 30, 2004. After income tax expense of $1,841,620 for the nine months ended September 30,2005, net income was $2,222,949 in 2005 compared to $2,905,242 in 2004.  Our effective income tax rate for the ninemonths ended September 30, 2005 was 45.3% compared to 44.3% for the sameperiod a year ago.  The difference in theeffective rate is due to the non-deductibility of certain lobbying expenses forincome tax purposes.  Income before incometaxes for the quarter ended September 30, 2005 was $1,188,574 compared to$1,894,111 for the quarter ended September 30, 2004.  After income tax expense of $500,202 in thethird quarter of 2005, net income was $688,372 compared to $1,064,204 for thethird quarter of 2004.

 

##### **Commitmentsand Contingencies**

 

On July 8, 2005, the Company paid a specialcash dividend of $.25 per share of common stock payable to shareholders ofrecord on June 17, 2005.  TheCompany has not adopted any policies regarding dividend payments and there canbe no assurance that any dividend will be paid in the future.

 

There have been no additional material changesin our outstanding commitments and contingencies since those reported at December 31,2004.

 

**Liquidity and Capital Resources**

 

During the period January 1, 2005through September 30, 2005, cash provided by operating activities was$2,934,095, which resulted primarily from net income of $2,222,949;depreciation of $1,183,350; an increase in accounts payable and accrued wagesand payroll taxes of $408,225, due to an increase in accounts payable of $607,000primarily attributable to a $213,000 increase in host fees payable, an increaseof $76,000 in amounts due to host tracks for settlements, an increase of$108,000 in host fees payable and $142,000 in deferred revenue from corporatesponsorship agreements.  Partiallyoffsetting these increases was a decrease in accrued wages of $199,000 dueprimarily to the net effect of a decrease in the number of days accrued at September 30compared to December 31 of $467,000 and an increase of $232,000 in amountsaccumulated for the employee stock purchase plan. These items which providedcash for operating activities were partially offset by a decrease in amountsdue to the MHBPA of $294,201 resulting primarily from purses paid during thelive meet; an increase in other current assets of $262,060 due to increases inprepaid expenses resulting

 

14

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from the timing of payments for insurance premiums and license feesassessed by the Minnesota Racing Commission; and a decrease of $194,154 inpayable to horsepersons due to requested pay outs to horse organizations.

 

Pursuant to an agreement with the MHBPA,during the nine months ended September 30, 2005 and 2004, the Companytransferred into a trust account for these purposes or paid directly to theMHBPA $6,500,000 and $6,450,000 respectively. At September 30, 2005, the Company had a receivable from the MHBPAof $163,055 resulting from purse overpayments by the thoroughbred horsemenduring the live meet that concluded on September 5, 2005.  This receivable was collected in full on October 14,2005.

 

During the period January 1, 2004through September 30, 2004, cash provided by operating activities was$6,415,793, which resulted primarily from net income of $2,905,242; depreciationof $929,750; an increase in Card Club accruals of $1,057,959 including anincrease of $376,508 for jackpot funds and the player pool, and prize money forthe Fall Classic poker tournament of $504,000; and an increase in accountspayable and accrued wages and payroll taxes of $1,623,831, due to an increasein accounts payable of $851,000 primarily attributable to an increase of$279,000 in vendor payables, an increase of $159,000 for MVP Program rewards, a$151,000 increase in uncashed winning tickets and an increase of $158,000 inhost fees payable.  Also, accrued wagesrose $772,000 compared to December 31, 2003 due to an increase in thenumber of days accrued at September 30 compared to December 31. Theseitems were partially offset by an increase in accounts receivable of $261,580due to guest fees from other racetracks and receivables from group sales; andan increase in other current assets of $281,718 due to an increase in prepaidexpenses including rising insurance premiums and license fees assessed by theMinnesota Racing Commission.  .

 

Net cash used in investing activities for thefirst nine months of 2005 of $2,728,935 resulted primarily from $3.1 million inadditions to building improvements and equipment.  A number of improvement projects in the barnarea and facilities supporting live racing at the Racetrack were completed inearly 2005 and a new outdoor catering area was added before the start of liveracing.  This was partially offset by adecrease is restricted cash resulting primarily from decreases in amounts dueto the MHPBA and other horsemen.  Duringthe nine-month period ended September 30, 2004, net cash used forinvestment purposes was approximately $4.0 million resulting primarily from$3.3 million in building improvements, the most significant of which was therenovation of the club-level of the Racetrack’s grandstand facility totaling$1.8 million, the acquisition of gaming equipment for the Card Club, and otherequipment and building improvement projects. In addition the Company experienced an increase in restricted cash of$780,134 due primarily to a $377,000 increase in the Card Club’s jackpot poolsand player pool caused by timing differences due to jackpots, prizes andgiveaways paid to the players

 

During the period January 1, 2005through September 30, 2005, cash used in financing activities was$472,240, representing a special cash dividend to shareholders of $973,717,which was partially offset by proceeds of $501,477 from the exercise of stockoptions.  During the period January 1,2004 through September 30, 2004, cash used in financing activities was$681,668 representing a special cash dividend to shareholders of $947,129, andwhich was partially offset by proceeds of $265,641from the exercise of stockoptions.

 

The Company has renewed a general creditagreement with Bremer Bank, which provides a revolving credit line of up to$2,250,000 with interest at the prime rate until April 20,

 

15

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2007.  The Company had noborrowings under the line of credit at September 30, 2005 or December 31,2004.  The credit agreement containscertain covenants requiring the Company to maintain certain financialratios.  The Company was in compliancewith these requirements at all times throughout the quarter ended September 30,2005.

 

Unrestricted cash balances at September 30,2005 were $3,911,464 compared to $4,178,544 at December 31, 2004. TheCompany believes that the funds available in its cash accounts, amountsavailable under the general credit and security agreement, along with fundsgenerated from operations, will be sufficient to satisfy its liquidity andcapital resource requirements during 2005 for regular operations.

 

##### **CriticalAccounting Policies**

 

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 2004 Annual Report on Form 10-K. We believethe following critical accounting policies affect our more significantjudgments and estimates used in the preparation of our consolidated financialstatements.

 

*Land, Buildings and Equipment* - We havesignificant capital invested in our property and equipment, which representsapproximately 74% of our total assets. We utilize our judgment in various waysincluding: determining whether an expenditure is considered a maintenanceexpense or a capital asset; determining the estimated useful lives of assets;and determining if or when an asset has been impaired. 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 valueand is charged to operations in the period in which such impairment isdetermined by management.

 

*Regulation –*Gamingactivities are subject to extensive statutory and regulatory control by federaland state agencies and could be significantly affected by any changes in thepolitical climate and changes to economic and regulatory policies.  These changes may impact the operations ofthe Company in a materially adverse way. Significant adverse changes couldresult in an impairment of our property and equipment in accordance withgenerally accepted accounting standards. Additional information regarding howour business can be impacted by legislative and regulatory changes are includedin Item 1 (vi), and Item 1 (vii), respectively, in our 2004 Annual Report on Form 10-K.

 

16

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**Legislation**

 

On March 10, 2005, a bill was introducedin the Minnesota Legislature, to allow electronic gaming devices to be operatedby the Minnesota State Lottery at the Racetrack.  This concept, often referred to as a “Racino”,as proposed for Canterbury Park would include 3,000 gaming devices, a 250-roomhotel, an Olympic scale horse park and additional restaurant venues.  Legislation was also introduced in the 2005session to remove the 50-table limit in the card room defined by currentMinnesota Law, and to impose a gaming tax on card room revenues. However, on July 13,2005 the Minnesota Legislature adjourned without taking further action on anyof these bills.

 

Legislation was enacted in Minnesota to raisethe minimum wage from $5.15 to $6.15 an hour effective August 1,2005.  Minnesota joined 15 other stateswith higher minimums than those set by the Federal government.  In addition, the Minnesota Legislature passeda law authorizing social Texas Hold’em tournaments in bars andrestaurants.  Under this new law, barsand restaurants cannot charge an entry fee for participating in a tournament oraward total prizes more than $200.  Dueto the very recent commencement date of this legislation, management is unableto determine at this time what effect this legislation has had, or potentiallymay have, on the Company’s Card Club operations.

 

The Minnesota Legislature will reconvene in March 2006,and the Racino legislation will be pending in the Minnesota House. Based on thesuccess of several Racinos in other states, the Company believes that if thislegislation becomes law, it will enhance horse racing with increased purses,provide growth and development opportunities for the Company, and producesignificant new tax revenues for state and local governments.  The effort to obtain legislative authorityfor these initiatives has required, and will continue to require, substantialexpenditures and there can be no assurance that any bill favorable to theCompany’s interests will be enacted into law.

 

**Factors Affecting Future Performance**

 

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 suchforward-looking statements, the Company claims the protection of the safeharbor for forward-looking statements contained in federal securitieslaws.  Shareholders and the investingpublic should understand that such forward-looking statements are subject torisks and uncertainties which could cause actual performance, activities orplans to differ significantly from those indicated in the forward-lookingstatements.  Such risks and uncertaintiesinclude, but are not limited to: fluctuations in attendance at the Racetrack,material changes in the level of wagering by patrons, decline in interest inthe unbanked card games offered at the Card Club, legislative and regulatorychanges, the impact of wagering products and technologies introduced bycompetitors; increases in the percentage of revenues allocated for purse fundpayments; increase in compensation and employee benefit costs; the generalhealth of the gaming sector; higher than expected expense related to newmarketing initiatives; and other factors discussed from time to time in theCompany’s filings with the Securities and Exchange Commission.

 

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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 primerate.  At September 30, 2005 we haveno 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 and cash equivalents ininvestment grade, highly liquid investments, consisting of money marketinstruments, bank certificates of deposit, and short-term government andcorporate bonds.

 

**ITEM 4:     CONTROLSAND PROCEDURES**

 

(a)                                  Evaluationof Disclosure Controls and Procedures:

 

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

 

(b)                                 Changesin Internal Control Over Financial Reporting:

 

There have been no significant changes ininternal control over financial reporting that occurred during the fiscalquarter covered by this report that have materially affected, or are reasonablylikely to materially affect, the registrant’s internal control over financialreporting.

 

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**Part II - OTHER INFORMATION**

 
| Item 1. | ** ** | **Legal Proceedings**                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |       | Not Applicable                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Item 2. | ** ** | **Unregistered Sales of Equity Securities and****Use of Proceeds**                                                                                                                                                                                                                                                                                                                                                                     |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |       | Not Applicable                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Item 3. | ** ** | **Defaults Upon Senior Securities**                                                                                                                                                                                                                                                                                                                                                                                                    |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |       | Not Applicable                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Item 4. | ** ** | **Submission of Matters to a Vote of Security  Holders**                                                                                                                                                                                                                                                                                                                                                                               |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |       | Not Applicable                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Item 5. | ** ** | **Other Information**                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |       | Not Applicable                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Item 6. | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                           |
|    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                             |
|    |       | (a)                                  The following  exhibits are included herein:                                                                                                                                                                                 |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |       | 11                                    Statement  re computation of per share earnings – See Net Income Per Share under Note 1  of Notes to Consolidated Financial Statements under Part 1, Item 1,  which is incorporated herein by reference |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |       | 31.1                           Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (rules 13a-14 and 15d-14 of the Exchange Act).                                                                                                         |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |       | 31.2                           Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (rules 13a-14 and 15d-14 of the Exchange Act).                                                                                                         |
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |       | 32                                    Certfications  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  1350).                                                                                                                  |

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                                 | **Canterbury Park Holding Corporation**     |
|--------------------------------------|---------------------------------------------|
|                                 |                                        |
| Dated:   November 14, 2005 |   /s/ Randall D. Sampson          |
|                                 | Randall D. Sampson,                         |
|                                 | President, and Chief Executive Officer      |
|                                 |                                        |
| Dated:   November 14, 2005 |   /s/ David C. Hansen             |
|                                 | David C. Hansen,                            |
|                                 | Vice President, and Chief Financial Officer |

 

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