**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-K**

 
| **(Mark  One)**                                                                                                                                                                     | ** ** | ** **                                                                                     | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|------------|
| **ý**                                                                                                                                                                          | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|                                                                                                                                                                                |       |                                                                                           |
| **For the fiscal year ended December 31, 2005**                                                                                                                                     |
|                                                                                                                                                                                |
| **OR**                                                                                                                                                                              |
|                                                                                                                                                                                |       |
| **o**                                                                                                                                                                               | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                          | ** ** | ** **                                                                                     |
| **For the Transition period from              to              ** |

 

**CommissionFile Number:  001-31569**

 

**CANTERBURY PARK HOLDINGCORPORATION**

(Exact Name ofRegistrant as Specified in Its Charter)

 

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

 

**1100 Canterbury Road**

**Shakopee, MN 55379**

(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code:  **(952) 445-7223**

 

Securities registered pursuant to Section12(b) of the Act:

 

| **Common Stock, $.01 par value** | ** ** | **American Stock Exchange**          |
|----------------------------------|------------|--------------------------------------|
| Title of Each Class              |       | Name of Exchange on which Registered |

 

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

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section15(d) of the Act.
|   | YES | o |   | NO | ý |   |
|--------|-----|---|--------|----|--------|--------|

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.
|   | YES | ý |   | NO | o |   |
|--------|-----|--------|--------|----|---|--------|

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Rule 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.   o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Exchange Act Rule 12b-2).
|   | Large accelerated filer | o | Accelerated filer | o | Non-accelerated filer | ý |   |
|--------|-------------------------|---|-------------------|---|-----------------------|--------|--------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Exchange Act Rule12b-2).
|   | YES | o |   | NO | ý |   |
|--------|-----|---|--------|----|--------|--------|

 

The aggregatemarket value of the shares of voting and non-voting common equity held bynon-affiliates computed by reference to the price at which the common equitywas last sold of $17.40 per share on the American Stock Exchange as of the lastbusiness day of the registrant’s most recently completed second fiscal quarter,June 30, 2005, was approximately $41,566,000.

 

On March 22,2006, the Company had 4,014,885 shares of common stock, $.01 par value,outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions ofthe Company’s definitive Proxy Statement for its 2006 Annual Meeting ofShareholders, to be held on June 1, 2006, are incorporated by reference intoPart III of this Form 10-K.

 

 

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CANTERBURY PARK HOLDING CORPORATION

FORM 10-K ANNUAL REPORT

FOR THE YEAR ENDED DECEMBER 31, 2005

 

TABLE OF CONTENTS

 
| PART I         |
|----------------|
|           |   |   |   |
| ITEM 1.        |   | Business |   |
| ITEM 1A.       |   | Risk Factors |   |
| ITEM 1B.       |   | Unresolved Staff Comments |   |
| ITEM 2.        |   | Properties |   |
| ITEM 3.        |   | Legal Proceedings |   |
| ITEM 4.        |   | Submission of Matters to a Vote of Security  Holders |   |
|           |   |   |   |
| PART II        |
|           |   |   |   |
| ITEM 5.        |   | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities |   |
| ITEM 6.        |   | Selected Financial Data |   |
| ITEM 7.        |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
| ITEM 7A.       |   | Quantitative and Qualitative Disclosures  about Market Risk |   |
| ITEM 8.        |   | Financial Statements and Supplementary Data |   |
| ITEM 9.        |   | Changes In and Disagreements With  Accountants on Accounting and Financial Disclosure |   |
| ITEM 9A.       |   | Controls and Procedures |   |
| ITEM 9B.       |   | Other Information |   |
|           |   |   |   |
| PART  III      |
|           |   |   |   |
| ITEM 10.       |   | Directors and Executive Officers of the  Registrant |   |
| ITEM 11.       |   | Executive Compensation |   |
| ITEM 12.       |   | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters |   |
| ITEM 13.       |   | Certain Relationships and Related Transactions |   |
| ITEM 14.       |   | Principal Accountant Fees and Services |   |
|           |   |   |   |
| PART  IV       |
|           |   |   |   |
| ITEM 15.       |   | Exhibits and Financial Statement Schedules |   |
|           |   |   |   |
| SIGNATURES     |   |
|           |   |
| EXHIBIT INDEX  |   |
|           |   |
| CERTIFICATIONS |   |

 

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**Item 1.****    BUSINESS**

 

#### ***(a) General Development of theBusiness***

 

CanterburyPark Holding Corporation (the “Company”) hosts pari-mutuel wagering on livethoroughbred and quarter horse racing at its facilities in Shakopee, Minnesota(the “Racetrack”) and pari-mutuel wagering on races held at out-of-stateracetracks that are televised simultaneously at the Racetrack (“simulcasting”).  In addition, the Company hosts “unbanked”card games.  The Company also derivesrevenues from related services and activities, such as concessions, parking,advertising, admissions, programs, a recreational vehicle park and from otherentertainment events held at the Racetrack.

 

TheCompany was incorporated under the laws of Minnesota on March 24, 1994 andacquired the Racetrack on March 29, 1994. On May 6, 1994 the Company commenced simulcasting operations, which noware generally conducted seven days per week. Beginning in May 1995, the Company began hosting live horse racing andrelated pari-mutuel wagering on a seasonal basis, generally from mid May tolate August or early September.

 

On April 19, 2000, theCompany opened its Canterbury Card Club (the “Card Club”).  At the Card Club patrons compete against eachother in various unbanked card games. The Card Club operates under laws adopted in 1999 (the “Card ClubLegislation”) and is regulated by the Minnesota Racing Commission (the “MRC”).  Under the Card Club Legislation, the Companyis authorized to host card games at up to 50 tables and receive a percentage ofthe wagers or a fee from the players as its revenue for providing the facilityand services.  The Card Club Legislationrequires that the Racetrack’s purse fund and the State of Minnesota Breeders’Fund receive a minimum of 10% to 14% of the gross revenue generated by the CardClub

 

TheCompany maintains a website at www.canterburypark.com.  Our annual reports on Form 10-K, our quarterlyreports on Form 10-Q and our periodic reports on Form 8-K (and any amendmentsto these reports) are available free of charge on our website.

 

***(b) Financial Information About Segments***

 

TheCompany divides its business into three segments: card club, horse racing andconcessions. The card club segment represents operations of the Canterbury CardClub. The horse racing segment represents simulcast and live racing operations,and the concessions segment represents food and beverage services for simulcastand live racing, the Card Club, and during special events. Further informationregarding the Company’s business segments is set forth in Note 10 of the Notesto Consolidated Financial Statements under Item 8 of this Form 10K and suchinformation is incorporated herein by reference.

 

***(c) Narrative Description of Business***

 

**(i)****            CardClub Operations**

 

The Card Clubis open 24 hours per day, seven days per week, offering two types of unbankedcard games: Poker and Casino Games.

 

Poker games,including Texas Hold ‘Em, 7-Card Stud and Omaha, with table limits rangingbetween $2 and $60, are currently offered on a maximum of 34 tables in thepoker room.  In the Canterbury Card Club,a dealer, employed by the Company, regulates the play of the game at each tableand deals the cards, but does not participate in play.  In poker games, the sponsor (the Company), isallowed to deduct a percentage from the accumulated wagers and impose other chargesfor hosting the activity, but does not have an interest in the outcome of agame.  The sponsor may add additionalprizes, awards, or money to any game for promotional purposes.  The Company collects a “rake” of 10% of eachaddition to the “pot”, up to a maximum of $4.00 or $4.50 per hand, depending onthe game, as its collection revenue.  Inaddition, poker games offer progressive jackpots

 

3

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for most games.  In order to fund the jackpot pool, the dealerwithholds $1.00 from each final pot, which exceeds the minimum of $15.

 

Casino Games,including Pai Gow Poker, Blackjack, Caribbean Stud, Let-It-Ride, Three CardPoker and Four Card Poker, are currently offered at 16 tables and are playedusing a “player pool” system.  “Playerpool” means a wagering system, in which wagers lost in card games, areaccumulated into a pool for purposes of enhancing the total amount paid back towinning players.  In such instances, thesponsor may only serve as custodian of the player pool and may not have anactive interest in any card game.  In thecasino games area of the Card Club, the amount that the dealer “wins” or “loses”during the course of play is accumulated in a “Player Pool” to be used to repayplayers in the form of promotions, giveaways, prizes or by other means.  The Company also takes a “rake” of $.50 to$3.00 per wager, depending on the game and size of wager, for the Company’scollection revenue.  The only casino gameto offer a progressive jackpot is Caribbean Stud.  The player has the option of playing thejackpot, and has the opportunity to win some, or all, of the jackpot amountdepending upon his hand.

 

**(ii)****           HorseRacing Operations**

 

The Company’shorse racing operations consist of year-round pari-mutuel wagering on simulcasthorse races (“simulcasting”) and live horse races (“live meets”) held on aseasonal basis beginning in May and concluding in September.  Thoroughbred and quarter horse racing isconducted during the live meet.  TheCompany has also conducted two-day harness racing live meets from time to time.

 

*LiveRacing.*

 

The Companyconducts live horse racing at its facility generally from mid-May until earlySeptember each year.  In 2005 theRacetrack hosted 68 days of live racing beginning May 7th and concludingSeptember 5th.  The meetincluded 46 days of mixed Thoroughbred and Quarter Horse racing and 22 days ofThoroughbred only racing.  The 2004 livemeet was 67 days long, beginning May 14th and ending September 6th, andconsisted of 35 days of mixed Thoroughbred and Quarter Horse racing and 32 daysof Thoroughbred only racing

 

Currently,Minnesota law requires the Racetrack to schedule a minimum of 125 days of liveracing annually, unless the MHBPA agrees to a lesser number of live racing days.  Since 1995, the MHBPA has agreed to waive the125-day requirement and allow the Company to run a live meet of at least 50days each year.  After 2006, no assurancecan be given that the MHBPA will agree to a shorter live meet than the 125-daystatutory minimum.  If the MHBPA does notagree to a live meet shorter than 125 days, the Company’s operations could beadversely impacted by a decrease in the daily purses and potential reduction inquality of horses, attendance and overall handle, as well as increasedoperating expenses.

 

*Simulcasting.*

 

Simulcastingis the process by which live horse races held at one facility (the “host track”)are transmitted simultaneously to other locations that allow patrons at eachreceiving location (the “guest track”) to place wagers on races transmittedfrom the host track.  Monies arecollected at the guest track and the information with respect to the totalamount wagered is electronically transmitted to the host track.  All of the amounts wagered at guest tracksare combined into the appropriate pools at the host track with the final oddsand payouts determined based upon all the monies in the respective pools.

 

The Companyoffers “full card” simulcast racing (broadcasting of another racetrack’s entiredaily live racing program) from up to 20 racetracks per day, seven days a week,364 days per year, including Churchill Downs, Hollywood Park, Santa Anita,Gulfstream Park, Belmont Park and Saratoga Racecourse.  In addition, races of national interest, suchas the Kentucky Derby, Preakness Stakes and Breeders’ Cup, supplement theregular simulcast program.  The Companyregularly evaluates its agreements with other racetracks in order to offer themost popular simulcast signals of live horse racing that are feasible to offer atthe Racetrack.

 

4

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Underapplicable provisions of federal and state law, the Racetrack must obtain theconsent of the state’s regulatory authority, and the organization whichrepresents the majority of the owners and trainers of the horses who race atthe Racetrack, with respect to simulcast operations both as a host and guesttrack.  In Minnesota such consent must beobtained from the Minnesota Horsemen’s Benevolent and Protective Association(the “MHBPA”) and the MRC.

 

**(iii)****         SpecialEvents**

 

Whilepari-mutuel horse racing and Card Club operations are the Company’s principalbusinesses, the Company’s facilities are capable of being used for multiplepurposes.  In an effort to more fullyutilize the property and to generate additional revenues, the Company hasincreasingly used its grandstand, grounds and parking lot for special eventsand rentals.  While the use of theCompany’s facilities for particular special events and purposes varies fromyear to year, the following are among the types of events and purposes forwhich the Company’s facilities have been used: snowmobile races, major arts andcrafts shows, trade shows, concerts, motorcycle races, fund raisers, automobileshows and competitions, vehicle and boat storage, and private parties.

 

**(iv)****          Sourcesof Revenue**

 

*General.*

 

The Company’srevenues are principally derived from Card Club operations, live and simulcasthorseracing and related activities, food and beverage sales and othersources.  For the fiscal year endedDecember 31, 2005 revenues from Card Club operations represented 53.6% of totalrevenues.  Horseracing and relatedactivities, including pari-mutuel revenue, admissions, parking and publicationsales, generated 32.0% of total revenues in 2005.

 

*Card ClubOperations*

 

TheCompany receives revenues from its Card Club operations, which run 24 hours perday, seven days per week.  The Companycurrently receives collection revenue from 34 poker tables and 16 tablesoffering casino games.  Under Minnesotalaw, the Company is required to pay 10% of the first $6 million of gross CardClub revenues as purse monies.  Aftermeeting the $6,000,000 threshold, the Company must pay 14% of gross Card Clubrevenues as purse monies, although by agreement with the MHBPA the Company paid14% of Card Club collection revenues into the purse fund in 2003 and 2002 and15% of Card Club revenues in 2005 and 2004. Of funds allocated for purses, the Company pays 10% of the purse moniesto the State of Minnesota Breeders’ Fund, with the remaining 90% of pursemonies divided between thoroughbred (90%), quarter horse (9%) and standard bred(1%) purse funds

 

##### *Horseracing and RelatedActivities*

 

Pari-mutuel wagering –General.

 

In pari-mutuelwagering, bettors wager against each other in a pool, rather than against theoperator of the facility or with preset odds. From the total amount wagered or “handle,” the Minnesota Pari-MutuelHorse Racing Act (the “Racing Act”) specifies the maximum percentage, referredto as the “takeout,” which may be withheld by the Racetrack, with the balancereturned to the winning bettors.  Thetakeout constitutes one of the Racetrack’s primary sources of operatingrevenue.  From the takeout, funds arepaid to the State of Minnesota for pari-mutuel taxes, with additional amountsset aside for purses and for the “Breeders’ Fund,” which is a fund apportionedby the MRC among various purposes related to Minnesota’s horse breeding andhorse racing industries.  The balance ofthe takeout remaining after these deductions is commonly referred to as the “retainage.”

 

5

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The variousforms of pari-mutuel wagering can be divided into two categories:  straight wagering pools and multiple wageringpools, which are also referred to as “exotic” wagering pools.  Examples of straight wagers include:  “win” (a wager on one specific horse tofinish first); “place” (a wager on one specific horse to finish first orsecond); and “show” (a wager on one specific horse to finish first, second orthird).  Examples of exotic wagersinclude: “daily double” (a wager in which the bettor selects the horses thatwill win two consecutive races);  “exacta”(a wager in which the bettor selects the horses that will finish first andsecond, in order); “trifecta” (a wager in which the bettor selects the horsesthat will finish first, second and third, in order); and “pick six” (a wager inwhich the bettor selects the horses that will finish first in six consecutiveraces).

 

The amount oftakeout earned by the Company depends on where the race is run and the form ofwager (straight or exotic).  Net revenuesfrom pari-mutuel wagering on live races run at the Racetrack consist of thetotal amount wagered, less the amounts paid (i) to winning patrons, (ii) forpurses, (iii) to the Breeders’ Fund and (iv) for pari-mutuel taxes to the Stateof Minnesota.  Net revenues frompari-mutuel wagering on races being run at out-of-state racetracks andsimulcast to the Racetrack have similar expenses, but also include a host feepayment to the host track.  The host fee,which is calculated as a percentage of monies wagered (generally 2.50% to4.50%), is negotiated with the host track and must comply with state lawsgoverning the host track.

 

Wagering on Live Races.

 

The Racing Actestablishes the maximum takeout that may be deducted from the handle.  The takeout percentage on live races dependson the type of wager.  The total maximumtakeouts are 17% from straight wagering pools and 23% from exotic wageringpools.  From this takeout, Minnesota lawrequires deductions for purses, pari-mutuel taxes and the Breeders’ Fund.

 

While theRacing Act provides that a minimum of 8.4% of the live racing handle is to bepaid as purses to the owners of the horses, the size of the purse is subject tofurther agreement with the horsepersons’ associations. The Breeders’ Fundreceives 1% of the handle.  Thepari-mutuel tax applicable to wagering on all live races is 6% of takeout inexcess of $12 million during the twelve month period beginning July 1 andending the following June 30.

 

The followingtable sets forth the percentage distribution of each dollar wagered on liveraces at the Racetrack, as established by the Racing Act, and the Racetrack’sretainage:

 
| ** **                      | ** ** | **Live Racing** | ** ** |
|---------------------------------|------------|-----------------|------------|
| ** **                      | ** ** | **Straight**    | ** ** | **Exotic** | ** ** |
|                            |       |            |       |   |   |   |   |   |   |
| Returned to  Winning Patrons    |       |            |       | 83.00 | % |   |   | 77.00 | % |
| Purse (1)                       |       | 8.40            |       |   |   | 8.40 |   |   |   |
| Minnesota Breeders’ Fund   |       | 1.00            |       |   |   | 1.00 |   |   |   |
| Minnesota Pari-Mutuel Taxes (2) |       | .17             |       |   |   | .23 |   |   |   |
| Racetrack Retainage (1)         |       | 7.43            |       |   |   | 13.37 |   |   |   |
| Total Takeout                   |       |            |       | 17.00 |   |   |   | 23.00 |   |
|                            |       |            |       |   |   |   |   |   |   |
| Total Handle                    |       |            |       | 100.00 | % |   |   | 100.00 | % |

 

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(1)           Minnesota law providesthat the 8.40% purse payment is a minimum. The actual percentage, if any, above the minimum is determined betweenthe Racetrack and the MHBPA.  Any additionalamounts paid for purses decrease the Racetrack’s retainage.

(2)           The current pari-mutueltax structure exempts the first $12 million of takeout during a statutorilymandated twelve-month period.  The totalpari-mutuel tax liability for a twelve-month period will depend upon the totaltakeout during that period.

 

6

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Wageringon Simulcast Races.

 

The amount oftakeout from simulcast wagering is determined by the laws of the state in whichthe host track is located.  In addition,the Racing Act establishes a minimum that must be set aside from simulcastingfor purse payments on racing within Minnesota. Different amounts are deducted for purses from the takeout depending onwhether simulcasting occurs during the “Racing Season,” a statutorily defined25 week period beginning in early May each year, or outside of the RacingSeason.  If simulcasting occurs duringthe Racing Season, the amount set aside for purses further depends on whetherthe simulcasting is part of a full racing card that occurs during the part ofthe day that live races are conducted at the Racetrack.  For races that are part of a full simulcastracing card that takes place within the time of live races at the Racetrack,the amount reserved for purse payout is 8.4%. For simulcasting conducted during the Racing Season that does not occurwithin the time period of live races, the purse is equal to 50% of the takeoutremaining after deductions for pari-mutuel taxes, payments to the Breeders’ Fundand payments to the host racetrack for host track fees.  For simulcasting conducted outside of theRacing Season, the amount that must be contributed to the purses is 25% of thetakeout after deducting pari-mutuel taxes, payments to the Minnesota Breeders’Fund and host fee payments to the host racetrack.

 

Thefollowing table sets forth the approximate percentage distribution of eachdollar wagered for races simulcast at the Racetrack and the Racetrack’sretainage at December 31, 2005 and 2004:

 
| ** **                       | ** ** | **During Racing Season**       | ** ** | ** **                         | ** ** |
|----------------------------------|------------|--------------------------------|------------|------------------------------------|------------|
| ** **                       | ** ** | **Concurrent with  Live Card** | ** ** | **Not Concurrent with  Live Card** | ** ** | **Outside of Racing  Season** | ** ** |
|                             |       |                           |       |                               |       |   |   |   |   |   |   |   |   |
| Returned to  Winning Patrons (1) |       |                           |       | 80.50                              | %          |   |   | 80.50 | % |   |   | 80.50 | % |
| Minnesota Breeders’ Fund    |       | 1.00                           |       |                               |       | 1.00 |   |   |   | 1.10 |   |   |   |
| Minnesota Pari-Mutuel Taxes (2)  |       | .19                            |       |                               |       | .19 |   |   |   | .19 |   |   |   |
| Purse (3)                        |       | 8.40                           |       |                               |       | 7.39 |   |   |   | 1.70 |   |   |   |
| Host Track Fees (4)              |       | 3.50                           |       |                               |       | 3.50 |   |   |   | 3.50 |   |   |   |
| Racetrack Retainage (3)          |       | 6.41                           |       |                               |       | 7.32 |   |   |   | 13.01 |   |   |   |
| Total  Takeout                   |       |                           |       | 19.50                              |       |   |   | 19.50 |   |   |   | 19.50 |   |
|                             |       |                           |       |                               |       |   |   |   |   |   |   |   |   |
| Total Handle                     |       |                           |       | 100.00                             | %          |   |   | 100.00 | % |   |   | 100.00 | % |

 

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(1)           This amount will dependupon the takeout at the host racetrack. This percentage will be determined by local and state law applicable tothe host track, and ranges from 75.0% to 85.0%.

 

(2)           The current pari-mutueltax structure exempts the first $12 million of takeout during a statutorilymandated twelve-month period.  The totalpari-mutuel tax liability for a twelve-month period will depend upon the totaltakeout during that period.

 

(3)           Although Minnesota lawspecifies purse percentages, the actual percentage is determined by agreementbetween the Racetrack and the MHBPA. Until December 31, 2004, Minnesota law allowed the Company to deduct anadditional 8% expense factor when calculating the purse contribution forperiods outside of the racing season. The MHBPA agreed to allow the Company to continue this deduction throughDecember 31, 2005.

 

(4)           Payments to the hosttrack generally range from 2.5% to 4.5% of total handle, subject to negotiationwith each host track.  For purposes ofthis table, the host track fee is assumed to be 3.5%.

 

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Revenues fromHorseracing Related Activities

 

The Company generatescash revenues from the receipt of admission and reserved seating charges,preferred and valet parking, and the sales of various daily pari-mutuelpublications.

 

*Food and Beverage Sales Revenues*

 

The Companyearns revenue from food and beverage sales in its restaurant and numerousconcession stands located throughout the facility.   Food and beverage sales occur during liveand simulcast racing, in the Card Club and during special events.

 

*Other Revenues*

 

Additionalrevenues are derived from the operation of an RV Park during the summer months,and the use of the facility year round for special events such as concerts,trade and craft shows, snowmobile racing, business meetings, private parties,horse expositions and sales, boat and automobile storage, communityevents.  The Company also generatesrevenue from providing advertising signage space similar to that appearing atmany sports stadiums and leases excess parking lot space for various automotiveactivities and vehicle storage.

 

**(v)****            Competition**

 

From 1994through 2004, the Company was the only Racetrack licensed to operate in theState of Minnesota.  On January 20, 2005,the MRC granted a license to the North Metro Harness Initiative, LLC (“NMHI”)to construct and operate a harness racetrack in Columbus Township, AnokaCounty, MN.  Construction has not begunon that facility as of March 2006. Columbus Township is approximately 50 miles from Canterbury Park.  This license authorizes NMHI to engage inpari-mutuel wagering on live and simulcast racing for standardbred (harness)horses.  Current Minnesota state lawpermits licensed racetracks to operate a card room with up to 50 tables subjectto completion of a 50-day live race meet and regulatory approval of a card roomplan of operation.  NMHI has publiclystated its intentions to seek legislation to allow them to apply for a licenseto operate a card room prior to completion of the minimum 50 live race days,and to permit pari-mutuel simulcast racing of all breeds at its racetrack.

 

The Companycompetes with other forms of gaming in the State of Minnesota, principallycasino-style gambling including slots and blackjack, and more recently unbankedcard games available at casinos located on Native American-owned landsthroughout the State of Minnesota, including a large casino locatedapproximately four miles from the Racetrack. In addition, the Company competes against charitable gambling (bingo andpull tabs) and various state lottery products. The Company also facesincreasing competition from offshore and out-of-state simulcast operationsoffering internet and telephone account home wagering systems to Minnesotaresidents, although Minnesota regulatory authorities believe such wagering isillegal.

 

The Companyalso competes with other forms of entertainment in the Minneapolis-Saint Paulmetropolitan area, including a wide range of live and televised professionaland collegiate sporting events.  Inaddition, live horse racing competes with a wide variety of summer attractions,including amusements parks, sporting events and other local activities.

 

In addition,the Company competes with racetracks located throughout the United States insecuring better quality horses to run at the Racetrack.  Attracting the owners and trainers of betterquality horses is largely dependent on the ability to offer large purses.  The Company experiences significantcompetition for better quality horses from a racetrack located near Des Moines,Iowa, as well as racetracks in Chicago, Illinois, both of which offersubstantially larger purses than the Company. This competition is expected to continue for the foreseeable future.

 

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**(vi)****          Regulation**

 

*General.*

 

The ownershipand operation of the Racetrack in Minnesota is subject to significantregulation by the MRC under the Racing Act and the rules adopted by theMRC.  The Racing Act provides for theallocation of each wagering pool to winning bettors, the Racetrack, purses, theState of Minnesota and the Breeders’ Fund and empowers the MRC to license andregulate substantially all aspects of horse racing in the State.  The MRC, among other things, grants operatinglicenses to racetracks after an application process and public hearings,licenses all employees of a racetrack, jockeys, trainers, veterinarians andother participants, regulates the transfer of ownership interests in licenses,allocates live race days and simulcast-only race days, approves race programs,regulates the conduct of races, sets specifications for the racing ovals,animal facilities, employee quarters and public areas of racetracks, regulatesthe types of wagers on horse races, and approves significant contractualarrangements with racetracks, including management agreements, simulcastarrangements, totalizator contracts and concessionaire agreements.

 

A federalstatute, the Interstate Horse Racing Act of 1978, also provides that aracetrack must obtain the consent of the group representing the horsepersons(owners and trainers) racing the breed of horses that race a majority of thetime at the racetrack, and the consent of the state agency regulating theracetrack, in order to transmit simulcast signals of its live races or toreceive and use simulcast signals from other racetracks.  The Company has obtained the consent of theMHBPA and MRC for receiving and sending simulcasting signals.

 

*Issuance ofClass A, and Class B Licenses to the Company.*

 

The Companyholds a Class A License, issued by the MRC, which allows the Company to own andoperate the Racetrack.  The Class ALicense is effective until revoked or suspended by the MRC, or relinquished bythe licensee.  Currently the fee for aClass A License is $253,000 per fiscal year.

 

The Companyalso holds a Class B License, issued by the MRC that allows the Company tosponsor and manage horse racing on which pari-mutuel wagering is conducted atits Class A licensed racetrack and on other horse races run at out-of-statelocations as authorized by the MRC.  TheClass B License is renewable each year by the MRC after a public hearing (if requiredby the MRC).  Currently the fee for theClass B License is $500 for each assigned race day on which live racing isactually conducted and $100 for each day on which simulcasting is authorizedand actually takes place

 

*Limitationon the Number of Class A, and Class B Licenses.*

 

Pursuant tothe Racing Act, so long as the Racetrack maintains its Class A License, noother Class A License may be issued to operate a racetrack in the seven countymetropolitan area (the counties of Hennepin, Ramsey, Washington, Scott, Dakota,Anoka and Carver), except the MRC may issue an additional Class A Licensewithin the seven county metropolitan area, provided that the additional licensemay only be issued for a facility which, among other conditions, is locatedmore than 20 miles from the Racetrack, contains a track no larger thanfive-eighths of a mile in circumference, and is used exclusively for standardbred (harness) racing.  An additionalClass A license was issued to NMHI on January 20, 2005 (see “Competition”above).  However, as long as the Companyholds its Class A License, only the Company may own and operate a racetrack inthe seven county metropolitan area where thoroughbred horses and quarter horsesmay be raced.

 

*Limitationon Ownership and Management of an Entity, which holds a Class A License and/orClass B License.*

 

The Racing Actrequires prior MRC approval of all officers, directors, 5% shareholders, orother persons having a present or future direct or indirect financial ormanagement interest in any person applying for a Class A and Class B license,and if a change of ownership of more than 5% of the licensee’s shares is madeafter an application is filed or the license issued, the applicant or licenseemust notify the MRC of the changes within five days of this occurrence andprovide the information required by the Racing Act.

 

9

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*Card ClubRegulation.*

 

TheMRC is authorized by law to regulate Card Club operations and the law requiresthat the Company reimburse the MRC for its actual costs, including personnelcosts, of regulating the Card Club.  Forfiscal years ended December 31, 2005, and 2004, the Company paid $110,000 and$102,000, respectively, to the MRC as reimbursement for costs of regulating cardclub operations.

 

TheMRC issued an additional Class B License to the Company on January 19, 2000that authorizes the Company to host unbanked card games.  The Class B License is renewable each year bythe MRC after a public hearing (if required by the MRC).  Currently, the Class B License Fee of $10,000per calendar year is included in the Class A License Fee of $253,000 percalendar year.

 

*LocalRegulation.*

 

The Company’soperations are subject to state and local laws, regulations, ordinances andother provisions affecting zoning and other matters which may have the effectof restricting the uses to which the Company’s land and other assets may beused.  Also, any development of theRacetrack site is, among other things, subject to applicable zoning ordinancesand requires approval by the City of Shakopee and other authorities and therecan be no assurance such approvals would be obtained if any development wasundertaken.

 

**(vii)****         Legislation**

 

On March 10, 2006, a bill was introduced in the Minnesota Legislature,that, if passed, would place a proposed amendment of the Minnesota Constitutionon the November 2006 ballot to establish a framework for authorizing electronicgaming devices and banked card games at the Racetrack. This concept, oftenreferred to as a “Racino”, as proposed for Canterbury Park would includeapproximately 3,000 gaming devices, 40 table games, a 250-room hotel, anOlympic scale horse park and additional restaurant venues.  Based on the success of several Racinos inother states, the Company believes if the proposed constitutional amendment wasapproved and a Racino was authorized at the Racetrack, the Racino would enhancehorse racing with increased purses, provide growth and developmentopportunities for the Company, and produce significant new tax revenues forstate and local governments.

 

Legislation has also been introduced to remove the 50-table limitcurrently imposed by Minnesota law and allow Canterbury Park to offer “banked”games in the Card Club.  Similar billswere pursued in the 2005 Minnesota Legislature, however no action was takenprior to adjournment on July 13, 2005.

 

The effort to obtain legislative authority for initiatives favorable tothe Company has required, and will continue to require, substantialexpenditures.   Due to the inherentuncertainty of the outcome of legislative activities, there can be no assurancethat any bills favorable to the Company’s interests will be enacted into law,and it is possible bills adverse to the Company could be enacted.

 

**(viii)****        Marketing**

 

The Company’sprimary market is the seven-county Minneapolis-Saint Paul metropolitan area.Current demographic information indicates that approximately 2.3 million adultsage 20 and older, reside within a 50-mile radius of Shakopee, Minnesota andanother .8 million adults age 20 and older, reside between a 50-100 mile radiusof the Racetrack.  The City of Shakopee,located in the southwestern portion of the metropolitan area, is one of thefastest growing communities in the region and Scott County is one of thefastest growing mid-sized counties in the country.  Between 2004 and 2009, the population basewithin 100 miles of the Racetrack is expected to increase by an estimated 5.0%.

 

To support itspari-mutuel horse racing and Card Club businesses, the Company conductsyear-round marketing efforts to maintain the loyalty of live and simulcastpatrons and attract new racing and Card Club customers.  The Company’s marketing uses newspapers,television, the Internet, other print media, radio and

 

10

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direct mail.  Often the Company combines its marketingefforts to communicate the excitement of both wagering on horse racing and cardplaying.  In addition to its regularadvertising program, the Company conducts numerous special promotions and handicappingcontests to increase simulcast patronage, and maintains successful pari-mutuelplayer and Casino Games player rewards programs.

 

The 2005combined Card Club and live racing advertising campaigns utilized print, radioand television advertising to highlight the attractive, park-like atmosphere ofCanterbury Park, promoting activities for the entire family, as well as the funand excitement of live horse racing and card playing.  In addition, the development over the pastseven years of a customer database has enabled the Company to increasinglyutilize direct mail advertising.

 

Becausewagering on horse racing and playing poker card games and table card games aremore complex than many other forms of gaming, such as slot machines or variouslottery products, the Company continues to develop and conduct variouseducational programs, such as complimentary poker and table game lessons, toursof the Racetrack, wagering classes and contests that it believes will make thesport of horse racing and pari-mutuel wagering and card playing moreunderstandable to the general public.

 

**(ix)****          Employees**

 

At March 15,2006, the Company had 410 full-time employees and 301 part-time employees.  On a seasonal basis the Company addsapproximately 120 full-time and 250 part-time employees for live racingoperations from early May until early September.  The Company’s management believes itsemployee relations are good.

 

 

 **(x)****          ExecutiveOfficers**

 

The executiveofficers of the Company, their ages and their positions with the Company are asfollows:

 
| **Name**            | ** ** | **Age** | ** ** | **Position with Company**                      |
|---------------------|------------|---------|------------|----------------------------------------------------------|
|                |       |    |       |                                                     |
| Randall D.  Sampson |       | 47      |       | President,  CEO and General Manager                      |
|                |       |    |       |                                                     |
| David C.  Hansen    |       | 49      |       | Vice  President of Finance, CFO & Secretary          |
|                |       |    |       |                                                     |
| Mark A.  Erickson   |       | 49      |       | Vice  President of Facilities                            |
|                |       |    |       |                                                     |
| Jerrold J.  Fuller  |       | 61      |       | Vice  President of Card Club Operations                  |
|                |       |    |       |                                                     |
| Michael J.  Garin   |       | 50      |       | Vice  President of Hospitality & Assistant Secretary |
|                |       |    |       |                                                     |
| Eric A.  Halstrom   |       | 37      |       | Vice  President of Racing & Simulcasting             |
|                |       |    |       |                                                     |
| John R.  Harty      |       | 61      |       | Vice  President of Marketing                             |

 

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Randall D.Sampson has been President and Chief Executive Officer since the formation ofthe Company in March 1994 and General Manager since September 1995.  He has been active in horse industryassociations, currently serving on the Board of Directors of the ThoroughbredRacetracks of America and is past President of the Minnesota ThoroughbredAssociation.  Mr. Sampson also currentlyserves as a director of Communications Systems, Inc. (AMEX:JCS), a manufacturerof telecommunications and data communications products based in Hector,Minnesota.  Mr. Sampson is the son ofCurtis A. Sampson, the Company’s Chairman of the Board and the beneficial ownerof approximately 23% of the Company’s common stock.

 

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David C.Hansen joined the Company in July 2001 as Vice President of Finance and ChiefFinancial Officer.  From 2000 to 2001 Mr.Hansen served as Director of Accounting for Prairie Meadows Racetrack andCasino in Altoona, IA, one of the nations first Racino operations.  He served as Controller, and later Directorof Finance at Treasure Island Resort & Casino, in Red Wing, MN, from 1993until 2000.  Mr. Hansen earned his CPAcertification in 1983.  Mr. Hansen is amember of the Minnesota Society of Certified Public Accountants and theHospitality Financial and Technology Professionals Association.

 

Mark A.Erickson has been Vice President of Facilities since May 1997, serving as theRacetrack’s Director of Facilities since April 1994.  From 1992 to 1994 Mr. Erickson served asMaintenance Supervisor for the Mall of America, supervising the interiormaintenance for one of the largest shopping malls in North America.  Mr. Erickson was Master Electrician for CanterburyDowns from 1986 to 1992, supervising the installation and maintenance of allelectrical equipment.

 

Jerrold J.Fuller has been Vice President of Card Club Operations since June of 2005.  He has worked in various capacities for theCompany including most recently as the Executive Director of Card ClubOperations.  He joined the Company inFebruary 2000 as a Poker Shift Manager and played a significant role in theopening of the Card Club in April of that year. Mr. Fuller has been employed in the gaming industry since 1968 inCalifornia, Montana, and Louisiana, and is currently a member of the PokerTournament Directors Association of America.

 

Michael J.Garin has been Vice President of Hospitality since May of 1997.  He had served as President of Canterbury ParkConcessions, Inc. since September of 1995. From 1993 to 1994 Mr. Garin served as Food & Beverage Supervisor forLittle Six, Inc., one of the largest tribal casino operations in thecountry.  Mr. Garin was President of MMRVending, Inc., a regional vending company, from 1988 to 1992.  Prior to 1988 he was a Regional Director atGeneral Mills Restaurant Group overseeing seven restaurants in three states.

 

Eric A. Halstrom has been vice President of Racing and Simulcastingsince June of 2005.  Employed atCanterbury Park since 1997, Mr. Halstrom has worked in various capacities forthe Company including most recently as the Executive Director of TeleracingOperations.  Prior to his employment withCanterbury Park, Mr. Halstrom worked for Churchill Downs Management Companyfrom 1994 – 1997 and was their Director of Off-Track Betting Operations inIndiana.  Mr. Halstrom serves on theBoard of Directors of the North Star Problem Gambling Alliance and theMinnesota affiliate of the National Council on Problem Gambling.

 

John R. Hartyjoined the Company in February 2000 as Vice President of Marketing.  From 1996 to 1999 Mr. Harty served asPresident of Minneapolis based Sun Products a manufacturer of sporting goodsand pet products.  He served that companyas Vice President of Sales and Marketing from 1992 to 1996.  From 1977 to 1991 Mr. Harty worked forGenesco, a billion dollar footwear company. He served as Executive Vice President in charge of Sales and Marketingfor its Hosiery Divisions located in New York City.  Mr. Harty currently serves on the Board ofthe Shakopee Area Chamber of Commerce.

 

**Item1A.  RISK FACTORS**

 

The Company issubject to risk factors that may affect our operating results.  Such risk factors include, but are notlimited to, the matters discussed below as well as the additional risksdiscussed under Forward Looking Statements on page 30 of this Form 10-K foradditional risks to which the Company is exposed.

 

*We face significant competition from other gaming operations that couldhave a material adverse effect on our operations.*

 

We faceintense competition in our market, particularly competition from casinoslocated on Native American-owned lands. Such facilities have the advantage of being exempt from certain stateand federal taxes.  We also compete withinternet wagering on horse races, other forms of gambling, other forms ofentertainment and other racetracks throughout the country as previouslydiscussed under *Competition*above.

 

In addition,we may experience competition from another racetrack.  In early 2005, the MRC granted a license tothe North Metro Harness Initiative, LLC (“NMHI”) to construct and operate aharness racetrack in

 

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Columbus Township, Anoka County,MN, which is approximately 50 miles from Canterbury Park.  This license authorizes NMHI to engage inpari-mutuel wagering on live and simulcast racing for standardbred (harness)horses.  Minnesota law permits licensedracetracks to operate a card room with up to 50 tables after completing a50-day live race meet and regulatory approval of a card room plan of operation.

 

We expectcompetition for our existing and future operations to increase both from NMHI ,and as existing casinos on Native American-owned lands expand theiroperations.  In addition, several of ourcompetitors have substantially better name recognition, marketing and financialresources than we do.  We are unable topredict with any certainty the effects of existing and future competition onour operating results.

 

*We are subject to extensive regulation from gaming authorities thatcould adversely affect us.*

 

The ownershipand operation of our Racetrack and Card Club are subject to significantregulation by the MRC under the Racing Act and the rules adopted by theMRC.  The MRC has the authority to imposeincreases in the Class A and Class B license fees.  In addition, State law requires that wereimburse the MRC for its actual costs of regulating the Card Club, includingpersonnel costs.  Increases in theselicensing and regulatory costs could adversely affect our results ofoperations.

 

Decisions bythe MRC in regard to any one of more of the following matters could alsoadversely affect the Company’s operations: the allocation of each wagering pool to winning bettors, the Racetrack,purses, the State of Minnesota and the Breeders’ Fund; the granting ofoperating licenses to racetracks after an application process and publichearings; the licensing of all employees of a racetrack, jockeys, trainers,veterinarians and other participants; regulating the transfer of ownershipinterests in licenses, allocating live race days and simulcast-only race days,approving race programs, regulating the conduct of races, settingspecifications for the racing ovals, animal facilities, employee quarters andpublic areas of racetracks; changes to the types of wagers on horse races; andapproval of significant contractual agreements.

 

*We are subject to changes in the laws that govern our business,including the possibility of an increase in gaming taxes, which would increaseour costs.*

 

Our operationsand oversight by the MRC are ultimately subject to the laws of Minnesota andthere exists the risk that these laws may be amended in ways adverse to ouroperations.  In particular, we arerequired to pay substantial taxes and fees in addition to normal federal, stateand local income taxes, and such taxes and fees are subject to increase at anytime.  From time to time, state and locallegislators and officials have proposed changes in tax laws, or in the administrationof such laws, affecting our industry.  Inaddition, poor economic conditions could intensify the efforts of state andlocal governments to raise revenues through increases in gaming taxes.  It is not possible to determine withcertainty the likelihood of changes in tax laws or in the administration ofsuch laws.  Such changes, if adopted,could have a material adverse effect on our operations.

 

*Energy and fuel price increases may adversely affect our costs ofoperations and our revenues.*

 

Ourfacility uses significant amounts of electricity, natural gas and other formsof energy.  While no shortages of energyhave been experienced, increases in the cost of electricity or natural gasnegatively affect our results of operations. In addition, energy and fuel price increases could negatively impact ouroperations by reducing disposable income of potential customers and decreasingvisitation to our facility.

 

*A downturn in general economic conditions may adversely affect ourresults of operations.*

 

Our businessis subject to changes in national and local economic conditions, includingchanges in the economy related to threatened or actual terrorist attacks andrelated to the war with Iraq.  Arecession or downturn in the general or regional economy could result in fewercustomers visiting our facility, adversely affecting our results of operations.

 

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**Item 1B. UNRESOLVED STAFF COMMENTS**

 

*Not Applicable.*

 

**Item 2.****    PROPERTIES**

 

*General.*

 

The Company’sfacilities, which are operated under the name “Canterbury Park,” are a moderncomplex of buildings and grounds, generally comparable to other majorracetracks located throughout the country. The Racetrack’s grandstand has a patron capacity of approximately 10,000within enclosed areas, and a maximum patron capacity of over 30,000, includingoutside areas around the grandstand.  Thegrandstand and most public outdoor areas contain numerous pari-mutuel windows,odds information boards, video monitors, concessions stands and otheramenities.  The audio/visual systemincludes over 600 television monitors with most areas providing multi-screenviewing of the races.

 

The Racetrackis located approximately 25 miles southwest of downtown Minneapolis.  The area immediately surrounding theRacetrack consists of commercial and industrial buildings, farmland andresidential areas.  The Racetrack is inreasonable proximity to a number of major entertainment destinations including:  Valleyfair, an amusement park about two milesfrom the Racetrack which annually attracts approximately more than one millionvisitors during the spring and summer; the Renaissance Festival, aseven-weekend late summer attraction attracting approximately 350,000 visitors,located about five miles from the Racetrack; and Mystic Lake Casino, locatedabout four miles from the Racetrack, which draws approximately 5.2 millionpatrons annually.  The Mall of America,the largest enclosed shopping mall in the United States, which attractsapproximately 35 to 40 million visitors per year, is approximately 17 milesfrom the Racetrack.

 

*RacingSurfaces.*

 

The racingsurfaces consist of a one-mile oval dirt/limestone track and a 7/8 mile ovalturf course.  The dirt track includes amile and one-quarter front stretch chute, a 6-1/2 furlong backstretch chute, a3-1⁄2 furlong chute, and is lighted for night racing.

 

*Grandstand.*

 

The grandstandis a modern, air-conditioned, and enclosed structure of approximately 275,000square feet with a variety of facilities on six levels.  The Lower Level contains space for supportfunctions such as jockey quarters, administrative offices, Racing Commissionoffices, first aid, mechanical and electrical rooms.  The Track Level includes pari-mutuel windows,restrooms, a variety of concession stands and other services.  The Card Club occupies 27,000 square feet onthe Track Level. The Mezzanine Level contains 1,320 fixed seats in aglass-enclosed, air-conditioned area and an additional 3,000 seats locatedoutside.  In addition to the seats, theMezzanine Level contains pari-mutuel windows, restrooms, concession stands andother guest facilities. A portion of the mezzanine level is currently beingused as a simulcast center during live racing, and for banquets and otherevents during the off-season.  TheKitchen Level is an intermediate level located between the Mezzanine andClubhouse floors; it contains a full-service kitchen which can support a fulldining menu for the track-side dining terraces on the Clubhouse Level and foodpreparation for the other concession areas. The Clubhouse Level is a multi-purpose area serving as a simulcastcenter during wagering sessions on televised races, as well as a full-servicedining area during the live racing season. The Clubhouse Level includes 325 trackside tables, each equipped with atelevision set, with a total seating capacity of 1,200 patrons and anadditional 1,000 seats are located in lounges located throughout the area.  The Press Box/Officials’ Level is located inthe roof trusses over the Clubhouse and contains work areas for the press,racing officials, closed-circuit television, photo finish and the trackannouncer.  In addition, the grandstandwas structurally built to accommodate skyboxes under the Press Box/Officials’Level, although none have yet been constructed. Escalators and elevators are available to move patrons among the variouslevels within the grandstand.

 

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*Barn andBackside Facilities.*

 

The stablearea consists of 33 barns with a total of approximately 1,650 stalls.  In the stable area, there are 216 dormitoryrooms for the grooms and others working at the Racetrack.  The stable area also contains a combinationracing office and cafeteria/recreation building for stable personnel, twoblacksmith buildings and a one half mile training track.

 

*Parking.*

 

Approximately7,500 paved parking spaces are available for patron and employee automobiles atthe Racetrack, including parking spaces that are reserved for physicallychallenged patrons.  The Racetrack alsohas unpaved areas available for overflow parking for approximately 5,000additional automobiles.  Areas are alsoreserved for bus parking.

 

*RV Park.*

 

In December2002, the Company acquired a recreational vehicle (RV) park, located onapproximately 29 acres adjacent to the Minnesota River.  The RV Park, located 2 miles from theRacetrack in Shakopee, has 68 independent sites and 40 dependent sites, anindoor swimming pool, laundry facilities, game room and mini store.  The sites are rented to horsemenparticipating in Canterbury’s racing operations, seasonal employees, and thegeneral public.

 

*Undeveloped Land.*

 

In December2003, the Company acquired an additional 18 acres of undeveloped land adjacentto the Racetrack.  More than 100 acres ofthe 380 acres owned by the Company are not necessary for currentoperations.  This property could be soldin whole or in part, depending upon future opportunities.  The Company regularly evaluates otherbusiness activities and development opportunities that would maximize the useof the real estate surrounding the Racetrack and which would complement theCompany’s primary businesses of horse racing and card club operations.

 

**Item 3.****    LEGALPROCEEDINGS**

 

There are nomaterial legal proceedings pending against the Company.  From time to time, the Company is party toordinary and routine litigation incidental to our business.  We do not expect the outcome of any suchpending litigation to have a material adverse effect on our consolidatedfinancial position or results of operations.

 

**Item 4.****    SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS.**

 

NotApplicable.

 

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**PART II**

 

**Item 5.  MARKET FOR REGISTRANT’SCOMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES**

 

**(a)****           MARKETINFORMATION**

 

The Company’sCommon Stock trades on the American Stock Exchange under the symbol ECP.  The table set forth below indicates the highand low sale prices for the Common Stock in the quarterly periods endingDecember 31, 2005 and 2004.

 
| ** **       | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| ** **       | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|             |       |     |       |     |       |   |   |   |   |
| **Common Stock** |       |     |       |     |       |   |   |   |   |
|             |       |     |       |     |       |   |   |   |   |
| First  Quarter   |       | $        | 20.49      |     | $          | 15.55 |   | $ | 19.25 |   | $ | 16.31 |   |
| Second  Quarter  |       | 18.40    |       | 15.60    |       | 23.10 |   | 15.10 |   |
| Third  Quarter   |       | 18.10    |       | 13.83    |       | 17.25 |   | 15.50 |   |
| Fourth  Quarter  |       | 15.29    |       | 13.72    |       | 20.50 |   | 15.71 |   |
|                  |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

**(b)****           HOLDERS**

 

At March 17,2006, the Company had 731 holders of record of its common stock.  In addition, on that date a depositorycompany held approximately 2,441,000 shares as nominee for an estimated 2,115beneficial holders.

 

**(c)****           DIVIDENDS**

 

The Companypaid special cash dividends on its common stock of $.25 per share on July 8,2005 and $.25 per share on July 9, 2004. The Company has not adopted any policy regarding the payment ofdividends and further dividend payments, if any, would require Board ofDirector approval.

 

**(d)****           RECENTSALES OF UNREGISTERED SECURITIES**

 

Notapplicable.

 

**(e)****           REPURCHASESOF REGISTRANT’S EQUITY SECURITIES**

 

Notapplicable.

 

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**Item 6.****    SELECTED FINANCIAL DATA**

 

(In thousands except for pershare amounts)
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| **OPERATING DATA**           | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|                              |       |                        |       |   |   |   |   |   |   |   |   |
| Total  Revenues                   |       | $                           | 55,223     |   | $ | 54,899 |   | $ | 47,846 |   | $ | 41,701 |   | $ | 39,492 |   |
|                              |       |                        |       |   |   |   |   |   |   |   |   |
| Operating  expenses               |       | 49,777                      |       | 48,132 |   | 42,587 |   | 37,899 |   | 36,405 |   |
|                              |       |                        |       |   |   |   |   |   |   |   |   |
| Income  Before Income Tax Expense |       | 5,565                       |       | 6,801 |   | 5,299 |   | 3,831 |   | 3,143 |   |
|                              |       |                        |       |   |   |   |   |   |   |   |   |
| Income Tax  Expense               |       | (2,512                      | )          | (2,939 | ) | (2,429 | ) | (1,554 | ) | (1,327 | ) |
|                              |       |                        |       |   |   |   |   |   |   |   |   |
| Net Income                        |       | $                           | 3,053      |   | $ | 3,862 |   | $ | 2,870 |   | $ | 2,277 |   | $ | 1,817 |   |
|                              |       |                        |       |   |   |   |   |   |   |   |   |
| Basic Net Income per Share        |       | $                           | 78         |   | $ | 1.02 |   | $ | .78 |   | $ | .64 |   | $ | .52 |   |
| Diluted Net Income per Share      |       | .73                         |       | .92 |   | .70 |   | .57 |   | .49 |   |
| Dividends per Share               |       | .25                         |       | .25 |   | .15 |   | .25 |   | .00 |   |
|                              |       |                        |       |   |   |   |   |   |   |   |   |
| Cash Flow  from Operations        |       | $                           | 4,957      |   | $ | 6,796 |   | $ | 4,234 |   | $ | 3,593 |   | $ | 3,631 |   |

 
| ** **                                       | ** ** | **At December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|
| **BALANCE SHEET DATA**                 | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                       | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Land,  Buildings & Equipment                 |       | $                             | 22,694     |   | $ | 20,439 |   | $ | 17,113 |   | $ | 14,551 |   | $ | 12,439 |   |
|                                             |       |                          |       |   |   |   |   |   |   |   |   |
| Total Assets                                     |       | 31,440                        |       | 28,223 |   | 22,418 |   | 19,030 |   | 16,544 |   |
|                                             |       |                          |       |   |   |   |   |   |   |   |   |
| Stockholders’  Equity                       |       | 24,358                        |       | 20,996 |   | 16,826 |   | 13,907 |   | 11,855 |   |
|                                             |       |                          |       |   |   |   |   |   |   |   |   |
| Book Value  per Share                            |       | $                             | 6.15       |   | $ | 5.47 |   | $ | 4.53 |   | $ | 3.82 |   | $ | 3.36 |   |
|                                             |       |                          |       |   |   |   |   |   |   |   |   |
| Number of  Common Shares Outstanding at Year End |       | 3,960                         |       | 3,836 |   | 3,714 |   | 3,638 |   | 3,529 |   |

 

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I**tem 7.****   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The followingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations (“MD&A”) is intended to help the reader understand CanterburyPark Holding Corporation, our operations and our present businessenvironment.  MD&A is provided as asupplement to – and should be read in conjunction with – our consolidatedfinancial statements and the accompanying notes to the financial statements(the “Notes”).  This overview summarizesthe MD&A, which includes the following sections:

 

•      *Strategic Overview* – a general descriptionof our business, summary of our financial performance, and our strengths andstrategic initiatives.

 

•      *Critical Accounting Policies and Estimates*

 

•      *New Accounting Pronouncements*

 

•      *Contingencies*

 

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

 

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

 

•      *Commitments andContractual Obligations*

 

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

 

**STRATEGICOVERVIEW**

 

CanterburyPark Holding Corporation (the “Company”) was incorporated under the laws ofMinnesota and acquired the Racetrack in March 1994.  The Racetrack facility is located inShakopee, Minnesota, approximately 25 miles southwest of downtownMinneapolis.  In May 1994 we commencedyear round horse racing simulcast operations and hosted the first annual liverace meet during the summer of 1995.  Ourlive racing operations are a seasonal business as we host live race meets eachyear from early May until Labor Day.  Weearn additional pari-mutuel revenue by televising our live racing toout-of-state Racetracks around the country. We also derive revenues from related services and activities, such asadvertising, admissions, parking and publication sales, and from otherentertainment events and activities held at the Racetrack.

 

In April 2000we opened the Canterbury Card Club (the “Card Club”).  The Card Club operates 24 hours a day, sevendays a week and is limited by Minnesota State law to a maximum of 50tables.  The Card Club currently offers34 tables of Poker Games and 16 tables of Casino Games.

 

Our three largest sources of revenues, CardClub operations, pari-mutuel operations and concessions sales generate cashrevenues.  Consequently, the Company ishighly liquid and has not utilized its line of credit in over three years.

 

During the year ended December31, 2005, increased competition (discussed below) along with a general industrydecline in on-track wagering and other causes mentioned in the operationsreview discussion that follows, resulted in a decrease in pari-mutuel handle,pari-mutuel revenues, and net income for the first time since the opening ofthe Card Club in 2000

 

18

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| **Financial Performance Summary** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |     |       |     |       |     |       |
| Total  Revenues                             |       | $        | 55,223     |     | $          | 54,899   |       | $        | 47,846     |     | $          | 41,701 |   | $ | 39,492 |   |
|                                        |       |     |       |     |       |     |       |     |       |     |       |
| Operating  Expenses                         |       | 49,777   |       | 48,132   |       | 42,587   |       | 37,899   |       | 36,405   |       |
|                                        |       |     |       |     |       |     |       |     |       |     |       |
| Income  Before Income Tax Expense           |       | 5,565    |       | 6,801    |       | 5,299    |       | 3,831    |       | 3,143    |       |
|                                        |       |     |       |     |       |     |       |     |       |     |       |
| Income Tax  Expense                         |       | (2,512   | )          | (2,939   | )          | (2,429   | )          | (1,554   | )          | (1,327   | )          |
|                                        |       |     |       |     |       |     |       |     |       |     |       |
| Net Income                                  |       | $        | 3,053      |     | $          | 3,862    |       | $        | 2,870      |     | $          | 2,277 |   | $ | 1,817 |   |

 

The primarystrengths of Canterbury Park are our dedicated and capable staff, ourfirst-class facilities and 380-acre property, and the legal authority to offerour unique gaming products in our market area.

 

Our management team has extensive knowledgeof the horse racing and card businesses and our staff has demonstrated acommitment to taking care of our customers. Recently we initiated acomprehensive customer satisfaction measurement and enhancement program.  Our management team has good relationship withour workforce and is able to retain qualified personnel as demonstrated by ourvery low turnover rate.

 

Our facilitiesare modern by racetrack industry standards and we have invested heavily in thepast few years to update and upgrade them to meet the needs of our customersand horsemen.  Our 380-acre property witha prime location in one of the fastest-growing areas in Minnesota provides uswith great long-term growth and development opportunities.  Our Board of Directors has begun the processof conducting research to determine the highest and best potential uses of ourunderutilized land.  Our long-termstrategic direction is to enhance the character of our property as a uniquegaming and entertainment destination.

 

We have astrong commitment to live racing and have been particularly successful inattracting new customers and providing a quality live racing experience for ourhorse racing fans as well as the horsemen who participate in the live racing atCanterbury Park.  The success of the CardClub has greatly enhanced our ability to offer a more competitive pursestructure for our live racing and has allowed us to make significantimprovements to our Grandstand and the backside stabling and training facilities.  As a result, we have been near capacity forhorses stabled at Canterbury Park during our recent live race meets.  We have also increased live racing attendanceduring a time when the industry trend has generally been downward.

 

Currentlywe are the only facility offering live and simulcast racing in our market,although we do have competition in the simulcast market from Internet horseracing sites.  While a number ofMinnesota Tribal Casinos operate the same unbanked card games offered at CanterburyPark, we are currently the only non-tribal operator and we have the only Pokerroom operating within the seven-county Twin Cities metropolitan area.  However, in January 2005, the MRC granted asecond license to construct and operate a harness racetrack in ColumbusTownship, Anoka County, MN.  Whileconstruction of the harness track has not begun as of March of 2006, thelicsensee has stated they plan to break ground this summer and hope to conducta live harness meet in 2007.  Undercurrent law this licensee would be allowed live and simulcast racing only onharness races and would have to operate a 50-day live racing meet before theycould be granted a license to operate a Card Club.

 

We continue to believe that our best optionfor long-term growth is to gain authority under Minnesota law to offer additional gaming options, which wouldenhance horse racing with increased purses, provide growth and developmentopportunities for us, and produce significant new tax revenues for state andlocal governments.  The effort to obtainlegislative authority for these initiatives has required, and will continue torequire, substantial expenditures.  Dueto the inherent uncertainty of the outcome of legislative activities, there canbe no assurance that any bills favorable to the Company’s interests will beenacted into law, and it is possible bills adverse to the Company could beenacted.

 

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**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

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

 

Our significantaccounting policies are included in Note 1 to our consolidated financialstatements. We believe the following critical accounting policies affect ourmore significant judgments and estimates used in the preparation of ourconsolidated financial statements.

 

*Property and Equipment -*Wehave significant capital invested in our property and equipment, whichrepresents approximately 72.2% of our total assets at December 31, 2005. Weutilize our judgment in various ways including: determining whether anexpenditure is considered a maintenance expense or a capital asset; determiningthe estimated useful lives of assets; and determining if or when an asset hasbeen impaired.  Management periodicallyreviews the carrying value of property and equipment for potential impairmentby comparing the carrying value of these assets with their related expectedfuture net cash flows.  Should the sum ofthe related expected future net cash flows be less than the carrying value, wewill determine whether an impairment loss should be recognized.  An impairment loss would be measured by theamount by which the carrying value of the asset exceeds the fair value of theassets.  To date, we have determined thatno impairment of these assets exists.

 

*Regulation-*Ourbusiness can be materially impacted both positively and negatively bylegislative and regulatory changes, such as those previously described.  Significant negative changes resulting fromthese activities could result in an impairment of our property and equipment inaccordance with generally accepted accounting principles.  Additional information regarding how ourbusiness can be impacted by legislative and regulatory changes are included inItem 1 (vi), and Item 1 (vii), respectively, in this Form 10-K.

##### * *

##### ***NEWACCOUNTING PRONOUNCEMENTS***

 

InDecember 2004, the FASB revised SFAS No. 123, Share Based Payment (SFAS No.123R).  This Statement supercedesAccounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issuedto Employees, which resulted in no stock-based employee compensation costrelated to stock options if the options granted had an exercise price equal tothe market value of the underlying common stock on the date of grant.  SFAS No. 123R requires recognition ofemployee services provided in exchange for a share-based payment based on thegrant date fair market value.  We arerequired to adopt SFAS No. 123R as of January 1, 2006 and plan to adopt thisStatement using the Modified Prospective Application Method.  As of the effective date, this Statementapplies to all new awards issued as well as awards modified, repurchased, orcancelled.  Additionally, for stock-basedawards issued prior to the effective date, compensation cost attributable tofuture services will be recognized as the remaining service is rendered.

 

**CONTINGENCIES**

 

Inconnection with the purchase of the Racetrack, the company entered into an EarnOut Promissory Note dated March 29, 1994. In accordance with the Earn Out Noteif (i) off-track betting becomes legally permissible in the State of Minnesotaand (ii) we begin to conduct off-track betting with respect to or in connectionwith its operations, we will be required to pay to the IMR Fund, L.P. thegreater of $700,000 per operating year, as defined, or 20% of the net pretaxprofit, as defined for each of five operating years.  At this time, we believe that the likelihoodthat these two conditions will be met, and that we will be required to paythese amounts is remote. At the 

 

20

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date(if any) that these two conditions are met, the five minimum payments will bediscounted back to their present value and the sum of those discounted paymentswill be capitalized as part of the purchase price in accordance with generallyaccepted accounting principles.  Thepurchase price will be further increased if payments become due under the “20%of Net Pretax Profit” calculation.  Thefirst payment is to be made 90 days after the end of the third operating yearin which off-track betting is conducted by us. Remaining payments would be made within 90 days of the end of each ofthe next four operating years.

 

**OPERATIONSREVIEW**

 

###### ***YEAR ENDED DECEMBER 31, 2005COMPARED TO YEAR ENDED DECEMBER 31, 2004***

 

**OPERATINGREVENUES**

 

Total operating revenuesfor the year ended December 31, 2005 were $55.2 million, an increase of$324,000 or .6% compared to total operating revenues of $54.9 million for theyear ended December 31, 2004.  Total CardClub revenues increased 4.2%, pari-mutuel revenues decreased 7.3% andconcession revenues increased 5.7% in fiscal 2005 compared to fiscal 2004.   Discussions of Pari-mutuel and Card Clubrevenues follow.

 
| **SUMMARY OF PARI-MUTUEL OPERATING DATA:** | ** **            | **Year Ended  12/31/05** | ** ** | **Year Ended  12/31/04** | ** ** |
|----------------------------------------------------------------|-----------------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                     | ** **            | ** **                    | ** ** | ** **                    | ** ** |
| **Racing Days**                                                | ** **            | ** **                    | ** ** | ** **                    | ** ** |
| Simulcast only days                                            |                  | 296                           |       | 298                           |       |
| Live and simulcast days                                        |                  | 68                            |       | 67                            |       |
| Live harness and simulcast days                                |                  | —                        |       | —                        |       |
| ** **                                                     | **Total Racing Days** |                          | 364        |                          | 365        |   |
|                                                           |                  |                          |       |                          |       |
| **On-Track  Handle**                                           |                  |                          |       |                          |       |
| Simulcast handle on non-live race days                         |                  | $                             | 41,341,000 |                          | $          | 46,295,000 |   |
|                                                           |                  |                          |       |                          |       |
| Simulcast handle on live race days                             |                  | 17,287,000                    |       | 17,657,000                    |       |
| Total simulcast handle                                         |                  | 58,628,000                    |       | 63,952,000                    |       |
|                                                           |                  |                          |       |                          |       |
| Live racing handle                                             |                  | 17,591,000                    |       | 17,990,000                    |       |
| **Total On-Track Handle**                                      |                  | 76,219,000                    |       | 81,942,000                    |       |
|                                                           |                  |                          |       |                          |       |
| **Out-of-state  Live Handle**                                  |                  | 14,180,000                    |       | 17,473,000                    |       |
|                                                           |                  |                          |       |                          |       |
| ** **                                                     | **Total Handle**      |                          | $          | 90,399,000                    |       | $ | 99,415,000 |   |
|                                                           |                  |                          |       |                          |       |
| **On-Track  Average Daily Handle**                             |                  |                          |       |                          |       |
| Simulcast only days                                            |                  | $                             | 140,000    |                          | $          | 155,000 |   |
| Live and simulcast days                                        |                  | 513,000                       |       | 532,000                       |       |

 

Pari-mutuelrevenues include commission and breakage revenues on live on-track andsimulcast racing, fees received from out-of-state Racetracks for wagering onour live races, and proceeds from uncashed winning tickets.  Pari-mutuel revenues decreased $1.3 million,or 7.7%, to $16.5 million compared to 2004, primarily reflecting the decreasein all categories of handle for 2005 totaling $9.0 million or 9.1%, compared to2004.  Total handle wagered on simulcastraces in 2005 decreased $5.3 million or 8.3% compared to 2004.  In addition, on-track live handle decreasedby $399,000 or 2.2% compared to 2004 despite one additional live racing day in2005.  Finally, out-of-state live handledecreased $3.3 million, or 18.3%, compared to 2004.

 

The reductionin on-track simulcast and live handle can be primarily attributed to an overallindustry decline as well a number of other factors including significant growthin the accessibility of internet pari-mutuel wagering,

 

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the lack of a Triple Crowncontender in the Belmont Stakes, and major construction projects in 2005 onfreeways leading to Canterbury Park.  There is also a shift in simulcast handle from days when onlysimulcasting is offered (see table above) to days when both live and simulcastracing are offered, due to the live meet starting one week earlier on KentuckyDerby day, May 7th, in 2005 compared to May 14th in2004.  The Kentucky Derby simulcasthandle of $1.4 million in 2005 is included in the table above in simulcast handleon live and simulcast days, compared to the 2004 Kentucky Derby simulcasthandle of $1.5 million which is included in simulcast handle on simulcast onlydays.

 

The decreasein amounts wagered by out-of-state racetracks on Canterbury’s live race meet isdue primarily to our decision to discontinue accepting wagers from selectedinternet wagering and offshore locations due to questions about the regulationof these entities.  This decisioncontributed to lower wagering at out-of-state racetracks on the nationallyrecognized Claiming Crown racing event as handle decreased $1.1 million to $1.6million in 2005, from $2.7 million in 2004.

 

Revenuesrecognized on proceeds from winning pari-mutuel tickets, which were notpresented for payment within one year of the end of the respective race meets,decreased to approximately $407,000 in 2005 compared to $426,000 in 2004,reflecting a decrease in overall handle in 2005.

 
| **SUMMARY OF CARD CLUB REVENUES:** | ** ** | ** Year Ended  12/31/05** | ** ** | **Year Ended  12/31/04** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------|------------|
|                                                   |       |                                |       |                          |       |
| Poker Games                                            |       | $                                   | 18,279,000 |                          | $          | 16,214,000 |   |
| Casino Games                                           |       | 10,557,000                          |       | 11,418,000                    |       |
| Total Collection Revenue                               |       | $                                   | 28,836,000 |                          | $          | 27,632,000 |   |
|                                                   |       |                                |       |                          |       |
| Other Revenue                                          |       | 778,000                             |       | 801,000                       |       |
|                                                   |       |                                |       |                          |       |
| Total Card Club Revenue                                |       | $                                   | 29,614,000 |                          | $          | 28,433,000 |   |
|                                                   |       |                                |       |                          |       |
| Number of Days Offered                                 |       | 364                                 |       | 365                           |       |
| Average Revenue per Day                                |       | $                                   | 81,400     |                          | $          | 77,900 |   |

 

The primarysource of Card Club revenue is a percentage of the wagers received from theplayers as compensation for providing the Card Club facility and services,referred to as “collection revenue”. Other Revenue includes fees collected for the administration oftournaments, and amounts earned as reimbursement of the administrative costs ofmaintaining the jackpot funds.

 

TheCard Club is divided into two areas, the casino games area and the pokerarea.  The average daily collectionamount per game is dependent upon the number of tables utilized to offer thegame.  Patron demand determines thenumber of tables to be used for a specific game.  There were a total of 16 tables in the CasinoGames area and 34 tables in the Poker area at December 31, 2005, and 19 and 31tables, respectively, in 2004.

 

Total Card Club revenueincreased $1.2 million or 4.2% compared to 2004.  The increase in Card Club revenue is dueprimarily to growth of $2.1 million or 12.7% in poker revenue, partially offsetby reductions of $861,000 or 7.5% in casino games and $23,000 or 2.9% in otherrevenues.  The popularity of Texas Hold’Emand televised poker tournaments continues to fuel growth in our poker business.  However, our Casino Games operationexperienced a significant increase in competition in 2005 from local NativeAmerican casinos, which have expanded their casino games offerings to includethe same unbanked card games offered at the Card Club.

 

Card Clubrevenues represent 53.6% and 51.8% of total revenues for 2005 and 2004,respectively. The percentage for 2005 is higher primarily due to decreasedpari-mutuel revenues accompanied by modest growth in Card Club revenues during2005.

 

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We expect thatcompetition from internet wagering and Native American casinos will continue toput pressure on pari-mutuel and Card Club operating revenues in futureperiods.  As a result, we continue tosearch for opportunities to make Canterbury Park the most attractivealternative when our customers want to wager on horseracing or play cardgames.  A number of promotions andinitiatives to encourage on-track simulcast wagering have recently beenimplemented and the Card Club is continually introducing new daily promotions.

 

Concessionrevenues increased 10.6% to $5,843,000 in 2005 compared to $5,529,000 in2004.   The increase is primarilyattributable to an increase of $128,000 in food & beverage revenues in theCard Club during 2005 compared to 2004, an increase of $118,000 beverage salesduring live racing, and an increase of $83,000 in revenues from group salescompared to 2004 primarily generated in a new outdoor catering area opened in2005.

 

Other operating revenueincreased $129,000 or 6.6% to $2,089,000 in fiscal year 2005 compared to2004.  The increase in 2005 was dueprimarily to continued growth in the corporate sponsorship program of $99,000and a rise in cash services fees of $28,000 resulting from increased patronagein the Card Club.

 

**OPERATINGEXPENSES**

 

Totaloperating expenses increased approximately $1,645,000, or 3.4%, to $49,777,000in 2005, from $48,132,000 in 2004 primarily due to increases in salaries, wagesand benefit costs, depreciation, utilities and cost of sales related to theincrease in revenues in 2005. See below for a detailed quantification of eachof these items.  Total operating expensesas a percentage of total revenues increased to 90.1% from 87.7% in 2004. Weexperienced decreases in pari-mutuel revenues in 2005, accompanied by modestgrowth in Card Club and concession revenues As a result, despite decreases invariable pari-mutuel expenses, fixed pari-mutuel expenses and increases inother fixed expenses such as depreciation, insurance and regulatory costsbecome a larger percentage of total revenues.

 

Total purse andMinnesota Breeders’ Fund (“MBF”) expense decreased approximately $19,000 or .2%for the year ended December 31, 2005 compared to the year ended December 31,2004.  Purse and MBF expense is one ofour largest single expense items. Minnesota law requires us to allocate a portion of funds received frombetting in the Card Club and wagering on simulcast and live horse races forfuture payment as purses for live horse races or other uses of Minnesota’shorsepersons’ associations.

 
| ** **        | ** ** | **Purse Expense** | ** ** | **Minnesota Breeders’ Fund  Expense** | ** ** |
|-------------------|------------|------------------------|------------|------------------------------------------------------|------------|
| ** **        | ** ** | **2005**               | ** ** | **2004**                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Card Club         |       | $                      | 3,999,001  |                                                 | $          | 3,730,258 |   | $ | 444,334 |   | $ | 414,473 |   |
|              |       |                   |       |                                                 |       |   |   |   |   |
| Simulcast  Racing |       | 2,806,429              |       | 3,047,941                                            |       | 650,423 |   | 705,531 |   |
|              |       |                   |       |                                                 |       |   |   |   |   |
| Live Racing       |       | 1,700,897              |       | 1,718,281                                            |       | 175,907 |   | 179,904 |   |
|              |       |                   |       |                                                 |       |   |   |   |   |
| Total             |       | $                      | 8,506,327  |                                                 | $          | 8,496,480 |   | $ | 1,270,664 |   | $ | 1,299,908 |   |

 

While we are obligatedby state law to pay up to 14% of Card Club revenues to the purse fund and MBF,pursuant to an agreement with the MHBPA, we paid a total of 15% of total CardClub revenues to these funds in 2005. The amounts paid are allocated 90% to the purse funds and 10% to theMBF.  The growth in Card Club revenues in2005 compared to 2004 resulted in the increases illustrated in the abovetable.  During 2004 the Company paid 15%of collection revenue into the purse fund and MBF.

 

Total purse and MBFexpense associated with simulcast racing decreased due to lower wagering during2005 compared to 2004.  The amounts paidto the purse fund for simulcast racing differ depending upon whether thesimulcast wagering occurs during the “Racing Season,” a statutorily defined 25week period beginning in early 

 

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Mayeach year, or outside of the Racing Season. We paid an average of 4.79% of handle to the purse fund in 2005,compared to 4.76% in 2004.  We pay 5.50%of pari-mutuel simulcast commission revenues to the MBF.

 

Purse and MBF expense relatedto live racing remained relatively unchanged compared to 2004.  Minnesota law generally provides that aminimum of 8.4% of the on-track live racing handle be paid to the purse fund.  The amount paid to the purse fund for wagersby out-of-state racetracks is 50% of the net of fees collected less costsincurred to provide the uplink signal. We experienced a decrease of $72,000 in purse expense attributable tolower on-track wagering and wagering by out-of-state racetracks on live racingin 2005, which was partially offset by an increase in the Claiming Crown netpurse guarantee of $55,000.  We pay 1.0%of on-track live handle to the MBF.

 

We also experiencedreductions in host fees and pari-mutuel taxes in 2005 due to lower wageringlevels compared to 2004.

 

Salary and benefitexpenses increased by $963,000 or 4.8% for the twelve months ended December 31,2005 compared to the twelve months ended December 31, 2004.  Direct hourly Card Club labor and relatedpayroll taxes increased approximately $428,000 or 7.6% in 2005 compared to2004.  This is primarily attributable toan increase in the minimum wage of $1.00 effective August 2005, which had thegreatest impact on wages related to the Card Club, where tipped positions arecompensated at minimum wage.  Card Clubwages also increased due to a 4.2% growth in revenue compared to 2004.  The labor costs associated with live racingincreased $81,000 due to a longer live race meet which began a week earlierthan in prior years.  Labor costsassociated with sales of food and beverage increased $161,000 or 5.2% in 2005compared to 2004, coinciding with an increase of 5.7% in concessionrevenues.  Health benefit costs increasedby $211,000 in 2005 compared to 2004 due to higher insurance rates along withincreased participation. The increase in labor costs also reflects the effectsof inflation on wages and salaries. These increases were partially offset by a decrease of $304,000 inincentive pay and Employee Stock Ownership Plan contribution expense.

 

Cost of concessions andpublication sales increased a total of $200,000.  This is primarily due to an increase of$176,000 or 7.6% in the cost of concession sales attributed to the 5.7%increase in concessions revenues, and to increases in certain product costscompared to 2004.

 

Depreciationexpense increased $362,000 or 27.6% in 2005 compared to 2004.  We have made significant investments in ourfacilities during the past two years.  Wecompleted a total remodel and modernization of the clubhouse level of thegrandstand in 2004, and added improvements to the stable area and trainingfacilities between the 2004 and 2005 live meets.  We acquired gaming equipment for the CardClub in 2004 and made various other investments in building improvements andfurniture, fixtures and equipment in both 2005 and 2004.

 

Utilitiesexpense increased $138,000 or 11.8% in 2005 primarily due to higher energycosts for electricity and natural gas compared to 2004.

 

Net nonoperating income increased $86,000 or257% in 2005 compared to 2004.  Thisincrease is primarily attributable to an $81,000 increase in interest income onour cash balances during 2005.  Theinterest rate on our cash balances increased to 3.28% at year-end 2005, from1.23% at the end of 2004.

 

Income tax expense as a percentage of pre-taxincome increased to 45.1% for the year ended December 31, 2005 from 43.2% forthe year ended December 31, 2004.  Theincrease is primarily attributable to the impact of higher non-deductiblelobbying expenses on lower pretax income in 2005 compared to 2004.

 

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###### *YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEARENDED DECEMBER 31, 2003*

 

**OPERATINGREVENUES**

 

Total operating revenuesfor the year ended December 31, 2004 were $54.9 million, an increase of $7.1million or 14.7% compared to total operating revenues of $47.8 million for theyear ended December 31, 2003.  Total CardClub revenues increased 23.9%, pari-mutuel revenues increased 2.7% andconcession revenues increased 14.5% in fiscal 2004 compared to fiscal2003.   Discussions of Pari-mutuel andCard Club revemues follow.

 
| **SUMMARY OF PARI-MUTUEL OPERATING DATA:** | ** **            | **Year Ended  12/31/04** | ** ** | **Year Ended  12/31/03** | ** ** |
|----------------------------------------------------------------|-----------------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                     | ** **            | ** **                    | ** ** | ** **                    | ** ** |
| **Racing  Days**                                               | ** **            | ** **                    | ** ** | ** **                    | ** ** |
| Simulcast only days                                            |                  | 298                           |       | 299                           |       |
| Live and simulcast days                                        |                  | 67                            |       | 63                            |       |
| Live harness and simulcast days                                |                  | —                        |       | 2                             |       |
| ** **                                                     | **Total Racing Days** |                          | 365        |                          | 364        |   |
|                                                           |                  |                          |       |                          |       |
| **On-Track  Handle**                                           |                  |                          |       |                          |       |
| Simulcast handle on non-live race days                         |                  | $                             | 46,295,000 |                          | $          | 46,568,000 |   |
|                                                           |                  |                          |       |                          |       |
| Simulcast handle on live race days                             |                  | 17,657,000                    |       | 16,243,000                    |       |
| Total simulcast handle                                         |                  | 63,952,000                    |       | 62,811,000                    |       |
|                                                           |                  |                          |       |                          |       |
| Live racing handle                                             |                  | 17,990,000                    |       | 17,709,000                    |       |
| **Total On-Track Handle**                                      |                  | 81,942,000                    |       | 80,520,000                    |       |
|                                                           |                  |                          |       |                          |       |
| **Out-of-state  Live Handle**                                  |                  | 17,473,000                    |       | 13,090,000                    |       |
|                                                           |                  |                          |       |                          |       |
| ** **                                                     | **Total Handle**      |                          | $          | 99,415,000                    |       | $ | 93,610,000 |   |
|                                                           |                  |                          |       |                          |       |
| **On-Track  Average Daily Handle**                             |                  |                          |       |                          |       |
| Simulcast only days                                            |                  | $                             | 155,000    |                          | $          | 156,000 |   |
| Live and simulcast days                                        |                  | 532,000                       |       | 522,000                       |       |

 

Total handleincreased $5,805,000 or 6.2% in 2004 compared to 2003.  Total Pari-mutuel revenues increased 2.7% toapproximately $17,806,000 in 2004 from $17,331,000 in 2003 principally due totwo more live race days and higher average daily out-of-state handle on liverace days in 2004.  Total on-track handleincreased approximately 1.8% to $81,942,000 in 2004 from $80,520,000 in2003.  Total simulcast handle increased1.8% to $63,952,000 in 2004 from $62,811,000 in 2003.  Consequently, pari-mutuel revenues related tosimulcast racing increased 1.8% to $13,059,000 in 2004 from $12,834,000 in2003.  On track wagering on live racesincreased by $281,000, or 1.6% to $17,990,000 in 2004 from $17,709,000 in 2003,causing pari-mutuel revenue related to live racing to increase by 1.6% to$3,792,000 in 2004 from $3,732,000 in 2003. This increase is partially due to an increase in the number of liveracing days to 67 in 2004 from 65 in 2003.

 

Handle wageredat out-of-state locations during the 2004 live meet increased by $4,383,000million or 33.5% compared to 2003. Canterbury Park was the site of the Claiming Crown national event in2004.  Handle wagered at out-of-statelocations on Claiming Crown day in 2004 was $2.7 million compared to $2.5million for the 2003 Claiming Crown.  ExcludingClaiming Crown days, average daily import handle increased to approximately$220,000 per day in 2004 compared to $163,000 per day in 2003.

 

25

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** **

Revenuesrecognized on proceeds from winning pari-mutuel tickets, which were notpresented for payment within one year of the end of the respective race meetsincreased to approximately $426,000 in 2004 compared to $373,000 in 2003,reflecting the growth in overall handle in 2004.

 
| **SUMMARY OF CARD CLUB REVENUES:** | ** ** | **Year Ended  12/31/04** | ** ** | **Year Ended  12/31/03** | ** ** |
|--------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
|                                                   |       |                          |       |                          |       |
| Poker Games                                            |       | $                             | 16,214,000 |                          | $          | 11,511,000 |   |
| Casino Games                                           |       | 11,418,000                    |       | 10,655,000                    |       |
| Total Collection Revenue                               |       | $                             | 27,632,000 |                          | $          | 22,166,000 |   |
|                                                   |       |                          |       |                          |       |
| Other Revenue                                          |       | 801,000                       |       | 788,000                       |       |
| Total Card Club Revenue                                |       | $                             | 28,433,000 |                          | $          | 22,954,000 |   |
|                                                   |       |                          |       |                          |       |
| Number of Days Offered                                 |       | 365                           |       | 364                           |       |
| Average Revenue per Day                                |       | $                             | 77,900     |                          | $          | 63,060 |   |

 

The Companyreceives a percentage of the wagers or a fee from the players as compensationfor providing the Card Club facility and services, referred to as the “collectionrevenue”. 2004 collection revenue was $27.6 million, an increase of 24.7%compared to 2003, which reflects the continued growth in popularity of poker. TheCompany also retains a specified percentage of the jackpot fund collections asreimbursement for administrative costs of maintaining the jackpot funds, andcollects fees for administering tournaments.

 

The Card Clubis divided into two areas, the casino games area and the poker area. Theaverage daily collection amount per game is dependent upon the number of tablesutilized to offer the game. Patron demand determines the number of tables to beused for a specific game. There were a total of 19 tables in the Casino gamesarea and 31 tables in the Poker area at December 31, 2004 and 2003.

 

Concessionrevenues increased 14.5% to $5,529,000 in 2004 compared to $4,829,000 in 2003. Theincrease is primarily attributable to increased patronage in the Card Clubduring 2004 compared to 2003, and to two more live racing days in 2004 comparedto 2003.

 

Otheroperating revenue increased $428,000 or 27.9% to $1,960,000 in fiscal year2004. The increase in 2004 was due primarily to growth in the corporate sponsorshipprogram of $128,000, increases in cash services fees resulting from increasedpatronage in the card club of $77,000, and a $79,000 increase in special eventrevenues in 2004.

 

**OPERATINGEXPENSES**

 

Totaloperating expenses increased approximately $5,545,000, or 13.0%, to $48,132,000in 2004, from $42,587,000 in 2003 primarily due to increases in purse expense,salaries and wages, and other operating expenses incurred to support theoverall increase in revenues in 2004. See below for a detailed quantificationof each of these items. Total operating expenses as a percentage of totalrevenues decreased to 87.7% in 2004 from 89.0% in 2003. The Company experiencedrapid growth in the Card Club for the third straight year. Growing Card Clubrevenues result in increased amounts of variable operating expenses,particularly purse and salaries and benefits expenses, but many of the CardClub’s operating expenses are fixed and don’t increase in proportion tobusiness volume. Consequently, the percentage increase in variable operatingexpenses is less than the increase in the collection revenue from the CardClub.

 

Total purseand Minnesota Breeders’ Fund expenses increased 13.2% or approximately $1.1million for the year ended December 31, 2004 compared to the year endedDecember 31, 2003. Purse expense is one of the Company’s largest single expenseitems. Minnesota law requires the Company to allocate a portion of fundsreceived from betting in the Card Club and wagering on simulcast and live horseraces for future payment as purses for live horse races or other uses ofMinnesota’s horsepersons’ associations.

 

26

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| ** **        | ** ** | **Purse  Expense** | ** ** | **Minnesota  Breeders’ Fund  Expense** | ** ** |
|-------------------|------------|--------------------|------------|---------------------------------------------|------------|
| ** **        | ** ** | **2004**           | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **        | ** ** | ** **         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Card Club         |       | $                  | 3,730,258  |                                        | $          | 2,792,828 |   | $ | 414,473 |   | $ | 310,319 |   |
|              |       |               |       |                                        |       |   |   |   |   |
| Simulcast  Racing |       | 3,047,941          |       | 3,012,129                                   |       | 705,531 |   | 691,483 |   |
|              |       |               |       |                                        |       |   |   |   |   |
| Live Racing       |       | 1,718,281          |       | 1,667,373                                   |       | 179,904 |   | 177,088 |   |
|              |       |               |       |                                        |       |   |   |   |   |
| Total             |       | $                  | 8,496,480  |                                        | $          | 7,472,370 |   | $ | 1,299,908 |   | $ | 1,178,890 |   |

 

The increasein purse and Minnesota Breeders’ Fund expense was due primarily to the fundsgenerated by the Card Club operation for purses. The Company paid 15% of totalCard Club collection revenue to the purse fund and the Breeders’ Fund in 2004,compared to 14% in 2003.  Total pursefund expenses related to Card Club operations for the year ended December 31,2004 increased $937,000, or 33.6%, compared to the year ended December 31,2003. The Company also paid $104,000 more to the Breeders Fund related to CardClub operations in 2004 than in 2003. Purse expense related to live racingincreased approximately $51,000 compared to 2003 due primarily to an increasein handle wagered at out-of-state locations. In addition, the Company incurredincremental pari-mutuel purse expense due to a Claiming Crown net purseguarantee of $50,000 for the year 2004 compared to $83,000 in 2003. The totalamount paid to the Minnesota Breeders’ Fund for simulcast and live horseracingin 2004 increased compared to 2003 in proportion to the increase in totalon-track handle.

 

Salary and benefitexpenses increased by $2,788,000 or 15.9% for the twelve months ended December31, 2004 compared to the twelve months ended December 31, 2003. Health benefitcosts increased by $499,000 in 2004 compared to 2003 due to higher insurancerates along with increased participation. Direct hourly Card Club labor andrelated payroll taxes increased approximately $1,080,000 or 20.9% in 2004compared to 2003 due to a 27.6% increase in Card Club revenues. In addition,the Company added an Employee Stock Ownership Plan effective January 1, 2004resulting in a charge to operations for 2004 of $252,000. The increase in laborcosts also reflects a longer live race meet in 2004, increased revenues in theconcessions company, the effects of inflation on wages and salaries and anincrease in incentive pay.

 

Cost of concessions andpublication sales increased a total of $394,000. Publications experienced an$82,000 increase in costs due to higher production costs of the simulcast andlive racing programs. Concessions cost of sales increased $312,000 to$2,310,000 due primarily to higher sales volumes.

 

License fees andproperty taxes increased $234,000 or 54.3% to $664,000 in 2004 compared to $431,000in 2003. License fees assessed to the Company by the Minnesota RacingCommission increased $115,000 to $323,500 in 2004 from $208,700 in 2003. TheCompany’s annual assessment for license fees increased effective July 1, 2003. Theyear ended December 31, 2004 was the first full year of the higher license feerates. In addition, real estate tax expense increased $119,000 or 53.4% in 2004compared to 2003.

 

Advertisingand marketing expenses increased approximately $124,000 or 5.5% in 2004compared to 2003. The increase is primarily attributable to higher couponexpense of $68,000 and an increase in television advertising of $55,000compared to 2003 due to the increased utilization of television advertising forthe Card Club.

 

Insurancecosts increased $191,000 or 20.8% in 2004 compared to 2003. Workerscompensation costs increased $99,000 and property and liability insurancepremium costs increased $92,000 due to rate increases, higher volumes ofbusiness activity and growth in labor costs for the Company in 2004.

 

Otheroperating expenses include personnel recruiting and training costs,professional fees, equipment rental, contracted services and other expenses. Theseexpenses increased approximately $320,000 or 8.5% in 2004 compared to 2003,primarily due to increases in charitable contributions of $101,000, contractedservices related to live racing of $46,000 and an increase of $172,000 inprofessional fees including audit, legal and

 

27

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consulting, attributable togeneral business growth and costs related to compliance with the Sarbanes-OxleyAct of 2002.

 

Income tax expense as a percentage of pre-taxincome decreased to 43.2% for the year ended December 31, 2004 from 45.8% forthe year ended December 31, 2003. The decrease is primarily attributable tolower non-deductible lobbying expenses in 2004.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

At December31, 2005, we had cash and cash equivalents of $4.9 million compared to $4.2million at December 31, 2004, the end of our last fiscal year. This $700,000increase consists of $5.0 million net cash provided by operating activities,offset by $4.0 million net cash used in investing activities and $200,000 netcash used in financing activities. In addition, as of December 31, 2005, we had$2.25 million of capacity under a commercial revolving credit line as part of ageneral credit and security agreement with Bremer Bank. In April 2005 thisagreement was renewed for an additional two-year term. We had no borrowings underthe credit line during the years 2005 or 2004.

 

Our threelargest sources of revenue, pari-mutuel activities, card club operations, andconcession sales, are generated primarily on a cash basis. Consequently, wehave significant inflows of cash on a daily basis. We restrict cash balanceswhich will be required to satisfy certain short-term liabilities such asprogressive jackpots, the player pool, and amounts due horsemen for purses andawards. We believe that our existing cash balances, restricted cash balances,cash flow from operations and borrowings available under our credit line willbe sufficient to support our working capital needs and planned capitalexpenditures for the foreseeable future.

 

Casino gamesare played using a “player pool”. “Player pool” means a wagering system or gamewhere wagers lost in a number of card games are accumulated into a pool forpurposes of enhancing the total amount paid back to players in any other cardgame. In such games, the sponsor may only serve as custodian of the player pooland may not have an active interest in any card game. In the casino games areaof the Card Club, the net amount that the dealer “wins” or “loses” during thecourse of play is accumulated as a player pool liability, and is not recognizedas revenue. We are required by law to return accumulated player pool funds tothe players through giveaways, promotional items, prizes or by other means. Theaccumulated player pool liability was approximately $442,000 at December 31,2005 compared to $341,000 at December 31, 2004.

 

The Card Cluboffers progressive jackpots for poker games and certain casino games.  Amounts collected for these jackpot funds areaccrued as liabilities until paid to winners. At December 31, 2005, accruedjackpot funds totaled approximately $679,000 compared to $524,000 at December31, 2004.  The Minnesota RacingCommission (“MRC”) regulates the operation of the player pool and progressivejackpot pools. These liabilities have the potential for significant fluctuationon a daily basis.

 

All games inthe Card Club are played using chips. The value of chips issued andoutstanding, referred to as the “outstanding chip liability”, was approximately$221,000 at December 31, 2005 compared to $196,000 at December 31, 2004. Thisliability has the potential for significant fluctuation on a daily basisdepending upon the demand for chip redemptions and sales.

 

Our second largestoperating expense item is purse expense. Pursuant to an agreement with theMinnesota Horsemen’s Benevolent and Protective Association, (the “MHBPA”), wetransferred into a trust account or paid directly to the MHBPA, approximately$7,575,000 and $7,601,000 in purse funds for the years ended December 31, 2005and 2004, respectively. Minnesota Statutes specify that amounts transferredinto trust are the property of the trust and not the Company. Unpaid purse fundobligations due the MHBPA were $94,853 and $131,146 at December 31, 2005 and2004, respectively. The interest rates on any purses accrued but nottransferred into the trust (which are guaranteed by our Chairman of the Board)were 7.25% and 5.25% at December 31, 2005 and 2004, respectively.

 

28

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*CASH FLOWS FROM OPERATING ACTIVITIES*

 

Net cashprovided by operations during the year ended December 31, 2005 was $4,956,836,which resulted primarily from net income of $3,053,479, depreciation of$1,672,827, and an increase in card club accruals of $385,587. These sources ofcash and noncash reconciling items are partially offset by an increase inaccounts payable and accrued wages and payroll taxes of $615,287. The increasein Card Club accruals includes an increase of $101,000 in the player pool, anincrease of $155,000 in the jackpot pools and an increase of $25,000 in the outstandingchip liability as discussed above. The decrease in accounts payable and accruedwages and payroll taxes is due to a decrease of $253,000 in accrued wages andpayroll taxes and a decrease of $362,000 in accounts payable and accruals. Year-endpayroll accruals decreased $156,000 due to a decrease in the number of dayspayable as of year-end and the accrual for funds collected for the EmployeeStock Purchase Plan decreased by $100,000 compared to December 31, 2004. Thedecrease in accounts payable primarily results from lower accruals at December31, 2005 for a large capital project compared to 2004, and to excluding fromoperating activities the noncash investing activity item of $115,000 forcapital expenditure accruals at December 31, 2005.

 

During theyear ended December 31, 2004, net cash provided by operations was $6,795,661,which resulted primarily from net income of $3,862,308, depreciation andamortization of $1,311,124, an increase in accounts payable and accrued wagesand payroll taxes of $659,922 and an increase in card club accruals of$441,920. The increase in accounts payable is due primarily to an increase inthe liability for uncashed winning tickets of $240,000. In addition, payrollaccruals increased $365,000 due to an increase in year-end incentive awards of$200,000 and an increase in the number of days payable as of year-end. Cardclub accruals increased due primarily to an increase of $238,000 in the pokerpromotional fund and an increase of $245,000 in the poker jackpot pools. Theseitems providing cash from operations were partially offset by an increase inaccounts receivable of $380,636 due primarily to an increase in amountsreceivable from other tracks for fees and settlements

 

*CASH FLOWS FROM INVESTING ACTIVITIES*

 

Cash used ininvesting activities for the year ended December 31, 2005 totaled $4,020,252including $3.8 million for additions to land, buildings and equipment,primarily capital improvements to buildings and land. During 2005 we completedconstruction on a number of projects begun in 2004 including the installationof an equine swimming pool, widening and upgrading the surface of the practicetrack and replacing stalls in the summer barns in the Racetrack’s stable area. Also,additional remodeling was completed on the clubhouse level of the grandstandand the Card Club purchased additional gaming equipment. We also experienced anincrease in restricted cash in 2005 primarily due to higher balances in thePlayer Pool and Poker Jackpot Pools at December 31, 2005 compared to December31, 2004. These Card Club accruals do not change in direct correlation to CardClub revenues.

 

Cash used ininvesting activities for the year ended December 31, 2004 totaled $4,846,122,including $4.6 million for capital expenditures, including $1,762,000 forremodeling and modernization of the clubhouse level of the grandstand and$1,092,000 for the projects mentioned above which were under construction atDecember 31, 2004.  We also acquiredgaming equipment for the Card Club in 2004 amounting to $378,000 and madevarious other investments in building improvements and furniture, fixtures andequipment. Restricted cash increased compared to 2003 due to an increase of$102,000 in liabilities to horsemen, including the MHBPA, resulting from thetiming of payments to the horsepersons’ associations. In addition, the pokerjackpot funds increased $483,000 and the player pool decreased by $132,000compared to year-end 2003.

 

###### *CASH FLOWS FROM FINANCING ACTIVITIES*

 

Cash used by financingactivities was $200,762 for the year ended December 31, 2005 compared to cashused by financing activities of $294,555 for the year ended December 31, 2004.The 2005 net cash outflows resulted primarily from a $.25 per share cashdividend totaling $973,717 paid in July 2005. This outflow was partially offsetby proceeds of $772,955 received upon the issuance of common stock due to theexercise of stock options and shares of common stock purchased by employeespursuant to our Employee Stock Purchase Plan. The net cash outflows in 2004resulted primarily from a $.25 per share cash dividend totaling $947,129,partially

 

29

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offsetby proceeds of $666,938 from the issuance of common stock upon the exercise ofstock options and pursuant to our Employee Stock Purchase Plan.

 

**COMMITMENTSAND CONTRACTUAL OBLIGATIONS**

 

We entered into afive-year extension of our totalizator services agreement with Scientific GamesCorporation (previously, Autotote Systems, Inc.) in January 2004. Pursuant tothe agreement, Scientific Games Corporation provides totalizator equipment andcomputer programs which record and process all wagers and calculate odds andpayoffs. Amounts payable pursuant to this agreement are calculated as acontractually agreed upon percentage of handle. For the years ended December31, 2005, 2004 and 2003 amounts charged to operations were approximately$348,000, $370,000 and $390,000, respectively. During live meets, ScientificGames Corporation also provides uplink services, which enables us to simulcasthorse races held at Canterbury Park to out-of-state racetracks. Amounts chargedin 2005, 2004 and 2003 for these services were approximately $137,500,$135,500, and $126,000, respectively.

 

We have entered into operating leases for rental of office equipmentand equipment to print certain publications. Amounts charged to operationsunder these agreements for the years ended December 31, 2005, 2004 and 2003were approximately $162,000, $170,000 and $170,000, respectively. All suchleases expire on or before November 30, 2008.

 

*CONTRACTUAL OBLIGATIONS TABLE*

 

Thefollowing table reflects our contractual obligations as of December 31, 2005:

 
| ** **                               | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligation (1)** | ** ** | **TOTAL**                                 | ** ** | **Less than  1 year** | ** ** | **1 – 3   years** | ** ** | **3 – 5  years** | ** ** | **More  than  5 years** | ** ** |
| ** **                               | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating Lease Obligations (2)          |       | $                                         | 171,700    |   | $ | 72,200 |   | $ | 99,500 |   | $ | 0 |   | $ | 0 |   |
|                                          |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)     Totalizatorlease obligations as discussed above are excluded from the table as the expenseis entirely dependent upon wagering levels.

(2)     Includes operating lease obligations forgeneral office and printing equipment rental.

 

Since December 31, 2005, there have been no material changesoutside the ordinary course of business to our contractual obligations as setforth above.  As of December 31,2005, we had no borrowings pursuant to our line of credit and were not party tocapital lease obligations, significant purchase obligations or other long-termobligations.

 

**FORWARD-LOOKINGSTATEMENTS**

 

Fromtime to time, in reports filed with the Securities and Exchange Commission, inpress releases, and in other communications to shareholders or the investingpublic, we may make forward-looking statements concerning possible oranticipated future financial performance, business activities or plans whichare typically preceded by the words “believes,” “expects,” “anticipates,” “intends”or similar expressions. For such forward-looking statements, we claim theprotection of the safe harbor for forward-looking statements contained in federalsecurities laws. Shareholders and the investing public should understand thatsuch forward-looking statements are subject to risks and uncertainties whichcould affect our actual results, and cause actual results to differ materiallyfrom those indicated in the forward-looking statements. Such risks anduncertainties include, but are not limited to: material fluctuations inattendance at the Racetrack, material changes in the level of wagering bypatrons, decline in interest in the unbanked card games offered at the CardClub, competition from other venues offering unbanked card games, competitionfrom other sports and entertainment options, increases in costs associated withour efforts to obtain legislative authority for additional gaming options, increasesin compensation and employee benefit costs; increases in the percentage ofrevenues allocated for purse fund payments; higher than expected expense

 

30

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relatedto new marketing initiatives; the impact of wagering products and technologiesintroduced by competitors; legislative and regulatory decisions and changes;the general health of the gaming sector; and other factors that are beyond ourability to control or predict.

 

**Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to market risk from changes in interest rates onborrowings under our commercial revolving credit line that bears interest atthe prime rate. At December 31, 2005 we have no debt borrowings under our creditfacility.

 

We have no derivative financial instruments or derivative commodityinstruments in our cash and cash equivalents and marketable securities. Weinvest, or may invest, cash and cash equivalents in investment grade, highlyliquid investments, consisting of money market instruments, bank certificatesof deposit, and short-term government and corporate bonds.

 

**Item 8.****    FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

(a)           Financial Statements

 

The following financialstatements of the Company are set forth on pages 32 through 46 of the Form10-K:

 
| Report of Independent Registered Public  Accounting Firm                                                              |   |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                  |   |   |
| Consolidated Balance Sheets as of December  31, 2005 and 2004                                                         |   |   |
|                                                                                                                  |   |   |
| Consolidated Statements of Operations for  the years ended December 31, 2005, 2004 and 2003                           |   |   |
|                                                                                                                  |   |   |
| Consolidated Statements of Changes in Stockholders’ Equity for the  years ended December 31, 2005, 2004 and 2003 |   |   |
|                                                                                                                  |   |   |
| Consolidated Statements of Cash Flows for  the years ended December 31, 2005, 2004 and 2003                           |   |   |
|                                                                                                                  |   |   |
| Notes to Consolidated Financial Statements  for the years ended December 31, 2005, 2004 and 2003                      |   |   |

 

(b)           Supplementary Data

 

See Note 11 of Notes toConsolidated Financial Statements at page 46 of this report.

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors andStockholders of

Canterbury Park HoldingCorporation

Shakopee, Minnesota

 

We have audited theaccompanying consolidated balance sheets of Canterbury Park Holding Corporationand subsidiaries (the Company) as of December 31, 2005 and 2004 and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2005. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits inaccordance with standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the consolidated financial statementsare free of material misstatement. The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financialreporting. An audit includes consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting. Accordingly,we express no such opinion. An audit also includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Canterbury Park Holding Corporation and subsidiaries asof December 31, 2005 and 2004 and the results of its operations and its cashflows for each of the three years in the period ended December 31, 2005 inconformity with accounting principles generally accepted in the United Statesof America.

 

Deloitte & Touche LLP

 

March 27, 2006

Minneapolis, Minnesota

 

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**CANTERBURYPARK HOLDING CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER31, 2005 AND 2004**

 
| ** **                                                                                                                         | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                               |       |       |       |       |       |
| **ASSETS**                                                                                                                         |       |       |       |       |       |
|                                                                                                                               |       |       |       |       |       |
| CURRENT  ASSETS:                                                                                                                   |       |       |       |       |       |
| Cash                                                                                                                               |       | $          | 4,914,366  |       | $          | 4,178,544 |   |
| Restricted cash                                                                                                                    |       | 1,988,982  |       | 1,746,599  |       |
| Accounts receivable, net of allowance of  $82,600 and $82,600                                                                      |       | 696,857    |       | 750,612    |       |
| Inventory                                                                                                                          |       | 158,470    |       | 134,653    |       |
| Deposits                                                                                                                           |       | 20,000     |       | 20,000     |       |
| Prepaid expenses                                                                                                                   |       | 763,976    |       | 850,881    |       |
| Deferred income taxes (Note 3)                                                                                                     |       | 203,400    |       | 103,000    |       |
| Total current assets                                                                                                               |       | 8,746,051  |       | 7,784,289  |       |
|                                                                                                                               |       |       |       |       |       |
| LAND,  BUILDINGS AND EQUIPMENT, net (Note 2)                                                                                       |       | 22,694,438 |       | 20,438,532 |       |
|                                                                                                                               |       | $          | 31,440,489 |       | $          | 28,222,821 |   |
|                                                                                                                               |       |       |       |       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                     |       |       |       |       |       |
|                                                                                                                               |       |       |       |       |       |
| CURRENT  LIABILITIES:                                                                                                              |       |       |       |       |       |
| Accounts payable                                                                                                                   |       | $          | 1,882,923  |       | $          | 2,129,405 |   |
| Card club accruals                                                                                                                 |       | 2,122,333  |       | 1,736,746  |       |
| Accrued wages and payroll taxes                                                                                                    |       | 1,546,155  |       | 1,799,419  |       |
| Accrued interest payable                                                                                                           |       | 7,303      |       | 229        |       |
| Due to MHBPA (Note 1)                                                                                                              |       | 94,853     |       | 131,146    |       |
| Accrued property taxes                                                                                                             |       | 403,357    |       | 282,119    |       |
| Income taxes payable                                                                                                               |       | 66,108     |       | 17,486     |       |
| Payable to horsepersons                                                                                                            |       | 366,266    |       | 414,621    |       |
| Total current liabilities                                                                                                          |       | 6,489,298  |       | 6,511,171  |       |
|                                                                                                                               |       |       |       |       |       |
| DEFERRED  INCOME TAXES (Note 3)                                                                                                    |       | 593,100    |       | 716,000    |       |
|                                                                                                                               |       |       |       |       |       |
| COMMITMENTS  AND CONTINGENCIES (Notes 7 and 8)                                                                                     |       |       |       |       |       |
|                                                                                                                               |       |       |       |       |       |
| STOCKHOLDERS’  EQUITY (Note 4):                                                                                               |       |       |       |       |       |
| Common stock, $.01 par value, 10,000,000  shares authorized, 3,959,885 and 3,835,669, respectively, shares issued and  outstanding |       | 39,599     |       | 38,357     |       |
| Additional paid-in capital                                                                                                         |       | 14,045,248 |       | 12,763,811 |       |
| Accumulated earnings                                                                                                               |       | 10,273,244 |       | 8,193,482  |       |
| Total stockholders’ equity                                                                                                    |       | 24,358,091 |       | 20,995,650 |       |
|                                                                                                                               |       | $          | 31,440,489 |       | $          | 28,222,821 |   |

 

See notes to consolidatedfinancial statements.

 

33

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**CANTERBURYPARK HOLDING CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**YEARSENDED DECEMBER 31, 2005, 2004 AND 2003**

 
| ** **                                            | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                  |       |       |       |       |       |       |       |
| OPERATING  REVENUES:                                  |       |       |       |       |       |       |       |
| Pari-mutuel                                           |       | $          | 16,513,318 |       | $          | 17,805,597 |       | $ | 17,330,838 |   |
| Card Club                                             |       | 29,614,309 |       | 28,432,768 |       | 22,954,218 |       |
| Concessions                                           |       | 5,842,558  |       | 5,529,203  |       | 4,828,711  |       |
| Admissions and parking                                |       | 578,177    |       | 539,826    |       | 552,746    |       |
| Publications                                          |       | 585,529    |       | 631,432    |       | 646,403    |       |
| Other operating revenue                               |       | 2,089,368  |       | 1,960,466  |       | 1,532,823  |       |
|                                                  |       | 55,223,259 |       | 54,899,292 |       | 47,845,739 |       |
|                                                  |       |       |       |       |       |       |       |
| OPERATING  EXPENSES:                                  |       |       |       |       |       |       |       |
| Purses                                                |       | 8,506,327  |       | 8,496,480  |       | 7,472,370  |       |
| Minnesota Breeders’ Fund                         |       | 1,270,664  |       | 1,299,908  |       | 1,178,890  |       |
| Host track fees                                       |       | 2,176,022  |       | 2,344,500  |       | 2,244,721  |       |
| Pari-mutuel taxes                                     |       | 208,646    |       | 267,754    |       | 246,475    |       |
| Salaries and benefits                                 |       | 21,246,165 |       | 20,283,216 |       | 17,495,140 |       |
| Cost of concessions and publication sales             |       | 3,426,313  |       | 3,226,150  |       | 2,832,537  |       |
| Depreciation                                          |       | 1,672,827  |       | 1,311,124  |       | 1,158,458  |       |
| Utilities                                             |       | 1,306,389  |       | 1,168,824  |       | 1,158,207  |       |
| Repairs, maintenance and supplies                     |       | 1,476,063  |       | 1,496,697  |       | 1,430,802  |       |
| License fees and property taxes                       |       | 725,775    |       | 664,172    |       | 430,528    |       |
| Advertising and marketing                             |       | 2,376,076  |       | 2,372,159  |       | 2,247,878  |       |
| Insurance                                             |       | 1,194,336  |       | 1,106,900  |       | 916,351    |       |
| Other operating expenses                              |       | 4,191,707  |       | 4,094,163  |       | 3,774,322  |       |
|                                                  |       | 49,777,310 |       | 48,132,047 |       | 42,586,679 |       |
| NONOPERATING  (EXPENSES) REVENUES:                    |       |       |       |       |       |       |       |
| Interest expense (Note 6)                             |       | (11,419    | )          | (16,406    | )          | (3,116     | )          |
| Other                                                 |       | 130,792    |       | 49,885     |       | 42,837     |       |
|                                                  |       | 119,373    |       | 33,479     |       | 39,721     |       |
|                                                  |       |       |       |       |       |       |       |
| INCOME  BEFORE INCOME TAX EXPENSE                     |       | 5,565,322  |       | 6,800,724  |       | 5,298,781  |       |
|                                                  |       |       |       |       |       |       |       |
| Income tax expense (Note 3)                           |       | (2,511,843 | )          | (2,938,416 | )          | (2,428,651 | )          |
| NET INCOME                                            |       | $          | 3,053,479  |       | $          | 3,862,308  |       | $ | 2,870,130 |   |
|                                                  |       |       |       |       |       |       |       |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING |       | 3,903,844  |       | 3,775,990  |       | 3,675,919  |       |
|                                                  |       |       |       |       |       |       |       |
| BASIC NET  INCOME PER COMMON SHARE (Note 5)           |       | $          | .78        |       | $          | 1.02       |       | $ | .78 |   |
|                                                  |       |       |       |       |       |       |       |
| DILUTED NET  INCOME PER COMMON SHARE (Note 5)         |       | $          | .73        |       | $          | .92        |       | $ | .70 |   |
|                                                       |            |            |            |            |            |            |            |  |  |  |  |  |  |  |

 

See notes to consolidatedfinancial statements.

 

34

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**CANTERBURYPARK HOLDING CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**YEARSENDED DECEMBER 31, 2005, 2004 AND 2003**

** **
| ** **                                         | ** ** | **Number  of Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Earnings** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|-------------------|------------|----------------------------------|------------|---------------------------|------------|-----------|------------|
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| ***Balance, December 31, 2002***                   |       | 3,638,473             |       | $                 | 36,385     |                             | $          | 10,910,985                |       | $         | 2,959,869  |   | $ | 13,907,239 |   |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Cash  dividend paid                                |       |                  |       |              |       |                             |       | (551,696                  | )          | (551,696  | )          |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Exercise of  stock options                         |       | 43,500                |       | 435               |       | 200,562                          |       |                      |       | 200,997   |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Tax benefit  of stock option exercises             |       |                  |       |              |       | 166,500                          |       |                      |       | 166,500   |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Shares issued under Employee Stock Purchase  Plan  |       | 32,396                |       | 324               |       | 232,603                          |       |                      |       | 232,927   |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Net income                                         |       |                  |       |              |       |                             |       | 2,870,130                 |       | 2,870,130 |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| ***Balance, December 31, 2003***                   |       | 3,714,369             |       | $                 | 37,144     |                             | $          | 11,510,650                |       | $         | 5,278,303  |   | $ | 16,826,097 |   |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Cash  dividend paid                                |       |                  |       |              |       |                             |       | (947,129                  | )          | (947,129  | )          |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Exercise of  stock options                         |       | 77,850                |       | 779               |       | 293,834                          |       |                      |       | 294,613   |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Purchase and  retirement of common stock           |       | (752                  | )          | (8                | )          | (14,356                          | )          |                      |       | (14,364   | )          |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Tax benefit  of stock option exercises             |       |                  |       |              |       | 349,800                          |       |                      |       | 349,800   |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Shares issued under Employee Stock Purchase  Plan  |       | 29,202                |       | 292               |       | 372,033                          |       |                      |       | 372,325   |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Shares issued under Employee Stock  Ownership Plan |       | 15,000                |       | 150               |       | 251,850                          |       |                      |       | 252,000   |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Net income                                         |       |                  |       |              |       |                             |       | 3,862,308                 |       | 3,862,308 |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| ***Balance, December 31, 2004***                   |       | 3,835,669             |       | $                 | 38,357     |                             | $          | 12,763,811                |       | $         | 8,193,482  |   | $ | 20,995,650 |   |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Cash  dividend paid                                |       |                  |       |              |       |                             |       | (973,717                  | )          | (973,717  | )          |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Exercise of  stock options                         |       | 78,900                |       | 789               |       | 394,337                          |       |                      |       | 395,126   |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Tax benefit  of stock option exercises             |       |                  |       |              |       | 310,301                          |       |                      |       | 310,301   |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Shares issued under Employee Stock Purchase  Plan  |       | 31,174                |       | 312               |       | 377,517                          |       |                      |       | 377,829   |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Shares issued under Employee Stock  Ownership Plan |       | 14,142                |       | 141               |       | 199,282                          |       |                      |       | 199,423   |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| Net income                                         |       |                  |       |              |       |                             |       | 3,053,479                 |       | 3,053,479 |       |
|                                               |       |                  |       |              |       |                             |       |                      |       |      |       |
| ***Balance, December 31, 2005***                   |       | 3,959,885             |       | $                 | 39,599     |                             | $          | 14,045,248                |       | $         | 10,273,244 |   | $ | 24,358,091 |   |

 

See notes to consolidatedfinancial statements.

 

35

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**CANTERBURYPARK HOLDING CORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARSENDED DECEMBER 31, 2005, 2004 AND 2003**

 
| ** **                                                                     | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Operating  Activities:**                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                     |       | $          | 3,053,479  |       | $          | 3,862,308  |       | $ | 2,870,130 |   |
| Adjustments to reconcile net income to net  cash provided by operations:       |       |       |       |       |       |       |       |
| Depreciation                                                                   |       | 1,672,827  |       | 1,311,124  |       | 1,158,458  |       |
| Tax benefit from exercise of stock options                                     |       | 310,301    |       | 349,800    |       | 166,500    |       |
| Gain on sale of property & equipment                                       |       | (35,323    | )          |       |       |       |       |
| Contribution of common stock to ESOP                                           |       | 199,423    |       | 252,000    |       |       |       |
| (Decrease) increase in deferred income  taxes                                  |       | (223,300   | )          | 224,000    |       | 43,000     |       |
| Decrease (increase) in accounts receivable                                     |       | 53,755     |       | (380,636   | )          | (64,395    | )          |
| Decrease (increase) in other current assets                                    |       | 63,088     |       | (1,277     | )          | (556,480   | )          |
| Increase (decrease) in income taxes payable                                    |       | 48,622     |       | (78,013    | )          | 412,170    |       |
| (Decrease) increase in accounts payable and  accrued wages & payroll taxes |       | (615,287   | )          | 659,922    |       | 416,697    |       |
| Increase (decrease) in card club accruals                                      |       | 385,587    |       | 441,920    |       | (197,837   | )          |
| Increase (decrease) in accrued interest                                        |       | 7,074      |       | (1,929     | )          | 2,158      |       |
| Increase (decrease) in accrued property  taxes                                 |       | 121,238    |       | 58,212     |       | (4,983     | )          |
| (Decrease) increase in payable to  horsepersons                                |       | (48,355    | )          | 70,278     |       | (11,233    | )          |
| (Decrease) increase in due to MHBPA                                            |       | (36,293    | )          | 27,952     |       |       |       |
| Net cash provided by operations                                                |       | 4,956,836  |       | 6,795,661  |       | 4,234,135  |       |
|                                                                           |       |       |       |       |       |       |       |
| **Investing  Activities:**                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Additions to land, buildings and equipment                                     |       | (3,813,469 | )          | (4,386,261 | )          | (3,638,832 | )          |
| Proceeds from sale of equipment                                                |       | 35,600     |       |       |       |       |       |
| (Increase) decrease in restricted cash                                         |       | (242,383   | )          | (459,861   | )          | 468,093    |       |
| Net cash used in investing activities                                          |       | (4,020,252 | )          | (4,846,122 | )          | (3,170,739 | )          |
|                                                                           |       |       |       |       |       |       |       |
| **Financing  Activities:**                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from issuance of common stock                                         |       | 772,955    |       | 666,938    |       | 433,924    |       |
| Purchase of stock                                                              |       |       |       | (14,364    | )          |       |       |
| Decrease in due to MHBPA                                                       |       |       |       |       |       | (76,152    | )          |
| Cash dividend to shareholders                                                  |       | (973,717   | )          | (947,129   | )          | (551,696   | )          |
| Net cash used in financing activities                                          |       | (200,762   | )          | (294,555   | )          | (193,924   | )          |
|                                                                           |       |       |       |       |       |       |       |
| Net increase  in cash                                                          |       | 735,822    |       | 1,654,984  |       | 869,522    |       |
|                                                                           |       |       |       |       |       |       |       |
| Cash at  beginning of year                                                     |       | 4,178,544  |       | 2,523,560  |       | 1,654,038  |       |
|                                                                           |       |       |       |       |       |       |       |
| Cash at end  of year                                                           |       | $          | 4,914,366  |       | $          | 4,178,544  |       | $ | 2,523,560 |   |
|                                                                           |       |       |       |       |       |       |       |
| **Suppemental  disclosure of noncash investing activities:**                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Additions to land, buildings and equipment  funded through  accounts payable   |       | $          | 115,541    |       | $          | 250,462    |       | $ | 81,545 |   |
|                                                                           |       |       |       |       |       |       |       |
| **Supplemental  disclosure of cash flow information:**                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income taxes, net of refunds                                                   |       | $          | 2,355,000  |       | $          | 2,425,000  |       | $ | 1,807,000 |   |
| Net cash payments for interest                                                 |       | 0          |       | 9,000      |       | 608        |       |
|                                                                                |            |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

See notes to consolidatedfinancial statements.

 

36

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**CANTERBURYPARK HOLDING CORPORATION AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED DECEMBER 31, 2005, 2004 AND 2003**

 

1.             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

*Business*- Canterbury Park Holding Corporation (the Company) was incorporated on March24, 1994. On March 29, 1994 the Company acquired all the outstanding securitiesof Jacobs Realty, Inc. (JRI) from Irwin Jacobs and IMR Fund, L.P. (aninvestment fund for various pension plans and trusts).  JRI was merged into the Company and theacquisition was accounted for under the purchase method of accounting wherebythe acquired assets and liabilities have been recorded at the Company’s cost. Theprimary asset of JRI was Canterbury Downs Racetrack and the 325 acres ofsurrounding land.

 

On May 20, 1994, the Company adopted a planof Reorganization pursuant to which the sole shareholder of Canterbury ParkConcessions, Inc. (CPC), and majority shareholder of the Company, agreed toexchange his shares of CPC stock for 198,888 shares of the Company’s commonstock concurrent with the closing of a public offering. Pursuant to the Plan ofReorganization, CPC became a wholly owned subsidiary of the Company in August1994 when the Company completed the initial public offering of its commonstock. This reorganization was treated in a manner similar to a pooling ofinterests. Net proceeds received by the Company from the public offering wereapproximately $4,847,000, which along with additional borrowings under theCompany’s line of credit with the majority shareholder, were used to pay offthe remaining notes payable from the acquisition of JRI.

 

The consolidated financial statements includethe accounts of the Company, CPC and Shakopee Valley RV Park AcquisitionCompany, LLC after elimination of intercompany accounts and transactions.

 

*Revenue Recognition -*Our revenues are derived primarilyfrom the operations of a Card Club, pari-mutuel wagering on simulcast and livehorse races, concession sales and related activities. Collection revenue fromCard Club operations and pari-mutuel commission and fee revenues are recognizedat the time that the wagering process is complete. Revenues related to wageringactivities including concession and publication sales, and parking andadmission fees are recognized as revenue when the service has been performed orthe product has been delivered.

 

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

 

*Reclassifications* –Certain prior year numbers have been reclassified to be consistent with currentperiod presentation. These reclassifications had no effect on net earnings orstockholders’ equity. In our consolidated statement of cash flows we changedthe classification of changes in restricted cash balances to present suchchanges as an investing activity. We previously presented such changes as anoperating activity. In the accompanying consolidated statements of cash flowsfor the years ended December 31, 2004 and 2003 we reclassified changes inrestricted cash balances to be consistent with our 2005 presentation whichresulted in an increase of $459,861 and a decrease of $468,093, respectively,in cash used in investing activities and a corresponding increase and decrease,respectively, in cash flows provided by operations from the amounts previouslyreported. In addition, we reclassified acquisitions of land, building andequipment funded through accounts payable at year-end to a noncash investingactivity to be consistent with our 2005 presentation. In the accompanyingconsolidated statements of cash flows for the years ended December 31, 2004 and2003 we reclassified $250,462 and $81,545, respectively to a noncash investingactivity. These acquisitions were previously presented as increases in accountspayable under operating activities and additions to land, buildings andequipment under investing activities and resulted in decreases in these itemsfrom amounts previously reported.

 

*Uncashed Winning Tickets –*Pari-mutueltickets which are not cashed within one year of the end of the respective racemeet become the property of the Company. The Company records revenue associatedwith the uncashed winning tickets at the time that, based on historicalexperience, management can reasonably estimate the amount of additional winningtickets from a race meet that will be presented for payment.

 

37

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*Pari-mutuel Taxes –*The first $12 million of pari-mutuelrevenue is exempt from the 6% pari-mutuel tax. Pari-mutuel taxes are estimatedfor each 12-month period from July 1 through June 30, and an estimated annualeffective tax rate is applied to all pari-mutuel commission revenues.

 

*Restricted Cash* –Restricted cash represents refundable deposits and amounts due to horsemen forpurses, stakes and awards, and amounts accumulated in card game progressivejackpot pools, the Player Pool and Poker Promotional Fund to be used to repaycard players in the form of promotions, giveaways, prizes, or by other means.

 

*Due to Minnesota Horsemen’s Benevolent andProtective Association, Inc. (“MHBPA”)* - The MinnesotaPari-Mutuel Horse Racing Act specifies that the Company is required tosegregate a portion of funds (recorded as purse expense in the statements ofoperations), received from card club operations and wagering on simulcast andlive horse races, for future payment as purses for live horse races or other usesof the horsepersons’ associations. Pursuant to an agreement with the MHBPA, theCompany has transferred into a trust account or paid directly to the MHBPA,approximately $7,575,000, $7,601,000 and $6,770,000 for the years endedDecember 31, 2005, 2004 and 2003, respectively, related to thoroughbred races. Amountsdue to the MHBPA, are guaranteed by the Chairman of the Board. MinnesotaStatutes specify that amounts transferred into the trust account are theproperty of the trust and not of the Company. The interest rates on any pursesaccrued but not transferred into the trust were 7.25%, 5.25% and 4.00% atDecember 31, 2005, 2004 and 2003, respectively.

 

*Impairment of Long-Lived Assets -*Managementof the Company periodically reviews the carrying value of property andequipment for potential impairment by comparing the carrying value of theseassets with their related expected future net cash flows. Should the sum of therelated expected future net cash flows be less than the carrying value,management will determine whether an impairment loss should be recognized. Animpairment loss would be measured by the amount by which the carrying value ofthe asset exceeds the fair value of the asset. To date, management hasdetermined that no impairment of these assets exists.

 

*Depreciation* -Buildings and equipment are depreciated on a straight-line basis over theestimated useful lives of the assets, generally 5 to 39 years.

 

# *Card Club Accruals –*Minnesota law allows the Company to collect amounts from patrons to fundprogressive jackpot pools in the Card Club. These amounts, along with amountsearned by the player pool, promotional pools and the outstanding chipliability, are accrued as short-term liabilities at each balance sheet date.

 

*Borrowings* - Theweighted average interest rates on short-term borrowings at December 31, 2005,2004 and 2003 were 7.25%, 5.25% and 4.00%, respectively. The weighted averagerates for short-term borrowings for the years ended December 31, 2005, 2004 and2003 were 5.90%, 4.23% and 4.17%, respectively.

 

*Income Taxes* -Income taxes are accounted for under the asset and liability method. Deferredtax assets and liabilities are recognized for the estimated future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases. Deferred tax assets and liabilities are measured using enacted tax ratesin effect for the year in which those temporary differences are expected toreverse.

 

*Net Income Per Share*- Basic net income per common share is based on the weighted average number ofcommon shares outstanding during each year. Diluted net income per common sharetakes into effect the dilutive effect of potential common shares outstanding. TheCompany’s only potential common shares outstanding are stock options.

 

*Comprehensive Income –*Statementof Financial Accounting Standards (SFAS) No. 130, *ReportingComprehensive Income,*establishes standards for reporting anddisplay of comprehensive income and its components in a full set of financialstatements. Comprehensive income includes all changes in stockholders’ equityexcept those resulting from investments by and distributions to owners. SFASNo. 130 is not currently applicable for the Company because the Company did nothave any items of other comprehensive income in any of the periods presented.

 

38

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

 

*Statement of Financial Accounting StandardsNo. 123 (SFAS 123) -*In 1996, the Company adopted SFAS123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accountingfor Stock-Based Compensation — Transition and Disclosure”. As permitted by SFAS123, the Company has elected to continue following the guidance of APB 25 formeasurement and recognition of stock-based transactions with employees. Nocompensation cost has been recognized for stock options issued under the StockOption Plan because the exercise price of all options granted was at leastequal to the fair value of the common stock at the date of grant. Ifcompensation cost for the Company’s Stock Plan and Employee Stock Purchase Planhad been determined based on the fair value at the grant dates, consistent withthe method provided in SFAS 123, the Company’s net income and earnings pershare would have been as follows:

 
| ** **                   | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Net Income:                  |       |      |       |      |       |      |       |
| As reported                  |       | $         | 3,053,479  |      | $          | 3,862,308 |       | $ | 2,870,130 |   |
| Pro forma                    |       | 2,637,139 |       | 3,414,243 |       | 2,450,141 |       |
|                         |       |      |       |      |       |      |       |
| Basic  Earnings Per Share:   |       |      |       |      |       |      |       |
| As reported                  |       | $         | .78        |      | $          | 1.02      |       | $ | .78 |   |
| Pro forma                    |       | .68       |       | .90       |       | .67       |       |
|                         |       |      |       |      |       |      |       |
| Diluted  Earnings Per Share: |       |      |       |      |       |      |       |
| As reported                  |       | $         | .73        |      | $          | .92       |       | $ | .70 |   |
| Pro forma                    |       | .63       |       | .82       |       | .60       |       |

 

The fair value of options granted under thePlan during 2005, 2004 and 2003 were estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted averageassumptions and results:

 
| ** **                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Dividend  yield                      |       | 1.49     | %          | None     |       | None     |       |
| Expected  volatility                 |       | 43       | %          | 46       | %          | 37       | %          |
| Risk-free  interest rate             |       | 4.14     | %          | 3.28     | %          | 2.99     | %          |
| Expected  life of option             |       | 70 mo.   |       | 71 mo.   |       | 71 mo.   |       |
| Fair value  of options on grant date |       | $        | 698,000    |     | $          | 840,000  |       | $ | 837,000 |   |
|                                      |            |          |            |          |            |          |            |  |  |  |

 

*Accounting Pronouncements*- In December 2004, the FASB revised SFAS No. 123, Share Based Payment (SFAS No.123R). This Statement supercedes Accounting Principles Board (APB) Opinion No.25, Accounting for Stock Issued to Employees, which resulted in no stock-basedemployee compensation cost related to stock options if the options granted hadan exercise price equal to the market value of the underlying common stock onthe date of grant. SFAS No. 123R requires recognition of employee servicesprovided in exchange for a share-based payment based on the grant date fairmarket value. The Company is required to adopt SFAS No. 123R effective January1, 2006 and plan to adopt this Statement using the Modified Prospective Method.As of the effective date, this Statement applies to all new awards issued aswell as awards modified, repurchased, or cancelled. Additionally, forstock-based awards issued prior to the effective date, compensation costattributable to future services will be recognized as the remaining service isrendered.

 

39

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2.             LAND, BUILDINGS ANDEQUIPMENT

 

Land, buildings and equipment consists of thefollowing at December 31:

 
| ** **                           | ** ** | **2005**    | ** ** | **2004**   | ** ** |
|--------------------------------------|------------|-------------|------------|------------|------------|
|                                 |       |        |       |       |       |
| Land                                 |       | $           | 6,645,701  |       | $          | 6,645,701 |   |
| Buildings  and building improvements |       | 15,448,272  |       | 12,683,492 |       |
| Furniture  and equipment             |       | 12,028,619  |       | 10,978,532 |       |
|                                 |       | 34,122,592  |       | 30,307,725 |       |
| Accumulated  depreciation            |       | (11,428,154 | )          | (9,869,193 | )          |
|                                 |       | $           | 22,694,438 |       | $          | 20,438,532 |   |
|                                      |            |             |            |            |            |  |  |  |  |

 

3.             INCOME TAXES

 

A reconciliation between income taxescomputed at the statutory federal income tax rate and the effective tax rate isas follows:

 
| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003**  | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
|                                            |       |     |       |     |       |      |       |
| Federal tax  expense computed at statutory rate |       | $        | 1,892,000  |     | $          | 2,312,000 |       | $ | 1,802,000 |   |
| Nondeductible  lobbying expense                 |       | 184,000  |       | 163,000  |       | 197,000   |       |
| State  expense, net of federal impact           |       | 395,000  |       | 471,000  |       | 381,000   |       |
| Other                                           |       | 40,843   |       | (7,584   | )          | 48,651    |       |
|                                            |       | $        | 2,511,843  |     | $          | 2,938,416 |       | $ | 2,428,651 |   |

 

Income tax expense for the years endedDecember 31, 2005, 2004 and 2003 consists of the following:

 
| ** **                   | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Current                      |       |      |       |      |       |      |       |
| Federal                      |       | $         | 2,289,559  |      | $          | 2,081,616 |       | $ | 1,822,351 |   |
| State                        |       | 445,584   |       | 632,800   |       | 563,300   |       |
|                         |       | 2,735,143 |       | 2,714,416 |       | 2,385,651 |       |
| Deferred,  primarily Federal |       | (223,300  | )          | 224,000   |       | 43,000    |       |
|                         |       | $         | 2,511,843  |      | $          | 2,938,416 |       | $ | 2,428,651 |   |

 

Current and long term temporary differencesand tax carryforwards at December 31 are as follows:

 
| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Current                         |       |     |       |     |       |
| Vacation  accrual               |       | 75,000   |       | 64,000   |       |
| Player  rewards program accrual |       | 80,400   |       | —   |       |
| Other                           |       | 48,000   |       | 39,000   |       |
| Net current deferred tax asset  |       | $        | 203,400    |     | $          | 103,000 |   |
|                                 |            |          |            |          |            |  |  |

 
| ** **                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Long-Term                                        |       |     |       |     |       |
| Tax  depreciation greater than book depreciation |       | $        | (587,700   | )        | $          | (740,000 | ) |
| Deferred  gain on sale of land                   |       | (104,000 | )          | (104,000 | )          |
| Other                                            |       | 98,600   |       | 128,000  |       |
| Net long-term deferred tax liability             |       | $        | (593,100   | )        | $          | (716,000 | ) |

 

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4.             STOCKHOLDERS’ EQUITY

 

*Stock Options:*

 

The Company’s 1994 Stock Plan (the Plan)provides for the granting of awards in the form of stock options, restrictedstock, stock appreciation rights, and deferred stock to key employees andnon-employees, including directors of and consultants to the Company and anysubsidiary, to purchase up to a maximum of 1,450,000 shares of common stock. Optionsthat are granted under the Plan may be either options that qualify as “incentivestock options” within the meaning of Section 422 of the Internal Revenue Codeof 1986, as amended (Incentive Stock Options), or those that do not qualify asIncentive Stock Options (Non-Qualified Stock Options). The Plan is administeredby the Board of Directors, or a committee designated by the Board, whichdetermines the persons who are to receive awards under the Plan, the type ofaward to be granted, the number of shares subject to each award and, if anoption, the exercise price of each option. The Plan also provides for formulagrants of Non-Qualified Stock Options to non-employee directors of the Company.

 

Stock option activity related to the Planduring the years ended December 31, 2005, 2004 and 2003 is summarized below:

 
| ** **                         | ** ** | **2005**   | ** ** | **2004**                               | ** ** | **2003**   | ** ** |
|------------------------------------|------------|------------|------------|----------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                               |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Outstanding at beginning of year   |       | 708,850    |       | $                                      | 7.90       |       | 692,200    |   | $ | 5.42 |   | 639,700 |   | $ | 4.79 |   |
|                               |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Granted                            |       | 92,000     |       | 16.81                                  |       | 94,500     |       | 16.67 |   | 96,000 |   | 15.13 |   |
| Exercised                          |       | (78,900    | )          | 5.01                                   |       | (77,850    | )          | 3.78 |   | (43,500 | ) | 4.48 |   |
|                               |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Outstanding  at end of year        |       | 721,950    |       | $                                      | 9.35       |       | 708,850    |   | $ | 7.90 |   | 692,200 |   | $ | 6.24 |   |
|                               |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Options exercisable at end of year |       | 696,283    |       | $                                      | 9.08       |       | 631,850    |   | $ | 6.88 |   | 616,200 |   | $ | 5.42 |   |
|                                    |            |            |            |                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following table summarizes informationconcerning all options outstanding and options exercisable as of December 31,2005:

 
| **Range of  Exercise Price** | ** **        | **Options  Outstanding** | ** ** | **Weighted  Average Remaining  Contractual  Life in Years** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Options  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|------------------------------|-------------------|--------------------------|------------|-------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|
| $                            | 1.75 – 2.50  |                     |       | 104,150                                                     |       |                                   | 1.4        |                     |       | $                                      | 2.24       |   |   | 104,150 |   |   |   | $ | 2.24 |   |   |
|                         | 2.50 – 5.00  |                     |       | 89,400                                                      |       |                                   | 2.9        |                     |       | 3.98                                   |       |   | 89,400 |   |   |   | 3.98 |   |   |
|                         | 5.00 – 7.50  |                     |       | 238,400                                                     |       |                                   | 3.8        |                     |       | 6.48                                   |       |   | 238,400 |   |   |   | 6.48 |   |   |
|                         | 7.50 – 17.25 |                     |       | 290,000                                                     |       |                                   | 4.0        |                     |       | 15.93                                  |       |   | 264,333 |   |   |   | 15.86 |   |   |

 

The Plan provides that paymentof the exercise price may be made in the form of unrestricted shares of commonstock already owned by the optionee. The Company calculates the fair marketvalue of unrestricted shares as the average of the high and low sales prices onthe date of exercise.  During 2004, theCompany purchased and retired 752 shares valued at $14,364.

 

*Employee Stock Purchase Plan:*

 

On April 3, 1995, the Board of Directorsadopted an Employee Stock Purchase Plan (the “plan”). The plan is open to allemployees of the Company working more than 15 hours per week. The plan consistsof one-year phases. The phases commence on October 1 of each year and under theterms of the plan employees were allowed to set aside a portion of theirpayroll earnings to purchase shares of the Company’s common stock. Prior to thephase which started October 1, 2005, the purchase price was the lower of 85% ofthe fair market value of the shares on the commencement date of each phase or85% of the fair market value on the termination date of each phase. Effectivewith the phase beginning October 1, 2005 the purchase price is 95% of the fairmarket value of the shares on the termination date of the

 

41

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phase. The plan provides for the sale of upto 250,000 shares. The plan issued 31,174, 29,202 and 32,396 shares in 2005,2004 and 2003, respectively. The plan has issued a total of 215,999 sharessince the inception of the plan.

 

*401(k) Plan:*

 

On June 1, 1998 the Company established adefined contribution savings plan for employees who had completed one year ofservice, as defined in the Plan document. The defined contribution savings planallows for employee compensation deferral contributions under Section 401(k) ofthe Internal Revenue Code and discretionary contributions by the Company. Employercontributions charged to operations in 2005, 2004 and 2003 were approximately$128,000, $113,000 and $108,000, respectively.

 

*Employee Stock Ownership Plan:*

 

In December 2004, the Company’s Board ofDirectors approved an Employee Stock Ownership Plan effective for calendaryears beginning January 1, 2004. All eligible employees of the Companyparticipate in the ESOP Plan after completing one full calendar year ofservice. Contributions to the plan are determined by the Board of Directors andcan be made in cash or shares of the Company’s common stock. Annualcontributions are allocated to each participant based on compensation and vestin accordance with a seven year graded vesting schedule. Compensation expensefor the ESOP is determined based on the average fair value of shares on thedate the Company commits to the contribution to the Plan. For the purposes ofearnings per share, ESOP shares are included in weighted-average common sharesoutstanding at year-end as the shares are committed to be contributed on thatdate. On December 22, 2005, the Company committed to contribute 14,000 sharesof the Company’s common stock valued at $197,400. The shares were issued inJanuary 2006 and will be allocated to the accounts of eligible employees basedupon their 2005 compensation during the first quarter of 2006. The Companycontributed 15,000 shares of the Company’s common stock valued at $252,000 forcalendar year 2004. During 2005, the Company contributed an additional 142shares valued at $2,000 for calendar year 2004.

 

5.             EARNINGS PER SHARECOMPUTATIONS

 

The following is areconciliation of the numerator and denominator of the earnings per commonshare computations:

 
| ** **                                                                               | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                                                     |       |      |       |      |       |      |       |
| Net income (numerator) amounts used for  basic and fully diluted per share computations: |       | $         | 3,053,479  |      | $          | 3,862,308 |       | $ | 2,870,130 |   |
|                                                                                     |       |      |       |      |       |      |       |
| Weighted  average shares (denominator) of common stock outstanding:                      |       |      |       |      |       |      |       |
| Basic                                                                                    |       | 3,903,844 |       | 3,775,990 |       | 3,675,919 |       |
| Plus dilutive effect of stock options                                                    |       | 287,422   |       | 408,243   |       | 401,621   |       |
| Diluted                                                                                  |       | 4,191,266 |       | 4,184,233 |       | 4,077,540 |       |
|                                                                                     |       |      |       |      |       |      |       |
| Net income  per common share:                                                            |       |      |       |      |       |      |       |
| Basic                                                                                    |       | $         | .78        |      | $          | 1.02      |       | $ | .78 |   |
| Diluted                                                                                  |       | .73       |       | .92       |       | .70       |       |

 

Optionsto purchase 157,833 shares of common stock at an average of $16.75 per sharewere outstanding at December 31, 2005 but were not included in the computationof diluted EPS because the options’ exercise price was greater than the averagemarket price of the common shares. The options expire in an average of 5.9years.

 

6.             LINES OFCREDIT

 

The Company has a general credit and securityagreement with Bremer Bank, N.A. Borrowings under the credit agreement includea commercial revolving credit line, which provides for maximum advances of

 

42

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$2,250,000 with interest at the prime rateuntil April 30, 2007. The Company had no borrowings under the credit lineduring the year 2005. The credit agreement contains covenants requiring theCompany to maintain certain financial ratios. The Company was in compliancewith these requirements as of December 31, 2005. Management believes that fundsavailable under this line of credit, along with funds generated from card cluband simulcast operations, will be sufficient to satisfy its liquidity andcapital resource requirements during 2006.

 

7.             OPERATING LEASES ANDCOMMITMENTS

 

In January 2004 the Company entered into afive-year totalizator services agreement with Autotote Systems, Inc.(Autotote). Pursuant to the agreement, Autotote provides totalizator equipmentand computer programs which record and process all wagers and calculate theodds and payoffs. Amounts charged to operations under this agreement for theyears ended December 31, 2005, 2004 and 2003 were approximately $348,000,$370,000 and $390,000, respectively. During annual live race meets, Autototeprovides uplink services, which enables the Company to simulcast horse racesheld at Canterbury Park to out-of-state racetracks. These services resulted inamounts charged to operations in 2005, 2004 and 2003 of approximately $137,500,$135,500 and $126,000, respectively.

 

We have entered into operating leases for rental ofoffice equipment and equipment to print certain publications. Amounts chargedto operations under these agreements for the yeasr ended December 31, 2005,2004 and 2003 were approximately $162,000, $170,000 and $170,000, respectively.All such leases expire on or before November 30, 2008. Future lease paymentobligations under these leases are $72,200, $55,600 and $43,900 in 2006, 2007and 2008, respectively.

 

8.             CONTINGENCIES

 

In connection with the purchase of theRacetrack (Note 1), the Company entered into an Earn Out Promissory Note datedMarch 29, 1994. In accordance with the Earn Out Note, if (i) off-track bettingbecomes legally permissible in the State of Minnesota and (ii) the Companybegins to conduct off-track betting with respect to or in connection with itsoperations, the Company will be required to pay to the IMR Fund, L.P. thegreater of $700,000 per operating year, as defined, or 20% of the net pretax profit,as defined for each of five operating years. At this time, management believesthat the likelihood that these two conditions will be met, and that the Companywill be required to pay these amounts is remote. At the date (if any) thatthese two conditions are met, the five minimum payments will be discounted backto their present value and the sum of those discounted payments will becapitalized as part of the purchase price in accordance with generally acceptedaccounting principles. The purchase price will be further increased if paymentsbecome due under the “20% of Net Pretax Profit” calculation. The first paymentis to be made 90 days after the end of the third operating year in whichoff-track betting is conducted by the Company. Remaining payments would be madewithin 90 days of the end of each of the next four operating years.

 

The Company is periodically involved invarious legal actions arising in the normal course of business. At December 31,2005, management believes that the resolution of any legal actions outstandingwill not have a material impact on the consolidated financial statements.

 

9.             RELATED-PARTYTRANSACTIONS

 

The president/director and two otherdirectors have guaranteed performance by the Company under a $500,000 bondissued to the Minnesota Racing Commission.

 

The Company paid a total of $50,100 in 2005,$50,052 in 2004 and $62,000 in 2003 to the Chair and Vice Chair of the Companyin consideration for the services they provided pursuant to consultingagreements. In addition, another non-employee Board member received $25,500 in2005, $32,000 in 2004 and $61,000 in 2003 for services related to buildingsupport for proposed legislation to provide additional gaming authority to theCompany.

 

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10.           OPERATING SEGMENTS

 

The Company has three reportable operatingsegments: card club, horse racing, and concessions. The card club segmentincludes operations of the Canterbury Card Club. The horse racing segmentincludes simulcast and live horse racing operations, and the concessionssegment provides concessions during simulcast and live racing, in the card cluband during special events. The Company’s reportable operating segments arestrategic business units that offer different products and services. They aremanaged separately because the segments differ in the nature of the productsand services provided, as well as processes to produce those products andservices. The horse racing and card club segments are regulated by the State ofMinnesota Racing Commission.

 

The accounting policies of the operatingsegments are the same as those described in the summary of significantaccounting policies

 

Depreciation, interest expense and incometaxes are allocated to the segments but no allocation is made to concessionsfor shared facilities. The concessions segment paid approximately 25% of grossrevenues on live racing and special event days to the horse racing segment foruse of the facilities in 2005, 2004 and 2003.

 

Thefollowing tables provide information about the Company’s operating segments (in000’s):

 
| ** **                          | ** ** | **Twelve Months Ended December 31, 2005** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Horse Racing**                          | ** ** | **Card Club** | ** ** | **Concessions** | ** ** | **Total** | ** ** |
| Revenues  from external customers   |       | $                                         | 19,762     |   | $ | 29,614 |   | $ | 5,847 |   | $ | 55,223 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Intersegment  revenues              |       | 338                                       |       |   |   | 1,995 |   | 2,333 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Net interest  income (expense)      |       | 119                                       |       |   |   |   |   | 119 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Depreciation  and amortization      |       | 1,001                                     |       | 556 |   | 116 |   | 1,673 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Segment  income before income taxes |       | 2                                         |       | 5,560 |   | 1,256 |   | 6,818 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Segment  Assets                     |       | $                                         | 27,191     |   | $ | 3,493 |   | $ | 4,821 |   | $ | 35,505 |   |

 
| ** **                          | ** ** | **Twelve Months Ended December 31, 2004** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Horse Racing**                          | ** ** | **Card Club** | ** ** | **Concessions** | ** ** | **Total** | ** ** |
| Revenues  from external customers   |       | $                                         | 20,944     |   | $ | 28,433 |   | $ | 5,522 |   | $ | 54,899 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Intersegment  revenues              |       | 357                                       |       |   |   | 1,872 |   | 2,229 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Net interest  income (expense)      |       | 33                                        |       |   |   |   |   | 33 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Depreciation  and amortization      |       | 688                                       |       | 527 |   | 96 |   | 1,311 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Segment  income before income taxes |       | 706                                       |       | 6,047 |   | 1,142 |   | 7,895 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Segment  Assets                     |       | $                                         | 23,962     |   | $ | 3,688 |   | $ | 3,599 |   | $ | 31,249 |   |

 

44

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| ** **                          | ** ** | **Twelve Months Ended December 31, 2003** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Horse Racing**                          | ** ** | **Card Club** | ** ** | **Concessions** | ** ** | **Total** | ** ** |
| Revenues  from external customers   |       | $                                         | 20,061     |   | $ | 22,954 |   | $ | 4,831 |   | $ | 47,846 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Intersegment  revenues              |       | 362                                       |       |   |   | 1,586 |   | 1,948 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Net interest  income (expense)      |       | 40                                        |       |   |   |   |   | 40 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Depreciation  and amortization      |       | 601                                       |       | 463 |   | 94 |   | 1,158 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Segment  income before income taxes |       | 783                                       |       | 4,531 |   | 904 |   | 6,218 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Segment  Assets                     |       | $                                         | 18,026     |   | $ | 3,727 |   | $ | 2,339 |   | $ | 24,092 |   |

 

Included in horse racing segment revenues forthe years ended December 31, 2005, 2004 and 2003 is approximately $274,000,$288,000 and $212,000, respectively, for rental of the racing facility forspecial events and storage.

 

The following are reconciliations ofreportable segment revenue, income before income taxes, and assets, to theCompany’s consolidated totals (in 000’s):

 
| ** **                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues                                                |       |     |       |     |       |     |       |
| Total  revenue for reportable segments                  |       | $        | 57,556     |     | $          | 57,128   |       | $ | 49,794 |   |
| Elimination  of intersegment revenues                   |       | (2,333   | )          | (2,229   | )          | (1,948   | )          |
| Total consolidated revenues                             |       | $        | 55,223     |     | $          | 54,899   |       | $ | 47,846 |   |
| Income  before income taxes                             |       |     |       |     |       |     |       |
| Total  segment income before income taxes               |       | $        | 6,818      |     | $          | 7,895    |       | $ | 6,218 |   |
| Elimination  of intersegment income before income taxes |       | (1,253   | )          | (1,094   | )          | (919     | )          |
| Total consolidated income before income  taxes          |       | $        | 5,565      |     | $          | 6,801    |       | $ | 5,299 |   |

 
| ** **                               | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| Assets                                   |       |                   |       |                   |       |                   |       |
| Total assets  for reportable segments    |       | $                      | 35,505     |                   | $          | 31,249                 |       | $ | 24,213 |   |
| Elimination  of intercompany receivables |       | (4,065                 | )          | (3,026                 | )          | (1,795                 | )          |
| Total consolidated assets                |       | $                      | 31,440     |                   | $          | 28,223                 |       | $ | 22,418 |   |

 

45

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11.**          **SUPPLEMENTARYFINANCIAL INFORMATION (UNAUDITED)

 
| ** **                  | ** ** | **2005 Quarter Ended:** | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **March 31**            | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Operating  revenues         |       | $                       | 11,722,555 |   | $ | 14,906,919 |   | $ | 16,485,467 |   | $ | 12,108,318 |   |
|                        |       |                    |       |   |   |   |   |   |   |
| Operating  expenses         |       | 9,795,375               |       | 14,000,302 |   | 15,331,438 |   | 10,650,195 |   |
|                        |       |                    |       |   |   |   |   |   |   |
| Net income                  |       | 1,080,428               |       | 454,149 |   | 688,372 |   | 830,530 |   |
|                        |       |                    |       |   |   |   |   |   |   |
| Basic  earnings per share   |       | .28                     |       | .12 |   | .18 |   | .21 |   |
|                        |       |                    |       |   |   |   |   |   |   |
| Diluted  earnings per share |       | .26                     |       | .11 |   | .16 |   | .20 |   |
|                             |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                  | ** ** | **2004 Quarter Ended:** | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **March 31**            | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Operating  revenues         |       | $                       | 11,385,965 |   | $ | 14,422,649 |   | $ | 17,279,804 |   | $ | 11,810,874 |   |
|                        |       |                    |       |   |   |   |   |   |   |
| Operating  expenses         |       | 9,105,737               |       | 13,394,712 |   | 15,393,116 |   | 10,238,482 |   |
|                        |       |                    |       |   |   |   |   |   |   |
| Net income                  |       | 1,260,178               |       | 580,860 |   | 1,064,204 |   | 957,066 |   |
|                        |       |                    |       |   |   |   |   |   |   |
| Basic  earnings per share   |       | .34                     |       | .15 |   | .28 |   | .25 |   |
|                        |       |                    |       |   |   |   |   |   |   |
| Diluted  earnings per share |       | .30                     |       | .14 |   | .26 |   | .23 |   |
|                             |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

46

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**Item 9.  CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not Applicable.

 

**Item 9A. CONTROLS AND PROCEDURES**

 

(a)           Evaluationof Disclosure Controls and Procedures:

 

TheCompany’s Chief Executive Officer, Randall D. Sampson, and Chief FinancialOfficer, David C. Hansen, have reviewed the Company’s disclosure controls andprocedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the periodcovered by this report. Based upon this review, these officers have concludedthat the Company’s disclosure controls and procedures are effective to ensurethat information required to be disclosed in the reports that the Company filesunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the SEC and that thedisclosure controls are also effective to ensure that information required tobe disclosed in the Company’s Exchange Act reports is accumulated andcommunicated to management, including the chief executive officer and chieffinancial officer, to allow timely decisions regarding required disclosure.

 

(b)           Changesin Internal Control Over Financial Reporting:

 

There has been no change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) under theSecurities Exchange Act of 1934) that occurred during our fiscal quarter endedDecember 31, 2005, that have materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**Item 9B.****     OTHER INFORMATION**

 

Not Applicable.

 

**PARTIII**

 

**Item 10.****     DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT**

 

Information Incorporated by Reference.

 

Information required under Item 402 of RegulationS-K to the extent applicable with respect to the directors will be set forth ina section captioned “Election of Directors” in the Company’s Proxy Statementfor the Annual Meeting of Shareholders to be held on June 1, 2006 (the “2006Proxy Statement”), a definitive copy of which will be filed with the Commissionwithin 120 days of the close of the 2005 fiscal year, which information isincorporated herein by reference. Information required under Item 402 ofRegulation S-K regarding executive officers is presented under Item 1(c)(x)herein. Information required under Item 405 regarding Exchange Act Section 16acompliance to the extent required will be set forth in a section titled “Section16a Beneficial Ownership Reporting Compliance” in the 2006 Proxy statement.

 

Code of Ethics

 

The Company has adopted a code of Ethicsapplicable to all officers of the Company as well as certain other keyaccounting personnel. A copy of the Code of Ethics can be obtained free ofcharge upon written request directed to the Company’s Secretary at theexecutive offices of the Company.

 

**Item 11.****     EXECUTIVE COMPENSATION**

 

Information required under Item 402 ofRegulation S-K will be set forth in a section entitled “Executive Compensationand Other Information” in the Company’s 2006 Proxy Statement which informationis incorporated herein by reference.

 

47

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**Item 12.****     SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

Information requiredunder Item 403 of Regulation S-K will be set forth in a section entitled “SecurityOwnership of Certain Beneficial Owners” and “Election of Directors” in theCompany’s 2006 Proxy Statement which information is incorporated herein byreference.

 

INFORMATION REGARDING EQUITY COMPENSATION PLANS

 

Thefollowing table sets forth information as of December 31, 2005 regarding ourequity compensation plans.

 

**Securities Authorized for Issuance UnderEquity Compensation Plans**

 
| **Plan Category (1)**                                            | ** ** | **(a)  Number of shares  of common stock to  be issued upon  exercise of  outstanding  options, warrants  and rights** | ** ** | **(b)  Weighted-average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **(c)  Number of shares of  common stock  remaining available for  future issuance under  equity compensation  plans (excluding  shares in column (a))** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Equity  compensation plans approved by security holders:**     |       |                                                                                                                   |       |                                                                                     |       |                                                                                                                                                     |       |
| 1994 Stock Plan                                                  |       | 721,950                                                                                                                |       | $                                                                                        | 9.35       |                                                                                                                                                     | 259,000    |   |
| 1995 Employee Stock Purchase Plan                                |       | 0                                                                                                                      |       | 0                                                                                        |       | 34,001                                                                                                                                                   |       |
|                                                             |       |                                                                                                                   |       |                                                                                     |       |                                                                                                                                                     |       |
| **Equity  compensation plans not approved by security holders:** |       |                                                                                                                   |       |                                                                                     |       |                                                                                                                                                     |       |
| Stock Option Plan for Non-Employee  Consultants and Advisors (2) |       | 0                                                                                                                      |       | 0                                                                                        |       | 172,500                                                                                                                                                  |       |
|                                                             |       |                                                                                                                   |       |                                                                                     |       |                                                                                                                                                     |       |
| **Total**                                                        | ** ** | **721,950**                                                                                                            | ** ** | ** **                                                                               | ** ** | **465,501**                                                                                                                                              | ** ** |
|                                                                  |            |                                                                                                                        |            |                                                                                          |            |                                                                                                                                                          |            |  |

 

----

(1) The Company does not haveindividual compensation arrangements involving the granting of options, warrants, rights or restrictedstock.

 

(2) Adopted by the Company’s Board of Directors in 1997,the purpose of the Stock Option Plan for Non-Employee Consultants and Advisorsis to attract and retain the services of experienced and knowledgeablenon-employee consultants and advisors to assist in projects having strategicsignificance for the Company, to provide an alternative form of cashcompensation to such persons and to provide such persons with the opportunityto participate in the Company’s long term progress and success.

 

**Item 13.****     CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS**

 

Information, if any, required by Item 404 ofRegulation S-K will be set forth in a section entitled “Certain Transactions”in the Company’s 2006 Proxy Statement which information is incorporated hereinby reference.

 

**Item 14.****     PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

Information required by Item 14 of this Form10-K and Item 9(e) of Schedule 14A will be set forth in a section entitled “TheCompany’s Auditors” in the Company’s 2006 Proxy statement which information isincorporated herein by reference.

 

48

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**PART IV**

 

**Item 15.****    ****EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 
| (a)  1. | The  following Consolidated Financial Statements of Canterbury Park Holding  Corporation and subsidiaries are included in Part II, Item 8 pages 32 - 46: |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                     |
|    | Report of Independent  Registered Public Accounting Firm                                                                                                 |
|    |                                                                                                                                                     |
|    | Consolidated Balance Sheets as of  December 31, 2005 and 2004                                                                                            |
|    |                                                                                                                                                     |
|    | Consolidated Statements Of  Operations for the years ended December 31, 2005, 2004, and 2003                                                             |
|    |                                                                                                                                                     |
|    | Consolidated Statements of  Changes in Stockholders’ Equity for the years ended December 31, 2005, 2004,  and 2003                                  |
|    |                                                                                                                                                     |
|    | Consolidated Statements of  Cash Flows for the years ended December 31, 2005, 2004, and 2003                                                             |
|    |                                                                                                                                                     |
|    | Notes to Consolidated  Financial statements                                                                                                              |
|    |                                                                                                                                                     |
| (b).    | The  exhibits listed on the “Exhibits Index” on pages 51 & 52 are filed with  this Form 10-K or incorporated by reference in this report.  |
|    |                                                                                                                                                     |
| (c).    | No  financial statement schedules are required by Item 8 and Item 15(c) of Form  10-K.                                                                   |

 

49

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| Dated: March 29, 2006 |   | CANTERBURY PARK HOLDING CORPORATION   |
|-----------------------|--------|---------------------------------------|
|                  |   |                                  |
|                  | By     | /s/ Randall D. Sampson                |   |
|                  |   | Randall D. Sampson                    |
|                  |   | President and Chief Executive Officer |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the following persons on behalf of theRegistrant and in the capacities and the dates indicated have signed thisreport below.

 

**Power of Attorney**

 

Each person whose signature appears belowconstitutes and appoints CURTIS A. SAMPSON, DALE H. SCHENIAN and RANDALL D.SAMPSON as his true and lawful attorneys-in-fact and agents, each acting alone,with full power of substitution and resubstitution, for him and in his name,place and stead, in any and all capacities, to sign any of all amendments tothis Annual Report on Form 10-K and to file the same, with all exhibitsthereto, and other documents in connection therewith, with the Securities andExchange Commission, granting unto said attorneys-in-fact and agents, eachacting alone, full power and authority to do and perform each and every act andthing requisite and necessary to be done in and about the premises, as fully toall intents and purposes as he might or could do in person, hereby ratifyingand confirming all said attorneys-in-fact and agents, each acting alone, or hissubstitute or substitutes, may lawfully do or cause to be done by virtuethereof.

 
| **Signature**          | ** ** | **Title** | ** **                          | **Date** |
|------------------------|------------|-----------|-------------------------------------|----------|
|                   |       |      |                                |     |
| /s/ Curtis A. Sampson  |       |      | Chairman of the Board               |     | March 29, 2006 |
| Curtis A. Sampson      |       |      |                                |     |   |
|                   |       |      |                                |     |   |
|                   |       |      |                                |     |   |
| /s/ Dale H. Schenian   |       |      | Director; Vice Chairman             |     | March 29, 2006 |
| Dale H. Schenian       |       |      |                                |     |   |
|                   |       |      |                                |     |   |
|                   |       |      |                                |     |   |
| /s/ Randall D. Sampson |       |      | Chief Executive Officer, President, |     | March 29, 2006 |
| Randall D. Sampson     |       |      | General Manager, Treasurer and      |     |   |
|                   |       |      | Director                            |     |   |
|                   |       |      |                                |     |   |
| /s/ David C. Hansen    |       |      | Chief Financial Officer*            |     | March 29, 2006 |
| David C. Hansen        |       |      |                                |     |   |
|                   |       |      |                                |     |   |
|                   |       |      |                                |     |   |
| /s/ Patrick R. Cruzen  |       |      | Director                            |     | March 29, 2006 |
| Patrick R. Cruzen      |       |      |                                |     |   |
|                   |       |      |                                |     |   |
|                   |       |      |                                |     |   |
| /s/ Carin J. Offerman  |       |      | Director                            |     | March 29, 2006 |
| Carin J. Offerman      |       |      |                                |     |   |
|                   |       |      |                                |     |   |
|                   |       |      |                                |     |   |
| /s/ Burton F. Dahlberg |       |      | Director                            |     | March 29, 2006 |
| Burton F. Dahlberg     |       |      |                                |     |   |

 

* Principal Accounting Officer

 

50

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CANTERBURY PARK HOLDING CORPORATION ANDSUBSIDIARY

 

Exhibit Index To

Form 10-K for the Year Ended December 31,2005

 
| **Regulation S-B  Exhibit Table  Reference** | ** ** | **Title of Document**                                                                                                                                            | ** ** | **Location in Consecutive Numbering  System as Filed with the Securities  and Exchange Commission**                                    |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                   |       |                                                                                                                                                                       |       |                                                                                                                                                                                     |
| 3.1                                                    |       | Articles of  Incorporation, as amended.                                                                                                                                    |       | Filed as  Exhibit 3.1 to the Forms SB-2 Registration Statement of the Company, File No.  33-81262C, (the “SB-2 Registration Statement”) and incorporated herein by  reference. |
|                                                   |       |                                                                                                                                                                       |       |                                                                                                                                                                                     |
| 3.2                                                    |       | Bylaws, as  amended                                                                                                                                                        |       | Filed as  Exhibit 3.2 to the SB-2 Registration Statement and incorporated herein by  reference.                                                                                          |
|                                                   |       |                                                                                                                                                                       |       |                                                                                                                                                                                     |
| 10.1                                                   |       | Plan of  Reorganization dated as of May 20, 1994 between Canterbury Park Holding  Corporation and Canterbury Park Concessions, Inc.                                        |       | Filed as  Exhibit 10.1 to the SB-2 Registration Statement and incorporated herein by  reference.                                                                                         |
|                                                   |       |                                                                                                                                                                       |       |                                                                                                                                                                                     |
| 10.2                                                   |       | Restated  Stock Purchase Agreement                                                                                                                                         |       | Filed as  Exhibit 10.2 to the SB-2 Registration Statement and incorporated herein by  reference.                                                                                         |
|                                                   |       |                                                                                                                                                                       |       |                                                                                                                                                                                     |
| 10.3                                                   |       | Letter dated  April 4, 1994 from the Minnesota Horsemen’s Benevolent and Protective  Association, Inc. to Minnesota Racing Commission waiving 125 day racing  minimum |       | Filed as  Exhibit 10.3 to the SB-2 Registration Statement and incorporated herein by  reference.                                                                                         |
|                                                   |       |                                                                                                                                                                       |       |                                                                                                                                                                                     |
| 10.5                                                   |       | Stock Option  Plan, as amended*                                                                                                                                            |       | Filed as  Exhibit 4.1 to the Registration Statement on Form S-8 of the Company filed on  August 28, 1997 (File No. 333-34509) and incorporated herein by reference.                      |
|                                                   |       |                                                                                                                                                                       |       |                                                                                                                                                                                     |
| 10.6                                                   |       | Form of  Non-qualified Stock Option Agreement                                                                                                                              |       | Filed as  Exhibit 10.6 to the SB-2 Registration Statement and incorporated herein by  reference.                                                                                         |

 

* Denotes an exhibit that covers managementcontracts or compensatory plans or arrangements.

 

51

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| **Regulation S-B  Exhibit Table  Reference** | ** ** | **Title of Document**                                                                                                                                                                                                                                                        | ** ** | **Location in Consecutive Numbering  System as Filed with the Securities  and Exchange Commission**               |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                   |       |                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                                |
| 10.7                                                   |       | Curtis A. Sampson Guaranty to HRA                                                                                                                                                                                                                                                      |       | Filed as Exhibit 10.7 to the SB-2 Registration Statement and  incorporated herein by reference.                                                                     |
|                                                   |       |                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                                |
| 10.10                                                  |       | General Credit and Security Agreement dated as of June 3, 1998  between Canterbury Park Holding Corporation and Bremer Bank N.A. (previously  First American Bank, N.A.) This exhibit 10.10 replaces exhibit 10.10 filed  previously as an exhibit to the SB-2 Registration Statement. |       | Filed as Exhibit 10.10 to the Form 10-KSB for the fiscal year ended  December 31, 1998.                                                                             |
|                                                   |       |                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                                |
| 10.11                                                  |       | Stock Purchase Savings Plan                                                                                                                                                                                                                                                            |       | Filed as Exhibit 10.11 to Form 10-KSB for the fiscal year ended  December 31, 1997 and incorporated herein by reference.                                            |
|                                                   |       |                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                                |
| 10.13                                                  |       | Stock Option Plan for Non-Employee Consultants and Advisors                                                                                                                                                                                                                            |       | Filed as Exhibit 4.3 to the Registration Statement on Form S-8 of the  Company filed on August 28, 1997 (File No. 333-34509) and incorporated herein  by reference. |
|                                                   |       |                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                                |
| 21                                                     |       | Subsidiaries of the Registrant                                                                                                                                                                                                                                                         |       | Filed herewith.                                                                                                                                                     |
|                                                   |       |                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                                |
| 23                                                     |       | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                               |       | Filed herewith.                                                                                                                                                     |
|                                                   |       |                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                                |
| 24                                                     |       | Power of Attorney                                                                                                                                                                                                                                                                      |       | Included in signature page at page 43.                                                                                                                              |
|                                                   |       |                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                                |
| 31.1                                                   |       | Certification of the Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act 0f 2002                                                                                                                                                                                |       | Filed herewith                                                                                                                                                      |
|                                                   |       |                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                                |
| 31.2                                                   |       | Certification of the Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                |       | Filed herewith                                                                                                                                                      |
|                                                   |       |                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                                |
| 32                                                     |       | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                               |       | Filed herewith.                                                                                                                                                     |

 

The exhibits referred to in this Exhibit willbe supplied to a shareholder at a charge of $.25 per page upon written requestdirected to Canterbury Park Holding Corporation at the executive offices of theCompany.

 

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