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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

OR

Commission File Number:  001-31569

CANTERBURY PARK HOLDING CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

1100 Canterbury Road

Shakopee, MN  55379

(Address of principal executive offices and zip code)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES   o       NO   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES   o       NO   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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   x       NO   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

YES    o    NO    x

The Company had 3,930,483 shares of common stock, $.01 par value, outstanding as of November 14, 2008.

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Canterbury Park Holding Corporation

INDEX

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PART 1 - FINANCIAL INFORMATION

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2008 AND DECEMBER 31, 2007 (Unaudited)

See notes to consolidated financial statements.

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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

PERIODS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)

See notes to consolidated financial statements.

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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

PERIODS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)

See notes to consolidated financial statements.

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CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PERIODS ENDED SEPTEMBER 30, 2008 AND 2007

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business – Canterbury Park Holding Corporation (the “Company”) was incorporated under the laws of Minnesota and acquired land and buildings to conduct pari-mutuel horse racing operations (the “Racetrack”) in March 1994.  The Racetrack is located in Shakopee, Minnesota, approximately 25 miles southwest of downtown Minneapolis.  In May 1994, we commenced year-round horse racing simulcast operations and hosted the first annual live race meet during the summer of 1995.  Our live racing operations are a seasonal business as we host live race meets each year from early May until Labor Day.  We earn additional pari-mutuel revenue by televising our live racing to out-of-state racetracks around the country.  We also derive revenues from related services and activities, such as advertising, admissions, parking and publication sales and from other entertainment events and activities held at the Racetrack.  In April 2000, we opened Canterbury Park’s Card Club (the “Card Club”), which is authorized to host “unbanked” card games.  The Card Club operates 24 hours a day, seven days a week and is limited by Minnesota State law to a maximum of 50 tables.  The Card Club currently offers 34 tables of Poker Games and 16 tables of Casino Games.  Our three largest sources of revenues, Card Club operations, pari-mutuel operations and concessions sales, generate cash revenues.

Unaudited Financial Statements - The consolidated balance sheet as of September 30, 2008, the consolidated statements of operations for the three and nine months ended September 30, 2008 and 2007, the consolidated statements of cash flows for the nine months ended September 30, 2008 and 2007, and the related information contained in these notes have been prepared by management without audit.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of financial position and results of operations for such periods have been made.  Results for an interim period should not be considered as indicative of results for a full year.

The summary of significant accounting policies is included in the notes to consolidated financial statements in the 2007 Annual Report on Form 10-K.

Revenue Recognition - Our revenues are derived primarily from the operations of a Card Club, pari-mutuel wagering on simulcast and live horse races, concession sales, and related activities.  Collection revenue from Card Club operations and pari-mutuel commission and fee revenues are recognized at the time that the wagering process is complete.  Revenues related to concession and publication sales and parking and admission fees are recognized as revenue when the service has been performed or the product has been delivered.

Estimates - The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

Restricted Cash – Restricted cash represents refundable deposits and amounts due to horsemen for purses, stakes and awards, and amounts accumulated in the player pool and jackpot pools to be used to repay card club players in the form of promotions, giveaways, prizes, or by other means.

Income Taxes - Income tax expense is computed by applying the estimated annual effective tax rate to the year-to-date income.  Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to reverse.

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The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB No. 109, (“FIN 48”), on January 1, 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  Interest and penalties associated with uncertain income tax positions are presented in income tax expense. The Company has not recorded any significant income tax related interest or penalties during any of the periods presented.  Upon implementation, we determined all recorded benefits and income tax positions were more-likely-than-not.  Therefore, no cumulative effect relating to the adoption of FIN 48 was recorded.

The Company and its consolidated subsidiaries file income tax returns in the United States (“U.S.”) federal jurisdiction.  The Company is no longer subject to U.S. federal examinations by tax authorities for years prior to 2007 or by State of Minnesota tax authorities for years prior to 2003.  We do not believe there will be any material changes in our unrecognized tax positions over the next twelve months.

Net (Loss) Income Per Share - Basic net (loss) income per common share is based on the weighted average number of common shares outstanding during each period.  The weighted average number of common shares outstanding for the three and nine-month periods ended September 30, 2008 were 3,948,473 and 4,011,126, respectively.  The weighted average number of common shares outstanding for the three and nine-month periods ended September 30, 2007 were 4,071,570 and 4,064,435, respectively.  Diluted net income per common share takes into effect the dilutive effect of potential common shares outstanding.  The Company’s potential common shares outstanding are stock options and shares of unvested (“restricted”) stock.  After considering the dilutive effect of stock options outstanding, the weighted average shares used to calculate diluted earnings per share for the three and nine-month periods ended September 30, 2008 were 3,948,473 and 4,098,070, respectively.  61,092 weighted average shares were considered anti-dilutive and excluded from the computation of common equivalent shares for the three months ended September 30, 2008, as the Company reported a net loss for that period.  The weighted average shares used to calculate diluted earnings per share for the three and nine-month periods ended September 30, 2007 were 4,205,514 and 4,236,214, respectively.

Fair Values of Financial Instruments – Due to the current classification of all financial instruments of the Company, and given the short-term nature of the related account balances, carrying amounts reported in the consolidated balance sheets approximate fair value.

New Accounting Pronouncements – In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 (“SFAS 157”), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  SFAS 157 for financial assets and liabilities is effective for fiscal years beginning after November 15, 2007, and the Company has adopted the standard for those assets and liabilities as of January 1, 2008 and the impact of adoption had no impact on our financial position or results of operation.  See Note 3 for further discussion.

In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115.  SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. S FAS 159 became effective for fiscal years beginning after November 15, 2007.  We have elected not to implement the fair value option with respect to any existing assets or liabilities; therefore, the adoption of SFAS 159 had no impact on our financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141(revised) (“SFAS 141(R)”), Business Combinations .  SFAS 141(R) applies to all business combinations. Under SFAS 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their

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fair values on the acquisition date. We are required to adopt this statement starting in 2009 and it is to be applied to business combinations occurring in 2009 and after. Early adoption of this statement is prohibited.  The Company will evaluate the impact the adoption of SFAS No. 141 (R) will have on any future business combinations.

In December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), Noncontrolling Interests in Consolidated Financial Statements .  SFAS 160 applies to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements.  SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity.  We are required to adopt this statement beginning in 2009.  Early adoption of this statement is prohibited and we are currently in the process of evaluating the effect that this statement will have on our consolidated results of operations and financial condition.

In March 2008, the FASB issued SFAS No. 161 (“SFAS 161”), Disclosures about Derivative Instruments and Hedging Activities , an amendment of SFAS 133.”  SFAS 161 requires entities to provide greater transparency about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for under SFAS 133, and how the instruments and related hedged items affect the financial position, results of operations, and cash flows of the entity.  SFAS 161 is effective for fiscal years beginning after November 15, 2008.  The Company is evaluating the impact the adoption of SFAS 161 will have on its consolidated results of operations and financial condition.

In May 2008, the FASB issued SFAS No. 162 (“SFAS 162”), The Hierarchy of Generally Accepted Accounting Principles .  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).  SFAS 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.   The FASB has stated that it does not expect SFAS 162 will result in a change in current practice.  The application of SFAS 162 will have no effect on the Corporation’s financial position or results of operations.

In October 2008, the FASB issued FSP 157-3 (“FSP 157-3”), Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS 157 in a market that is not active.  FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued.  The adoption of FSP 157-3 had no impact on our financial position or results of operations.

2.      STOCK BASED COMPENSATION

Effective January 1, 2006, we adopted FASB Statement No.123(R), Share Based Payment (“SFAS 123R”), applying the modified prospective transition method.  We recognized $116,086 and $185,434 in stock-based compensation expense in salaries and benefits expense line item on the consolidated statements of operations during the nine months ended September 30, 2008 and 2007, respectively.

Our annual grant of stock-based compensation generally takes place during the first quarter of each fiscal year.  Each non-employee member of the Board of Directors receives an annual recurring grant of 3,000 non-qualified stock options on the first business day in February.  On February 1, 2008, 15,000 options were granted to the five non-employee board members with an exercise price equal to the market price on the date of grant of $11.35.  The stock options vest over a six month period and expire in ten years.  The compensation cost associated with this grant of Board of Director options is $29,700 to be recognized as expense over the six month vesting period.  On February 1, 2007, 15,000 options were granted to the five non-employee board members with an exercise price equal to the market price on the date of grant of $13.76.

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The number of shares granted and the weighted average fair value per share during the periods presented were:

The fair value of stock options granted under the Plan during first nine months of 2008 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results:

A summary of stock option activity as of September 30, 2008 and changes during the nine months then ended is presented below:

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3.      FAIR VALUE

        SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities.  The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

4.      BORROWINGS UNDER CREDIT AGREEMENT

Borrowings under the Company’s credit agreement with Bremer Bank include a commercial revolving credit line, which provides for maximum advances of $5,000,000 until June 30, 2009 with interest at the prime rate but not less than 4.5% per annum.  The Company had no borrowings under this credit line at September 30, 2008 and December 31, 2007.  The credit agreement contains certain covenants requiring the Company to maintain certain financial ratios.  The Company was in compliance with these requirements as of September 30, 2008.  Management believes that funds available under this line of credit, along with funds generated from card club and simulcast operations, will be sufficient to satisfy its liquidity and capital resource requirements during 2008.

5.      OPERATING SEGMENTS

During the first nine months of 2008 and 2007, the Company had three reportable operating segments:  horse racing, card club, and concessions.  The horseracing segment primarily represents simulcast and live horse racing operations.  The card club segment primarily represents operations of Canterbury Park’s Card Club, and the concessions segment primarily represents concessions provided during simulcast and live racing, in the Card Club, and during special events.  The Company’s reportable operating segments are strategic business units that offer different products and services.  They are managed separately because the segments differ in the nature of the products and services provided as well as processes to produce those products and services.  The Minnesota Racing Commission regulates the horse racing and card club segments.

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The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the 2007 Annual Report on Form 10-K.

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

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

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

6.      COMMITMENTS AND CONTINGENCIES

In accordance with an Earn Out Note, given to the prior owner of the Racetrack as part of the consideration paid by the Company to acquire the Racetrack in 1994, if (i) off-track betting becomes legally permissible in the State of Minnesota and (ii) the Company begins to conduct off-track betting with respect to or in connection with its operations, the Company will be required to pay to the IMR Fund, L.P. the greater of $700,000 per operating year, as defined, or 20% of the net pretax profit, as defined for each of five operating years.  At this time, management believes that the likelihood that these two conditions will be met, and that the Company will be required to pay these amounts is remote.  At the date (if any) that these two conditions are met, the five minimum payments will be discounted back to their present value and the sum of those discounted payments will be capitalized as part of the purchase price in accordance with generally accepted accounting principles.  The purchase price will be further increased if payments become due under the “20% of Net Pretax Profit” calculation.  The first payment is to be made 90 days after the end of the third operating year in which off-track betting is conducted by the Company.  Remaining payments would be made within 90 days of the end of each of the next four operating years.

The Company is periodically involved in various legal actions arising in the normal course of business.  At September 30, 2008, management believes that the resolution of any legal actions outstanding will not have a material impact on the consolidated financial statements.

On October 24, 2008, the Company announced that it had begun to implement a reduction in its workforce of roughly 10%.  This elimination of approximately 60 full and part-time positions was completed by the date of this filing and will result in the payment of severance costs to terminated employees during the fourth quarter of 2008.

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ITEM 2:     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

Overview:

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

The Racetrack is the only pari-mutuel thoroughbred and quarter horse racing facility in the State of Minnesota.  The Racetrack earns revenues from pari-mutuel take-out on races simulcast year-round to Canterbury Park from racetracks throughout the country and from live race meets featuring thoroughbred and quarter horse racing.  In 2008, the live race meet began in May and concluded in September.  During the live meet, the Company televises its races to out-of-state racetracks around the country and earns additional pari-mutuel revenue on wagers placed on our races at the out-of-state racetracks.

 Canterbury Park’s Card Club (the “Card Club”) hosts “unbanked” card games in which players compete against each other and not against the house.  The Card Club is open twenty-four hours a day, seven days a week.  Under Minnesota law, the Company is required to pay up to 14% of the gross Card Club revenues to the Racetrack’s purse fund and the State of Minnesota Breeders’ Fund.

The Company also generates revenues from other activities such as admission and parking fees and from the sale of food and beverage, programs and other racing publications, and corporate sponsorships.  Additional revenues are derived from an RV park and the use of the Racetrack facilities for special events such as concerts, craft shows and snowmobile racing.

Operations Review for the Three and Nine Months Ended September 30, 2008 and September 30, 2007:

Total net revenues decreased $4,375,867, or 10.5%, during the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, and decreased $2,286,211, or 14.7%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. The decrease was due primarily to reductions of 11.4% and 12.6% in pari-mutuel and Card Club revenues for the nine months ended September 30, 2008.  Pari-mutuel and Card Club revenues decreased 14.9% and 18.7%, respectively, for the three months ended September 30, 2008.

Pari-mutuel revenues decreased $1,428,455, or 11.4%, in the nine-month period ended September 30, 2008 compared to the same period in 2007, and decreased $760,770, or 14.9%, for the three-month period ended September 30, 2008 compared to the same period in 2007.  Total handle wagered on simulcast races for the first nine months of 2008 was down $6.7 million, or 8.7%, compared to the same period last year.  The decrease in pari-mutuel revenues is partially due to a smoking ban that became effective October 1, 2007.  The Company believes that those simulcast customers who smoke and no longer visit our facilities are unlawfully wagering on the Internet.  The smoking ban is discussed later in this filing under the Legislation heading.  Inclement weather during the first quarter of 2008 at racetracks that simulcast their signal to our racetrack also resulted in decreased pari-mutuel revenues.  In addition, on April 11, 2008, Running Aces Harness Park, located in Columbus Township, Anoka County, Minnesota, began their race meet.  The Company believes that this new alternative simulcast betting location for our simulcast customers has resulted in decreased simulcast wagering at the Racetrack.  Finally, the economic downturn has adversely impacted discretionary spending on entertainment throughout 2008, especially during the third quarter.

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The following table provides additional information regarding pari-mutuel operations:

Total Card Club revenue decreased $2,709,195, or 12.6%, for the first nine months of 2008 and $1,307,182, or 18.7%, for the third quarter of 2008 compared to the same periods in 2007.  The primary source of Card Club revenue, referred to as “collection revenue,” is a percentage of the wagers received from the players as compensation for providing the Card Club facility and services.  Other revenue includes fees collected for the administration of tournaments and amounts earned as reimbursement of the administrative costs of maintaining jackpot funds.  Poker collection revenue fell $1,085,741 or 8.2% compared to the first nine months of 2007.  In addition, Casino Games collection revenue dropped $1,554,673 or 20.4% compared to the first nine months of 2007.  The decrease in revenue is partially due to the smoking ban that became effective on October 1, 2007.  The Company believes that those Card Club customers who smoke and no longer visit the Card Club are now patronizing tribal casinos where smoking is permitted.  The smoking ban is discussed later in this filing under the Legislation heading.  Also, on June 30, 2008, Running Aces Harness Park opened their card room.  The Company believes that this alternative location for our poker and casino games customers has resulted in decreased attendance at the Racetrack.  In addition, the economic downturn has adversely impacted discretionary spending on entertainment throughout 2008, especially during the third quarter.  Total Card Club revenues represented 50.6% and 42.9% of net revenues for the nine-month and three-month periods ended September 30, 2008, respectively.

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The following table provides additional information regarding Card Club operations: