** **

**UNITED STATES****SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 

**(MarkOne)**

** **
| **ý**                                                                                                                                      |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                            |   |                                                                                          |
| **For  the fiscal year ended December 31, 2003**                                                                                                |
|                                                                                                                                            |   |                                                                                          |
|                                                                                                                                            |   | **OR**                                                                                        |
|                                                                                                                                            |   |                                                                                          |
| **o**                                                                                                                                           |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                            |   |                                                                                          |
| **For  the Transition period from                     to** |
|                                                                                                                                            |   |                                                                                          |
| **Commission  File Number:  001-31569**                                                                                                    |

 

| **CANTERBURY PARK HOLDING CORPORATION**                                             |
|-------------------------------------------------------------------------------------|
| (Exact Name of  Registrant 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 registeredpursuant to Section 12(b) of the Act:          **Common Stock, $.01 par value**

 

Securities registeredpursuant to Section 12(g) of the Act:          **None**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

YES         ý            NO          o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.   o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).    

 

YES         o            NO          ý

 

The aggregate marketvalue of the shares of voting stock held by non-affiliates of the Company(persons other than directors and officers) computed at the closing price of$16.59 per share on the American Stock Exchange on March 15, 2004 wasapproximately $31,097,000.

 

On March 15, 2004, theCompany had 3,730,769 shares of common stock, $.01 par value, outstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Portions of the Company’sdefinitive Proxy Statement for its 2004 Annual Meeting of Shareholders, to beheld on June 3, 2004, are incorporated by reference into Part III of this Form10-K.

 

 

----

 

CANTERBURY PARKHOLDING CORPORATION

FORM 10-K ANNUALREPORT

FOR THE YEAR ENDEDDECEMBER 31, 2003

 

TABLE OF CONTENTS

 
|          |                                                                                        | **Page** |
|---------------|---------------------------------------------------------------------------------------------|----------|
| PART I        |                                                                                        |
|          |                                                                                        |     |
| ITEM 1.       | Business                                                                                    | 3        |
| ITEM 2.       | Properties                                                                                  | 12       |
| ITEM 3.       | Legal Proceedings                                                                           | 13       |
| ITEM 4.       | Submission of Matters to a Vote of Security  Holders                                        | 13       |
|          |                                                                                        |     |
| PART II       |                                                                                        |
|          |                                                                                        |     |
| ITEM 5.       | Market for Registrant’s Common Equity and  Related Stockholder Matters                 | 14       |
| ITEM 6.       | Selected Financial Data                                                                     | 16       |
| ITEM 7.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 17       |
| ITEM 7A.      | Quantitative and Qualitative Disclosures about  Market Risk                                 | 24       |
| ITEM 8.       | Financial Statements and Supplementary Data                                                 | 25       |
| ITEM 9.       | Changes In and Disagreements With Accountants on  Accounting and Financial Disclosure       | 41       |
| ITEM 9A.      | Controls and Procedures                                                                     | 41       |
|          |                                                                                        |     |
| PART III      |                                                                                        |
|          |                                                                                        |     |
| ITEM 10.      | Directors and Executive Officers of the Registrant                                          | 41       |
| ITEM 11.      | Executive Compensation                                                                      | 41       |
| ITEM 12.      | Security Ownership of Certain Beneficial Owners  and Management                             | 41       |
| ITEM 13.      | Certain Relationships and Related Transactions                                              | 41       |
| ITEM 14.      | Principal Accountant Fees and Services                                                      | 41       |
| ITEM 15.      | Exhibits, Financial Statement Schedules, and  Reports on Form 8-K                           | 41       |
|          |                                                                                        |     |
| SIGNATURES    |                                                                                        | 43       |
|          |                                                                                        |     |
| EXHIBIT INDEX |                                                                                        | 44       |

 

2

----

 

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

 

#### ***(a) General Development of the Business***

 

Canterbury Park HoldingCorporation (the “Company”) hosts pari-mutuel wagering on live thoroughbred andquarter horse racing at its facilities in Shakopee, Minnesota (the “Racetrack”)and pari-mutuel wagering on races held at out-of-state racetracks that aretelevised simultaneously at the Racetrack (“simulcasting”).  In addition, the Company is authorized underMinnesota law to host “unbanked” card games in which the players competeagainst each other and not against the house. The Company also derives revenues from related services and activities,such as concessions, parking, advertising, admissions and programs, and fromother entertainment 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(“live meets”) and related pari-mutuel wagering on a seasonal basis, generallyfrom mid May to late August or early September.

 

  On April 19, 2000, the Company opened itsCanterbury Card Club (the “Card Club”). At the Card Club patrons compete against each other in various unbankedcard games.  The Card Club operatesunder laws adopted in 1999 (the “Card Club Legislation”) and is regulated bythe Minnesota Racing Commission.  Underthe Card Club Legislation, the Company is authorized to host up to 50 tableswhere card games are played and receive a percentage of the wagers or a feefrom the players as its revenue for providing the facility and services.  The Card Club Legislation requires that theRacetrack’s purse fund and the State of Minnesota Breeders’ Fund receive aminimum of 10% to 14% of the gross revenue generated by the Card Club

 

TheCompany maintains a website at www.canterburypark.com.  Our annual reports on Form 10-K, ourquarterly reports on Form 10-Q and our periodic reports on Form 8-K (and anyamendments to these reports) are available free of charge by linking from ourwebsite to the Securities & Exchange Commission website.

 

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

 

TheCompany divides its business into three segments: card club, horse racing andconcessions. The card club segment includes operations of the Canterbury CardClub. The horse racing segment includes 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)            Card ClubOperations**

 

The Card Club is open 24hours per day, seven days per week, offering two types of unbanked card games:poker games and casino games.

 

Poker games, includingTexas Hold ‘Em, 7-Card Stud and Omaha, with table limits ranging between $2 and$60, are currently offered on a maximum of 31 tables in the poker room.  In the Canterbury Card Club, a dealer, employedby the Company, regulates the play of the game at each table and deals thecards, but does not participate in play. In poker games, the sponsor (the Company), is allowed to deduct apercentage from the accumulated wagers and impose other charges for hosting theactivity, but does not have an interest in the outcome of a game.  The sponsor may add additional prizes,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

 

3

----

 

per hand, depending onthe game, as its collection revenue.  Inaddition, poker games offer progressive jackpots for most games.  In order to fund the jackpot pool, thedealer withholds $1.00 from each final pot, which exceeds the minimum of $15.

 

Casino games includingPai Gow Poker, Minnesota 21 (a version of blackjack), Super Nine, CaribbeanStud, Let-It-Ride and Three Card poker, which are currently offered at 19tables, are played using a “player pool” system.  “Player pool” means a wagering system, in which wagers lost incard games, are accumulated into a pool for purposes of enhancing the totalamount paid back to winning players in other card games.  In such instances, the sponsor may onlyserve as custodian of the player pool and may not have an active interest inany card game.  In the casino games areaof the Card Club, the amount that the dealer “wins” or “loses” during thecourse of play is accumulated in a “Player Pool” to be used to repay players inthe 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 casinogame to 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)   Horse Racing Operations**

 

The Company’s horseracing operations consist of year-round pari-mutuel wagering on simulcast horseraces (“simulcasting”) and live horse races (“live meets”) held on a seasonalbasis beginning in May and concluding in September.  Thoroughbred and quarter horse racing is conducted during thelive meet.  The Company has alsoconducted live harness racing from time to time.

 

*Simulcasting.*

 

Simulcasting is theprocess by which live horse races held at one facility (the “host track”) aretransmitted simultaneously to other locations that allow patrons at eachreceiving location (the “guest track”) to place wagers on the race beingbroadcast.  Monies are collected at theguest track and the information with respect to the total amount wagered iselectronically transmitted to the host track. All of the amounts wagered at guest tracks are combined into theappropriate pools at the host track with the final odds and payouts determinedbased upon all the monies in the respective pools.

 

The Company offers “fullcard” simulcast racing (broadcasting of another racetrack’s entire daily liveracing program) from up to 20 racetracks per day, seven days a week, 364 daysper year, including Churchill Downs, Hollywood Park, Santa Anita, GulfstreamPark, Belmont Park and Saratoga Racecourse. In addition, races of national interest, such as the Kentucky Derby,Preakness Stakes and Breeders’ Cup, supplement the regular simulcastprogram.  The Company regularlyevaluates its agreements with other racetracks in order to offer the mostpopular simulcast signals of live horse racing which is feasible to offer atthe Racetrack.

 

Under applicableprovisions of federal and state law, the Racetrack must obtain the consent ofthe state’s regulatory authority, and the organization which represents themajority of the owners and trainers of the horses who race at the Racetrack,with respect to simulcast operations both as a host and guest track.  In Minnesota such consent must be obtainedfrom the Minnesota Horsemen’s Benevolent and Protective Association (the“MHBPA”) and the Minnesota Racing Commission.

 

*Live Racing.*

 

The Company conducts livehorse racing at its facility generally from mid-May until early September eachyear.  The Company raced 63 days in theyear 2003, beginning May 16th and ending September 1st, consisting of 32 daysof mixed Thoroughbred and Quarter Horse racing and 31 days of Thoroughbred onlyracing.  In addition, the Racetrackhosted 2 days of live Harness racing on September 13th and 14th.  In 2004, the Racetrack will conduct 68 liverace days, beginning May 14th and concluding September 6th.  The race meet will include 32 days of mixedThoroughbred and Quarter Horse racing, and 36 days of Thoroughbred only racing.

 

4

----

 

Currently, Minnesota lawrequires the Racetrack to schedule a minimum of 125 days of live racingannually, unless the MHBPA agrees to a lesser number of live racing days.  Since 1995, the MHBPA has agreed to waivethe 125-day requirement and allow the Company to run a minimum of 50 days oflive racing each year.  After 2004, noassurance can be given that the MHBPA will agree to a shorter live meet thanthe 125-day statutory minimum.  If theMHBPA does not agree to a live meet shorter than 125 days, the Company’soperations could be adversely impacted by a decrease in the daily purses andpotential reduction in quality of horses, attendance and overall handle, aswell as increased operating expenses.

 

 

**(iii)         SpecialEvents**

 

While pari-mutuel horseracing and card club operations are the Company’s principal businesses, the Company’sfacilities are capable of being used for multiple purposes.  In an effort to more fully utilize theproperty and to generate additional revenues, the Company has, in each year ofits operations, expanded the use of the grandstand, grounds and parking lot forspecial events and rentals.

 

From 1996 through 2003, anumber of non-horseracing events were held, including snowmobile races, majorarts and crafts shows, trade shows, concerts, motorcycle races, fund raisers,automobile shows and competitions and private parties.  The Company also hosted major concerts eachSeptember, from 1998 through 2003.

 

** (iv)         Sources of Revenue**

 

*General.*

 

The Company’s revenuesare principally derived from pari-mutuel wagering and Card Club operations. Thepercentage of total revenue the Company obtained from its three businesssegments during 2003 are: 48.0% Card Club, 41.9% Pari-mutuel wagering, and10.1% Concessions.

 

*Pari-mutuelwagering – general.*

 

In pari-mutuel wagering,bettors wager against each other in a pool, rather than against the operator ofthe facility or with preset odds.  Fromthe total amount wagered or “handle,” the Minnesota Pari-Mutuel Horse RacingAct (the “Racing Act”) specifies the maximum percentage, referred to as the“takeout,” which may be withheld by the Racetrack, with the balance returned tothe winning bettors.  The takeoutconstitutes one of the Racetrack’s primary sources of operating revenue.  From the takeout, funds are paid to theState of Minnesota for pari-mutuel taxes, with additional amounts set aside forpurses and for the “Breeders’ Fund,” which is a fund apportioned by theMinnesota Racing Commission (“Racing Commission”) among various purposesrelated to Minnesota’s horse breeding and horse racing industries.  The balance of the takeout remaining afterthese deductions is commonly referred to as the “retainage.”

 

The various forms ofpari-mutuel wagering can be divided into two categories:  straight wagering pools and multiplewagering pools, 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 willfinish first and second, in order); “trifecta” (a wager in which the bettorselects the horses that will finish first, second and third, in order); and“pick six” (a wager in which the bettor selects the horses that will finishfirst in six consecutive races).

 

The amount of takeoutearned by the Company depends on where the race is run and the form of wager(straight or exotic).  Net revenues frompari-mutuel wagering on live races run at the Racetrack consist of the totalamount wagered, less the amounts paid (i) to winning patrons, (ii) for purses,(iii) to the Breeders’ Fund and (iv) for pari-mutuel taxes to the State ofMinnesota.  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

 

5

----

 

host track.  The host fee, which is calculated as apercentage of monies wagered (generally 2.50% to 4.50%), is negotiated with thehost track and must comply with state laws governing 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 the Racing Actprovides that a minimum of 8.4% of the live racing handle is to be paid aspurses to the owners of the horses, the size of the purse is subject to furtheragreement with the horsepersons’ associations. The Breeders’ Fund receives 1%of the handle.  The pari-mutuel taxapplicable to wagering on all live races is 6% of takeout in excess of $12million during the twelve month period beginning July 1 and ending thefollowing June 30.

 

The following table setsforth the percentage distribution of each dollar wagered on live races at theRacetrack, as established by the Racing Act, and the Racetrack’s retainage:

 
|                             |   | **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 | % |

 

----

(1)                                  Minnesotalaw provides that the 8.40% purse payment is a minimum.  The actual percentage, if any, above theminimum is determined between the Racetrack and the MHBPA.  Any additional amounts paid for pursesdecrease the Racetrack’s retainage.

(2)                                  Thecurrent pari-mutuel tax structure exempts the first $12 million of takeoutduring a statutorily mandated twelve-month period.  The total pari-mutuel tax liability for a twelve-month periodwill depend upon the total takeout during that period.

 

*Wagering on Simulcast Races.*

 

The amount of takeoutfrom simulcast wagering is determined by the laws of the state in which thehost track is located.  In addition, theRacing Act establishes a minimum that must be set aside from simulcasting forpurse 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’Fund and 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 an 8% expense factor, pari-mutuel taxes, payments tothe Breeders’ Fund and host fee payments to the host racetrack.

 

6

----

 

Thefollowing table sets forth the approximate percentage distribution of eachdollar wagered for races simulcast at the Racetrack and the Racetrack’s retainage:

 
|                             |   | **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                            | %      |                                 |   | 1.10                          | %      |   |   | 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 | % |

 

----

(1)                                  Thisamount will depend upon the takeout at the host racetrack.  This percentage will be determined by localand state law applicable to the host track, and ranges from 75.0% to 85.0%.

 

(2)                                  Thecurrent pari-mutuel tax structure exempts the first $12 million of takeoutduring a statutorily mandated twelve-month period.  The total pari-mutuel tax liability for a twelve-month periodwill depend upon the total takeout during that period.

 

(3)                                  AlthoughMinnesota law specifies a minimum, the actual percentage is determined byagreement between the Racetrack and the MHBPA. Any additional amounts paid for purses reduce the Racetrack’s retainage.

 

(4)                                  Paymentsto the host track generally range from 2.5% to 4.5% of total handle, subject tonegotiation with each host track.  Forpurposes of this table, the host track fee is assumed to be 3.5%.

 

*Card Club Operations*

 

Asdiscussed above, the Company receives revenues from its Card Club operations,which run 24 hours per day, seven days per week.  The Company currently receives collection revenue from 31 pokertables and 19 tables offering table games. Under Minnesota law, the Company is required to pay 10% of the first $6million of gross Card Club revenues as purse monies.  After meeting the $6,000,000 threshold, the Company must pay 14%of gross Card Club revenues as purse monies, although by agreement with theMHBPA the Company has paid 14% of all Card Club revenues into the purse fundfor 2002 and 2003.  In addition, theCompany has agreed with the MHBPA to pay 15% of Card Club revenues into thepurse fund for 2004.  Of funds allocatedfor purses, the Company pays 10% of the purse monies to the State of MinnesotaBreeders’ Fund.  The remaining 90% ofthe purse monies is divided between thoroughbred (90%), quarter horse (9%) andstandard bred (1%) purse funds

 

*Other Revenues*

 

The Company also derivesrevenue from other activities such as admissions and parking fees, as well asfrom the sale of food and beverage, programs, and other racingpublications.  The Company offersadvertising signage space similar to that appearing at many sportsstadiums.  Finally, additional revenuesare derived from RV Park and the use of the facilities for events such asconcerts, trade and craft shows, snowmobile racing, business meetings, privateparties, horse expositions and sales, boat and automobile storage, communityevents, and rental of the parking lot for various automobile activities andvehicle storage.

 

7

----

 

**(v)            Competition**

 

The Company competes withother forms of gaming in the State of Minnesota, principally casino-stylegambling including slots and blackjack, and more recently unbanked card gamesavailable at Native American reservations throughout the State of Minnesota,including a large casino located approximately four miles from theRacetrack.  In addition, the Companycompetes against charitable gambling (bingo and pull tabs) and various statelottery products. The Company also faces increasing competition from offshoreand out-of-state simulcast operations illegally marketing Internet andtelephone account home wagering systems to Minnesota residents.

 

The Company also competeswith other forms of entertainment in the Minneapolis-Saint Paul metropolitanarea, including a wide range of live and televised professional and collegiatesporting events.  In addition, livehorse racing competes with a wide variety of summer attractions, includingamusements parks, sporting events and other local activities.

 

The Company also competeswith racetracks located throughout the United States in securing better qualityhorses to run at the Racetrack. Attracting the owners and trainers of better quality horses is largelydependent on the ability to offer large purses.  The Company experiences significant competition for betterquality horses from a racetrack located near Des Moines, Iowa, as well asracetracks in Chicago, Illinois, both of which offer substantially largerpurses than the Company.  Thiscompetition is expected to continue for the foreseeable future.

 

**(vi)****                                                       Legislation**

 

OnFebruary 18, 2003, a bill was introduced in the Minnesota Legislature, to allowelectronic gaming devices to be operated by the Minnesota State Lottery at theRacetrack. This concept often referred to as a “Racino”, as proposed forCanterbury Park would include approximately 2,000 gaming devices, a 250-roomhotel, an Olympic scale horse park and additional restaurant venues.  The bill was approved in May 2003 by a 71 to60 margin by the Minnesota House of Representatives. However, on May 29, 2003the Minnesota Legislature adjourned the first year of its regular sessionwithout taking further action on the Racino legislation.  The Minnesota Legislature reconvened for thesecond year of its regular session in February 2004, and the Racino legislationis an agenda item in the Minnesota Senate having already passed the MinnesotaHouse of Representatives. Based on the success of several Racinos in other states,the Company feels that if this legislation becomes law, it will enhance horseracing with increased purses, provide growth and development opportunities forthe Company, and produce significant new tax revenues for state and localgovernments.

 

Inaddition, legislation was introduced in 2004 to remove the 50-table limit inthe Card Club imposed by the Card Club Legislation.  This bill passed the Minnesota House Government Operations andVeterans Affairs Policy Committee and now awaits action on the House floor. Noversion of this bill has been introduced in the Minnesota Senate.  The effort to obtain legislative authorityfor these initiatives has required, and will continue to require, substantialexpenditures and there can be no assurance that any bill favorable to theCompany’s interests will be enacted into law.

 

**(vii)         Marketing**

 

The Company’s primarymarket is the seven-county Minneapolis-Saint Paul metropolitan area. Currentdemographic information indicates that approximately 1.45 million adults age 18and older, reside within a 25-mile radius of Shakopee, Minnesota and another1.68 million adults age 18 and older, reside within a 25-100 mile radius of theRacetrack.

 

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 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 andhandicapping contests to increase simulcast patronage, and successfullyimplemented a

 

8

----

 

pari-mutuel playerrewards program in March of 2001.  TheCompany also implemented a Casino Games player rewards program in October of2003.

 

The 2003 combined CardClub and live racing advertising campaigns utilized print, radio and televisionadvertising to highlight the attractive, park-like atmosphere of CanterburyPark, promoting activities for the entire family, as well as the fun andexcitement of live horse racing and card playing.  In addition, the development over the past five years of acustomer database has enabled the Company to increasingly utilize direct mailadvertising.

 

                Because wagering on horse racing and playing pokercard games and table card games are more complex than many other forms ofgaming, such as slot machines or the various lottery products, the Companycontinues to develop and conduct various educational programs, such ascomplimentary poker and table game lessons, tours of the Racetrack, wageringclasses and contests that it believes will make the sport of horse racing andpari-mutuel wagering and card playing more understandable to the generalpublic.

 

**(viii)        Regulation**

 

*General.*

 

The ownership andoperation of the Racetrack in Minnesota is subject to significant regulation bythe Racing Commission under the Racing Act and the rules adopted by the RacingCommission.  The Racing Act provides forthe allocation of each wagering pool to winning bettors, the Racetrack, purses,the State of Minnesota and the Breeders’ Fund and empowers the RacingCommission to license and regulate substantially all aspects of horse racing inthe State.  The Racing Commission, amongother things, grants operating licenses to racetracks after an applicationprocess and public hearings, licenses all employees of a racetrack, jockeys,trainers, veterinarians and other participants, regulates the transfer ofownership interests in licenses, allocates live race days and simulcast-onlyrace days, approves race programs, regulates the conduct of races, setsspecifications for the racing ovals, animal facilities, employee quarters andpublic areas of racetracks, regulates the types of wagers on horse races andapproves significant contractual arrangements with racetracks, includingmanagement agreements, simulcast arrangements, totalizator contracts andconcessionaire agreements.  Decisions bythe Racing Commission in regard to any one or more of the foregoing matterscould adversely affect the Company’s operations.

 

A federal statute, theInterstate Horse Racing Act of 1978, also provides that a racetrack must obtainthe consent of the group representing the horsepersons (owners and trainers)racing the breed of horses that race a majority of the time at the racetrack,and the consent of the state agency regulating the racetrack, in order totransmit simulcast signals of its live races or to receive and use simulcastsignals from other racetracks.  TheCompany has obtained the consent of the MHBPA and Minnesota Racing Commissionfor receiving and sending simulcasting signals.

 

*Issuance of Class A, and Class BLicenses to the Company.*

 

The Racing Commissionissued a Class A License to the Company on April 27, 1994.  The Class A License allows the Company toown and operate the Racetrack.  TheClass A License is effective until revoked or suspended by the RacingCommission, or relinquished by the licensee. The fee for a Class A License until June 30, 2003 was $10,000 per fiscalyear.  Effective July 1, 2003 the feefor a Class A License increased to $253,000 per fiscal year.

 

The Racing Commissionissued a Class B License to the Company on April 27, 1994.  The Class B License 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 Racing Commission.  The Class B License is renewable each year by the RacingCommission after a public hearing (if required by the Racing Commission).  Until June 30, 2003 the fee for the Class BLicense was $100 for each assigned race day on which live racing is actuallyconducted and $50 for each day on which simulcasting is authorized and actuallytakes place.  Effective July 1, 2003, theClass B License fee increased to $500 for each live racing day and $100 foreach simulcast day.

 

9

----

 

The Racing Commission hasthe ability to impose further increases in the Class A and Class B license fees,which could materially adversely impact the Company’s operating results.

 

*Limitation on the Number of Class A,and Class B Licenses.*

 

Pursuant to the RacingAct, so long as the Racetrack maintains its Class A License, no other Class ALicense may be issued to operate a racetrack in the seven county metropolitanarea (the counties of Hennepin, Ramsey, Washington, Scott, Dakota, Anoka andCarver), except the Racing Commission 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.  Therefore, aslong as the Company holds the Class A License, only the Company may own andoperate a racetrack in the seven county metropolitan area where thoroughbredhorses and quarter horses may be raced.

 

On February 18, 2004,Southwest Casino and Hotel Corporation in partnership with MTR Gaming Group,Inc., made their first appearance before the Minnesota Racing Commission toapply for a license to operate a harness racetrack and card club in easternAnoka County near Forest Lake, Minnesota. The racetrack is required by law to conduct 50 days of live standardbred racing before approval can be given to the applicant to host unbanked cardgames.

 

*Limitation on Ownership andManagement of an Entity, which holds a Class A License and/or Class B License.*

 

The Racing Act requiresprior Racing Commission approval of all officers, directors, 5% shareholders,or other 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 Racing Commission of the changes within five days of thisoccurrence and provide the information required by the Racing Act.

 

*Card Club Regulation.*

 

TheRacing Commission is authorized by law to regulate Card Club operations and thelaw requires that the Company reimburse the Minnesota Racing Commission for it’sactual costs, including personnel costs, of regulating the Card Club.  The Racing Commission issued an additionalClass B License to the Company on January 19, 2000.  This Class B License allows the Company to host unbanked cardgames.  The Class B License is renewableeach year by the Racing Commission after a public hearing (if required by theRacing Commission).  The fee for thisClass B License was $10,000 per calendar year until June 30, 2003.  Effective July 1, 2003, the Class B LicenseFee of $10,000 is included in the Class A License Fee of $253,000 per calendaryear.

 

*Local Regulation.*

 

The Company’s operationsare subject to state and local laws, regulations, ordinances and otherprovisions affecting zoning and other matters which may have the effect ofrestricting the uses to which the Company’s land and other assets may beused.  Also, any development of theRacetrack site will, among other things, be subject to applicable zoningordinances and require approval by the City of Shakopee and other authoritiesand there can be no assurance such approvals will be obtained.

 

**(ix)          Employees**

 

At March 15, 2004, theCompany had 384 full-time employees and 201 part-time employees.  On a seasonal basis the Company addsapproximately 120 full-time and 260 part-time employees for live racingoperations from early May until early September.  The Company’s management believes its employee relations aregood.

 

10

----

 

**(x)           ExecutiveOfficers**

 

The executive officers ofthe Company, their ages and their positions with the Company are as follows:

 
| **Name**           |   | **Age** |   | **Position with Company**                                |
|--------------------|--------|---------|--------|----------------------------------------------------------|
|               |   |    |   |                                                     |
| Randall D. Sampson |   | 45      |   | President, CEO and  General Manager                      |
|               |   |    |   |                                                     |
| David C. Hansen    |   | 47      |   | Vice President of  Finance, CFO & Secretary          |
|               |   |    |   |                                                     |
| Mark A. Erickson   |   | 47      |   | Vice President of  Facilities                            |
|               |   |    |   |                                                     |
| Michael J. Garin   |   | 48      |   | Vice President of  Hospitality & Assistant Secretary |
|               |   |    |   |                                                     |
| John R. Harty      |   | 59      |   | Vice President of  Marketing                             |

 

Randall D. Sampson hasbeen President and Chief Executive Officer since the formation of the Companyin March 1994 and General Manager since September 1995.  Mr. Sampson earned his CPA certification in1982.  He has been active in horseindustry associations, currently serving on the Board of Directors of theThoroughbred Racetracks of America and is past President of the MinnesotaThoroughbred Association.  Mr. Sampsonalso currently serves as a director of Communications Systems, Inc. (AMEX:JCS),a manufacturer of telecommunications and data communications products based inHector, Minnesota.  Mr. Sampson is theson of Curtis A. Sampson, the Company’s Chairman of the Board, the beneficialowner of approximately 27% of the Company’s common stock.

 

David C. Hansen joinedthe Company in July 2001 as Vice President of Finance and Chief FinancialOfficer.  From 2000 to 2001 Mr. Hansenserved as Director of Accounting for Prairie Meadows Racetrack and Casino inAltoona, 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 beenVice President of Facilities since May 1997, serving as the Racetrack’sDirector of Facilities since April 1994. From 1992 to 1994 Mr. Erickson served as Maintenance Supervisor for theMall of America, supervising the interior maintenance for one of the largestshopping malls in North America.  Mr.Erickson was Master Electrician for Canterbury Downs from 1986 to 1992,supervising the installation and maintenance of all electrical equipment.

 

Michael J. Garin has beenVice President of Hospitality since May of 1997. He had served as President ofCanterbury Park Concessions, Inc. since April of 1994.  From 1993 to 1994 Mr. Garin served as Food& Beverage Supervisor for Little Six, Inc., one of the largest tribal casinooperations in the country.  Mr. Garinwas President of MMR Vending, Inc., a regional vending company, from 1988 to1992.  Prior to 1988 he was a RegionalDirector at General Mills Restaurant Group overseeing seven restaurants inthree states.  Mr. Garin had served asPresident of Canterbury Park Concessions, Inc. since April of 1994.

 

John R. Harty joined theCompany 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 thatcompany as 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 of the Shakopee AreaChamber of Commerce.

 

11

----

 

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

 

*General.*

 

The Company’s facilities,which are operated under the name “Canterbury Park,” are a modern complex ofbuildings and grounds, generally comparable to other major racetracks locatedthroughout the country.  The Racetrack’sgrandstand has a patron capacity of approximately 10,000 within enclosed areas,and a maximum patron capacity of over 30,000, including outside areas aroundthe grandstand.  The grandstand and mostpublic outdoor areas contain numerous pari-mutuel windows, odds informationboards, video monitors, concessions stands and other amenities.  The audio/visual system includes over 600television monitors with most areas providing multi-screen viewing of theraces.

 

The Racetrack is locatedapproximately 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 twomiles from the Racetrack which annually attracts approximately 1.3 millionvisitors during the spring and summer; the Renaissance Festival, aseven-weekend late summer attraction attracting approximately 340,000 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 42.5 million visitors per year, is approximately 17 miles fromthe Racetrack.

 

*Racing Surfaces.*

 

The racing surfacesconsist of a one-mile oval dirt/limestone track and a 7/8 mile oval turfcourse.  The dirt track includes a mileand one-quarter front stretch chute, a 6-1/2 furlong backstretch chute, a 3 1⁄2furlong chute, and is lighted for night racing.

 

*Grandstand.*

 

The grandstand is amodern, air-conditioned, and enclosed structure of approximately 275,000 squarefeet with a variety of facilities on six levels.  The Lower Level contains space for support functions such asjockey quarters, administrative offices, Racing Commission offices, first aid,mechanical and electrical rooms.  TheTrack Level includes pari-mutuels windows, restrooms, a variety of concessionstands and other services.  The CardClub currently occupies 27,000 square feet on the Track Level. The MezzanineLevel contains 1,320 fixed seats in a glass-enclosed, air-conditioned area andan additional 3,000 seats located outside. In addition to the seats, the Mezzanine Level contains pari-mutuelwindows, restrooms, concession stands and other guest facilities. A portion ofthe mezzanine level is currently being used as a simulcast center during liveracing, and for banquets and other events during the off-season.  The Kitchen Level is an intermediate levellocated between the Mezzanine and Clubhouse floors; it contains a full-servicekitchen which can support a full dining menu for the track-side dining terraceson the Clubhouse Level and food preparation for the other concessionareas.  The Clubhouse Level is amulti-purpose area serving as a simulcast center during wagering sessions ontelevised races, as well as a full-service dining area during the live racingseason.  The Clubhouse Level includes325 trackside tables, each equipped with a television set, with a total seatingcapacity of 1,200 patrons and an additional 1,000 seats are located in loungeslocated throughout the area.  The PressBox/Officials’ Level is located in the roof trusses over the Clubhouse andcontains work areas for the press, racing officials, closed-circuit television,photo finish and the track announcer. In addition, the grandstand was structurally built to accommodateskyboxes under the Press Box/Officials’ Level, although none have yet beenconstructed.  Escalators and elevatorsare available to move patrons among the various levels within the grandstand.

 

*Barn and Backside Facilities.*

 

The stable area consistsof 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.

 

12

----

 

*Parking.*

 

Approximately 7,500 pavedparking spaces are available for patron and employee automobiles at theRacetrack, including parking spaces that are reserved for physically challengedpatrons.  The Racetrack also has unpavedareas available for overflow parking for approximately 5,000 additionalautomobiles.  Areas are also reservedfor bus parking.

 

*Other Properties.*

 

*UndevelopedLand:*

 

In December 2003, theCompany acquired an additional 18 acres of undeveloped land adjacent to theRacetrack.  More than 100 acres of the380 acres owned by the Company are not necessary for current operations.  This property is undeveloped and could besold in 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 the Company’sprimary businesses of horse racing and card club operations.

 

*RVPark:*

 

In December 2002, theCompany acquired a recreational vehicle (RV) park, located on approximately 29acres adjacent to the Minnesota River. The RV park, located 2 miles from the Racetrack in Shakopee, has 68independent sites and 40 dependent sites, an indoor swimming pool, laundryfacilities, game room and mini store. The sites are rented to horsemen participating in Canterbury’s racingoperations, seasonal employees, and the general public.

 

**Item 3****.    LEGAL PROCEEDINGS**

 

There are no materiallegal proceedings currently 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 pendinglitigation to have a material adverse effect on our consolidated financialposition or results of operations.

 

**Item 4****.    SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

 

Not Applicable.

 

13

----

 

**PART II**

 

**Item 5****.    MARKET FOR REGISTRANT’S COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS**

 

**(a)           MARKETINFORMATION**

 

The Company’s CommonStock began trading on the American Stock Exchange on December 18, 2002 underthe symbol ECP. Prior to that date, the Company’s Common Stock traded on theNASDAQ Small Cap Market under the symbol TRAK. The table set forth belowindicates the high and low sale prices for the Common Stock in the quarterlyperiods ending December 31, 2003 and 2002. These prices indicate interdealerprices without retail markup, markdowns or commissions.

 
|            |   | **2003** |   | **2002** |   |
|-----------------|--------|----------|--------|----------|--------|
|            |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
|            |   |     |   |     |   |   |   |   |   |
| Common  Stock   |   |     |   |     |   |   |   |   |   |
|            |   |     |   |     |   |   |   |   |   |
| First  Quarter  |   | $        | 15.98  |     | $      | 13.15 |   | $ | 9.19 |   | $ | 6.35 |   |
| Second  Quarter |   | 17.50    |   | 10.41    |   | 11.25 |   | 7.23 |   |
| Third  Quarter  |   | 16.25    |   | 11.31    |   | 10.99 |   | 8.00 |   |
| Fourth  Quarter |   | 17.18    |   | 14.91    |   | 15.05 |   | 8.25 |   |
|                 |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

**(b)           HOLDERS**

 

At March 15, 2004, theCompany had approximately 648 holders of record of its common stock.  In addition, on that date a depositorycompany held approximately 1,950,000 shares as nominees for an estimated 1,900beneficial holders.

 

**(c)           DIVIDENDS**

 

The Company paid specialcash dividends on its common stock of $.15 per share on July 11, 2003 and $.25per share on July 12, 2002.  Totaldividends paid were $551,696 and  $896,394,respectively.  The Company has notadopted any policies regarding the payment of dividends and further dividendpayments, if any, would require Board of Director approval.  The Company’s current loan arrangements witha commercial bank prohibit the payment of dividends without the bank’s consent.

 

14

----

 

**(d)           OTHER INFORMATION REGARDING EQUITY COMPENSATION PLANS**

 

The following table sets forth information as ofDecember 31, 2003 regarding our equity compensation plans.

 

**Securities Authorized for IssuanceUnder Equity 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                                                   |   | 692,200                                                                                                                |   | 6.24                                                                                       |   | 145,500                                                                                                                                                    |   |
| 1995 Employee Stock  Purchase Plan                                |   | 0                                                                                                                      |   | 0                                                                                          |   | 94,377                                                                                                                                                     |   |
|                                                              |   |                                                                                                                   |   |                                                                                       |   |                                                                                                                                                       |   |
| **Equity compensation plans not approved by security  holders:**  |   |                                                                                                                   |   |                                                                                       |   |                                                                                                                                                       |   |
| Stock Option Plan for  Non- Employee Consultants and Advisors (2) |   | 0                                                                                                                      |   | 0                                                                                          |   | 172,500                                                                                                                                                    |   |
|                                                              |   |                                                                                                                   |   |                                                                                       |   |                                                                                                                                                       |   |
| **Total**                                                         |   | **692,200**                                                                                                            |   |                                                                                       |   | **412,377**                                                                                                                                                |   |

 

----

(1)The Company does not have individual compensation arrangements involving thegranting of options, warrants andrights

 

(2)Adopted by the Company’s Board of Directors in 1997, the purpose of the StockOption Plan for Non-Employee Consultants and Advisors is to attract and retainthe services of experienced and knowledgeable non-employee consultants andadvisors to assist in projects having strategic significance for the Company,to provide an alternative form of cash compensation to such persons and toprovide such persons with the opportunity to participate in the Company’s longterm progress and success.

 

**e)****                                     ****RECENT SALES OF UNREGISTERED SECURITIES**

 

Not applicable.

 

15

----

 

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

 

(In thousands except forper share amounts)

 
|                              |   | **Year Ended  December 31,** |   |
|-----------------------------------|--------|------------------------------|--------|
| **OPERATING DATA**                |   | **2003**                     |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                              |   |                         |   |   |   |   |   |   |   |   |   |
|                              |   |                         |   |   |   |   |   |   |   |   |   |
| Total  Revenues                   |   | $                            | 47,846 |   | $ | 41,701 |   | $ | 39,492 |   | $ | 32,463 |   | $ | 20,331 |   |
|                              |   |                         |   |   |   |   |   |   |   |   |   |
| Operating  expenses               |   | 42,587                       |   | 37,899 |   | 36,405 |   | 30,969 |   | 19,766 |   |
|                              |   |                         |   |   |   |   |   |   |   |   |   |
| Income  Before Income Tax Expense |   | 5,299                        |   | 3,831 |   | 3,143 |   | 1,482 |   | 558 |   |
|                              |   |                         |   |   |   |   |   |   |   |   |   |
| Income  Tax Expense               |   | (2,429                       | )      | (1,554 | ) | (1,327 | ) | (643 | ) | (121 | ) |
|                              |   |                         |   |   |   |   |   |   |   |   |   |
| Net  Income                       |   | 2,870                        |   | 2,277 |   | 1,817 |   | 839 |   | 437 |   |
|                              |   |                         |   |   |   |   |   |   |   |   |   |
| Basic  Net Income per Share       |   | .78                          |   | .64 |   | .52 |   | .24 |   | .14 |   |
| Diluted  Net Income per Share     |   | .70                          |   | .57 |   | .49 |   | .23 |   | .13 |   |
| Dividends  per Share              |   | .15                          |   | .25 |   | .00 |   | .00 |   | .00 |   |
|                              |   |                         |   |   |   |   |   |   |   |   |   |
| Cash  Flow from Operations        |   | $                            | 4,784  |   | $ | 3,593 |   | $ | 3,631 |   | $ | 3,561 |   | $ | 1,018 |   |

 
|                                             |   | **At  December 31,** | ** ** |
|--------------------------------------------------|--------|----------------------|------------|
| **BALANCE SHEET DATA**                           |   | **2003**             | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
|                                             |   |                 | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                             |   |                 |       |   |   |   |   |   |   |   |   |
| Property  & Equipment                        |   | $                    | 17,113     |   | $ | 14,551 |   | $ | 12,439 |   | $ | 11,334 |   | $ | 8,084 |   |
|                                             |   |                 |       |   |   |   |   |   |   |   |   |
| Total  Assets                                    |   | 22,297               |       | 19,030 |   | 16,544 |   | 13,318 |   | 10,189 |   |
|                                             |   |                 |       |   |   |   |   |   |   |   |   |
| Stockholders’  Equity                       |   | 16,826               |       | 13,907 |   | 11,855 |   | 9,763 |   | 8,451 |   |
|                                             |   |                 |       |   |   |   |   |   |   |   |   |
| Book  Value per Share                            |   | $                    | 4.53       |   | $ | 3.82 |   | $ | 3.36 |   | $ | 2.81 |   | $ | 2.51 |   |
|                                             |   |                 |       |   |   |   |   |   |   |   |   |
| Number  of Common Shares Outstanding at Year End |   | 3,714                |       | 3,638 |   | 3,529 |   | 3,474 |   | 3,372 |   |

 

16

----

 
| I**tem 7****.** |   | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS** |
|-----------------|--------|-------------------------------------------------------------------------------------------------|

 

###### *** YEAR ENDED DECEMBER31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002***

 

Totaloperating revenues for the year ended December 31, 2003 were $47.8 million, anincrease of  $6.1 million or 14.7%compared to total operating revenues of $41.7 million for the year endedDecember 31, 2002.  Total Card Clubrevenues increased 26.5%, pari-mutuel revenues increased 2.8% and concessionrevenues increased 11.0% in fiscal 2003 compared to fiscal 2002.   Discussions of Card Club results andPari-mutuel results follow.

 

**SUMMARYOF CARD CLUB REVENUES:**

 
|                     |   | **Year Ended****12/31/03** |       | **Year Ended****12/31/02** |   |
|--------------------------|--------|----------------------------|------------|----------------------------|--------|
|                     |   |                       |       |                       |   |
| Total  Poker Games       |   | $                          | 11,511,000 |                       | $      | 9,017,000 |   |
|                     |   |                       |       |                       |   |
| Total  Casino Games      |   | 10,655,000                 |       | 8,412,000                  |   |
|                     |   |                       |       |                       |   |
| Total  Card Club Games   |   | $                          | 22,166,000 |                       | $      | 17,429,000 |   |
|                     |   |                       |       |                       |   |
| Number  of Days Offered  |   | 364                        |       | 364                        |   |
| Average  Revenue per Day |   | $                          | 60,900     |                       | $      | 47,900 |   |

 

The Company receives apercentage of the wagers or a fee from the players as compensation forproviding the Card Club facility and services, referred to as the “collectionrevenue”, which totaled $22.2 million in 2003 an increase of 27.2% compared to$17.4 million in 2002.  The Companyretains a specified percentage of the jackpot fund collections as reimbursementfor administrative costs of maintaining the jackpot funds.  The Card Club also collects fees foradministering tournaments and jackpot pools.

 

The Card Club is dividedinto two areas, the casino games area and the poker games area.  The average daily collection amount per gameis dependent upon the number of tables utilized to offer the game.  Patron demand determines the number oftables to be used for a specific game. There were a total of 19 tables in the Casino games area and 31 tablesin the Poker area at December 31, 2003 and 2002.

 

**SUMMARY OF PARI-MUTUEL OPERATINGDATA:**

 
|                               |   | **2003**   |       | **2002**   |       |
|------------------------------------|--------|------------|------------|------------|------------|
| **Racing  Days**                   |   |       | ** ** |       | ** ** |
| Simulcast  only days               |   | 299        |       | 303        |       |
| Live  and simulcast days           |   | 65         |       | 61         |       |
| **Total  Racing Days**             |   | 364        |       | 364        |       |
|                               |   |       |       |       |       |
| **On-Track  Handle**               |   |       |       |       |       |
| Simulcast  only days               |   | $          | 46,568,000 |       | $          | 48,175,000 |   |
| Live  and simulcast days:          |   |       |       |       |       |
| Live  racing                       |   | 17,709,000 |       | 15,256,000 |       |
| Simulcast  racing                  |   | 16,243,000 |       | 15,397,000 |       |
| **Out-of-state  Live Handle**      |   | 13,090,000 |       | 11,256,000 |       |
| **Total  Handle**                  |   | $          | 93,610,000 |       | $          | 90,084,000 |   |
|                               |   |       |       |       |       |
| **On-Track  Average Daily Handle** |   |       |       |       |       |
| Simulcast  only days               |   | $          | 156,000    |       | $          | 159,000 |   |
| Live  and simulcast days           |   | 522,000    |       | 503,000    |       |

 

17

----

 

Total Pari-mutuelrevenues increased 2.8% to approximately $17,331,000 in 2003 from $16,858,000in 2002.  Total on-track handleincreased approximately 2.1% to $80,520,000 in 2003 from $78,828,000 in 2002.An increase in live on-track handle was partially offset by a decrease in totalsimulcast handle.  Total simulcasthandle decreased 1.2% to $62,811,000 in 2003 from $63,572,000 in 2002.  Consequently, pari-mutuel revenues relatedto simulcast racing decreased 1.3% to $12,834,000 in 2003 from $13,006,000 in2002.  On track wagering on live racesincreased by $2,453,000, or 16.1% to $17,709,000 in 2003 from $15,256,000 in2002, causing pari-mutuel revenue related to live racing to increase by 16.1%to $3,732,000 in 2003 from $3,215,000 in 2002. This increase is partially due to an increase in the number of liveracing days to 65 in 2003 from 61 in 2002, and also to the return of theClaiming Crown to the Racetrack in 2003. The Claiming Crown was not held at Canterbury Park in 2002, but theRacetrack is the scheduled site of this national event in 2004 and 2005.  Handle wagered at out-of-state locations onthe 2003 Claiming Crown races was $2.5 million, contributing to an overallincrease in 2003 in handle wagered at out-of-state locations of $1.8 million or16.3% compared to 2002 out-of-state live handle.

 

Revenues recognized onproceeds from winning pari-mutuel tickets, which were not presented for paymentwithin one year of the end of the respective race meets increased toapproximately $373,000 in 2003 compared to $309,000 in 2002.

 

Concession revenuesincreased 11.0% to $4,829,000 in 2003 compared to $4,351,000 in 2002.   The increase is primarily attributable toincreased patronage in the Card Club during 2003 compared to 2002, and to fourmore live racing days in 2003 compared to 2002.

 

Other operating revenueincreased $382,000 or 33.2% to $1,533,000 in fiscal year 2003.  The increase was due primarily to increasesin cash services fees, and corporate sponsorships in 2003, partially offset bythe effect of a $258,000 gain on the sale of five acres of real estate in 2002.

 

**SUMMARYOF****OPERATING EXPENSES**

 

Total operating expensesincreased approximately $4,688,000 or 12.4% to $42,587,000 in 2003, from$37,899,000 in 2002.  The increase inoperating expenses is primarily due to greater overall business volumes in 2003compared to 2002.

 

Pari-mutuel expensesincreased 9.9% or approximately $1,004,000 for the year ended December 31, 2003compared to the year ended December 31, 2002. Purse expense is one of the Company’s largest single expense items.  Minnesota law requires the Company toallocate a portion of funds received from betting in the Card Club and wageringon simulcast and live horse races for future payment as purses for live horseraces or other uses of Minnesota’s horsepersons’ associations.  The increase in purse expense was dueprimarily to the funds generated by the Card Club operation for purses.  Total purse fund expenses related to CardClub operations for the year ended December 31, 2003 were $2,793,000 comparedto $2,196,000 for the year ended December 31, 2002. The Company also paid$310,000 and $244,000 to the Breeders Fund related to Card Club operations in2003 and 2002, respectively.  Inaddition, live racing purse expense increased $289,000 compared to 2002 due toan increase in on-track live handle and the return of the Claiming Crown racesto the Racetrack in 2003.  The ClaimingCrown had moved to another venue for 2002. The Company incurred incremental pari-mutuel purse expense due to aClaiming Crown net purse guarantee of $83,000 for the year 2003.  This amount is included in pari-mutuelstatutory purse expense in the 2003 statement of operations.  Amounts paid to the Minnesota Breeders’ Fundfor simulcast and live horseracing are a function of on-track handle andincreased to $869,000 in 2003 compared to $852,000 in 2002. The increase isattributable to and consistent with the increase in total on-track handle.

 

Salaryand benefit expenses increased by $1,839,000 or 11.7% for the twelve monthsended December 31, 2003 compared to the twelve months ended December 31,2002.  The Company experienced increasesin health insurance rates along with increased labor rates and hours workedconsistent with the increased operating levels.

 

Utilitiesand insurance expenses increased in 2003 primarily due to increases in ratescharged to the Company compared to 2002 and to higher volumes of businessactivity during the year.

 

18

----

 

Licensefees assessed to the Company by the Minnesota Racing Commission increased$164,300 to $208,700 in 2003 from $44,400 in 2002.  The increase in license fee rates effective July 1, 2003, is aresult of the 2003 Legislative Session, which directed the Commission toestablish a dedicated license fee revenue structure for the racing and cardplaying industries, sufficient to recover the regulation costs of theCommission.  The full impact of thelicense fee increase will occur in the year 2004 when the higher license feesare in effect for the full twelve-month period.

 

Advertising and marketingexpenses increased approximately $219,000 or 10.8% in 2003 compared to 2002primarily due to increased participation in the patron loyalty program.  The Company also experienced increased costsfor fulfillment of corporate sponsorships.

 

Other operating expensesinclude personnel recruiting and training costs, professional fees, equipmentrental, contracted services and other expenses.  These expenses increased approximately $618,000 or 19.6% in 2003,compared to 2002 primarily due to increases in charitable contributions,contracted services related to live racing, costs associated with the Company’slegislative efforts and a general increase in contracted services due to anincreased volume of business in 2003.

 

###### ***YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER31, 2001***

 

Total operating revenuesfor the year ended December 31, 2002 were $41.7 million, an increase of  $2.2 million or 5.6% compared to totaloperating revenues of $39.5 million for the year ended December 31, 2001.  Pari-mutuel revenues increased 2.3%, Cardclub revenues increased 7.0% and concession revenues increased 5.7% in fiscalyear 2002 compared to fiscal year 2001. Discussions of Card Club and Pari-mutuel results follow.

 

**SUMMARYOF CARD CLUB REVENUES:**

 
|                     |   | **Year Ended  12/31/02** |       | **Year Ended****12/31/01** |   |
|--------------------------|--------|--------------------------|------------|----------------------------|--------|
|                     |   |                     |       |                       |   |
| Total  Poker Games       |   | $                        | 9,017,000  |                       | $      | 9,524,000 |   |
|                     |   |                     |       |                       |   |
| Total  Casino Games      |   | 8,412,000                |       | 6,779,000                  |   |
|                     |   |                     |       |                       |   |
| Total  Card Club Games   |   | $                        | 17,429,000 |                       | $      | 16,303,000 |   |
|                     |   |                     |       |                       |   |
| Number  of Days Offered  |   | 364                      |       | 364                        |   |
| Average  Revenue per Day |   | $                        | 47,900     |                       | $      | 44,800 |   |

 

The Company’s collectionrevenue was $17.4 million in 2002, an increase of 6.9% compared to $16.3million in 2001.  This increase reflectsa full year of operating 50 tables in 2002, compared to operating 38 tablesJanuary through May 2001 and 50 tables the remainder of 2001.  In addition, the Company retains a specifiedpercentage of the jackpot fund collections as reimbursement for administrativecosts of maintaining the jackpot funds. The Card Club also collects fees for the administration of tournamentsand jackpot pools.

 

The Card Club is dividedinto two areas, the Casino games area and the Poker games area.  The average daily collection amount per gameis dependent upon the number of tables utilized to offer the game.  Patron demand determines the number oftables to be used for a specific game. There were a total of 19 tables in the Casino games area and 31 tablesin the Poker area at December 31, 2002 and 2001.

 

19

----

 

**SUMMARY OF PARI-MUTUEL OPERATINGDATA:**

 
|                               |   | **2002**   |       | **2001**   |       |
|------------------------------------|--------|------------|------------|------------|------------|
| **Racing  Days**                   |   |       | ** ** |       | ** ** |
| Simulcast  only days               |   | 303        |       | 301        |       |
| Live  and simulcast days           |   | 61         |       | 63         |       |
| **Total  Racing Days**             |   | 364        |       | 364        |       |
|                               |   |       |       |       |       |
| **On-Track  Handle**               |   |       |       |       |       |
| Simulcast  only days               |   | $          | 48,175,000 |       | $          | 46,138,000 |   |
| Live  and simulcast days:          |   |       |       |       |       |
| Live  racing                       |   | 15,256,000 |       | 16,014,000 |       |
| Simulcast  racing                  |   | 15,397,000 |       | 14,510,000 |       |
| **Out-of-state  Live Handle**      |   | 11,256,000 |       | 13,105,000 |       |
| **Total  Handle**                  |   | $          | 90,084,000 |       | $          | 89,767,000 |   |
|                               |   |       |       |       |       |
| **On-Track  Average Daily Handle** |   |       |       |       |       |
| Simulcast  only days               |   | $          | 159,000    |       | $          | 153,000 |   |
| Live  and simulcast days           |   | 503,000    |       | 485,000    |       |

 

Total Pari-mutuelrevenues increased 2.3% to approximately $16,858,000 in 2002 from $16,478,000in 2001.  Total on-track handleincreased approximately 2.8% to $78,828,000 in 2002 from $76,662,000 in2001.  Pari-mutuel revenues related tosimulcast racing increased 4.5% to $13,006,000 in 2002 from $12,443,000 in2001. This change was consistent with the increase in total simulcast handle.On-track wagering on live races decreased by $758,000 or 4.7%, to $15,256,000in 2002 from $16,014,000 in 2001, causing pari-mutuel revenue related to liveracing to decrease by 4.6% to $3,215,000 in 2002 from $3,370,000 in 2001.  This decrease is primarily due to a decreasein the number of live racing days to 61 from 63 in 2001.  Handle wagered at out-of-state locationsdecreased 14.1% or $1,849,000 compared to 2001.  Handle wagered at out-of-state locations on the 2001 ClaimingCrown races was $2.5 million.  TheClaiming Crown was not held at Canterbury Park in 2002, but the Racetrack wasthe scheduled site of this national event in 2003 and 2004.

 

Revenues recognized onproceeds from winning pari-mutuel tickets, not presented for payment within oneyear of the end of the respective race meets decreased $10,000 to approximately$309,000 in 2002 compared to 2001.

 

Other operating revenueincreased $459,000 or 66% to $1,151,000 in fiscal year 2002.   The increase was due primarily to a$258,000 gain on the sale of 5 acres of real estate.  Also contributing to the increase were increases in check cashingand ATM fees, and corporate sponsorships, partially offset by decreases inspace rental for special events and boat and vehicle storage.

 

**SUMMARYOF****OPERATING EXPENSES**

 

Total operating expensesincreased approximately $1,494,000 or 4.1% to $37,899,000 in 2002, from$36,405,000 in 2001.  The increase inoperating expenses is primarily due to the increase in overall business volumesin 2002 compared to 2001.

 

Pari-mutuel expensesincreased 5.7% or approximately $544,000 for the year ended December 31, 2002compared to the year ended December 31, 2001. The increase was due primarily to the funds generated by the Card Cluboperation for purses.  Total purse andbreeders fund expenses for the Card Club for the year ended December 31, 2002was $2,440,000 compared to $2,042,000 for the year ended December 31, 2001.

 

The Company incurredincremental pari-mutuel purse expense due to a Claiming Crown purse guaranteeof $182,000 for the year 2001.  Thisamount is included in pari-mutuel statutory purse expense in the 2001 statementof operations.

 

20

----

 

Amounts paid to theMinnesota Breeders’ Fund for simulcast and live horseracing are a function ofon-track handle and increased to $852,000 in 2002 compared to $826,000 in 2001.The increase is attributable to and consistent with the increase in totalon-track handle.  The Company also paid$244,000 and $204,000 to the Breeders Fund related to Card Club operations in2002 and 2001 respectively.

 

Salaryand benefit expenses increased by $414,000 or 2.7% for the twelve months endedDecember 31, 2002 compared to the twelve months ended December 31, 2001.  The Company experienced increases in wagerates, health insurance rates, along with increased labor consistent with theincreased revenue levels.

 

Depreciation andamortization expense increased 8.3% in 2002 compared to 2001.  The increase corresponds to the increase incapital assets acquired during the year 2002.

 

Advertising and marketingexpenses increased approximately $186,000 or 10.1% in 2002 compared to 2001primarily due to increased participation in the patron loyalty program.  The Company also experienced increased costsfor the production and placement of media advertising to promote the Card Cluband live racing.

 

Other operating expensesinclude personnel, recruiting and training costs, professional fees, equipmentrental, contracted services and other expenses.  These expenses increased approximately $216,000 or 7.4% in 2002,compared to 2001.  This increase isprimarily caused by an increase in costs to retain experts to advise managementon issues related to the Company’s legislative efforts.

 

*COMMITMENTS AND CONTINGENCIES*

 

The Company entered intoa five-year totalizator services agreement with Autotote Systems, Inc.(Autotote) in January 1999.  Thisfive-year contract was renewed for an additional five-year term in January2004.  Pursuant to the agreement,Autotote provides totalizator equipment and computer programs which record andprocess all wagers and calculate odds and payoffs.  Amounts charged to operations under this agreement for the yearsended December 31, 2003, 2002 and 2001 were approximately $390,000, $383,000and $346,000, respectively.  During theannual live race meets, Autotote provided uplink services, which enabled theCompany to simulcast horse races held at Canterbury Park to out-of-stateracetracks.  These services resulted inamounts charged to operations in 2003, 2002 and 2001 of approximately $126,000,$124,000 and $122,000, respectively.

 

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) the Company begins to conduct off-track betting with respect to or inconnection with its operations, the Company will be required to pay to the IMRFund, L.P. the greater of $700,000 per operating year, as defined, or 20% of thenet pretax profit, as defined for each of five operating years.  At the date (if any) that these twoconditions are met, the five minimum payments will be discounted back to theirpresent value and the sum of those discounted payments will be recorded as anincrease to the purchase price.  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 the Company.  Remaining payments would be made within 90days of the end of each of the next four operating years.

 

*CRITICAL ACCOUNTING POLICIES*

 

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

 

21

----

 

Oursignificant accounting policies are included in Note 1 to our consolidatedfinancial statements. We believe the following critical accounting policiesaffect our more significant judgments and estimates used in the preparation ofour consolidated financial statements.

 

*Property and Equipment* – We havesignificant capital invested in our property and equipment, which representsapproximately 77% of our total assets. We utilize our judgment in various waysincluding: determining whether an expenditure is considered a maintenanceexpense or a capital asset; determining the estimated useful lives of assets;and determining if or when an asset has been impaired. Our property andequipment is evaluated for impairment whenever circumstances indicate that thecarrying value of an asset may not be recoverable from the estimated futurecash flows expected to result from its use. If the sum of the expected futurecash flows (undiscounted and without interest charges) is less than thecarrying amount, we recognize an impairment loss. The impairment lossrecognized is the amount by which the carrying amount exceeds the fair valueand is charged to operations in the period in which such impairment isdetermined by management. We do not believe that any impairment has occurred oris likely to occur in the near future.

 

*Regulation-*Our business can be materially impactedboth positively and negatively by legislative and regulatory changes, such asthose previously described. Significant negative changes resulting from theseactivities could result in an impairment of our property and equipment inaccordance with generally accepted accounting standards. Additional informationregarding how our business can be impacted by legislative and regulatorychanges are included in Item 1 (vi), and Item 1 (vii), respectively, in thisForm 10-K.

 

##### *ACCOUNTING PRONOUNCEMENTS*

##### * *

InNovember 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*.  FIN No. 45 clarifies the requirements for guarantor’s accountingfor and disclosure of certain guarantees issued and outstanding.  The initial recognition and the initialmeasurement provisions of FIN No. 45 are applicable to guarantees issued ormodified after December 31, 2002.  Theadoption of FIN No. 45 did not have a significant impact on the Company’sfinancial statements.

 

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable InterestEntities, an Interpretation of Accounting Research Bulletin No. 51,Consolidated Financial Statements* (“FIN No. 46”).  FIN No. 46 prescribes how to identifyvariable interest entities and how an enterprise assesses its interests in avariable interest entity to decide whether to consolidate that entity.  This interpretation requires existingunconsolidated variable interest entities to be consolidated by their primarybeneficiaries if the entities do not effectively disperse risks among partiesinvolved.  FIN No. 46 was scheduled tobe effective for variable interest entities created after January 31, 2003.  On December 24, 2003, the FASB published arevision to FIN No. 46 (“FIN No. 46 (R)”). FIN No. 46(R) clarifies certain provisions of FIN No. 46 and exemptscertain entities from its requirements. For interests in variable interest entities acquired prior to January31, 2003, the provisions of FIN No. 46(R) will be applied on March 31,2004.  The Company does not anticipatethat the adoption of FIN No. 46 and FIN No. 46(R) will have a material effecton its financial position and results of operations.

 

**LIQUIDITYAND CAPITAL RESOURCES:**

 

During the year endedDecember 31, 2003, net cash provided by operations was $4,783,823, whichresulted primarily from net income of $2,870,130, depreciation and amortizationof $1,158,458, an increase in accounts payable and accrued wages and payrolltaxes of $498,242 and an increase in income taxes payable of $578,670.  These items were partially offset by anincrease in other current assets of $556,480 and a decrease in card clubaccruals of $197,837.   During the yearended December 31, 2002 net cash provided by operating activities was$3,592,970, which resulted principally from net income of $2,276,595depreciation and amortization of $1,152,298, and an increase in Card Clubaccruals, accounts payable and accrued wages and payroll taxes of $488,843.

 

22

----

 

The Card Club offersprogressive jackpots for poker games and certain table games.  Amounts collected for these jackpot fundsare accrued as liabilities until paid to winners.  At December 31, 2003, accrued jackpot funds totaled approximately$283,000 compared to $525,000 at December 31, 2002.  Table games are played using a “player pool”.  “Player pool” means a wagering system orgame where 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 mayonly serve as custodian of the player pool and may not have an active interestin any card game.  In the table gamesarea of the Card Club, the net amount that the dealer “wins” or “loses” duringthe course of play is accumulated as a “player pool” liability, and is notrecognized as revenue by the Company. The Company is required by law to return accumulated player pool fundsto the players through giveaways, promotional items, prizes or by othermeans.  The accumulated player poolliability was approximately $473,000 at December 31, 2003 compared to $647,000at December 31, 2002.  The MinnesotaRacing Commission regulates the operation of the jackpot and player poolfunds.  All games in the Card Club areplayed using chips.  The value of chipsissued and outstanding, referred to as the “outstanding chip liability”, wasapproximately $221,000 at December 31, 2003 compared to $154,000 at December31, 2002.   These Card Club accrualshave the potential for significant fluctuation on a daily basis.  The Company believes it has adequateliquidity to meet the potential daily obligations of these accrual items.

 

Cash used in investingactivities for the year ended December 31, 2003 was $3,720,377 for capitalexpenditures, including the purchase of eighteen acres of undeveloped landadjacent to the Racetrack for approximately $2,085,000, $303,000 forimprovements to the track level of the grandstand, and various other additionsto building improvements and furniture, fixtures and equipment.  For fiscal 2002, net cash used in investingactivities was $3,005,825 for capital expenditures including $1,022,733 for theacquisition of 12 acres of undeveloped land adjacent to the Racetrack, a 29acre RV Park, a large screen video board used outside for viewing live racing,and various additions to furniture, fixtures and equipment partially offset byproceeds of $423,000 from the sale of five acres of real estate.

 

Cashused by financing activities was $193,924 for the year ended December 31, 2003compared to cash used by financing activities of $577,460 for the year endedDecember 31, 2002. In 2003 the net cash outflows resulted primarily from thespecial cash dividend of $551,696 and net payments to the MHBPA of $76,152,partially offset by proceeds of $433,924 from the issuance of common stock dueto the exercise of stock options and the Company’s employee stock purchaseplan.  The 2002 net cash outflows resultedprimarily from the special cash dividend of $896,394 and net payments to theMHBPA of $193,894, partially offset by proceeds of $512,828 from the issuanceof common stock due to the exercise of stock options and the Company’s employeestock purchase plan.

 

Pursuantto an agreement with the Minnesota Horsemen’s Benevolent and ProtectiveAssociation, (the “MHBPA”), the Company transferred into a trust account orpaid directly to the MHBPA, approximately $6,770,000 and $6,110,000 in pursefunds for the years ended December 31, 2003 and 2002, respectively.  Minnesota Statutes specify that amountstransferred into trust are the property of the trust and not of theCompany.  Unpaid purse fund obligationsdue the MHBPA were $103,194 and $179,346 at December 31, 2003 and 2002,respectively.  The interest rates on anystatutory purses accrued but not transferred into the trust (which areguaranteed by the Company’s Chairman of the Board) were 4.00% and 4.25% atDecember 31, 2003 and 2002, respectively.

 

The Company renewed ageneral credit and security agreement with Bremer Bank, N.A. on April 30,2003.  Borrowings under the creditagreement include a commercial revolving credit line, which provides formaximum advances of $2,250,000 with interest at the prime rate (4.00% atDecember 31, 2003).  No borrowings underthe credit line were outstanding during the year ended December 31, 2003 and2002 respectively.

 

Cashbalances at December 31, 2003 were $2,523,560 compared to $1,654,038 atDecember 31, 2002.  Restricted cashbalances were $1,286,738 at December 31, 2003 compared to $1,754,831 atDecember 31, 2002 and represent refundable deposits and amounts due to horsemenfor purses, stakes and awards, and amounts accumulated in the Player Pool to beused to repay card players through promotions, giveaways, prizes, or by othermeans.  Management believes that fundsavailable in its cash accounts, amounts available under the general credit andsecurity agreement, along with funds generated from operations, will be sufficientto satisfy its liquidity and capital resource requirements during 2004.

 

23

----

 

**FACTORSAFFECTING FUTURE PERFORMANCE:**

 

Fromtime to time, in reports filed with the Securities and Exchange Commission, inpress releases, and in other communications to shareholders or the investingpublic, the Company may make forward-looking statements concerning possible oranticipated future financial performance, business activities or plans whichare typically preceded by the words “believes,” “expects,” “anticipates,”“intends” or similar expressions.  Forsuch forward-looking statements, the Company claims the protection of the safeharbor for forward-looking statements contained in federal securitieslaws.  Shareholders and the investingpublic should understand that such forward-looking statements are subject torisks and uncertainties which could cause actual performance, activities orplans to differ significantly from those indicated in the forward-lookingstatements.  Such risks 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, legislative and regulatory changes, the impact of wagering products andtechnologies introduced by competitors; increases in the percentage of revenuesallocated for purse fund payments; increases in compensation and employeebenefit expense; the general health of the gaming sector; higher than expectedexpense related to new marketing initiatives; and other factors discussed fromtime to time in the Company’s filings with the Securities and ExchangeCommission.

 

**Item 7A****.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

Weare exposed to market risk from changes in interest rates on borrowings underour commercial revolving credit line that bears interest at the primerate.  At December 31, 2003 we have nodebt borrowings under our credit facility.

 

Wehave no derivative financial instruments or derivative commodity instruments inour cash and cash equivalents and marketable securities.  We invest, or may invest, cash and cashequivalents in investment grade, highly liquid investments, consisting of moneymarket instruments, bank certificates of deposit, and short-term government andcorporate bonds.

 

24

----

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

 

The following financialstatements of the Company are set forth on pages 26 through 40 of the Form10-K:

 
|                                                                                                                   | **Page** |
|------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                   |     |
| Independent  Auditors’ Report                                                                                     | 26       |
|                                                                                                                   |     |
|                                                                                                                   |     |
| Consolidated Balance Sheets  as of December 31, 2003 and 2002                                                          | 27       |
|                                                                                                                   |     |
|                                                                                                                   |     |
| Consolidated  Statements of Operations for the years ended December 31, 2003, 2002 and 2001                            | 28       |
|                                                                                                                   |     |
|                                                                                                                   |     |
| Consolidated  Statements of Changes in Stockholders’ Equity for the years ended December  31, 2003, 2002 and 2001 | 29       |
|                                                                                                                   |     |
|                                                                                                                   |     |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                            | 30       |
|                                                                                                                   |     |
|                                                                                                                   |     |
| Notes to  Consolidated Financial Statements for the years ended December 31, 2003, 2002  and 2001                      | 31       |

 

25

----

 

**INDEPENDENTAUDITOR****S’ REPORT**

 

Board of Directors

Canterbury Park HoldingCorporation

Shakopee, Minnesota

 

We have audited theaccompanying consolidated balance sheets of Canterbury Park Holding Corporationand subsidiaries (the Company) as of December 31, 2003 and 2002 and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2003.  These consolidated financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America.  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Canterbury Park HoldingCorporation and subsidiaries as of December 31, 2003 and 2002 and the resultsof their operations and their cash flows for each of the three years in theperiod ended December 31, 2003, in conformity with accounting principlesgenerally accepted in the United States of America.

 

Deloitte & Touche LLP

 

 

March 17, 2004

Minneapolis, Minnesota

 

26

----

 

**CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY**

 

**CONSOLIDATEDBALANCE SHEET****S**

**DECEMBER 31, 2003 AND 2002**

 
|                                                                                                                               |   | **2003**   |       | **2002**   |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
|                                                                                                                               |   |       |       |       |   |
| **ASSETS**                                                                                                                         |   |       |       |       |   |
|                                                                                                                               |   |       |       |       |   |
| CURRENT  ASSETS:                                                                                                                   |   |       |       |       |   |
| Cash                                                                                                                               |   | $          | 2,523,560  |       | $      | 1,654,038 |   |
| Restricted  cash                                                                                                                   |   | 1,286,738  |       | 1,754,831  |   |
| Accounts  receivable                                                                                                               |   | 369,976    |       | 305,581    |   |
| Inventory                                                                                                                          |   | 135,298    |       | 125,585    |   |
| Deposits                                                                                                                           |   | 20,000     |       | 20,000     |   |
| Prepaid  expenses                                                                                                                  |   | 848,959    |       | 302,192    |   |
| Income  taxes receivable  (Note 3)                                                                                            |   |       |       | 316,671    |   |
| Total  current assets                                                                                                              |   | 5,184,531  |       | 4,478,898  |   |
|                                                                                                                               |   |       |       |       |   |
| LAND,  BUILDINGS AND EQUIPMENT, net  (Note 2)                                                                                 |   | 17,112,933 |       | 14,551,014 |   |
|                                                                                                                               |   |       |       |       |   |
|                                                                                                                               |   | $          | 22,297,464 |       | $      | 19,029,912 |   |
|                                                                                                                               |   |       |       |       |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                     |   |       |       |       |   |
|                                                                                                                               |   |       |       |       |   |
| CURRENT  LIABILITIES:                                                                                                              |   |       |       |       |   |
| Accounts  payable                                                                                                                  |   | $          | 1,584,145  |       | $      | 1,535,824 |   |
| Card  club accruals                                                                                                                |   | 1,294,826  |       | 1,492,663  |   |
| Accrued  wages and payroll taxes                                                                                                   |   | 1,434,295  |       | 984,374    |   |
| Accrued  interest payable                                                                                                          |   | 2,158      |       |       |   |
| Advance  from MHBPA  (Note 1)                                                                                                 |   | 103,194    |       | 179,346    |   |
| Accrued  property taxes                                                                                                            |   | 223,907    |       | 228,890    |   |
| Income  taxes payable  (Note 3)                                                                                               |   | 95,499     |       |       |   |
| Payable  to horsepersons                                                                                                           |   | 344,343    |       | 355,576    |   |
| Deferred  tax liability  (Note 3)                                                                                             |   | 389,000    |       | 346,000    |   |
| Total  current liabilities                                                                                                         |   | 5,471,367  |       | 5,122,673  |   |
|                                                                                                                               |   |       |       |       |   |
| COMMITMENTS  AND CONTINGENCIES (Notes 7 and 8)                                                                                     |   |       |       |       |   |
|                                                                                                                               |   |       |       |       |   |
| STOCKHOLDERS’  EQUITY (Note 4):                                                                                               |   |       |       |       |   |
| Common  stock, $.01 par value, 10,000,000 shares authorized, 3,714,369 and 3,638,473,  respectively, shares issued and outstanding |   | 37,144     |       | 36,385     |   |
| Additional  paid-in capital                                                                                                        |   | 11,510,650 |       | 10,910,985 |   |
| Accumulated  earnings                                                                                                              |   | 5,278,303  |       | 2,959,869  |   |
| Total  stockholders’ equity                                                                                                   |   | 16,826,097 |       | 13,907,239 |   |
|                                                                                                                               |   | $          | 22,297,464 |       | $      | 19,029,912 |   |

 

See notes to consolidatedfinancial statements.

 

27

----

 

**CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY**

 

**CONSOLIDATEDSTATEMENTS OF OPERATION****S**

**YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**

 
|                                                  |   | **2003**   |       | **2002**   |   | **2001**   |   |
|-------------------------------------------------------|--------|------------|------------|------------|--------|------------|--------|
|                                                  |   |       |       |       |   |       |   |
| OPERATING  REVENUES:                                  |   |       |       |       |   |       |   |
| Pari-mutuel                                           |   | $          | 17,330,838 |       | $      | 16,857,745 |   | $ | 16,477,564 |   |
| Card  Club                                            |   | 22,954,218 |       | 18,152,012 |   | 16,968,407 |   |
| Concessions                                           |   | 4,828,711  |       | 4,351,096  |   | 4,117,222  |   |
| Admissions  and parking                               |   | 552,746    |       | 526,443    |   | 567,248    |   |
| Publications                                          |   | 646,403    |       | 663,178    |   | 669,795    |   |
| Other  operating revenue                              |   | 1,532,823  |       | 1,150,840  |   | 691,801    |   |
|                                                  |   | 47,845,739 |       | 41,701,314 |   | 39,492,037 |   |
|                                                  |   |       |       |       |   |       |   |
| OPERATING  EXPENSES:                                  |   |       |       |       |   |       |   |
| Pari-mutuel  expenses:                                |   |       |       |       |   |       |   |
| Statutory  purses                                     |   | 7,472,370  |       | 6,556,575  |   | 6,278,104  |   |
| Host  track fees                                      |   | 2,244,721  |       | 2,234,115  |   | 2,084,041  |   |
| Pari-mutuel  taxes                                    |   | 246,475    |       | 251,338    |   | 202,029    |   |
| Minnesota  Breeders’ Fund                        |   | 1,178,890  |       | 1,096,076  |   | 1,030,201  |   |
| Salaries  and benefits                                |   | 17,495,140 |       | 15,656,565 |   | 15,242,771 |   |
| Cost  of concessions and publication sales            |   | 2,832,537  |       | 2,655,888  |   | 2,619,233  |   |
| Depreciation  and amortization                        |   | 1,158,458  |       | 1,152,298  |   | 1,064,407  |   |
| Utilities                                             |   | 1,158,207  |       | 916,249    |   | 1,064,085  |   |
| Repairs,  maintenance and supplies                    |   | 1,430,802  |       | 1,348,971  |   | 1,400,901  |   |
| License  fees and property taxes                      |   | 430,528    |       | 262,440    |   | 228,022    |   |
| Advertising  and marketing                            |   | 2,247,878  |       | 2,029,033  |   | 1,842,618  |   |
| Insurance                                             |   | 916,351    |       | 583,355    |   | 408,363    |   |
| Other  operating expenses                             |   | 3,774,322  |       | 3,156,547  |   | 2,940,435  |   |
|                                                  |   | 42,586,679 |       | 37,899,450 |   | 36,405,210 |   |
| NONOPERATING  (EXPENSES) REVENUES:                    |   |       |       |       |   |       |   |
| Interest  expense (Note 6)                            |   | (3,116     | )          | (8,321     | )      | (6,836     | )      |
| Other,  net                                           |   | 42,837     |       | 37,261     |   | 63,464     |   |
|                                                  |   | 39,721     |       | 28,940     |   | 56,628     |   |
|                                                  |   |       |       |       |   |       |   |
| INCOME  BEFORE INCOME TAX EXPENSE                     |   | 5,298,781  |       | 3,830,804  |   | 3,143,455  |   |
|                                                  |   |       |       |       |   |       |   |
| Income  tax expense  (Note 3)                    |   | (2,428,651 | )          | (1,554,209 | )      | (1,326,675 | )      |
|                                                  |   |       |       |       |   |       |   |
| NET  INCOME                                           |   | $          | 2,870,130  |       | $      | 2,276,595  |   | $ | 1,816,780 |   |
|                                                  |   |       |       |       |   |       |   |
| WEIGHTED  AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |   | 3,675,919  |       | 3,581,546  |   | 3,496,781  |   |
|                                                  |   |       |       |       |   |       |   |
| BASIC  NET INCOME PER COMMON SHARE (Note 5)           |   | $          | .78        |       | $      | .64        |   | $ | .52 |   |
|                                                  |   |       |       |       |   |       |   |
| DILUTED  NET INCOME PER COMMON SHARE (Note 5)         |   | $          | .70        |       | $      | .57        |   | $ | .49 |   |

 

See notes to consolidatedfinancial statements.

 

28

----

 

**CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY**

 

**CONSOLIDATEDSTATEMENTS OF CHANGES****IN STOCKHOLDERS’ EQUITY**

**YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**

 
|                                              |   | **Number  of Shares** |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Earnings** |   | **Total**  |      |
|---------------------------------------------------|--------|-----------------------|--------|-------------------|--------|----------------------------------|--------|---------------------------|--------|------------|-----------|
|                                              |   |                  |   |              |   |                             |   |                      |   |       |      |
| ***Balance,   December 31, 2000***           |   | 3,473,832             |   | 34,738            |   | 9,965,017                        |   | (237,112                  | )      | 9,762,643  |      |
|                                              |   |                  |   |              |   |                             |   |                      |   |       |      |
| Exercise  of stock options                        |   | 30,500                |   | 305               |   | 104,663                          |   |                      |   | 104,968    |      |
|                                              |   |                  |   |              |   |                             |   |                      |   |       |      |
| Tax  benefit of stock option exercises            |   |                  |   |              |   | 42,860                           |   |                      |   | 42,860     |      |
|                                              |   |                  |   |              |   |                             |   |                      |   |       |      |
| Shares  issued under Employee Stock Purchase Plan |   | 24,992                |   | 250               |   | 127,709                          |   |                      |   | 127,959    |      |
|                                              |   |                  |   |              |   |                             |   |                      |   |       |      |
| Net  income                                       |   |                  |   |              |   |                             |   | 1,816,780                 |   | 1,816,780  |      |
|                                              |   |                  |   |              |   |                             |   |                      |   |       |      |
| ***Balance, December 31, 2001***                  |   | 3,529,324             |   | 35,293            |   | 10,240,249                       |   | 1,579,668                 |   | 11,855,210 |      |
|                                              |   |                  |   |              |   |                             |   |                      |   |       |      |
| Cash  dividend paid                               |   |                  |   |              |   |                             |   | (896,394                  | )      | (896,394   | )         |
|                                              |   |                  |   |              |   |                             |   |                      |   |       |      |
| Exercise  of stock options                        |   | 81,850                |   | 819               |   | 372,238                          |   |                      |   | 373,057    |      |
|                                              |   |                  |   |              |   |                             |   |                      |   |       |      |
| Tax  benefit of stock option exercises            |   |                  |   |              |   | 159,000                          |   |                      |   | 159,000    |      |
|                                              |   |                  |   |              |   |                             |   |                      |   |       |      |
| Shares  issued under Employee Stock Purchase Plan |   | 27,299                |   | 273               |   | 139,498                          |   |                      |   | 139,771    |      |
|                                              |   |                  |   |              |   |                             |   |                      |   |       |      |
| Net  income                                       |   |                  |   |              |   |                             |   | 2,276,595                 |   | 2,276,595  |      |
|                                              |   |                  |   |              |   |                             |   |                      |   |       |      |
| ***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 |   |

 

See notes to consolidatedfinancial statements.

 

29

----

 

**CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**

 
|                                                                     |   | **2003**   |      | **2002**   |   | **2001**   |   |
|--------------------------------------------------------------------------|--------|------------|-----------|------------|--------|------------|--------|
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                   |   |       |      |       |   |       |   |
| Net  income                                                              |   | $          | 2,870,130 |       | $      | 2,276,595  |   | $ | 1,816,780 |   |
| Adjustments  to reconcile net income to net cash provided by operations: |   |       |      |       |   |       |   |
| Depreciation  and amortization                                           |   | 1,158,458  |      | 1,152,298  |   | 1,064,407  |   |
| Gain  on sale of property & equipment                                |   |       |      | (258,074   | )      |       |   |
| Deferred  income taxes                                                   |   | 43,000     |      | 178,000    |   | 247,100    |   |
| Decrease  (increase) in restricted cash                                  |   | 468,093    |      | (310,340   | )      | (245,642   | )      |
| (Increase)  decrease in accounts receivable                              |   | (64,395    | )         | 250,611    |   | (249,340   | )      |
| (Increase)  decrease in other current assets                             |   | (556,480   | )         | 11,392     |   | (60,863    | )      |
| Increase  (decrease) in income taxes payable                             |   | 578,670    |      | (292,001   | )      | (27,650    | )      |
| Increase  in accounts payable and accrued wages & payroll taxes      |   | 498,242    |      | 54,645     |   | 868,461    |   |
| (Decrease)  increase in card club accruals                               |   | (197,837   | )         | 434,198    |   | 240,653    |   |
| Increase  (decrease) in accrued interest                                 |   | 2,158      |      | (15,878    | )      | 4,173      |   |
| Decrease  in accrued property taxes                                      |   | (4,983     | )         | (8,894     | )      | (54,762    | )      |
| (Decrease)  increase in payable to horsepersons                          |   | (11,233    | )         | 120,418    |   | 27,340     |   |
| Net cash  provided by operations                                         |   | 4,783,823  |      | 3,592,970  |   | 3,630,657  |   |
|                                                                     |   |       |      |       |   |       |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                   |   |       |      |       |   |       |   |
| Additions  to land, buildings and equipment                              |   | (3,720,377 | )         | (3,428,488 | )      | (2,169,416 | )      |
| Proceeds  from sale of land                                              |   |       |      | 422,663    |   |       |   |
| Net  cash used in investing activities                                   |   | (3,720,377 | )         | (3,005,825 | )      | (2,169,416 | )      |
|                                                                     |   |       |      |       |   |       |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                   |   |       |      |       |   |       |   |
| Net  payments on advance from MHBPA                                      |   | (76,152    | )         | (193,894   | )      | (49,815    | )      |
| Proceeds  from issuance of common stock                                  |   | 433,924    |      | 512,828    |   | 232,927    |   |
| Cash  dividend paid                                                      |   | (551,696   | )         | (896,394   | )      |       |   |
| Net  cash (used in) provided by financing activities                     |   | (193,924   | )         | (577,460   | )      | 183,112    |   |
|                                                                     |   |       |      |       |   |       |   |
| NET  INCREASE IN CASH                                                    |   | 869,522    |      | 9,685      |   | 1,644,353  |   |
|                                                                     |   |       |      |       |   |       |   |
| CASH  AT BEGINNING OF YEAR                                               |   | 1,654,038  |      | 1,644,353  |   | 0          |   |
|                                                                     |   |       |      |       |   |       |   |
| CASH  AT END OF YEAR                                                     |   | $          | 2,523,560 |       | $      | 1,654,038  |   | $ | 1,644,353 |   |
|                                                                     |   |       |      |       |   |       |   |
| INTEREST  PAID                                                           |   | $          | 608       |       | $      | 19,947     |   | $ | 2,663 |   |
|                                                                     |   |       |      |       |   |       |   |
| INCOME  TAXES PAID                                                       |   | $          | 1,807,000 |       | $      | 1,680,000  |   | $ | 1,112,500 |   |

 

See notes to consolidatedfinancial statements.

 

30

----

 

**CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**

 

1.             SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

 

*Business* -Canterbury Park Holding Corporation (the Company) was incorporated on March 24,1994.  On March 29, 1994 the Companyacquired all the outstanding securities of Jacobs Realty, Inc. (JRI) from IrwinJacobs and IMR Fund, L.P. (an investment fund for various pension plans andtrusts).   JRI was merged into theCompany and the acquisition was accounted for under the purchase method ofaccounting whereby the acquired assets and liabilities have been recorded atthe Company’s cost.  The primary assetof JRI was Canterbury Downs Racetrack and the 325 acres of surrounding land.

 

On May 20, 1994, theCompany adopted a plan of Reorganization pursuant to which the sole shareholderof Canterbury Park Concessions, Inc. (CPC), and majority shareholder of theCompany, agreed to exchange his shares of CPC stock for 198,888 shares of theCompany’s common stock concurrent with the closing of a public offering.  Pursuant to the Plan of Reorganization, CPCbecame a wholly owned subsidiary of the Company in August 1994 when the Companycompleted the initial public offering of its common stock.  This reorganization was treated in a mannersimilar to a pooling of interests.  Netproceeds received by the Company from the public offering were approximately$4,847,000, which along with additional borrowings under the Company’s line ofcredit with the majority shareholder, were used to pay off the remaining notespayable from the acquisition of JRI.

 

The consolidatedfinancial statements include the accounts of the Company, CPC and ShakopeeValley RV Park Acquisition Company, LLC after elimination of intercompanyaccounts and transactions.

 

*Operations -*TheCompany’s revenues are derived primarily from the operations of a Card Club andpari-mutuel wagering on simulcast and live horse races.

 

*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.  Actual results could differ from theseestimates.

 

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

 

*RestrictedCash –* Restricted cash represents refundable deposits and amountsdue to horsemen for purses, stakes and awards, and amounts accumulated in thePlayer Pool to be used to repay card players in the form of promotions,giveaways, prizes, or by other means.

 

*Reclassifications*– Certain prior period numbers have been restated to be consistent with currentperiod presentation.  Thesereclassifications had no effect on net earnings or stockholders’ equity.

 

*Uncashed Winning Tickets –*Pari-mutueltickets which are not cashed within one year of the end of the respective race meetbecome the property of the Company.  TheCompany records revenue associated with the uncashed winning tickets at thetime that, based on historical experience, management can reasonably estimatethe amount of additional winning tickets from a race meet that will bepresented for payment.

 

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

 

31

----

 

*Advance from the MinnesotaHorsemen’s Benevolent and Protective Association, Inc. (the “MHBPA”)*- The Minnesota Pari-Mutuel Horse Racing Act specifies that the Company isrequired to segregate a portion of funds (recorded as statutory purses in thestatements of operations), received from wagering on simulcast and live horseraces, for future payment as purses for live horse races or other uses of thehorsepersons’ associations.  Pursuant toan agreement with the MHBPA, the Company has transferred into a trust accountor paid directly to the MHBPA, approximately $6,770,000, $6,110,000 and$5,624,000 for the years ended December 31, 2003, 2002 and 2001, respectively,related to thoroughbred races.  Amountsdue to the MHBPA, are guaranteed by the Chairman of the Board.  Minnesota Statutes specify that amounts transferredinto the trust account are the property of the trust and not of the Company.  The interest rates on any statutory pursesaccrued but not transferred into the trust were 4.00%, 4.25% and 4.75% atDecember 31, 2003, 2002 and 2001, respectively.

 

*Borrowings* - Theweighted average interest rates on short-term borrowings at December 31, 2003,2002 and 2001 were 4.00%, 4.25% and 4.75%, respectively.  The weighted average rates for short-termborrowings for the years ended December 31, 2003, 2002 and 2001 were 4.17%,4.50% and 7.54%, respectively.

 

*Income Taxes* -Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the estimated future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enactedtax rates in effect for the year in which those temporary differences areexpected to reverse.

 

*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 share takes into effect the dilutiveeffect of potential common shares outstanding. The Company’s only potential common shares outstanding are stockoptions.

 

*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 the related expectedfuture net cash flows be less than the carrying value, management willdetermine 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 theasset.  To date, management hasdetermined that no impairment of these assets exists.

 

*Comprehensive Income –*Statementof Financial Accounting Standards (SFAS) No. 130, *Reporting Comprehensive Income,*establishesstandards for reporting and display of comprehensive income and its componentsin a full set of financial statements. Comprehensive income includes all changes in stockholders’ equity exceptthose resulting from investments by and distributions to owners.  SFAS No. 130 is not currently applicable forthe Company because the Company did not have any items of other comprehensiveincome in any of the periods presented.

 

# *CardClub Accruals –*Minnesota law allowsthe Company to collect amounts from patrons to fund progressive jackpot poolsin the Card Club.  These amounts, alongwith amounts earned by the player pool, promotional pools and the outstandingchip liability, are accrued as short-term liabilities at each balance sheetdate.

 

32

----

 

*Statementof Financial Accounting Standards No. 123 (SFAS 123) -*In1996, the Company adopted SFAS 123, “Accounting for Stock-BasedCompensation.”  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.  No compensation cost has been recognized forstock options issued under the Stock Option Plan because the exercise price ofall options granted was at least equal to the fair value of the common stock atthe date of grant.  If compensation costfor the Company’s Stock Plan and Employee Stock Purchase Plan had beendetermined based on the fair value at the grant dates, consistent with themethod provided in SFAS 123, the Company’s net income and earnings per sharewould have been as follows:

 
|                         |   | **2003**  |      | **2002**  |   | **2001**  |   |
|------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
| Net Income:                  |   |      |      |      |   |      |   |
| As  reported                 |   | $         | 2,870,130 |      | $      | 2,276,595 |   | $ | 1,816,780 |   |
| Pro  forma                   |   | 2,450,141 |      | 2,061,359 |   | 1,562,399 |   |
|                         |   |      |      |      |   |      |   |
| Basic  Earnings Per Share:   |   |      |      |      |   |      |   |
| As  reported                 |   | $         | .78       |      | $      | .64       |   | $ | .52 |   |
| Pro  forma                   |   | .67       |      | .58       |   | .45       |   |
|                         |   |      |      |      |   |      |   |
| Diluted  Earnings Per Share: |   |      |      |      |   |      |   |
| As  reported                 |   | $         | .70       |      | $      | .57       |   | $ | .49 |   |
| Pro  forma                   |   | .60       |      | .52       |   | .42       |   |

 

*AccountingPronouncements* -  In November 2002, the FASB issued FASBInterpretation (“FIN”) No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*.  FIN No. 45 clarifies the requirements forguarantor’s accounting for and disclosure of certain guarantees issued andoutstanding.  The initial recognitionand the initial measurement provisions of FIN No. 45 are applicable toguarantees issued or modified after December 31, 2002.  The adoption of FIN No. 45 did not have asignificant impact on the Company’s financial statements.

 

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable InterestEntities, an Interpretation of Accounting Research Bulletin No. 51,Consolidated Financial Statements* (“FIN No. 46”).  FIN No. 46 prescribes how to identifyvariable interest entities and how an enterprise assesses its interests in avariable interest entity to decide whether to consolidate that entity.  This interpretation requires existingunconsolidated variable interest entities to be consolidated by their primarybeneficiaries if the entities do not effectively disperse risks among partiesinvolved.  FIN No. 46 was scheduled tobe effective for variable interest entities created after January 31,2003.  On December 24, 2003, the FASBpublished a revision to FIN No. 46 (“FIN No. 46 (R)”).  FIN No. 46(R) clarifies certain provisionsof FIN No. 46 and exempts certain entities from its requirements.  For interests in variable interest entitiesacquired prior to January 31, 2003, the provisions of FIN No. 46(R) will beapplied on March 31, 2004.  The Companydoes not anticipate that the adoption of FIN No. 46 and FIN No. 46(R) will havea material effect on its financial position and results of operations.

 

33

----

 

2.             LAND, BUILDINGS ANDEQUIPMENT

 

Land, buildings andequipment consists of the following at December 31:

 
|                                 |   | **2003**   |       | **2002**   |   |
|--------------------------------------|--------|------------|------------|------------|--------|
|                                 |   |       |       |       |   |
| Land                                 |   | $          | 6,637,027  |       | $      | 4,934,741 |   |
| Buildings  and building improvements |   | 9,232,778  |       | 8,251,643  |   |
| Furniture  and equipment             |   | 9,968,428  |       | 8,938,202  |   |
|                                 |   | 25,838,233 |       | 22,124,586 |   |
| Accumulated  depreciation            |   | (8,725,300 | )          | (7,573,572 | )      |
|                                 |   | $          | 17,112,933 |       | $      | 14,551,014 |   |

 

3.             INCOME TAXES

 

A reconciliation betweenincome taxes computed at the statutory federal income tax rate and theeffective tax rate is as follows:

 
|                                            |   | **2003** |      | **2002** |   | **2001**  |   |
|-------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                            |   |     |      |     |   |      |   |
| Federal  tax expense computed at statutory rate |   | $        | 1,802,000 |     | $      | 1,303,000 |   | $ | 1,100,000 |   |
| Nondeductible  lobbying expense                 |   | 197,000  |      | 23,000   |   | 25,000    |   |
| State  expense, net of federal impact           |   | 381,000  |      | 253,000  |   | 205,000   |   |
| Other                                           |   | 48,651   |      | (24,791  | )      | (3,325    | )      |
|                                            |   | $        | 2,428,651 |     | $      | 1,554,209 |   | $ | 1,326,675 |   |

 

Income tax expense forthe years ended December 31, 2003, 2002 and 2001 consists of the following:

 
|                         |   | **2003**  |      | **2002**  |   | **2001**  |   |
|------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
| Current                      |   |      |      |      |   |      |   |
| Federal                      |   | $         | 1,822,351 |      | $      | 1,054,309 |   | $ | 819,575 |   |
| State                        |   | 563,300   |      | 321,900   |   | 260,000   |   |
|                         |   | 2,385,651 |      | 1,376,209 |   | 1,079,575 |   |
| Deferred,  primarily Federal |   | 43,000    |      | 178,000   |   | 247,100   |   |
|                         |   | $         | 2,428,651 |      | $      | 1,554,209 |   | $ | 1,326,675 |   |

 

Temporary differences andtax carryforwards at December 31 are as follows:

 
|                                             |   | **2003** |     | **2002** |   | **2001** |   |
|--------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
|                                             |   |     |     |     |   |     |   |
| Tax  depreciation greater than book depreciation |   | $        | (474,000 | )        | $      | (302,000 | )      | $ | (191,000 | ) |
| Deferred  gain on sale of land                   |   | (104,000 | )        | (104,000 | )      |     |   |
| Vacation  accrual                                |   | 98,000   |     |     |   |     |   |
| Repairs  capitalized                             |   | 3,000    |     | 3,000    |   | 3,000    |   |
| Other                                            |   | 88,000   |     | 57,000   |   | 20,000   |   |
| Net  liability                                   |   | $        | (389,000 | )        | $      | (346,000 | )      | $ | (168,000 | ) |

 

34

----

 

4.             STOCKHOLDERS’ EQUITY

 

*Employee Stock Purchase Plan:*

 

On April 3, 1995, theBoard of Directors adopted the 1995 Employee Stock Purchase Plan.  The plan, which is open to all employees ofthe Company working more than 15 hours per week, commenced on April 15, 1995and will continue for 10 years.  Theplan consists of one-year phases.  Thephases commence on October 1 of each year. Under the terms of the plan, employees may set aside a portion of theirpayroll earnings to purchase shares of the Company’s common stock at the lowerof 85% of the fair market value of the shares on the commencement date of eachphase or 85% of the fair market value on the termination date of eachphase.  The plan provides for the saleof up to 250,000 shares.  The planissued 32,396, 27,299 and 24,992 shares in 2003, 2002 and 2001, respectively.

 

*401(k) Plan:*

 

On June 1, 1998 theCompany established a defined contribution savings plan for employees who hadcompleted one year of service, as defined in the Plan document.  The defined contribution savings plan allowsfor employee compensation deferral contributions under Section 401(k) of theInternal Revenue Code and discretionary contributions by the Company.  Employer contributions charged to operationsin 2003, 2002 and 2001 were approximately $108,000, $88,000 and $66,000,respectively.

 

*StockOptions:*

 

The Company’s 1994 StockPlan (the Plan) provides for the granting of awards in the form of stockoptions, restricted stock, stock appreciation rights, and deferred stock to keyemployees and non-employees, including directors of and consultants to theCompany and any subsidiary, to purchase up to a maximum of 1,150,000 shares ofcommon stock.  Options that are grantedunder the Plan may be either options that qualify as “incentive stock options”within the meaning of Section 422 of the Internal Revenue Code of 1986, asamended (Incentive Stock Options), or those that do not qualify as IncentiveStock Options (Non-Qualified Stock Options). The Plan is administered by the Board of Directors, or a committeedesignated by the Board, which determines the persons who are to receive awardsunder the Plan, the type of award to be granted, the number of shares subjectto each award and, if an option, the exercise price of each option.  The Plan also provides for formula grants ofNon-Qualified Stock Options to non-employee directors of the Company.

 

Stock option activityrelated to the Plan during the years ended December 31, 2003, 2002 and 2001 issummarized below:

 
|                                |   | **2003**   |   | **2002**                               |   | **2001**   |    |
|-------------------------------------|--------|------------|--------|----------------------------------------|--------|------------|---------|
|                                |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   | **Shares** |    | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   |
|                                |   |       |   |                                   |   |       |    |   |   |   |   |   |   |
| Outstanding  at beginning of year   |   | 639,700    |   | $                                      | 4.79   |       | 633,800 |   | $ | 4.39 |   | 536,300 |   | $ | 3.89 |   |
|                                |   |       |   |                                   |   |       |    |   |   |   |   |   |   |
| Granted                             |   | 96,000     |   | 15.13                                  |   | 86,500     |    | 7.49 |   | 113,000 |   | 6.76 |   |
| Exercised                           |   | (43,500    | )      | 4.48                                   |   | (76,850    | )       | 4.49 |   | (15,500 | ) | 4.23 |   |
| Canceled                            |   |       |   |                                   |   | (3,750     | )       | 6.63 |   |   |   |   |   |
|                                |   |       |   |                                   |   |       |    |   |   |   |   |   |   |
| Outstanding  at end of year         |   | 692,200    |   | $                                      | 6.24   |       | 639,700 |   | $ | 4.79 |   | 633,800 |   | $ | 4.39 |   |
|                                |   |       |   |                                   |   |       |    |   |   |   |   |   |   |
| Options  exercisable at end of year |   | 616,200    |   | $                                      | 5.42   |       | 590,367 |   | $ | 4.56 |   | 583,800 |   | $ | 4.20 |   |

 

35

----

 

The following tablesummarizes information concerning all options outstanding and optionsexercisable as of December 31, 2003:

 
| **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              |   | 170,700                  |   | 2.8                                                          |   | $                                      | 2.16   |                     | 170,700 |                                   | $      | 2.16 |   |
|   2.50 – 5.00         |   | 131,000                  |   | 3.9                                                          |   | 3.85                                   |   | 131,000                  |    | 3.85                                   |   |
|   5.00 – 7.50         |   | 275,000                  |   | 5.8                                                          |   | 6.54                                   |   | 261,333                  |    | 6.46                                   |   |
|    7.50 –  15.55 |   | 115,500                  |   | 5.4                                                          |   | 14.28                                  |   | 64,167                   |    | 13.26                                  |   |
|                                 |        |                          |        |                                                              |        |                                        |        |                          |         |                                        |        |  |  |

 

The fair value of optionsgranted under the Plan during 2003, 2002 and 2001 were estimated on the date ofgrant using the Black-Scholes option-pricing model with the following weightedaverage assumptions and results:

 
|                                 |   | **2003** |    | **2002** |   | **2001** |   |
|--------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Dividend  yield                      |   | None     |    | None     |   | None     |   |
| Expected  volatility                 |   | 37       | %       | 37       | %      | 42       | %      |
| Risk-free  interest rate             |   | 2.99     | %       | 4.41     | %      | 5.01     | %      |
| Expected  life of option             |   | 71       | mo.     | 69       | mo.    | 120      | mo.    |
| Fair  value of options on grant date |   | $        | 837,000 |     | $      | 363,000  |   | $ | 492,000 |   |
|                                      |        |          |         |          |        |          |        |  |  |  |

 

5.             EARNINGS PER SHARECOMPUTATIONS

 

Thefollowing is a reconciliation of the numerator and denominator of the earningsper common share computations:

 
|                                                                                      |   | **2003**  |   | **2002**  |   | **2001**  |   |
|-------------------------------------------------------------------------------------------|--------|-----------|--------|-----------|--------|-----------|--------|
|                                                                                      |   |      |   |      |   |      |   |
| Net  income (numerator) amounts used for basic and fully diluted per share  computations: |   | 2,870,130 |   | 2,276,595 |   | 1,816,780 |   |
|                                                                                      |   |      |   |      |   |      |   |
| Weighted  average shares (denominator) of common stock outstanding:                       |   |      |   |      |   |      |   |
| Basic                                                                                     |   | 3,675,919 |   | 3,581,546 |   | 3,496,781 |   |
| Plus  dilutive effect of stock options                                                    |   | 401,621   |   | 381,982   |   | 225,843   |   |
| Diluted                                                                                   |   | 4,077,540 |   | 3,963,528 |   | 3,722,624 |   |
|                                                                                      |   |      |   |      |   |      |   |
| Net  income per common share:                                                             |   |      |   |      |   |      |   |
| Basic                                                                                     |   | $         | .78    |      | $      | .64       |   | $ | .52 |   |
| Diluted                                                                                   |   | .70       |   | .57       |   | .49       |   |
|                                                                                           |        |           |        |           |        |           |        |  |  |  |

 

Optionsto purchase 48,000 shares of common stock at a weighted average exercise priceof $8.30 per share were outstanding during 2001 but were not included in thecomputation of diluted EPS because the options’ exercise prices were greaterthan the average market price of the common shares.

 

6.             LINES OF CREDIT

 

The Company has a generalcredit and security agreement with Bremer Bank, N.A.  Borrowings under the credit agreement include a commercial revolvingcredit line, which provides for maximum advances of $2,250,000 with interest atthe prime rate (4.00% at December 31, 2003). The Company had no borrowings under the credit line during the year2003.  The weighted average interestrate on the line of credit was 4.12% in 2003. The credit agreement containscovenants requiring the Company to maintain certain financial ratios.  The Company was in compliance with theserequirements as of December 31,

 

36

----

 

2003.  The current loan arrangements prohibit thepayment of dividends without the bank’s consent, however the Company’s specialcash dividend on its common stock of $.15 per share paid on July 11, 2003received the necessary consent.

 

7.             OPERATING LEASES ANDCOMMITMENTS

 

TheCompany leased certain copying equipment under an operating lease, whichexpired in February 2001.  Rentalexpense charged to operations was approximately $5,560 for the year endedDecember 31, 2001.

 

In addition, in January1999 the Company entered into a five-year totalizator services agreement withAutotote Systems, Inc. (Autotote).  Thisfive-year contract was renewed for an additional five-year term in January2004.  Pursuant to the agreement,Autotote provides totalizator equipment and computer programs which record andprocess all wagers and calculate the odds and payoffs.  Amounts charged to operations under thisagreement for the years ended December 31, 2003, 2002 and 2001 were approximately$390,000, $383,000 and $346,000, respectively. During annual live race meets, Autotote provides uplink services, whichenables the Company to simulcast horse races held at Canterbury Park toout-of-state racetracks.  These servicesresulted in amounts charged to operations in 2003, 2002 and 2001 ofapproximately $126,000, $124,000 and $122,000, respectively.

 

8.             CONTINGENCIES

 

In connection with thepurchase of the Racetrack (Note 1), the Company entered into an Earn OutPromissory Note dated March 29, 1994. In accordance with the Earn Out Note, if(i) off-track betting becomes legally permissible in the State of Minnesota and(ii) the Company begins to conduct off-track betting with respect to or inconnection with its operations, the Company will be required to pay to the IMRFund, L.P. the greater of $700,000 per operating year, as defined, or 20% ofthe net pretax profit, as defined for each of five operating years.  At the date (if any) that these twoconditions are met, the five minimum payments will be discounted back to theirpresent value and the sum of those discounted payments will be recorded as anincrease to the purchase price.  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 the Company.  Remaining payments would be made within 90days of the end of each of the next four operating years.

 

The Company isperiodically involved in various legal actions arising in the normal course ofbusiness.  At December 31, 2003,management believes that the resolution of any legal actions outstanding willnot have a material impact on the consolidated financial statements.

 

9.             RELATED-PARTYTRANSACTIONS

 

The president/directorand two other directors have guaranteed performance by the Company under a$500,000 bond issued to the Minnesota Racing Commission.

 

The Company paid $74,000per year to a former member of the Board of Directors for advertising andmarketing services provided to the Company in 2002 and 2001.

 

The Company paid a totalof $62,000 in 2003 to the Chair and Vice Chair of the Company in considerationfor the services they provided pursuant to consulting agreements.  In addition, another non-employee Boardmember received $61,000 in 2003 and $13,000 in 2002 for services related tobuilding grass roots support for proposed legislation to provide expandedgaming authority to the Company.

 

37

----

 

10.                                  OPERATINGSEGMENTS

 

The Company has threereportable operating segments:  cardclub, horse racing, and concessions. The card club segment includes operations of the Canterbury Card Club.The horse racing segment includes simulcast and live horse racing operations,and the concessions segment provides concessions during simulcast and liveracing, in the card club and during special events.  The Company’s reportable operating segments are strategicbusiness units that offer different products and services.  They are managed separately because thesegments differ in the nature of the products and services provided, as well asprocesses to produce those products and services.  The horse racing and card club segments are regulated by theState of Minnesota Racing Commission.

 

The accounting policiesof the operating segments are the same as those described in the summary ofsignificant accounting policies.  Prioryears are reclassified to be consistent with the revised current year allocationmethod.  In addition, the 2002 horseracing segment reflects the $258,074 gain on sale of five acres of real estate.

 

Depreciation, interestexpense and income taxes are allocated to the segments but no allocation ismade to concessions for shared facilities. The concessions segment paid approximately 25% of gross revenues on liveracing and special event days to the horse racing segment for use of thefacilities in 2003 and 2002.  In yearsprior to 2002, the concessions segment paid approximately 25% of all grossrevenues for use of the facilities.

 

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

 
|                                |   | **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      |   | 695                                        |   | 463 |   |   |   | 1,158 |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Segment  income before income taxes |   | 693                                        |   | 4,621 |   | 998 |   | 6,312 |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Segment  Assets                     |   | $                                          | 18,459 |   | $ | 3,727 |   | $ | 1,905 |   | $ | 24,092 |   |

 
|                                |   | **Twelve  Months Ended December 31, 2002** |   |
|-------------------------------------|--------|--------------------------------------------|--------|
|                                |   | **Horse  Racing**                          |   | **Card Club** |   | **Concessions** |   | **Total** |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Revenues  from external customers   |   | 19,194                                     |   | 18,154 |   | 4,353 |   | 41,701 |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Intersegment  revenues              |   | 395                                        |   |   |   | 1,215 |   | 1,610 |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Net  interest income (expense)      |   | 29                                         |   |   |   |   |   | 29 |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Depreciation  and amortization      |   | 596                                        |   | 556 |   |   |   | 1,152 |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Segment  income before income taxes |   | 541                                        |   | 3,290 |   | 639 |   | 4,470 |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Segment  Assets                     |   | 14,883                                     |   | 4,003 |   | 1,116 |   | 20,003 |   |

 

38

----

 
|                                |   | **Twelve  Months Ended December 31, 2001** |   |
|-------------------------------------|--------|--------------------------------------------|--------|
|                                |   | **Horse Racing**                           |   | **Card Club** |   | **Concessions** |   | **Total** |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Revenues  from external customers   |   | 18,354                                     |   | 16,969 |   | 4,169 |   | 39,492 |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Intersegment  revenues              |   | 692                                        |   |   |   | 1,253 |   | 1,945 |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Net  interest income (expense)      |   | 57                                         |   |   |   |   |   | 57 |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Depreciation  and amortization      |   | 597                                        |   | 467 |   |   |   | 1,064 |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Segment  income before income taxes |   | 341                                        |   | 2,802 |   | 113 |   | 3,256 |   |
|                                |   |                                       |   |   |   |   |   |   |   |
| Segment  Assets                     |   | 11,962                                     |   | 4,493 |   | 522 |   | 16,977 |   |

 

Included in horse racingsegment revenues for the years ended December 31, 2003, 2002 and 2001 isapproximately $212,000, $228,000 and $377,000, respectively, for rental of theracing facility for special events and storage.

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

 
|                                                    |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Revenues                                                |   |     |   |     |   |     |   |
| Total  revenue for reportable segments                  |   | $        | 49,794 |     | $      | 43,311   |   | $ | 41,437 |   |
| Elimination  of intersegment revenues                   |   | (1,948   | )      | (1,610   | )      | (1,945   | )      |
| Total  consolidated revenues                            |   | 47,846   |   | 41,701   |   | 39,492   |   |
| Income  before income taxes                             |   |     |   |     |   |     |   |
| Total  segment income before income taxes               |   | $        | 6,312  |     | $      | 4,470    |   | $ | 3,256 |   |
| Elimination  of intersegment income before income taxes |   | (1,013   | )      | (639     | )      | (113     | )      |
| Total  consolidated income before income taxes          |   | 5,299    |   | 3,831    |   | 3,143    |   |

 
|                                     |   | **December  31,  2003** |   | **December  31,  2002** | ** ** | **December  31,  2001** | ** ** |
|------------------------------------------|--------|-------------------------|--------|-------------------------|------------|-------------------------|------------|
| Assets                                   |   |                    |   |                    |       |                    |       |
| Total  assets for reportable segments    |   | $                       | 24,092 |                    | $          | 20,003                  |       | $ | 16,977 |   |
| Elimination  of intercompany receivables |   | (1,795                  | )      | (973                    | )          | (433                    | )          |
| Total  consolidated assets               |   | 22,297                  |   | 19,030                  |       | 16,544                  |       |
|                                          |        |                         |        |                         |            |                         |            |  |  |  |

 

39

----

 

11.**          **SUPPLEMENTARYFINANCIAL INFORMATION (UNAUDITED)

 
|                        |   | **2003  Quarter Ended:** |      |
|-----------------------------|--------|--------------------------|-----------|
|                        |   | **March 31**             |      | **June 30** |   | **September  30** |   | **December 31** |   |
|                        |   |                     |      |   |   |   |   |   |   |
| Operating  Revenues         |   | $                        | 9,229,250 |   | $ | 13,128,383 |   | $ | 14,981,550 |   | $ | 10,506,556 |   |
|                        |   |                     |      |   |   |   |   |   |   |
| Operating  expenses         |   | 7,771,922                |      | 12,105,109 |   | 13,716,910 |   | 8,992,738 |   |
|                        |   |                     |      |   |   |   |   |   |   |
| Net  Income                 |   | 839,087                  |      | 593,552 |   | 575,547 |   | 861,944 |   |
|                        |   |                     |      |   |   |   |   |   |   |
| Basic  Earnings per share   |   | .23                      |      | .16 |   | .16 |   | .23 |   |
|                        |   |                     |      |   |   |   |   |   |   |
| Diluted  Earnings per share |   | .21                      |      | .15 |   | .14 |   | .21 |   |
|                             |        |                          |           |  |  |  |  |  |  |  |  |  |  |

 
|                        |   | **2002  Quarter Ended:** | ** ** |
|-----------------------------|--------|--------------------------|------------|
|                        |   | **March 31**             |       | **June 30** | ** ** | **September  30** | ** ** | **December  31** | ** ** |
|                        |   |                     |       |   |   |   |   |   |   |
| Operating  Revenues         |   | $                        | 8,947,223  |   | $ | 11,930,749 |   | $ | 12,110,549 |   | $ | 8,712,793 |   |
|                        |   |                     |       |   |   |   |   |   |   |
| Operating  expenses         |   | 7,367,117                |       | 10,903,545 |   | 11,737,339 |   | 7,891,449 |   |
|                        |   |                     |       |   |   |   |   |   |   |
| Net  Income                 |   | 931,038                  |       | 613,005 |   | 234,679 |   | 497,873 |   |
|                        |   |                     |       |   |   |   |   |   |   |
| Basic  Earnings per share   |   | .26                      |       | .17 |   | .07 |   | .14 |   |
|                        |   |                     |       |   |   |   |   |   |   |
| Diluted  Earnings per share |   | .24                      |       | .16 |   | .06 |   | .13 |   |
|                             |        |                          |            |  |  |  |  |  |  |  |  |  |  |

 

40

----

 
| **Item 9****.** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING  AND FINANCIAL DISCLOSURE** |
|-----------------|-------------------------------------------------------------------------------------------|

 

Not Applicable.

 

**Item 9A****.****       ****CONTROLS AND PROCEDURES**

 

(a)           Evaluation of Disclosure Controls andProcedures:

 

The Company’s Chief Executive Officer, Randall D.Sampson, and Chief Financial Officer, David C. Hansen, have evaluated theCompany’s disclosure controls and procedures as of the end of the periodcovered by this report.  Based upon thatreview, they have concluded that these controls and procedures are effective inensuring that material information related to the Company is made known to themby others within the Company.

 

(b)           Changes in Internal Control Over FinancialReporting:

 

Therehave been no significant changes in internal control over financial reportingthat occurred during the fiscal quarter covered by this report that havematerially affected, or are reasonably likely to materially affect, theregistrant’s internal control over financial reporting.

 

**PART III**

 

**Item10****.****              DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT**

 

Information requiredunder this item with respect to the directors will be set forth in a sectioncaptioned “Election of Directors” in the Company’s Proxy Statement for theAnnual Meeting of Shareholders to be held on June 3, 2004 (the “2004 ProxyStatement”), a definitive copy of which will be filed with the Commissionwithin 120 days of the close of the 2003 fiscal year, which information isincorporated    herein byreference.  Information regardingexecutive officers is presented under Item 1(c)(x) herein.

 

**Item 11****.****              EXECUTIVECOMPENSATION**

 

Information required under this item willbe set forth in a section entitled “Executive Compensation and OtherInformation” in the Company’s 2004 Proxy Statement which information isincorporated herein by reference.

 

**Item12****.****              SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Information required under this item willbe set forth in a section entitled “Security Ownership of Certain BeneficialOwners” in the Company’s 2004 Proxy Statement which information is incorporatedherein by reference.

 

**Item13****.****              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Information, if any, requiredto be disclosed under this item will be set forth in a section entitled“Certain Transactions” in the Company’s 2004 Proxy Statement which informationis incorporated herein by reference.

 

**Item14****.****              PRINCIPAL ACCOUNTANTFEES AND SERVICES**

 

Informationrequired under this item will be set forth in a section entitled “The Company’sAuditors” in the Company’s 2004 Proxy statement which information isincorporated herein by reference.

 

**Item 15****.****             ****EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

(a)        1.Consolidated Financial Statements

 

The following Consolidated FinancialStatements of Canterbury Park Holding Corporation and subsidiaries are includedin Part II, Item 8 pages 26 - 40:

 

Independent Auditors Report

 

Consolidated Balance Sheets as ofDecember 31, 2003 and 2002

 

Consolidated StatementsOf Operations for the years ended December 31, 2003, 2002, and 2001

 

Consolidated Statementsof Changes in Stockholders’ Equity for the years ended December 31, 2003, 2002,and 2001

 

Consolidated Statementsof Cash Flows for the years ended December 31, 2003, 2002, and  2001

 

Notes to ConsolidatedFinancial statements

 

 

41

----

 

2.  All other schedules are omitted, becausethey are not applicable, not significant or not required, or because theinformation is included in the financial statements or notes thereto.

 

3.  The exhibits listed on the “Exhibits Index”on pages 46 & 47 are filed with this Form 10-K or incorporated by referencein this report.

 

(b)   Reports filed on Form 8-K during the fourth quarter of 2003.

 

On November 14, 2003 theCompany filed a current report on Form 8-K with the Securities and ExchangeCommission, reporting under Item 12 the results for the third quarter endedSeptember 30, 2003.

 

c) Exhibits

 

The exhibits listed onthe “Exhibits Index” on pages 46 & 47 are filed with this Form 10-K orincorporated by reference in this report.

 

(d) Schedules

 

Not applicable

 

 

42

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
| Dated:  March 29, 2004 |   | CANTERBURY PARK HOLDING  CORPORATION        |
|-----------------------------|--------|---------------------------------------------|
|                        |   |                                        |
|                        | By     |  /s/ Randall D.  Sampson               |
|                        |   |  Randall D. Sampson                    |
|                        |   |  President and Chief Executive Officer |
|                        |   |                                        |
|                        | By     |  /s/ David C.  Hansen                  |
|                        |   |  David C. Hansen                       |
|                        |   |  Chief Financial  Officer              |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the following persons on behalf of the Registrant and inthe capacities and the dates indicated have signed this report below.

 

**Power of Attorney**

 

Each person whose signature appears below constitutesand appoints CURTIS A. SAMPSON, DALE H. SCHENIAN and RANDALL D. SAMPSON as histrue and lawful attorneys-in-fact and agents, each acting alone, with fullpower of substitution and resubstitution, for him and in his name, place andstead, in any and all capacities, to sign any of all amendments to this Annual Reporton Form 10-K and to file the same, with all exhibits thereto, and otherdocuments in connection therewith, with the Securities and Exchange Commission,granting unto said attorneys-in-fact and agents, each acting alone, full powerand authority to do and perform each and every act and thing requisite andnecessary to be done in and about the premises, as fully to all intents andpurposes as he might or could do in person, hereby ratifying and confirming allsaid attorneys-in-fact and agents, each acting alone, or his substitute orsubstitutes, may lawfully do or cause to be done by virtue thereof.

 
| **Signature**                  |   | **Title**                            |   | **Date**       |   |
|--------------------------------|--------|--------------------------------------|--------|----------------|--------|
|                           |   |                                 |   |           |   |
|  /s/  Curtis A. Sampson   |   | Chairman of the Board                |   | March 29, 2004 |   |
|  Curtis  A. Sampson       |   |                                 |   |           |   |
|                           |   |                                 |   |           |   |
|  /s/ Dale H. Schenian     |   | Director; Vice Chairman              |   | March 29, 2004 |   |
|  Dale H. Schenian         |   |                                 |   |           |   |
|                           |   |                                 |   |           |   |
|  /s/ Randall D. Sampson   |   | Chief Executive  Officer, President, |   | March 29, 2004 |   |
|  Randall  D. Sampson      |   | General Manager,  Treasurer and      |   |           |   |
|                           |   | Director                             |   |           |   |
|                           |   |                                 |   |           |   |
|  /s/ Brian C. Barenscheer |   | Director                             |   | March 29, 2004 |   |
|  Brian  C. Barenscheer    |   |                                 |   |           |   |
|                           |   |                                 |   |           |   |
|  /s/ Patrick R. Cruzen    |   | Director                             |   | March 29, 2004 |   |
|  Patrick R. Cruzen        |   |                                 |   |           |   |
|                           |   |                                 |   |           |   |
|  /s/ Carin J. Offerman    |   | Director                             |   | March 29, 2004 |   |
|  Carin  J. Offerman       |   |                                 |   |           |   |

 

 

 

43

----

 

CANTERBURY PARKHOLDING CORPORATION AND SUBSIDIARY

 

Exhibit Index To

Form 10-K for theYear Ended December 31, 2003

 
| **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.

 

 

 

44

----

 
| **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 Form10-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                                           |   | Independent Auditors’  Consent                                                                                                                                                                                                                                                          |   | 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  of 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 toin this Exhibit will be supplied to a shareholder at a charge of $.25 per pageupon written request directed to Canterbury Park Holding Corporation at theexecutive offices of the Company.

 

 

 

45

----