**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-K**

** **

| **(Mark One)**                                  |
|-------------------------------------------------|
| **ý**                                      | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                            |   |
| **For the fiscal year ended December 31, 2002** |
|                                            |   |
| **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:  0-24554**

** **

**CANTERBURY PARK HOLDING CORPORATION**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Minnesota**                                                                      |   | **41-1775532**                        |
|------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdiction  of Incorporation or Organization)                    |   | (I.R.S. Employer  Identification No.) |
|                                                                               |   |                                  |
| **1100 Canterbury Road  Shakopee, MN  55379**                                 |
| (Address of principal executive offices and zip code)                              |
|                                                                               |   |                                  |
| Registrant’s telephone number, including area code:  **(952)  445-7223** |

 

Securitiesregistered pursuant to Section 12(b) of the Act:                  **Common Stock, $.01 par value**

 

Securitiesregistered pursuant to Section 12(g) of the Act:                  **None**

 

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

 

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

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).    
|   | YES | o |   | NO | ý |   |   |
|--------|-----|---|--------|----|--------|--------|--------|

 

The aggregatemarket value of the shares of voting stock held by non-affiliates of theCompany (persons other than directors and officers) computed at the closingprice of $14.64 per share on the American Stock Exchange on March 17, 2003 wasapproximately $25,280,000.  On March 17,2003, the Company had 3,640,473 shares of common stock, $.01 par value,outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions ofthe Company’s definitive Proxy Statement for its 2003 Annual Meeting ofShareholders, to be held on June 5, 2003, are incorporated by reference intoPart III of this Form 10-K.

 

 

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CANTERBURY PARK HOLDING CORPORATION

FORM 10-K ANNUAL REPORT

FOR THE YEAR ENDED DECEMBER 31, 2002

 

TABLE OF CONTENTS

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

 

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

 

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

 

CanterburyPark Holding Corporation (the “Company”) hosts pari-mutuel wagering on livethoroughbred and quarter Horse racing at its facilities in Shakopee, Minnesota(the “Racetrack”) and pari-mutuel wagering on races held at out-of-stateracetracks that are televised simultaneously at the Racetrack(“simulcasting”).  In addition, theCompany is the only facility in the State of Minnesota authorized by law tohost “unbanked” card games in which the players compete against each other andnot against the house.  The Company alsoderives revenues from related services and activities, such as concessions,parking, admissions and programs, and from other entertainment events held atthe 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.

 

OnApril 19, 2000, the Company opened its Canterbury Card Club (the “CardClub”).  At the Card Club patrons competeagainst each other in various unbanked card games.  The Card Club operates under the authority of legislation enactedinto law in May 1999 (the “Card Club Legislation”) and is regulated by theMinnesota Racing Commission.  Under theCard Club Legislation, the Company is authorized to host up to 50 tables wherecard games are played and receives a percentage of the wagers or a fee from theplayers 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 atotal 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 provides food and beverage during simulcast andlive racing, in 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 Clubis open 24 hours per day, seven days per week, offering two types of unbankedcard games: poker games and casino games.

 

Poker games,including Texas Hold ‘Em, 7-Card Stud and Omaha, with table limits rangingbetween $2 and $60, are offered on a maximum of 31 tables currently availablein the poker room.  In poker games, thesponsor is allowed to deduct a percentage from the accumulated wagers andimpose other charges for hosting the activity, but does not have an interest inthe outcome of a game.  The sponsor mayadd additional prizes, awards, or money to any game for promotionalpurposes.  In the Canterbury Card Club,a dealer, employed by the Company, regulates the play of the game at each tableand deals the cards, but does not participate in play.  The Company collects a “rake” of 10% of eachaddition to the “pot”, up to a maximum of $4.00 or $4.50 per hand, depending onthe game, as its collection revenue.  Inaddition, poker games offer progressive jackpots for most

 

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

 

Casino gamesare offered currently at 19 tables. Casino games include Pai Gow Poker, Minnesota 21 (a version ofblackjack), Super Nine, Caribbean Stud, Let-It-Ride and Three Card poker.  Casino games are played using a “playerpool” system.  “Player pool” means awagering system, in which wagers lost in card games, may be accumulated into apool for purposes of enhancing the total amount paid back to winning players inother card games.  In such instances,the sponsor may only serve as custodian of the player pool and may not have anactive interest in any card game.  Inthe casino games area of the Card Club, the amount that the dealer “wins” or“loses” during the course of play is accumulated in a “Player Pool” to be usedto repay players in the form of promotions, giveaways, prizes or by othermeans.  The Company also takes a “rake”of $.50 to $1.00 per wager, depending on the game, for the Company’s collectionrevenue.  The only casino game to offera progressive jackpot is Caribbean Stud. The player has the option of playing the jackpot, and has theopportunity to win some, or all, of the jackpot amount depending upon his hand.

 

**(ii)**                                          **Horse Racing Operations**

 

The Company’shorse racing operations consist of year-round pari-mutuel wagering on simulcasthorse races (“simulcasting”) and live meets held on a seasonal basis beginningin May and concluding in September. Thoroughbred and quarter horse racing is conducted during the live meet.  The Company has also conducted live harnessracing from time to time.

 

*Simulcasting.*

* *

Simulcastingis the process by which live horse races held at one facility (the “hosttrack”) are transmitted simultaneously to other locations that allow patrons ateach receiving 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 Companyoffers “full card” simulcast racing (broadcasting of another racetrack’s entiredaily live racing program) from up to 20 racetracks per day, seven days a week,364 days per year, including Churchill Downs, Hollywood Park, Santa Anita,Gulfstream Park, Belmont Park and Saratoga Racecourse.  In addition, races of national interest,such as the Kentucky Derby, Preakness Stakes and Breeders’ Cup, supplement theregular simulcast program.  The Companyregularly evaluates its agreements with other racetracks in order to offer themost popular simulcast signals of live horse racing which is feasible to offerat the Racetrack.

 

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

 

*Live Racing.*

 

The Companyconducts live horse racing at its facility generally from May until earlySeptember each year.  The Company raced61 days in the year 2002, beginning May 17th and ending September 2nd,consisting of 27 days of mixed Thoroughbred and Quarter Horse racing, 34 daysof Thoroughbred only racing.  In 2003,the Racetrack will conduct 63 live race days, beginning May 16th and concludingSeptember 1st.  The race meet willinclude 27 days of mixed Thoroughbred and Quarter Horse racing, and 36 days ofThoroughbred only racing.

 

Currently,Minnesota law requires the Racetrack to schedule a minimum of 125 days of liveracing annually, unless the MHBPA agrees to a lesser number of live racingdays.  Since 1995, the MHBPA has agreedto waive the 125-day requirement and allow the Company to run a minimum of 50days of live racing each year.  After

 

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2003, no assurance can be giventhat the MHBPA will agree to a shorter live meet than the 125-day statutoryminimum.  If the MHBPA does not agree toa live meet shorter than 125 days, the Company’s operations could be adverselyimpacted by a decrease in the daily purses and potential reduction in qualityof horses, attendance and overall handle, as well as increased operatingexpenses.

 

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

 

Whilepari-mutuel horse racing and card club operations are the Company’s principalbusinesses, the Company’s facilities are capable of being used for multiplepurposes.  In an effort to more fullyutilize the property and to generate additional revenues, the Company has, ineach year of its operations, expanded the use of the grandstand, grounds andparking lot for special events and rentals.

 

From 1996through 2002, a number of non-horseracing events were held, including snowmobileraces, major arts 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 2002.

 

In October2000, the Company erected a semi-permanent structure, attached to the mainentrance of the grandstand that is referred to as the “Pavilion”.  The Pavilion has approximately 18,000 squarefeet and has allowed the Company to market itself as a venue for large indoorentertainment events.

 

**(iv)**                                         **Sources ofRevenue**

 

*General.*

 

The Company’srevenues in the year 2002 were principally derived from pari-mutuel wageringand Card Club operations.

 

In pari-mutuelwagering, bettors wager against each other in a pool, rather than against theoperator of the facility or with preset odds. From the total amount wagered or “handle,” the Minnesota Pari-MutuelHorse Racing Act (the “Racing Act”) specifies the maximum percentage, referredto as the “takeout,” which may be withheld by the Racetrack, with the balancereturned to the winning bettors.  Thetakeout constitutes the Racetrack’s primary source 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 variousforms of pari-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 oftakeout earned by the Company depends on where the race is run and the form ofwager (straight or exotic).  Netrevenues from pari-mutuel wagering on live races run at the Racetrack consistof the total amount wagered, less the amounts paid (i) to winning patrons, (ii)for purses, (iii) to the Breeders’ Fund and (iv) for pari-mutuel taxes to theState of Minnesota.  Net revenues frompari-mutuel wagering on races being run at out-of-state racetracks andsimulcast to the Racetrack have similar expenses, but also include a host feepayment to the host track.  The hostfee, which is calculated as a percentage of monies wagered (generally 2.50% to4.50%), is negotiated with the host track and must comply with state lawsgoverning the host track.

 

5

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*Wagering on Live Races.*

 

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

 

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

 

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

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

 

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

 

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

 

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|                            |   | **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 | % |

 

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(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.  Of funds allocated forpurses, 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 Companyalso derives revenue from other activities such as admissions and parking fees,as well as from 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 use of the facilities for events such as concerts, trade andcraft shows, snowmobile racing, business meetings, private parties, horseexpositions and sales, boat and automobile storage, community events, and rentalof the parking lot for various automobile activities and vehicle storage.

 

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

 

The Companycompetes with other forms of gaming in the State of Minnesota, particularlycasino-style gambling located on Native American reservations throughout theState of Minnesota, including a large casino

 

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located approximately threemiles from the Racetrack.  In addition,the Company competes against charitable gambling (bingo and pull tabs) andvarious state lottery products. In addition, the Company faces increasingcompetition from offshore and out-of-state simulcast operations illegallymarketing Internet and telephone account home wagering systems to Minnesotaresidents.

 

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

 

The Companyalso competes with racetracks located throughout the United States in securingthe better quality horses to run at the Racetrack.  Attracting the owners and trainers of better quality horses islargely influenced by the ability to offer large purses.  The Company experiences significantcompetition for better quality horses from a racetrack located near Des Moines,Iowa, as well as racetracks in Chicago, Illinois, which offer substantiallylarger purses than the Company.  Thiscompetition is expected to continue for the foreseeable future.

 

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

** **

On February 18, 2003, a bill was introduced in the MinnesotaLegislature, which seeks to allow electronic gaming devices to be operated bythe Minnesota State Lottery at the Racetrack. Often referred to as “Racinos”,this concept includes 2,000 gaming devices, a 250-room hotel, an Olympic scalehorse park and additional restaurant venues. Based on the success of several Racinos in other states, the Companyfeels that if this legislation is successful, it will enhance horse racing withincreased purses, provide growth and development opportunities for the Company,and produce significant new tax revenues for state and local governments.  The effort to obtain legislative authorityfor electronic gaming devices at the Racetrack will require substantialexpenditures and there can be no assurance that this bill or a version of thisbill will be enacted into law.

 

**(vii)**                                     **Marketing**

 

The Company’sprimary market is the seven-county Minneapolis-Saint Paul metropolitan area.Current demographic information indicates that approximately 1.45 millionadults age 18 and older, reside within a 25-mile radius of Shakopee, Minnesotaand another 1.68 million adults age 18 and older, reside within a 25-100 mileradius of the Racetrack.

 

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 on communicating the excitement of wagering on horse racing with cardplaying.  In addition to its regularadvertising program, the Company conducts numerous special promotions andhandicapping contests to increase simulcast patronage, and successfullyimplemented a player rewards program in March of 2001.

 

The 2002combined Card Club and live racing advertising campaigns utilized print, radioand television advertising to highlight the attractive, park-like atmosphere ofCanterbury Park, promoting activities for the entire family, as well as the funand excitement of live horse racing and card playing.  In addition, the development over the past five years of acustomer database has enabled the Company to increasingly utilize direct mailadvertising.

 

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

 

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**(viii)**                                 **Regulation**

 

*General.*

 

The ownershipand operation of the Racetrack in Minnesota is subject to significantregulation by the Racing Commission under the Racing Act and the rules adoptedby the Racing Commission.  The RacingAct provides for the allocation of each wagering pool to winning bettors, theRacetrack, purses, the State of Minnesota and the Breeders’ Fund and empowersthe Racing Commission to license and regulate substantially all aspects ofhorse racing in the State.  The RacingCommission, among other things, grants operating licenses to racetracks afteran application process and public hearings, licenses all employees of aracetrack, jockeys, trainers, veterinarians and other participants, regulatesthe transfer of ownership interests in licenses, allocates live race days andsimulcast-only race days, approves race programs, regulates the conduct ofraces, sets specifications for the racing ovals, animal facilities, employeequarters and public areas of racetracks, regulates the types of wagers on horseraces and approves significant contractual arrangements with racetracks,including management agreements, simulcast arrangements, totalizator contractsand concessionaire agreements. Decisions by the Racing Commission in regard to any one or more of theforegoing matters could adversely affect the Company’s operations.

 

A federalstatute, the Interstate Horse Racing Act of 1978, also provides that aracetrack must obtain the consent of the group representing the majority of thehorsepersons (owners and trainers) of the horses racing at the racetrack, andthe consent of the state agency regulating the racetrack, in order to transmitsimulcast signals of its live races or to receive and use simulcast signalsfrom other racetracks.  The Company hasobtained the consent of the MHBPA and Minnesota Racing Commission for receivingand sending simulcasting signals.

 

*Issuance of Class A, and Class B Licenses tothe Company.*

 

The RacingCommission issued 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 is $10,000 per calendar year.

 

The RacingCommission issued 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).  The fee for this Class B License is $100 foreach assigned race day on which live racing is actually conducted and $50 foreach day on which simulcasting is authorized and actually takes place.  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 is $10,000 per calendar year.

 

The RacingCommission has the ability to impose increases in the Class A and Class Blicense fees, which would adversely impact the Company’s operating expenses.

 

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

 

Pursuant tothe Racing Act, so long as the Racetrack maintains its Class A License, noother Class A License may be issued in the seven county metropolitan area (thecounties of Hennepin, Ramsey, Washington, Scott, Dakota, Anoka and Carver),except the Racing Commission may issue an additional Class A License within theseven county metropolitan area, provided that the additional license may onlybe issued for a facility which, among other conditions, is located more than 20miles from the Racetrack, contains a track no larger than five-eighths of amile in circumference, and is used exclusively for Standard bred (harness)racing.  Therefore, as long as theCompany holds the Class A License, only the Company may own and operate aracetrack in the seven county metropolitan area where thoroughbred horses andquarter horses may be raced.

 

9

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*Limitation on Ownership and Management of anEntity, which holds a Class A License and/or Class B License.*

 

The Racing Actrequires prior Racing Commission approval of all officers, directors, 5%shareholders, or other persons having a present or future direct or indirectfinancial or management interest in any person applying for a Class A and ClassB license, and if a change of ownership of more than 5% of the licensee’sshares is made after an application is filed or the license issued, theapplicant or licensee must notify the Racing Commission of the changes withinfive days of this occurrence and provide the information required by the RacingAct.

 

*Card Club Regulation.*

* *

TheRacing Commission is authorized by law to regulate Card Club operations.  The law required that the Company submit aplan of operation for card playing activities to the Racing Commission prior toreceiving its Class B license to operate the Card Club.  The operating plan received final approvaland the Class B license was granted on January 19, 2000.  The law requires that the Company reimbursethe Minnesota Racing Commission for it’s actual costs, including personnelcosts, of regulating the Card Club.

 

*Local Regulation.*

 

The Company’soperations are subject to state and local laws, regulations, ordinances andother provisions affecting zoning and other matters which may have the effectof restricting the uses to which the Company’s land and other assets may beused.  Also, any development of theRacetrack site 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 14,2003, the Company had 321 full-time employees and 309 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.

 

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

 

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

 
| **Name**            |   | **Age** |   | **Position  with Company**           |
|---------------------|--------|---------|--------|--------------------------------------|
|                |   |    |   |                                 |
| Randall D.  Sampson |   | 44      |   | President,  and General Manager      |
|                |   |    |   |                                 |
| David C.  Hansen    |   | 46      |   | Vice  President of Finance & CFO |
|                |   |    |   |                                 |
| Mark A.  Erickson   |   | 46      |   | Vice  President of Facilities        |
|                |   |    |   |                                 |
| Michael J.  Garin   |   | 47      |   | Vice  President of Hospitality       |
|                |   |    |   |                                 |
| John R.  Harty      |   | 58      |   | Vice  President of Marketing         |

 

10

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Randall D.Sampson has been President since the formation of the Company in March 1994 andGeneral Manager since September 1995. He also serves as a director of the Thoroughbred Racing Association ofNorth America and Communications Systems, Inc., manufacturer oftelecommunications and data communications products based in Hector,Minnesota.  Mr. Sampson is the son ofCurtis A. Sampson, the Company’s Chairman of the Board who is a holder ofapproximately 30% of the Company’s common stock.

 

David C.Hansen joined the Company in July 2001 as Vice President of Finance and ChiefFinancial Officer.  Mr. Hansen wasemployed as Controller, and later Director of Finance at Treasure Island Resort& Casino, in Red Wing, MN, from 1993 until 2000.  He then served as Director of Accounting for Prairie MeadowsRacetrack and Casino in Altoona, IA from 2000 to 2001.

 

Mark A.Erickson has been Vice President of Facilities since May 1997.  Mr. Erickson was the Director of Facilitiesfrom 1994 until 1997.

 

Michael J.Garin has been Vice President of Hospitality since May of 1997.  Mr. Garin had served as President ofCanterbury Park Concessions, Inc. since April of 1994.

 

John R. Hartyhas been Vice President of Marketing since February of 2000.  Mr. Harty served as Vice President of Salesand Marketing for Kim and Sun Hosiery in Philadelphia prior to joiningCanterbury Park.

 

**Item2****.**                     **PROPERTIES**

 

*General.*

 

The Company’sfacilities, which are operated under the name “Canterbury Park Racetrack andCard Club,” are a modern complex of buildings and grounds, generally comparableto other major racetracks located throughout the country.  The Racetrack’s grandstand has a patroncapacity of approximately 10,000 within enclosed areas, and a maximum patroncapacity of over 30,000 including the outside areas around the grandstand.  The grandstand and most public outdoor areascontain numerous pari-mutuel windows, odds information boards, video monitors,concessions stands and other amenities. The audio/visual system includes over 600 television monitors with mostareas providing multi-screen viewing of the races.

 

The Racetrackis located approximately 25 miles southwest of downtown Minneapolis.  The area immediately surrounding theRacetrack consists primarily of a partially developed industrial park andfarmland.  However, 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 three miles from the Racetrack, which draws approximately 5.2 millionpatrons annually.  Approximately 20miles from the Racetrack is the Mall of America, the largest enclosed shoppingmall in the United States, which attracts approximately 42.5 million visitorsper year.

 

*Racing Surfaces.*

 

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

 

*Grandstand.*

 

The grandstandis a modern, air-conditioned, and enclosed structure of approximately 275,000square feet with a variety of facilities on six levels.  The Lower Level contains space for supportfunctions such as jockey quarters, administrative offices, Racing Commissionoffices, the pari-mutuels department, concession and maintenance offices, firstaid, mechanical and electrical rooms. The Track Level includes pari-mutuels windows,

 

11

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restrooms, a variety ofconcession stands and other services. The Card Club currently occupies 27,000 square feet on the Track Level.The Mezzanine Level contains 1,320 fixed seats in a glass-enclosed,air-conditioned area and an additional 3,000 seats located outside.  In addition to the seats, the MezzanineLevel contains pari-mutuel windows, restrooms, concession stands and otherguest facilities. A portion of the mezzanine level is currently being used as asimulcast center to be used during live racing, and for banquets and otherevents during the off-season.  TheKitchen Level is an intermediate level located between the Mezzanine andClubhouse floors; it contains a full-service kitchen which can support a fulldining menu for the track-side dining terraces on the Clubhouse Level and toprepare food for the other concession areas. The Clubhouse Level is a multi-purpose area serving as a simulcastcenter during wagering sessions on televised races, as well as a full-servicedining area during the live racing season. The Clubhouse Level includes 325 trackside tables, each equipped with atelevision set, with a total seating capacity of 1,200 patrons and an additional1,000 seats are located in lounges located throughout the area.  An additional feature of the Clubhouse Levelis a special club area, which includes 225 dining seats, a party room and alarge bar and lounge.  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 stablearea consists of 33 barns with a total of approximately 1,650 stalls.  In the stable area, there are 216 dormitoryrooms for the grooms and others working at the Racetrack.  The stable area also contains a combinationracing office and cafeteria/recreation building for stable personnel, twoblacksmith buildings and a one half mile training track.

 

*Parking.*

 

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

 

*Other Properties.*

 

*Undeveloped Land:*

* *

In January2002, the Company acquired an additional 12 acres of undeveloped land adjacentto the Racetrack, and in April 2002, subsequently sold another 5 acres ofundeveloped land.  More than 90 acres ofthe 362 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 theCompany’s primary businesses of horse racing and card club operations.

 

*RV Park:*

* *

In December2002, the Company acquired an recreational vehicle (RV) park, located onapproximately 29 acres, adjacent to the Minnesota River, and located 2 milesfrom the Racetrack in Shakopee.  The RVpark has 68 independent sites and 40 dependent sites, an indoor swimming pool,laundry facilities, game room and mini store. The sites will be rented to horsemen participating in Canterbury’sracing operations, seasonal employees, and the general public.

 

12

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**Item3****.**                     **LEGALPROCEEDINGS**

 

From time totime, the Company is party to ordinary and routine litigation incidental to ourbusiness.  We do not expect the outcomeof any pending litigation to have a material adverse effect on our consolidatedfinancial position or results of operations.

 

**Item4****.**                     **SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

NotApplicable.

 

**PART II**

** **

**Item5****.**                     **MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

** **

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

 

The Company’sCommon Stock began trading on the American Stock Exchange on December 18, 2002under the symbol ECP. Prior to that date, the Company’s Common Stock traded onthe NASDAQ Small Cap Market under the symbol TRAK. The table set forth belowindicates the high and low trade prices for the Common Stock in the quarterlyperiods ending December 31, 2002 and 2001. These prices indicate interdealerprices without retail markup, markdowns or commissions.

 
|           |   | **2002** |       | **2001** |       |
|----------------|--------|----------|------------|----------|------------|
|           |   | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|           |   |     | ** ** |     | ** ** |   | ** ** |   | ** ** |
| Common Stock   |   |     |       |     |       |   |   |   |   |
|           |   |     |       |     |       |   |   |   |   |
| First Quarter  |   | $        | 9.19       |     | $          | 6.35 |   | $ | 7.94 |   | $ | 5.88 |   |
| Second Quarter |   | 11.25    |       | 7.23     |       | 9.50 |   | 5.85 |   |
| Third Quarter  |   | 10.99    |       | 8.00     |       | 7.69 |   | 5.75 |   |
| Fourth Quarter |   | 15.05    |       | 8.25     |       | 8.25 |   | 6.00 |   |
|                |        |          |            |          |            |  |  |  |  |  |  |  |  |

 

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

 

At March 17,2003, the Company had approximately 565 holders of record of its commonstock.  In addition, on that date adepository company held approximately 1,817,000 shares as nominees for anestimated 1,900 beneficial holders.

 

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

 

The Companypaid a special cash dividend on its common stock of $.25 per share on July 12,2002, which totaled $896,394.   TheCompany has not adopted any policies regarding the payment of dividends anddoes not anticipate paying any dividends in the foreseeable future.  The Company’s current loan arrangements witha commercial bank prohibit the payment of dividends without the bank’s consent.

 

13

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**(d)**                                            **OTHERINFORMATION REGARDING EQUITY COMPENSATION PLANS**

 

The following table sets forth information as ofDecember 31, 2002 regarding our equity compensation plans.

 

**Securities Authorizedfor Issuance Under 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                                                 |   | 639,700                                                                                                                |       | 4.79                                                                                     |       | 223,500                                                                                                                                                  |       |
| 1995 Employee Stock  Purchase Plan                              |   | 0                                                                                                                      |       | 0                                                                                        |       | 126,773                                                                                                                                                  |       |
|                                                            |   |                                                                                                                   |       |                                                                                     |       |                                                                                                                                                     |       |
| **Equity compensation plans not approved by security holders:** |   |                                                                                                                   |       |                                                                                     |       |                                                                                                                                                     |       |
| Stock Option Plan for Non-Employee Consultants and Advisors(2)  |   | 0                                                                                                                      |       | 0                                                                                        |       | 172,500                                                                                                                                                  |       |
|                                                            |   |                                                                                                                   |       |                                                                                     |       |                                                                                                                                                     |       |
| **Total**                                                       |   | **639,700**                                                                                                            | ** ** |                                                                                     | ** ** | **522,773**                                                                                                                                              | ** ** |

 

----

(1) The Companydoes not have individual compensation arrangements involving the granting of options, warrants and rights

 

(2) The purpose of the Stock Option Plan forNon-Employee Consultants and Advisors is to attract and retain the services ofexperienced and knowledgeable non-employee consultants and advisors to assistin projects having strategic significance for the Company, to provide analternative form of cash compensation to such persons and to provide suchpersons with the opportunity to participate in the Company’s long term progressand success.

 

14

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**Item6****.**                     **SELECTEDFINANCIAL DATA**

** **

(In thousands except for pershare amounts)

 
|                             |   | **Year Ended  December 31,** |       |
|----------------------------------|--------|------------------------------|------------|
| **OPERATING  DATA**              |   | **2002**                     | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** | **1998** | ** ** |
|                             |   |                         | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Total Revenues                   |   | $                            | 41,701     |   | $ | 39,492 |   | $ | 32,463 |   | $ | 20,331 |   | $ | 19,195 |   |
|                             |   |                         |       |   |   |   |   |   |   |   |   |
| Operating expenses               |   | 37,899                       |       | 36,405 |   | 30,969 |   | 19,766 |   | 18,698 |   |
|                             |   |                         |       |   |   |   |   |   |   |   |   |
| Income Before Income Tax Expense |   | 3,831                        |       | 3,143 |   | 1,482 |   | 558 |   | 387 |   |
|                             |   |                         |       |   |   |   |   |   |   |   |   |
| Income Tax (Expense) Benefit     |   | (1,554                       | )          | (1,327 | ) | (643 | ) | (121 | ) | 47 |   |
|                             |   |                         |       |   |   |   |   |   |   |   |   |
| Net Income                       |   | 2,277                        |       | 1,817 |   | 839 |   | 437 |   | 434 |   |
|                             |   |                         |       |   |   |   |   |   |   |   |   |
| Basic Net Income per Share       |   | .64                          |       | .52 |   | .24 |   | .14 |   | .14 |   |
| Diluted Net Income per Share     |   | .57                          |       | .49 |   | .23 |   | .13 |   | .14 |   |
| Dividends - Special              |   | .25                          |       | .00 |   | .00 |   | .00 |   | .00 |   |
|                             |   |                         |       |   |   |   |   |   |   |   |   |
| Cash Flow from Operations        |   | $                            | 3,903      |   | $ | 3,876 |   | $ | 3,561 |   | $ | 1,018 |   | $ | 1,384 |   |

 
|                                             |   | **At December 31,** |   |
|--------------------------------------------------|--------|---------------------|--------|
| **BALANCE  SHEET DATA**                          |   | **2002**            |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                             |   |                |   |   |   |   |   |   |   |   |   |
| Property & Equipment                         |   | $                   | 14,551 |   | $ | 12,439 |   | $ | 11,334 |   | $ | 8,084 |   | $ | 8,386 |   |
|                                             |   |                |   |   |   |   |   |   |   |   |   |
| Total Assets                                     |   | 19,030              |   | 16,544 |   | 13,318 |   | 10,189 |   | 9,418 |   |
|                                             |   |                |   |   |   |   |   |   |   |   |   |
| Borrowings under Credit Agreement                |   | 0                   |   | 0 |   | 0 |   | 0 |   | 608 |   |
|                                             |   |                |   |   |   |   |   |   |   |   |   |
| Stockholders’ Equity                        |   | 13,907              |   | 11,855 |   | 9,763 |   | 8,451 |   | 6,650 |   |
|                                             |   |                |   |   |   |   |   |   |   |   |   |
| Stockholders’ Equity per Share              |   | $                   | 3.82   |   | $ | 3.36 |   | $ | 2.81 |   | $ | 2.51 |   | $ | 2.20 |   |
|                                             |   |                |   |   |   |   |   |   |   |   |   |
| Number of Common Shares Outstanding at Year  End |   | 3,638               |   | 3,529 |   | 3,474 |   | 3,372 |   | 3,020 |   |

 

15

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

 

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

 

Totaloperating revenues for the year ended December 31, 2002 were $41.7 million, anincrease of  $2.2 million or 5.6%compared to total operating revenues of $39.5 million for the year endedDecember 31, 2001.  Card Club revenuesincreased 7.0%, pari-mutuel revenues increased 2.3% and concession revenuesincreased 5.7% in fiscal year 2002 compared to fiscal year 2001.   Discussions of the changes in Card Club andPari-mutuel revenues follow.

 

**SUMMARY OF CARD CLUBCOLLECTION REVENUE DATA:**

 
|                    |   | **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 Companyreceives a percentage of the wagers or a fee from the players as compensationfor providing the Card Club facility and services, referred to as the“collection revenue”, which totaled $17.4 million in 2002 an increase of 6.9%compared to $16.3 million in 2001.  Thisincrease was partially due to a full year of operating 50 tables in 2002,compared to operating 38 tables January through May 2001, and 50 tables theremainder of 2001. In addition, the Company is authorized by law to retain aspecified percentage of the jackpot fund collections as reimbursement foradministrative costs of maintaining the jackpot funds.  The Card Club also charges enrollment feesfor dealer training school and collects entry fees for card club tournaments.

 

The Card Clubis divided into 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 room and 31 tablesin the Poker room at December 31, 2002 and 2001.

 

**SUMMARYOF PARI-MUTUEL OPERATING DATA:**

 
|                              |   | **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    |       |

 

16

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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 in 2001.  Pari-mutuel revenues related to simulcastracing increased 4.5% to $13,006,000 in 2002 from $12,443,000 in 2001.  This change was consistent with the increasein total simulcast handle.  On trackwagering on live races decreased by $758,000, or 4.7% to $15,256,000 in 2002from $16,014,000 in 2001, causing pari-mutuel revenue related to live racing todecrease 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 by 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 isthe scheduled site of this national event in three of the next seven years.

 

Revenuesrecognized on proceeds from winning pari-mutuel tickets, which were notpresented for payment within one year of the end of the respective race meetsdecreased to approximately $309,000 in 2002 compared to $319,000 in 2001.

 

Otheroperating revenue increased $459,000 or 66% to $1,151,000 in fiscal year2002.  The increase was due primarily toa $258,000 gain on the sale of 5 acres of real estate. Also contributing to theincrease were increases in check cashing and ATM fees, and corporatesponsorships, offset by decreases in space rental for special events and boatand vehicle storage.

 

Totaloperating expenses increased approximately $1,494,000 or 4.1% to $37,899,000 in2002, from $36,405,000 in 2001.  Theincrease in operating expenses is primarily due to the increase in overallbusiness volumes in 2002 compared to 2001.

 

Minnesota lawrequires the Company to allocate a portion of funds received from betting inthe Card Club and wagering on simulcast and live horse races for future paymentas purses for live horse races or other uses of Minnesota’s horsepersons’associations.  This purse expense is oneof the Company’s largest single expense items. Pari-mutuel expenses increased 5.7% or approximately $544,000 for the yearended December 31, 2002 compared to the year ended December 31, 2001.  The increase was due primarily to the fundsgenerated for purses by the Card Club operation.  Total purse and breeders fund expenses for the Card Club for theyear ended December 31, 2002 was $2,440,000 compared to $2,042,000 for the yearended December 31, 2001.

 

The Companyincurred incremental pari-mutuel purse expense due to a Claiming Crown purseguarantee of $182,000 for the year 2001. The Claiming Crown was moved to another venue for 2002, but returns toCanterbury Park in 2003.  This amount isincluded in pari-mutuel statutory purse expense in the statements ofoperations.

 

Amounts paidto the Minnesota Breeders’ Fund for simulcast and live horse-racing are afunction of on-track handle and increased to $852,000 in 2002 compared to$826,000 in 2001. The increase is attributable to and consistent with theincrease in total on-track handle. The Company also paid $244,000 and $204,000to the Breeders Fund related to Card Club operations in 2002 and 2001respectively.

** **

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.

 

17

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

 

Advertisingand marketing expenses increased approximately $186,000 or 10.1% in 2002compared to 2001 primarily due to increased participation in the patron loyaltyprogram.  The Company also experiencedincreased costs for production and placement of media advertising to promotethe Card Club and live racing.

 

Otheroperating expenses include personnel recruiting and training costs,professional fees, equipment rental, contracted services, property andliability insurance and other expenses. These expenses increased approximately $391,000 or 11.5% in 2002,compared to 2001.  This increase isprimarily caused by increasing insurance rates, and retaining experts to advisemanagement on issues related to the Company’s legislative efforts.

 

###### *YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEARENDED DECEMBER 31, 2000*

 

Totaloperating revenues for the year ended December 31, 2001 were $39.5 million, anincrease of  $7.0 million or 21.7%compared to total operating revenues of $32.5 million for the year endedDecember 31, 2000.  Pari-mutuel revenuesincreased 5.6% in fiscal year 2001compared to fiscal year 2000 and concessionrevenues increased 11.6%.  The increasein concession revenues is primarily due to a full year of food and beveragesales in the Card Club. Discussions of the changes in Card Club and Pari-mutuelrevenues follow.

 

**SUMMARY OF CARD CLUBCOLLECTION REVENUE DATA:**

 
|                    |   | **Year Ended  12/31/01** |       | **Year Ended  12/31/00** |       |
|-------------------------|--------|--------------------------|------------|--------------------------|------------|
|                    |   |                     | ** ** |                     | ** ** |
| Total Poker Games       |   | $                        | 9,524,000  |                     | $          | 7,529,000 |   |
|                    |   |                     |       |                     |       |
| Total Casino Games      |   | 6,779,000                |       | 3,504,000                |       |
|                    |   |                     |       |                     |       |
| Total Card Club Games   |   | $                        | 16,303,000 |                     | $          | 11,033,000 |   |
|                    |   |                     |       |                     |       |
| Number of Days Offered  |   | 364                      |       | 255                      |       |
| Average Revenue per Day |   | $                        | 44,800     |                     | $          | 43,000 |   |

 

The Companyreceives a percentage of the wagers or a fee from the players as compensationfor providing the Card Club facility and services, referred to as the“collection revenue”, which totaled $16.3 million in 2001 compared to $11.0million for the period April 19, 2000 to December 31, 2000 or an increase of47.8%.  This increase was due to a fullyear of operation and an expansion of the operation from 38 tables to 50tables, which was completed in May 2001. In addition, the Company is authorized by law to retain a specified percentageof the jackpot fund collections as reimbursement for administrative costs ofmaintaining the jackpot funds.  The CardClub also charges enrollment fees for dealer training school and collects entryfees for card club tournaments.

 

The Card Clubis divided into 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. At December 31, 2001, there were a total of 19 tables in the casinogames room and 31 tables in the poker room compared to 10 and 33 tables,respectively, at December 31, 2000.

 

18

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**SUMMARYOF PARI-MUTUEL OPERATING DATA:**

 
|                              |   | **2001**   |       | **2000**   |       |
|-----------------------------------|--------|------------|------------|------------|------------|
| **Racing Days**                   |   |       | ** ** |       | ** ** |
| Simulcast only days               |   | 301        |       | 305        |       |
| Live and simulcast days           |   | 63         |       | 60         |       |
| **Total Racing Days**             |   | 364        |       | 365        |       |
|                              |   |       |       |       |       |
| **On-Track Handle**               |   |       |       |       |       |
| Simulcast only days               |   | $          | 46,138,000 |       | $          | 44,102,000 |   |
| Live and simulcast days:          |   |       |       |       |       |
| Live racing                       |   | 16,014,000 |       | 15,673,000 |       |
| Simulcast racing                  |   | 14,510,000 |       | 13,154,000 |       |
| **Out-of-state Live Handle**      |   | 13,105,000 |       | 9,647,000  |       |
| **Total Handle**                  |   | $          | 89,767,000 |       | $          | 82,576,000 |   |
|                              |   |       |       |       |       |
| **On-Track Average Daily Handle** |   |       |       |       |       |
| Simulcast only days               |   | $          | 153,000    |       | $          | 145,000 |   |
| Live and simulcast days           |   | 485,000    |       | 480,000    |       |

 

Totalpari-mutuel revenues increased 5.6% to approximately $16,478,000 in 2001 from$15,609,000 in 2000.  Total on-trackhandle increased approximately 5.1% to $76,662,000 in 2001 from $72,929,000 in2000.  Pari-mutuel revenues related tosimulcast racing increased 6.1% to $12,443,000 in 2001 from $11,722,000 in2000. This change was consistent with the increase in total simulcast handle.On-track wagering on live races increased by $341,000 or 2.2%, to $16,014,000in 2001 from $15,673,000 in 2000, causing pari-mutuel revenue related to liveracing to increase by 2.0% to $3,370,000 in 2001 from $3,304,000 in 2000.  This increase is primarily due to anincrease in the number of live racing days to 63 from 60 in 2000.  Handle wagered at out-of-state locationsincreased 35.9% or $3,458,000 compared to 2000.  Handle wagered by out-of-state locations on the Claiming Crownraces on August 4, 2001 was $2.5 million, compared to $1.4 million fromout-of-state wagering on the 2000 Claiming Crown races.

 

Revenuesrecognized on proceeds from winning pari-mutuel tickets, which were notpresented for payment within one year of the end of the respective race meetsdecreased to approximately $319,000 in 2001 compared to $330,000 in 2000.

 

Otheroperating revenue decreased $42,000 or 5.7% to $692,000 in fiscal year2001.   The revenues from leasing unusedareas of the Racetrack for vehicle storage decreased 31.2% from approximately$278,000 in 2000 to $191,000 in 2001. However, increases in space rental for special events, and check cashingand ATM fees partially offset the decrease in space rental revenues fromvehicle storage.

 

Totaloperating expenses increased approximately $5,436,000 or 17.6% to $36,405,000in 2001, from $30,969,000 in 2000.  Theincrease in operating expenses is primarily due to the ongoing costs ofoperating the Card Club for twelve months in 2001 compared to approximately eightmonths in 2000.

 

Minnesota lawrequires the Company to allocate a portion of funds received from betting inthe Card Club and wagering on simulcast and live horse races for future paymentas purses for live horse races or other uses of Minnesota’s horsepersons’associations.  This purse expense is oneof the Company’s largest single expense items. Pari-mutuel expenses increased 13.2% or approximately $1,122,000 for theyear ended December 31, 2001 compared to the year ended December 31, 2000.  The increase was due primarily to the purseexpense attributable to the Card Club operation.  Total purse and breeders fund expenses for the Card Club for theyear ended December 31, 2001 was $2,042,000 compared to $1,305,000 for the yearended December 31, 2000.

 

19

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The Companyincurred incremental pari-mutuel purse expense due to Claiming Crown purseguarantees of $182,000 and $162,000 for the years 2001 and 2000,respectively.  These amounts areincluded in pari-mutuel statutory purse expense in the statements ofoperations.

** **

Amounts paidto the Minnesota Breeders’ Fund for simulcast and live horse-racing are afunction of on-track handle and increased to $826,000 in 2001 compared to$783,000 in 2000. The increase is attributable to and consistent with theincrease in total on-track handle.  TheCompany also paid $204,000 and $131,000 to the Breeders Fund related to CardClub operations in 2001 and 2000 respectively.

** **

Salary andbenefit expenses increased by $3.2 million or 26.6% for the twelve months endedDecember 31, 2001 compared to the twelve months ended December 31, 2000.  The full year of Card club operations in2001 was the primary reason for the significant increase in labor costs.  The Card Club salary and benefit expensesfor the year 2001 were approximately $7.5 million compared to approximately$5.9 million for 2000.  In addition, theCompany experienced an increase in its health insurance expense.  Rate increases, coupled with an increase inemployees resulted in a 50% increase in costs for employee health insurance in2001. Also, the Company extended the length of its live race meet from 60 daysin 2000 to 63 days in 2001, increasing salaries related to the live racingoperations in 2001 compared to the same periods in 2000.

 

Depreciationand amortization expense increased 17.0% in 2001 compared to 2000.  The increase was primarily attributable tobuilding improvements and capital assets acquired for the Card Club expansionduring the year 2001.

 

Repairs,maintenance and supply costs increased approximately $169,000 or 13.7% for 2001compared to 2000.  The Company maderepairs to the major building systems and equipment, including elevators,electrical, heating and air flow systems. Because the Card Club relies significantly upon these building systemsdue to its 24 / 7 operations, it is allocated a pro-rata portion of theserepair and maintenance expenses.  Inaddition, the Card Club made significant purchases for decks of cards, radios,uniforms, printed materials and other supplies for the full year in 2001.

 

Advertisingand marketing expenses increased approximately $193,000 or 11.7% in 2001compared to 2000 primarily due to expenditures related to the full year ofoperating the Card Club.  The Companyexperienced increased costs for the production and broadcast of televisionadvertising to promote the Card Club and live racing. Advertising and marketingcosts for the Card Club increased 36% to approximately $834,000 for 2001compared to $614,000 for 2000.

 

Otheroperating expenses include personnel costs, professional fees, equipment rent,contracted services, insurance and other expenses.  These expenses increased approximately $280,000 or 9% in 2001,compared to 2000.  Approximately$173,000 of the increase was attributable to the full year of operating theCard Club.  Also, the number of liverace days increased to 63 days in 2001, from 60 days in 2000.  This increase in number of race days, alongwith an increase in rates paid to the Minnesota Racing Commission forreimbursement for stewards, veterinarians and drug testing costs, resulted in a7% increase in contracted services related to live racing.

 

*COMMITMENTS AND CONTINGENCIES*

 

The Company entered intoa five-year totalizator services agreement with Autotote Systems, Inc.(Autotote) in January 1999.  Pursuant tothe agreement, Autotote provides totalizator equipment and computer programswhich record and process all wagers and calculate the odds and payoffs.  For such services, Autotote receives a feeof approximately .45% of the gross monies wagered.  Amounts charged to operations under this agreement for the yearsended December 31, 2002, 2001 and 2000 were approximately $383,000, $346,000and $332,000, 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 2002, 2001 and 2000 of approximately $124,000,$122,000 and $118,000, respectively. In addition, the Company leased certaincopying equipment under an operating lease, which expired in February2001.  Rental expenses charged tooperations were approximately $5,560 and $66,720 for the years ended December31, 2001 and 2000, respectively.

 

20

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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% 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.

 

TheMinnesota Department of Labor and Industry (DOL&I) is conducting an auditfor the period April 10, 1999 through April 10, 2001 regarding compliance withthe tip law sections of the Minnesota Fair Labor Standards Act.  At March 28, 2003, the Company had receivedno communications from the DOL&I regarding the disposition of theiraudit.  Management believes that theCompany’s practices regarding tips are consistent with the requirements ofMinnesota law.

 

*CRITICAL ACCOUNTING POLICIES*

* *

Inpreparing the financial statements, we follow accounting principles generallyaccepted in the United States of America, which in many cases require us tomake assumptions, estimates and judgments that affect the amountsreported.  Many of these policies arerelatively straightforward.  There are,however, a few policies that are critical because they are important in determiningthe financial condition and results of operations and they can be difficult toapply.  We believe that the mostcritical accounting policies applied in the preparation of our financialstatements relate to: a) accounting for contingencies, under which we accrue aloss when it is probable that a liability has been incurred and the amount canbe reasonably measured; and b) measuring long-term assets for impairment.

 

Thedifficulty in applying these policies arises from the assumptions, estimatesand judgments that have to be made currently about matters that are inherentlyuncertain, such as future economic conditions, operating results and valuationsas well as management intentions.  Asthe difficulty increases, the level of precision decreases, meaning that actualresults can and probably will be different from those currently estimated.  We base our assumptions, estimates andjudgments on a combination of historical experience and other reasonablefactors.

 

##### *AccountingPronouncements*

 

In conjunction with the issuance of the newguidance for business combinations, the Financial Accounting StandardsBoard  (FASB) issued SFAS No. 142, *Goodwill and Other Intangible Assets*,which addresses the accounting and reporting for acquired goodwill and otherintangible assets and supersedes APB Opinion 17.  Under the provisions of SFAS no. 142, intangible assets acquiredin a business combination, which do not possess finite useful lives will nolonger be amortized into net income over an estimated useful life but ratherwill be tested for impairment at least annually based on specific guidanceprovided in the new standard.  TheCompany adopted SFAS No. 142 on January 1, 2002, and it had no material impacton the Company’s financial statements.

 

The FASB also issued SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, which is required to be adopted for fiscal yearsbeginning after December 15, 2001.  SFASNo. 144 establishes accounting and reporting standards for the impairment ordisposal of long-lived assets.  Theprovisions of SFAS No. 144 became effective for the Company on January 1, 2002and did not have a material impact on its financial position and results ofoperations.

 

In December 2002, the FASB issued SFAS No.148, *Accounting for Stock-Based Compensation- Transition and Disclosure*, which amends SFAS No. 123, Accountingfor Stock-Based Compensation.  SFAS No.148 provides alternative methods of transition for a voluntary change to thefair value based method of accounting for stock-based employee compensation. Inaddition, SFAS No. 148 amends the disclosure requirement of SFAS

 

21

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No. 123 to require more prominent and more frequent disclosures infinancial statements of the effects of stock-based compensation. The transitionguidance and annual and interim disclosure provisions of SFAS No. 148 becameeffective for the Company on January 1, 2003. The Company has elected tocontinue to apply Accounting Principles Board (APB) Opinion No. 25 and relatedinterpretations in accounting for stock option plans, as permitted under SFASNo. 123 and SFAS No. 148. Accordingly, no compensation cost has been recognizedfor its stock option plan upon adoption of SFAS No. 148. The additional interimdisclosures will be included in the Company’s Form 10-Q starting with the threemonths ending March 31, 2003.

 

LIQUIDITY ANDCAPITAL RESOURCES:

 

During theyear ended December 31, 2002, net cash provided by operations was $3,903,310,which resulted primarily from net income of $2,276,595, depreciation andamortization of $1,152,298, and an increase in Card Club accruals, accountspayable and accrued wages and payroll taxes of $488,843.  During the year ended December 31, 2001 cashprovided by operating activities was $3,876,299, which resulted principallyfrom net income of $1,816,780 depreciation and amortization of $1,064,407, andan increase in Card Club accruals, accounts payable and accrued wages andpayroll taxes of $1,109,114.

 

The Card Cluboffers progressive jackpots for poker games and certain table games.  Amounts collected for these jackpot fundsare accrued as liabilities until paid to winners.  At December 31, 2002, accrued jackpot funds totaled approximately$531,000 compared to $421,000 at December 31, 2001.  Table games are played using a “player pool”.  “Player pool” means a wagering system orgame where wagers lost in a number of card games may be accumulated into a poolfor purposes of enhancing the total amount paid back to players in any othercard game.  In such games, the sponsormay only serve as custodian of the player pool and may not have an activeinterest in any card game.  In the tablegames area of the Card Club, the net amount that the dealer “wins” or “loses”during the course of play is accumulated as a “player pool” liability, and isnot recognized as revenue by the Company. The Company is required by law to return accumulated player pool fundsto the players in the forms of giveaways, promotional items, prizes or by othermeans.  The accumulated player poolliability is approximately $647,000 at December 31, 2002 compared to $398,000at December 31, 2001.  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 $154,000 at December 31, 2002 compared to $97,000 at December 31,2001.   These Card Club accruals havethe 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 ininvesting activities for the year ended December 31, 2002 was $3,005,825 forcapital expenditures related to the 12 acres of undeveloped land adjacent tothe Racetrack, a 29 acre RV Park, a large screen video board used outside forviewing live racing, and various additions to furniture, fixtures and equipmentpartially offset by proceeds of $423,000 from the sale of 5 acres of realestate.  For fiscal 2001, net cash usedin investing activities was $2,169,416 for capital expenditures generallyrelated to the expansion of the Card Club in May 2001.

 

Cashused by financing activities was $577,460 for the year ended December 31, 2002compared to cash provided by financing activities of $183,112 for the yearended December 31, 2001. The net cash outflows resulted primarily from thespecial cash dividend of $896,394 and net payments to the MHBPA of $193,894,partially offset by proceeds of $512,828 from the issuance of common stock dueto the exercise of stock options and the Company’s employee stock purchaseplan.  The 2001 net cash inflows relatedto proceeds from the issuance of common stock of $232,927, partially offset bynet payments to the MHBPA of $49,815.

 

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 $6,110,000 and $5,624,000 in pursefunds for the years ended December 31, 2002 and 2001, 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 $179,346 and $373,240 at December 31, 2002 and 2001,respectively.  The interest rates on anystatutory purses accrued but not transferred into the trust (which are

 

22

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guaranteedby the Company’s Chairman of the Board) were 4.25% and 4.75% at December 31,2002 and 2001, respectively.

 

The Company renewed a general credit andsecurity agreement with Bremer Bank, N.A., a financial institution located inSouth Saint Paul, Minnesota, on April 30, 2001.  Borrowings under the credit agreement include a commercialrevolving credit line, which provides for maximum advances of $2,250,000 withinterest at the prime rate (4.25% at December 31, 2002).  No borrowings under the credit line were outstandingduring the year ended December 31, 2002, and the average daily balance on theline of credit was $14,000 in 2001, with a weighted average interest rate forthe year of 6.66%.

 

Cash balances at December 31, 2002 were$3,408,869 compared to $3,088,844 at December 31, 2001.  Management believes that funds available inits cash accounts, amounts available under the general credit and securityagreement, along with funds generated from operations, will be sufficient tosatisfy its liquidity and capital resource requirements during 2003.

 

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: fluctuations in attendance atthe Racetrack, changes in the level of wagering by patrons, continued interestin the unbanked card games offered at the Card Club, legislative and regulatorychanges, the impact of wagering products and technologies introduced bycompetitors; fluctuations in purse fund payments; upward pressure on salary andbenefit 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.

** **

**Item7A****.**            **QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to market risk from changes in interest rates onborrowings under our commercial revolving credit line that bears interest atthe prime rate.  At December 31, 2002 wehave no debt borrowings under our credit facility.

 

We have no derivative financial instruments or derivative commodityinstruments in our 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.

 

23

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**Item8****.**                     **FINANCIALSTATEMENTS**

** **

The following financialstatements of the Company are set forth on pages 25 through 40 of the Form10-K:

 
| Independent Auditors’ Report                                                                                     |
|-----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                  |
| Consolidated Balance Sheets as of December 31, 2002 and 2001                                                          |
|                                                                                                                  |
| Consolidated Statements of Operations for  the years ended December 31, 2002, 2001 and 2000                           |
|                                                                                                                  |
| Consolidated Statements of Changes in  Stockholders’ Equity for the years ended December 31, 2002, 2001 and 2000 |
|                                                                                                                  |
| Consolidated Statements of Cash Flows for  the years ended December 31, 2002, 2001 and 2000                           |
|                                                                                                                  |
| Notes to Consolidated Financial Statements  for the years ended December 31, 2002, 2001 and 2000                      |

 

24

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**INDEPENDENT AUDITORS’ REPORT**

 

Board of Directors

Canterbury Park HoldingCorporation

Shakopee, Minnesota

 

We have audited theaccompanying consolidated balance sheets of Canterbury Park Holding Corporationand subsidiary (the Company) as of December 31, 2002 and 2001 and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows forthe years ended December 31, 2002, 2001, and 2000.  These consolidated financial statements are the responsibility ofthe Company’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether theconsolidated 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 statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Canterbury Park Holding Corporationand subsidiary as of December 31, 2002 and 2001and the results of theiroperations and their cash flows for the years ended December 31, 2002, 2001,and 2000, in conformity with accounting principles generally accepted in theUnited States of America.

 
| Deloitte  & Touche LLP |
|----------------------------|
|                       |
|                       |
| March 17,  2003            |
| Minneapolis,  Minnesota    |

 

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**CANTERBURY PARK HOLDING CORPORATION ANDSUBSIDIARY**

** **

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2002 AND 2001**

 
|                                                                                                                               |   | **2002**   |       | **2001**   |       |
|------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|------------|
|                                                                                                                               |   |       | ** ** |       | ** ** |
| **ASSETS**                                                                                                                         |   |       |       |       |       |
|                                                                                                                               |   |       |       |       |       |
| CURRENT ASSETS:                                                                                                                    |   |       |       |       |       |
| Cash                                                                                                                               |   | $          | 3,408,869  |       | $          | 3,088,844 |   |
| Accounts receivable                                                                                                                |   | 305,581    |       | 556,192    |       |
| Inventory                                                                                                                          |   | 125,585    |       | 113,324    |       |
| Deposits                                                                                                                           |   | 20,000     |       | 45,000     |       |
| Prepaid expenses                                                                                                                   |   | 302,192    |       | 300,845    |       |
| Income taxes receivable                                                                                                            |   | 316,671    |       |       |       |
| Total current assets                                                                                                               |   | 4,478,898  |       | 4,104,205  |       |
|                                                                                                                               |   |       |       |       |       |
| PROPERTY AND EQUIPMENT, net  (Note 2)                                                                                         |   | 14,551,014 |       | 12,439,413 |       |
|                                                                                                                               |   |       |       |       |       |
|                                                                                                                               |   | $          | 19,029,912 |       | $          | 16,543,618 |   |
|                                                                                                                               |   |       |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                      |   |       |       |       |       |
|                                                                                                                               |   |       |       |       |       |
| CURRENT LIABILITIES:                                                                                                               |   |       |       |       |       |
| Accounts payable                                                                                                                   |   | $          | 1,535,824  |       | $          | 1,683,092 |   |
| Card club accruals                                                                                                                 |   | 1,492,663  |       | 1,058,465  |       |
| Accrued wages and payroll taxes                                                                                                    |   | 984,374    |       | 782,461    |       |
| Accrued interest payable                                                                                                           |   |       |       | 15,878     |       |
| Advance from MHBPA (Note 1)                                                                                                        |   | 179,346    |       | 373,240    |       |
| Accrued property taxes                                                                                                             |   | 228,890    |       | 237,784    |       |
| Income taxes payable                                                                                                               |   |       |       | 134,330    |       |
| Payable to horsepersons                                                                                                            |   | 355,576    |       | 235,158    |       |
| Deferred tax liability (Note 3)                                                                                                    |   | 346,000    |       | 168,000    |       |
| Total current liabilities                                                                                                          |   | 5,122,673  |       | 4,688,408  |       |
|                                                                                                                               |   |       |       |       |       |
| COMMITMENTS AND CONTINGENCIES (Notes 7 and  8)                                                                                     |   |       |       |       |       |
|                                                                                                                               |   |       |       |       |       |
| STOCKHOLDERS’ EQUITY (Note 4):                                                                                                |   |       |       |       |       |
| Common stock, $.01 par value, 10,000,000  shares authorized, 3,638,473 and 3,529,324, respectively, shares issued and  outstanding |   | 36,385     |       | 35,293     |       |
| Additional paid-in capital                                                                                                         |   | 10,910,985 |       | 10,240,249 |       |
| Accumulated earnings                                                                                                               |   | 2,959,869  |       | 1,579,668  |       |
| Total stockholders’ equity                                                                                                    |   | 13,907,239 |       | 11,855,210 |       |
|                                                                                                                               |   | $          | 19,029,912 |       | $          | 16,543,618 |   |

 

See notes to consolidatedfinancial statements.

 

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**CANTERBURY PARK HOLDING CORPORATION ANDSUBSIDIARY**

** **

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

 
|                                                  |   | **2002**   |       | **2001**   |       | **2000**   |       |
|-------------------------------------------------------|--------|------------|------------|------------|------------|------------|------------|
|                                                  |   |       | ** ** |       | ** ** |       | ** ** |
| OPERATING REVENUES:                                   |   |       |       |       |       |       |       |
| Pari-mutuel                                           |   | $          | 16,857,745 |       | $          | 16,477,564 |       | $ | 15,608,800 |   |
| Card Club                                             |   | 18,152,012 |       | 16,968,407 |       | 11,277,153 |       |
| Concessions                                           |   | 4,351,096  |       | 4,117,222  |       | 3,689,715  |       |
| Admissions and parking                                |   | 526,443    |       | 567,248    |       | 518,609    |       |
| Publications                                          |   | 663,178    |       | 669,795    |       | 635,183    |       |
| Other operating revenue                               |   | 1,150,840  |       | 691,801    |       | 733,956    |       |
|                                                  |   | 41,701,314 |       | 39,492,037 |       | 32,463,416 |       |
|                                                  |   |       |       |       |       |       |       |
| OPERATING EXPENSES:                                   |   |       |       |       |       |       |       |
| Pari-mutuel expenses:                                 |   |       |       |       |       |       |       |
| Statutory purses                                      |   | 6,556,575  |       | 6,278,104  |       | 5,441,897  |       |
| Host track fees                                       |   | 2,234,115  |       | 2,084,041  |       | 1,961,447  |       |
| Pari-mutuel taxes                                     |   | 251,338    |       | 202,029    |       | 155,268    |       |
| Minnesota Breeders’ Fund                         |   | 1,096,076  |       | 1,030,201  |       | 913,868    |       |
| Salaries and benefits                                 |   | 15,656,565 |       | 15,242,771 |       | 12,036,380 |       |
| Cost of sales related to concessions                  |   | 1,790,450  |       | 1,766,668  |       | 1,447,778  |       |
| Cost of sales related to publications                 |   | 865,438    |       | 852,565    |       | 839,525    |       |
| Depreciation and amortization                         |   | 1,152,298  |       | 1,064,407  |       | 909,345    |       |
| Repairs, maintenance and supplies                     |   | 1,348,971  |       | 1,400,901  |       | 1,232,205  |       |
| Property taxes                                        |   | 218,040    |       | 183,022    |       | 260,996    |       |
| Advertising and marketing                             |   | 2,029,033  |       | 1,842,618  |       | 1,649,592  |       |
| Utilities                                             |   | 916,249    |       | 1,064,085  |       | 1,006,546  |       |
| Other operating expenses                              |   | 3,784,302  |       | 3,393,798  |       | 3,114,132  |       |
|                                                  |   | 37,899,450 |       | 36,405,210 |       | 30,968,979 |       |
| NONOPERATING (EXPENSES) REVENUES:                     |   |       |       |       |       |       |       |
| Interest expense (Note 6)                             |   | (8,321     | )          | (6,836     | )          | (126,045   | )          |
| Other, net                                            |   | 37,261     |       | 63,464     |       | 113,817    |       |
|                                                  |   | 28,940     |       | 56,628     |       | (12,228    | )          |
|                                                  |   |       |       |       |       |       |       |
| INCOME BEFORE INCOME TAX EXPENSE                      |   | 3,830,804  |       | 3,143,455  |       | 1,482,209  |       |
|                                                  |   |       |       |       |       |       |       |
| Income tax expense (Note 3)                           |   | (1,554,209 | )          | (1,326,675 | )          | (643,300   | )          |
|                                                  |   |       |       |       |       |       |       |
| NET INCOME                                            |   | $          | 2,276,595  |       | $          | 1,816,780  |       | $ | 838,909 |   |
|                                                  |   |       |       |       |       |       |       |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING |   | 3,581,546  |       | 3,496,781  |       | 3,449,666  |       |
|                                                  |   |       |       |       |       |       |       |
| BASIC NET INCOME PER COMMON SHARE (Note 5)            |   | $          | .64        |       | $          | .52        |       | $ | .24 |   |
|                                                  |   |       |       |       |       |       |       |
| DILUTED NET INCOME PER COMMON SHARE (Note  5)         |   | $          | .57        |       | $          | .49        |       | $ | .23 |   |

 

See notes to consolidatedfinancial statements.

 

27

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**CANTERBURY PARK HOLDING CORPORATION ANDSUBSIDIARY**

** **

**CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY**

**YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

 
|                                              |   | **Number  of Shares** |       | **Common  Stock** |       | **Additional  Paid-in  Capital** |       | **Accumulated  Deficit** |       | **Total**  |       |
|---------------------------------------------------|--------|-----------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|------------|------------|
|                                              |   |                  | ** ** |              | ** ** |                             | ** ** |                     | ** ** |       | ** ** |
| ***Balance,  December 31, 1999***            |   | 3,371,999             |       | $                 | 33,720     |                             | $          | 9,493,101                |       | $          | (1,076,021 | ) | $ | 8,450,800 |   |
|                                              |   |                  |       |              |       |                             |       |                     |       |       |       |
| Exercise of stock options                         |   | 84,200                |       | 842               |       | 314,952                          |       |                     |       | 315,794    |       |
|                                              |   |                  |       |              |       |                             |       |                     |       |       |       |
| Tax benefit of stock option exercises             |   |                  |       |              |       | 82,200                           |       |                     |       | 82,200     |       |
|                                              |   |                  |       |              |       |                             |       |                     |       |       |       |
| Shares issued under Employee Stock Purchase  Plan |   | 17,633                |       | 176               |       | 74,764                           |       |                     |       | 74,940     |       |
|                                              |   |                  |       |              |       |                             |       |                     |       |       |       |
| Net income                                        |   |                  |       |              |       |                             |       | 838,909                  |       | 838,909    |       |
|                                              |   |                  |       |              |       |                             |       |                     |       |       |       |
| ***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 |   |
|                                                   |        |                       |            |                   |            |                                  |            |                          |            |            |            |  |  |  |  |  |

 

See notes to consolidatedfinancial statements.

 

28

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**CANTERBURY PARK HOLDING CORPORATION ANDSUBSIDIARY**

** **

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

 
|                                                                     |   | **2002**   |      | **2001**   |   | **2000**   |   |
|--------------------------------------------------------------------------|--------|------------|-----------|------------|--------|------------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                    |   |       |      |       |   |       |   |
| Net income                                                               |   | $          | 2,276,595 |       | $      | 1,816,780  |   | $ | 838,909 |   |
| Adjustments to reconcile net income to net  cash provided by operations: |   |       |      |       |   |       |   |
| Depreciation and amortization                                            |   | 1,152,298  |      | 1,064,407  |   | 909,345    |   |
| Gain on sale of property & equipment                                 |   | (258,074   | )         |       |   |       |   |
| Deferred income taxes                                                    |   | 178,000    |      | 247,100    |   | 251,700    |   |
| Decrease (increase) in accounts receivable                               |   | 250,611    |      | (249,340   | )      | (119,389   | )      |
| Decrease (increase) in other current assets                              |   | 11,392     |      | (60,863    | )      | (168,712   | )      |
| (Decrease) increase in income taxes payable                              |   | (292,001   | )         | (27,650    | )      | 293,733    |   |
| Increase in accounts payable and accrued  wages & payroll taxes      |   | 54,645     |      | 868,461    |   | 626,407    |   |
| Increase in card club accruals                                           |   | 434,198    |      | 240,653    |   | 817,812    |   |
| (Decrease) increase in accrued interest                                  |   | (15,878    | )         | 4,173      |   | 4,252      |   |
| Decrease in accrued property taxes                                       |   | (8,894     | )         | (54,762    | )      |       |   |
| Increase in payable to horsepersons                                      |   | 120,418    |      | 27,340     |   | 107,280    |   |
| Net cash provided by operations                                          |   | 3,903,310  |      | 3,876,299  |   | 3,561,337  |   |
|                                                                     |   |       |      |       |   |       |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                    |   |       |      |       |   |       |   |
| Additions to property and equipment                                      |   | (3,428,488 | )         | (2,169,416 | )      | (4,159,318 | )      |
| Proceeds on sale of property &  equipment                            |   | 422,663    |      |       |   |       |   |
| Net cash used in investing activities                                    |   | (3,005,825 | )         | (2,169,416 | )      | (4,159,318 | )      |
|                                                                     |   |       |      |       |   |       |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                    |   |       |      |       |   |       |   |
| Net (payments) proceeds on advance from  MHBPA                           |   | (193,894   | )         | (49,815    | )      | 56,044     |   |
| Proceeds from issuance of common stock                                   |   | 512,828    |      | 232,927    |   | 390,734    |   |
| Proceeds from long-term financing                                        |   |       |      |       |   | 1,586,750  |   |
| Payments on long-term financing                                          |   |       |      |       |   | (1,586,750 | )      |
| Cash dividend paid                                                       |   | (896,394   | )         |       |   |       |   |
| Net cash (used in) provided by financing  activities                     |   | (577,460   | )         | 183,112    |   | 446,778    |   |
|                                                                     |   |       |      |       |   |       |   |
| NET INCREASE (DECREASE) IN CASH                                          |   | 320,025    |      | 1,889,995  |   | (151,203   | )      |
|                                                                     |   |       |      |       |   |       |   |
| CASH AT BEGINNING OF YEAR                                                |   | 3,088,844  |      | 1,198,849  |   | 1,350,052  |   |
|                                                                     |   |       |      |       |   |       |   |
| CASH AT END OF YEAR                                                      |   | $          | 3,408,869 |       | $      | 3,088,844  |   | $ | 1,198,849 |   |
|                                                                     |   |       |      |       |   |       |   |
| INTEREST PAID                                                            |   | $          | 19,947    |       | $      | 2,663      |   | $ | 121,793 |   |
|                                                                     |   |       |      |       |   |       |   |
| INCOME TAXES PAID                                                        |   | $          | 1,680,000 |       | $      | 1,112,500  |   | $ | 99,476 |   |

 

See notes to consolidatedfinancial statements.

 

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**CANTERBURY PARK HOLDING CORPORATION ANDSUBSIDIARY**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

 

1.                                               SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

*Business* - Canterbury Park Holding Corporation(the Company) was incorporated on March 24, 1994.  On March 29, 1994 the Company acquired all the outstandingsecurities of Jacobs Realty, Inc. (JRI) from Irwin Jacobs and IMR Fund, L.P.(an investment fund for various pension plans and trusts).   JRI was merged into the Company and theacquisition was accounted for under the purchase method of accounting wherebythe acquired assets and liabilities have been recorded at the Company’scost.  The primary asset of JRI was CanterburyDowns Racetrack and the 325 acres of surrounding land.

 

On May 20,1994, the Company adopted a plan of Reorganization pursuant to which the soleshareholder of Canterbury Park Concessions, Inc. (CPC), and majorityshareholder of the Company, agreed to exchange his shares of CPC stock for198,888 shares of the Company’s common stock concurrent with the closing of apublic offering.  Pursuant to the Planof Reorganization, CPC became a wholly owned subsidiary of the Company inAugust 1994 when the Company completed the initial public offering of itscommon stock.  This reorganization wastreated in a manner similar to a pooling of interests.  Net proceeds received by the Company fromthe public offering were approximately $4,847,000, which along with additionalborrowings under the Company’s line of credit with the majority shareholder,were used to pay off the remaining notes payable from the acquisition of JRI.

 

Theconsolidated financial statements include the accounts of the Company and CPCafter elimination of intercompany accounts and transactions.

 

*Operations -*The Company’s revenues are derived primarilyfrom the operations of a Card Club and pari-mutuel wagering on simulcast andlive 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* -Property and equipment are depreciated on a straight-line basis over theestimated useful lives of the assets, generally 5 to 39 years.

 

*Uncashed Winning Tickets  - *Pari-mutueltickets which are not cashed within one year of the end of the respective racemeet become the property of the Company. The Company records revenue associated with the uncashed winning ticketsat the time that, based on historical experience, management can reasonablyestimate the amount of additional winning tickets from a race meet that will bepresented for payment.

 

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

 

30

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*Advance from the Minnesota Horsemen’sBenevolent 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 $6,110,000, $5,624,000 and$4,717,000 for the years ended December 31, 2002, 2001 and 2000, respectively,related to thoroughbred races.  Amountsdue to the MHBPA, are guaranteed by the Chairman of the Board.  Minnesota Statutes specify that amountstransferred into the trust account are the property of the trust and not of theCompany.  The interest rates on anystatutory purses accrued but not transferred into the trust were 4.25%, 4.75%and 9.50% at December 31, 2002, 2001 and 2000, respectively.

 

*Borrowings* - Theweighted average interest rates on short-term borrowings at December 31, 2002,2001 and 2000 were 4.25%, 4.75% and 9.50%, respectively.  The weighted average rates for short-termborrowings for the years ended December 31, 2002, 2001 and 2000 were 4.50%,7.54% and 9.11%, respectively.  TheCompany incurred long-term debt in May 2000, which was paid in December2000.  The weighted average interestrate on this borrowing was 11.62%.

 

*Income Taxes* - Priorto the completion of the Company’s initial public offering of its common stock,the Company was taxed as a “small business corporation” under Subchapter S ofthe Internal Revenue Code.  As a result,any income tax liability or benefit was being passed through to the individualshareholders and no income taxes payable or income tax expenses were recordedin the consolidated financial statements. Simultaneous with the Company’s completion of the public offering of itscommon stock, the Company’s Subchapter S election was terminated.  A portion of the losses accumulated prior tothe public offering is not available to offset future earnings.  The Company currently accounts for incometaxes in accordance with Statement of Financial Accounting Standards (SFAS) No.109, *Accountingfor Income Taxes*.

 

*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 expected futurenet cash flows be less than the carrying value, management will determinewhether an impairment loss should be recognized.  An impairment loss would be measured by the amount by which thecarrying value of the asset exceeds the fair value of the asset.  To date, management has determined that noimpairment 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.

 

# *Card Club Accruals -*Minnesota law allows the Company to collect amounts from patrons tofund progressive jackpot pools in the Card Club.  These amounts, along with amounts earned by the player pool,promotional pools and the outstanding chip liability, are accrued as short-termliabilities at each balance sheet date.

 

31

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*Accounting Pronouncements* - In conjunctionwith the issuance of the new guidance for business combinations, the FASBissued SFAS No. 142, *Goodwill and OtherIntangible Assets*, which addresses the accounting and reporting foracquired goodwill and other intangible assets and supersedes APB Opinion17.  Under the provisions of SFAS no.142, intangible assets acquired in a business combination, which do not possessfinite useful lives will no longer be amortized into net income over an estimateduseful life but rather will be tested for impairment at least annually based onspecific guidance provided in the new standard.  The Company adopted SFAS No. 142 on January 1, 2002, which had nomaterial impact on the Company’s financial statements.

 

The FASBissued SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets* in August 2001.  SFAS No. 144 establishes accounting andreporting standards for the impairment or disposal of long-lived assets.  The provisions of SFAS No. 144 became effectivefor the Company on January 1, 2002 and did not have a material impact on itsfinancial position and results of operations.

 

**InDecember 2002, the FASB issued SFAS No. 148, *Accountingfor Stock-Based Compensation – Transition and Disclosure*, whichamends SFAS No. 123, Accounting for Stock-Based Compensation.  SFAS No. 148 provides alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, SFAS No. 148 amends thedisclosure requirement of SFAS No. 123 to require more prominent and morefrequent disclosures in financial statements of the effects of stock-basedcompensation. The transition guidance and annual and interim disclosureprovisions of SFAS No. 148 became effective for the Company on January 1, 2003.The Company has elected to continue to apply Accounting Principles Board (APB)Opinion No. 25 and related interpretations in accounting for stock optionplans, as permitted under SFAS No. 123 and SFAS No. 148. Accordingly, no compensationcost has been recognized for its stock option plan upon adoption of SFAS No.148. The additional interim disclosures will be included in the Company’s Form10-Q starting with the three months ending March 31, 2003.**

 

2.                                                 PROPERTYAND EQUIPMENT

 

Property and equipment consists of thefollowing at December 31:

 
|                                |   | **2002**   |       | **2001**   |       |
|-------------------------------------|--------|------------|------------|------------|------------|
|                                |   |       | ** ** |       | ** ** |
| Land                                |   | $          | 4,934,741  |       | $          | 3,617,865 |   |
| Buildings and building improvements |   | 8,251,643  |       | 7,161,764  |       |
| Furniture and equipment             |   | 8,938,202  |       | 8,085,758  |       |
|                                |   | 22,124,586 |       | 18,865,387 |       |
| Accumulated depreciation            |   | (7,573,572 | )          | (6,425,974 | )          |
|                                |   | $          | 14,551,014 |       | $          | 12,439,413 |   |

 

32

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3.                                                 INCOMETAXES

 

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

 
|                                            |   | **2002** |       | **2001** |       | **2000**  |       |
|-------------------------------------------------|--------|----------|------------|----------|------------|-----------|------------|
|                                            |   |     | ** ** |     | ** ** |      | ** ** |
| Federal tax expense computed at statutory  rate |   | $        | 1,303,000  |     | $          | 1,100,000 |       | $ | 519,000 |   |
| Nondeductible lobbying expense                  |   | 23,000   |       | 25,000   |       | 22,000    |       |
| State expense, net of federal impact            |   | 253,000  |       | 205,000  |       | 99,000    |       |
| Other                                           |   | (24,791  | )          | (3,325   | )          | 3,300     |       |
|                                            |   | $        | 1,554,209  |     | $          | 1,326,675 |       | $ | 643,300 |   |

 

Income tax expense for the years endedDecember 31, 2002, 2001 and 2000 consists of the following:

 
|                        |   | **2002**  |       | **2001**  |       | **2000**  |       |
|-----------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
| Current                     |   |      | ** ** |      | ** ** |      | ** ** |
| Federal                     |   | $         | 1,054,309  |      | $          | 819,575   |       | $ | 294,200 |   |
| State                       |   | 321,900   |       | 260,000   |       | 97,400    |       |
|                        |   | 1,376,209 |       | 1,079,575 |       | 391,600   |       |
| Deferred, primarily Federal |   | 178,000   |       | 247,100   |       | 251,700   |       |
|                        |   | $         | 1,554,209  |      | $          | 1,326,675 |       | $ | 643,300 |   |

 

Temporary differences and tax carryforwardsat December 31 are as follows:

 
|                                             |   | **2002** |       | **2001** |       | **2000** |       |
|--------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                             |   |     | ** ** |     | ** ** |     | ** ** |
| Federal / State AMT Benefit                      |   | $        |       |     |       |     | $          | 180,100 |   |
| Tax depreciation greater than book  depreciation |   | (302,000 | )          | (191,000 | )          | (134,000 | )          |
| Deferred gain on sale of land                    |   | (104,000 | )          |     |       |     |       |
| Repairs capitalized                              |   | 3,000    |       | 3,000    |       | 5,000    |       |
| Other                                            |   | 57,000   |       | 20,000   |       | 28,000   |       |
| Net (liability) asset                            |   | $        | (346,000   | )        | $          | (168,000 | )          | $ | 79,100 |   |
|                                                  |        |          |            |          |            |          |            |  |  |  |  |  |

 

The Company had federal income tax netoperating loss carryforwards of approximately $307,000 at December 31, 1999, whichwere fully utilized in 2000.

 

33

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4.                                                 STOCKHOLDERS’EQUITY

 

*Employee Stock Purchase Plan:*

* *

On April 3, 1995, the Board of Directorsadopted the 1995 Employee Stock Purchase Plan. The plan, which is open to all employees of the Company working morethan 15 hours per week, commenced on April 15, 1995 and will continue for tenyears.  The plan consists of one-yearphases.  The phases commence on October1 of each year.  Under the terms of theplan, employees may set aside a portion of their payroll earnings to purchaseshares of the Company’s common stock at the lower of 85% of the fair marketvalue of the shares on the commencement date of each phase or 85% of the fairmarket value on the termination date of each phase.  The plan provides for the sale of up to 250,000 shares.  The plan issued 27,299, 24,992 and 17,633shares in 2002, 2001 and 2000, respectively.

 

*401(k) Plan:*

 

On June 1, 1998 the Company established adefined contribution savings plan for employees who had completed one year ofservice, as defined in the Plan document. The defined contribution savings plan allows for employee compensationdeferral contributions under Section 401(k) of the Internal Revenue Code anddiscretionary contributions by the Company. Employer contributions charged to operations in 2002, 2001 and 2000 wereapproximately $88,000, $66,000 and $28,000, respectively.

 

34

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*Stock Options:*

 

The Company has a stock option plan (theStock Option Plan) which provides for the granting of awards in the form ofstock options, restricted stock, stock appreciation rights, and deferred stockto key employees and non-employees, including directors of and consultants tothe Company and any subsidiary, to purchase up to a maximum of 1,150,000 sharesof common stock.  Options that aregranted under the plan may be either options that qualify as “incentive stockoptions” within the meaning of Section 422 of the Internal Revenue Code of1986, as amended (Incentive Stock Options), or those that do not qualify asIncentive Stock Options (Non-Qualified Stock Options).  The plan is administered by the Board ofDirectors, or a committee designated by the Board, which determines the personswho are to receive awards under the plan, the type of award to be granted, thenumber of shares subject to each award and, if an option, the exercise price ofeach option.  The plan also provides forformula grants of Non-Qualified Stock Options to non-employee directors of theCompany.

 

Stock option activity related to the Planduring the years ended December 31, 2002, 2001 and 2000 is summarized below:

 
|                               |   | **2002**   |   | **2001**                               |   | **2000**   |    |
|------------------------------------|--------|------------|--------|----------------------------------------|--------|------------|---------|
|                               |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   | **Shares** |    | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   |
|                               |   |       |   |                                   |   |       |    |   |   |   |   |   |   |
| Outstanding at beginning of year   |   | 633,800    |   | $                                      | 4.39   |       | 536,300 |   | $ | 3.89 |   | 426,500 |   | $ | 3.09 |   |
|                               |   |       |   |                                   |   |       |    |   |   |   |   |   |   |
| Granted                            |   | 86,500     |   | 7.49                                   |   | 113,000    |    | 6.76 |   | 146,000 |   | 6.23 |   |
| Exercised                          |   | (76,850    | )      | 4.49                                   |   | (15,500    | )       | 4.23 |   | (34,200 | ) | 3.75 |   |
| Canceled                           |   | (3,750     | )      | 6.63                                   |   |       |    |   |   | (2,000 | ) | 5.63 |   |
|                               |   |       |   |                                   |   |       |    |   |   |   |   |   |   |
| Outstanding at end of year         |   | 639,700    |   | $                                      | 4.79   |       | 633,800 |   | $ | 4.39 |   | 536,300 |   | $ | 3.89 |   |
|                               |   |       |   |                                   |   |       |    |   |   |   |   |   |   |
| Options exercisable at end of year |   | 590,367    |   | $                                      | 4.56   |       | 583,800 |   | $ | 4.20 |   | 474,800 |   | $ | 3.65 |   |

 

35

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The following tablesummarizes information concerning all options outstanding and optionsexercisable as of December 31, 2002:

 
| **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 |                     | 186,200 |                                                         | 3.9    |                                   | $      | 2.17                     |    | 186,200                                |   | $ | 2.17 |   |
|                         | 2.50 – 5.00 |                     | 143,000 |                                                         | 4.8    |                                   | 3.86   |                     | 143,000 |                                   | 3.86   |   |
|                         | 5.00 – 9.94 |                     | 310,500 |                                                         | 6.8    |                                   | 6.78   |                     | 261,167 |                                   | 6.65   |   |
|                              |                  |                          |         |                                                              |        |                                        |        |                          |         |                                        |        |  |  |  |

 

In 1996, the Company adopted Statement ofFinancial Accounting Standards No. 123 (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 option and employee stock purchase plans 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:

 
|                        |   | **2002**  |      | **2001**  |   | **2000**  |   |
|-----------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
| Net Income:                 |   |      |      |      |   |      |   |
| As reported                 |   | $         | 2,276,595 |      | $      | 1,816,780 |   | $ | 838,909 |   |
| Pro forma                   |   | 1,851,003 |      | 1,294,655 |   | 374,355   |   |
|                        |   |      |      |      |   |      |   |
| Basic Earnings Per Share:   |   |      |      |      |   |      |   |
| As reported                 |   | $         | .64       |      | $      | .52       |   | $ | .24 |   |
| Pro forma                   |   | .52       |      | .37       |   | .11       |   |
|                        |   |      |      |      |   |      |   |
| Diluted Earnings Per Share: |   |      |      |      |   |      |   |
| As reported                 |   | $         | .57       |      | $      | .49       |   | $ | .23 |   |
| Pro forma                   |   | .47       |      | .35       |   | .10       |   |

 

The fair value of options granted under theStock Option Plan during 2002, 2001 and 2000 were estimated on the date ofgrant using the Black-Scholes option-pricing model with the following weightedaverage assumptions and results:

 
|                                |   | **2002** |    | **2001** |   | **2000** |   |
|-------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Dividend yield                      |   | None     |    | None     |   | None     |   |
| Expected volatility                 |   | 37       | %       | 42       | %      | 47       | %      |
| Risk-free interest rate             |   | 4.41     | %       | 5.01     | %      | 5.11     | %      |
| Expected life of option             |   | 69       | mo.     | 120      | mo.    | 120      | mo.    |
| Fair value of options on grant date |   | $        | 363,000 |     | $      | 492,000  |   | $ | 666,200 |   |
|                                     |        |          |         |          |        |          |        |  |  |  |

 

36

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5.                                                 EARNINGSPER SHARE COMPUTATIONS

 

The following is a reconciliation of thenumerator and denominator of the earnings per common share computations:                                              

 
|                                                                                     |   | **2002**  |       | **2001**  |       | **2000**  |       |
|------------------------------------------------------------------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                                                                                     |   |      | ** ** |      | ** ** |      | ** ** |
| Net income (numerator) amounts used for  basic and fully diluted per share computations: |   | 2,276,595 |       | 1,816,780 |       | 838,909   |       |
|                                                                                     |   |      |       |      |       |      |       |
| Weighted average shares (denominator) of  common stock outstanding:                      |   |      |       |      |       |      |       |
| Basic                                                                                    |   | 3,581,546 |       | 3,496,781 |       | 3,449,666 |       |
| Plus dilutive effect of stock options                                                    |   | 381,982   |       | 225,843   |       | 239,169   |       |
| Diluted                                                                                  |   | 3,963,528 |       | 3,722,624 |       | 3,688,836 |       |
|                                                                                     |   |      |       |      |       |      |       |
| Net income per common share:                                                             |   |      |       |      |       |      |       |
| Basic                                                                                    |   | $         | .64        |      | $          | .52       |       | $ | .24 |   |
| Diluted                                                                                  |   | .57       |       | .49       |       | .23       |       |
|                                                                                          |        |           |            |           |            |           |            |  |  |  |

 

Options to purchase 48,000 shares of commonstock at a weighted average exercise price of $8.30 per share were outstandingduring 2001 but were not included in the computation of diluted EPS because theoptions’ exercise prices were greater than the average market price of thecommon shares.

 

6.                                                 LINESOF CREDIT

 

The Company has a general credit and securityagreement with Bremer Bank, N.A., a financial institution located in SouthSaint Paul, Minnesota.  Borrowings underthe credit agreement include a commercial revolving credit line, which providesfor maximum advances of $2,250,000 with interest at the prime rate (4.25% atDecember 31, 2002).  The Company had noborrowings under the credit line during the year 2002.  The weighted average interest rate on theline of credit was 4.67% in 2002. The credit agreement contains covenants requiringthe Company to maintain certain financial ratios.  The Company was in compliance with these requirements as ofDecember 31, 2002.  The current loanarrangements prohibit the payment of dividends without the bank’s consent,however the Company’s special cash dividend on its common stock of $.25 pershare paid on July 12, 2002 received the necessary consent.

 

7.                                                 OPERATINGLEASES AND COMMITMENTS

 

The Company leased certain copying equipmentunder an operating lease, which expired in February 2001.  Rental expenses charged to operations wereapproximately $5,560 and $66,720 for the years ended December 31, 2001 and2000, respectively.

 

In addition, in January 1999 the Companyentered into a five-year totalizator services agreement with Autotote Systems,Inc. (Autotote).  Pursuant to theagreement, Autotote provides totalizator equipment and computer programs whichrecord and process all wagers and calculate the odds and payoffs.  For such services, Autotote receives a feeof approximately .45% of the gross monies wagered.  Amounts charged to operations under this agreement for the yearsended December 31, 2002, 2001 and 2000 were approximately $383,000, $346,000and $332,000, respectively.  Duringannual live race meets, Autotote provides uplink services, which enables theCompany to simulcast horse races held at Canterbury Park to out-of-stateracetracks.  These services resulted inamounts charged to operations in 2002, 2001 and 2000 of approximately $124,000,$122,000 and $118,000, respectively.

 

37

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8.                                                 CONTINGENCIES

 

In connection with the purchase of theRacetrack (Note 1), the Company entered into an Earn Out Promissory Note datedMarch 29, 1994. In accordance with the Earn Out Note, if (i) off-track bettingbecomes legally permissible in the State of Minnesota and (ii) the Companybegins to conduct off-track betting with respect to or in connection with itsoperations, the Company will be required to pay to the IMR Fund, L.P. thegreater of $700,000 per operating year, as defined, or 20% of the net pretaxprofit, as defined for each of five operating years.  At the date (if any) that these two conditions are met, the fiveminimum payments will be discounted back to their present value and the sum ofthose discounted payments will be recorded as an increase to the purchaseprice.  The purchase price will befurther increased if payments become due under the “20% of Net Pretax Profit”calculation.  The first payment is to bemade 90 days after the end of the third operating year in which off-trackbetting is conducted by the Company. Remaining payments would be made within 90 days of the end of each ofthe next four operating years.

 

The Company is periodically involved invarious legal actions arising in the normal course of business.  At December 31, 2002, management believesthat the resolution of any legal actions outstanding will not have a materialimpact on the consolidated financial statements.

 

The Minnesota Department ofLabor and Industry (DOL&I) is conducting an audit for the period April 10,1999 through April 10, 2001 regarding compliance with the tip law sections ofthe Minnesota Fair Labor Standards Act. At December 31, 2002, the Company has received no communications fromthe DOL&I regarding the disposition of their audit.  Management believes that the Company’spractices regarding tips are consistent with the requirements of Minnesota law.

 

9.                                                 RELATED-PARTYTRANSACTIONS

 

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

 

The Company paid $74,000 to a Board memberfor advertising and marketing services provided to the Company in 2002, 2001and 2000.

 

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 racing operations, and theconcessions segment provides concessions during simulcast racing, live racing,in the card club and during special events. The Company’s reportable operating segments are strategic business unitsthat offer different products and services. They are managed separately because the segments differ in the nature ofthe products and services provided, as well as processes to produce thoseproducts and services.  The horse racingand card club segments are regulated by the State of Minnesota RacingCommission.

 

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

 

Depreciation, interest expense and incometaxes are allocated to the segments but no allocation is made to concessionsfor shared facilities.  The concessionssegment paid approximately 25% of gross revenues on live racing and specialevent days to the horse-racing segment for use of the facilities in 2002.  In years prior to 2002, the concessionssegment paid approximately 25% of all gross revenues for use of the facilities.

 

38

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

 
|                               |   | **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 |   | 378                                        |       | 3,453 |   | 639 |   | 4,470 |   |
|                               |   |                                       |       |   |   |   |   |   |   |
| Segment Assets                     |   | 14,883                                     |       | 4,003 |   | 1,116 |   | 20,003 |   |

 
|                               |   | **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 |   |

 
|                               |   | **Twelve Months Ended December 31, 2000** |   |
|------------------------------------|--------|-------------------------------------------|--------|
|                               |   | **Horse Racing**                          |   | **Card Club** |   | **Concessions** |   | **Total** |   |
|                               |   |                                      |   |   |   |   |   |   |   |
| Revenues from external customers   |   | $                                         | 17,375 |   | $ | 11,347 |   | $ | 3,741 |   | $ | 32,463 |   |
|                               |   |                                      |   |   |   |   |   |   |   |
| Intersegment revenues              |   | 658                                       |   |   |   | 874 |   | 1,532 |   |
|                               |   |                                      |   |   |   |   |   |   |   |
| Net interest income (expense)      |   | 88                                        |   | (100 | ) |   |   | (12 | ) |
|                               |   |                                      |   |   |   |   |   |   |   |
| Depreciation and amortization      |   | 585                                       |   | 324 |   |   |   | 909 |   |
|                               |   |                                      |   |   |   |   |   |   |   |
| Segment income before income taxes |   | 512                                       |   | 970 |   | 123 |   | 1,605 |   |
|                               |   |                                      |   |   |   |   |   |   |   |
| Segment Assets                     |   | $                                         | 9,968  |   | $ | 3,318 |   | $ | 525 |   | $ | 13,811 |   |

 

Included in horse racing segment revenues forthe years ended December 31, 2002, 2001 and 2000 is approximately $228,000,$377,000 and $444,000, respectively, for rental of the racing facility forspecial events and storage.

 

39

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

 
|                                                    |   | **2002** |       | **2001** |       | **2000** |       |
|---------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                    |   |     | ** ** |     | ** ** |     | ** ** |
| Revenues                                                |   |     |       |     |       |     |       |
| Total revenue for reportable segments                   |   | $        | 43,311     |     | $          | 41,437   |       | $ | 33,995 |   |
| Elimination of intersegment revenues                    |   | (1,610   | )          | (1,945   | )          | (1,532   | )          |
| Total consolidated revenues                             |   | 41,701   |       | 39,492   |       | 32,463   |       |
|                                                    |   |     |       |     |       |     |       |
| Income before income taxes                              |   |     |       |     |       |     |       |
| Total segment income before income taxes                |   | $        | 4,470      |     | $          | 3,256    |       | $ | 1,605 |   |
| Elimination of intersegment income before  income taxes |   | (639     | )          | (113     | )          | (123     | )          |
| Total consolidated income before income  taxes          |   | 3,831    |       | 3,143    |       | 1,482    |       |

 
|                                    |   | **December 31,  2002** |   | **December 31,  2001** |   | **December 31,  2000** |   |
|-----------------------------------------|--------|------------------------|--------|------------------------|--------|------------------------|--------|
| Assets                                  |   |                   |   |                   |   |                   |   |
| Total assets for reportable segments    |   | $                      | 20,003 |                   | $      | 16,977                 |   | $ | 13,811 |   |
| Elimination of intercompany receivables |   | (973                   | )      | (433                   | )      | (493                   | )      |
| Total consolidated assets               |   | 19,030                 |   | 16,544                 |   | 13,318                 |   |
|                                         |        |                        |        |                        |        |                        |        |  |  |  |

 

11.        Supplementary Finanical Information(Unaudited)

** **
|                       |   | **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 |   |
|                            |        |                          |           |  |  |  |  |  |  |  |  |  |  |

 

 
|                       |   | **2001  Quarter Ended:** |      |
|----------------------------|--------|--------------------------|-----------|
|                       |   | **March 31**             |      | **June 30** |   | **September  30** |   | **December  31** |   |
| Operating Revenues         |   | $                        | 8,034,245 |   | $ | 10,694,550 |   | $ | 12,196,624 |   | $ | 8,566,618 |   |
|                       |   |                     |      |   |   |   |   |   |   |
| Operating expenses         |   | 6,792,903                |      | 10,469,158 |   | 11,668,578 |   | 7,474,571 |   |
|                       |   |                     |      |   |   |   |   |   |   |
| Net Income                 |   | 723,620                  |      | 133,050 |   | 376,103 |   | 582,007 |   |
|                       |   |                     |      |   |   |   |   |   |   |
| Basic Earnings per share   |   | .21                      |      | .04 |   | .11 |   | .16 |   |
|                       |   |                     |      |   |   |   |   |   |   |
| Diluted Earnings per share |   | .20                      |      | .04 |   | .10 |   | .15 |   |
|                            |        |                          |           |  |  |  |  |  |  |  |  |  |  |

 

**Item 9****.**                     **CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not Applicable.

 

40

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**PART III**

 

**Item10****.**              **DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Information required under this item withrespect to the directors will be set forth in a section captioned  “Election of Directors” in the Company’s ProxyStatement for the Annual Meeting of Shareholders to be held on June 5, 2003(the “2003 Proxy Statement”), a definitive copy of which will be filed with theCommission within 120 days of the close of the 2002 fiscal year, whichinformation is incorporated    herein byreference.  Information regardingexecutive officers is presented under Item 1(c)(x) herein.

 

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

 

Informationrequired under this item will be set forth in a section entitled “ExecutiveCompensation and Other Information” in the Company’s 2003 Proxy Statement whichinformation is incorporated herein by reference.

 

**Item 12****.**              **SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT**

 

Informationrequired under this item will be set forth in a section entitled “SecurityOwnership of Certain Beneficial Owners” in the Company’s 2003 Proxy Statementwhich information is incorporated herein by reference.

 

**Item 13****.**              **CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

Information required under this item will beset forth in a section entitled “Certain Transactions” in the Company’s 2003 Proxy Statementwhich information is incorporated herein by reference

 

**Item 14****.**              **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 reviewed theCompany’s disclosure controls and procedures within 90 days prior to the filingof this report.  Based upon this review,these officers believe that the Company’s disclosure controls and proceduresare effective in ensuring that material information related to the Company ismade known to them by others within the Company.

 

(b)         Changes in Internal Controls

 

There were no significant changes in the Company’sinternal controls or in other factors that would significantly affect thesecontrols during the quarter covered by this report or from the end of thereporting period to the date of this Form 10-K.

 

41

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**Item15****.**              **EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 
|   | (a)    | 1.                                                                  | Consolidated  Financial Statements                                                                                                                                                         |   |
|--------|--------|---------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                |                                                                                                                                                                                       |   |
|   |   |                                                                | The  following Consolidated Financial Statements of Canterbury Park Holding  Corporation and subsidiaries are included in Part II, Item 8 pages 24-30:                                     |
|   |   |                                                                |                                                                                                                                                                                       |   |
|   |   |                                                                | Independent Auditors  Report                                                                                                                                                               |   |
|   |   |                                                                |                                                                                                                                                                                       |   |
|   |   |                                                                | Consolidated Balance Sheets  as of December 31, 2002 and 2001                                                                                                                              |
|   |   |                                                                |                                                                                                                                                                                       |   |
|   |   |                                                                | Consolidated  Statements Of Operations for the years ended December 31, 2002, 2001,and 2000                                                                                                |
|   |   |                                                                |                                                                                                                                                                                       |   |
|   |   |                                                                | Consolidated  Statements of Changes in Stockholders’ Equity for the years ended December  31, 2002, 2001, and 2000                                                                    |
|   |   |                                                                |                                                                                                                                                                                       |   |
|   |   |                                                                | Consolidated  Statements of Cash Flows for the years ended December 31, 2002, 2001, and  2000                                                                                              |
|   |   |                                                                |                                                                                                                                                                                       |   |
|   |   |                                                                | Notes to  Consolidated Financial statements                                                                                                                                                |
|   |   |                                                                |                                                                                                                                                                                       |   |
|   |   | 2.                                                                  | All  other schedules are omitted, because they are not applicable, not significant  or not required, or because the information 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 reference in this report.                                    |
|   |   |                                                                |                                                                                                                                                                                       |
|   | (b)    |  Reports filed on Form 8-K during  the fourth quarter of 2002. |
|   |   |                                                                |                                                                                                                                                                                       |
|   |   |                                                                | NONE                                                                                                                                                                                       |

 

42

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**SIGNATURES**

 

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

 
| Dated:   March 28, 2003 |   | 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 theSecurities Exchange Act of 1934, the following persons on behalf of theRegistrant and in the capacities and the dates indicated have signed thisreport below.

 

**Powerof Attorney**

 

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

 
| **Signature**            |   | **Title**                           |   | **Date**       |
|--------------------------|--------|-------------------------------------|--------|----------------|
|                     |   |                                |   |           |
| /s/ Curtis A. Sampson    |   | Chairman of the Board               |   | March 28, 2003 |
| Curtis A. Sampson        |   |                                |   |           |
|                     |   |                                |   |           |
| /s/ Dale H. Schenian     |   | Director; Vice Chairman             |   | March 28, 2003 |
| Dale H. Schenian         |   |                                |   |           |
|                     |   |                                |   |           |
| /s/ Randall D. Sampson   |   | Chief Executive Officer, President, |   | March 28, 2003 |
| Randall D. Sampson       |   | General Manager, Treasurer and      |   |           |
|                     |   | Director                            |   |           |
|                     |   |                                |   |           |
| /s/ Brian C. Barenscheer |   | Director                            |   | March 28, 2003 |
| Brian C. Barenscheer     |   |                                |   |           |
|                     |   |                                |   |           |
| /s/ Patrick R. Cruzen    |   | Director                            |   | March 28, 2003 |
| Patrick R. Cruzen        |   |                                |   |           |
|                     |   |                                |   |           |
| /s/ Carin J. Offerman    |   | Director                            |   | March 28, 2003 |
| Carin J. Offerman        |   |                                |   |           |

 

43

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# ***CEO Certification:***

 

# *I, Randall D. Sampson certify that:*

 

1.               I have reviewed this annual report onForm 10-K of Canterbury Park Holding Corporation;

 

2.               Based on my knowledge, this annualreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.               The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a.               designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report is beingprepared;

b.              evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation date”); and

c.               presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation date;

 

5.               The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons performing the equivalent function):

 

a.               all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

b.              any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.   The registrant’s other certifying officerand I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Dated: March  28, 2003 |   | CANTERBURY  PARK HOLDING CORPORATION |
|------------------------|--------|--------------------------------------|
|                   |   |                                 |   | /s/ Randall  D. Sampson |   |
|                   |   |                                 |   | Randall D.  Sampson |
|                   |   |                                 |   | Chief  Executive Officer |

 

44

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# ***CFO Certification:***

 

# *I, David C. Hansen certify that:*

 

1.     I have reviewed this annual report on Form10-K of Canterbury Park Holding Corporation;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a.               designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

b.              evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation date”); and

c.               presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation date;

 

5.               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a.               all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

b.              any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               Theregistrant’s other certifying officer and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Dated: March  28, 2003 |   | CANTERBURY  PARK HOLDING CORPORATION |
|------------------------|--------|--------------------------------------|
|                   |   |                                 |   | /s/ David C.  Hansen |   |
|                   |   |                                 |   | David C.  Hansen |
|                   |   |                                 |   | Vice  President, and Chief Financial Officer |

 

45

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CANTERBURY PARK HOLDING CORPORATION ANDSUBSIDIARY

 

Exhibit Index To

Form 10-K for the Year Ended December 31,2002

 
| **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 management contracts or compensatoryplans or arrangements.

 

46

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| **Regulation  S-B  Exhibit Table  Reference** |   | **Title of Document**                                                                                                                                                                                                                                                                        |   | **Location in Consecutive Numbering  System as Filed with the Securities  and Exchange Commission**                                                                 |
|-----------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          |   |                                                                                                                                                                                                                                                                                         |   |                                                                                                                                                                |
| 10.7                                          |   | Curtis A. Sampson Guaranty to HRA                                                                                                                                                                                                                                                            |   | Filed as Exhibit 10.7 to the SB-2  Registration Statement and incorporated herein by reference.                                                                     |
|                                          |   |                                                                                                                                                                                                                                                                                         |   |                                                                                                                                                                |
| 10.10                                         |   | General Credit and Security Agreement dated  as of June 3, 1998 between Canterbury Park Holding Corporation and Bremer  Bank N.A. (previously First American Bank, N.A.)  This exhibit 10.10 replaces exhibit 10.10 filed previously as  an exhibit to the SB-2 Registration Statement. |   | Filed as Exhibit 10.10 to the Form 10-KSB  for the fiscal year ended December 31, 1998.                                                                             |
|                                          |   |                                                                                                                                                                                                                                                                                         |   |                                                                                                                                                                |
| 10.11                                         |   | Stock Purchase Savings Plan                                                                                                                                                                                                                                                                  |   | Filed as Exhibit 10.11 to Form 10-KSB for  the fiscal year ended December 31, 1997 and incorporated herein by reference.                                            |
|                                          |   |                                                                                                                                                                                                                                                                                         |   |                                                                                                                                                                |
| 10.13                                         |   | Stock Option Plan for Non-Employee  Consultants and Advisors                                                                                                                                                                                                                                 |   | Filed as Exhibit 4.3 to the Registration  Statement on Form S-8 of the Company filed on August 28, 1997 (File No.  333-34509) and incorporated herein by reference. |
|                                          |   |                                                                                                                                                                                                                                                                                         |   |                                                                                                                                                                |
| 21                                            |   | Subsidiaries of the Registrant                                                                                                                                                                                                                                                               |   | Filed herewith.                                                                                                                                                     |
|                                          |   |                                                                                                                                                                                                                                                                                         |   |                                                                                                                                                                |
| 23                                            |   | Independent Auditors’ Consent                                                                                                                                                                                                                                                           |   | Filed herewith.                                                                                                                                                     |
|                                          |   |                                                                                                                                                                                                                                                                                         |   |                                                                                                                                                                |
| 24                                            |   | Power of Attorney                                                                                                                                                                                                                                                                            |   | Included in signature page at page 43.                                                                                                                              |
|                                          |   |                                                                                                                                                                                                                                                                                         |   |                                                                                                                                                                |
| 99.1                                          |   | Certification under 18U.S.C., Section 1350                                                                                                                                                                                                                                                   |   | Filed herewith.                                                                                                                                                     |

 

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

 

47

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