CANTERBURY PARK HOLDING CORP, 10KSB, 1998-03-30

CANTERBURY PARK HOLDING CORP
10KSB, 1998-03-30
RACING, INCLUDING TRACK OPERATION

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997

/ / 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
- -------------------------------------------------------------------------------
(Name of small business issuer in its charter)

Minnesota 41-1775532
--------------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

1100 Canterbury Road
Shakopee, MN 55379
--------------------
(Address of principal executive offices and zip code)

Registrant's telephone number, including area code: (612) 445-7223

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Redeemable Common
Stock Purchase
Warrants Units,
each Unit consisting
of one share of
Common Stock and
one Redeemable
Common Stock
Purchase Warrant.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

YES x NO
----- -----

Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. /X/

The Company's operating revenues for its most recent fiscal year were
$18,202,216.

On March 11, 1998, the Company had 2,998,848 shares of common stock, $.01 par
value, outstanding.

The aggregate market value of the shares of voting stock held by
non-affiliates of the Company (persons other than directors and officers)
computed at the NASDAQ closing price of $2.75 per share on March 11, 1998 was
approximately $3,731,000.

DOCUMENTS INCORPORATED BY REFERENCE

The Company's Proxy Statement for its 1998 Annual Meeting of Shareholders, to
be held on June 4, 1998, is incorporated by reference into Part III of this
Form 10-KSB.

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CANTERBURY PARK HOLDING CORPORATION
FORM 10-KSB ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1997

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I
ITEM 1. Description of Business . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. Description of Property . . . . . . . . . . . . . . . . . . . . . 8
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . . 10

PART II

ITEM 5. Market for Common Equity and Related Stockholder Matters . . . . 11
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 12
ITEM 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . 30

PART III

ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act . . . . . . . . . . . . . 30
ITEM 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 11. Security Ownership of Certain Beneficial Owners and Management . . 30
ITEM 12. Certain Relationships and Related Transactions . . . . . . . . . . 30
ITEM 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 30

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

</TABLE>

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Item 1. DESCRIPTION OF BUSINESS

(a) BUSINESS DEVELOPMENT

Canterbury Park Holding Corporation (the "Company") is engaged in the
business of conducting live Thoroughbred and Quarter Horse racing and
pari-mutuel wagering operations related thereto at its facilities in
Shakopee, Minnesota (the "Racetrack"), as well as in conducting
"simulcasting", which is pari-mutuel wagering on races held at out-of-state
racetracks that are televised simultaneously at the Racetrack. The Company
also derives revenues from related services and activities, such as
concessions, parking, admissions and programs, and from other entertainment
events held at the Racetrack.

The Company was incorporated under the laws of Minnesota on March 24,
1994 and on March 29, 1994 acquired the Racetrack. (Further information
regarding prior operations of the Racetrack can be obtained by reference to
the Company's registration statement on Form SB-2 (File No. 33-81262C) under
"Business-History of the Racetrack", which discussion is incorporated herein
by reference.) On May 6, 1994 the Company commenced simulcasting operations.
In August 1994 the Company conducted a public offering of Units, consisting
of one share of common stock and a warrant to purchase one share of common
stock. With the proceeds from the public offering the Company retired debt
associated with its acquisition of the Racetrack. Since May 6, 1994 the
Company has been principally engaged in conducting its year-round
simulcasting operations, five to seven days per week and live horse racing
("live meets") on a seasonal basis, generally from late May to mid-August.
The Company plans 55 days of live racing in 1998. Live racing in 1998 will
consist of a 24-day mixed meet of Thoroughbred and Quarter Horse racing, a
28-day Thoroughbred only meet, and three days of live harness racing over the
Labor Day weekend.

(b) BUSINESS OF ISSUER

(i) RACING OPERATIONS

The Company's racing operations consist of year-round pari-mutuel
wagering on simulcast horse races ("simulcasting") and live meets held on a
seasonal basis beginning in May and concluding in August. One or more of
Thoroughbred, Quarter Horse or harness racing is conducted during the live
meet.

SIMULCASTING.

Simulcasting is the process by which live horse races held at one
facility (the "host track") are transmitted simultaneously to other locations
that allow patrons at each receiving location (the "guest track") to place
wagers on the race being broadcast. Monies are collected at the guest track
and the information with respect to the total amount wagered is
electronically transmitted to the host track. In effect, all of the amounts
wagered at the guest track are combined into the appropriate pools at the
host track with the final odds and payouts determined based upon all the
monies in the pools.

Throughout the year the Company offers simulcast wagering from
out-of-state racetracks, generally seven days a week. The Company offers
"full card" simulcast racing (broadcasting of another racetrack's entire
daily live racing program) from a number of racetracks, including Churchill
Downs, Hollywood Park, Santa Anita, Gulfstream Park, Arlington Park and
Sportsman's Park. In addition, races of national interest, such as the
Kentucky Derby, Preakness Stakes and Breeders' Cup, supplement the regular
simulcast program. The Company regularly evaluates its agreements with other
racetracks in order to offer the most popular simulcast signals of live horse
racing which is feasible to offer at the Racetrack.

Under applicable provisions of federal and state law, the Racetrack must
obtain the consent of the organization which represents the owners and
trainers of the breed of horse which predominately races at the Racetrack
with respect to simulcast operations both as a host and guest track. In
Minnesota such consent must be obtained from the Minnesota Horsemen's
Benevolent and Protective Association (the "MHBPA").

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LIVE RACING.

The Company conducted its first year of live racing in 1995 by operating
55 days of live horse racing. The Company hosted a 51-day live meet in 1996
and a 56-day live meet, including three days of live harness racing, in 1997.
The Company plans 55 days of live racing in 1998, consisting of a 24-day
mixed meet of Thoroughbred and Quarter Horse racing, a 28-day Thoroughbred
only meet, and three days of live harness racing over the Labor Day weekend.
Post times on Thursdays and Fridays will be 6:30 pm and 1:00 pm on Saturdays,
Sundays and holidays.

Currently, Minnesota law requires the Racetrack to schedule a minimum of
125 days of live racing annually, unless the MHBPA agrees to a lesser number
of live racing days. The MHBPA has agreed to waive the 125-day requirement
for years 1995 through 1998 and allow the Company to run a minimum of 50 days
of live racing each year. After 1998, no assurance can be given that the
MHBPA will agree to a shorter live meet than the 125-day statutory minimum.

(ii) SPECIAL EVENTS

While pari-mutuel horse racing is the Company's principal business, the
Company's facilities are capable of being used for multiple purposes. In an
effort to more fully utilize the property and to generate additional
revenues, the Company has, in each year of its operations, expanded the use
of the grandstand, grounds and parking lot for special events.

In 1996 and 1997, a number of non-horseracing events were held,
including snowmobile races, two major arts and crafts shows per year, trade
shows, concerts, motorcycle races, fund raisers, automobile shows and
competitions and private parties. Lilith Fair, an outdoor music event, came
to Canterbury Park in August of 1997, drawing over 30,000 people to the
Racetrack. In 1997 Canterbury Park hosted Holiday in Lights during the 1997
holiday season which consisted of a drive-through light display, located in
and around the barn area, and Santa's Village on track level of the
grandstand.

To date in 1998, the facility has hosted two additional successful
snowmobile races with attendance over 10,000 for each event. Canterbury Park
maintains a reputation as one of the premier snowmobile racing venues in the
world. In addition, the Company expects to increase revenues from parking
lot rentals in 1998.

(iii) SOURCES OF REVENUE

GENERAL.

The Company's revenues are principally derived from pari-mutuel
wagering. In pari-mutuel wagering, bettors wager against each other in a
pool, rather than against the operator of the facility or with preset odds.
From the total amount wagered or "handle," the Minnesota Pari-Mutuel Horse
Racing Act (the "Racing Act") specifies the maximum percentage, referred to
as the "takeout," which may be withheld by the Racetrack, with the balance
returned to the winning bettors. The takeout constitutes the Racetrack's
primary source of operating revenue. From the takeout, funds are paid to the
State of Minnesota for pari-mutuel taxes, with additional amounts set aside
for purses and for the "Breeders' Fund," which is a fund apportioned by the
Minnesota Racing Commission ("Racing Commission") among various purposes
related to Minnesota's horse breeding and horse racing industries. The
balance of the takeout remaining after these deductions is commonly referred
to as the "retainage."

The various forms of pari-mutuel wagering can be divided into two
categories: straight wagering pools and multiple wagering pools, which are
also referred to as "exotic" wagering pools. Examples of straight wagers
include: "win" (a wager on one specific horse to finish first); "place" (a
wager on one specific horse to finish first or second); and "show" (a wager
on one specific horse to finish first, second or third). Examples of exotic
wagers include: "daily double" (a wager in which the bettor selects the
horses that will win two consecutive races); "quinella" (a wager in which the
bettor selects the horses that will finish first and second, in either
order); "exacta" (a wager in which the bettor selects the horses that will
finish first and second, in order); "trifecta" (a wager in which

2
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the bettor selects 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 finish first in six consecutive races).

The amount of takeout earned by the Company depends on where the race is
run and the form of wager (straight or exotic). Net revenues from
pari-mutuel wagering on live races run at the Racetrack consist of 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 the
State of Minnesota. Net revenues from pari-mutuel wagering on races being
run at out-of-state racetracks and simulcast to the Racetrack have similar
expenses, but also include a host fee payment to the host track. The host
fee is calculated as a percentage of monies wagered (generally 2.50% to
4.50%) and is negotiated with the host track and must comply with each host
track's state statute.

WAGERING ON LIVE RACES.

The Racing Act establishes the maximum takeout that may be deducted from
the handle. The takeout percentage on live races depends on the type of
wager. The total maximum takeouts are 17% from straight wagering pools and
23% from exotic wagering pools. From this takeout, Minnesota law requires
deductions for purses, pari-mutuel taxes and the Breeders' Fund.

While the Racing Act provides that a minimum of 8.4% of the live racing
handle is to be paid as purses to the owners of the horses, the size of the
purse is subject to further agreement with the horsepersons' associations.
The Breeders' Fund receives 1% of the handle. As of July 1, 1996 the
pari-mutuel tax applicable to wagering on all live races is 6% of takeout in
excess of $12 million during the twelve month period beginning July 1 and
ending the following June 30. This pari-mutuel tax structure became
effective July 1, 1996 and continues through July 1, 1999. Assuming no
additional legislation, the pari-mutuel tax rate will return to 6% of takeout
(as it had been prior to July 1, 1996) effective July 1, 1999.

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

<TABLE>
<CAPTION>
Live Racing
-----------
Straight Exotic
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<S> <C> <C> <C> <C>

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) .10 .14
Racetrack Retainage (1) 7.50 13.46

Total Takeout 17.00 23.00
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Total Handle 100.00% 100.00%
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</TABLE>

- -------------------

(1) Minnesota law provides that the 8.40% purse payment is a minimum. The
actual percentage, if any, above the minimum is determined between the
Racetrack and the MHBPA. Any additional amounts paid for purses decrease
the Racetrack's retainage.
(2) This amount assumes the pari-mutuel tax structure in effect as of July 1,
1996 (which exempts the first $12 million of takeout during a statutorily
mandated twelve-month period). This amount will depend upon the total
takeout during the twelve-month period, which is estimated to be $13.1
million.

<PAGE>

WAGERING ON SIMULCAST RACES.

The amount of takeout from simulcast wagering is determined by the laws
of the state in which the host track is located. In addition, the Racing Act
established a minimum that must be set aside from simulcasting for purse
payments on racing within Minnesota. Different amounts are deducted for
purses from the takeout depending on whether simulcasting occurs during the
"Racing Season," a statutorily defined 25 week period beginning in early May
each year, or outside of the Racing Season. If simulcasting occurs during
the Racing Season, the amount set aside for purses further depends on whether
the simulcasting is part of a full racing card that occurs during the part of
the day that live races are conducted at the Racetrack. For races that are
part of a full simulcast racing 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 occur within
the time period of live races, the purse is equal to 50% of the takeout
remaining 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 the Racing Season, the amount that must be
contributed to the purses is 25% of the takeout after deducting an 8% expense
factor, pari-mutuel taxes, payments to the Breeders' Fund and host fee
payments to the host racetrack.

The following table sets forth the approximate percentage distribution
of each dollar wagered for races simulcast at the Racetrack and the
Racetrack's retainage:

<TABLE>
<CAPTION>
During Racing Season
--------------------

Not Concurrent
Concurrent with with Outside of
Live Card Live Card Racing Season
--------------- -------------- -------------
<S> <C> <C> <C>
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) .12 .12 .12
Purse (3) 8.40 7.39 1.70
Host Track Fees (4) 3.50 3.50 3.50
Racetrack Retainage (3) 6.48 7.39 13.08
Total Takeout 19.50 19.50 19.50
--------------- -------------- -------------

Total Handle 100.00% 100.00% 100.00%
--------------- -------------- -------------
--------------- -------------- -------------

</TABLE>

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

(2) This amount assumes the pari-mutuel tax structure in effect as of July 1,
1996 (which exempts the first $12 million of takeout during a statutorily
mandated twelve-month period). This amount will depend upon the total
takeout during the twelve-month period, which is estimated to be $13.1
million.

(3) Although Minnesota law specifies a minimum, the actual percentage is
determined by agreement between the Racetrack and the MHBPA. Any
additional amounts paid for purses reduce the Racetrack's retainage.

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

<PAGE>

OTHER REVENUE

The Company also derives revenue from other activities such as
admissions and parking fees, as well as from the sale of food and beverage,
programs, and other racing publications. The Company offers advertising
signage space similar to that appearing at many sports stadiums and
advertising space is sold in the printed live racing program. Finally,
additional revenues are derived from use of the facilities for events such as
concerts, holiday displays, trade and craft shows, snowmobile racing,
business meetings, private parties, horse expositions and sales, boat and
automobile storage, community events, and rental of the parking lot for
various automobile activities and vehicle storage.

(iv) COMPETITION

The Company competes with other forms of gaming in the State of
Minnesota, particularly Native American casino-style gambling located
throughout the State of Minnesota, including a large casino located
approximately three miles from the Racetrack. In addition, the Company
competes against charitable gambling (bingo and pulltabs) and various state
lottery products. Finally, the Company competes with a greyhound racetrack
located approximately 40 miles from the Racetrack at the eastern end of the
Minneapolis-Saint Paul metropolitan area. This greyhound track offers
wagering on live and simulcast dog racing, as well as wagering on
simulcasting of Thoroughbred horse racing.

The Racetrack also competes with other forms of entertainment in the
Minneapolis-Saint Paul metropolitan area, including a wide range of live and
televised professional and collegiate sporting events. Finally, live horse
racing competes with a wide variety of summer attractions, including
amusements parks, sporting events and other local activities.

The Company competes with racetracks located throughout the United
States in securing the better quality horses to run at the Racetrack.
Attracting the owners and trainers of better quality horses is largely
influenced by the ability to offer large purses. By reducing the number of
racing days and utilizing purse monies derived from simulcast and live race
wagering, the Company was able to offer purses during its 1995 and1996 live
racing seasons which were comparable to most other midwestern racetracks.
However, in 1997 the Company experienced increased competition for better
quality horses from a racetrack located near Des Moines, Iowa which offered
substantially larger purses than the Company in 1997. This increased
competition from the Des Moines racetrack is expected to continue in the
foreseeable future.

(v) MARKETING

The Company's primary market is the seven county Minneapolis-Saint Paul
metropolitan area which in 1990 contained approximately 1.7 million people 18
years and older.

To support its primary business of pari-mutuel horse racing, the Company
maintains yearr-round marketing efforts which are focused on maintaining the
loyalty of live and simulcast patrons and attracting new customers. Using
newspapers, television, other print media, radio and direct mail, the Company
concentrates its marketing efforts on communicating the excitement of
wagering on high caliber horse racing from around the country. In addition
to its regular advertising program, the Company conducts numerous special
promotions and Open Houses to increase simulcast patronage.

The 1997 and 1996 advertising campaigns utilized primarily print and
radio advertising to promote live racing by highlighting the attractive,
park-like atmosphere of Canterbury Park, promoting activities for the entire
family, as well as the fun and excitement of live horse racing. In addition,
the development of a customer data base enabled the Company to effectively
utilize direct mail advertising in 1997.

5
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Because wagering on horse racing is more complex than many other
forms of gaming, such as slot machines or the various lottery products, the
Company continues to develop and conduct various educational programs, such
as tours of the Racetrack, wagering classes and contests that it believes
will make the sport of horse racing and pari-mutuel wagering more
understandable to the general public.

(vi) REGULATION

GENERAL.

The ownership and operation of a horse racetrack in Minnesota is
subject to significant regulation by the Racing Commission under the Racing
Act and the rules adopted by the Racing Commission. The Racing Act provides
for the allocation of each wagering pool to winning bettors, the racetrack,
purses, the State of Minnesota and the Breeders' Fund and empowers the Racing
Commission to license and regulate substantially all aspects of horse racing
in the State. The Racing Commission, among other things, grants operating
licenses to racetracks after an application process and public hearings,
licenses all employees of a racetrack, jockeys, trainers, veterinarians and
other participants, regulates the transfer of ownership interests in
licenses, allocates live race days and simulcast-only race days, approves
race programs, regulates the conduct of races, sets specifications for the
racing ovals, animal facilities, employee quarters and public areas of
racetracks, regulates the types of wagers on horse races and approves
significant contractual arrangements with racetracks, including management
agreements, simulcast arrangements, totalizator contracts and concessionaire
agreements. Decisions by the Racing Commission in regard to any one or more
of the foregoing matters could adversely affect the Company's operations.

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

ISSUANCE OF CLASS A AND CLASS B LICENSES TO THE COMPANY.

The Racing Commission issued a Class A License to the Company on
April 27, 1994. The Class A License allows the Company to own and operate
the Racetrack. The Class A License is effective until revoked or suspended by
the Racing Commission, or relinquished by the licensee. The fee for a Class
A License is $10,000 per calendar year.

The Racing Commission issued a Class B License to the Company on
April 27, 1994. The Class B License allows the Company to sponsor and manage
horse racing on which pari-mutuel wagering is conducted at its Class A
licensed racetrack and on other horse races run at out-of-state locations as
authorized by the Racing Commission. The Class B License is renewable each
year by the Racing Commission after a public hearing (if required by the
Racing Commission). The Company's Class B License was renewed for the 1998
season in December 1997. The fee for a Class B License is $100 for each
assigned race day on which live racing is actually conducted and $50 for each
day on which simulcasting is authorized and actually takes place.

LIMITATION ON THE NUMBER OF CLASS A AND CLASS B LICENSES.

Pursuant to the Racing Act, so long as the Racetrack maintains its
Class A License, no other Class A License may be issued in the seven county
metropolitan area (the counties of Hennepin, Ramsey, Washington, Scott,
Dakota, Anoka and Carver), except the Racing Commission may issue an
additional Class A License within the seven county metropolitan area,
provided that the additional license may only be issued for a facility which,
among other conditions, is located more than 20 miles from the Racetrack,
contains a track no larger than five-eighths of a mile in circumference, and
is used exclusively for Standardbred (harness) racing. Therefore, as long as
the Company holds the Class A License, only the Company may own and operate a
racetrack in the seven county metropolitan area where Thoroughbred horses and
Quarter Horses may be raced.

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<PAGE>

LIMITATION ON OWNERSHIP AND MANAGEMENT OF AN ENTITY WHICH HOLDS A
CLASS A LICENSE AND/OR CLASS B LICENSE.

The Racing Act requires prior Racing Commission approval of all
officers, directors, 5% shareholders, or other persons having a present or
future direct or indirect financial or management interest in any person
applying for a Class A and Class B license, and if a change of ownership of
more than 5% of the licensee's shares is made after an application is filed
or the license issued, the applicant or licensee must notify the Racing
Commission of the changes within five days of this occurrence and provide the
information required by the Racing Act.

LOCAL REGULATION.

The Racetrack is subject to state and local laws, regulations,
ordinances and other provisions affecting zoning and other matters which may
have the effect of restricting the uses to which the Company's land and other
assets may be used. The Canterbury Park property was originally zoned
"Racetrack District," but the City of Shakopee has revised its zoning
ordinances and as of January 1, 1995 has zoned the Company's property as
"Major Recreation Zone." The Company believes such rezoning has not adversely
affected the current uses of the Racetrack and believes the rezoning will not
adversely affect the Racetrack in the future. Also, any development of the
Racetrack site will, among other things, be subject to applicable zoning
ordinances and require approval by the City of Shakopee and other authorities
and there can be no assurance such approvals will be obtained.

(vii) EMPLOYEES

At March 11, 1998, the Company had approximately 55 full-time
employees and 150 part-time employees. When the Company commences live
racing in May 1998, the Company expects to employ approximately 120
additional full-time seasonal employees and approximately 450 additional
part-time seasonal employees. The Company's management believes its employee
relations are good.

(viii) EXECUTIVE OFFICERS

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

Name Age Position with Company
- ---- --- ---------------------
<S> <C> <C>

Randall D. Sampson 39 Chief Executive Officer, President,
Chief Financial Officer, and General Manager

Michael J. Garin 42 Vice President of Hospitality

Troy J. Mertens 30 Vice President of Mutuels and Simulcasting

Mark A. Erickson 41 Vice President of Facilities

</TABLE>

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Randall D. Sampson has been CEO, President and Chief Financial
Officer since the formation of the Company in March 1994 and General Manager
since September 1995. Mr. Sampson has served as President of Sampson Racing,
Inc. since 1989 and managed the Thoroughbred racing and breeding operations
of the Curtis Sampson family. Mr. Sampson has been active in horse racing
industry associations, serving on the Board of Directors of the Minnesota
Thoroughbred Association from 1989 to 1993, and as Treasurer in 1990 to 1991
and its President in 1992. Mr. Sampson has also been a member of the
Minnesota Horsemen's Benevolent and Protective Association serving as Vice
President of the organization from 1993 to 1994. Mr. Sampson served on the
1992 Governor's Commission on Canterbury Downs and was a member of the
Minnesota Racing Commission Breeders' Fund Advisory Board from 1991 to 1997.
He also serves as a director of the Thoroughbred Racing

<PAGE>

Association of North America. Mr. Sampson is the son of Curtis A. Sampson,
the Company's Chairman of the Board who is a holder of approximately 35% of
the Company's common stock.

Michael J. Garin has been Vice President of Hospitality since May of
1997. He had served as President of Canterbury Park Concessions, Inc. since
April of 1994. From September 1993 to April 1994, Mr. Garin was employed as
Food and Beverage Supervisor of Little Six, Inc. During March 1992 to
September 1993 he served as a Training Program District Manager for Arby's.

Troy J. Mertens has been Vice President of Mutuels and Simulcasting
since May 1997, was Director of Mutuel and Simulcast Operations from April
1994 through April 1997, and Assistant General Manager from September 1995
until April 1997. Previously, he worked for the prior owners of the
Racetrack as a mutuel teller, mutuels supervisor, assistant to the Mutuels
Manager and an operations accountant.

Mark A. Erickson has served as Vice President of Facilities since May
1997. He was the Director of Facilities from April 1994 until April 1997.
From May 1992 until employment with the Racetrack, Mr. Erickson served as
Maintenance Supervisor for the Mall of America in Bloomington, Minnesota.

ITEM 2. DESCRIPTION OF PROPERTY

GENERAL.

The Racetrack, which is operated under the name "Canterbury Park," is
a modern facility, generally comparable to other major racetracks located
throughout the country. The Racetrack has an average patron capacity of
approximately 10,000 within the enclosed grandstand and a maximum patron
capacity of approximately 30,000 including the outside areas around the
grandstand. The grandstand and most public outdoor areas contain numerous
pari-mutuel windows, odds information boards, video monitors, concessions
stands and other amenities. The audio/visual system includes over 600
television monitors with most areas providing multi-screen viewing of the
races.

The Racetrack is located approximately 25 miles southwest of downtown
Minneapolis. The area immediately surrounding the Racetrack consists
primarily of partially developed industrial park and farm land. However, the
Racetrack is in reasonable proximity to a number of major entertainment
destinations including: Valleyfair, an amusement park about two miles from
the Racetrack which annually attracts approximately one million visitors
during the spring and summer; the Renaissance Festival, a seven-weekend late
summer attraction attracting approximately 315,000 visitors, located about
five miles from the Racetrack; and Mystic Lake Casino, located about three
miles from the Racetrack, which draws approximately 4.5 million patrons
annually. Approximately 20 miles from the Racetrack is the Mall of America,
the largest enclosed shopping mall in the United States, which attracts
approximately 40 million visitors per year.

RACING SURFACES.

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

GRANDSTAND.

The grandstand is a modern, air-conditioned, enclosed structure of
approximately 275,000 square feet with a variety of facilities on six
levels. The Lower Level contains space for support functions such as jockey
quarters, administrative offices, Racing Commission offices, the mutuels
department, concession and maintenance offices, first aid, mechanical and
electrical rooms. The Track Level includes mutuels windows, restrooms, a
variety of concession stands and other services. A large area of the track
level is used as a simulcast center during live racing and is utilized for
banquets and other events during the off-season. The Mezzanine Level
contains 1,320

<PAGE>

fixed seats in a glass-enclosed, air-conditioned area and an additional
3,000 seats located outside. In addition to the seats, the Mezzanine Level
contains mutuel windows, restrooms, concession stands and other guest
facilities. The Kitchen Level is an intermediate level located between the
Mezzanine and Clubhouse floors; it contains a full-service kitchen which can
support a full dining menu for the track-side dining terraces on the
Clubhouse Level and to prepare food for the other concession areas. The
Clubhouse Level is a multi-purpose area serving as a simulcast center during
wagering sessions on televised races, as well as a full-service dining area
during the live racing season. The Clubhouse Level includes 325 trackside
tables, each equipped with a television set, with a total seating capacity of
1,200 patrons and an additional 1,000 seats are located in lounges located
throughout the area. An additional feature of the Clubhouse Level is a
special club area which includes 225 dining seats, a party room and a large
bar and lounge. The Press Box/Officials' Level is located in the roof
trusses over the Clubhouse and contains work areas for the press, racing
officials, closed-circuit television, photo-finish and the track announcer.
In addition, the grandstand was structurally built to accommodate skyboxes
under the Press Box/Officials' Level, although none have yet been
constructed. Escalators and elevators are available to move patrons among the
various levels within the grandstand.

OTHER VIEWING AREAS.

In addition to the grandstand, patrons can watch races from the
following outdoor areas: the apron, or standee ramp, between the grandstand
and the racetrack and a large picnic area immediately north of the
grandstand. These areas have concession stands and mutuel windows nearby.

GROUNDS; SADDLING PADDOCK AREA.

The grounds surrounding the grandstand are extensively landscaped.
Located near the main entrance behind the grandstand is a European-style
paddock area where patrons can observe the jockey mounting and the post
parade.

BARN AND BACKSIDE FACILITIES.

The stable area consists of 33 barns with a total of approximately
1,650 stalls. In the stable area, there are 216 dormitory rooms for the
grooms and others working at the Racetrack. The stable area also contains a
combination racing office and cafeteria/recreation building for stable
personnel, two blacksmith buildings and space for a future veterinarian
hospital.

PARKING.

Approximately 7,500 paved parking spaces are available for patron and
employee automobiles at the Racetrack, including parking spaces that are
reserved for physically challenged patrons. The Racetrack also has unpaved
areas available for overflow parking for approximately 5,000 additional
automobiles. Areas are also reserved for bus parking.

INSURANCE.

The Company maintains insurance on its facilities in amounts it
believes are sufficient.

OTHER PROPERTIES.

Approximately 80 acres of the 355 acres owned by the Company are not
necessary for racing operations. This property, adjacent to the Racetrack,
is undeveloped and could be sold in whole or in part, depending upon future
opportunities. The 355 acres includes 30 acres of undeveloped land adjacent
to Canterbury Park which was purchased on August 18, 1997, for investment or
future development. The Company regularly evaluates other business
activities and development opportunities that would maximize the use of the
real estate surrounding the Racetrack and which would complement the
Company's primary business of horse racing.

<PAGE>

ITEM 3. LEGAL PROCEEDINGS

Not Applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not Applicable.

<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) MARKET INFORMATION

The Company's Common Stock, Warrants and Units (each Unit consisting
of one share of common stock and one warrant to purchase one share of common
stock) are traded on the NASDAQ system under the symbols TRAK, TRAKW and
TRAKU, respectively. The table set forth below indicates the high and low
trade prices for the Units, Common Stock and Warrants for the years ended
December 31, 1997 and 1996. These prices indicate interdealer prices without
retail markup, markdowns or commissions.

<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
High Low High Low
----- ----- ----- -----

<S> <C> <C> <C> <C>
Units
- -----

First Quarter $ 4 5/8 $ 2 $ 2 7/8 $ 1 1/2
Second Quarter 6 2 3/8 3 3/4 2
Third Quarter 4 5/8 2 3/4 3 3/4 2 1/2
Fourth Quarter 6 1/2 2 3/4 2 3/4 2 1/16

Common Stock
- ------------

First Quarter 4 1/2 2 3/16 2 5/8 1 3/8
Second Quarter 5 7/8 2 1/2 3 3/8 1 1/8
Third Quarter 4 3/4 3 3/8 3 1/4 2 1/4
Fourth Quarter 7 2 3/4 2 5/8 2

Warrants
- --------

First Quarter 13/16 1/16 3/8 1/16
Second Quarter 1 1/4 9/16 1/4
Third Quarter 5/8 1/4 1/4 1/4
Fourth Quarter 1 1/2 17/64 1/4 1/16
</TABLE>

(b) HOLDERS

At March 11, 1998, the Company had 350 holders of record of its
common stock. In addition, on that date a depository company held
approximately 1,346,868 shares as nominees for an undetermined number of
additional beneficial holders.

The Company has not paid any dividends on its common stock and does
not anticipate paying any in the foreseeable future.

11
<PAGE>

ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

Canterbury Park Holding Corporation (the "Company") owns and operates
Canterbury Park (the "Racetrack"), the only pari-mutuel horse racing facility
in the State of Minnesota. The Company's revenues for the years ended
December 31, 1997 and 1996 were derived primarily from pari-mutuel take-out
on races simulcast year-round to Canterbury Park from racetracks throughout
the country, and on live Thoroughbred and Quarter Horse races at the
Racetrack. During 1997 and 1996 the Company conducted 358 and 312 days of
simulcast racing, respectively. The Company hosted 56 and 55 day live race
meets in 1997 and 1996, respectively. These live race meets commenced in the
month of May and concluded in August. In 1997, the Company hosted three days
of live harness racing over the Labor Day weekend. During these live race
meets, the Company earns additional pari-mutuel revenue from sending the
signal for its races to out-of-state racetracks around the country. In
addition to pari-mutuel revenues, the Company generates revenues from
admissions, parking, program sales, concession sales, special events,
advertising and other sources.

On April 11, 1996, legislation became effective in Minnesota which,
beginning July 1, 1996, exempted the first $12 million of pari-mutuel revenue
from the 6% pari-mutuel tax. The legislation is effective until July 1, 1999
and benefits the horsepersons' purse fund as well as the Company during a
statutorily mandated twelve month period, beginning July 1 and ending the
following June 30. Effective July 1, 1996, pari-mutuel taxes have been
estimated for the 12 month period from July 1 through June 30, and an
estimated annual effective tax rate has been applied to pari-mutuel
commission revenues generated during the twelve month period.

The legislation referred to above also provides that winning
pari-mutuel tickets which are not cashed within one year of the end of the
respective race meet will become the property of the Company. The
legislation is effective through December 31, 1999 after which uncashed
winning tickets will again be remitted to the State of Minnesota. The
Company is recording revenue associated with the uncashed winning tickets at
the time, based on historical experience, that management can reasonably
estimate the amount of additional winning tickets from a race meet that will
be presented for payment. For the twelve months ended December 31, 1997 and
December 31, 1996, total uncashed winning ticket revenue included in
pari-mutuel revenues totalled approximately $333,000 and $180,000,
respectively.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31,
1996

In 1997, the Company, with the full cooperation of the horsepersons'
organizations, successfully completed its third live racing meet featuring an
entertaining and competitive stable of horses and jockey colony. Net income
for the year ended December 31, 1997 was $135,788, compared to net income of
$71,149 for the year ended December 31, 1996. This improvement in operations
was accomplished primarily due to the legislation enacted in 1996 which was
in effect for all of fiscal year 1997. Pari-mutuel tax expense decreased to
$51,177 in 1997 compared to $421,787 in 1996 and 799,316 in 1995. Revenues
related to unclaimed tickets increased to $333,290 in 1997 compared to
unclaimed ticket revenue of $179,867 in 1996. This legislation, however,
also benefits the horsepersons' purse funds which receive a higher percentage
of pari-mutuel take-out and resulted in an increase in the Company's
statutory purse expense of approximately $240,000 in 1997 compared to
$122,000 in 1996.

Offsetting the benefits of the 1996 legislation were expenses for
legislative activities in 1997. Expense levels in 1997 for legislative
activity were much higher than a normal year due to the Company's efforts to
obtain legislative approval for a casino at the Racetrack which would
generate revenues to help finance a new major league baseball stadium in
Minnesota. During fiscal year 1997 the Company incurred lobbying and
communication expenses of $257,000 and charged an additional $150,000 to
operations, including $86,000 of noncash expense resulting from the issuance
of stock options to consultants, to develop financial, design and market
feasibility studies related to the casino concept. While this proposal did
not receive legislative authorization in 1997, the Company is continuing to
pursue legislative options in 1998 which would be in the long term interests
of the Company and the Racetrack.

12
<PAGE>

The following table summarizes operating data for the years ended December 31,
1997 and December 31, 1996:

SUMMARY OF OPERATING DATA:

<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
<S> <C> <C>
RACING DAYS
Simulcast only days 302 261
Live and simulcast days 56 51
----------------- -----------------
TOTAL RACING DAYS 358 312

ATTENDANCE
Simulcast only days 130,000 132,000
Live and simulcast days 191,000 192,000
----------------- -----------------
TOTAL ATTENDANCE 321,000 324,000

ON-TRACK HANDLE
Simulcast only days $ 42,182,000 $ 42,136,000
Live and simulcast days
Live racing 11,321,000 12,251,000
Simulcast racing 12,494,000 10,396,000
OUT-OF-STATE LIVE HANDLE 12,635,000 9,895,000
----------------- -----------------
TOTAL HANDLE $ 78,632,000 $ 74,678,000

AVERAGE DAILY ATTENDANCE
Simulcast only days 430 506
Live and simulcast days 3,403 3,765

ON-TRACK PER CAPITA WAGERING
Simulcast only days $ 324 $ 319
Live and simulcast days 125 118

ON-TRACK AVERAGE DAILY HANDLE
Simulcast only days $ 139,675 $ 161,441
Live and simulcast days 425,268 444,059
</TABLE>

Total operating revenues for the years ended December 31, 1997 and
December 31, 1996 were $18,202,216 and $17,371,005, respectively.

Total pari-mutuel revenues increased 4.0% to $14,023,668 in 1997
from $13,487,640 in 1996. Pari-mutuel revenues derived from simulcasting
increased 5.1% to approximately $10,940,000 from approximately $10,407,000 in
1996. This change was consistent with the change in simulcast handle, which
increased to $54,676,000 in 1997, compared to $52,532,000 in 1996.

On-track wagering on live races at the Racetrack decreased by
approximately $ 930,000, or 7.6%, to approximately $11,321,000 in 1997, from
approximately $12,251,000 in 1996. Consequently, pari-mutuel revenue from
these live races decreased by 8.7% to $2.4 million in 1997 from approximately
$2.6 million in 1996. While on-track average daily handle decreased to
$425,268 in 1997 from $444,059 in 1996, the on-track per capita wagering
increased on simulcast only days and on days when both live and simulcast
racing were conducted.

<PAGE>

Pari-mutuel revenue from simulcasting the Racetrack's live races to out-of-
state racetracks totalled $360,253 in 1997 compared to $282,670 in 1996. The
Racetrack receives amounts ranging from 2.50% to 3.00% of amounts wagered at
out-of-state racetracks as a "Guest fee". The handle wagered at out-of-state
racetracks increased to $12.6 million in 1997, compared to $9.9 million wagered
out of-state in 1996.

Revenues earned related to uncashed winning tickets were approximately
$333,000 in 1997 compared to $180,000 in 1996. Uncashed winning tickets were
remitted to the State of Minnesota until April 11, 1996, the date the
legislation became effective.

Concession, admission and parking revenues were higher during the twelve
months ended December 31, 1997 compared to the twelve months ended December 31,
1996, despite a slight decrease in attendance from horse racing, due to higher
overall attendance from events other than horse racing. The Lilith Fair outdoor
concert in August 1997, with attendance of over 30,000 patrons, contributed
approximately $130,000 to concession revenues. Holiday in Lights in November
and December 1997 drew an additional 23,000 patrons to the Racetrack and
contributed to both admission and concession revenues.

Publication revenues decreased during fiscal year 1997 compared to fiscal
year 1996 due to a change in the simulcast program content and pricing structure
to benefit late day arrivals.

Other revenues have increased by 16% due primarily to facility rental
revenues generated by special events and other parking lot rental agreements.

Total operating expenses increased 4.8% to $17,898,019 in 1997 from
$17,084,033 in 1996. The increased costs are primarily related to increased
costs of legislative activities in 1997 as previously discussed. Salary and
benefit costs increased by 7.9% in 1997 compared to 1996. Approximately 1.0% of
the increase is attributable to higher costs of employee benefits. The
remainder is due primarily to additional full-time employees in 1997 resulting
partially from an increased number of special events in the current year.

Minnesota law requires the Company to segregate a portion of funds received
from wagering on simulcast and live horse races for future payment as purses for
live horse races or other uses of Minnesota's horsepersons' associations. This
purse expense is one of the Company's largest single expense items. The
minimum percentage required by law to be set aside for purses from simulcasting
varies substantially depending on the time of year the simulcasting is
conducted. For the 25-week period beginning in early May, which is the
statutorily established "Racing Season," 50% of net pari-mutuel revenue, before
deducting for purses, is allocated to a fund for the payment of purses during
the live meet. For the remaining 27 weeks of the racing year, November through
April, funds accumulate at the rate of 25% of net pari-mutuel revenue, before
deducting for purses, but after deducting an 8% expense factor. Purse expense
as a percentage of the Company's pari-mutuel commission and breakage revenues
increased slightly to 27.7% for the year ended 1997, from 26.8% for the year
ended December 31, 1996. The increase in this percentage is attributed to two
factors. First, the reduction in the pari-mutuel tax, which became effective
July 1, 1996, also benefitted the horsepersons' associations. As a result of
this legislation the Racetrack allocated more funds for purses related to
simulcast races from other racetracks. Second, in 1997 the Racetrack paid
approximately $131,000 to the Minnesota Horsemen's Benevolent and Protective
Association (the "MHBPA") for purses on live races simulcast to out-of-state
racetracks, compared to $87,000 for 1996. In general, pursuant to the agreement
with the MHBPA, 50% of the net earnings from import races during the 1997 and
1996 live meets were paid to the MHBPA. Net earnings are defined as guest fees
received, less the costs of sending the simulcast signal ("uplinking").

Amounts paid to the Minnesota Breeders' Fund are a function of on-track
handle and the increase is consistent with the increase in total on-track
handle. Host track fees decreased slightly to 3.44% of simulcast handle in 1997
compared to 3.49% in 1996. The host fee is calculated as a percentage of monies
wagered on out-of-state racetracks (generally 2.50% to 4.50%) and is negotiated
with each host track. The Racetrack received simulcast signals from over 40
race meets in 1996 and added an additional 10 different out-of-state race meets
during 1997.

<PAGE>

Pari-mutuel taxes decreased $370,610, or 87.9%, to $51,177 for the year
ended December 31, 1997 compared to $421,787 for the year ended December 31,
1996. This decrease is attributed to the legislation enacted in the State of
Minnesota on April 11, 1996 and effective July 1, 1996. Effective July 1,
1996, pari-mutuel taxes have been estimated for the 12 month period from July 1
through June 30, and an estimated annual effective tax rate has been applied to
pari-mutuel commission revenues generated during the twelve month period.

Advertising and marketing costs were 9.8% lower in 1997 due to increased
focus on expense control in this area. A patron database developed during the
1996 and 1995 live race meets allowed the Racetrack to efficiently and
effectively contact patrons via direct mail in 1997, reducing the need for mass
media advertising.

Interest expense relates primarily to amounts due to Mr. Curtis Sampson,
the Company's Chairman of the Board and a 35% shareholder, under a line of
credit agreement and to amounts due to the MHBPA for purses. The average daily
balance of amounts due under the line of credit were approximately $1,190,000
and $1,855,000 for the years ended December 31, 1997 and December 31, 1996,
respectively. The weighted average rate of interest on the line of credit was
9.42% and 10.45% for 1997 and 1996, respectively. The contractual rate of
interest on the line of credit changed from prime rate plus 2% at the beginning
of 1997 to the base prime rate in August of 1997. The average daily balance of
amounts due to the MHBPA were approximately $662,000 and $473,000, for the years
ended December 31, 1997 and 1996, respectively. The weighted average rate of
interest on the amounts due to the MHBPA was 8.17% and 8.27% for 1997 and 1996,
respectively. The interest rate on the line of credit and the MHBPA liability
was 8.50% at December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES:

During the year ended December 31, 1997, cash provided by operating
activities was $1,233,910, which resulted principally from net income of
$135,788, depreciation and amortization of $856,982, an increase in payable to
horsepersons of $163,941 and an increase in accounts payable and accrued
expenses of $130,802. During the year ended December 31, 1996, cash provided by
operating activities was $977,941, which resulted principally from net income of
$71,149, depreciation and amortization of $811,509, and an increase in accounts
receivable and other current assets of $51,094.

Cash provided by financing activities was $116,785 for the year ended
December 31, 1997, which represents the net proceeds on the Company's line of
credit with its majority shareholder of $42,188 and the proceeds of $74,597
from the issuance of common stock due to the exercise of stock options and to
the issuance of common stock pursuant to the Company's employee stock
purchase plan. During 1996, cash used in financing activities was $774,787,
which was the net amount of payments on the company's line of credit with its
majority shareholder of $817,555 offset by proceeds of $42,768 from the
issuance of common stock due primarily to the exercise of options. For
fiscal 1997, net cash used in investing activities was $1,283,582 which
consisted of $935,141 for the acquisition of a 30 acre tract of undeveloped
land adjacent to the Racetrack, $395,355 for capital expenditures, primarily
consisting of equipment and building improvements, partially offset by
proceeds from the sale of equipment of $47,344. For fiscal 1996, net cash
used in investing activities was $362,584 for capital expenditures, partially
offset by proceeds from the sale of equipment of $67,530. The Company
estimates that it will spend approximately $400,000 for capital expenditures
during fiscal year 1998.

Minnesota law requires the Company to segregate a portion of funds
(recorded as statutory purses in the statement of operations), received from
wagering on simulcast and live horse races, for future payment as purses for
live horse races or other uses of the horsepersons' associations. Pursuant to
an agreement with the MHBPA, the Company has transferred into a trust account or
paid directly to the MHBPA, approximately $3,287,000 and $3,164,000 for the
years ended December 31, 1997 and 1996, respectively, related to thoroughbred
races. Minnesota Statutes specify that amounts transferred into the trust
account are the property of the trust and not of the Company. The amounts due
the MHBPA were $709,573 and $553,190 at December 31, 1997 and 1996,
respectively, and are guaranteed by the Company's Chairman of the Board. The
interest rates on any statutory purses accrued but not transferred into the
trust were 8.50% and 8.25% at December 31, 1997 and 1996, respectively.

<PAGE>

The Company believes that the cash to be generated from operations,
together with funds available under its $3,000,000 line of credit with the
Company's Chairman of the Board, will be sufficient to satisfy its liquidity and
capital resource requirements for the next twelve months. The Company
anticipates that it will pay down a portion of the borrowings under the line of
credit with funds generated from operations and borrow additional amounts under
the line of credit as funds are needed for working capital purposes. The
Company is also negotiating a credit facility from a traditional lender to
replace the line of credit with Mr. Sampson. Mr. Sampson has advised the
Company that if it is unable to obtain a credit facility from a traditional
lender, then he will keep his line of credit in place through at least March 31,
1999. As of March 11, 1998, borrowings under the line of credit had been
reduced to approximately $1,067,000.

Cash flows provided from operations in 1998 are anticipated to be
consistent with cash flows provided by operations in 1997.

OPERATING PLAN:

In 1997 the Company was successful in conducting its third live race meet
in three years. The Company competes with racetracks located throughout the
United States in securing the better quality horses to run at the Racetrack.
Attracting the owners and trainers of better quality horses is largely
influenced by the ability to offer large purses. By reducing the number of
racing days and utilizing purse monies from simulcasting and live race wagering,
the Company continues to offer purses during its live racing season which were
comparable to most other midwestern racetracks. However, the Company
experienced increased competition for better quality horses from a racetrack
located near Des Moines, Iowa which offered substantially larger purses than
the Company in 1997.

The Company plans a live race meet in 1998 which will consist of a 24-day
mixed meet of Thoroughbred and Quarter Horse racing, a 28-day Thoroughbred only
meet, and three days of live harness racing over Labor Day weekend.

The Company's ability to operate profitably in 1998 will largely depend on
its ability to maintain levels of attendance and wagering handle for live and
simulcast racing at levels similar to 1997. The Company will also need to
maintain operating expenses, including legislative related expenses, at levels
similar to 1997. In addition, the Company plans to continue its emphasis on
special events and maximizing the potential of the entire facility year-round.

FACTORS AFFECTING FUTURE PERFORMANCE:

The Company is in the process of initiating formal communications with its
significant suppliers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 issue. There can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted and would not have
an adverse effect on the Company's systems. The Company reviewed its internal
computer applications for vulnerability to the Year 2000 issue. Software
products deemed to be susceptible to corruption are under evaluation for
conversion or replacement in the year 1999 or earlier. These applications are
not considered critical to the Company's daily operations and costs to convert
or replace the software are not expected to be material.

From time to time, in reports filed with the Securities and Exchange
Commission, in press releases, and in other communications to shareholders or
the investing public, the Company may comment on anticipated future financial
performance. Such forward looking statements, including statements contained in
this Report on Form 10-KSB, are subject to risks and uncertainties which may
adversely affect future financial performance, including, but not limited to,
fluctuations in attendance at the Racetrack, changes in the level of wagering by
patrons, legislative and regulatory changes, the impact of wagering products
introduced by competitors, higher than expected expenses, and other risks
applicable to the horse racing industry generally.

16
<PAGE>

CHANGES IN ACCOUNTING STANDARDS

The Financial Accounting Standards Board ("FASB") has issued SFAS No. 130,
"Reporting Comprehensive Income". This statement establishes standards for
reporting and presenting comprehensive income and its components in the
financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. Management is currently
evaluating the impact of this pronouncement.

The FASB has also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement establishes standards for
the way public enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. Financial
statement disclosures from prior periods are required to be restated.
Management is currently evaluating the impact of this pronouncement.

ITEM 7. FINANCIAL STATEMENTS

The following financial statements of the Company are set forth on pages 18
through 29 of the Form 10-KSB:

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . 18

Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . . 19

Consolidated Statements of Operations for the years ended December 31,
1997 and December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . 20

Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997 and December 31, 1996 . . . . . . . . . . 21

Consolidated Statements of Cash Flows for the years ended December 31,
1997 and December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . 22

Notes to Consolidated Financial Statements for the years ended
December 31, 1997 and December 31, 1996 . . . . . . . . . . . . . . . 23
</TABLE>

<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
Canterbury Park Holding Corporation
Shakopee, Minnesota

We have audited the accompanying consolidated balance sheets of Canterbury Park
Holding Corporation and subsidiary (the Company) as of December 31, 1997 and
1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Canterbury Park
Holding Corporation and subsidiary as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.

February 27, 1998
Minneapolis, Minnesota

<PAGE>

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash $ 364,214 $ 296,671
Accounts receivable 185,468 186,834
Inventory 76,657 72,731
Deposits 20,000 20,000
Prepaid expenses 106,381 81,367
----------- -----------
Total current assets 752,720 657,603

PROPERTY AND EQUIPMENT, net (Note 2) 9,061,205 8,631,754

INTANGIBLE ASSETS, net of accumulated
amortization of $14,875 and $9,925,
respectively 9,494 12,775
----------- -----------
$ 9,823,419 $ 9,302,132
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable $ 715,062 $ 623,930
Accrued wages and payroll taxes 200,942 161,272
Accrued interest 103,184 149,387
Advance from shareholder (Note 6) 1,651,942 1,609,754
Accrued property taxes 305,032 370,916
Payable to horsepersons (Note 1) 724,496 560,555
----------- -----------
Total current liabilities 3,700,658 3,475,814

COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)

STOCKHOLDERS' EQUITY (Note 4):
Common stock, $.01 par value,
10,000,000 shares authorized,
2,998,848 and 2,961,382,
respectively, shares issued and
outstanding 29,989 29,614
Additional paid-in capital 8,061,875 7,879,551
Unearned compensation (22,044)
Accumulated deficit (1,947,059) (2,082,847)
----------- -----------
Total stockholders' equity 6,122,761 5,826,318
----------- -----------
$ 9,823,419 $ 9,302,132
----------- -----------
----------- -----------
</TABLE>

See notes to consolidated financial statements.

<PAGE>

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
OPERATING REVENUES:
Pari-mutuel $ 14,023,668 $ 13,487,640
Concessions 2,421,538 2,138,896
Admissions and parking 602,215 581,304
Publications 759,657 823,818
Other operating revenue 395,138 339,347
------------ ------------
18,202,216 17,371,005

OPERATING EXPENSES:
Pari-mutuel expenses:
Statutory purses 3,689,747 3,483,674
Host track fees 1,880,779 1,825,999
Pari-mutuel taxes 51,177 421,787
Minnesota Breeders' Fund 696,459 679,404
Salaries and benefits 4,321,476 4,004,104
Cost of sales related to concessions 721,146 636,231
Cost of sales related to publications 856,472 913,331
Depreciation and amortization 856,982 811,509
Repairs, maintenance and supplies 443,851 402,753
Property taxes 309,764 369,824
Advertising and marketing 873,855 968,375
Utilities 671,228 648,514
Other operating expenses 2,525,083 1,918,528
------------ ------------
17,898,019 17,084,033
NONOPERATING (EXPENSES) REVENUES:
Interest expense (Note 6) (166,252) (228,355)
Other, net 6,243 12,532
------------ ------------
(160,009) (215,823)
------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 144,188 71,149
Income tax expense (Note 3) (8,400)
------------ ------------
NET INCOME $ 135,788 $ 71,149
------------ ------------
------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,976,961 2,949,392
------------ ------------
------------ ------------

BASIC NET INCOME PER COMMON SHARE $ .05 $ .02
(Note 5) ------------ ------------
------------ ------------

DILUTED NET INCOME PER COMMON $ .04 $ .02
SHARE (Note 5) ------------ ------------
------------ ------------
</TABLE>

See notes to consolidated financial statements.

20
<PAGE>

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Additional Unearned
Number Common Paid-in Compen- Accumulated
of Shares Stock Capital sation Deficit Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 2,939,271 $ 29,393 $ 7,837,004 $ (2,153,996) $ 5,712,401

Exercise of stock options 15,000 150 27,975 28,125

Exercise of stock warrants 100 1 487 488

Shares issued under Employee
Stock Purchase Plan 7,011 70 14,085 14,155

Net income 71,149 71,149
------------ ------------ ------------ ------------ ------------

BALANCE, DECEMBER 31, 1996 2,961,382 29,614 7,879,551 (2,082,847) 5,826,318

Exercise of stock options 22,500 225 42,494 42,719

Issuance of compensatory
stock options 108,102 $ (22,044) 86,058
Shares issued under Employee
Stock Purchase Plan 14,966 150 31,728 31,878

Net income 135,788 135,788
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 2,998,848 $ 29,989 $ 8,061,875 $ (22,044) $ (1,947,059) $ 6,122,761
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>

See notes to consolidated financial statements.

21
<PAGE>

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 135,788 $ 71,149
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 856,982 811,509
Stock options issued for consulting services 86,058
Decrease in accounts receivable 1,366 51,094
(Increase) decrease in other current assets (28,940) 24,156
Increase (decrease) in accounts payable
and accrued expenses 130,802 (31,650)
(Decrease) Increase in accrued interest (46,203) 40,047
Decrease in accrued property taxes (65,884) (15,208)
Increase in payable to horsepersons 163,941 26,844
---------- ----------
Net cash provided by operations 1,233,910 977,941

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment and other assets (395,355) (362,584)
Additions to land (935,141)
Proceeds from sale of equipment 47,344 67,530
---------- ----------
Net cash used in investing activities (1,283,152) (295,054)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 74,597 42,768
Net proceeds from (payments on) advance from shareholder 42,188 (817,555)
---------- ----------
Net cash provided by (used in) financing activities 116,785 (774,787)
---------- ----------

NET INCREASE (DECREASE) IN CASH 67,543 (91,900)

CASH AT BEGINNING OF YEAR 296,671 388,571
---------- ----------

CASH AT END OF YEAR $ 364,214 $ 296,671
---------- ----------
---------- ----------

INTEREST PAID $ 212,450 $ 188,308
---------- ----------
---------- ----------
</TABLE>

See notes to consolidated financial statements.

22
<PAGE>

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------

1. SUMMARY OF 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 outstanding securities 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 the acquisition was
accounted for under the purchase method of accounting whereby the acquired
assets and liabilities have been recorded at the Company's cost. The
primary asset of JRI was Canterbury Downs Racetrack and the 325 acres of
surrounding land.

On May 20, 1994, the Company adopted a plan of Reorganization pursuant to
which the sole shareholder of Canterbury Park Concessions, Inc. (CPC), and
majority shareholder of the Company, agreed to exchange his shares of CPC
stock for 198,888 shares of the Company's common stock concurrent with the
closing of a public offering. Pursuant to the Plan of Reorganization, CPC
became a wholly owned subsidiary of the Company in August 1994 when the
Company completed the initial public offering of its common stock. This
reorganization was treated in a manner similar to a pooling of interests.
Net proceeds received by the Company from the public offering were
approximately $4,847,000 which, along with additional borrowings 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.

The consolidated financial statements include the accounts of the Company
and CPC after elimination of intercompany accounts and transactions.

OPERATIONS - The Company's revenues are derived primarily from pari-mutuel
wagering on simulcast and live horse races.

BASIS OF ACCOUNTING - The consolidated financial statements have been
prepared assuming that the Company will continue in existence. This
contemplates the realization of assets and settlement of obligations in the
ordinary course of business. The Company has incurred cumulative operating
losses of approximately $1,947,000, and has a working capital deficit of
approximately $2,948,000 at December 31, 1997. During 1997 and 1996, the
Company hosted a number of special events in addition to horse racing in an
effort to increase its cash flows and attain profitability. These
additional events, combined with the benefit to the Company of legislative
changes referred to below, have allowed the Company to achieve
profitability in 1996 and 1997. Management continues to pursue legislation
for additional potential sources of revenue and is also pursuing more
traditional bank financing. Management believes that funds available under
its line of credit, or any other line of credit which replaces it, along
with funds generated from operations, will be sufficient to satisfy its
liquidity and capital resource requirements during 1998. If the line of
credit is not replaced, the Company's majority shareholder has agreed not
to terminate the line of credit prior to March 31, 1999.

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

DEPRECIATION - Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets, generally 5 to 39
years.

23
<PAGE>

INTANGIBLE ASSETS - Intangible assets consist of organization and trademark
costs and are amortized on a straight-line basis over 60 months.

UNCASHED WINNING TICKETS - On April 11, 1996, legislation became
effective in Minnesota whereby winning pari-mutuel tickets which are not
cashed within one year of the end of the respective race meet will become
the property of the Company. The legislation is effective through December
31, 1999 after which uncashed winning tickets will again be remitted to the
State of Minnesota. The Company will record revenue associated with the
uncashed winning tickets at the time that, based on historical experience,
management can reasonably estimate the amount of additional winning tickets
from a race meet that will be presented for payment. In 1997, the Company
continued to refine its estimation process based on its additional
historical experience. As a result, the Company recorded additional
revenues of $55,794 in 1997 based on the revised estimation process.

PARI-MUTUEL TAXES - The legislation referred to above also provides that,
beginning July 1, 1996, the first $12 million of pari-mutuel revenue would
be exempt from the 6% pari-mutuel tax. The legislation is effective until
July 1, 1999 and benefits the horsepersons' purse fund as well as the
Company. Effective July 1, 1996, pari-mutuel taxes have been estimated for
each 12 month period from July 1 through June 30, and an estimated annual
effective tax rate has been applied to all pari-mutuel commission and
breakage revenues.

PAYABLE TO HORSEPERSONS - The Minnesota Pari-Mutuel Horse Racing Act
specifies that the Company is required to segregate a portion of funds
(recorded as statutory purses in the statements of operations), received
from wagering on simulcast and live horse races, for future payment as
purses for live horse races or other uses of the horsepersons'
associations. Pursuant to an agreement with the MHBPA, the Company has
transferred into a trust account or paid directly to the MHBPA,
approximately $3,287,000 and $3,164,000 for the years ended December 31,
1997 and 1996, respectively, related to Thoroughbred races. Amounts due to
the MHBPA are guaranteed by the Chairman of the Board. Minnesota Statutes
specify that amounts transferred into the trust account are the property of
the trust and not of the Company. The interest rates on any statutory
purses accrued but not transferred into the trust were 8.50% and 8.25% at
December 31, 1997 and 1996, respectively.

SHORT-TERM BORROWINGS - The weighted average interest rates on short-term
borrowings at December 31, 1997 and 1996 are 8.50% and 9.74%, respectively.
The weighted average rates for 1997 and 1996 were 8.97% and 10.00%,
respectively.

INCOME TAXES - Prior to 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 of the Internal Revenue Code. As a result,
any income tax liability or benefit was being passed through to the
individual shareholders and no income taxes payable or income tax expenses
were recorded in the consolidated financial statements. Simultaneous with
the Company's completion of the public offering of its common stock, the
Company's Subchapter S election was terminated. A portion of the losses
accumulated prior to the public offering is not available to offset future
earnings. The Company currently accounts for income taxes in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING
FOR INCOME TAXES.

NET INCOME PER SHARE - Effective December 15, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 128 "Earnings
per Share". The Statement requires the Company to present its net income
per share in basic and diluted forms and to restate net income per share
from prior periods to conform with the new statement. Basic net income
per common share is based on the weighted average number of common shares
outstanding during each year. Diluted net income per common share takes
into effect the dilutive effect of potential common shares outstanding.
The Company's only potential common shares outstanding are stock options
and warrants.

IMPAIRMENT OF LONG-LIVED ASSETS - Management of the Company periodically
reviews the carrying value of property and equipment for potential
impairment by comparing the carrying value of these assets with their

24
<PAGE>

related expected future net cash flows. Should the sum of the related
expected future net cash flows be less than the carrying value, management
will determine whether an impairment loss should be recognized. An
impairment loss would be measured by the amount by which the carrying value
of the asset exceeds the fair value of the asset. To date, management has
determined that no impairment of these assets exists.

2. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31:

<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 3,648,851 $ 2,713,710
Buildings and building improvements 2,829,762 2,754,502
Furniture and equipment 5,392,330 5,145,010
------------ ------------
11,870,943 10,613,222
Accumulated depreciation (2,809,738) (1,981,468)
------------ ------------
$ 9,061,205 $ 8,631,754
------------ ------------
------------ ------------
</TABLE>

3. INCOME TAXES

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

<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Federal tax expense computed at statutory rate $ 50,000 $ 25,000
Decrease in valuation allowance (155,000) (41,000)
Nondeductible lobbying expense 90,000 12,000
State expense, net of federal impact 24,000 6,000
Other (600) (2,000)
------------ ------------
$ 8,400 $ -
------------ ------------
------------ ------------
</TABLE>

Temporary differences, tax carryforwards and the valuation allowance at
December 31 are as follows:

<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Operating loss carryforward $ 491,000 $ 683,000
Tax depreciation greater than book depreciation (247,000) (272,000)
Organizational and start-up costs 31,000 54,000
Repairs capitalized 13,000 17,000
Other 59,000 20,000
Valuation allowance (347,000) (502,000)
------------ ------------
$ - $ -
------------ ------------
------------ ------------
</TABLE>

The benefit of deferred tax assets has been offset by a valuation allowance
at December 31, 1997 and 1996 because future realization is uncertain. At
December 31, 1997, the Company has federal income tax net operating loss
carryforwards of approximately $1,185,000 which expire in years 2009
through 2011.

25
<PAGE>

4. STOCKHOLDERS' EQUITY

EMPLOYEE STOCK PURCHASE PLAN:

On April 3, 1995, the Board of Directors adopted the 1995 Employee Stock
Purchase Plan. The plan, which is open to all employees of the Company
working more than 15 hours per week, commenced on April 15, 1995 and will
continue for ten years. The plan consists of one-year phases. The phases
commence on October 1 of each year. Under the terms of the plan, employees
may set aside a portion of their payroll earnings to purchase shares of the
Company's common stock at the lower of 85% of the fair market value of the
shares on the commencement date of each phase or 85% of the fair market
value on the termination date of each phase. The plan provides for the
sale of up to 100,000 shares. The plan issued 14,966 and 7,011 shares in
1997 and 1996, respectively.

STOCK OPTIONS:

The Company has a stock option plan (the Stock Option Plan) which provides
for the granting of awards in the form of stock options, restricted stock,
stock appreciation rights, and deferred stock to key employees and
nonemployees, including directors of and consultants to the Company and any
subsidiary, to purchase up to a maximum of 500,000 shares of common stock.
Options that are granted under the plan may be either options that qualify
as "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (Incentive Stock Options), or
those that do not qualify as Incentive Stock Options (Non-Qualified Stock
Options). The plan is administered by the Board of Directors, or a
committee designated by the Board, which determines the persons who are to
receive awards under the plan, the type of award to be granted, the number
of shares subject to each award and, if an option, the exercise price of
each option. The plan also provides for formula grants of Non-Qualified
Stock Options to nonemployee directors of the Company.

Stock option activity related to the Plan during the years ended December
31, 1997 and 1996 is summarized below:

<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
Weighted Weighted
Shares Average Shares Average
Exercise Price Exercise Price
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 184,000 $ 2.58 117,000 $ 2.90

Granted 102,000 2.12 85,000 1.98
Exercised (21,500) 1.85 (15,000) 1.88
Canceled (1,000) 2.06 (3,000) 1.75
-------------- -------------- -------------- --------------

Outstanding at end of year 263,500 $ 2.47 184,000 $ 2.58
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------

Options exercisable at end of year 221,750 $ 2.54 155,000 $ 2.74
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>

In addition to options granted under the plan, in June 1994 the Company
issued options to purchase 73,000 shares of common stock to certain
individuals who were instrumental in assisting the Company commence
operations. The 72,000 options currently outstanding are exercisable at
$3.00 per share and expire in August 1999.

26
<PAGE>

In 1997, the Company issued an option to purchase 50,000 shares of common stock
at an exercise price of $3.75 per share, for consulting services. The option
was valued at $88,176, of which $66,132 was recognized in the 1997 statement of
operations. The option expires March 31, 2000.

The Company also issued an option to purchase 12,500 shares of common stock at
an exercise price of $3.25 per share, to a Board member for consulting services.
The option was valued at $19,926, all of which was recognized in the 1997
statement of operations, and expires in 21 months.

In 1994, the Chairman of the Board was granted an option (which expires in May
1998) to purchase 51,825 shares at $2.64 per share.

At December 31, 1997, the weighted average remaining contractual life of all
options was 63 months, and the range of exercise prices was $1.75 to $4.00.

In 1996, the Company adopted Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation." As permitted by SFAS
123, the Company has elected to continue following the guidance of APB 25 for
measurement and recognition of stock-based transactions with employees. No
compensation cost has been recognized for stock options issued under the Stock
Option Plan because the exercise price of all options granted was at least equal
to the fair value of the common stock at the date of grant. If compensation
cost for the Company's stock option and employee stock purchase plans had been
determined based on the fair value at the grant dates, consistent with the
method provided in SFAS 123, the Company's net income (loss) and earnings (loss)
per share would have been as follows:

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net Income (Loss):
As reported $ 135,788 $ 71,149
Pro forma (71,022) (43,622)

Basic Earnings (Loss) Per Share:
As reported $ .05 $ .02
Pro forma (.02) (.01)

Diluted Earnings (Loss) Per Share:
As reported $ .04 $ .02
Pro forma (.02) (.01)
</TABLE>

The fair value of options granted under the Stock Option Plan during 1997 and
1996 were estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions and results:

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Dividend yield None None
Expected volatility 85% 88%
Risk-free interest rate 6.56% 5.86%
Expected life of option 120 mo. 120 mo.
Fair value of options on grant date $ 214,931 $ 130,722
</TABLE>

27
<PAGE>

WARRANTS:

In 1994, the Company issued warrants to purchase 400,000 shares of common
stock to the Company's founders in consideration for services performed.
The warrants expire in August 1998 and are exercisable at $4.00 per share.
Also, there are currently outstanding warrants to purchase 1,437,300 shares
of common stock related to the initial public offering which are
exercisable at $4.88 per share and expire in August 1998.

In addition to the above, the Company's selling agents have a warrant to
purchase 125,000 units (each unit consisting of one share of common stock
and one warrant to purchase one share of common stock) at an exercise price
of $4.80 per unit which expires in August 1998.

The Company's Articles of Incorporation provide that the Company may
redeem, at fair market value, securities held by any person or entity whose
status as a security holder, in the opinion of the Board of Directors of
the Company, may result in the disapproval, modification, or nonrenewal of
any contract or the loss or nonreinstatement from any governmental agency
of any license or franchise held by the Company or any of its subsidiaries,
which license or franchise is conditioned upon some or all of the holders
of capital stock meeting certain criteria.

5. EARNINGS PER SHARE

<TABLE>
<CAPTION>
Year Ended December 31, 1997 Year Ended December 31,1996
------------------------------------------ ------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 135,788 $ 71,149
------------ ------------
------------ ------------

BASIC EPS
Income available
to common
stockholders 135,788 2,976,961 $ .05 71,149 2,949,392 $ .02
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

EFFECT OF DILUTIVE
SECURITIES
Stock options 114,932 37,906
------------ ------------
DILUTED EPS
Income available
to common stock-
holders $ 135,788 3,091,893 $ .04 $ 71,149 2,987,298 $ .02
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>

Options to purchase 103,000 shares of common stock at a weighted average
exercise price of $3.88 per share were outstanding during 1997 but were not
included in the computation of diluted EPS because the options' exercise
prices were greater than the average market price of the common shares.
The options which expire in an average of 43 months were still outstanding
at the end of year 1997. In addition, 1,962,300 warrants were excluded
because the weighted average exercise price of $4.70 was greater than the
average market price of the common shares. The warrants expire in August
1998.

28
<PAGE>

6. LINE OF CREDIT

At December 31, 1997 and 1996, the Company had a $3,000,000 line of credit
arrangement with the Chairman of the Board, of which $1,651,942 and
$1,609,754, respectively, were outstanding. The interest rate for
borrowings under the line of credit is the prime rate at December 31, 1997.
The line of credit may be canceled on 90 days notice. Interest charged to
operations under this line of credit was approximately $112,000 and
$194,000 for the periods ended December 31, 1997 and 1996, respectively.

7. OPERATING LEASES AND COMMITMENTS

The Company leased certain copying equipment under an operating lease which
required monthly payments of $5,500. This lease expired in May 1996.
Rental expense charged to operations was approximately $27,500 for the year
ended December 31, 1996.

In addition, the Company entered into a five-year totalizator services
agreement with Autotote Systems, Inc. (Autotote) in May 1994. Pursuant to
the agreement, Autotote provides totalizator equipment and computer
programs which record and process all wagers and calculate the odds and
payoffs. For such services, Autotote receives a fee of approximately .35%
of the gross monies wagered. Amounts charged to operations under this
agreement for the years ended December 31, 1997 and 1996 were approximately
$311,000 and $291,000, respectively. During the 1997 and1996 live race
meets, Autotote provided uplink services which enabled the Company to
simulcast horse races held at Canterbury Park to out-of-state racetracks.
These services resulted in an amount charged to operations in 1997 and 1996
of approximately $95,000 and $102,000, respectively. A director of the
Company is the regional sales manager of Autotote.

8. CONTINGENCIES

In connection with the purchase of JRI (note 1), the company entered into
an Earn Out Promissory Note dated March 29, 1994. In accordance with the
Earn Out Note if (i) off-track betting becomes legally permissible in the
State of Minnesota and (ii) the Company begins to conduct off-track betting
with respect to or in connection with its operations, the Company will be
required to pay to the IMR Fund, L.P. the greater of $700,000 per operating
year, as defined, or 20% of the net pretax profit, as defined for each of
five operating years. At the date (if any) that these two conditions are
met, the five minimum payments will be discounted back to their present
value and the sum of those discounted payments will be recorded as an
increase to the purchase price. The purchase price will be further
increased if payments become due under the "20% of Net Pretax Profit"
calculation. The first payment is to be made 90 days after the end of the
third operating year in which off-track betting is conducted by the
Company. Remaining payments would be made within 90 days of the end of
each of the next four operating years.

9. RELATED-PARTY TRANSACTIONS

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

In 1997 and 1996, the Company paid $50,000 and $40,000, respectively, to a
Board member for advertising and marketing services provided to the
Company. This Board member was also granted 12,500 stock options (refer to
Note 4).

29
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Information required under this item with respect to the directors
will be set forth in a section captioned "Election of Directors"
in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on June 4, 1998 (the "1998 Proxy
Statement"), a definitive copy of which will be filed with the
Commission within 120 days of the close of the 1997 fiscal year,
which information is incorporated herein by reference. Information
regarding executive officers is presented under Item 1 herein.

ITEM 10. EXECUTIVE COMPENSATION

Information required under this item will be set forth in a section
entitled "Executive Compensation" in the Company's 1998 Proxy
Statement which information is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required under this item will be set forth in a section
entitled "Shareholdings of Principal Shareholders and Management"
in the Company's 1998 Proxy Statement which information is
incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required under this item will be set forth in a section
entitled "Certain Transactions" in the Company's 1998 Proxy Statement
which information is incorporated herein by reference.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS. See Exhibit Index at page 32 which is incorporated herein
by reference. Exhibits that cover management contracts or
compensatory plans or arrangements are marked with an asterisk (*) on
the Exhibit Index.

(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
fourth quarter of 1997.

30
<PAGE>

SIGNATURES
----------

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

Dated: March 24, 1998 CANTERBURY PARK HOLDING CORPORATION

By /s/ Randall D. Sampson
----------------------------------------
Randall D. Sampson
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the date set forth above.

POWER OF ATTORNEY

Each person whose signature appears below constitutes 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 or all amendments to this Annual Report on Form 10-KSB
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all said attorneys-in-
fact and agents, each acting alone, or his substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.

Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Curtis A. Sampson Chairman of the Board March 24, 1998
- ------------------------------
Curtis A. Sampson

/s/ Dale H. Schenian Director; Vice Chairman March 24, 1998
- ------------------------------
Dale H. Schenian

/s/ Randall D. Sampson Chief Executive Officer, March 24, 1998
- ------------------------------ President*, General Manager,
Randall D. Sampson Treasurer and Director

/s/ Brian C. Barenscheer Director March 24, 1998
- ------------------------------
Brian C. Barenscheer

/s/ Gibson Carothers Director March 24, 1998
- ------------------------------
Gibson Carothers

/s/ Terence McWilliams Director March 24, 1998
- ------------------------------
Terance McWilliams

/s/ Carin Offerman Director March 24, 1998
- ------------------------------
Carin Offerman
</TABLE>

*Chief Financial Officer and Chief Accounting Officer.

31
<PAGE>

CANTERBURY PARK HOLDING CORPORATION AND SUBSIDIARY

Exhibit Index To
Form 10-KSB for the Year Ended December 31, 1997

Regulation S-B Location in Consecutive Numbering
Exhibit Table System as Filed with the Securities
Reference Title of Document and Exchange Commission
- -------------- ------------------------------------------------------- ----------------------------------------------------
<S> <C> <C>
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.

4.1 Warrant Agreement between the Company and the Filed as Exhibit 4.1 to the SB-2 Registration
Warrant Agent Statement and incorporated herein by reference.

10.1 Plan of Reorganization dated as of May 20, 1994 Filed as Exhibit 10.1 to the SB-2 Registration
between Canterbury Park Holding Corporation and Statement and incorporated herein by reference.
Canterbury Park Concessions, Inc.

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 Filed as Exhibit 10.3 to the SB-2 Registration
Horsemen's Benevolent and Protective Association, Inc. Statement and incorporated herein by reference.
to Minnesota Racing Commission waiving 125 day
racing minimum

10.4 Totalizator Services Agreement dated May 2, 1994 Filed as Exhibit 10.4 to the SB-2 Registration
between Autotote Systems, Inc. and Canterbury Park Statement and incorporated herein by reference.
Holding Corporation.

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.
</TABLE>

* Denotes an exhibit that covers management contracts or compensatory plans or
arrangements.

32
<PAGE>

Regulation S-B Location in Consecutive Numbering
Exhibit Table System as Filed with the Securities
Reference Title of Document and Exchange Commission
- -------------- ------------------------------------------------------- ----------------------------------------------------
<S> <C> <C>
10.7 Curtis A. Sampson Guaranty to HRA Filed as Exhibit 10.7 to the SB-2 Registration
Statement and incorporated herein by reference.

10.8 Form of Founders' Warrants Filed as Exhibit 10.8 to the SB-2 Registration
Statement and incorporated herein by reference.

10.9 Curtis A. Sampson Warrant Filed as Exhibit 10.9 to the SB-2 Registration
Statement and incorporated herein by reference.

10.10 Line of Credit Agreement dated as of June 17, 1994 Filed as Exhibit 10.10 to the SB-2 Registration
between Canterbury Park Holding Corporation and Statement and incorporated herein by reference.
Curtis A. Sampson

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.

10.12 Compensatory Employee and Advisor Stock Plan Filed as Exhibit 4.2 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.

10.13 Stock Option Plan for Non-Employee Consultants Filed as Exhibit 4.3 to the Registration Statement
and Advisors on Form S-8 of the Company filed on August 28, 1997
(File No. 333-34509) and incorporated herein by
reference.

21 Subsidiary of the Registrant Filed herewith at page 34.

23 Independent Auditors' Consent Filed herewith at page 35.

24 Power of Attorney Included in signature page at page 31.
</TABLE>

The exhibits referred to in this Exhibit will be supplied to a shareholder at a
charge of $.25 per page upon written request directed to Canterbury Park Holding
Corporation at the executive offices of the Company.

<PAGE>

Exhibit 21

SUBSIDIARY OF CANTERBURY PARK HOLDING CORPORATION

Jurisdiction of
Subsidiaries Incorporation
------------ ---------------

Canterbury Park Concessions, Inc. Minnesota

The subsidiary is 100%-owned directly by Canterbury Park Holding Corporation.
The financial statements of such subsidiary are included in the Consolidated
Financial Statements of Canterbury Park Holding Corporation.

<PAGE>

Exhibit 23

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statements
No. 33-96582, No. 33-96580 and No. 333-34509 of Canterbury Park Holding
Corporation on Form S-8 and Registration Statement No. 33-81262C on form S-3
of Canterbury Park Holding Corporation of our report dated February 27, 1998
appearing in this Annual Report on Form 10-KSB of Canterbury Park Holding
Corporation for the year ended December 31, 1997.

Minneapolis, Minnesota
March 26, 1998

<PAGE>
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