5.STOCK BASED COMPENSATION

Stock Options:

The Company’s 1994 Stock Plan (the “Plan”) provides for the granting of awards in the form of stock options, restricted stock, stock appreciation rights, and deferred stock to key employees and non-employees, including directors of and consultants to the Company and any subsidiary, to purchase up to a maximum of 1,450,000 shares of common stock. The Company currently has 184,430 shares available for grant under the Plan. 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 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 non-employee directors and consultants of the Company.

The Plan provides that payment of the exercise price may be made in the form of unrestricted shares of common stock already owned by the optionee. The Company calculates the fair market value of unrestricted shares as the average of the high and low sales prices on the date of exercise. The Company’s common stock is purchased upon the exercise of stock options, and restricted stock awards are settled in shares of the Company’s common stock.

Stock option activity related to the Plan during the years ended December 31, 2012 and 2011 is summarized below:

	2012			2011
		Shares	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price

Outstanding at beginning of year		318,002	$9.89		368,437	$9.21

Granted		-	-		15,000	13.30
Exercised		(24,985)	7.09		(62,185)	6.82
Expired/Forfeited		(750)	6.76		(3,250)	7.23

Outstanding at end of year		292,267	$10.13		318,002	$9.89

Options exercisable at end of year		272,142	$10.27		257,252	$10.44

The grant-date fair value of options outstanding and exercisable at December 31, 2012 and 2011 was $1,115,000 and $1,091,000, respectively. The weighted average remaining contractual term of these options is 5.2 and 5.8 years, respectively.

The weighted-average grant-date fair value of options granted during 2011 was $93,750. There were no options granted in 2012. The total fair value of options exercised during the years ended December 31, 2012 and 2011 was $74,000 and $229,000, respectively. The total income tax benefit recognized in the income statement for stock-based compensation arrangements was $32,000 and $61,000 for 2012 and 2011, respectively.

The following table summarizes information concerning all options outstanding and options exercisable as of December 31, 2012:

Range of Exercise Price	Options Outstanding	Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Price	Options Exercisable	Weighted Average Exercise Price
$ 5.00 – 7.50	92,267	6.3	$ 6.22	92,267	$ 6.22
$ 7.51 – 11.25	80,500	7.1	$ 8.33	60,375	$ 8.35
$ 11.26 – 16.50	90,000	4.0	$ 13.52	90,000	$ 13.52
$ 16.51 – 17.25	29,500	1.6	$ 16.94	29,500	$ 16.94
Total	292,267	5.3	$ 10.13	272,142	$ 10.27

Board of Director Stock Option and Restricted Stock Grants

Prior to June 2, 2011, the Company’s Stock Plan provided for annual, automatic grants to each non-employee member of the Board of Directors on the first business day each February of non-qualified stock options to acquire 3,000 shares of common stock. Pursuant to this provision, on February 1, 2011, 15,000 options were granted to five non-employee board members with an exercise price per share equal to the market price on the date of grant of $13.30. The stock options vest over a six-month period and expire in ten years. The compensation cost associated with this grant of Board of Directors options is $93,750 and was recognized as expense over the six-month vesting period.

The Company used the Black-Scholes method to measure the compensation cost for these stock options. The Black-Scholes method requires the use of significant assumptions to estimate the fair value of the stock option awards. The expected term of the Board of Director options was calculated using the simplified method. The expected volatility was calculated primarily with reliance on historical volatility rates. For the 2011 grant, the Company used an adjusted dividend yield rate to reflect the expectation that no dividends would be declared. The risk-free rate utilized in the Black-Scholes calculations was the U.S. Constant Maturity Treasury Security for the period equivalent to the expected term of the option.

The fair value of options granted under the 1994 Stock Plan in 2011 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions and results; no stock options were granted in 2012:

			2011
Dividend yield			0.00%
Expected volatility			50%
Risk-free interest rate			2.02%
Expected term of options in years			5.5
Fair value of options on grant date			$93,750

Pursuant to Board action taken on April 15, 2011 and shareholder approval on June 2, 2011, the Company’s Stock Plan was amended to authorize annual grants of restricted stock or stock options, or both, as determined by the Board, and, pursuant to the amended Stock Plan, on June 2, 2011, 1,000 shares of restricted stock were granted to each of the five non-employee members of the Board of Directors with a price per share equal to the market price on the date of grant of $14.66. The restricted stock vested after one year and is subject to restrictions on resale for an additional year. The compensation cost associated with the total grant of 5,000 shares was $73,300 that was recognized as expense over the one-year vesting period. Also pursuant to the amended Stock Plan, on June 7, 2012, 2,364 shares of restricted stock were granted to each of the five non-employee members of the Board of Directors with a price per share equal to the market price on the date of grant of $12.69. The restricted stock will vest 100% after one year and will be subject to restrictions on resale for an additional year. The compensation cost associated with the total grant of 11,820 shares is $149,996 that will be recognized as expense over the one-year vesting period. As of December 31, 2012, total compensation cost related to this issuance of restricted stock not yet recognized was $62,498, which is expected to be recognized over the next 0.4 years on a weighted-average basis.

Employee Stock Option Grants

On April 23, 2009, 100,000 options were granted to employees with an exercise price equal to the market price on the date of grant of $6.00. The stock options vested over a 42-month period and expire in ten years. The compensation cost associated with this grant of employee options was $92,555 and was recognized as expense over the 42-month vesting period. The compensation cost related to these employee option awards included in salaries and benefits expense was $22,037 and $26,444 for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012, there was no unrecognized compensation cost related to these stock options.

Additionally, on February 25, 2010, 86,500 options were granted to employees with an exercise price equal to the market price on the date of grant of $8.28. The stock options vest over a 42-month period and expire in ten years. The compensation cost associated with this grant of employee options is $282,355 to be recognized as expense over the 42-month vesting period. The compensation cost related to these employee option awards included in salaries and benefits expense for the years ended December 31, 2012 and 2011 was $70,589. As of December 31, 2012, there was $47,059 of total unrecognized compensation cost related to these stock options which is expected to be recognized over 0.7 years.

Employee Deferred Stock Award Grants

On September 8, 2011, 54,250 shares of deferred stock awards were granted to employees with a price per share equal to the market price on the date of grant of $9.27. The issuance of these deferred stock awards was contingent upon the Company obtaining legislation authorizing the operation of a Racino at Canterbury Park on or before December 31, 2012 and the Racino opening for business to the public pursuant to such legal authority by December 31, 2014. The Company will not recognize any compensation cost related to this grant as the Company did not obtain legislation authorizing the operation of a Racino at Canterbury Park on or before December 31, 2012.

Additionally, on December 13, 2012, 20,500 shares of deferred stock awards were granted to employees with a price per share equal to the market price on the date of grant of $9.84. The deferred stock awards vest over a four-year period. The compensation cost associated with this grant of employee options is $172,200 to be recognized as expense over the four-year vesting period. The compensation cost related to these employee option awards included in salaries and benefits expense for the years ended December 31, 2012 was $1,794. As of December 31, 2012, there was $170,406 of total unrecognized compensation cost related to these stock options which is expected to be recognized over 4.0 years.

Stock Appreciation Rights (“SARs”)

As part of the Cooperative Marketing Agreement (the “Agreement”) discussed in Note 14, on June 14, 2012, the Company signed a Stock Appreciation Rights Agreement (the “SAR Agreement”) and issued SARs to non-employees. The SAR Agreement granted rights to non-employees to benefit from the appreciation in the value of 165,000 shares of Company common stock above $14.30 per share, a price agreed upon by the two parties. Each right represents the right to be paid the appreciation in the value of one share of stock above $14.30. Ten percent of the rights (16,500 rights) vested immediately and the remaining rights vest at the rate of 16,500 per year beginning in January 2013. The SAR Agreement provides for the cash payment of the excess of the fair market value of Canterbury Park Holding Corporation’s common stock price on the date of exercise over the grant price. SARs have no effect on dilutive shares or shares outstanding as any appreciation of the Company’s common stock value over the grant price is paid in cash and not in common stock. The SAR Agreement and all rights granted expire on December 31, 2022.

The fair value of SARs is revalued (mark-to-market) each reporting period using the Black-Scholes valuation model based on the Company’s period-end stock price. The expected term of the SARs granted is based on the contractual term. Expected volatility is based on the historical volatility of the Company’s stock for the length of time corresponding to the expected term of the SARs. The expected dividend yield is based on the Company’s planned dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the reporting date for the length of time corresponding to the expected term of the SARs.

The following weighted-average assumptions were used in calculating the fair value of SARs granted during the year ended December 31, 2012, using the Black-Scholes valuation model; no SARs were granted during the year ended December 31, 2011:



	Year Ended
	December 31, 2012
Expected dividend yield		0.00	%
Expected weighted-average volatility		47.8	%
Risk-free interest rate		1.65	%
Expected term of SARs (in years)		10.25

There were no exercises during the year ended December 31, 2012. The total fair value of SARs at December 31, 2012 was $239,788.

Changes to the Company’s non-vested SARs during the year ended December 31, 2012, are as follows:




	SARs		Fair Value (*)
Non-vested SARs at December 31, 2011		—		—
Granted		165,000	$	4.72
Vested		(15,000)	$	4.72
Cancellations		—		—
Non-vested SARs at December 31, 2012		150,000	$	4.72

*Weighted-average