**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-K**

 

**FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

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

 

**Commission File Number: 333-81778**

 

**WHEELING ISLAND GAMING, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **DELAWARE**                                                                       |   | **16-1333214**                        |
|------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                   |   | (I.R.S. Employer  Identification No.) |
|                                                                               |
| **1 South Stone Street  Wheeling, West Virginia**                                  |
| (Address of principal  executive offices)                                          |
| **26003**                                                                          |
| (Zip Code)                                                                         |
|                                                                               |
| Registrant’s telephone  number, including area code:  **(304) 232-5050** |

 

Securities registered pursuant to Section 12 (b) ofthe Act:  None.

 

Securities registered pursuant to Section 12 (g) ofthe Act:  None.

 

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

ý  Yes   o  No

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part II of this Form 10-K or any amendment to this Form 10-K. ý

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act).

o  Yes   ý  No

 

State the aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was last sold, or the average bid and asked priceof such common equity, as of the last business day of the registrant’s mostrecently completed second fiscal quarter: Not applicable.

 

Indicate the number of shares outstanding of each ofthe registrant’s classes of common stock, as of the latest practicabledate:  None.

 

Documents incorporated by reference:  None.

 

 

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**TABLE OF CONTENTS**

 
| **PART I**    |
|---------------|
|          |
| **ITEM 1.**   | BUSINESS |
|          | Operations |
|          | Marketing |
|          | The Wheeling Island  Expansion |
|          | Market |
|          | Competition |
|          | Intellectual Property  Rights |
|          | Suppliers |
|          | Employees |
|          | Security  and Controls |
|          | Regulation  and Licensing |
|          |   |
| **ITEM 2.**   | PROPERTIES |
|          |   |
| **ITEM 3.**   | LEGAL PROCEEDINGS |
|          |   |
| **ITEM  4.**  | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|          |   |
| **PART II**   |
|          |   |
| **ITEM  5.**  | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
|          |   |
| **ITEM 6.**   | SELECTED FINANCIAL  DATA |
|          |   |
| **ITEM  7.**  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|          | Overview |
|          | Critical Accounting  Policies |
|          | Recently Issued  Accounting Standards |
|          | Results  of Operations |
|          | 2002 Compared to 2001 |
|          | 2001 Compared  to 2000 |
|          | Liquidity and Capital  Resources |
|          | Contractual  Obligations and Commitments |
|          |   |
| **ITEM  7A.** | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|          |   |
| **ITEM  8.**  | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA |
|          |   |
| **ITEM  9.**  | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
|          |   |
| **PART III**  |
|          |   |
| **ITEM  10.** | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT |

 

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| **ITEM 11.**                                                              | EXECUTIVE COMPENSATION                                           |
|---------------------------------------------------------------------------|------------------------------------------------------------------|
|                                                                      |                                                             |
| **ITEM  12.**                                                             | STOCK  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT     |
|                                                                      | Principal  Shareholders                                          |
|                                                                      |                                                             |
| **ITEM  13.**                                                             | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                  |
|                                                                      |                                                             |
| **ITEM 14.**                                                              | CONTROLS AND  PROCEDURES                                         |
|                                                                      |                                                             |
| **PART IV**                                                               |
|                                                                      |                                                             |
| **ITEM 15.**                                                              | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K |
|                                                                      |
| SIGNATURES                                                                |
|                                                                      |
| CERTIFICATIONS PURSUANT TO SECTION 302 OF  THE SARBANES-OXLEY ACT OF 2002 |
|                                                                      |
| INDEX TO  CONSOLIDATED FINANCIAL STATEMENTS                               |
|                                                                      |
| CONSOLIDATED  FINANCIAL STATEMENTS                                        |
|                                                                      |
| INDEX TO EXHIBITS                                                         |
|                                                                      |
| EXHIBITS                                                                  |

 

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**ITEM1.  BUSINESS**

 

Weown and operate Wheeling Island Racetrack & Gaming Center, or WheelingIsland, a premier gaming and entertainment complex located in Wheeling, WestVirginia. Wheeling Island features 1,623 slot machines, a greyhound racetrack,pari-mutuel wagering on live greyhound racing and simulcast greyhound,thoroughbred and harness racing and various dining venues.  Weare a wholly owned subsidiary of Sportsystems Corporation, orSportsystems.  Sportsystems is a whollyowned subsidiary of Delaware North Companies, Incorporated, or Delaware North.

 

Wedo not have operations other than Wheeling Island and are entirely dependentupon this gaming site for our revenues. Accordingly, we may be subject to greater risks than a geographicallydiversified gaming operation.

 

**Operations**

 

WheelingIsland is a 174,000-square foot facility that, as of December 31, 2002,featured:

 

•                                          33,160 square feet of gaming area with 1,623 slotmachines;

 

•                                          a  1¤4mile greyhound racetrack with a 2,400-seat grandstand and mezzanine area;

 

•                                          a full-service 600-seat clubhouse restaurant, a180-seat buffet-style restaurant, four concession stands, three lounges and twobars; and

 

•                                          1,800 parking spaces.

 

*Gaming Operations*

 

Wecurrently operate 1,623 gaming devices in three main gaming areas.  Other than 259 slot machines, which welease, we own all of the slot machines operating at our facility.  The Island Room, an annex to the racetrack,contains 696 slot machines.  TheFairgrounds Room, located in the original lower grandstand of the racetrack,contains 579 slot machines.  Theconcourse area contains 348 slot machines. Our slot machines include mechanical spinning reel slot machines andvideo lottery terminals with either coin-out or voucher-out functionality.  Currently, 1,314 of the slot machines at ourfacility have the coin-out payment functionality, while the remainder pay outin vouchers redeemable at various cashier stations.  We offer one local progressive slot machine game, which linksmultiple machines playing for a single jackpot.  We plan to participate in statewide progressive slot machinegames if they are sanctioned by the West Virginia Lottery Commission, or theLottery Commission.  Such statewideprogressive slot machine games, which are currently under evaluation by theLottery Commission, would link slot machine terminals located in all four WestVirginia racetracks, each contributing to a progressive statewide jackpot.

 

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*Pari-Mutuel Operations*

 

Weoffer pari-mutuel wagering on live greyhound racing events and greyhound,thoroughbred and harness racing events simulcast from other racetracks acrossthe country.  We conduct eight liveracing events each week, and offer wagering on simulcast racing events everyday.  A live greyhound racing eventtypically consists of 15 greyhound races. We typically simulcast between four and 21 racing programs per day.

 

*Food and Beverage Operations*

 

Foodand beverage operations at our facility are comprised of a full-service600-seat clubhouse restaurant in the upper level of the grandstand, a 180-seatbuffet-style restaurant located in the Island Room and four concession stands,three lounges and two bars.

 

Pleasesee the financial statements filed as part of this Form 10-K and the“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” section for information regarding revenue, profit/loss and totalassets for each segment of our business.

 

**Marketing**

 

Ourmarketing efforts are dedicated to media and promotional programs that aim toattract and retain gaming customers. Our spending for media and promotional programs principally targets themajor markets within a 100-mile radius around Wheeling, West Virginia,including the local regional area and the major cities of Akron, Canton andYoungstown, Ohio and Pittsburgh, Pennsylvania, and, in addition, Columbus,Ohio.

 

Ourprimary promotional tool used to develop customer loyalty is the PreferredPlayers Club, which we introduced in July 2000. The Preferred Players Clubprovides gaming customers with reward incentives for increased levels ofplay.  Beginning in October 2002, suchreward incentives were revised to provide Preferred Players Club members withclub points equal to a percentage for all gaming dollars played.  Prior to October 2002, reward incentiveswere comprised of monthly coupons provided to members based on their averagelevel of play over the previous six months. We administer the Preferred Players Club through the use of a playertracking system. The player tracking system also contains informationconcerning customer preferences and interests that allows us to tailor ourprogram rewards and other promotions accordingly. Total club membership in thePreferred Players Club as of December 31, 2002 exceeded 165,000members.  In the future, we expect tostrengthen the Preferred Players Club by improving the variety of rewardsoffered to members.

 

Ourmarketing efforts aimed at group sales represent an integral part of ourmarketing program. We offer group packages designed to cater to groups thattravel by bus in an effort to attract customers from the outlying regions ofour market area who would not normally drive to our facility. We provideincentives for these groups in the form of discounts on food and beverageservices, as well as coupons that can be redeemed for slot machine gaming.  Due to our concentrated efforts ondeveloping our group sales business, the bus traffic at our facility has grownsignificantly. For the year ended December 31, 2002, we had 3,169 busgroups visit our facility, as compared to 1,935 bus groups that visited ourfacility in the year 2001.

 

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Ourother marketing efforts include:

 

•                                          creative and highly publicized special eventspromotions directed at our current markets in West Virginia, Ohio andPennsylvania;

 

•                                          cash and merchandise give-aways; and

 

•                                          food and beverage specials and local entertainmentattractions.

 

Ourmarketing and promotional efforts include extensive use of direct mail,television, radio and print media advertising in our primary market.  During fiscal year 2002, we spent a total of$9.1 million on marketing and advertising programs.  Of this amount, $0.7 million was spent onmedia advertising and $8.4 million was spent on promotional programs,including all reward expenditures related to the Preferred Players Club.  For the year ended December 31, 2002,the allocation of our expenditure for media advertising was 61.0% on directmail, 16.4% on newspapers, 2.4% on television, 9.8% on radio and 10.4% onbillboard advertising.

 

Ourgoal is to attract customers by promoting our facility, including the newamenities and gaming space that will be available once the Wheeling Island expansionopens, as a complete entertainment complex offering a unique combination ofquality racing, slot machine gaming, dining, special events and otherentertainment options.

 

**The Wheeling Island Expansion**

 

Toaccommodate growing demand, in October 2001 we began the preparatory phase ofthe Wheeling Island expansion, a gaming and hotel expansion that will beconnected to our existing gaming facility, by relocating utilities and parkingspace.  We have received approval forthe expansion from the Lottery Commission and the West Virginia RacingCommission, or the Racing Commission. On January 30, 2002, we received approval to increase our number of slotmachines to 2,400.  Upon completion ofthe Wheeling Island expansion, we plan to have approximately 2,200 slotmachines.  The Wheeling Island expansionis scheduled for completion in the third quarter of 2003.  However, construction projects, such as theWheeling Island expansion, entail significant risks, including those arisingfrom:

 

•             shortages of materials or skilled labor;

 

•             unforeseen engineering, environmental orgeological problems;

 

•             work stoppages;

 

•             weather interference, including floods;

 

•             interference with existing operations; and

 

•             unanticipated cost increases.

 

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Therefore,we cannot assure you that we will complete the construction on schedule, or atall.

 

Currentplans for the Wheeling Island expansion include:

 

•             30,000 square feet of gaming area with 570additional slot machines;

 

•             a 151-room hotel;

 

•             one fine dining restaurant, one casual diningrestaurant, a food court and bar and lounge areas;

 

•             a 600-seat multi-purpose showroom; and

 

•             180 covered parking spaces plus additional outdoorparking spaces.

 

The 30,000 square feet of additional gaming space is planned toaccommodate a total of 1,020 slot machines, 450 of which will be relocated fromour existing gaming areas.  Among otherfeatures, the 151-room hotel will feature nine large suite-styled rooms.  The fine dining restaurant will offer adistinctly different menu from our other dining areas in order to provide agreater variety of food choices for our patrons.  The new covered parking capacity will have direct elevator accessto the gaming area and hotel, which will provide greater security, comfort andconvenience for our customers.  Themulti-purpose showroom will be used as an entertainment venue for actspresented at our facility.  The showroomwill also be used for large special events including conferences, banquets andother large catered events.  We believethat the addition of the meeting room space will enable us to attractconferences and catered events to the facility.  We believe that these events, which normally occur on weekdays,will increase our customer base on the weekdays, which traditionally have alower number of customers.

 

*Construction Budget and Schedule*

 

Weexpect the cost of designing, developing, constructing and equipping theWheeling Island expansion to be approximately $67.0 million, including architectfees.  In July 2002, we executed aguaranteed maximum price contract for the Wheeling Island expansion with ourconstruction manager  Louis P. CiminelliConstruction Company, or Ciminelli Construction, which is expected to cover theso-called “hard” costs of the expansion construction.  The remainder of the costs not covered by this contract willinclude furniture and fixtures, gaming-related equipment and other equipmentcosts, including food and beverage equipment, computer equipment, security equipmentand point of sale systems.

 

Wecannot assure you that our plans and design for the Wheeling Island expansionwill not experience cost or budget overruns or that we will complete theconstruction on schedule, or at all.

 

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*Design and Construction Team*

 

Wehave selected Jeter, Cook & Jepson Architects, Inc., or JCJ, as thearchitect for the Wheeling Island expansion. JCJ is based in Hartford, Connecticut and was founded in 1936.  JCJ is one of the country’s largest and mostrespected architectural firms, having completed over 3,000 successful buildingprojects.  They have extensiveexperience in designing a variety of structures for public and private clientsin the education, health care and hospitality/entertainment industries.  JCJ has completed several projects ofvarying size for a number of gaming clients including Foxwoods Resort Casino,Gila River Resort & Casino and the Cypress Bayou Casino.  We used JCJ’s architectural services in thepast for the Island Room expansion, which was completed in June 2000.

 

CiminelliConstruction is overseeing all construction work being performed bysubcontractors.  For this service,Ciminelli Construction receives a percentage fee based on the overallconstruction cost, excluding items furnished by us.  Ciminelli Construction is based in Buffalo, New York and wasfounded in 1961.  Ciminelli Constructionserves many different private industries, including manufacturing, retail,lodging and sports entertainment, and has also completed projects for thepublic sector, including schools and courthouse facilities.  In addition to offering constructionmanagement services, Ciminelli Construction also has extensive experience asgeneral contractor.  Some of CiminelliConstruction’s most noted clients include Ford Motor Company, State FarmInsurance and the Buffalo Niagara International Airport.

 

**Market**

 

Ourprimary market consists of the 100-mile radius area around Wheeling, WestVirginia, including the major cities of Akron, Canton and Youngstown, Ohio andPittsburgh, Pennsylvania, and, in addition, Columbus, Ohio.  Patrons from these major population areasenjoy convenient access to Wheeling Island via Interstate Route 70, a major four-lanehighway adjacent to our property. According to Lottery Commission data, racetrack gaming revenues(representing gross terminal income) generated in West Virginia were $595.9million for the State’s fiscal year ended June 30, 2002, a 36.0% increaseover the prior year period.  According toLottery Commission data, during the most recent six-month period endedDecember 28, 2002, racetrack gaming revenues were $336.8 million,representing an increase of 22.4% over the same period in the prior year.

 

Ourmarket share of statewide racetrack gaming revenue (representing gross terminalincome) during the State’s fiscal year ended June 30, 2002 was 23.4%.  Our market share of statewide racetrackgaming revenue during the period from July 1, 2002 to December 28, 2002 was21.5%.  As of December 28, 2002, we had18.2% of the total number of slot machines operating in West Virginia.  The decline in our statewide market share isdue to larger increases in the number of slot machines at other racetracks andthe more favorable market demographics at the Charles Town, West Virginiaracetrack located in the eastern most portion of the State.  The current market for our facility consistsprimarily of day-trip customers from the surrounding area who generally livewithin the 100-mile radius of our facility. We believe that the location of our facility, along with the additionalgaming capacity and amenities that will be available once the Wheeling Islandexpansion is completed, will enable us to grow our share of gaming revenueswithin our primary market.  We alsobelieve that adding lodging, meeting rooms, entertainment and expanded food andbeverage components will attract new customers in the outlying areas of ourprimary market who may be willing to drive farther for gaming activity becausethere will be a hotel facility for overnight stays.

 

**Competition**

 

TheWest Virginia Racetrack Video Lottery Act, or the Lottery Act, provides thatonly licensed greyhound or horse racing facilities that were licensed prior toJanuary 1, 1994, and which conduct a minimum number of days of live racing, mayoffer slot machine gaming.  We are oneof four licensed racing facilities that have approval to offer slot machinegaming in West Virginia.

 

 

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Webelieve that the primary competitive factors in our industry are location,number of slot machines, types and prices of amenities, name recognition,customer service, overall atmosphere and availability and convenience ofparking.  We face significantcompetition for wagering dollars from various different competitors in WestVirginia, as well as in the adjacent states of Pennsylvania and Ohio.  Our principal direct competitor isMountaineer Park, located approximately 50 miles to the north in Chester, WestVirginia.  Mountaineer Park offers slotmachine gaming, pari-mutuel wagering on live thoroughbred racing and simulcastthoroughbred, harness and greyhound events. This gaming facility competes directly with us in attracting the westernPennsylvania market, including Pittsburgh, as well as the northern panhandlemarket of West Virginia and the feeder markets in northeastern Ohio.  Mountaineer Park currently offers moregaming machines and more amenities than we do, including a hotel facility.  We believe that our ability to compete withMountaineer Park will be greatly enhanced when we open the Wheeling Islandexpansion in the third quarter of 2003, which will add many amenities to ourfacility.  We also believe that theimpact of the expansion on our ability to compete with Mountaineer Park will becomplemented by our location and accessibility.  Wheeling Island is located in the City of Wheeling, one of themajor population centers of the northern panhandle market of West Virginia,while Mountaineer Park is located in the less populated Town of Chester.  Wheeling Island’s property is adjacent toInterstate Route 70, a major four-lane highway that provides customers witheasy access to our facility, while Mountaineer Park is located on a two-lanestate road.  Other than Mountaineer Park,there are currently no facilities offering competitive pari-mutuel live racingand slot machine gaming within a 150-mile radius of our facility.  In addition to our facility and MountaineerPark, there are two facilities located in West Virginia that offer slot machinegaming.  However, these facilities arelocated more than 150 miles away from our facility in Charleston and CharlesTown, West Virginia.  As a result, we believethat we do not compete to any significant extent with these facilities forcustomers.

 

To alesser extent, we compete with Thistledown, located approximately 143 miles tothe northwest in Cleveland, Ohio, Northfield Park, located approximately 150miles to the north in Northfield, Ohio, The Meadows, located approximately 35miles to the east in Washington, Pennsylvania and Beulah Park and Scioto Downs,located approximately 135 miles to the west in Columbus, Ohio.  These facilities offer pari-mutuel wageringbut do not currently offer slot machine gaming.  If such facilities were to receive legislative approval to offerslot machine gaming, they would compete directly with us for gaming customersin our primary market.

 

OnJanuary 1, 2002, legislation became effective which authorized up to 9,000video lottery terminals in adults-only facilities throughout WestVirginia.  The legislation allows videolottery terminals in establishments licensed by the State to sell beer or otheralcoholic beverages for consumption on the premises.  The allowed video lottery terminals have voucher-outfunctionality only and a $2.00 bet limit. No more than five video lotteryterminals are allowed in each establishment licensed to sell alcoholicbeverages that have been approved to operate these video lottery terminals.  No more than ten video lottery terminals areallowed in each fraternal or veterans organization that has been approved tooperate these video lottery terminals. As of December 31, 2002, 4,785 of these video lottery terminals arelicensed and operating in West Virginia. We believe the existence of such video lottery terminals has not had anadverse impact on our business, financial condition or results of operations.

 

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Pennsylvaniaand Ohio currently do not permit any form of casino gaming, including slotmachine gaming.  However, as a result ofgreater budgetary pressures, states are increasingly looking to new sources ofadditional revenue, which may include gaming. In the past, bills have been introduced in the Pennsylvania legislatureto legalize slot machine gaming at racetracks, none of which has successfullypassed.  Currently, there are severalsuch bills pending in the Pennsylvania legislature.  We are uncertain at this time whether these bills, or any othersimilar bills, will be passed in Pennsylvania. To the extent that either Pennsylvania or Ohio legalizes any form ofcasino gaming, or if additional gaming were approved in West Virginia, our slotmachine gaming operations would compete with any new gaming facilities that openedas a result of such legislation.  Forexample, if gaming similar to that which has been approved in West Virginia, isapproved in Pennsylvania and Ohio, there would be four racetracks inPennsylvania and seven racetracks in Ohio that could potentially compete withus for gaming customers.  In addition,increased competition could result from other nearby states allowing  expanded casino gaming, or gaming machinesthat are not offered by us, as well as other forms of gaming not currentlyavailable in West Virginia.  Inaddition, if Internet gaming were legalized, we might lose customers to thatmedium.

 

Wealso compete with statewide lotteries in West Virginia, Pennsylvania and Ohioand live and simulcast pari-mutuel wagering in Pennsylvania and Ohio.  In addition, we generally compete with otherentertainment options available to consumers.

 

**Intellectual Property Rights**

 

Weoperate using the names “Wheeling Island” and “Wheeling Island Racetrack &Gaming Center” and the associated logos. We have registered the domain name of our Internet sitewww.wheelingisland.com.  We believe thatthe use of our name has helped us establish a well-known reputation in thelocal gaming market.  We believe thatthe use of the “Wheeling Island” brand name contributes significantly toobtaining new customers in our market and to expanding our market.  We do not have any patents or any othermajor brand names that are material to our operations.

 

**Suppliers**

 

Wecontract for the supply of numerous goods and services.  Our significant agreements with suppliersare for totalisator services, video and peripheral equipment, communication andslot machine gaming supplies, the supply of beer and other alcoholic productsand fresh and frozen food products. These services generally are provided under short-term agreements.

 

**Employees**

 

Asof December 31, 2002, we employed approximately 576 persons, 435 of whomwere full-time employees and 141 of whom were part-time employees.  The United Food and Commercial WorkersUnion, Local 23 represents approximately 220 employees in our pari-mutuel,maintenance, cleaning and slot machine gaming operations departments.  Our collective bargaining agreement with theUnited Food and Commercial Workers Union, Local 23 expired on February 28, 2003and a renewal is currently being negotiated.

 

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TheHotel Employees and Restaurant Employees Union, Local 57 representsapproximately 145 employees in our food and beverage department and 31employees in our security department under separate collective bargainingagreements.  The collective bargainingagreement with the food and beverage employees expires on June 22, 2004,and the collective bargaining agreement with the security department employeesexpires on April 30, 2003.  We believethat we generally have satisfactory relations with our employees and with bothunions.  We anticipate that the numberof employees will increase materially in connection with the anticipatedopening of the Wheeling Island expansion in 2003.

 

TheUnited Food and Commercial Workers Union, Local 23 recently made a request forrecognition as the bargaining representative for 32 employees who serve aspatrol judges, leadouts, boxmen, brakemen, veterinary assistants and startersand who are not currently represented by a union.  On February 28, 2003, the United Food and Commercial WorkersUnion commenced an action under the West Virginia Labor-Management RelationsAct for the Private Sector seeking an election with respect to its request toserve as the bargaining agent for this additional group of employees.  If this effort for union representation issuccessful, we believe that it will not materially affect our business,financial condition or results of operations.

 

**Security andControls**

 

Weemploy stringent security measures at our facility to provide maximum safety toour customers and employees and protecting company assets.  These programs include 24-hour securitysurveillance of the entire facility, 24-hour stationed security guards on thegaming floor and in the gaming money room and security guard escorts for allmoney transfers to and from the gaming money room.  In addition, we have designed and implemented a comprehensiveprogram of accounting internal controls that further provide for thesafeguarding of all company assets.

 

**Regulation and Licensing**

 

The “West VirginiaLottery Regulations” section below references the terms “video lottery games”and “video lottery gaming” as those terms are used in the Lottery Act.  It should be noted that such terms asdefined by current statute encompass all slot machine gaming, includingmechanical spining reel slot machines with coin-out functionality.

 

*General*

 

Ouroperations are subject to extensive state and local regulations.  Our ability to remain in business and tooperate profitably depends upon our continued ability to satisfy all applicablegaming laws and regulations.

 

*West Virginia Racing Regulations*

 

Ourgreyhound racing operations are subject to extensive regulation by the Racing Commission.  The powers and responsibilities of theRacing Commission include, among other things: (i) granting permission annually to maintain racing licenses andschedule race meets; (ii) approving simulcasting activities; (iii) licensingall of our officers, directors, racing officials and certain other employees;and (iv) approving all of our contracts that affect our racing and pari-mutuelwagering operations.  Such powers andresponsibilities extend to the approval and/or oversight of all aspects of racingand pari-mutuel wagering operations.  Inorder to conduct simulcast racing, we are required under West Virginia law tohold a minimum of 220 live race days each year.  During 2002 we conducted a total of 312 live race days.  In addition, certain activities, such as

 

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simulcastingraces, require the consent of the representatives of a majority of thegreyhound owners and trainers at our facility.

 

Ourexport simulcast activities that occur outside of West Virginia are subject toregulation by other state racing commissions that prohibit us from acceptingoff-track wagering on simulcast racing without the approval of the RacingCommission and, subject to certain exceptions, of any other currently operatingtrack within 60 miles or, if none, of the closest racetrack in any adjoiningstate.  We have received all necessaryapprovals to conduct our current operations. However, such approvals are subject to renewal and approvalannually.  The failure to receive orretain approvals or renewals of approvals, or a delay in receiving suchapprovals and renewals, could cause the reduction or suspension of racing,pari-mutuel wagering and gaming operations at our facility and have a materialadverse effect on our business, financial condition and results of operations.

 

*West Virginia Lottery Regulations*

 

Theoperation of video lottery games in West Virginia is subject to the LotteryAct.  Licensing and regulatory controlare provided by the West Virginia Lottery Commission.  The Lottery Act provides that only licensed greyhound or horseracing facilities that were licensed prior to January 1, 1994 and conduct aminimum number of days of live racing may offer video lottery gaming.  There are only four facilities that qualifyunder this legislation, including us. Accordingly, we must comply fully with regulations of the RacingCommission to qualify for our license under the Lottery Act and maintain ourvideo lottery gaming operations.

 

TheLottery Act requires that we be subject to a written agreement with thegreyhound owners, breeders and trainers who race greyhounds at our facility,and we are party to such an agreement. The Lottery Act also requires that we be subject to an agreement withthe pari-mutuel clerks who work at our facility and we are party to such anagreement.  The absence of an agreementwith the kennels or the pari-mutuel clerks, or the termination or non-renewalof such agreements, would have a material adverse effect on our business,financial condition and results of operations.

 

TheLottery Commission has broad powers to approve and monitor all operations ofthe gaming machines, the specification of the machines and the interfacebetween the terminals and the West Virginia Central Lottery System.  The Lottery Commission also acts upon ourrequests for increases in the number of gaming machines.  The Lottery Commission’s denial of a requestto increase the number of machines at our facility could limit our growth andthus adversely affect our business, financial condition and results ofoperations.  In addition, the LotteryCommission licenses all persons who control or are key personnel of our gamingoperations to ensure their integrity and absence of any criminal involvement.

 

Theconduct of gaming by a racing facility is subject to the approval of the votersof the county in which the facility is located.  If such approval is obtained, the facilities may continue toconduct video lottery activities unless the matter is resubmitted to the voterspursuant to a petition signed by at least 5.0% of the registered voters, whomust wait at least five years from the approval to bring such a petition. Ifapproval is denied, another vote on the issue may not be held for two years.Gaming was approved in Ohio County, the location of Wheeling Island, in May1994.  If such approval were everrevoked, it would have a material adverse effect on our business, financialcondition and results of operations.

 

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Underthe Lottery Act, racetracks that conduct video lottery gaming, as well aspersons who service and repair gaming machines and validation managers (personswho perform video lottery ticket redemption services), are required to belicensed by the Lottery Commission.  Thelicensing application procedures are extensive and include inquiries into, andan evaluation of, the character, background (including criminal record,reputation and associations), business ability and experience of an applicantand the adequacy and source of the applicant’s financing arrangements.  In addition, a racetrack applicant must holda valid racing license and post a bond or irrevocable letter of credit in suchamount as the Lottery Commission shall determine.  No license will be granted until the Lottery Commissiondetermines that each person who has “control” of an applicant meets all of theapplicable licensing qualifications. Persons deemed to have control of a corporate applicant include (i) anyholding or parent company or subsidiary of the applicant who has the ability toelect a majority of the applicant’s board of directors or to otherwise controlthe activities of the applicant and (ii) key personnel of an applicant,including any executive officer, employee or agent who has the power toexercise significant influence over decisions concerning any part of theapplicant’s business operations.

 

Videolottery machines may only be operated in the grandstand building of a racetrackwhere pari-mutuel wagering is permitted; *provided, however*, that if a racetrack wasauthorized by the Lottery Commission prior to November 1, 1993 operate videolottery machines in another area of the racetrack’s facilities, such racetrackmay continue to do so.  Our competitorMountaineer Park is the only facility to benefit from such provision, and haslottery machines at the hotel on its premises.

 

TheLottery Act imposes extensive operational controls relating to, among othermatters, security and supervision, access to the machines, hours of operation,general liability insurance coverage and machine locations.  In addition, the Lottery Act prohibits theextension of credit for video lottery play, and requires Lottery Commissionapproval before any advertising and promotional activities for video lottery gamingare conducted.  The Lottery Act providesfor criminal and civil liability in the event of specified violations.

 

Allrevenues derived from the operation of video lottery games must be depositedwith the Lottery Commission to be shared in accordance with the provisions ofthe Lottery Act.  Under such provisions,each racetrack must electronically remit to the Lottery Commission its “grossterminal income” (total amounts wagered, net of winning patron payouts).  To ensure the availability of such funds tothe Lottery Commission, each racetrack must maintain in its account an amountequal to or greater than the gross terminal income to be remitted.  If a racetrack fails to maintain thisbalance, the Lottery Commission may disable all of the racetrack’s videolottery machines until full payment of all amounts due is made.

 

ByLottery Commission directive, all of our slot machines were required to beconnected to the SAMS 4.6 IGT central system maintained by the LotteryCommission.  If the operation of the centralsystem was disrupted for any reason, we believe that the Lottery Commissionwould suspend all gaming operations within the State until normal operation ofthe system was restored.  Any suchsuspension could cause a material disruption of our gaming operations and havea material adverse effect on our business, financial condition and results ofoperations.

 

Pursuantto the regulatory authority of both the Racing Commission and the LotteryCommission, we may be investigated by either body at any time.  Accordingly, we must comply with all gaminglaws at all times.  Should either bodyconsider us to be in violation of any of the applicable laws or regulations,each has the plenary authority to suspend or rescind our licenses.  Should we fail to comply, our business couldbe materially adversely affected.

 

 

10

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*State and Federal Simulcast Regulation*

 

Inaccordance with the agreements with the kennels, we have agreed upon theallocation of our revenues from import simulcast wagering to the pursefunds.  Because we cannot conduct importsimulcast wagering in the absence of the agreements with the kennels, thetermination or non-renewal of any of these agreements could have a materialadverse effect on our business, financial condition and results of operations.

 

*Compliance with Other Laws*

 

Weare also subject to a variety of other rules and regulations, including zoning,construction and land-use laws and regulations in West Virginia governing theserving of alcoholic beverages.  Wederive a significant portion of our other revenues from the sale of alcoholicbeverages to patrons of our facilities. Any interruption or termination of ourexisting ability to serve alcoholic beverages would have a material adverseeffect on our business, financial condition and results of operations.

 

*Restrictions on Share Ownership andTransfer*

 

TheLottery Act provides that a transfer of more than 5.0% of the voting stock of acorporation that controls a gaming license may only be to persons who have metthe licensing requirements of the Lottery Act, or which transfer has beenpre-approved by the Lottery Commission. Any transfer that does not comply with this requirement voids thelicense.

 

Ouroperations are subject to extensive government regulations and could besubjected at any time to additional or more restrictive regulations, whichcould have a negative effect on our business.

 

**ITEM2.  PROPERTIES**

 

WheelingIsland Racetrack & Gaming Center, which we own, is situated on approximately62 acres of land on Wheeling Island on the Ohio River in Wheeling, WestVirginia.

 

Weoperate out of approximately 174,000 square feet.  We are currently planning the Wheeling Island expansion that willadd an additional 30,000 square feet of gaming space and hotel, food andbeverage areas, additional parking facilities and entertainment options.

 

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InOctober 2001, we purchased 24 acres of land located at the northern limit ofthe Village of Beech Bottom, Brooke County, West Virginia, approximately 13miles from our facility.  Prior topurchasing this property, we received approval from the Racing Commission torelocate our greyhound kennel complex to this new site.  The construction of the new kennelfacilities began in December 2001 and was completed in July 2002.

 

**ITEM 3.  LEGALPROCEEDINGS**

 

Weare a co-defendant in litigation brought against an independent kennel for theloss of 14 racing greyhounds.  InOctober 2002, the plaintiffs were awarded a judgment which, with accruedinterest from the date of the loss, currently amounts to approximately$900,000.  We were found to havecommitted no negligent act in connection with the loss of the greyhounds, but theplaintiffs seek to hold us jointly and severally liable with the negligentkennel operator based on the theory that we and the kennel were engaged in ajoint venture.  We deny any liability orfinancial responsibility for the loss, and we believe the availability ofinsurance coverage and the possibility of legal recourse by us against thekennel will result in this matter having no material adverse impact on us.

 

Weare a party to a number of other legal proceedings that have arisen in theordinary course of our business. We believe that the outcome of suchproceedings will not have a material adverse effect on our operating results orfinancial condition.

 

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

 

Notapplicable.

 

**PART II**

 

**ITEM 5.  MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

Not applicable.

 

**ITEM 6. ****SELECTED FINANCIAL DATA**

 

The selected financial data presented below as of and for the fiveyears ended December 31, 2002 has been derived from our auditedconsolidated financial statements.  Theselected financial data should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthose consolidated financial statements and related notes thereto which areincluded elsewhere herein.

 

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|                                   |   | **Year Ended December 31,**          |        |
|----------------------------------------|--------|-------------------------------------------|-------------|
|                                   |   | **(dollars in thousands, except ratios)** |        |
|                                   |   | **2002**                                  |        | **2001(2)** |   | **2000** |   | **1999** |   | **1998** |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| **Statement of Operations Data:**      |   |                                      |        |   |   |   |   |   |   |   |   |
| Operating revenue:                     |   |                                      |        |   |   |   |   |   |   |   |   |
| Gaming revenue (1)                     |   | $                                         | 79,132      |   | $ | 67,847 |   | $ | 46,807 |   | $ | 25,613 |   | $ | 22,895 |   |
| Pari-mutuel revenue                    |   | 8,847                                     |        | 9,470 |   | 9,205 |   | 9,245 |   | 9,464 |   |
| Food and beverage revenue              |   | 4,913                                     |        | 4,502 |   | 3,875 |   | 2,539 |   | 2,514 |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| Total operating revenue                |   | 92,892                                    |        | 81,819 |   | 59,887 |   | 37,397 |   | 34,873 |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| Operating expenses:                    |   |                                      |        |   |   |   |   |   |   |   |   |
| Purse expense–gaming              |   | 16,883                                    |        | 15,007 |   | 10,624 |   | 5,788 |   | 5,151 |   |
| Other gaming costs                     |   | 12,876                                    |        | 9,848 |   | 7,961 |   | 5,805 |   | 6,245 |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| Gaming expenses                        |   | 29,759                                    |        | 24,855 |   | 18,585 |   | 11,593 |   | 11,396 |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| Purse expense–pari-mutuel         |   | 1,916                                     |        | 2,018 |   | 2,088 |   | 2,080 |   | 2,155 |   |
| Pari-mutuel and admissions             |   | 2,311                                     |        | 2,603 |   | 2,459 |   | 2,177 |   | 2,015 |   |
| Facilities and maintenance             |   | 2,216                                     |        | 2,301 |   | 1,975 |   | 1,921 |   | 1,746 |   |
| Racing and marketing                   |   | 2,264                                     |        | 2,398 |   | 2,058 |   | 2,069 |   | 1,840 |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| Pari-mutuel expenses                   |   | 8,707                                     |        | 9,320 |   | 8,580 |   | 8,247 |   | 7,756 |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| Food and beverage expenses             |   | 5,618                                     |        | 4,083 |   | 3,131 |   | 1,989 |   | 1,838 |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| Management fees (3)                    |   | —                                    |        | 25,521 |   | 15,162 |   | 13,939 |   | 11,275 |   |
| General and administrative (4)         |   | 3,909                                     |        | 3,069 |   | 1,935 |   | 1,617 |   | 1,400 |   |
| Depreciation and amortization          |   | 7,483                                     |        | 3,703 |   | 2,566 |   | 875 |   | 902 |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| Total operating expenses               |   | 55,476                                    |        | 70,551 |   | 49,959 |   | 38,260 |   | 34,567 |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| Income (loss) from operations          |   | 37,416                                    |        | 11,268 |   | 9,928 |   | (863 | ) | 306 |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| Interest income (expense), net         |   | (13,939                                   | )           | (1,427 | ) | (458 | ) | 135 |   | 75 |   |
| Other income (expense), net            |   | (333                                      | )           | (69 | ) | — |   | — |   | — |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| Income (loss) before income tax        |   | 23,144                                    |        | 9,772 |   | 9,470 |   | (728 | ) | 381 |   |
| Income tax expense (benefit)           |   | 8,303                                     |        | 3,313 |   | 3,266 |   | (202 | ) | 180 |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| Net income (loss)                      |   | $                                         | 14,841      |   | $ | 6,459 |   | $ | 6,204 |   | $ | (526 | ) | $ | 201 |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| **Operating Data:**                    |   |                                      |        |   |   |   |   |   |   |   |   |
| Gross terminal income (5)              |   | $                                         | 149,137,640 |   | $ | 116,297,474 |   | $ | 77,512,872 |   | $ | 41,982,562 |   | $ | 37,533,203 |   |
| Number of slot machines (6)            |   | 1,623                                     |        | 1,537 |   | 1,280 |   | 800 |   | 705 |   |
| Slot machine win per unit per  day (7) |   | $                                         | 267.87      |   | $ | 239.39 |   | $ | 220.76 |   | $ | 179.98 |   | $ | 153.68 |   |
|                                   |   |                                      |        |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                |   |                                      |        |   |   |   |   |   |   |   |   |
| Cash and cash equivalents              |   | $                                         | 9,014       |   | $ | 9,903 |   | $ | 5,020 |   | $ | 7,298 |   | $ | 2,408 |   |
| Total assets                           |   | 185,740                                   |        | 168,107 |   | 37,843 |   | 24,994 |   | 15,015 |   |
| Total long term debt                   |   | 126,500                                   |        | 125,000 |   | 14,500 |   | — |   | — |   |
| Shareholders’ equity              |   | 27,488                                    |        | 12,647 |   | 18,817 |   | 12,613 |   | 13,139 |   |

 

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(1)                                  Gaming revenues represent gross revenues from slotmachine gaming, or total amounts wagered, net of winning patron payouts (the“gross terminal income”) less (i) a fee of up to 4.0% of gross terminal incomepaid to the Lottery Commission for administering slot machine gaming at thelicensee’s race track (the “administration fee”), (ii) a tax of 30.0% of netterminal income (gross terminal income less the administration fee, “NTI”) paidto the State’s general revenue fund and (iii) an amount of 9.0% of NTI to bepaid to various state funds, including funds for tourism promotion, OhioCounty, employee pension programs and other programs.  All revenues derived from the operation of slot machines mustinitially be deposited with the Lottery Commission to be shared in accordancewith the provisions of the Lottery Act. Prior to legislative changes, whichbecame effective as of July 1, 2001, the State refunded the portion of theadministration fee in excess of the Lottery Commission’s administrative expenses.  In April 2001, the West Virginia legislatureadopted new legislation, effective as of July 1, 2001, which authorized anincrease in West Virginia’s share of NTI above a predetermined level, definedas the NTI generated for the State’s fiscal year ended June 30, 2001.  The State will deduct a 10.0% surcharge fromNTI in excess of the predetermined level. The remainder of the excess NTI will be divided as follows: 50.0% isreturned to the racetrack (of which 8.0% represents supplemental purse expense),41.0% is paid to the State’s general revenue fund and the remaining 9.0% isdivided among various state funds.  Ofthe total 10.0% surcharge, 42.0% is deposited in a capital reinvestment accountattributable to each racetrack.  Theracetrack is entitled to recoup monies in the capital reinvestmentaccount for certain types of capital improvements made at the racetrack on adollar-for-dollar basis.  Thislegislation also eliminated the refund of the portion of the administration feein excess of the Lottery Commission’s administrative expenses.

 

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We accrue the expectedsurcharge amount ratably during the year based upon estimates of the actualamounts expected to be paid in each State fiscal year.  The recoupment of amounts held in thecapital reinvestment account, and a similar fund held by the Racing Commissionto be used for racetrack capital improvements, are included in gaming revenuesduring the period in which approved qualifying expenditures are made.  Excess qualifying expenditures may becarried forward for recoupment in future periods, subject to certain statutorylimitations.

 

During2002, 2001 and 2000, we offered incentives to members of the Preferred PlayersClub in the form of coupons redeemable for cash.  Such coupon redemptions are deemed to be rebates or cashincentives.  Accordingly, such rebatestotaling $3.9 million, $1.6 million and $0.1 million for the years endedDecember 31, 2002, 2001 and 2000, respectively, have been classified as areduction of gaming revenues.

 

(2)                                  On December 19, 2001, we redeemed WHX’s entireequity interest for total consideration of $105.0 million (the Stock PurchaseTransaction).  Of the $105.0 milliontotal consideration, $90.0 million is attributable to the purchase price of theshares and $15.0 million is attributable to a non-compete covenant whereby WHXis prohibited from engaging in any business which is the same as, substantiallysimilar to, or directly competitive with the business activities conducted byus for a period of five years.  TheStock Purchase Transaction was accounted for using the purchase method inaccordance with Statements of Financial Accounting Standards (SFAS) No. 141,“Business Combinations”.  Accordingly,the values of our tangible and intangible assets were increased by 50.0%. ofthe difference between the carrying value and the fair value of theassets.  See Note 2 to the ConsolidatedFinancial Statements.

 

(3)                                  Historically, we recorded and paid management feesto two shareholders based on the total operating revenues of the preceding yearpursuant to management services agreements that terminated upon consummation ofthe Stock Purchase Transaction.

 

(4)                                  Effective December 20, 2001, Wheeling Islandentered into an administrative services agreement pursuant to whichadministrative fees are recorded and paid to Sportsystems.  Pursuant to this agreement, Sportsystemsreceives a fee that is equal to the greater of 1.5% of preceding year total operatingrevenues or $1.2 million per year.

 

(5)                                  Gross terminal income represents gross revenuesfrom slot machine gaming, or total amounts wagered, net of winning patronpayouts.

 

(6)                                  The number of slot machines are given as of theend of each period presented.

 

(7)                                  Slot machine win per unit per day refers to thegross terminal income for a given period divided by the average number of slotmachines operating in that period divided by the number of days in that period.

 

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**ITEM 7.****               MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Overview**

 

*General*

 

We own and operate Wheeling Island, a premier 174,000-square footgaming and entertainment complex located in Wheeling, West Virginia, whichoffers slot machine gaming and live and simulcast pari-mutuel wagering.  We operate principally through threebusiness segments:

 

•*                                          Gaming Operations.* The slot machine gaming segment is comprised of1,623 slot machines situated within 33,160 square feet of gaming area.  Our slot machines include mechanicalspinning reel slot machines and video lottery terminals with either coin-out orvoucher-out functionality.  The gamingmix is comprised of 1,314 slot machines that dispense coins and 309 slotmachines that dispense vouchers for patron winnings.  The gaming mix includes one progressive game that links multiplemachines playing for a larger combined jackpot.

 

•                                          *Pari-Mutuel Operations*. The pari-mutuel operations segment consistsof pari-mutuel wagering on live greyhound races and on greyhound, thoroughbredand harness events that are simulcast from other racetracks.  Our racetrack currently conducts eight livegreyhound races each week and offers a mix of simulcast wagering every day.

* *

                                                For the year endedDecember 31, 2002, we incurred an operating loss, prior to deductingadministrative expenses, on our pari-mutuel wagering business that was offsetby operating profits in our slot machine gaming business.  We are attempting to minimize or eliminatelosses from our pari-mutuel wagering business by increasing marketing efforts,cutting costs and enhancing the quality of our greyhound racingactivities.  Nonetheless, we cannotguarantee that this strategy will prove successful, that our unprofitableoperations can become profitable or that if they become profitable, willcontinue to be profitable.  We arerequired to continue our pari-mutuel wagering business in order to maintain ourgaming license.

* *

•                                          *Food and Beverage Operations.* The food and beverageoperations include a full-service 600-seat clubhouse restaurant, a 180-seatbuffet-style restaurant, four concession stands, three lounges and two bars.

 

*Stock Purchase Transaction*

 

Wewere formerly an equally owned subsidiary of Sportsystems and WHX EntertainmentCorp., or WHX.  On December 19, 2001, weredeemed WHX’s entire equity interest for total consideration of $105.0million, or the Stock Purchase Transaction. Of the $105.0

 

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milliontotal consideration, $90.0 million is attributable to the purchase price of theshares and $15.0 million is attributable to a non-compete covenant whereby WHXis prohibited from engaging in any business which is the same as, substantiallysimilar to, or directly competitive with our business activities for a periodof five years.  The Stock PurchaseTransaction was accounted for using the purchase method in accordance withStatement of Financial Accounting Standards (SFAS) No. 141, “BusinessCombinations”.  Accordingly, the valuesof the acquired tangible and intangible assets were increased by 50.0% of thedifference between the carrying value and the fair value of the assets.

 

*Administrative Services Agreements*

 

Simultaneouslywith the issuance of $125.0 million of unsecured senior notes in December 2001,we entered into an administrative services agreement with Sportsystems andDelaware North.  Pursuant to thisadministrative services agreement, Sportsystems receives an annualadministrative services fee that is equal to the greater of 1.5% of precedingyear total operating revenues or $1.2 million for certain administrativesupport services provided to us by Sportsystems and Delaware North.

 

*WheelingIsland Expansion*

 

To accommodate growing demand, we began developing the Wheeling Islandexpansion in October 2001.  The WheelingIsland expansion is a gaming and hotel expansion that will be adjacent to andconnected with our existing gaming facility. The construction phase of the Wheeling Island expansion has commenced,and in July 2002 we executed a construction management agreement with CiminelliConstruction.  Current plans for theWheeling Island expansion include:

 

•             30,000square feet of gaming area with 570 additional slot machines;

•             a151-room hotel;

•             onefine dining restaurant, one casual dining restaurant, a food court and bar andlounge areas;

•             a600-seat multi-purpose showroom; and

•             180covered parking spaces plus additional outdoor parking spaces.

 

We expect the cost of designing, developing, constructing and equippingthe Wheeling Island expansion to be approximately $67.0 million, includingarchitect fees.  We expect to completethe expansion and open the new area for gaming in the third quarter of2003.  During 2002 and 2001, we incurredcapital expenditures relating to the Wheeling Island expansion of $21.6 millionand $2.2 million, respectively.

 

**Critical AccountingPolicies**

 

Our critical accounting policiesare described in the notes to the Consolidated Financial Statements.  We believe the following represent ourcritical accounting policies.

 

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*Revenue Recognition*

 

Gaming revenues represent gross revenues from slot machine gaming, ortotal amounts wagered, net of winning patron payouts (the “gross terminalincome”) less (i) a fee of up to 4.0% of gross terminal income paid to theLottery Commission for administering slot machine gaming at the licensee’s racetrack (the “administration fee”), (ii) a tax of 30.0% of net terminal income(gross terminal income less the administration fee) paid to the State’s generalrevenue fund and (iii) an amount of 9.0% of net terminal income “NTI” to bepaid to various state funds, including funds for tourism promotion, OhioCounty, employee pension programs and other programs.  All revenues derived from the operation of slot machines mustinitially be deposited with the Lottery Commission to be shared in accordancewith the provisions of the Lottery Act. Prior to legislative changes, which became effective as of July 1, 2001,the State refunded the portion of the administration fee in excess of theLottery Commission’s administrative expenses.

 

In April 2001, the West Virginia legislature adopted new legislation,effective as of July 1, 2001, which authorized an increase in West Virginia’sshare of NTI above a predetermined level, defined as the NTI generated for theState’s fiscal year ended June 30, 2001. The State deducts a 10.0% surcharge from NTI in excess of thepredetermined level.  The remainder ofthe excess NTI is divided as follows: 50.0% is returned to the racetrack (ofwhich 8.0% represents supplemental purse expense), 41.0% is paid to the State’sgeneral revenue fund and the remaining 9.0% is divided among various statefunds.  Of the total 10.0% surcharge,42.0% is deposited in a capital reinvestment account attributable to eachracetrack.  The racetrack is entitled torecoup monies in the capital reinvestment account for certain types of capitalimprovements made at the racetrack on a dollar-for-dollar basis.  This legislation also eliminated the refundof the portion of the administration fee in excess of the Lottery Commission’sadministrative expenses.

 

The expected surcharge amount is accrued ratably during the year basedupon estimates of the actual amounts expected to be paid in each State fiscalyear.  The recoupment of amounts held inthe capital reinvestment account, and a similar fund held by the RacingCommission to be used for racetrack capital improvements, are included ingaming revenues during the period in which approved qualifying expenditures aremade.  Excess qualifying expendituresmay be carried forward for recoupment in future periods, subject to certainstatutory limitations.  During 2002 and2001, State surcharge amounts of $4.5 million and $1.5 million, as well as recognizedrecoupments of $2.4 million and $1.4 million, respectively, were recognized aselements of gaming revenue.  At December31, 2002, we had made $0.8 million of unreimbursed capital expenditures, whichwill be recouped from future distributions to the capital reinvestment account.

 

The Emerging Issues Task Force (EITF) reached aconsensus on certain issues within Issue No. 01-09, “Accounting forConsideration Given by a Vendor to a Customer” (EITF 01-09).  Application of EITF 01-09 is required forinterim and annual periods beginning after December 15, 2001.  EITF 01-09 requires rebates or cashconsideration given by a vendor to a customer to be classified as a reductionin selling price of the vendor’s product, and therefore should be characterizedas a reduction of revenue when recognized in the vendor’s incomestatement.  During 2002, 2001 and 2000,we offered incentives to members of our Preferred Players Club in the form ofcoupons redeemable for cash.  Under EITF01-09, such coupons are deemed to be rebates or cash incentives.  Rebates of $3.9 million have been classifiedas a reduction of revenues in 2002. Accordingly, $1.6 million and $0.1 million for the years ended December31, 2001 and 2000, respectively, previously recorded as promotional expenses,have been reclassified to conform to the current presentation with no effect onpreviously recorded operating income or net income.

 

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Pari-mutuel revenue represents commissions earned from on-site pari-mutuelwagering during live racing and simulcasting, net of State pari-mutuel taxesand simulcast commissions paid.  Thesecommissions are calculated as specified by applicable State statutes based onpercentages applied to various types of pari-mutuel wagering pools.  State pari-mutuel taxes and simulcastcommissions paid are based on specified percentages of the wagering pools.  We also receive commissions for simulcastingour events to other racetrack facilities. These commissions are based upon contractual percentages of amountswagered or stated amounts per performance. A portion of the pari-mutuel revenue and interest earned thereon arerestricted by statute for capital improvements and other specific uses, and aredeposited in a segregated account. Restricted commissions amounted to $0.4 million in each of the years2002, 2001 and 2000.  At December 31,2002, we had made unreimbursed qualifying expenditures of $28.6 million, whichare reimbursable from future restricted commissions earned.

 

Food and beverage revenue is recognized at the time of the sale tocustomers.  Revenue does not include theretail value of food and beverage provided gratuitously to customers.

 

*Valuation of Long-Lived Assets,Including Goodwill and other Intangible Assets*

 

The carrying value of long-lived assets, including goodwill and otherintangible assets, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying value may not be recoverable.  The recoverability of the carrying value oflong-lived assets, other than goodwill and indefinite-lived intangible assets,is assessed by estimating the undiscounted cash flows that are directlyassociated with and expected to arise from the use of and eventual dispositionof such assets over their respective estimated useful lives.  If the carrying value of the assets exceedsthe estimated undiscounted cash flows, an impairment charge is recorded to theextent the carrying value of the long-lived asset exceeds its fair value.  Fair value is determined through theperformance of internal analysis of discounted cash flows.  The undiscounted and discounted cash flowanalyses are based on a number of estimates and assumptions, including theexpected period over which the asset will be utilized, projected futureoperating results of the assets, discount rate and long-term cash flow growthrate.

 

To assess goodwill and indefinite-lived intangible assets forimpairment, an assessment of the carrying value of the Company is performed onan annual basis or when events and changes in circumstances occur that wouldmore likely than not reduce the fair value of the Company below carryingvalue.  If the carrying value of theCompany exceeds its fair value, the second step in the assessment process wouldbe performed and an impairment charge to earnings would be recorded to theextent the carrying amount of the Company’s goodwill and indefinite-livedintangible assets exceed its implied fair value.  The fair value is estimated through internal analysis, which utilizesan income valuation approach through the application of the traditionaldiscounted cash flow method.  The cashflows associated with the traditional discounted cash flow method are based ona number of estimates and assumptions, including the determination of reportingunits, the projected future operating results of the reporting unit, discountrate, long-term growth rate and appropriate market comparables.

 

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*PreferredPlayers Program*

 

Many of our customers aremembers of our frequent player program called the Preferred Players Club. ThePreferred Players Club is a promotional tool used to develop customer loyaltyby providing customers with reward incentives for increased levels of play.  Club members can accumulate points for slotwagering that can be redeemed for cash, food and beverages and retailproducts.  A liability is recorded forthe estimated value of the unredeemed points. The estimated value of the unredeemed points is based on the total valueof the unredeemed points adjusted by the Company’s historical redemption rate.Points redeemed for cash are recognized as a reduction in revenues while pointsredeemed for food and beverage and other retail products are recognized aspromotional expenses.

 

**Recently Issued Accounting Standards**

 

In June 2001, the Financial Accounting Standards Board (FASB) issuedStatements of Financial Accounting Standards (SFAS) No. 141, “BusinessCombinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets,” whichare effective July 1, 2001 and January 1, 2002, respectively.  The provisions of SFAS No. 141 (i) requirethat the purchase method of accounting be used for all business combinationsinitiated after June 30, 2001, (ii) provide specific criteria for the initialrecognition and measurement of intangible assets apart from goodwill and (iii)require that unamortized negative goodwill be written off immediately as anextraordinary gain instead of being deferred and amortized.  SFAS No. 141 also requires that uponadoption of SFAS No. 142 the carrying amounts of certain intangible assets bereclassified into or out of goodwill based on certain criteria.  SFAS No. 142 supersedes AccountingPrinciples Board No. 17, “Intangible Assets,” and is effective for fiscal yearsbeginning after December 15, 2001, as well as for goodwill and other intangibleassets that arose from a business combination completed after June 30,2001.  SFAS No. 142 primarily addressesthe accounting for goodwill and intangible assets subsequent to their initialrecognition.  The provisions of SFAS No.142 (i) prohibit the amortization of goodwill and indefinite-lived intangibleassets, (ii) require that goodwill and indefinite-lived intangible assets betested annually for impairment (and in interim periods if certain events occurindicating that the carrying value of goodwill and/or indefinite-livedintangible assets may be impaired), (iii) require that reporting units beidentified for the purpose of assessing potential future impairment of goodwilland (iv) remove the forty-year limitation on the amortization period ofintangible assets that have finite lives. The Company has completed its annual impairment assessment requiredpursuant to SFAS 142 and has determined that no impairment change is warranted.

 

We adopted the provisions of SFAS No. 141 and No. 142 with theaccounting for the Stock Purchase Transaction. Prior to the Stock Purchase Transaction, we had insignificant balancesrelated to goodwill and other intangible assets and, accordingly, theapplication of the provisions of SFAS No. 141 and SFAS No. 142 did not have amaterial impact on our financial position and results of operations.

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations”, which will be effective January 1, 2003.  SFAS No. 143 addresses financial accountingand reporting for obligations associated with the retirement of tangiblelong-lived assets and the associated asset retirement costs.  SFAS No. 143 requires that the fair value ofliability of an asset retirement obligation be recognized in the period inwhich it is incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs arecapitalized as a part of the carrying amount of the long-lived asset.  We adopted SFAS No. 143 on January 1, 2003and do not expect a material impact on our consolidated financial position orresults of operations.

 

19

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In August 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets”. SFAS No. 144 superseded SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of” and addressesfinancial accounting and reporting for impairment of long-lived assets to beheld and used, and long-lived assets and components of an entity to be disposedof.  We adopted SFAS No. 144 on January1, 2002, which had no impact on our financial position and results ofoperations.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities”. SFAS No. 146 requires obligations associated with disposing ofoperations to be recognized and measured at fair value when certain liabilitiesare incurred.  The current accountingguidance allows for recognition of liabilities on the commitment date of adisposal or exit plan.  We adopted SFASNo. 146 on January 1, 2002.  Theadoption of SFAS No. 146 had no impact on our financial position and results ofoperations.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” (FIN 45).  FIN 45 requires a guarantor to (i) include disclosure of certainobligations and (ii) if applicable, at the inception of the guarantee,recognize a liability for the fair value of other certain obligationsundertaken in issuing a guarantee.  Thedisclosure provisions of the FIN 45 are effective for financial statements ofinterim or annual reports that end after December 15, 2002.  The adoption of FIN 45 had no impact on ourdisclosures as of December 31, 2002. The recognition and measurement provisions of FIN 45 are effective forguarantees issued or modified after December 29, 2002.  We do not expect FIN 45 to have a materialeffect on our financial position or results of operations.

 

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**Resultsof Operations**

 

The following table summarizes business segment revenue as a percentageof total operating revenue for the years ended 2002, 2001 and 2000.

 
|                         |   | **Year Ended  December 31,** |   |
|------------------------------|--------|------------------------------|--------|
|                         |   | **2002**                     |   | **2001** |   | **2000** |   |
| Revenue by  Business Segment |   |                         |   |   |   |   |   |
|                         |   |                         |   |   |   |   |   |
| Gaming Revenue               |   | 85.2%                        |   | 82.9% |   | 78.2% |   |
| Pari-Mutuel  Revenue         |   | 9.5%                         |   | 11.6% |   | 15.4% |   |
| Food &  Beverage Revenue |   | 5.3%                         |   | 5.5% |   | 6.4% |   |
|                         |   |                         |   |   |   |   |   |
| Total                        |   | 100.0%                       |   | 100.0% |   | 100.0% |   |

 

**2002 Compared to 2001**

 

Gaming revenues were $79.1 million for the year ended December 30,2002, an increase of $11.3 million, or 16.6%, from $67.8 million for the yearended December 31, 2001.  The increasewas due to an expansion of our gaming operations in December 2001 and furtherincreases in the number of slot machines during 2002.  In December 2001, we increased the number of slot machines from1,400 to 1,537.  During 2002, the numberof machines was increased from 1,537 at December 31, 2001 to 1,623 at December31, 2002.  In addition, during 2002 wecontinued to increase spending on our marketing and promotions initiatives,including the expanded use of promotional programs and increased spending onthe Preferred Players Club.  Theincrease in gaming revenues during 2002 was achieved despite the loss of thereimbursement of a portion of the administrative fee paid to the LotteryCommission.  Such reimbursment equaling$1.8 million in 2001 became non-recurring as a result of new legislationeliminating the reimbursement, which became effective July 1, 2001.  In addition, such legislation lowered thepercentage of gross terminal income (net of administrative fee) received asrevenue for all gross terminal income amounts (net of administrative fee) abovea predetermined level.  As a result,gaming revenue derived from slot machines as a percentage of gross terminalincome decreased from 57.7% to 55.3%. Without such legislation, gaming revenues would have increased anadditional $5.5 million.

 

 

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Gaming expenses were $29.8 million for the year ended December 31,2002, an increase of $4.9 million, or 19.7%, from $24.9 million for the prioryear.  The increase was due to a $3.0million increase in other gaming costs and a $1.9 million increase in gamingpurse expense.  The $3.0 millionincrease in other gaming costs was due to a $1.9 million increase in marketingand promotions expense, a $0.6 million increase in payroll related gaming costsand a $0.2 million increase in insurance costs.  The increase in marketing and promotions expense was due toincreased promotions efforts, including increased spending on the PreferredPlayers Club.  The increase PreferredPlayers Club spending resulted from increasing the rewards provided to thePlayers and an increase in player membership from 107,876 at December 31, 2001to 167,405 at December 31, 2002.  The$0.6 million increase in gaming related payroll costs was due to the increasednumber of slot machines and increased levels of play.  The $0.2 million increase in insurance costs was due to higherpremiums paid for liability and property coverage.  The $1.9 million increase in gaming purse expense was directlyattributable to the $32.8 million increase in gross terminal income to $149.1million for the year ended December 31, 2002 from $116.3 million for the prioryear.  The increase in gaming purseexpense during 2002 occurred despite the loss of the purse distributionrepresenting a portion of the administrative fee reimbursement received fromthe Lottery Commission.  Such pursedistribution equaling $0.4 million in 2001 became non-recurring as a result ofnew legislation eliminating the administrative fee reimbursement, which becameeffective July 1, 2001.  In addition,such legislation lowered the percentage of gross terminal income (net ofadministrative fee) distributed to purses for all gross terminal income amounts(net of administrative fee) above a predetermined level.  As a result, gaming purse expense as apercentage of gross terminal income decreased from 12.6% to 11.3%.  Without such legislation, gaming purseexpense would have increased by an additional $2.2 million.

 

*Pari-Mutuel Operations*

 

Pari-mutuel revenues for the year ended December 31, 2002 were $8.8million, a decrease of $0.7 million, or 6.6%, from $9.5 million for the priorfiscal year.  The decrease inpari-mutuel revenues was due to a $3.3 million decrease in wagering handle onour live races.

 

Pari-mutuel expenses were $8.7 million for the year ended December 31,2002, a decrease of $0.6 million, or 6.6%, from $9.3 million for the year endedDecember 31, 2001.  The decrease was dueprimarily to lower expenses associated with a $3.3 million decrease in wageringhandle on our live races.

 

*Food and Beverage Operations*

 

Food and beverage revenues were $4.9 million for the year endedDecember 31, 2002, an increase of $0.4 million, or 9.1%, from $4.5 million forthe year ended December 31, 2001.  Theincrease in food and beverage revenues can be attributed to a 14.5% increase inattendance during 2002 as compared to 2001.

 

22

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Food and beverage expenses for the year ended December 31, 2002 were$5.6 million, an increase of $1.5 million, or 37.6%, from $4.1 million for theprior year.  Food and beverage expensesas a percentage of food and beverage revenues was 114.3% for the year endedDecember 31, 2002, which is higher than the prior year percentage of90.7%.  Such increase was due to theexpanded use of food and beverage price discounts and the complimentary drinkservice as promotional tools, and a $0.2 million increase in payroll costsassociated with management staff additions.

 

*Other Expenses*

 

For the fiscal year ended December 31, 2001, a management fee expenseof $25.5 million was recorded and no such expense was recorded for the yearended December 31, 2002.  Prior to theconsummation of the Stock Purchase Transaction on December 19, 2001, managementfees were calculated and paid in accordance with services agreements with theshareholders.  Such agreements wereterminated upon completion of the stock purchase transaction, therebydiscontinuing this expense.

 

General and administrative, or G&A, expenses were $3.9 million forthe year ended December 31, 2002, an increase of $0.8 million, or 27.4%, from$3.1 million for the year ended December 31, 2001.  The increase in G&A expense was due to a $0.7 millionincrease in administrative services fees paid to the shareholders, a $0.5million increase in payroll costs, and a $0.2 million increase in legal costs,offset by $0.5 million of non-recurring employment costs incurred last year anda $0.1 million decrease in consulting costs. The $0.5 million increase in payroll costs was due primarily to theaddition of management personnel needed to accommodate the anticipated growthof the gaming operation and other amenity offerings associated with the openingof the Wheeling Island expansion.

 

Depreciation and amortization expenses were $7.5 million for the yearended December 31, 2002, an increase of $3.8 million from the prior year.  The increase in depreciation andamortization expenses was due to $3.0 million of increased amortization expenseattributable to the full year impact of a $15.0 million non-compete agreementwith a prior shareholder and a $0.8 million increase in depreciationexpense.  The $15.0 million non-competeagreement represents a portion of the total consideration paid for the stockpurchased from that shareholder in the stock purchase transaction.  The Stock Purchase Transaction was completedon December 19, 2001.  During the twelvemonths ended December 31, 2002, $8.7 million of assets were added to ourbuildings, improvements and equipment accounts.  These assets are directly responsible for the $0.8 millionincrease in depreciation expense.

 

Interest expense was $13.9 million for the year ended December 31,2002, an increase of $12.5 million from $1.4 million for the year endedDecember 31, 2001.  The increase ininterest expense was due to a $12.9 million increase in interest expense andamortization of debt issuance costs associated with the full year impact of theDecember 2001 issuance of the $125.0 million of unsecured senior notes, $0.3million of interest expense related to a 2002 review of our 1999, 2000 and 2001federal income tax returns and $0.2 million of commitment fees associated withour $40.0 million revolving credit facility. This was offset partially by $1.0 million of interest expense andamortization of debt issuance costs recorded last year relating to borrowingsunder a previous $20.0 million revolving credit facility, which were fullyrepaid from the proceeds of the issuance of the $125.0 million of the unsecuredsenior notes.

 

23

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Income tax expense for the year ended December 31, 2002 was $8.3million, an increase of $5.0 million from $3.3 million for the prior year.  The increase was directly attributable tothe $13.3 million increase in income before taxes to $23.1 million for the yearended December 31, 2002 from $9.8 million for the year ended December 31, 2001.

 

**2001 Compared to 2000**

 

*Gaming Operations*

 

Gamingrevenues were $67.8 million for the year ended December 31, 2001, an increaseof $21.0 million, or 45.0%, from $46.8 million for the year ended December 31,2000.  The increase was due primarily tothe full twelve-month impact of the gaming expansion associated with theopening of the Island Room in June 2000. The opening of the Island Room increased the number of slot machinesfrom 800 to 1,280.  We further expandedour gaming operations during the year ended December 31, 2001 by increasing thenumber of slot machines from 1,280 to 1,537. The increased number of slot machines led to higher gaming revenuesduring 2001.  In addition, we believeour increased focus on marketing and promotion efforts in 2001, including thefull twelve-month impact of the Preferred Players Club first introduced inJuly 2000, contributed to increased gaming revenues.

 

Gamingexpenses were $24.9 million for the year ended December 31, 2001, an increaseof $6.3 million, or 33.7%, from $18.6 million for the year ended December 31,2000.  The increase was due primarily toan increase in gaming purse expenses, which were $15.0 million for the twelvemonths ended December 31, 2001, an increase of $4.4 million, or 41.3%, from$10.6 million for the prior year. The increase in gaming purse expenses was dueto the $38.8 million increase in gross terminal income to $116.3 million forthe year ended December 31, 2001 from $77.5 million for the year ended December31, 2000.  The effect of the increasedgross terminal income was offset partially by the $1.1 million decrease ingaming purse expenses attributable to the impact of new legislation that becameeffective on July 1, 2001.  Suchlegislation lowered the percentage of gross terminal income (net ofadministrative fee) distributed to purses for all gross terminal income amounts(net of administrative fee) above a predetermined level.  Other gaming costs were $9.8 million for theyear ended December 31, 2001, an increase of $1.8 million, or 23.7%, from $8.0million for the year ended December 31, 2000. The increase in other gaming costs was due to a $1.3 million increase inmarketing and promotions expenses and a $0.6 million increase ingaming-related payroll costs associated with operating the Island Room gamingexpansion for the full twelve-month period.

 

*Pari-Mutuel Operations*

 

Pari-mutuelrevenues for the year ended December 31, 2001 were $9.5 million, anincrease of $0.3 million, or 2.9%, from $9.2 million for the prioryear.  The increase in pari-mutuelrevenues was due to the full twelve-month impact of simulcast commissionsreceived from simulcasting our live races to other racetracks, which began inJuly 2000.

 

24

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Pari-mutuelexpenses were $9.3 million for the year ended December 31, 2001, anincrease of $0.7 million, or 8.6%, from $8.6 million for the yearended December 31, 2000.  Theincrease was due to a $0.3 million increase in racing costs related to thefull twelve-month impact of simulcasting our live races to otherracetracks and a $0.2 million increase in payroll-relatedmaintenance costs.

 

*Food and Beverage Operations*

 

Foodand beverage revenues were $4.5 million for the year endedDecember 31, 2001, an increase of $0.6 million, or 16.2%, from$3.9 million for the year ended December 31, 2000.  The full twelve-month impact ofoperating the 180-seat Island Room buffet-style restaurant, which firstopened in June 2000, contributed $0.9 million to the increase and wasoffset partially by a $0.2 million decrease in concession stand sales.

 

Foodand beverage expenses were $4.1 million for the year endedDecember 31, 2001, an increase of $1.0 million, or 30.4%, from$3.1 million for the prior year. This increase was due to the $0.4 million increase in cost of salesassociated with the $0.6 million increase in food and beverage revenuesduring the year and a $0.5 million increase in payroll costs related tooperating the Island Room buffet for the full twelve-month period.  Food and beverage expenses as a percentageof food and beverage revenues was 90.7% for the year ended December 31,2001, which compares unfavorably with the prior year percentage of 80.8%.  Such increase was due to the increased useof food and beverage price discounts as a promotional tool during the yearended December 31, 2001.

 

*Other Expenses*

 

Managementfees totaled $25.5 million for the year ended December 31, 2001, anincrease of $10.3 million, or 68.3%, from $15.2 million for the yearended December 31, 2000. Management fees were calculated based on preceding year revenues.  The base of revenues used for thecalculation of management fees for the year ended December 31, 2001 was$60.0 million, or $22.6 million higher than the revenues used for thecalculation of management fees for the prior year.  Due to the termination of the management fees upon the closing ofthe $125.0 million of unsecured senior notes on December 19, 2001, therecorded management fee expense for the year ended December 31, 2001 was$0.5 million lower than the calculated amount for the full year.

 

G&Aexpenses were $3.1 million for the year ended December 31, 2001, anincrease of $1.2 million, or 58.6%, from $1.9 million for the yearended December 31, 2000.  Theincrease in G&A expense was due principally to $0.5 million ofnon-recurring employment costs, $0.2 million of non-recurring consultingexpenses and a $0.2 million increase in payroll-related costs.

 

Depreciationand amortization expenses were $3.7 million for the year endedDecember 31, 2001, an increase of $1.1 million, or 44.3%, from$2.6 million for the year ended December 31, 2000.  The increase in depreciation andamortization expenses was due to the full twelve- month impact of the$17.9 million of assets placed in service during fiscal year 2000.  A substantial portion of these assets relateto the Island Room construction.

 

Interestincome (expense) was $(1.4) million for the year ended December 31, 2001,an increase of $(0.9) million from $(0.5) million for the year endedDecember 31, 2000.  The increase ininterest expense is due to the recording of $(0.5) million in interest expenserelating to the note offering, $(0.2) million of increased interest expenserelating to the full twelve-month impact of our original revolving creditfacility, which was entered into on June 30, 2000, and a $(0.2) millionwrite-off of the remaining debt issuance costs for the original revolver.

 

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**Liquidity and Capital Resources**

 

As of December 31, 2002, we had cash and cash equivalents of $9.0 million.  Our principal source of liquidity during theyear ended December 31, 2002 consisted of cash provided by operatingactivities.  As of December 31, 2001, wehad cash and cash equivalents of $9.9 million. Our principal source of liquidity during the year ended December 31,2001 consisted of cash from operating activities and the proceeds from ourissuance of $125.0 million of unsecured senior notes.

 

Cash provided by operating activities was $23.6 million for the yearended December 31, 2002 as compared to $12.2 million for the year endedDecember 31, 2001.  The $11.4 millionincrease was due to (i) a $8.4 million increase in net income, (ii) a $3.8million increase in non-cash depreciation and amortization, (iii) a $0.8million increase in other non-cash adjustments to net income, primarilyincreased interest expense associated with the full-year impact of theamortization of debt issuance costs related to the issuance of $125.0 millionof unsecured senior notes in December 2001, (iv) a $0.7 million decrease in thechange in working capital, primarily accrued expenses.  Such increases to cash provided by operatingactivities were partially offset by a $2.3 million decrease in our deferredincome tax liability.

 

Cash used in investing activities for the years ended December 31, 2002and 2001 was $25.4 million and $111.8 million, respectively.  The $86.4 million decrease in cash used forinvesting activities was due to the $105.0 million stock purchase transactionconsummated in December 2001, offset partially by a $18.6 million increase incapital expenditures due primarily to $21.6 million of capital expendituresmade in 2002 for the Wheeling Island expansion.

 

Cash provided by financing activities for the year ended December 31,2002 and December 31, 2001 was $0.9 million and $104.5 million,respectively.  The $103.6 milliondecrease in cash provided by financing activities was due to the proceeds fromour issuance of $125.0 million of unsecured senior notes in December 2001 and$0.6 million of debt issuance costs incurred in 2002, which relate to theissuance and registration of the unsecured senior notes.  These decreases in cash provided byfinancing activities are offset partially by (i) the $14.5 million repayment in2001 of borrowings under a previously existing $20.0 million revolving creditfacility that was fully repaid in 2001, (ii) $6.0 million of debt issuance costs incurred in 2001 associatedwith the offering of the $125.0 million of unsecured senior notes and theclosing of the $40.0 million revolving credit facility in December 2001 and(iii) a $1.5 million borrowing under the $40.0 million revolving creditfacility in 2002.

 

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**ContractualObligations and Commitments**

 

The following table reflects our contractual obligations andcommitments:

 
|                                           |   | **Payments  Due by Period (in thousands)** |    |
|------------------------------------------------|--------|--------------------------------------------|---------|
| **($000)**                                     |   | **Total**                                  |    | **Less than  1 Year** |   | **1-3  Years** |   | **4-5  Years** |   | **After 5  Years** |   |
|                                           |   |                                       |    |   |   |   |   |   |   |   |   |
| Long-Term Debt                                 |   | $                                          | 126,500 |   | $ | 0 |   | $ | 0 |   | $ | 1,500 |   | $ | 125,000 |   |
| Total Contractual  Obligations and Commitments |   | $                                          | 126,500 |   | $ | 0 |   | $ | 0 |   | $ | 1,500 |   | $ | 125,000 |   |

 

In addition to the commitments shown above, we have begun constructingthe Wheeling Island expansion.  Theexpansion is expected to include a hotel, new gaming areas, a conferencefacility, dining facilities and a multi-purpose showroom.  The cost of completing the expansion isexpected to be approximately $65.0 million. The construction management agreement was executed in July 2002.  Completion is anticipated in the thirdquarter of 2003.  The project will befinanced with cash flow from operations and, to the extent required, borrowingsunder our $40.0 million revolving credit facility.

 

Our ability to service our debt depends on our ability to generatesignificant cash flow in the future. This, to some extent, is subject to general economic, financial,competitive, legislative and regulatory factors, as well as other factors thatare beyond our control.  In addition,the ability to borrow funds under our $40.0 million revolving credit facilityin the future depends on our meeting the financial covenants in such creditagreement, including a minimum fixed charge coverage ratio test and a maximumleverage ratio test.  We cannot assureyou that our business will generate cash flow from operations, or that futureborrowings will be available to use under our $40.0 million revolving creditfacility or otherwise, in an amount sufficient to enable us to service ourlong-term debt or to fund other liquidity needs.

 

**ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

None.

 

**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

The ConsolidatedFinancial Statements and accompanying footnotes are set forth on pages F-1through F-21 of this report.

 

**ITEM9.****               CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS  ONACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

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**PART III**

 

**ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Thetable below sets forth the names, ages and positions of our directors andexecutive officers.

 
| **Name**              |   | **Age** |   | **Position and Office Held**           |
|-----------------------|--------|---------|--------|----------------------------------------|
|                  |   |    |   |                                   |
| Dennis  J. Szefel     |   | 56      |   | Chairman  of the Board                 |
| Thomas  A. Cooper     |   | 66      |   | Director,  Chairman of Audit Committee |
| William  R. Greiner   |   | 68      |   | Director,  Member of Audit Committee   |
| Richard  T. Stephens  |   | 60      |   | Director                               |
| William  J. Bissett   |   | 54      |   | Director                               |
| Ronald  A. Sultemeier |   | 54      |   | Chief  Executive Officer               |
| Scott  L. Cooper      |   | 55      |   | President                              |
| Mark  A. Fulton       |   | 38      |   | Chief  Operating Officer               |
| Michael  D. Corbin    |   | 41      |   | Vice  President of Finance             |

 

***Dennis J. Szefel****.*  Mr. Szefel was appointed as a director inDecember 2001 and was named Chairman of the Board in January 2003.  Since January 2002, Mr. Szefel has served asPresident of the Hospitality and Entertainment Group of Delaware NorthCompanies, Incorporated, or Delaware North. From October 1993 to January 2002,Mr. Szefel held the position of President of Delaware North Parks Services,Inc., a subsidiary of Delaware North. Mr. Szefel originally joined Sportservice Corporation, anotherDelaware North subsidiary, in January 1969. Since joining Delaware North in 1969, he has held a number of seniormanagement positions within Delaware North’s various business units.

 

***Thomas A. Cooper****. *Mr. Cooper wasappointed as a director and named Chairman of the Audit Committee in January2003.  In addition, Mr. Cooper isChairman of TAC Associates, Inc., a financial services consulting firm.  Mr. Cooper was appointed to the Board ofDirectors of Delaware North in June 1995. He also serves as a Director of BISYS, Inc. and as a Director ofRenaissance Reinsurance.  In addition,he is Chairman of Flatiron Credit Company.

 

***William R. Greiner****.* Mr. Greiner was appointed as a director and named a member of the AuditCommittee in January 2003.  In September1991, Mr. Greiner was appointed President of the University at Buffalo, theState University of New York. From August 1984 through March 1991, Mr. Greinerserved as the University’s Senior Vice President and Provost before hisappointment as Interim President in March 1991.  From 1980 through August 1984, Mr. Greiner served as theUniversity’s Associate Vice President for Academic Affairs and Chief AcademicOfficer for the Division of Academic Affairs.

 

***Richard T. Stephens****. *Mr. Stephens wasappointed as a director in January 2003. Since 1991, Mr. Stephens has served as President and Chief OperatingOfficer of Delaware North.  Mr. Stephenswas appointed to the Board of Directors of Delaware North in 1990.  From 1985 to 1991, Mr. Stephens served asPresident of Delaware North Companies, International, Ltd., a subsidiary ofDelaware North.  Mr. Stephens joinedDelaware North in 1976 as Vice President of Finance.

 

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***William J. Bissett****.*  Mr. Bissett has served as a directorsince October 1994. Mr. Bissett has served as Vice President, Government Affairs andCommunity Relations for Delaware North since March 1995, overseeing allgovernment relations activities, including interaction with legislative andregulatory agencies at all levels of government.  From June 1992 to March 1995, Mr. Bissett servedas President of Sportsystems Corporation.

 

***Ronald A. Sultemeier.***  Mr. Sultemeier was appointed as our ChiefExecutive Officer in March 2003. From October 1994 to November 2001, Mr.Sultemeier served as our Vice President and Treasurer. Mr. Sultemeier alsoserved as a director from October 1994 through January 2003. Mr. Sultemeierjoined Sportsystems Corporation in January 1994 and became President in 1995.From January 1981 to December 1993, Mr. Sultemeier held various seniormanagement positions at several greyhound racetracks, including TucsonGreyhound Park, Dairyland Greyhound Park and The Woodlands.

 

***Scott L. Cooper*.**  Mr. Cooperhas served as our President since April 2001.  From April 2001 until March 2003, Mr. Cooper was our ChiefExecutive Officer.  From December 1996through March 2001, Mr. Cooper was self-employed as a gaming consultant and advisedseveral companies that were attempting to purchase gaming properties.  From October 1992 toNovember 1996, Mr. Cooper worked for Players International, the lasttwo years of which he served as Executive Vice President of CorporateOperations for all four Players International properties.

 

***Mark A. Fulton.***  Mr.Fulton was appointed as our Chief Operating Officer in October 2002.  From 1993 to 2001, Mr. Fulton worked forIsle of Capri Casinos, Inc. in various management positions, including VicePresident and General Manager of their Vicksburg Casino, Vice President andGeneral Manager of their Tunica Casino and Vice President of SpecialProjects.  Prior to that position, hewas Controller for Medical Enterprises, Ltd. in Jackson, Mississippi.

 

***Michael D. Corbin***** Mr. Corbin was appointed as our VicePresident of Finance in November 2001. Mr. Corbin has been the Controller for Sportsystems Corporationsince April 1996.  Prior to thatposition, he was Senior Financial Analyst for Delaware North.

 

**ITEM 11.  EXECUTIVE COMPENSATION**

 

The following table sets forth thecompensation awarded, paid to or earned by our chief executive officer[s] andour most highly compensated executive officers (whose compensation exceeded$100,000 in the fiscal year ended December 31, 2002):

 
|                                                   |   | **SUMMARY  COMPENSATION TABLE**                  |   |
|--------------------------------------------------------|--------|--------------------------------------------------|--------|
|                                                   |   | **Annual  Compensation**                         |   |
|                                                   |   | **for the fiscal  year ended December 31, 2002** |   |
|                                                   |   | **Year**                                         |   | **Salary** |   | **Bonus** |   |
|                                                   |   |                                             |   |   |   |   |   |
| Scott L. Cooper  President and Chief Executive Officer |   | 2002                                             |   | $ | 230,000 |   | $ | 25,000 |   |
|                                                   |   |                                             |   |   |   |   |   |
| Alex M. Tucker  Director of Administration             |   | 2002                                             |   | $ | 98,461 |   | $ | 17,000 | (1) |

 

----

(1) Such bonus amount represents bonus compensation paid in the fiscalyear ended December 31, 2002 but earned in the fiscal year ended December 31,2001.  Bonus compensation earned in thefiscal year ended December 31, 2002 will not be determined and paid until April2003.

29

----

In March 2003, Ronald A. Sultemeier became our Chief Executive Officerinstead of Scott L. Cooper.  Mr. Coopercontinues to serve as our President.

 

Mark A. Fulton became our Chief Operating Officer in October 2002.  The compensation that he received in fiscalyear 2002 did not exceed $100,000, but if he had worked for all of fiscal year2002, his compensation would have been approximately $175,000.

 

None of the executive officersnoted in the table above were granted any options or stock appreciation rightsduring 2002, nor did any of such persons exercise any options or SAR’s during2002 or held any as of December 31, 2002.

 

As of January 2003, Messrs. Cooperand Greiner receive $25,000 annually as compensation for their service asdirectors.  In addition, Mr. Cooperreceives $15,000 annually as compensation for serving as Chairman of the AuditCommittee.  All such directors' fees arepaid quarterly. 

 

**ITEM 12.  STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

**PrincipalShareholders**

 

Thefollowing table sets forth information regarding the shares of our common stockbeneficially owned by each shareholder who is known by us to beneficially ownin excess of 5.0% of the outstanding shares of our common stock, by eachdirector and named executive officer and by all executive officers anddirectors as a group.

 
| **Name of  Beneficial Owner**                                |   | **Number of Shares****Beneficially Owned** |   | **Percentage****of  Class** |   |
|--------------------------------------------------------------|--------|--------------------------------------------|--------|-----------------------------|--------|
|                                                         |   |                                       |   |                        |   |
| Sportsystems  Corporation (1)                                |   | 500                                        |   | 100                         | %      |
| Ronald  A. Sultemeier                                        |   | 0                                          |   | 0                           |   |
| Scott  L. Cooper                                             |   | 0                                          |   | 0                           |   |
| Mark  A. Fulton                                              |   | 0                                          |   | 0                           |   |
| Michael  D. Corbin                                           |   | 0                                          |   | 0                           |   |
| William  J. Bissett                                          |   | 0                                          |   | 0                           |   |
| Dennis  J. Szefel                                            |   | 0                                          |   | 0                           |   |
| Thomas  A. Cooper                                            |   | 0                                          |   | 0                           |   |
| William  R. Greiner                                          |   | 0                                          |   | 0                           |   |
| Richard  T. Stephens                                         |   | 0                                          |   | 0                           |   |
| All  executive officers and directors as a group (9 persons) |   | 0                                          |   | 0                           |   |

 

----

(1)          Theaddress for Sportsystems Corporation is 40 Fountain Plaza, Buffalo, New York14202.

 

SportsystemsCorporation is our sole shareholder, and thus exercises control over allmatters that require approval by our shareholders, including the election ofdirectors and the approval of significant transactions.  There can be no assurance that the interestsof Sportsystems will not conflict with the interests of the holders of theunsecured senior notes.

 

30

----

 

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

InDecember 2001, we purchased all of the shares of our common stock held byWHX Entertainment Corp., or WHX, for total consideration of $105.0 million.  Of the $105.0 million totalconsideration, $90.0 million is attributable to the purchase price for theshares and $15.0 million is attributable to a non-compete agreemententered into with WHX.  As a result ofthe Stock Purchase Transaction, Sportsystems Corporation is our soleshareholder.  The stock purchaseagreement for this transaction contains customary representations, warranties,covenants and indemnifications.

 

Priorto the closing of the $125.0 million of unsecured senior notes in December 2001,we recorded and paid management fees to two shareholders, SportsystemsCorporation, or Sportsystems, and WHX, based on the total operating revenues ofthe preceding year pursuant to management services agreements between these twoshareholders and us.  The managementfees were paid on a regular basis as cash was available.  Any management fees remaining unpaid atyear-end were subsequently paid in the first quarter of the following fiscalyear.  At December 31, 2000, we had$1.6 million in unpaid management fees, which were subsequently paid inJanuary 2001. Upon the closing of the $125.0 million of unsecured seniornotes in December 2001, these management services agreements were terminatedand we entered into an administrative services agreement with Sportsystems andDelaware North.  Pursuant to thisadministrative services agreement, Sportsystems receives an annualadministrative services fee that is equal to the greater of 1.5% of precedingyear total operating revenues or $1.2 million for certain administrativesupport services provided to us by Sportsystems and Delaware North.  During 2002 and 2001, we recordedadministrative service fees under this agreement of $1.3 million and $39,000,respectively.  In addition, at theclosing of the $125.0 million of unsecured senior notes in December 2001, wepaid a one-time advisory fee of $1.3 million to Delaware North pursuant toan advisory services agreement for advisory services provided in connectionwith the negotiation, structuring and financing of the stock purchasetransaction.

 

Priorto the closing of the $125.0 million of unsecured senior notes in December2001, Sportsystems and Delaware North provided cash management services to us,whereby we invested our excess cash balances and earned interest atSportsystems’ reinvestment rate.  As ofthe closing of the $125.0 million of unsecured senior notes in December 2001,we began investing our excess cash in a segregated account administered byDelaware North under its centralized cash management program.  At December 31, 2002 and December 31, 2001,we had $2.0 million and $3.2 million invested with Delaware North,respectively.  During 2002, 2001 and2000, we earned $0.1 million, $0.1 million and $0.2 million on these investedcash balances, respectively.

 

Weentered into a tax sharing agreement, effective as of December 20, 2001,with Delaware North and Sportsystems providing for the payment by us toDelaware North of amounts representing not more than the amount of tax thatwould be payable by us had we and our subsidiaries filed a separateconsolidated or combined tax return as a Subchapter C corporation for therelevant taxing jurisdiction (less any tax directly paid by such persons withrespect to such period).

 

31

----

 

**ITEM 14.  CONTROLS AND PROCEDURES**

 

Our Chief Executive Officer, President and Vice President of Finance,after evaluating the effectiveness of our disclosure controls and procedures(as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and15d-14(c) as of a date within 90 days of the filing date of this annual reporton Form 10-K (the "Evaluation Date")), have concluded that as of theEvaluation Date, our disclosure controls and procedures were adequate andeffective to ensure that material information relating to us and oursubsidiaries would be communicated to them.

 

There were no significant changes in our internal controls or in otherfactors that could significantly affect our disclosure controls and proceduressubsequent to the Evaluation Date, nor any significant deficiencies or materialweaknesses in such disclosure controls and procedures requiring correctiveactions.  As a result, no correctiveactions were taken.

 

**PART IV**

 

**ITEM15. ****                                       ****EXHIBITS****, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

(a)  1. Financial Statements

 

The Consolidated Financial Statements ofthe Company filed as part of this report are listed on the Index on page F-1.

 

2.           FinancialStatement Schedules

 

None.

 

3.           Exhibits

 

The Exhibits required by Item 601 ofRegulation S-K and filed herewith are listed in the Index to Exhibitsimmediately preceding the Exhibits.

 

(b)  Reports on Form 8-K

 

On November 18, 2002, the Company filed aForm 8-K under Item 5 announcing that on November 13, 2002, the Company issuedthe press release filed as an Exhibit to such Form 8-K with respect to itsearnings for the third quarter of 2002.

 

On December 9, 2002, the Company filed aForm 8-K under Item 5 announcing that on December 5, 2002, the Company issuedthe press release filed as an Exhibit to such Form 8-K with respect to theappointment of Mark Fulton as the new Chief Operating Officer of the Company.

 

On February 19, 2003, the Company filed aForm 8-K under Item 5 announcing that on February 19, 2003, the Company issuedthe press release filed as an Exhibit to such Form 8-K with respect to theelection of the Board of Directors and formation of an Audit Committee of theBoard of Directors of the Company.

 

32

----

 

**SIGNATURES**

 

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

 
|                                                                     |   |                     | WHEELING ISLAND  GAMING, INC. |
|--------------------------------------------------------------------------|--------|--------------------------|-------------------------------|
|                                                                     |   |                     |
|                                                                     |   |                     |
|                                                                     |   | By:                      | /s/ Ronald A.  Sultemeier     |
|              |   | Ronald A. Sultemeier     |
|                                                                     |   | Chief Executive  Officer |
|                                                                     |   |                     |
|                                                                     |   |                     |
|                                                                     |   | By:                      | /s/ Scott L. Cooper           |
|                   |   | Scott L. Cooper          |
|                                                                     |   | President                |
|                                                                          |        |                          |                               |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**             |   | **Capacity**                                                     |   | **Date**        |
|---------------------------|--------|------------------------------------------------------------------|--------|-----------------|
|                      |   |                                                             |   |            |
| /s/  Ronald A. Sultemeier |   | Chief  Executive Officer                                         |   | March  27, 2003 |
| Ronald  A. Sultemeier     |   | (principal  executive officer)                                   |   |            |
|                      |   |                                                             |   |            |
|                      |   |                                                             |   |            |
| /s/  Scott L. Cooper      |   | President                                                        |   | March  27, 2003 |
| Scott  L. Cooper          |   | (principal  executive officer)                                   |   |            |
|                      |   |                                                             |   |            |
|                      |   |                                                             |   |            |
| /s/  Michael D. Corbin    |   | Vice  President of Finance                                       |   | March  27, 2003 |
| Michael  D. Corbin        |   | (principal  financial officer and principal  accounting officer) |   |            |
|                      |   |                                                             |   |            |
|                      |   |                                                             |   |            |
| Dennis  J. Szefel         |   | Chairman  of the Board                                           |   | March  27, 2003 |
| Dennis  J. Szefel         |   |                                                             |   |            |
|                      |   |                                                             |   |            |
|                      |   |                                                             |   |            |

 

33

----

 
| /s/  Richard T. Stephens |   | Director |   | March  27, 2003 |
|--------------------------|--------|----------|--------|-----------------|
| Richard  T. Stephens     |   |     |   |            |
|                     |   |     |   |            |
|                     |   |     |   |            |
| /s/  William J. Bissett  |   | Director |   | March  27, 2003 |
| William  J. Bissett      |   |     |   |            |

 

 

**CERTIFICATION**

 

I, Ronald A. Sultemeier,certify that:

 

1.                                       I have reviewed this annual report on Form10-K of Wheeling Island Gaming, Inc.;

 

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

 

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

 

4.                                       The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

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

 

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

 

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

 

5.                                       The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):

 

a)                                      all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

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

 

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

 
| Dated:  March 27, 2003 |   | /s/ Ronald A. Sultemeier |
|-----------------------------|--------|--------------------------|
|                        |   | Ronald A. Sultemeier     |
|                        |   | Chief Executive Officer  |

 

34

----

 

**CERTIFICATION**

 

I, Scott L. Cooper, certifythat:

 

1.                                       I have reviewed this annual report on Form10-K of Wheeling Island Gaming, Inc.;

 

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

 

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

 

4.                                       The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

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

 

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

 

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

 

5.                                       The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):

 

a)                                      all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

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

 

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

 

 
| Dated:  March 27, 2003 |   | /s/ Scott L. Cooper |
|-----------------------------|--------|---------------------|
|                        |   | Scott. L. Cooper    |
|                        |   | President           |

 

 

 

35

----

 

**CERTIFICATION**

 

I, Michael D. Corbin,certify that:

 

1.                                       I have reviewed this annual report on Form10-K of Wheeling Island Gaming, Inc.;

 

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

 

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

 

4.                                       The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

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

 

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

 

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

 

5.                                       The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):

 

a)                                      all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

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

 

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

 
| Dated:  March 27, 2003 |   | /s/ Michael D. Corbin     |
|-----------------------------|--------|---------------------------|
|                        |   | Michael D. Corbin         |
|                        |   | Vice President of Finance |

 

36

----

 

 

 
| **INDEX TO CONSOLIDATED FINANCIAL STATEMENTS** | **Page** |
|------------------------------------------------|----------|
|                                           |     |
|                                           |     |
| Report of Independent  Accountants             | F-2      |
|                                           |     |
| Consolidated Balance  Sheets                   |     |
| As of December 31, 2002 and 2001               | F-3      |
|                                           |     |
| Consolidated Statements of  Operations         |     |
| Years Ended December 31, 2002, 2001 and 2000   | F-4      |
|                                           |     |
| Consolidated Statements of  Cash Flows         |     |
| Years Ended December 31, 2002, 2001, and 2000  | F-5      |
|                                           |     |
| Notes to Consolidated  Financial Statements    |     |
| Years Ended December 31, 2002, 2001 and 2000   | F-6      |

 

F-1

----

 

 

 

**Reportof Independent Accountants**

 

 

To the Board of Directors and Shareholder ofWheeling Island Gaming, Inc.

 

 

In our opinion, the accompanying consolidated balance sheets and therelated consolidated statements of operations and of cash flows present fairly,in all material respects, the financial position of Wheeling IslandGaming, Inc. and its subsidiaries at December 31, 2002 and 2001, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2002, in conformity with accounting principlesgenerally accepted in the United States of America.  These financial statements are the responsibility of theCompany’s management; our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits of these statements in accordance with auditingstandards generally accepted in the United States of America, which requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used, and significant estimatesmade by management, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

 

PricewaterhouseCoopers LLP

Buffalo, New York

 

March 16, 2003

 

F-2

----

 

**WHEELINGISLAND GAMING, INC.**

 

**ConsolidatedBalance Sheets**

**($000’somitted)**

 
|                                                                                                       |   | **December  31,** |    |
|------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                       |   | **2002**          |    | **2001** |   |
| **Assets**                                                                                                 |   |              |    |   |   |
|                                                                                                       |   |              |    |   |   |
| Current assets:                                                                                            |   |              |    |   |   |
| Cash and cash  equivalents                                                                                 |   | $                 | 9,014   |   | $ | 9,903 |   |
| Receivables                                                                                                |   | 1,292             |    | 1,180 |   |
| Prepaid expenses  and other assets                                                                         |   | 479               |    | 440 |   |
| Prepaid income  taxes                                                                                      |   | 1,067             |    | 43 |   |
| Deferred income  taxes                                                                                     |   | 92                |    | 71 |   |
|                                                                                                       |   |              |    |   |   |
| Total current  assets                                                                                      |   | 11,944            |    | 11,637 |   |
|                                                                                                       |   |              |    |   |   |
| Property and  equipment, net                                                                               |   | 55,845            |    | 35,241 |   |
| Operating  Licenses                                                                                        |   | 65,919            |    | 65,919 |   |
| Goodwill                                                                                                   |   | 32,221            |    | 32,219 |   |
| Non-compete  covenant                                                                                      |   | 11,902            |    | 14,902 |   |
| Other intangible  assets                                                                                   |   | 2,318             |    | 2,356 |   |
| Debt issuance  costs                                                                                       |   | 5,591             |    | 5,833 |   |
|                                                                                                       |   |              |    |   |   |
| Total assets                                                                                               |   | $                 | 185,740 |   | $ | 168,107 |   |
|                                                                                                       |   |              |    |   |   |
| **Liabilities and Shareholder's  Equity**                                                                  |   |              |    |   |   |
|                                                                                                       |   |              |    |   |   |
| Current  liabilities:                                                                                      |   |              |    |   |   |
| Accounts payable                                                                                           |   | $                 | 3,949   |   | $ | 2,517 |   |
| Accrued expenses                                                                                           |   | 4,273             |    | 2,716 |   |
|                                                                                                       |   |              |    |   |   |
| Total current  liabilities                                                                                 |   | 8,222             |    | 5,233 |   |
|                                                                                                       |   |              |    |   |   |
| Long-term debt                                                                                             |   | 126,500           |    | 125,000 |   |
| Deferred income  tax                                                                                       |   | 23,530            |    | 25,227 |   |
|                                                                                                       |   |              |    |   |   |
| Total  liabilities                                                                                         |   | 158,252           |    | 155,460 |   |
|                                                                                                       |   |              |    |   |   |
| Shareholder's  equity:                                                                                     |   |              |    |   |   |
| Common stock, $1  par value, 500 shares authorized, issued and outstanding in 2002 and 2001,  respectively |   | 1                 |    | 1 |   |
| Additional  paid-in capital                                                                                |   | 5,915             |    | 5,915 |   |
| Retained  earnings                                                                                         |   | 21,572            |    | 6,731 |   |
|                                                                                                       |   |              |    |   |   |
| Total  shareholder's equity                                                                                |   | 27,488            |    | 12,647 |   |
|                                                                                                       |   |              |    |   |   |
| Total  liabilities and shareholder's equity                                                                |   | $                 | 185,740 |   | $ | 168,107 |   |

 

The accompanying notesare an integral part of these financial statements.

 

F-3

----

 

**WHEELINGISLAND GAMING, INC.**

 

**ConsolidatedStatement of Operations**

**($000’somitted)**

 
|                           |   | **Years  ended December 31,** |   |
|--------------------------------|--------|-------------------------------|--------|
|                           |   | **2002**                      |   | **2001** |   | **2000** |   |
|                           |   |                          |   |   |   |   |   |
| Operating  revenue:            |   |                          |   |   |   |   |   |
| Gaming  revenue                |   | $                             | 79,132 |   | $ | 67,847 |   | $ | 46,807 |   |
| Pari-mutuel  revenue           |   | 8,847                         |   | 9,470 |   | 9,205 |   |
| Food  & beverage revenue   |   | 4,913                         |   | 4,502 |   | 3,875 |   |
|                           |   |                          |   |   |   |   |   |
|                           |   | 92,892                        |   | 81,819 |   | 59,887 |   |
|                           |   |                          |   |   |   |   |   |
| Operating  expenses:           |   |                          |   |   |   |   |   |
| Purse  expense - gaming        |   | 16,883                        |   | 15,007 |   | 10,624 |   |
| Other  gaming costs            |   | 12,876                        |   | 9,848 |   | 7,961 |   |
| Gaming  expenses               |   | 29,759                        |   | 24,855 |   | 18,585 |   |
|                           |   |                          |   |   |   |   |   |
| Purse  expense - pari-mutuel   |   | 1,916                         |   | 2,018 |   | 2,088 |   |
| Pari-mutuel  and admissions    |   | 2,311                         |   | 2,603 |   | 2,459 |   |
| Facilities  and maintenance    |   | 2,216                         |   | 2,301 |   | 1,975 |   |
| Racing  and marketing          |   | 2,264                         |   | 2,398 |   | 2,058 |   |
| Pari-mutuel  expenses          |   | 8,707                         |   | 9,320 |   | 8,580 |   |
|                           |   |                          |   |   |   |   |   |
| Food  & beverage expenses  |   | 5,618                         |   | 4,083 |   | 3,131 |   |
|                           |   |                          |   |   |   |   |   |
| Management  fees               |   | —                        |   | 25,521 |   | 15,162 |   |
| General  and administrative    |   | 3,909                         |   | 3,069 |   | 1,935 |   |
| Depreciation  and amortization |   | 7,483                         |   | 3,703 |   | 2,566 |   |
|                           |   |                          |   |   |   |   |   |
|                           |   | 55,476                        |   | 70,551 |   | 49,959 |   |
|                           |   |                          |   |   |   |   |   |
| Operating  income              |   | 37,416                        |   | 11,268 |   | 9,928 |   |
| Interest  expense, net         |   | (13,939                       | )      | (1,427 | ) | (458 | ) |
| Other  expense, net            |   | (333                          | )      | (69 | ) | — |   |
| Income  before income tax      |   | 23,144                        |   | 9,772 |   | 9,470 |   |
| Income  tax expense            |   | 8,303                         |   | 3,313 |   | 3,266 |   |
|                           |   |                          |   |   |   |   |   |
| Net  income                    |   | $                             | 14,841 |   | $ | 6,459 |   | $ | 6,204 |   |

 

Theaccompanying notes are an integral part of these financial statements

 

F-4

----

 

**WHEELINGISLAND GAMING, INC.**

 

**ConsolidatedStatements of Cash Flows**

**($000’somitted)**

 
|                                                                                |   | **Years  ended December 31,** |   |
|-------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                |   | **2002**                      |   | **2001** |   | **2000** |   |
|                                                                                |   |                          |   |   |   |   |   |
| Cash flows  relating to operating activities:                                       |   |                          |   |   |   |   |   |
| Net Income                                                                          |   | $                             | 14,841 |   | $ | 6,459 |   | $ | 6,204 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities - |   |                          |   |   |   |   |   |
| Depreciation and  amortization                                                      |   | 7,483                         |   | 3,703 |   | 2,566 |   |
| Loss on sale of  assets                                                             |   | 333                           |   | 69 |   | — |   |
| Deferred income  taxes                                                              |   | (1,718                        | )      | 605 |   | 432 |   |
| Other                                                                               |   | 811                           |   | 244 |   | 34 |   |
| Change in assets  and liabilities:                                                  |   |                          |   |   |   |   |   |
| Receivables                                                                         |   | (112                          | )      | (279 | ) | (69 | ) |
| Prepaid expenses  and other assets                                                  |   | (39                           | )      | (134 | ) | (123 | ) |
| Prepaid income  taxes                                                               |   | (1,024                        | )      | 584 |   | (437 | ) |
| Accounts payable                                                                    |   | 1,432                         |   | (34 | ) | (7,992 | ) |
| Accrued expenses                                                                    |   | 1,557                         |   | 946 |   | (66 | ) |
|                                                                                |   |                          |   |   |   |   |   |
| Net cash  provided by operating activities                                          |   | 23,564                        |   | 12,163 |   | 549 |   |
|                                                                                |   |                          |   |   |   |   |   |
| Cash flows  relating to investing activities:                                       |   |                          |   |   |   |   |   |
| Payments for  capital expenditures                                                  |   | (25,381                       | )      | (6,752 | ) | (17,060 | ) |
| Stock Purchase  Transaction (Note 2)                                                |   | —                        |   | (105,000 | ) | — |   |
|                                                                                |   |                          |   |   |   |   |   |
| Net cash used in  investing activities                                              |   | (25,381                       | )      | (111,752 | ) | (17,060 | ) |
|                                                                                |   |                          |   |   |   |   |   |
| Cash flows  relating to financing activities:                                       |   |                          |   |   |   |   |   |
| Proceeds from  long-term borrowings                                                 |   | 1,500                         |   | 125,000 |   | 16,500 |   |
| Repayment of  long-term borrowings                                                  |   | —                        |   | (14,500 | ) | (2,000 | ) |
| Debt issuance  costs and other                                                      |   | (572                          | )      | (6,028 | ) | (267 | ) |
|                                                                                |   |                          |   |   |   |   |   |
| Net cast  provided by financing activities                                          |   | 928                           |   | 104,472 |   | 14,233 |   |
|                                                                                |   |                          |   |   |   |   |   |
| Net increase  (decrease) in cash                                                    |   | (889                          | )      | 4,883 |   | (2,278 | ) |
|                                                                                |   |                          |   |   |   |   |   |
| Cash balances:                                                                      |   |                          |   |   |   |   |   |
| Beginning of  year                                                                  |   | 9,903                         |   | 5,020 |   | 7,298 |   |
|                                                                                |   |                          |   |   |   |   |   |
| End of period                                                                       |   | $                             | 9,014  |   | $ | 9,903 |   | $ | 5,020 |   |
|                                                                                |   |                          |   |   |   |   |   |
| Supplemental  disclosure:                                                           |   |                          |   |   |   |   |   |
| Cash paid during  the year for -                                                    |   |                          |   |   |   |   |   |
| Income taxes                                                                        |   | $                             | 11,045 |   | $ | 2,125 |   | $ | 3,270 |   |
|                                                                                |   |                          |   |   |   |   |   |
| Interest                                                                            |   | $                             | 12,750 |   | $ | 870 |   | $ | 583 |   |

 

The accompanying notesare an integral part of these financial statements

 

F-5

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**WHEELINGISLAND GAMING, INC.**

 

**Notes toConsolidated Financial Statements**

**($000’somitted)**

 

**1.****                  Significantaccounting policies**

 

**Businessand ownership**

 

Wheeling Island Gaming,Inc. (the Company) owns and operates Wheeling Island Racetrack & GamingCenter, a premier gaming and entertainment complex located in Wheeling, WestVirginia. Business operations are comprised of slot machine gaming, a greyhoundracetrack, pari-mutuel wagering on live greyhound racing and simulcastgreyhound, thoroughbred and harness racing and various dining venues.

 

The Company was formerlyequally owned by Sportsystems Corporation (Sportsystems) and WHX EntertainmentCorp. (WHX).  On December 19, 2001, theCompany redeemed all outstanding shares of its common stock held by WHX (seeNote 2).  Thereafter, the Company is awholly owned subsidiary of Sportsystems. Sportsystems is a wholly owned subsidiary of Delaware North Companies,Incorporated (DNC).

 

**Principles of consolidation**

 

The consolidatedfinancial statements include the accounts of the Company and all of its whollyowned subsidiaries, which consist of WDRA Food Service, Inc. and Wheeling LandDevelopment Corp.  All significantintercompany balances and transactions have been eliminated in consolidation.

 

**Cash and cash equivalents**

 

The Company considers short-term, highlyliquid investments with an original maturity of three months or less to be cashequivalents.  Interest-bearing timedeposits of $2,007 and $3,212 are included in cash and cash equivalents as ofDecember 31, 2002 and 2001, respectively.

 

**Fair value of financial instruments**

 

The carrying value of the Company’s cashand cash equivalents, trade and other receivables and trade payablesapproximates fair value primarily because of the short maturities of theseinstruments.  The fair market value ofthe Company’s Senior Notes at December 31, 2002 is $125.3 million based ontheir trading value in the open market. The Company’s Revolving

 

F-6

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Credit Facility approximates fair valuebased upon its market-based variable interest rate.

 

**Property and equipment**

 

Property and equipment are stated atcost.  Expenditures that extend theuseful lives of assets are capitalized, while re­pair and maintenance costs arecharged to operations as in­curred. Depreciation is computed principally using the straight-line method overthe estimated useful lives of the assets.

 

**Intangibleassets**

 

Indefinite lived intangibleassets consisting of licenses, trade name and goodwill are stated at cost whichis equal to fair value at their acquisition date (see Note 2).  In accordance with SFAS 142 (see below), theseassets are not subject to amortization for book or tax purposes.  The non-compete covenant is being amortizedover its term of five years and the value assigned to the Company’s customerrelationships is amortized over its twenty year estimated life.

 

**Impairment of long-lived assets, includinggoodwill and other intangible assets**

 

The carrying value of long-lived assets, including goodwilland other intangible assets, are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying value may not berecoverable.  The recoverability of thecarrying value of long-lived assets, other than goodwill and indefinite-livedintangible assets, is assessed by estimating the undiscounted cash flows thatare directly associated with and expected to arise from the use of and eventualdisposition of such assets over their respective estimated useful lives.  If the carrying value of the assets exceedsthe estimated undiscounted cash flows, an impairment charge is recorded to theextent the carrying value of the long-lived asset exceeds its fair value.

 

To assess goodwill and indefinite lived intangible assets forimpairment, an assessment of the carrying value of the Company is performed onan annual basis or when events and changes in circumstances occur that would morelikely than not reduce the fair value of the Company below carrying value.  If the carrying value of the Company exceedsits fair value, the second step in the assessment process would be performedand an impairment charge to earnings would be recorded to the extent thecarrying amount of the Company’s goodwill and indefinite-lived intangibleassets exceed its implied fair value.

 

**PreferredPlayers Program**

 

The Company offers a program whereby participants canaccumulate points for casino wagering that can currently be redeemed for cash,food and beverages, and retail offers. A liability is recorded for the estimated value of unredeemed pointswhich is based on the Company’s redemption history.  Points redeemed for cash are recognized as a reduction inrevenues while points redeemed for food and beverage and other retail offersare recognized as promotional expenses. See further discussion in Note 3.

 

**Advertisingcosts**

 

Advertising costs are charged tooperations when incurred.  During 2002,2001 and 2000, respectively, advertising expense totaled $703, $980, and$1,119.

 

**Debt issuance costs**

 

Costs incurred in connection with theissuance of long-term debt are capitalized and amortized over the terms of therelated debt agreements through periodic charges to interest expense.

 

**Income tax**

 

The Company follows theasset and liability approach to account for income taxes.  This approach requires the recognition ofdeferred tax assets and liabilities for the expected future tax consequences oftemporary differences between the carrying amounts and tax bases of assets andliabilities.

 

F-7

----

 

BeginningDecember 20, 2001, federal taxable income of the Company is included in theconsolidated federal income tax return of DNC and subsidiaries.  Pursuant to a tax sharing agreement, theportion of the consolidated federal income tax provision allocated to theCompany is that which would result if the Company filed a federal income taxreturn with its subsidiaries on a stand-alone basis.  Federal income taxes included in the accompanying balance sheetat December 31, 2002 and December 31, 2001 are due to DNC.

 

**Reclassificationof balances**

 

Certain prior yearamounts have been reclassified in order to conform to the presentation used inthe 2002 financial statements.

 

**Newaccounting pronouncements**

 

In June 2001, theFinancial Accounting Standards Board (FASB) issued Statements of FinancialAccounting Standards (SFAS) No. 141, “Business Combinations”, and SFAS No. 142,“Goodwill and Other Intangible Assets,” which are effective July 1, 2001 andJanuary 1, 2002, respectively.  Theprovisions of SFAS No. 141 (i) require that the purchase method of accountingbe used for all business combinations initiated after June 30, 2001, (ii)provide specific criteria for the initial recognition and measurement ofintangible assets apart from goodwill and (iii) require that unamortizednegative goodwill be written off immediately as an extraordinary gain insteadof being deferred and amortized.  SFAS141 also requires that upon adoption of SFAS No. 142 that the carrying amountsof certain intangible assets reclassified into or out of goodwill, based oncertain criteria.  SFAS No. 142supersedes Accounting Principles Board No. 17, “Intangible Assets,” and iseffective for fiscal years beginning after December 15, 2001, as well as forgoodwill and other intangible assets that arose from a business combinationcompleted after June 30, 2001.  SFAS No.142 primarily addresses the accounting for goodwill and intangible assetssubsequent to their initial recognition. The provisions of SFAS No. 142 (i) prohibit the amortization of goodwilland indefinite-lived intangible assets, (ii) require that goodwill and indefinite-livedintangible assets be tested annually for impairment (and in interim periods ifcertain events occur indicating that the carrying value of goodwill and/orindefinite-lived intangible assets may be impaired), (iii) require thatreporting units be identified for the purpose of assessing potential futureimpairment of goodwill, and (iv) remove the forty-year limitation on theamortization period of intangible assets that have finite lives.  The Company has completed its annualimpairment assessment required pursuant to SFAS 142 and has determined that noimpairment change is warranted.

 

We adopted the provisionsof SFAS 141 and 142 with the accounting for the stock purchasetransaction.  Prior to the stockpurchase transaction, we had insignificant balances related to goodwill andother intangible assets and accordingly the application of the provisions ofthese Standards did not have a material impact on our financial position andresults of operations.

 

In June 2001, the FASBissued SFAS No. 143, “Accounting for Asset Retirement Obligations”, which willbe effective January 1, 2003.  ThisStatement addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  The Statementrequires that the fair value of liability of an asset retirement obligation berecognized in the period in which it is incurred if a reasonable estimate offair value can be made.  The associatedasset retirement costs are capitalized as a part of the carrying amount of thelong-lived asset.  We adopted thisStatement on January 1, 2003 and do not expect a material impact on ourconsolidated financial position or results of operations.

 

F-8

----

 

In August 2001, the FASBissued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets”.  This Statement superseded SFASNo. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of” and addresses financial accounting and reporting forimpairment of long-lived assets to be held and used, and long-lived assets andcomponents of an entity to be disposed of. We adopted this Statement on January 1, 2002, which had no impact on ourfinancial position and results of operations.

 

In June 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities”.  This Statement requiresobligations associated with disposing of operations to be recognized and measuredat fair value when certain liabilities are incurred.  The current accounting guidance allows for recognition ofliabilities on the commitment date of a disposal or exit plan.  We adopted this Statement on January 1,2002.  The adoption of this Statementhad no impact on our financial position and results of operations.

 

In November 2002, theFASB issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” (FIN 45).  FIN 45 requires aguarantor to (i) include disclosure of certain obligations and (ii) ifapplicable, at the inception of the guarantee, recognize a liability for thefair value of

 

F-9

----

 

other certain obligationsundertaken in issuing a guarantee.  Thedisclosure provisions of the Interpretation are effective for financialstatements of interim or annual reports that end after December 15, 2002.  The adoption of FIN 45 had no impact on theCompany’s disclosures as of December 31, 2002. The recognition and measurement provisions of FIN 45 are effective forguarantees issued or modified after December 29, 2002.  The Company does not expect InterpretationNo. 45 to have a material effect on the Company’s financial position or resultsof operations.

 

**Use ofestimates in the preparation of financial statements**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

**2.****                  StockPurchase Transaction**

 

On December 19, 2001, the Companyredeemed WHX’s entire equity interest for the total consideration of $105,000(the Stock Purchase Transaction).  Ofthe $105,000 total consideration, $90,000 is attributable to the purchase priceof the shares and $15,000 is attributable to a non-compete covenant whereby WHXis prohibited from engaging in any business which is the same as, substantiallysimilar to, or directly competitive with the business activities conducted bythe Company for a period of five years.  The Stock Purchase Transaction was accounted for using the purchasemethod in accordance with SFAS No. 141. Accordingly, the values of the Company’s tangible and intangible assetswere increased by 50% of the difference between the carrying value and the fairvalue of the assets.  The totalconsideration of $105,000 and related acquisition costs of $187 have beenallocated as follows:

 

F-10

----

 

| Selling shareholder’s equity      |   | $       | 12,629  |   |
|----------------------------------------|--------|---------|---------|--------|
| Property and equipment                 |   | 1,512   |    |
| Intangible assets other than goodwill: |   |    |    |
| Gaming license                         |   | 64,283  |    |
| Racing license                         |   | 1,636   |    |
| Trade name                             |   | 1,539   |    |
| Customer  relationships                |   | 778     |    |
| Deferred income taxes                  |   | (24,411 | )       |
| Goodwill                               |   | 32,221  |    |
|                                   |   | 90,187  |    |
| Non-compete covenant                   |   | 15,000  |    |
|                                   |   | $       | 105,187 |   |

 

The Company funded the Stock PurchaseTransaction using proceeds from the issuance of $125,000 in 10.125% SeniorNotes.

 

Goodwill has beenallocated $31,073 to the gaming business segment, $457 to the pari-mutuelbusiness segment and $691 to the food and beverage business segment.

 

If theStock Purchase Transaction and related financing transactions had taken placeat the beginning of each year, pro forma net income would have been $12,622 and$5,158 for 2001 and 2000, respectively. Total revenue would have been unchanged.  These pro forma disclosures are unaudited and are based onhistorical results, adjusted for the impact of certain acquisition relatedadjustments to reflect additional interest expense, depreciation andamortization, elimination of management incentive fees, and the related incometax effects.  Pro forma results are notintended to be a reflection of future results.

 

**3.****                  Revenuesand costs**

 

**Gamingbusiness segment**

 

Gaming revenues representgross revenues from slot machine gaming, or total amounts wagered, net ofwinning patron payouts (the “gross terminal income”) less (1) a fee of up to 4%of gross terminal income paid to the Lottery Commission for administering slotmachine gaming at the licensee’s race track (the “administration fee”), (2) atax of 30% of net terminal income (gross terminal income less theadministration fee) paid to the State’s general revenue fund and (3) an amountof 9% of net terminal income (NTI) to be paid to various state funds, includingfunds for tourism promotion, Ohio County, employee pension programs and otherprograms.  All revenues derived from theoperation of slot machines must initially be deposited with the LotteryCommission to be shared in accordance with the provisions of the Lottery Act.

 

F-11

----

 

Prior to legislativechanges which became effective as of July 1, 2001, the State refunded theportion of the administration fee in excess of the Lottery Commission’sadministrative expenses.

 

In April 2001, the WestVirginia legislature adopted new legislation, effective as of July 1, 2001,which authorized an increase in West Virginia’s share of NTI above apredetermined level, defined as the NTI generated for the State’s fiscal yearended June 30, 2001.  The State deductsa 10% surcharge from NTI in excess of the predetermined level.  The remainder of the excess NTI is dividedas follows: 50% is returned to the racetrack (of which 8% represents supplementalpurse expense), 41% is paid to the State’s general revenue fund and theremaining 9% is divided among various state funds.  Of the total 10% surcharge, 42% is deposited in a capitalreinvestment account attributable to each racetrack.  The racetrack is entitled to recoup monies in the capitalreinvestment account for certain types of capital improvements made at theracetrack on a dollar-for-dollar basis. This legislation also eliminated the refund of the portion of theadministration fee in excess of the Lottery Commission’s administrativeexpenses.

 

The Company accrues theexpected surcharge amount ratably during the year based upon estimates of theactual amounts expected to be paid in each state fiscal year.  The recoupment of amounts held in thecapital reinvestment account, and a similar fund held by the West VirginiaRacing Commission to be used for racetrack capital improvements, are includedin gaming revenues during the period in which approved qualifying expendituresare made.  Excess qualifyingexpenditures may be carried forward for recoupment in future periods, subjectto certain statutory limitations. During 2002, the Company has accrued state surcharges of $4,452 andrecognized recoupments of $2,448 as elements of reported gaming revenue.

 

The Emerging Issues Task Force (“EITF”)reached a consensus on certain issues within Issue No. 01-09, “Accounting forConsideration Given by a Vendor to a Customer.”  Application of EITF 01-09 is required for interim and annualperiods beginning after December 15, 2001. EITF 01-09 requires rebates or cash consideration given by a vendor to acustomer to be classified as a reduction in selling price of the vendorsproduct and therefore should be characterized as a reduction of revenue whenrecognized in the vendor’s income statement. During 2002, 2001, and 2000, the Company offered incentives to membersin its Preferred Players Club in the form of coupons redeemable for cash.  Under Issue No. 01-09, such coupons aredeemed to be rebates or cash incentives. Rebates of $3,876 have been classified as a reduction of revenues in2002.  Accordingly, $1,567 and $65 forthe years ended December 31, 2001 and 2000, respectively, previously recordedas promotional expenses, have been reclassified to conform to the currentpresentation, with no effect on previously recorded operating income or netincome.

 

Gaming purse expense represents paymentsmade to dog owners to supplement pari-mutuel purses, as required by law, whichrepresent 14% of NTI up to the base amount, and 8% of the excess NTI over thebase amount after the 10% surcharge is applied.  The Company accrues gaming purse expense ratably during the year,based upon estimates of the actual amounts

 

F-12

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expected to be paid in each state fiscalyear.

 

**Pari-mutuelbusiness segment**

 

Pari-mutuel revenue represents theCompany’s commissions earned from on-site pari-mutuel wagering during liveracing and simulcasting, net of state pari-mutuel taxes and simulcastcommissions paid.  These commissions arecalculated as specified by applicable state statutes based on percentagesapplied to various types of pari-mutuel wagering pools.  State pari-mutuel taxes and simulcastcommissions paid are based on specified percentages of the wagering pools. TheCompany also receives commissions for its events, which are, simulcast to otherracetrack facilities.  These commissionsare based upon contractual percentages of amounts wagered or stated amounts perperformance.  A portion of the Company’spari-mutuel revenue and interest earned thereon are restricted by statute forcapital improvements and other specific uses, and are deposited in a segregatedaccount.  Restricted commissions amountedto $435, $469 and $411 in 2002, 2001 and 2000, respectively.  At December 31, 2002 the Company had madeunreimbursed qualifying expenditures of $28,521, which are reimbursable fromfuture restricted commissions earned.

 

Pari-mutuel purse expense representsstatutory and contractual percentages of pari-mutuel handle paid by the Companyto greyhound owners and kennel operators.

 

**Food andBeverage Segment**

 

Food and beverage revenueis recognized at the time of the sale to customers.  Revenue does not include the retail value of food and beverageprovided gratuitously to customers.

 

F-13

----

 

**4.****                  Intangibleassets**

 

Intangible assets atDecember 31, 2002 and 2001 are comprised of the following:

 
|                                 |   | **December  31,  2002** |   | **December  31,  2001** |   | **Estimated  Life** |   |
|--------------------------------------|--------|-------------------------|--------|-------------------------|--------|---------------------|--------|
|                                 |   |                    |   |                    |   |                |   |
| Gaming license                       |   | $                       | 64,283 |                    | $      | 64,283              |   | Indefinite |   |
| Racing license                       |   | 1,636                   |   | 1,636                   |   | Indefinite          |   |
| Licenses                             |   | $                       | 65,919 |                    | $      | 65,919              |   |   |   |
| Goodwill                             |   | $                       | 32,221 |                    | $      | 32,219              |   | Indefinite |   |
| Non-compete  covenant                |   | 15,000                  |   | 15,000                  |   | 5 years             |   |
| Less:  accumulated amortization |   | (3,098                  | )      | (98                     | )      |                |   |
|                                 |   | $                       | 11,902 |                    | $      | 14,902              |   |   |   |
| Trade name                           |   | $                       | 1,539  |                    | $      | 1,539               |   | Indefinite |   |
| Customer  relationships              |   | 778                     |   | 778                     |   | 20 years            |   |
| Less:  accumulated amortization |   | (39                     | )      | (1                      | )      |                |   |
| Other                                |   | 40                      |   | 40                      |   | Indefinite          |   |
| Other intangible  assets             |   | $                       | 2,318  |                    | $      | 2,356               |   |   |   |

 

The Company amortizes itsfinite lived intangibles over their estimated lives on a straight linebasis.  Amortization expense of $3,039and $99 was recorded during 2002 and 2001, respectively.  Estimated amortization expense for the nextfive years is $3,039 for years 2003 through 2005, $2,941 for 2006 and $39 for2007.

 

**5.****                  Propertyand equipment, net**

 
|                                 |   | **Estimated  life  in years** |   | **December  31,** |   |
|--------------------------------------|--------|-------------------------------|--------|-------------------|--------|
| **2002**                             |   | **2001**                      |   |
| Land                                 |   | n/a                           |   | $                 | 4,892  |   | $ | 4,797 |   |
| Buildings and  improvements          |   | 10 - 31                       |   | 30,339            |   | 24,698 |   |
| Equipment                            |   | 3 - 10                        |   | 21,178            |   | 18,785 |   |
| Construction in  progress            |   | n/a                           |   | 18,692            |   | 2,006 |   |
|                                 |   |                          |   |              |   |   |   |
|                                 |   |                          |   | 75,101            |   | 50,286 |   |
| Less:  accumulated depreciation |   |                          |   | 19,256            |   | 15,045 |   |
|                                 |   |                          |   |              |   |   |   |
|                                 |   |                          |   | $                 | 55,845 |   | $ | 35,241 |   |

 

Depreciation expense was $4,444, $3,598,and $2,561 for the years ended December 31, 2002, 2001 and 2000, respectively.

 

**6.****                  Long-termdebt**

 

On December 19, 2001, the Company issued$125,000 in unsecured Senior Notes, the proceeds of which were used to financethe Stock Purchase Transaction (see Note 2), and also to repay the outstandingbalance of the Company’s then-existing Revolving Credit Facility.  The Senior Notes bear interest at 10.125%,payable semi-annually in June and December, and mature on December 15, 2009.Issuance costs totaling $6,001 were incurred in connection with the SeniorNotes and are being amortized on a straight-line basis over the termthereof.  Amortization is

 

F-14

----

 

included with interest expense and amountedto $726 in 2002 and $22 in 2001.  Therelated debt agreement requires the Company to comply with certain covenants,which include limitations on additional debt, restrictions on distributions to,and other transactions with, affiliates and certain investments.  The Senior Notes are fully andunconditionally guaranteed by all of the Company’s subsidiaries on a joint andseveral basis.  The subsidiaries, WDRAFood Service, Inc. and Wheeling Land Development Corp., were inactive during2002, 2001, and 2000.  At December 31,2002, aggregate total subsidiary assets totaled $673 and consisted of land.

 

At any time prior to December 15, 2004,the Company may elect to redeem up to 20% of the Senior Notes at a redemptionprice of 110.125% of the principal amount using the proceeds of another equityoffering.  After December 15, 2005, theCompany may redeem all or a part of the Senior Notes at stipulated redemptionprices.  The Company may also redeem theSenior Notes of any holder that is unable to comply with the provisions of anyracing or gaming law.  Any holder canrequire the Company to redeem its Senior Notes at 101% of the principal amountthereof upon the occurrence of a change in control of the Company.

 

Also in December 2001, the Companyexecuted a new $40,000 secured Revolving Credit Facility (Revolver) with a bankgroup, against which $1,500 has been drawn as of December 31, 2002.  The Revolver includes a $5,000 letter ofcredit component, and is secured by the assets of the Company.  Interest is based on LIBOR plus a statedpercentage or, at the Company’s option, the lead bank’s commercial base rateplus a stated percentage.  At December31, 2002, the lowest applicable rate was 3.63%.  A commitment fee is payable quarterly on the unused balance.  The Revolver provides for quarterlyreductions in the commitment beginning in December 2003 and continuing untilthe commitment is reduced to $20,000. The Revolver matures in December 2006. The related debt agreement requires the Company to comply with certaincovenants, which include limitations on additional debt, restrictions ondistributions to, and other transactions with, affiliates, a maximum leverageratio, a minimum cash flow coverage ratio and limitations on certaininvestments.  Issuance costs totaling$427 were incurred in connection with the Revolver and are being amortized overits term.  Amortization, includingamounts associated with the Company’s prior Revolving Credit Facility, totaling$85 for 2002, $246 for 2001 and $34 for 2000, is included with interestexpense.

 

The Company is in full compliance withall covenants.

 

F-15

----

 

**7.****                  Shareholder's equity**

 
|                                                        |   | **Common  Stock** |   | **Additional  Paid-in capital** |   | **Retained  Earnings** |   | **Total** |   |
|-------------------------------------------------------------|--------|-------------------|--------|---------------------------------|--------|------------------------|--------|-----------|--------|
|                                                        |   |              |   |                            |   |                   |   |      |   |
| Balance at December 31, 1999                                |   | $                 | 1      |                            | $      | 11,830                 |   | $         | 782    |   | $ | 12,613 |   |
|                                                        |   |              |   |                            |   |                   |   |      |   |
| Net Income                                                  |   |              |   |                            |   | 6,204                  |   | 6,204     |   |
|                                                        |   |              |   |                            |   |                   |   |      |   |
| Balance at December 31, 2000                                |   |              | 1      |                            |   | 11,830                 |   |      | 6,986  |   |   | 18,817 |   |
|                                                        |   |              |   |                            |   |                   |   |      |   |
| Net income – January 1, 2001 through December 19, 2001 |   |              |   |                            |   | 6,440                  |   | 6,440     |   |
|                                                        |   |              |   |                            |   |                   |   |      |   |
| Less:  Stock Purchase  Transaction (Note 2)            |   |              |   | (5,915                          | )      | (6,714                 | )      | (12,629   | )      |
|                                                        |   |              |   |                            |   |                   |   |      |   |
| Balance at December 19, 2001                                |   | 1                 |   | 5,915                           |   | 6,712                  |   | 12,628    |   |
|                                                        |   |              |   |                            |   |                   |   |      |   |
| Net income – December 20 - 31, 2001                    |   |              |   |                            |   | 19                     |   | 19        |   |
|                                                        |   |              |   |                            |   |                   |   |      |   |
| Balance at December 31, 2001                                |   | $                 | 1      |                            | $      | 5,915                  |   | $         | 6,731  |   | $ | 12,647 |   |
|                                                        |   |              |   |                            |   |                   |   |      |   |
| Net income                                                  |   |              |   |                            |   | 14,841                 |   | 14,841    |   |
|                                                        |   |              |   |                            |   |                   |   |      |   |
| Balance at December 31, 2002                                |   | $                 | 1      |                            | $      | 5,915                  |   | $         | 21,572 |   | $ | 27,488 |   |

 

**8.****                  Incometax expense (benefit)**

 

The provision for income taxes consistsof the following:

 
|                         |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                         |   |     |   |     |   |     |   |
| Current federal tax expense  |   |     |   |     |   |     |   |
|                         |   | $        | 10,021 |     | $      | 2,708    |   | $ | 2,834 |   |
|                         |   |     |   |     |   |     |   |
| Deferred federal tax expense |   |     |   |     |   |     |   |
| (benefit)                    |   | (1,718   | )      | 605      |   | 432      |   |
|                         |   |     |   |     |   |     |   |
|                         |   | $        | 8,303  |     | $      | 3,313    |   | $ | 3,266 |   |

 

During 2002 the Internal RevenueService (IRS) completed a review of the Company’s federal income tax returnsfor 1999, 2000, and 2001.  For incometax purposes, the Company has agreed to capitalize a portion of the managementincentive fees previously deducted in those years and which the IRS consideredto be attributable to various projects of a long-term nature.  Such amounts will be amortized over periodsof up to five years.  In addition, theCompany agreed to extend the depreciable life of its gaming machines, for taxpurposes only, from five to seven years. As a result of these adjustments, theCompany has recorded a current tax provision and a deferred tax benefit of$2,442 during 2002.  The future taxbenefit of these income tax adjustments has been reflected as a component ofdeferred income taxes in the accompanying balance sheets.

 

The Company is notsubject to state income tax.

 

F-16

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The provision for income taxes differs fromthe amount of income tax determined by applying the U.S. statutory rate toincome (loss) before income tax as a result of the following:

 
|                      |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|
| Income tax statutory rate |   | $        | 8,100  |     | $      | 3,322    |   | $ | 3,220 |   |
| Miscellaneous adjustments |   | 203      |   | (9       | )      | 46       |   |
|                      |   |     |   |     |   |     |   |
| Income tax expense        |   | $        | 8,303  |     | $      | 3,313    |   | $ | 3,266 |   |

 

Deferred tax assets(liabilities) consist of the following:

 
|                           |   | **2002** |    | **2001** |   |
|--------------------------------|--------|----------|---------|----------|--------|
|                           |   |     |    |     |   |
| Gross  deferred tax assets     |   | $        | 92      |     | $      | 71 |   |
|                           |   |     |    |     |   |
| Property  and equipment        |   | 459      |    | (1,345   | )      |
| Licenses                       |   | (23,072  | )       | (23,072  | )      |
| Other  intangibles             |   | (797     | )       | (810     | )      |
| Other                          |   | 80       |    | —   |   |
| Other                          |   | (200     | )       | —   |   |
| Gross deferred tax liabilities |   | (23,530  | )       | (25,227  | )      |
|                           |   |     |    |     |   |
| Net  deferred tax liabilities  |   | $        | (23,438 | )        | $      | (25,156 | ) |

 

**9.****                  Relatedparty transactions**

 

Through December 19, 2001, pursuant toservice agreements between the Company and Sportsystems and WHX that terminatedupon consummation of the Stock Purchase Transaction, Sportsystems and WHXprovided various administrative and management services for which they were compensated,primarily in the form of a management incentive fee.  The management incentive fee was calculated based upon operatingrevenues for the preceding year, and was not subject to a stated minimum ormaximum amount.  Expenses totaling$25,521 and $15,162 pursuant to these agreements are presented as managementfees in 2001and 2000, respectively.

 

Effective December 20,2001, the Company entered into an administrative services agreement withSportsystems and DNC.  Pursuant to thisagreement, the Company pays an annual administrative services fee equal to thegreater of 1.5% of the preceding year’s total operating revenues or $1,200 forcertain support services provided to the Company.  During 2002 and 2001, the Company recorded administrativeservices fees of $1,251 and $39, respectively. In addition, during December 2001, the Company paid a one-time fee toDNC, pursuant to an advisory services agreement, of $1,313 for advisoryservices provided in connection with the financing, negotiation, and structuringof the Stock Purchase Transaction.  TheCompany has

 

F-17

----

 

recorded $1,247 of suchamount as a component of debt issuance cost with the remainder included withcapitalized acquisition costs.

 

Through December 19,2001, Sportsystems provided cash management services whereby the Companyinvested its excess cash balances and earned interest at Sportsystems’reinvestment rate.  Subsequent toDecember 19, 2001, the Company began investing its excess cash in a segregatedaccount administered by DNC under its centralized cash management program.  At December 31, 2002 and 2001, the Companyhad $2,007 and $3,212 invested with DNC and Sportsystems, respectively.  During 2002, 2001 and 2000, respectively,the Company earned interest income of $134, $81, and $232.

 

**10.****           Retirementplans**

 

Non-union employeesparticipate in a defined contribution retirement savings plan administered byDNC, while union employees participate in a union-sponsored definedcontribution plan.  Total expenserelating to the profit sharing plans was and $144 in 2002, $227 in 2001, and$169 in 2000.

 

**11.****           Commitments**

 

In connection with itspari-mutuel operations, the Company leases totalisator services, video, andperipheral equipment under agreements expiring at various dates through2006.  Expense related to such servicesis determined primarily as a percentage of the pari-mutuel handle or statedamounts per performance.  During 2002,2001 and 2000, this expense totaled $788, $835 and $657, respectively.

 

In connection with its gaming operations,the Company leases 266 slot machines and obtains maintenance services for theseand other gaming machines from Autotote Systems, Inc.   Such expense was $1,082 in 2002, $1,230 in 2001, and $1,886 in2000. The Company extended this agreement through December 31, 2003 and iscommitted to pay a minimum amount of $583 during 2003.

 

The Company presently is undertaking asignificant expansion project adjacent to, and connected with, the existinggaming facility.  The expansion willinclude a hotel, new gaming areas, a multi-purpose showroom intended for use asan entertainment venue and conference and dining facilities.  The cost of completing the expansion isexpected to be approximately $67,000. Through December 31, 2002, the Company had incured $23,851 of capitalexpenditures related to the expansion. Completion is anticipated in the 3rd quarter of 2003.  The project will be financed with cash fromoperations and the Revolver, to the extent required.

 

F-18

----

 

**12.****           Litigation**

 

The Company is party to anumber of pending legal proceedings in the ordinary course of business,although management does not expect that the outcome of such proceedings,either individually or in the aggregate, will have a material effect on theCompany’s financial condition or results of operations.

 

**13.****           Risksand uncertainties**

 

The Company’s operationsare subject to extensive government regulations and could be subjected at anytime to additional or more restrictive regulations.  The Company is subject to the provisions of the West VirginiaRacing Act, which governs the conduct of dog racing in West Virginia, and theWest Virginia Racetrack Video Lottery Act (the Lottery Act) which, under theregulatory control of the West Virginia Lottery Commission, governs theoperation of video lottery terminals in West Virginia.  Specifically, the Lottery Act provides thatonly licensed greyhound or horse racing facilities that were licensed prior toJanuary 1, 1994 and conduct a minimum number of days of live racing may offervideo lottery gaming.  Accordingly, theCompany must comply fully with regulations of the Racing Commission to qualifyfor its license under the Lottery Act and maintain its video lottery gamingoperations.

 

The Company’s ability toremain in business depends upon its continued ability to operate in compliancewith all applicable gaming and racing laws and regulations, including theacquisition and maintenance of several licenses and permits.  The Lottery Act requires that the Company besubject to a written agreement with the dog owners, breeders, and trainers whorace greyhound dogs at its facility. The Company is a party to the requisiteagreements with the kennels that operate at its facility. The Lottery Act alsorequires that the Company be subject to an agreement with the pari-mutuelclerks who work at its facility.  Thisrequirement is satisfied by a letter sent to the Lottery Commission annually,which states that such agreement exists. The Company’s material licenses are subject to annual or other periodicrenewal and governmental authorities may refuse to grant the Company thelicenses necessary to continue to operate its existing facility.  In addition, the Company may be investigatedby either the Racing Commission or the Lottery Commission at any time.  Should either body consider the Company tobe in violation of any applicable laws or regulations, each has the plenaryauthority to suspend or rescind the Company’s licenses.  The Company believes that it is in fullcompliance with all relevant regulations.

 

**14.****           Businesssegments**

 

The Company adopted SFAS131, *Disclosuresabout Segments of an Enterprise and Related Information*.  Reportable operating segments are determinedbased on the Company’s

 

F-19

----

 

management approach; theway that the chief operating decision-maker organizes the segments for makingoperating decisions and assessing performance. As management fees and general and administrative expenses are notutilized by the chief operating decision-maker in assessing segmentperformance, such expenses are excluded.

 

The Company operates through threebusiness segments: gaming, pari-mutuel, and food & beverage operations.  All operations are conducted from the samefacility in Wheeling, West Virginia.

 

Revenues and income(loss) for these segments are as follows:

 
|                                 |   | **Years  Ended December 31,** |   |
|--------------------------------------|--------|-------------------------------|--------|
|                                 |   | **2002**                      |   | **2001** |   | **2000** |   |
| Revenues:                            |   |                          |   |   |   |   |   |
|                                 |   |                          |   |   |   |   |   |
| Gaming                               |   | $                             | 79,132 |   | $ | 67,847 |   | $ | 46,807 |   |
| Pari-mutuel                          |   | 8,847                         |   | 9,470 |   | 9,205 |   |
| Food &  Beverage                 |   | 4,913                         |   | 4,502 |   | 3,875 |   |
|                                 |   | $                             | 92,892 |   | $ | 81,819 |   | $ | 59,887 |   |
|                                 |   |                          |   |   |   |   |   |
| Income (loss)  from operations:      |   |                          |   |   |   |   |   |
| Gaming                               |   | $                             | 43,374 |   | $ | 39,964 |   | $ | 26,226 |   |
| Pari-mutuel                          |   | (1,199                        | )      | (396 | ) | 139 |   |
| Food &  Beverage                 |   | (850                          | )      | 290 |   | 660 |   |
|                                 |   | 41,325                        |   | 39,858 |   | 27,025 |   |
| Management fees                      |   | —                        |   | (25,521 | ) | (15,162 | ) |
| General and  administrative expenses |   | (3,909                        | )      | (3,069 | ) | (1,935 | ) |
|                                 |   | $                             | 37,416 |   | $ | 11,268 |   | $ | 9,928 |   |

 

Management fees andgeneral and administrative expenses are considered general corporate expenses.

 

F-20

----

 

Other selected financialinformation for these segments is as follows:

 
|                                              |   | **Years  Ended December 31,** |   |
|---------------------------------------------------|--------|-------------------------------|--------|
|                                              |   | **2002**                      |   | **2001** |   | **2000** |   |
| Depreciation  and amortization:                   |   |                          |   |   |   |   |   |
|                                              |   |                          |   |   |   |   |   |
| Gaming                                            |   | $                             | 5,999  |   | $ | 3,028 |   | $ | 1,996 |   |
| Pari-mutuel                                       |   | 1,339                         |   | 546 |   | 486 |   |
| Food &  Beverage                              |   | 145                           |   | 129 |   | 84 |   |
|                                              |   | $                             | 7,483  |   | $ | 3,703 |   | $ | 2,566 |   |
|                                              |   |                          |   |   |   |   |   |
| Capital  expenditures for property and equipment: |   |                          |   |   |   |   |   |
| Gaming                                            |   | $                             | 18,696 |   | $ | 5,738 |   | $ | 16,076 |   |
| Pari-mutuel                                       |   | 6,552                         |   | 993 |   | 233 |   |
| Food &  Beverage                              |   | 133                           |   | 21 |   | 751 |   |
|                                              |   | $                             | 25,381 |   | $ | 6,752 |   | $ | 17,060 |   |
|                                              |   |                          |   |   |   |   |   |
| Property and  equipment, net:                     |   |                          |   |   |   |   |   |
| Gaming                                            |   | $                             | 40,740 |   | $ | 25,769 |   | $ | 21,063 |   |
| Pari-mutuel                                       |   | 14,420                        |   | 8,775 |   | 8,756 |   |
| Food &  Beverage                              |   | 685                           |   | 697 |   | 825 |   |
|                                              |   | $                             | 55,845 |   | $ | 35,241 |   | $ | 30,644 |   |

 

**15.****           Quarterly Data (Unaudited)**

 

The following table summarizes financial results of Wheeling for eachof the quarters in the years ended December 31, 2002 and 2001.

 
|                          |   | **Quarter  Ended ($000)** |   |
|-------------------------------|--------|---------------------------|--------|
| **2002**                      |   | **Mar. 31**               |   | **Jun. 30** |   | **Sep. 29** |   | **Dec. 31** |   |
|                          |   |                      |   |   |   |   |   |   |   |
| Total Operating  Revenue (1)  |   | 22,553                    |   | 24,431 |   | 24,494 |   | 21,414 |   |
| Total Operating  expenses (1) |   | 13,564                    |   | 14,283 |   | 14,190 |   | 13,439 |   |
| Operating Income              |   | 8,989                     |   | 10,148 |   | 10,304 |   | 7,975 |   |
| Net Income                    |   | 3,632                     |   | 4,433 |   | 4,123 |   | 2,653 |   |

 
|                          |   | **Quarter  Ended ($000)** |   |
|-------------------------------|--------|---------------------------|--------|
| **2001**                      |   | **Apr. 1**                |   | **Jul. 1** |   | **Sep. 30** |   | **Dec. 31** |   |
|                          |   |                      |   |   |   |   |   |   |   |
| Total Operating  Revenue (2)  |   | 18,144                    |   | 19,380 |   | 24,376 |   | 19,919 |   |
| Total Operating  expenses (2) |   | 16,880                    |   | 17,323 |   | 19,135 |   | 17,213 |   |
| Income from  Operation        |   | 1,264                     |   | 2,057 |   | 5,241 |   | 2,706 |   |
| Net Income                    |   | 628                       |   | 1,215 |   | 3,360 |   | 1,256 |   |

 

(1) Total operating revenue and operating expenses above reflect areduction of $967, $1,198, $1,051, and $660 for the quarters ended March 31,2002, June 30, 2002, September 29, 2002, and December 31, 2002, respectively,for the amount of cash rebates redeemed and accrued for in connection with theCompany's Preferred Players Program.

 

(2) Amounts have been reclassified in order to conform with thepresentation used in 2002.

F-21

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**INDEX TO EXHIBITS**

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                          |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 3.1              |   | Certificate of  Incorporation of Wheeling Island Gaming, Inc. (the “Company”), incorporated  by reference to Exhibit 3.1 to the Company’s Registration Statement on Form  S-4 (Registration No. 333-81778)                                                                                                                                                                |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 3.2              |   | Restated  By-laws of the Company *                                                                                                                                                                                                                                                                                                                                                       |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1              |   | Indenture, dated as of  December 19, 2001, by and among the Company, the Guarantors (as defined  therein) and U.S. Bank, N.A., as trustee, incorporated by reference to  Exhibit 4.1 to the Company’s Registration Statement on Form S-4 (Registration  No. 333-81778)                                                                                                              |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.2              |   | Notation of Guarantee,  WDRA Food Service, Inc. (“WDRA”) as Guarantor, incorporated by reference to  Exhibit 4.2 to the Company’s Registration Statement on Form S-4 (Registration  No. 333-81778)                                                                                                                                                                        |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.3              |   | Notation of Guarantee,  Wheeling Land Development Corp. (“Wheeling Land”) as Guarantor, incorporated  by reference to Exhibit 4.3 to the Company’s Registration Statement on Form  S-4 (Registration No. 333-81778)                                                                                                                                                       |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.4              |   | Registration Rights  Agreement, dated as of December 19, 2001, by and among the Company as Issuer,  WDRA and Wheeling Land as Guarantors and Banc of America Securities LLC and  Wells Fargo Brokerage Services LLC, incorporated by reference to Exhibit 4.4  to the Company’s Registration Statement on Form S-4 (Registration No.  333-81778)                                    |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1             |   | Amended and Restated  Loan Agreement, dated as of December 14, 2001, by and among the Company as  Borrower, the Lenders and Syndication Agent referred to therein and Bank of  America, N.A. as Administrative Agent for itself and the other Lenders,  incorporated by reference to Exhibit 10.1 to the Company’s Registration  Statement on Form S-4 (Registration No. 333-81778) |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2             |   | Purchase Agreement,  dated as of December 12, 2001, by and among the Company as Issuer, WDRA and  Wheeling Land as Guarantors and Banc of America Securities LLC and Wells  Fargo Brokerage Services LLC, incorporated by reference to Exhibit 10.2 to  the Company’s Registration Statement on Form S-4 (Registration No. 333-81778)                                               |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3             |   | Stock Redemption  Agreement, dated as of November 16, 2001, by and among the Company, WHX  Entertainment Corp. and Sportsystems Corporation, incorporated by reference to  Exhibit 10.3 to the Company’s Registration Statement on Form S-4  (Registration No. 333-81778)                                                                                                           |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4             |   | Advisory Services  Agreement, dated as of November 16, 2001, by and between the Company and  Delaware North Companies, Incorporated, incorporated by reference to Exhibit  10.4 to the Company’s Registration Statement on Form S-4 (Registration No.  333-81778)                                                                                                                   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5             |   | Administrative  Services Agreement, effective as of December 19, 2001, by and among the  Company, Sportsystems Corporation and Delaware North Companies, Incorporated,  incorporated by reference to Exhibit 10.5 to the Company’s Registration  Statement on Form S-4 (Registration No. 333-81778)                                                                                 |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6             |   | Tax Sharing Agreement,  effective as of December 20, 2001, by and among Delaware North Companies, Incorporated,  Sportsystems Corporation and the Company for itself and its subsidiaries,  incorporated by reference to Exhibit 10.6 to the Company’s Registration  Statement on Form S-4 (Registration No. 333-81778)                                                             |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7             |   | Agreement, dated  September 1, 2001, by and between the Company and Louis P. Ciminelli  Construction Company, Inc. (“Ciminelli”) *                                                                                                                                                                                                                                             |

 

 

----

 
| 10.8   |   | Amendment No. 1 to Agreement between the Company and Ciminelli, dated  September 26, 2002, by and between the Company and Ciminelli *                                  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                   |
| 10.9   |   | Agreement, dated March  14, 2002, by and between the Company and Jeter, Cook & Jepson Architects,  Inc. *                                                          |
|   |   |                                                                                                                                                                   |
| 21.1   |   | List of subsidiaries  of the Company, incorporated by reference to Exhibit 21.1 to the Company’s  Registration Statement on Form S-4 (Registration No. 333-81778) |
|   |   |                                                                                                                                                                   |
| 99.1   |   | Certification by Chief  Executive Officer of the Company as required by Section 906 of the  Sarbanes-Oxley Act of 2002 *                                               |
|   |   |                                                                                                                                                                   |
| 99.2   |   | Certification by Chief  Executive Officer of the Company as required by Section 906 of the Sarbanes-Oxley  Act of 2002 *                                               |
|   |   |                                                                                                                                                                   |
| 99.3   |   | Certification by Chief  Financial Officer of the Company as required by Section 906 of the  Sarbanes-Oxley Act of 2002 *                                               |

 

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*              Filed herewith.

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