**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**FOR ANNUAL ANDTRANSITION REPORTS PURSUANT TO SECTIONS 13 OR**

**15(d) OF THESECURITIES 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, 2004** |
|                                            |                                                                                           |
| **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 of registrant as specified in itscharter)

 
| **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) of the Act:**None.**        |
|                                                                          |       |                                 |
| Securities  registered pursuant to Section 12 (g) of the Act:**None.**        |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

ý   Yes    o   No

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§ 229.405 of this chapter) is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part II of this Form 10-Kor any amendment to this Form 10-K. ý

 

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

o   Yes    ý   No

 

Statethe aggregate market value of the voting and non-voting common equity held bynon-affiliates computed by reference to the price at which the common equitywas last sold, or the average bid and asked price of such common equity, as ofthe last business day of the registrant’s most recently completed second fiscalquarter:  Not applicable.

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date:

 
| Common  Stock, $1 par value |   | 500 shares outstanding |
|-----------------------------|--------|------------------------|

 

Documentsincorporated by reference:  None.

 

 

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**TABLE OF CONTENTS**

 
| **PART I**    |                                                                                                                   |
|---------------|------------------------------------------------------------------------------------------------------------------------|
|          |                                                                                                                   |   |
| **ITEM 1.**   | BUSINESS                                                                                                               | 1 |
|          | Operations                                                                                                             | 1 |
|          | Marketing                                                                                                              | 2 |
|          | The Wheeling Island  Expansion                                                                                         | 3 |
|          | Market                                                                                                                 | 3 |
|          | Competition                                                                                                            | 4 |
|          | Intellectual Property  Rights                                                                                          | 5 |
|          | Suppliers                                                                                                              | 5 |
|          | Employees                                                                                                              | 6 |
|          | Available Information                                                                                                  | 6 |
|          | Security  & Controls                                                                                               | 6 |
|          | Regulation and Licensing                                                                                               | 6 |
|          |                                                                                                                   |   |
| **ITEM 2.**   | PROPERTIES                                                                                                             | 9 |
|          |                                                                                                                   |   |
| **ITEM 3.**   | LEGAL PROCEEDINGS                                                                                                      | 9 |
|          |                                                                                                                   |   |
| **ITEM  4.**  | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                   | 10 |
|          |                                                                                                                   |   |
| **PART II**   |                                                                                                                   |
|          |                                                                                                                   |   |
| **ITEM  5.**  | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES |  

11 |
|          |                                                                                                                   |   |
| **ITEM 6.**   | SELECTED FINANCIAL  DATA                                                                                               | 11 |
|          |                                                                                                                   |   |
| **ITEM  7.**  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                            |  

15 |
|          | Overview                                                                                                               | 15 |
|          | Critical Accounting  Policies                                                                                          | 16 |
|          | Results  of Operations                                                                                                 | 18 |
|          | 2004  Compared to 2003                                                                                                 | 18 |
|          | 2003  Compared to 2002                                                                                                 | 21 |
|          | Liquidity and Capital  Resources                                                                                       | 24 |
|          | Contractual  Obligations and Commitments                                                                               | 25 |
| ** **    | ** **                                                                                                             | ** ** |
| **ITEM  7A.** | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                            | 25 |
|          |                                                                                                                   |   |
| **ITEM  8.**  | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                           | 25 |
|          |                                                                                                                   |   |
| **ITEM  9.**  | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                  |  

25 |

 

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| **ITEM 9A.**                       | CONTROLS  AND PROCEDURES                                     | 26     |
|------------------------------------|--------------------------------------------------------------|--------|
|                               |                                                         |   |
| **ITEM 9B.**                       | OTHER MATTERS                                                | 26     |
|                               |                                                         |   |
| **PART  III**                      |                                                         |
|                               |                                                         |   |
| **ITEM 10.**                       | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT          | 27     |
|                               | Audit  Committee of the Board of Directors                   | 28     |
|                               | Code of Ethics                                               | 28     |
|                               |                                                         |   |
| **ITEM 11.**                       | EXECUTIVE  COMPENSATION                                      | 29     |
|                               | Remuneration of Directors                                    | 29     |
|                               | Compensation of  Executive Officers                          | 29     |
|                               | Report  of the Board of Directors on Executive Compensation  | 30     |
|                               |                                                         |   |
| **ITEM 12.**                       | STOCK  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 31     |
|                               | Principal Shareholders                                       | 31     |
|                               |                                                         |   |
| **ITEM 13.**                       | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS              | 32     |
|                               |                                                         |   |
| **ITEM 14.**                       | PRINCIPAL  ACCOUNTING FEES AND SERVICES                      | 33     |
|                               |                                                         |   |
| **PART  IV**                       |                                                         |
|                               |                                                         |   |
| **ITEM 15.**                       | EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES                  | 34     |
|                               |                                                         |   |
| Signatures                         |                                                         | 35     |
|                               |                                                         |   |
| INDEX  TO EXHIBITS                 | 36                                                           |
|                               |                                                         |   |
| CONSOLIDATED  FINANCIAL STATEMENTS | F-1                                                          |

 

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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 2,362slot machines, a hotel, showroom, greyhound racetrack, pari-mutuel wagering onlive greyhound racing and simulcast greyhound, thoroughbred and harness racingand various dining venues.  We are awholly owned subsidiary of Delaware North Companies Gaming & Entertainment,Inc. (or Delaware North G&E, formerly Sportsystems Corporation).  Delaware North G&E is a wholly ownedsubsidiary of Delaware North Companies, Incorporated, or Delaware North.

 

Wedo not have operations other than the Wheeling Island Racetrack & GamingCenter and are entirely dependent upon this gaming site for our revenues.  Accordingly, we may be subject to greaterrisks than a geographically diversified gaming operation.

 

**Operations**

 

WheelingIsland is a 270,000-square foot facility that, as of December 31, 2004,featured:

 

**•**                                          64,272 square feet of gaming area with 2,362slot machines;

 

**•**                                          151-room hotel;

 

**•**                                          550 seat showroom;

 

**•**                                          4,100 square feet of conference space;

 

**•**                                          a 1/4 mile greyhoundracetrack with a 2,400-seat grandstand and mezzanine area;

 

**•**                                          a full-service 600-seat clubhouse restaurant,a 180-seat buffet-style restaurant, a 128- seat casual restaurant, a 70-seatfine dining restaurant, a 140-seat food court, four concession stands, fourlounges and three bars;

 

**•**                                          180 covered parking spaces and;

 

**•**                                          2,295 uncovered parking spaces.

 

*Gaming Operations*

 

Wecurrently operate 2,362 gaming devices in three main gaming areas.  Other than 140 slot machines, which we lease,we own all of the slot machines operating at our facility.  The Wheeling Island expansion, an annex toour existing gaming facility, contains 1,148 machines.  The Wheeling Island expansion opened forgaming on June 26, 2003.  The Island Roomcontains 650 slot machines.  TheFairgrounds Room, located in the original lower grandstand of the racetrack,contains 564 slot machines.  Our slotmachines include mechanical spinning reel slot machines and video lotteryterminals with either coin-out or voucher-out functionality.  Currently, 2,014 of the slot machines at ourfacility have the coin-out payment functionality, while the remainder pay outin vouchers redeemable at various cashier stations.  In late 2004 we initiated a concerted effortto convert the necessary hardware in all of our coin-out machines so they willaccept vouchers or cash and pay out only in vouchers.  We offer one local progressive slot machinegame, which links multiple machines playing for a single 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 eventconsists of 15 or 20 greyhound races.  Wetypically 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, a 128-seat casualrestaurant, a 70-seat fine dining restaurant, a 140-seat food court, twoconcession stands, four lounges and three bars. The casual restaurant, fine dining restaurant, food court, one loungeand one bar were added with the opening of the Wheeling Island expansion.

 

*Lodging and Entertainment Operations*

 

Lodgingoperations are comprised of a 151-room hotel, which includes 9 suite stylerooms.  The hotel was opened on June 26,2003 in conjunction with the Wheeling Island expansion.

 

Entertainmentoperations consist of a 550-seat multi-purpose showroom and various conferencefacilities, which opened on June 26, 2003 in connection with the WheelingIsland expansion.  The multi-purposeshowroom is used as an entertainment venue and for large special events.  During 2004 the showroom hosted 256events.  The conference facilities areused to host a variety of large meeting functions and other catered events.

 

**Marketing**

 

Ourmarketing efforts are dedicated to media and promotional programs that aim toattract and retain gaming customers.  Ourspending for media and promotional programs principally targets the majormarkets within a 150-mile radius around Wheeling, West Virginia, including thelocal regional area and the major cities of Akron, Canton, Youngstown andColumbus, Ohio and Pittsburgh, Pennsylvania.

 

Ourprimary promotional tool used to develop customer loyalty is the PreferredPlayer Club, which we introduced in July 2000. The Preferred Player Clubprovides gaming customers with reward incentives for increased levels ofplay.  Beginning in October 2002, suchreward incentives were revised to provide Preferred Player Club members withclub points equal to a percentage of all gaming dollars played.  Club points can be redeemed for cash, foodand beverage, lodging, entertainment and retail offers.  Members also receive complimentary couponsand promotional offers and discounts as part of a monthly mailer.  We administer the Preferred Player Clubthrough the use of a player tracking system. The player tracking system alsocontains information concerning customer preferences and interests that allowsus to tailor our program rewards and other promotions accordingly. Total clubmembership in the Preferred Player Club as of December 31, 2004 exceeded318,000 members.  In the future, weexpect to strengthen the Preferred Player Club by improving the variety ofrewards offered 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 on developingour group sales business and the opening of the Wheeling Island expansion, thebus traffic at our facility has grown substantially in recent years.

 

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Ourother marketing efforts include:

 

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

 

**•**                                          local, regional and national entertainmentattractions;

 

**•**                                          cash and merchandise give-aways; and

 

**•**                                          food and beverage specials and localentertainment attractions.

 

Ourmarketing and promotional efforts include extensive use of direct mail,television, radio and print media advertising in our primary market.  During fiscal year 2004, we spent a total of$6.6 million on marketing and advertising programs.  Of this amount, $1.4 million was spenton media advertising and $5.2 million was spent on promotional programs,including all reward expenditures related to the Preferred Player Club.  For the year ended December 31, 2004,the allocation of our expenditures for media advertising was 30.0% on directmail, 27.0% on newspapers, 16.0% on television, 11.0% on radio, and 16.0% onbillboard advertising.

 

Ourgoal is to attract customers by promoting our facility as a completeentertainment complex offering a unique combination of quality racing, slotmachine gaming, dining, special events and other entertainment options.

 

**The Wheeling Island Expansion**

 

To accommodate growingdemand we opened the Wheeling Island expansion on June 26, 2003.  The Wheeling Island expansion increased thenumber of slot machines from 1,630 to 2,200 while also adding the followingamenities to the Wheeling Island complex:

 

**•**                  a151-room hotel;

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

**•**                  a550-seat multi-purpose showroom; and

**•**                  180covered parking spaces plus additional outdoor parking spaces.

 

**Market**

 

Ourprimary market consists of the 150-mile radius area around Wheeling, WestVirginia, including the major cities of Akron, Canton, Youngstown and Columbus,Ohio and Pittsburgh, Pennsylvania. Patrons from these major population areas enjoy convenient access toWheeling Island via Interstate Route 70, a major four-lane highway adjacent toour property.  According to the WestVirginia Lottery Commission, (or the Lottery Commission), annual gamingrevenues (representing gross terminal income) generated in West Virginia were$854.9 million for the State’s fiscal year ended June 30, 2004, a 19.2%increase over the prior year period. According to Lottery Commission data, during the most recent six-monthperiod ended January 1, 2005, gaming revenues were $444.6 million,representing an increase of 10.8% over the same period in the prior year.

 

Ourmarket share of gaming revenue (representing gross terminal income) during theState’s fiscal year ended June 30, 2004 was 22.5%.  Our market share of gaming revenue during theperiod from July 1, 2004 to January 1, 2005 was 21.7%.  We believe the suspension of our gamingoperations caused by the flooding of the Ohio River in September was a factorin our lower reported market share of gaming revenues during the last sixmonths of 2004.  As of January 1, 2005,we had 21.5% of the total number of slot machines operating in West Virginia.  The

 

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currentmarket for our facility consists primarily of day-trip customers from thesurrounding area and gaming patrons from the major cities of Akron, Canton andYoungstown, Ohio and Pittsburgh, Pennsylvania, which utilize our 151-room hotelfor extended stays typically lasting from 1 - 2 nights.  The average length of stay in our hotelduring 2004 was 1.7 days.  We believethat the location of our facility along with the additional gaming capacity andamenities that were added from the Wheeling Island expansion will enable us tocontinue to grow our share of gaming revenues within our primary market in thenear term.  In the longer term, howeverwe believe that our market share of gaming revenues within our primary marketwill be adversely affected by the introduction of slot machine gaming inwestern Pennsylvania.

 

**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 one offour licensed racing facilities that have approval to offer slot machine gamingin West Virginia.

 

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 significant competitionfor wagering dollars from various different competitors in West Virginia, aswell as in the adjacent states of Pennsylvania and Ohio.  Currently, our principal direct competitor isMountaineer Park, located approximately 50 miles to the north in Chester, WestVirginia.  Mountaineer Park offers slotmachine gaming and pari-mutuel wagering on live thoroughbred racing andsimulcast thoroughbred, harness and greyhound events.  This gaming facility competes directly withus in attracting the western Pennsylvania market, including Pittsburgh, as wellas the northern panhandle market of West Virginia and the feeder markets innortheastern Ohio.  Mountaineer Parkcurrently offers more gaming machines and more entertainment amenities than wedo, including an 18-hole golf course, a 5,000-seat concert venue and a healthspa. We believe that our ability to compete with Mountaineer Park was greatlyenhanced when we opened the Wheeling Island expansion in the second quarter of2003, which added many amenities to our facility.  We also believe that the competitive impactof the expansion is complemented by our location and accessibility.  Wheeling Island is located in the City ofWheeling, one of the major population centers of the northern panhandle marketof West Virginia, while Mountaineer Park is located in the less populated Townof Chester.  Wheeling Island’s propertyis adjacent to Interstate Route 70, a major four-lane highway that providescustomers with easy access to our facility, while Mountaineer Park is locatedon a two-lane state road.  Other thanMountaineer Park, there are currently no facilities offering competitivepari-mutuel live racing and slot machine gaming within a 150-mile radius of ourfacility.  In addition to our facilityand Mountaineer Park, there are two facilities located in West Virginia thatoffer slot machine gaming.  However,these facilities are located more than 150 miles away from our facility inCharleston and Charles Town, West Virginia. As a result, we believe that we do not compete to any significant extentwith these facilities for customers.

 

OnJuly 5, 2004, legislation was enacted in Pennsylvania permitting theintroduction of slot machine gaming in that state.  The newly enacted law provides for theestablishment of a state gaming control board that will award fourteen licensesto operate slot machine gaming facilities in Pennsylvania.  Our primary market consists of the 150-mileradius around Wheeling and includes the western Pennsylvania market area thatincludes Pittsburgh.  Slot machineoperators that are awarded licenses in western Pennsylvania will competedirectly with us for customers in our market. We believe that such licenses will be awarded in 2005 and that gamingoperations in western Pennsylvania will commence in late 2006.  We expect the introduction of slot machinegaming in the western Pennsylvania market to have a material adverse impact onour business, financial condition and results of operation.

 

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Wecurrently compete with The Meadows, a harness racetrack located approximately35 miles to the east in Washington, Pennsylvania.  Currently, The Meadows only offerspari-mutuel wagering, however we believe it is likely that The Meadows will beawarded a slot machine gaming license in 2005 under the Pennsylvania legislationenacted in 2004.

 

Ohiocurrently does not permit any form of casino gaming, including slot machinegaming.  However, as a result of greaterbudgetary pressures, states are increasingly looking to new sources ofadditional revenue, which may include gaming. In the past, bills have been introduced in the Ohio legislature tolegalize slot machine gaming at racetracks, none of which has successfullypassed.  To the extent that Ohiolegalizes any form of casino gaming, or if additional gaming were approved inWest Virginia, our slot machine gaming operations would compete with any newgaming facilities that opened as a result of such legislation.  For example, if gaming similar to that whichhas been approved in West Virginia and Pennsylvania is approved in Ohio, therewould be seven racetracks in Ohio that could potentially compete with us forgaming customers.  In addition, increasedcompetition could result from other nearby states allowing expanded casino gaming,or gaming machines that are not offered by us, as well as other forms of gamingnot currently available in West Virginia. In addition, if Internet gaming were legalized, we might lose customersto that medium.

 

Wealso compete with Thistledown, located approximately 143 miles to the northwestin Cleveland, Ohio, Northfield Park, located approximately 150 miles to thenorth in Northfield, Ohio, and Beulah Park and Scioto Downs, locatedapproximately 135 miles to the west in Columbus, Ohio.  These facilities offer pari-mutuel wageringbut do not currently offer slot machine gaming.

 

OnJanuary 1, 2002, legislation became effective which authorized up to 9,000 slotmachines in adults-only facilities throughout West Virginia.  The legislation allows slot machines inestablishments licensed by the State to sell beer or other alcoholic beveragesfor consumption on the premises.  No morethan five slot machines are allowed in each establishment licensed to sellalcoholic beverages that has been approved to operate these slot machines.  No more than ten slot machines are allowed ineach fraternal or veterans organization that has been approved to operate theseslot machines.  As of December 31, 2004,7,338 of these slot machines are licensed and operating in West Virginia.  While we believe the existence of such slotmachines has reduced the growth rate of our gaming revenues we do not believesuch machines has had a material impact on our business, financial condition orresults of operations.

 

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 the localgaming market.  We believe that the useof the “Wheeling Island” brand name contributes significantly to obtaining newcustomers in our market and to expanding our market.  We do not have any patents or any other majorbrand names that are material to our operations.

 

**Suppliers**

 

Wecontract for the supply of numerous goods and services.  Our significant agreements with suppliers arefor totalisator services, video and peripheral equipment, communication andslot machine gaming supplies, the supply

 

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ofbeer and other alcoholic products and fresh and frozen food products.  These services generally are provided undershort-term agreements.

 

**Employees**

 

Asof December 31, 2004, we employed approximately 997 persons, 818 of whomwere full-time employees and 179 of whom were part-time employees.  The United Food and Commercial Workers Union,Local 23, represents approximately 373 employees in our pari-mutuel,maintenance, cleaning, racing and slot machine gaming operationsdepartments.  Our current agreement withthe United Food and Commercial Workers Union, Local 23 expires on February 26,2006.  The Hotel Employees and RestaurantEmployees Union, Local 57 represents approximately 234 employees in our foodand beverage department, 40 employees in our security department, and 29lodging department employees under three separate collective bargainingagreements.  The collective bargainingagreements with the food and beverage employees and security department employeesexpire on June 22, 2006, and April 30, 2006 respectively.  The separate collective bargaining agreementwith the lodging employees expires on June 30, 2009.  We believe that we generally havesatisfactory relations with our employees and with both unions.

 

**Available Information**

 

Wemake available free of charge through our Internet website, www.wheelingisland.com,our annual report on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, and amendments to these reports filed or furnished pursuant toSection 13(a) of the Securities Exchange Act of 1934 as soon as reasonablypracticable after we electronically file such materials with, or furnish them,to the Securities and Exchange Commission, (or SEC).

 

Ourprincipal executive offices are located at 1 South Stone Street, Wheeling, WestVirginia, and our telephone number is (304) 232-5050.  Unless the context specifically requiresotherwise, the terms, the “Company”, “Wheeling Island”, “we”, “us” and “our”mean Wheeling Island Gaming, Inc., a Delaware corporation, and its subsidiarieson a consolidated basis.

 

**Security and Controls**

 

Weemploy stringent security measures at our facility to provide maximum safety toour customers and employees while also protecting company assets.  These programs include 24-hour securitysurveillance of the entire facility, stationed security guards on the gamingfloor 24 hours a day and security guard escorts for all significant moneytransfers to and from the gaming money room.

 

**Regulation and Licensing**

 

*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 WestVirginia Racing Commission, or the Racing Commission.  The powers and responsibilities of the RacingCommission include, among other things: (i) granting permission annually to maintain racing licenses andschedule race meets; (ii) approving simulcasting

 

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activities;(iii) licensing all of our officers, directors, racing officials and certainother employees; and (iv) approving all of our contracts that affect our racingand pari-mutuel wagering operations. Such powers and responsibilities extend to the approval and/or oversightof all aspects of racing and pari-mutuel wagering operations.  In order to conduct simulcast racing, we arerequired under West Virginia law to hold a minimum of 220 live race days eachyear.  During 2004 we conducted a totalof 291 live race days.  In addition,certain activities, such as simulcasting races, require the consent of therepresentatives of a majority of the greyhound owners and trainers at ourfacility.

 

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 licensedgreyhound or horse racing facilities that were licensed prior to January 1, 1994and conduct a minimum number of days of live racing may offer video lotterygaming.  There are only four facilitiesthat qualify under this legislation, including us.  Accordingly, we must comply fully withregulations of the Racing Commission to qualify for our license under theLottery Act and maintain our video lottery gaming operations.

 

TheLottery Act requires that we be subject to a written agreement with thegreyhound owners, breeders and trainers who race greyhounds at ourfacility.  We are party to the requisiteagreements with the appropriate parties at the kennels that operate at ourfacility.  The Lottery Act also requiresthat we be subject to an agreement with the pari-mutuel clerks who work at our facility.  We are party to such an agreement, which wenotify the Lottery Commission of annually. The absence of an agreement with the kennels or the pari-mutuel clerks,or the termination or non-renewal of such agreements, would have a materialadverse 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 to conductvideo lottery activities unless the matter is resubmitted to the voters pursuantto a petition signed by at least 5.0% of the registered voters, who must waitat least five years from the approval to bring such a petition. If approval isdenied, another vote on the issue may not be held for two years. Gaming wasapproved in Ohio County, the location of Wheeling Island, in May 1994.  If such approval were ever revoked, it wouldhave a material adverse effect on our business, financial condition and resultsof 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 LotteryCommission determines that each person who has “control” of an applicant meetsall of the applicable 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 was authorized by the LotteryCommission prior to November 1, 1993 to operate video lottery machines inanother area of the racetrack’s facilities, such racetrack may continue to doso.  Our competitor, Mountaineer Park isthe only facility to benefit from this, and has lottery machines at the hotelon 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 lotterygaming are conducted.  The Lottery Actprovides for 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 video lotterymachines until full payment of all amounts due it are 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 thecentral system was disrupted for any reason, we believe that the LotteryCommission would suspend all gaming operations within the State until normaloperation of the system was restored. Any such suspension could cause a material disruption of our gaming operationsand have a material adverse effect on our business, financial condition andresults of operations.

 

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.

 

8

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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 theserve of alcoholic beverages.  We derivea 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 and Transfer*

 

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.

 

# **ITEM 2. PROPERTIES**

#  

WheelingIsland Racetrack & Gaming Center, which is owned by us, is situated onapproximately 62 acres of land on Wheeling Island on the Ohio River inWheeling, West Virginia.  The entireWheeling Island facility occupies approximately 270,000 square feet.

 

Wealso own 24 acres of land located at the northern limit of the Village of BeechBottom in Brooke County, West Virginia, approximately 13 miles from ourWheeling Island facility.  Our greyhoundkennel facility is located on this property.

 

**ITEM 3.  LEGALPROCEEDINGS**

 

Thekennels for some of the racing greyhounds, which participate in our racingmeets, were relocated to Brooke County, West Virginia during the 2002 calendaryear.  The County Commission of BrookeCounty, West Virginia, is now claiming an entitlement to a portion of therevenue generated by our gaming and pari-mutuel racing operations by virtue ofthe location of our kennel compound in Brooke County.  The Brooke County Commission threatened totake legal action to obtain those revenues, or in the alternative, to enjointhe continued operation of our kennels in Brooke County because of theirconstruction without prior approval in a local option election.  It is our position that Brooke County is notentitled to a share of our gaming and pari-mutuel racing revenues.  In addition, the construction and operationof our kennels was approved by the West Virginia Racing Commission.  On February 25, 2004, we commenced an actionin the Circuit Court of Kanawha County, West Virginia, which names the BrookeCounty Commission, the Ohio County Commission and the West Virginia RacingCommission as defendants.  The actionseeks a declaratory judgment to confirm that the West Virginia RacingCommission followed all lawful procedures and acted within the scope of itsauthority when the Racing Commission approved the construction and operation ofour kennels, that the local

 

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optionelection contended for by the Brooke County Commissioners was not required, andthat Brooke County is only entitled to receive the property tax revenueassociated with the kennel facility. This matter is in the litigation discovery phase, and theparties have conducted some very preliminaryexploration into possible settlement of this dispute.

 

Weare currently involved in a dispute with representatives of the United Food andCommercialWorkersUnion concerning the rates of payreceived by the mutuel tellers who work in the simulcasting area of theracetrack facility.  This dispute isscheduled to be resolved by arbitration in April, 2005.

 

Weare a party to a number of other legal proceedings that have arisen in the ordinarycourse of our business.  We believe thatthe outcome of such proceedings will not have a material adverse effect on ouroperating results or financial condition.

 

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

 

Notapplicable.

 

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**PART II**

 

**ITEM 5.  MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED****STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES**

 

Not applicable.

 

**ITEM 6.  SELECTEDFINANCIAL DATA**

 

The selected financialdata presented below as of and for the five years ended December 31, 2004has been derived from our audited consolidated financial statements.  The selected financial data should be read inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and those consolidated financial statements andrelated notes thereto which are included elsewhere herein.

 

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| ** **                                  | ** ** | **Year Ended December 31,**           | ** **  |
|---------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                  | ** ** | **(dollars in thousands, except  ratios)** | ** **  |
| ** **                                  | ** ** | **2004**                                   | ** **  | **2003** | ** ** | **2002** | ** ** | **2001 (2)** | ** ** | **2000** | ** ** |
|                                        |       |                                       |        |   |   |   |   |   |   |   |   |
| **Statement  of Operations Data:**          |       |                                       |        |   |   |   |   |   |   |   |   |
| Operating  revenue:                         |       |                                       |        |   |   |   |   |   |   |   |   |
| Gaming  revenue (1)                         |       | $                                          | 100,378     |   | $ | 88,634 |   | $ | 78,550 |   | $ | 67,372 |   | $ | 46,224 |   |
| Pari-mutuel  revenue                        |       | 6,841                                      |        | 7,704 |   | 8,639 |   | 9,145 |   | 9,062 |   |
| Food &  beverage revenue                |       | 7,782                                      |        | 6,066 |   | 4,913 |   | 4,502 |   | 3,875 |   |
| Lodging  revenue                            |       | 2,468                                      |        | 1,542 |   | — |   | — |   | — |   |
| Other  revenue                              |       | 1,947                                      |        | 1,357 |   | 790 |   | 800 |   | 726 |   |
| ** **                                  |       |                                       |        |   |   |   |   |   |   |   |   |
| Total  operating revenue                    |       | 119,416                                    |        | 105,303 |   | 92,892 |   | 81,819 |   | 59,887 |   |
| ** **                                  |       |                                       |        |   |   |   |   |   |   |   |   |
| Operating  expenses:                        |       |                                       |        |   |   |   |   |   |   |   |   |
| Purse  expense                              |       | 21,473                                     |        | 20,147 |   | 18,799 |   | 17,025 |   | 12,712 |   |
| Gaming costs                                |       | 7,440                                      |        | 7,025 |   | 4,397 |   | 3,755 |   | 3,819 |   |
| Pari-mutuel  costs                          |       | 3,521                                      |        | 3,772 |   | 4,049 |   | 4,335 |   | 3,943 |   |
| Food &  beverage costs                  |       | 8,444                                      |        | 6,857 |   | 5,617 |   | 4,083 |   | 3,130 |   |
| Lodging  expenses                           |       | 1,239                                      |        | 810 |   | — |   | — |   | — |   |
| Other  expenses                             |       | 739                                        |        | 339 |   | — |   | — |   | — |   |
| Marketing  and promotions                   |       | 8,258                                      |        | 6,568 |   | 6,046 |   | 4,270 |   | 2,910 |   |
| Facilities  and maintenance                 |       | 9,704                                      |        | 7,309 |   | 5,176 |   | 4,790 |   | 3,782 |   |
| Management  fees (3)                        |       | —                                     |        | — |   | — |   | 25,521 |   | 15,162 |   |
| General and  administrative (4)             |       | 6,404                                      |        | 5,117 |   | 3,909 |   | 3,069 |   | 1,935 |   |
| Depreciation  and amortization              |       | 11,693                                     |        | 9,630 |   | 7,483 |   | 3,703 |   | 2,566 |   |
|                                        |       |                                       |        |   |   |   |   |   |   |   |   |
| Total operating  expenses                   |       | 78,915                                     |        | 67,574 |   | 55,476 |   | 70,551 |   | 49,959 |   |
|                                        |       |                                       |        |   |   |   |   |   |   |   |   |
| Income from  operations                     |       | 40,501                                     |        | 37,729 |   | 37,416 |   | 11,268 |   | 9,928 |   |
|                                        |       |                                       |        |   |   |   |   |   |   |   |   |
| Interest  expense, net                      |       | (14,338                                    | )           | (14,013 | ) | (13,939 | ) | (1,427 | ) | (458 | ) |
| Casualty  Loss (5)                          |       | (4,308                                     | )           | — |   | — |   | — |   | — |   |
| Other income  (expense), net                |       | (254                                       | )           | 1 |   | (333 | ) | (69 | ) | — |   |
| Income  before income tax                   |       | 21,601                                     |        | 23,717 |   | 23,144 |   | 9,772 |   | 9,470 |   |
| Income tax  expense                         |       | 7,593                                      |        | 8,325 |   | 8,303 |   | 3,313 |   | 3,266 |   |
|                                        |       |                                       |        |   |   |   |   |   |   |   |   |
| Net income                                  |       | $                                          | 14,008      |   | $ | 15,392 |   | $ | 14,841 |   | $ | 6,459 |   | $ | 6,204 |   |
| ** **                                  |       |                                       |        |   |   |   |   |   |   |   |   |
| **Operating  Data:**                        |       |                                       |        |   |   |   |   |   |   |   |   |
| Gross  terminal income (6)                  |       | $                                          | 193,705,811 |   | $ | 174,829,040 |   | $ | 149,137,640 |   | $ | 116,297,474 |   | $ | 77,512,872 |   |
| Number of  slot machines (7)                |       | 2,362                                      |        | 2,200 |   | 1,623 |   | 1,537 |   | 1,280 |   |
| Slot machine  win per unit per day (8) |       | $                                          | 237.38      |   | $ | 253.60 |   | $ | 267.87 |   | $ | 239.39 |   | $ | 220.76 |   |
| Hotel  occupancy % (9)                      |       | 90.9                                       | %           | 81.5 | % |   |   |   |   |   |   |
| Revenue per  available room (10)            |       | $                                          | 45.28       |   | $ | 54.04 |   |   |   |   |   |   |   |
|                                        |       |                                       |        |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data:**                    |       |                                       |        |   |   |   |   |   |   |   |   |
| Cash and  cash equivalents                  |       | $                                          | 10,509      |   | $ | 9,517 |   | $ | 7,867 |   | $ | 9,903 |   | $ | 5,020 |   |
| Total assets                                |       | 220,086                                    |        | 230,516 |   | 185,740 |   | 168,107 |   | 37,843 |   |
| Total long  term debt                       |       | 142,250                                    |        | 159,000 |   | 126,500 |   | 125,000 |   | 14,500 |   |
| Shareholder’s  equity                  |       | 32,388                                     |        | 30,880 |   | 27,488 |   | 12,647 |   | 18,817 |   |

 

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(1)           Gaming revenuesrepresent gross revenues from slot machine gaming, or total amounts wagered,net of winning patron payouts (the “gross terminal income”) less (1) a fee ofup to 4% of gross terminal income paid to the Lottery Commission foradministering slot machine gaming at the licensee’s race track (the “administrationfee”), (2) a tax 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.  The State deducts a 10%surcharge from all amounts of NTI above a predetermined level, defined as theNTI generated for the State’s fiscal year ended June 30, 2001.  The remainder of the excess NTI is divided asfollows: 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 depositedin a capital reinvestment account attributable to each racetrack.  The racetrack is entitled to recoup monies inthe capital reinvestment account for certain types of capital improvements madeat the racetrack on a dollar-for-dollar basis. All revenues derived from the operation of slot machines must initiallybe deposited with the Lottery Commission to be shared in accordance with theprovisions of the Lottery Act.

 

The Company accrues for the state’s increasedshare of NTI and the expected surcharge amount 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 West VirginiaRacing Commission to be used for racetrack capital improvements, are includedin gaming revenues during the period in which they are earned and approvedqualifying expenditures made.  Excessqualifying expenditures may be carried forward for recoupment in futureperiods, subject to certain statutory limitations.  During 2004, the Company has recognizedrecoupments of $4,517 as elements of reported gaming revenue.

 

(2)          On December 19, 2001, we redeemed WHX’sentire equity interest for total consideration of $105.0 million (the StockPurchase Transaction).  Of the $105.0million total consideration, $90.0 million is attributable to the purchaseprice of the shares and $15.0 million is attributable to a non-compete covenantwhereby WHX is prohibited from engaging in any business, which is the same as,substantially similar to, or directly competitive with the business activitiesconducted, by us for a period of five years.

 

(3)           Historically, we recorded and paid managementfees to two shareholders based on the total operating revenues of the precedingyear pursuant to management services agreements that terminated uponconsummation of the Stock Purchase Transaction.

 

(4)           Effective December 20, 2001, Wheeling Islandentered into an administrative services agreement pursuant to whichadministrative fees are recorded and paid to Delaware North G&E.  Pursuant to this agreement, Delaware NorthG&E receives a fee that is equal to the greater of 1.5% of preceding yeartotal operating revenues or $1.2 million per year.

 

(5)           Casualty loss represents the repair costsincurred in 2004 related to the damage caused by the flooding of

 

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the Ohio River in September.

 

(6)           Gross terminal income represents grossrevenues from slot machine gaming, or total amounts wagered, net of winningpatron payouts.

 

(7)           The number of slot machines are given as ofthe end of each period presented.

 

(8)           Slot machine win per unit per day refers tothe gross terminal income for a given period divided by the average number ofslot machines operating in that period divided by the number of days in thatperiod.

 

(9)           Represents total number of rooms sold orprovided gratuitously to customers, divided by the total number of roomsavailable for sale.

 

(10)         Represents total lodging revenues for theyear divided by the total number of rooms available for sale during the year.

 

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

 

*CautionaryNote Regarding Forward-Looking Statements*

 

Except for historical information contained herein, the statements inthis report (including without limitation, statements indicating that we “expect”,“estimate”, “anticipate”, or “believe” and all other statements concerningfuture financial results, product or service offerings or other events thathave not yet occurred) are forward-looking statements that are made pursuant tothe safe harbor provisions of applicable securities legislation andregulations.  Forward-looking statementsinvolve known and unknown factors, risks and uncertainties which may cause ouractual results in future periods to differ materially from those expressed inany forward-looking statements.

 

# **Overview**

#  

*General*

 

Weown and operate Wheeling Island Racetrack & Gaming Center, or WheelingIsland, a premier gaming and entertainment complex located in Wheeling, WestVirginia.  Wheeling Island features 2,362slot machines, a hotel, showroom, greyhound racetrack, pari-mutuel wagering onlive greyhound racing and simulcast greyhound, thoroughbred and harness racingand various dining venues.

 

Ourgaming operation is comprised of 2,362 slot machines situated within 64,272square feet of gaming area.  Our slotmachines include mechanical spinning reel slot machines and video lotteryterminals with either coin-out or voucher-out functionality.  The gaming mix is comprised of 2,014 slotmachines that dispense coins and 348 slot machines that dispense vouchers forpatron winnings.  The gaming mix includesone progressive game that links multiple machines playing for a larger combinedjackpot.

 

Ourpari-mutuel operations consist of pari-mutuel wagering on live greyhound racesand on greyhound, thoroughbred and harness events that are simulcast from otherracetracks.  Our racetrack currentlyconducts eight live greyhound races each week and offers a mix of simulcastwagering every day.

 

Ourfood and beverage operations include a full-service 550-seat clubhouserestaurant, a 180-seat buffet-style restaurant, a 128-seat casual restaurant, a70-seat fine dining restaurant, a 140-seat food court, four concession stands,four lounges and three bars.

 

Ourlodging operations are comprised of a 151-room hotel, which includes 9 suitestyle rooms.

 

Ourentertainment operations consist primarily of a 550-seat multi-purpose showroomand various conference facilities.

 

*WheelingIsland Expansion*

 

On June 26, 2003, theWheeling Island expansion was completed and opened for gaming.  The gaming and hotel expansion is connectedto our existing gaming facility.  Theopening of the Wheeling Island expansion increased the number of slot machinesfrom 1,630 to 2,200 while also adding the following amenities to the WheelingIsland complex:

 

**•**                  a151-room hotel;

 

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

**•**                  a550-seat multi-purpose showroom; and

**•**                  180covered parking spaces plus additional outdoor parking spaces.

 

Thetotal cost of designing, developing, constructing and equipping the WheelingIsland expansion was approximately $69.0 million, including architecturalfees.  During 2004, 2003 and 2002, weincurred capital expenditures relating to the Wheeling Island expansion of $0.8million, $44.6 million and $21.6 million, respectively.

 

*Casualty Loss*

 

During September 2004, the Company’s gaming and racing facilities weredamaged as a result of the flooding of the Ohio River.  As a consequence, the Company was forced tosuspend all operations for several days. The Company has recorded a casualty loss of $4.3 million for the yearended December 31, 2004 on the accompanying consolidated financial statement,which represents flood-related repairs incurred in 2004.  In addition, the Company has recorded a $0.3million loss, which represents the net carrying value of equipment assets lostduring the flood.  The equipment assetsthat were purchased to replace the lost equipment were recorded as capitalexpenditures on the accompanying consolidated financial statements and totaled$0.3 million.

 

Thesuspension of operations resulted in a loss of operating profits during theshut down period.  The Company expects asubstantial portion of the flood repair costs and the lost profits to berecovered pursuant to the Company’s insurance program.  Such proceeds will be recognized whenrealized.

 

**Critical AccountingPolicies**

 

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

 

*Revenue Recognition*

 

Gaming revenues represent gross revenues from slot machine gaming, ortotal amounts wagered, net of winning patron payouts (the “gross terminalincome”) less (1) a fee of up to 4% of gross terminal income paid to theLottery Commission for administering slot machine gaming at the licensee’s racetrack (the “administration fee”), (2) a tax of 30% of net terminal income(gross terminal income less the administration fee) paid to the State’s generalrevenue fund and (3) an amount of 9% of net terminal income (NTI) to be paid tovarious state funds, including funds for tourism promotion, Ohio County,employee pension programs and other programs.

 

TheState deducts a 10% surcharge from all amounts of NTI above a predeterminedlevel, defined as the NTI generated for the State’s fiscal year ended June 30,2001.  The remainder of the excess NTI isdivided as follows: 50% is returned to the racetrack (of which 8% representssupplemental purse expense), 41% is paid to the State’s general revenue fundand the remaining 9% is divided among various state funds.  Of the total 10% surcharge, 42% is depositedin a capital reinvestment account attributable to each racetrack.  The racetrack is entitled to recoup monies inthe capital reinvestment account for certain types of capital improvements madeat the racetrack on a dollar-for-dollar basis. Allrevenuesderived from the operation of slot machines must initially be deposited withthe Lottery Commission to be shared in accordance with the provisions of the

 

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LotteryAct.

 

The Company accrues the expected surcharge amount ratably during theyear based upon estimates of the actual amounts expected to be paid in eachstate fiscal year.  The recoupment ofamounts held in the capital reinvestment account, and a similar fund held bythe West Virginia Racing Commission to be used for racetrack capitalimprovements, are included in gaming revenues during the period in which theyare earned and approved qualifying expenditures are made.  Excess qualifying expenditures may be carriedforward for recoupment in future periods, subject to certain statutorylimitations.  During 2004, the Companyhas recognized recoupments of $4,517 as elements of reported gaming revenue.

 

*Valuation of Goodwill and Other Intangible Assets*

 

Thecarrying value of long-lived assets, including goodwill and other intangibleassets, are reviewed for impairment annually or more frequently whenever eventsor changes in circumstances indicate that the assets might be impaired.

 

On July 5, 2004,legislation was enacted in Pennsylvania permitting the introduction of slotmachine gaming inthat state. The newly enacted law provides for the establishment of astate gaming control board that will award fourteen licenses to operate slotmachine gaming facilities in Pennsylvania. Our primary market consists of the 150-mile radius around Wheeling andincludes the western Pennsylvania market area that includes Pittsburgh.  Slot machine operators that are awardedlicenses in western Pennsylvania will compete directly with us for customers inour market.

 

We expect the introductionof slot machine gaming in the western Pennsylvania market to have an adverseeffect on the implied fair value of the Company.  Accordingly, we performed a review of thecarrying value of the operating licenses and goodwill for impairment as ofSeptember 26, 2004.

 

We first tested theoperating licenses for impairment.  Thefair value of our operating licenses was determined based on the discountedcash flow method.  The cash flowsassociated with the discounted cash flow method were based on a number ofestimates and assumptions, including the projected future operating results ofthe Gaming unit, which include the estimated impact of gaming in westernPennsylvania, a 50% chance of enhanced gaming in West Virginia, our long-termgrowth rate and a discount rate. Pursuant to this evaluation we determined that the operating licenseswere not impaired.

 

The first step in ourgoodwill impairment test, used to identify potential impairment, compared thefair value of the Company to its carrying value, including goodwill.  The fair value of the Company was determinedbased on the discounted cash flow method. The cash flows associated with the discounted cash flow method werebased on a number of estimates and assumptions, including the projected futureoperating results of the Company, which include the estimated impact of gamingin western Pennsylvania and a 50% chance of enhanced gaming in West Virginia,our long-term growth rate and a discount rate. As the fair value of the Company exceeds its carrying value, the secondstep in the assessment process was not necessary.  Accordingly, no impairment charge wasrequired.

 

Significant changes to oneor more of these assumptions could change our conclusions in the future.  Our analysis assumes that gaming inPennsylvania will commence in 2006, and as that date approaches and morespecific information becomes available, the Company’s goodwill and otherintangible assets may be

 

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determined to be impaired.

 

*Preferred Player Program*

 

Many of our customers are members of our frequent playerprogram called the Preferred Player Club. The Preferred Player Club is apromotional tool used to develop customer loyalty by providing customers withreward incentives for increased levels of play. Club members can accumulate points for casino wagering that can beredeemed for cash, food and beverages, lodging, entertainment, and retail products.  A liability is recorded for the estimate ofunredeemed points based on redemption history. Points redeemed for cash arerecognized as a reduction in revenues while points redeemed for food andbeverage, lodging, entertainment, and other retail products are recognized aspromotional expenses.

 

# **Results of Operations**

 

**2004 Compared to 2003**

 

Gamingrevenues were $100.4 million for the year ended December 31, 2004, an increaseof $11.8 million, or 13.2%, from $88.6 million for the year ended December 31,2003.  The increase was due to theincreased gaming activity associated with the June 26, 2003 opening of theWheeling Island expansion and the further expansion of the gaming operationsthat occurred in 2004 and the $2.3 million decrease in the redemption ofPreferred Players Club points and coupons for cash offset partially by a $0.4million increase in the accrued share of net terminal income and surchargeamount (net of recoupments) owed to the state of West Virginia and a $0.3million non-recurring downward adjustment of gaming revenues resulting from acumulative adjustment in the state’s computation of net terminal income.  These gaming revenue variances are explainedbelow.

 

TheWheeling Island expansion increased the number of slot machines from 1,630 to2,200 and added new lodging, food and beverage and entertainment amenities tothe Wheeling Island complex.  TheWheeling Island expansion opened on June 26, 2003 and was only open forapproximately six months during the twelve months ended December 31, 2003.  The full year impact of the Wheeling Islandexpansion and the further expansion of Wheeling Island’s gaming operationswhich increased the number of slot machines from 2,200 to 2,362 during 2004resulted in higher levels of gaming activity which increased net terminalincome from $167.8 million to $186.0 million or 10.8%.  The increase in gaming activity occurreddespite the closure of the gaming facility for four days and portions of twoother days as a result of the flooding of the Ohio River in September.

 

Allcash redemptions of points earned by members in our Preferred Players Club andredemption of cash coupons provided to Preferred Players Club members arerecognized as reductions in gaming revenues. Total cash redemptions were $3.5 million for the year ended December 31,2004, a decrease of $2.3 million or 39.2% from $5.8 million for the year endedDecember 31, 2003.  The decrease in cashredemptions despite increased membership in the Preferred Players Club is dueto the elimination of cash coupons provided to Preferred Players Club membersbeginning in September 2003.

 

TheState of West Virginia’s share of net terminal income above a predeterminedlevel increases from 30.0% to 41.0% during a State fiscal year.  In addition, the State retains a 10.0%surcharge from all net terminal income in excess of the predetermined level forthe State fiscal year.  Of the total10.0% surcharge, 42.0% can be recouped for certain types of capital investmentsmade at the facility.  We accrue for theState’s increased share of net terminal income and the expected surchargeamounts (net of recoupments) ratably throughout the State fiscal year.  The State’s percentage share of net terminalincome increased during the year ended December 31, 2004 due to estimatedincreases in net terminal income that were subject to the higher

 

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percentagepaid to the state (41.0%) and the 10.0% surcharge (net of recoupments).  As a result, gaming revenue derived from slotmachines as a percentage of net terminal income decreased from 56.3% to 56.0%.

 

TheState of West Virginia computes the net terminal income through the use of acentralized computer system. The year to date net terminal income for WheelingIsland was adjusted downward on a one-time basis in August 2004 by $0.6 millionto more properly account for the initial settings of progressive jackpotpayouts during the last three years. Such adjustment in net terminal income resulted in a $0.3 millionnon-recurring downward adjustment of gaming revenues.

 

Pari-mutuelrevenues for the year ended December 31, 2004 were $6.8 million, a $0.9 milliondecrease, or 11.2%, from $7.7 million for the year ended December 31,2003.  The $0.9 million decrease is dueto a $5.5 million decrease in wagering handle on our live races and a $0.4million decrease in wagering handle on our simulcast races.  The decrease in wagering handle on our liveand simulcast races was due primarily to the cancellation of 33 live and 10simulcast performances during the shutdown of racing operations caused by theflooding of the Ohio River in September.

 

Foodand Beverage revenues for the year ended December 31, 2004 were $7.8 million,an increase of $1.7 million, or 28.3%, from $6.1 million for the year endedDecember 31, 2003.  The increase in foodand beverage revenues is due primarily to the full year impact of the June 26,2003 opening of a new fine dining restaurant, a casual dining restaurant, afood court and two bar areas in connection with the Wheeling Island expansion,offset partially by the increase in the number of food and beveragecomplimentaries provided to Preferred Players Club members through pointredemptions and coupons.

 

Lodgingrevenues were $2.5 million for the year ended December 31, 2004, an increase of$1.0 million, or 60.1%, from $1.5 million for the year ended December 31,2003.  The increase in lodging revenuesis due primarily to the full year impact of the 151-room hotel that opened on June26, 2003 offset partially by an increase in discounted room rate offerings.

 

Otherrevenues were $1.9 million for the year ended December 31, 2004, an increase of$0.5 million, or 43.5%, from $1.4 million for the year ended December 31,2003.  The increase in other revenues isdue primarily to increased ATM fee income related to the increase in gamingactivity and an increase in the ATM fee charge and increased retail revenueassociated with the full year impact of the June 26, 2003 opening of the newgift shop.

 

Purseexpenses for the year ended December 31, 2004 were $21.5 million, an increaseof $1.4 million, or 6.6%, from $20.1 million for the prior fiscal year.  The $1.4 million increase was due to theincrease in gaming purse expense associated with the increase in net terminalincome to $186.0 million for the year ended December 31, 2004 from $167.8million for the year ended December 31, 2003. Such increase in purse expenses was offset partially by a $0.4 milliondecrease in the accrued purse share of net terminal income and a $0.2 milliondecrease in pari-mutuel purse expense. The state of West Virginia’s share of net terminal income above apredetermined level increases from 30.0% to 41.0% during the state fiscalyear.  In addition, the state deducts a10.0% surcharge from all net terminal income in excess of the predeterminedlevel for the state fiscal year.  Thepurse share of all excess net terminal income amounts remaining after thesurcharge deduction is 8.0% as compared to 14.0% for all net terminal incomebefore the predetermined level.  Weaccrue for the expected decrease in the purse share of net terminal incomeratably throughout the state fiscal year. The purse share of net terminal income decreased during the year endedDecember 31, 2004 due to estimated increases in net terminal income that weresubject to the 10.0% surcharge and the lower percentage paid to purses (8%)after the surcharge deduction.  As aresult, gaming purse expense as a percentage of net terminal income decreased from11.0% to 10.8%.  The $0.2 million decreasein pari-mutuel purse expense is due to the $5.5

 

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milliondecrease in wagering handle on our live races due primarily to the cancellationof several performances due to the closure of the racetrack facility caused bythe flooding of the Ohio River in September.

 

Gamingexpenses were $7.4 million for the year ended December 31, 2004, an increase of$0.4 million, or 5.9%, from $7.0 million for the year ended December 31,2003.  The increase in gaming expenses isdue primarily to a $1.9 million increase in gaming payroll costs associatedwith the full year impact of the Wheeling Island expansion and the in-houselabor dedicated to the technical maintenance of the Company’s slot machineswhich was previously provided by a contracted service and $0.5 million oflicensee fee costs for licensed slot games offset partially by (i) therecording in 2004 of a $0.6 million recovery of previously recorded cashshortages (ii) the recording of a $0.7 million cash shortage during 2003 and(iii) a $0.7 million decrease in contract services costs relating to thetechnical maintenance of the Company’s slot machines.

 

Pari-mutuelexpenses were $3.5 million for the year ended December 31, 2004, a decrease of$0.3 million, or 6.7%, from $3.8 million for the year ended December 31,2003.  The decrease in pari-mutuelexpenses is due primarily to lower expenses associated with the cancellation of33 live and 10 simulcast performances during the shutdown of racing operationscaused by the flooding of the Ohio River in September.

 

Foodand beverage expenses for the year ended December 31, 2004 were $8.4 million,an increase of $1.5 million, or 23.1%, from $6.9 million for the prioryear.  The increase in food and beverageexpenses is due principally to a $1.1 million increase in payroll costs relatedto the opening of a new fine dining restaurant, a casual restaurant, a foodcourt and two bar areas on June 26, 2003, and a $0.5 million increase in costof sales associated with the $1.7 million increase in food and beveragerevenues.

 

Lodgingexpenses were $1.2 million for the year ended December 31, 2004, an increase of$0.4 million, or 53.0%, from $0.8 million for the year ended December 31,2003.  The increase in lodging expenses isdue to the full year impact of the 151-room hotel that opened on June 26, 2003offset partially by cost decreases associated with the closure of the hotelfacility during the flood.

 

Otherexpenses were $0.7 million for the year ended December 31, 2004, an increase of$0.4 million from $0.3 million for the year ended December 31, 2003.  The increase in other expenses is dueprimarily to the costs associated with the retail gift shop and multi-purposeshowroom that opened on June 26, 2003.

 

Marketingand promotions expenses for the year ended December 31, 2004 were $8.3 million,an increase of $1.7 million, or 25.7%, from $6.6 million for the prioryear.  The increase in marketing andpromotions expense is due primarily to a $1.3 million increase in costs associatedwith complimentaries and higher Preferred Players Club point redemptions fornon-cash items, a $0.3 million increase in media and advertising expense and a$0.2 million increase in marketing payroll costs.

 

Facilitiesand maintenance expenses for the year ended December 31, 2004 were $9.7million, an increase of $2.4 million, or 32.8%, from $7.3 million for the yearended December 31, 2003.  The increase infacilities and maintenance expense is due primarily to a $0.7 million increasein security and cleaning payroll costs, a $0.7 million increase in realproperty and personal property taxes, a $0.7 million increase in insurancepremiums paid for liability and property coverage and a $0.2 million increasein utilities expense related to the full year impact of the opening of theWheeling Island expansion.

 

Generaland administrative, or G&A, expenses for the year ended December 31, 2004were $6.4 million, an increase of $1.3 million, or 25.2% from $5.1 million forthe year ended December 31, 2003.  Theincrease in G&A expense was due primarily to a $0.7 million increase in administrativepayroll and employment related costs for staff additions associated with theWheeling Island expansion, a $0.3 million increase in

 

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administrativeservices fees paid to the shareholder and a $0.2 million increase in otherprofessional services costs.

 

Depreciationand amortization expenses for the year ended December 31, 2004 were $11.7million, a $2.1 million, or 21.4% increase from $9.6 million for the prioryear.  The increase was due primarily tothe full year impact of increased depreciation expense associated with the$63.6 million of Wheeling Island expansion assets that were added to ourbuildings, improvements and equipment accounts in 2003 and $5.1 million ofadditional assets that were added to our buildings, improvements and equipmentaccounts during the twelve months ended December 31, 2004.

 

Interestexpense was $14.3 million for the year ended December 31, 2004, an increase of$0.3 million, or 2.3%, from $14.0 million for the year ended December 31,2003.  The $0.3 million of increasedinterest expense is due primarily to increased borrowings under our revolvingcredit facility for the six months ended June 26, 2004 as compared to last yearand the capitalization of $0.2 million of interest expense in June 2003,related to borrowings under our revolving credit facility to fund the WheelingIsland expansion expenditures offset partially by the lower interest expenseassociated with decreased borrowings under our revolving credit facility duringthe six months ended December 31, 2004 as compared to last year.

 

Acasualty loss due to the flood of $4.3 million was recorded for the year endedDecember 31, 2004.  Such loss representsthe repair costs incurred in 2004 related to the flooding of the Ohio River inSeptember.  No such expense was recordedin 2003.

 

Otherexpense for the twelve months ended December 31, 2004 was $0.3 million andprimarily represents the loss on the disposition of equipment assets destroyedby the flooding of the Ohio River in September. No such expense was recorded in 2003.

 

Incometax expense was $7.6 million for the year ended December 31, 2004, a decreaseof $0.7 million, or 8.8%, from $8.3 million for the year ended December 31,2003.  The decrease was directlyattributable to the $2.1 million decrease in income before income taxes from$23.7 million for the year ended December 31, 2003 to $21.6 million for theyear ended December 31, 2004.  Income taxexpense for the year ended December 31, 2004 was based on an effective tax rateof 35.0%.  Income tax expense for theyear ended December 31, 2003 was based on an effective tax rate of 35.1%.

 

**2003 Compared to 2002**

 

Gamingrevenues were $88.6 million for the year ended December 31, 2003, an increaseof $10.0 million, or 12.8%, from $78.6 million for the year ended December 31,2002.  The increase was due to theincreased gaming activity associated with the June 26, 2003 opening of the WheelingIsland expansion and the expanded use of the Preferred Players Club, offsetpartially by a $1.9 million increase in the accrued share of net terminalincome and surcharge amount (net of recoupments) owed to the state of WestVirginia and a $1.9 million increase in the redemption of Preferred PlayersClub points and coupons for cash.  Thesegaming revenue variances are explained below.

 

OnJune 26, 2003, the Wheeling Island expansion was opened for gaming.  Such expansion increased the number of slotmachines from 1,630 to 2,200 and added new lodging, food and beverage andentertainment amenities to the Wheeling Island complex.  In October 2002, the Preferred Players Clubrewards were revised to provide greater incentives for higher levels ofplay.  Such revisions combined with theopening of the Wheeling Island expansion resulted in higher levels of gamingactivity and increased club membership from 167,405 at December 31, 2002 to249,298 at December 31, 2003.

 

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Aspreviously explained, the Company records the percentage of net terminal incomedue to the State ratably throughout the state fiscal year based on expected netterminal income during that year.  Due tothe opening of the Wheeling Island expansion a higher estimate of net terminalincome was used in 2003.  As a result,gaming revenue derived from slot machines as a percentage of net terminalincome decreased from 57.6% to 56.3%.

 

Allcash redemptions of points earned by members in our Preferred Players Club andredemption of cash coupons provided to Preferred Players Club members arerecognized as reductions in gaming revenues. Such cash redemptions were $5.8 million for the year ended December 31,2003, an increase of $1.9 million, or 50.1%, from $3.9 million for the yearended December 31, 2002.  The increase incash redemptions is due to the increase in player club membership from 167,405at December 31, 2002 to 249,298 at December 31, 2003 and a revision inPreferred Players Club reward incentives in October 2002 that allowedinstantaneous redemptions of points for cash.

 

Pari-mutuelrevenues for the year ended December 31, 2003 were $7.7 million, a decrease of$0.9 million, or 10.8%, from $8.6 million for the year ended December 31,2002.  The decrease in pari-mutuelrevenues was due to a $5.0 million decrease in wagering handle on our liveraces and a $1.5 million decrease in wagering handle on our simulcastraces.  The lower live wagering handlewas due to the cancellation of sixteen live racing performances due to a viralinfection of our racing greyhounds, the cancellation of three live racingperformances caused by unfavorable winter weather and a 9.4% decrease in theaverage live wagering handle per performance. The lower simulcast-wagering handle was also due to the unfavorablewinter weather, which cancelled two planned simulcast performances and a 9.4%decrease in the average simulcast wagering handle per performance.

 

Foodand beverage revenues for the year ended December 31, 2003 were $6.1 million,an increase of $1.2 million, or 23.5%, from $4.9 million for the year endedDecember 31, 2002.  The increase in foodand beverage revenues is due primarily to the June 26, 2003 opening of a newfine dining restaurant, a casual dining restaurant, a food court, lounge andbar in connection with the Wheeling Island expansion, offset partially by theincrease in the number of food and beverage complimentaries provided toPreferred Players Club members through point redemptions and coupons.

 

Lodgingrevenues were $1.5 million for the year ended December 31, 2003.  Lodging revenues represent all revenuesassociated with the 151-room hotel that opened on June 26, 2003.

 

Otherrevenues were $1.4 million for the year ended December 31, 2003 an increase of$0.6 million, or 71.8%, from $0.8 million for the year ended December 31,2002.  The increase in other revenues isdue primarily to $0.2 million of entertainment revenues, and $0.1 million ofincreased retail revenues associated with the June 26, 2003 opening of themulti-purpose showroom and gift shop respectively and increased check cashingand ATM fee income related to the increase in gaming activity.

 

Purseexpenses were $20.1 million for the year ended December 31, 2003, an increaseof $1.3 million, or 7.2%, from $18.8 million for the year ended December 31,2002.  The $1.3 million increase was dueto a $2.7 million increase in gaming purse expense associated with an increasein net terminal income to $167.8 million for the year ended December 31, 2003,from $143.2 million for the year ended December 31, 2002, offset partially by a$1.1 million decrease in gaming purse expense due to a decrease in the accruedpurse share of net terminal income, and a $0.2 million decrease in pari-mutuelpurse expense.  As explained previously,the expected decrease in the purse share of net terminal income is accruedratably throughout the State fiscal year based on the expected net terminalincome for that State fiscal year.  As aresult of using a higher estimate of

 

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netterminal income in 2003, gaming purse expense as a percentage of net terminalincome decreased from 11.8% to 11.0%. The $0.2 million decrease in pari-mutuel purse expense is due primarilyto a $5.0 million decrease in wagering handle on our live races.

 

Gamingexpenses were $7.0 million for the year ended December 31, 2003, an increase of$2.6 million, or 59.8%, from $4.4 million for the year ended December 31,2002.  The increase in gaming expenses isdue primarily to a $1.8 million increase in gaming payroll costs associatedwith the Wheeling Island expansion which increased the number of slot machinesfrom 1,630 to 2,200 on June 26, 2003, and the recording during 2003 of $0.7million of gaming expense resulting from cash shortfalls discovered duringreconciliations of cash on hand to the expected balance.

 

Pari-mutuelexpenses were $3.8 million for the year ended December 31, 2003, a decrease of$0.2 million, or 6.8%, from $4.0 million for the prior fiscal year.  The decrease in pari-mutuel expenses is dueprimarily to lower expenses associated with the cancellation of sixteen liveracing performances due to a viral infection of the racing greyhounds and thecancellation of three live racing performances due to unfavorable weatherconditions.

 

Foodand beverage expenses for the year ended December 31, 2003 were $6.9 million,an increase of $1.3 million, or 22.1%, from $5.6 million for the year endedDecember 31, 2002.  The increase in foodand beverage expenses is due principally to a $1.2 million increase in payrollcosts related to the opening of a new fine dining restaurant, a casualrestaurant, a food court, lounge and bar on June 26, 2003, a $0.5 millionincrease in cost of sales associated with the $1.2 million increase in food andbeverage revenues, and $0.2 million of increased supplies and othermiscellaneous expenses, offset partially by a $0.6 million reduction in cost ofsales, which can be attributed to a decrease in food and beverage costs as apercentage of food and beverage revenues from 50.6% for the year ended December31, 2002, to 38.3% for the year ended December 31, 2003.

 

Lodgingexpenses were $0.8 million for the year ended December 31, 2003.  Lodging expenses represent all expensesdirectly related to the operation of the 151-room hotel, which opened on June26, 2003.

 

Otherexpenses were $0.3 million for the year ended December 31, 2003.  Other expenses represent retail andentertainment costs related to the new retail shop and multi-purpose showroom,which opened on June 26, 2003.

 

Marketingand promotions expense were $6.6 million for the year ended December 31, 2003,an increase of $0.6 million, or 8.6%, from $6.0 million for the year endedDecember 31, 2002.  The increase inmarketing and promotions expenses is due primarily to a $0.4 million increasein payroll costs related to the opening of the Wheeling Island expansion, a$0.4 million increase in advertising costs, and a $0.2 million increase inconsulting costs, offset partially by a $0.6 million decrease in costsassociated with merchandise giveaways and other promotional events.

 

Facilitiesand maintenance expenses were $7.3 million for the year ended December 31,2003, an increase of $2.1 million, or 41.2%, from $5.2 million for the yearended December 31, 2002.  The increase infacilities and maintenance expense is due primarily to a $0.7 million increasein security and cleaning payroll costs, a $0.4 million increase in insurancepremiums paid for liability and property coverage, a $0.4 million increase inutilities expense and a $0.4 million increase in real property and personalproperty taxes related to the opening of the Wheeling Island expansion.

 

Generaland administrative (or G&A), expenses were $5.1 million for the year endedDecember 31, 2003, an

 

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increaseof $1.2 million, or 30.9%, from $3.9 million for the year ended December 31,2002.  The increase in G&A expensewas due primarily to a $0.5 million increase in payroll costs related to staffadditions associated with the opening of the Wheeling Island expansion, a $0.3million increase in other professional services costs and a $0.2 millionincrease in administrative services fees paid to the shareholder.

 

Depreciationand amortization expenses for the year ended December 31, 2003 were $9.6million, a $2.1 million, or 28.7% increase, from $7.5 million for the priorfiscal year.  The increase was due to theincreased depreciation expense associated with $65.7 million of assets thatwere added to our buildings, improvements and equipment accounts during thetwelve months ended December 31, 2003, including $63.1 million of assetsrelated to the Wheeling Island expansion.

 

Interestexpense was $14.0 million for the year ended December 31, 2003, an increase of$0.1 million, or 0.5%, from $13.9 million for the year ended December 31,2002.  The $0.1 million increase is dueprincipally to $0.4 million of increased interest expense associated with the$32.5 million increase in borrowings under the $50.0 million revolving creditfacility during the twelve months ended December 31, 2003, offset partially bythe recording of $0.3 million of non-recurring interest expense in 2002relating to an Internal Revenue Service review.

 

Otherexpense for the twelve months ended December 31, 2002 was $0.3 million andrepresents a loss on the disposition of assets due to the demolition ofbuilding assets in connection with the Wheeling Island expansion. No suchexpense was recorded during 2003.

 

Incometax expense of $8.3 million and the corresponding effective income tax rate of35.1% for the year ended December 31, 2003 was relatively unchanged from theyear ended December 31, 2002.

 

**Liquidity and CapitalResources**

 

Asof December 31, 2004 we had cash and cash equivalents of $10.5 million.  Our principal source of liquidity during theyear ended December 31, 2004 consisted of cash provided by operatingactivities.  As of December 31, 2003 wehad cash and cash equivalents of $9.5 million. Our principal source of liquidity for the year ended December 31, 2003consisted of cash provided by operating activities and borrowings from our$50.0 million revolving credit facility.

 

Cashprovided by operating activities for the year ended December 31, 2004 was $34.5million as compared to $28.2 million for the year ended December 31, 2003.  The $6.3 million increase was due to (i) a$13.9 million decrease in the change in working capital due primarily to a $7.8million decrease in the change in receivables relating to the timing of thereceipt of the capital improvement fund recoupments from the state of WestVirginia, a $2.4 million decrease in prepaid income taxes and a $1.8 millionincrease in accounts payable affiliate, (ii) a $2.3 million increase innon-cash depreciation and amortization and other non-cash adjustments offsetpartially by a $8.6 million decrease in the change in deferred income taxesliability relating to various income tax adjustments made as a result of theIRS review in 2004 and the 2003 increase in our differential between our bookand tax basis depreciation and a $1.4 million decrease in net income.

 

Cashused in investing activities for the year ended December 31, 2004 and 2003 was$5.0 million and $47.1 million respectively. The $42.1 million decrease in cash used for investing activities was dueprimarily to the $44.6 million of capital expenditures incurred for theWheeling Island expansion in 2003.

 

Cashused in financing activities for the year ended December 31, 2004 was $28.5million or $49.0 million lower than the $20.5 million of cash provided byfinancing activities for the year ended December 31, 2003.

 

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The$49.0 million decrease in cash provided by (used in) financing activities isdue to the $16.8 million of repayments made under our revolving credit facilityduring the year ended December 31, 2004 as compared to the $32.5 million ofborrowings made under the revolving credit facility during the year ended December31, 2003 and a $0.5 million increase in the dividends paid to the shareholderoffset partially by a $0.7 million change in cash overdrafts for the year endedDecember 31, 2004.  As of December 31,2004 we have drawn $17.3 million against the revolving credit facility and thetotal commitment balance was $34.4 million. During the next twelve months the commitment balance will be reduced to$25.0 million.

 

Webelieve our cash provided by future operating activities, as well asavailability under our revolving credit facility, will provide sufficientfunding for our future working capital needs and capital expenditures.

 

**Contractual Obligationsand Commitments**

 

Thefollowing table reflects our contractual obligations and commitments:

 
| ** **                                     | ** ** | **Payments Due by period (in  thousands)** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| **($000)**                                     | ** ** | **Total**                                  | ** ** | **Less than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **After 5  Years** | ** ** |
|                                           |       |                                       |       |   |   |   |   |   |   |   |   |
| Long Term  Debt                                |       | $                                          | 142,250    |   | $ | 0 |   | $ | 17,250 |   | $ | 125,000 |   | $ | 0 |   |
| Total  Contractual Obligations and Commitments |       | $                                          | 142,250    |   | $ | 0 |   | $ | 17,250 |   | $ | 125,000 |   | $ | 0 |   |

 

Our ability to service ourdebt depends on our ability to generate significant cash flow in thefuture.  This, to some extent, is subjectto general economic, financial, competitive, legislative and regulatory factors,as well as other factors that are beyond our control.  In addition, the ability to borrow fundsunder our $50.0 million revolving credit facility in the future depends on ourmeeting the financial covenants in such credit agreement, including a minimumfixed charge coverage ratio test and a maximum leverage ratio test.  We cannot assure you that our business willgenerate cash flow from operations, or that future borrowings will be availableto use under our $50.0 million revolving credit facility or otherwise, in anamount sufficient to enable us to service our long-term debt or to fund otherliquidity needs.

 

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

#  

None.

 

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

 

TheConsolidated Financial Statements and accompanying footnotes are set forth onpages F-1 through F-14 of this report.

 

**ITEM 9.  CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS****ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

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**ITEM 9A.  CONTROLSAND PROCEDURES**

 

*Disclosure Controls and Procedures*

 

Asof the end of the period covered by this report, our management, with theparticipation of our principal executive officer and principal financialofficer, performed an evaluation of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”)).  Based on suchevaluation, our management, including our principal executive officer andprincipal financial officer, have concluded that, as of the end of such period,our disclosure controls and procedures were effective in ensuring that theinformation required to be disclosed by us in this report has been made knownto them in a timely manner.

 

*Changes in Internal Control Over Financial Reporting*

 

There were no significantchanges in our internal control over financial reporting that occurred duringour most recently completed fiscal quarter that materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

During2004 the Company recovered $0.6 million of previously recorded cashshortages.  The cash recovery resultedfrom a cumulative downward adjustment of the state’s computation of netterminal income to more properly account for the initial settings ofprogressive jackpot payouts during the last three years.

 

**ITEM 9B.  OTHER MATTERS**

 

None.

 

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**PART III**

 

**ITEM 10****.  DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

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

 
| **Name**                    | ** ** | **Age** | ** ** | **Position and Office Held**           |
|-----------------------------|------------|---------|------------|----------------------------------------|
|                        |       |    |       |                                   |
| Charles  E. Moran, Jr. |       | 54      |       | Chairman  of the Board                 |
| Thomas  A. Cooper           |       | 68      |       | Director,  Chairman of Audit Committee |
| William  R. Greiner         |       | 70      |       | Director,  Member of Audit Committee   |
| William  J. Bissett         |       | 56      |       | Director                               |
| Ronald  A. Sultemeier       |       | 56      |       | Chief  Executive Officer               |
| Geoffry  P. Andres          |       | 38      |       | President                              |
| Eric  H. Persson            |       | 31      |       | Vice  President of Operations          |
| James  J. Rafferty          |       | 49      |       | Vice  President of Marketing           |
| Michael  D. Corbin          |       | 43      |       | Vice  President of Finance             |
| Dean  J. Lawrence           |       | 37      |       | Vice  President of Finance             |

 

***Charles E. Moran, Jr.***  Mr. Moranwas appointed as a director and named Chairman of the Board in August of2004. Mr. Moran has served as the President and Chief Operating Officer ofDelaware North Companies, Inc. since January 2004.  For 2002 and 2003, Mr. Moran served asChief Financial Officer of Delaware North.  Mr. Moran joined CA One Services, Inc.,a Delaware North subsidiary as Vice President of Finance in 1992.  Mr. Moran was appointed President of CAOne Services in 1997.

 

***Thomas A. Cooper***.  Mr. Cooperwas appointed as a director and named Chairman of the Audit Committee.  In addition, Mr. Cooper is Chairman ofTAC Associates, Inc., a financial services consulting firm.  Mr. Cooper was appointed to the Board ofDirectors of Delaware North Companies, Incorporated in June 1995.  He also serves as a Director of BISYS, Inc.and as a Director of Renaissance Reinsurance.

 

***William R. Greiner***.  Mr. Greinerwas appointed as a director and named a member of the Audit Committee in January 2003.  Mr. Greiner is a law professor at theUniversity at Buffalo, the State University of New York.  From 1991 to 2003, Mr. Greiner wasserved as the University’s President and from 1984 through 1991, Mr. Greinerserved as the University’s Senior Vice President and Provost.  From 1980 through August 1984, Mr. Greinerserved as the University’s Associate Vice President for Academic Affairs andChief Academic Officer for the Division of Academic Affairs.

 

***William J. Bissett***.  Mr. Bissetthas served as a director since October 1994.  Mr. Bissett has served as VicePresident, Government Affairs and Community Relations for Delaware North since March 1995,overseeing all government relations activities, including interaction withlegislative and regulatory agencies at all levels of government.  From June 1992 to March 1995, Mr. Bissettserved as President of Delaware North G&E.

 

***Ronald A. Sultemeier***.  Mr. Sultemeierwas appointed as our Chief Executive Officer in March 2003.  From October 1994 to November 2001,Mr. Sultemeier served as our Vice President and Treasurer.  Mr. Sultemeier also served as a directorfrom October 1994 through January 2003.  Mr. Sultemeier joined Delaware NorthG&E in January 1994 and became President in 1995.  From January 1981 to December 1993,Mr. Sultemeier held various senior management positions at several greyhoundracetracks, including Tucson Greyhound Park, Dairyland Greyhound Park and TheWoodlands.

 

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***Geoffry P. Andres***.  Mr. Andreswas appointed as our President in January 2004.  From 1988 to 2003, Mr. Andres worked forHarrah’s Entertainment, Inc. in various management positions, includingVice President of Casino Operations for their New Orleans Casino and theirShreveport Casino Hotel.  From 1998 to2001, Mr. Andres served as Director of Table Games for Harrah’s Las VegasCasino and from 1997 to 1998 served as Director of Slot Operations for Harrah’sLake Tahoe Casino.

 

***Eric H. Persson***.  Mr. Perssonwas appointed Vice President of Operations in March 2004.  From February 2000 to March 2004, Mr. Perssonserved in various management capacities at different gaming properties forHarrah’s Entertainment, Inc., including Director of Table Games at Harrah’sPrairie Band in Topeka, Kansas.  From1999 to February 2000, Mr. Persson served as Assistance Research Directorfor the American Gaming Association.

 

***James J. Rafferty***.  Mr. Raffertywas appointed Vice President of Marketing in January 2003.  From August 2001 through January 2003,Mr. Rafferty was self-employed as a gaming consultant and was acontributing columnist for the Global Gaming Business Magazine.  From 1995 through 2001, Mr. Raffertyserved as Senior Vice President of Corporate Marketing for Harvey’s CasinoResorts.

 

***Michael D. Corbin***.** **Mr. Corbin was appointed as aVice President of Finance in November 2001.  Mr. Corbin has been the Controller forDelaware North G&E since April 1996. Prior to that position, he was Senior Financial Analyst for DelawareNorth.

 

***Dean J. Lawrence***.  Mr. Lawrencewas appointed as a Vice President of Finance in February 2005.  From 2000 to 2005 Mr. Lawrence wasemployed by Harrah’s Entertainment, Inc. in various financial managementpositions including Director of Finance for Harrah’s Louisiana Downs.

 

**Audit Committee of the Board of Directors**

 

TheBoard of Directors has an Audit Committee, which held five meetings in fiscal2004.  The Audit Committee currentlyconsists of Messrs. Cooper and Greiner. The Board of Directors has determined that Thomas A. Cooper is an “auditcommittee financial expert,” within the meaning of the rules of theSecurities and Exchange Commission.  BothMr. Cooper and Mr. Greiner qualify as “independent” as such term isused in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Actassuming the listing standards of the National Association of SecuritiesDealers, Inc. applied.

 

TheAudit Committee oversees our financial reporting process and internal auditfunctions on behalf of the Board of Directors. In fulfilling its responsibility, the Audit Committee recommends to theBoard of Directors the selection of our independent certified publicaccountants.  The Audit Committee alsoreviews our consolidated financial statements and the adequacy of our internalcontrols.  The Audit Committee meets atleast quarterly with management and the independent certified publicaccountants to discuss the results of their audit of the consolidated financialstatements, their evaluation of our internal controls, the overall quality ofour financial reporting, our critical accounting policies and to review andapprove any related party transactions. Periodically the Audit Committee meets separately with the independentcertified public accountants.

 

**Code ofEthics**

 

We have adopted a Code of Ethics that applies to our President, ChiefExecutive Officer and Vice President of Finance.  Our Code of Ethics can be found on ourInternet website at www.wheelingisland.com. In the future we intend to disclose any amendment to, or waiver of, aprovision of the Code of Ethics that applies to our President, Chief ExecutiveOfficer or Vice President of Finance on our website.

 

28

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# **ITEM11.** EXECUTIVE COMPENSATION

 

**Remunerationof Directors**

 

Outsidedirectors are compensated for their services as follows: 

 

•        Anannual retainer fee of $25,000, payable in equal quarterly installments forserving on the Board of Directors.

 

•        Anannual retainer fee of $15,000, payable in equal quarterly installments foreach director who serves on the Audit Committee.

 

•        A feeof $1,000 for each Board of Directors meeting and each Audit Committee Meetingattended.  If the Board of Directorsmeeting and Audit Committee Meeting are held on the same day then a $1,000 feeis paid for participation at both meetings.

 

Thereasonable expenses incurred by each director in connection with his duties asa director are also reimbursed by us.  ABoard member who is also an employee of the Company or Delaware North does notreceive compensation for service as a director.

 

**Compensation of Executive Officers**

 

The following table sets forth for our fiscal years ended December 31,2002, December 31, 2003 and December 31, 2004, in prescribed format,the compensation awarded, paid to or earned by our chief executive officer andthe other four most highly compensated “executive officers” whose compensationexceeded $100,000 at December 31, 2004 (the “Named Executive Officers”):

 
| ** **                   | ** ** | **Annual Compensation** | ** ** |
|------------------------------|------------|-------------------------|------------|
| ** **                   | ** ** | **Year**                | ** ** | **Salary $** | ** ** | **Bonus $ ** | ** ** |
|                         |       |                    |       |   |   |   |   |
| Ronald A. Sultemeier (1)     |       | 2004                    |       | 251,000 |   | 81,875 |   |
| Chief Executive Officer      |       | 2003                    |       | 245,000 |   | 0 |   |
|                         |       | 2002                    |       | 240,000 |   | 100,000 |   |
|                         |       |                    |       |   |   |   |   |
| Geoffry P. Andres (2)        |       | 2004                    |       | 213,942 |   | 93,355 |   |
| President                    |       | 2003                    |       | — |   | — |   |
|                         |       | 2002                    |       | — |   | — |   |
|                         |       |                    |       |   |   |   |   |
| James J. Rafferty            |       | 2004                    |       | 166,769 |   | 31,800 |   |
| Vice President of Marketing  |       | 2003                    |       | 144,615 |   | 12,532 |   |
|                         |       | 2002                    |       | — |   | — |   |
|                         |       |                    |       |   |   |   |   |
| Eric H. Persson (3)          |       | 2004                    |       | 109,991 |   | 25,313 |   |
| Vice president of Operations |       | 2003                    |       | — |   | — |   |
|                         |       | 2002                    |       | — |   | — |   |
|                         |       |                    |       |   |   |   |   |
| Janie Libby                  |       | 2004                    |       | 91,307 |   | 10,649 |   |
| Director of Human Resources  |       | 2003                    |       | 85,000 |   | 8,500 |   |
|                         |       | 2002                    |       | 41,407 |   | 4,250 |   |
|                         |       |                    |       |   |   |   |   |
| Scott L. Cooper (4)          |       | 2004                    |       | 19,583 |   | 0 |   |
| President                    |       | 2003                    |       | 235,000 |   | 0 |   |
|                         |       | 2002                    |       | 230,000 |   | 61,000 |   |
|                         |       |                    |       |   |   |   |   |
| Alex M. Tucker (5)           |       | 2004                    |       | 15,846 |   | 0 |   |
| Director of Slot Operations  |       | 2003                    |       | 103,000 |   | 10,300 |   |
|                         |       | 2002                    |       | 100,000 |   | 17,000 |   |

 

29

----

 

----

(1)                RonaldA. Sultemeier is compensated by Delaware North G&E in his capacity asPresident of that company.

 

(2)                InJanuary 2004, Geoffry P. Andres became our President and at that time receiveda $50,000 bonus.  His annual salary is$215,000.

 

(3)                EricH. Persson became our Vice President of Operations in March of 2004.  His annual salary is $135,000.

 

(4)                ScottL. Cooper resigned as our President in January 2004.

 

(5)                AlexM. Tucker resigned as Director of Slot Operations in February 2004.

 

**REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVECOMPENSATION**

 

Compensation of executive officers and the Chief Executive Officer isgoverned by the executive compensation philosophy, policy and procedures ofDelaware North.  Annual base salary andvariable compensation for each named executive officer, is reviewed andapproved by the compensation committee of the Delaware North Board of Directorsor the Compensation Committee.

 

**Compensation Philosophy**

 

Ourcompensation philosophy is to relate the compensation of executives to measuresof the Company’s performance that contribute to the increased value of theCompany and is based on the following goals:

 

•        Compensationpolicies, procedures and practices are designed to attract and retain topquality management.

 

•        Totalcompensation must reflect a competitive and performance-oriented environmentthat motivates executives to set and achieve aggressive goals in theirrespective areas of responsibility.

 

•        Incentivebased compensation is contingent upon the performance of each executive againstpre-established annual financial and strategic performance objectives.

 

TheBoard of Directors periodically reviews the components of compensation for ourexecutive officers on the basis of its philosophy and goals.

 

30

----

 

**Executive Compensation Components**

 

Paylevels for each named executive officer, other than the Chief ExecutiveOfficer, largely reflect the recommendation of the Chief Executive Officerbased upon individual experience and breadth of knowledge, internalconsiderations, and other subjective factors.

 

ThePresident’s salary is reviewed annually by the Chief Executive Officer inconjunction with a performance evaluation. The Chief Executive Officer will make a recommendation for salaryadjustment to the Compensation Committee for approval.

 

ThePresident’s bonus compensation is computed as a percentage of base salaryranging from a minimum of 0% to a maximum of 40%.  The actual percentage of base salary earnedas bonus compensation is based upon the achievement of the specificpre-established financial and strategic performance objectives.

 

Thesalary compensation of the Vice President of Finance is reviewed annually bythe Chief Executive Officer in conjunction with a performance evaluation.  The Chief Executive Officer makes arecommendation for a salary adjustment to Delaware North.

 

**Chief Executive Officer Compensation**

 

Thesalary compensation of the Chief Executive Officer is reviewed annually by theCompensation Committee.

 

Thebonus compensation of the Chief Executive Officer is computed as a percentageof base salary ranging from a minimum of 0% to a maximum of 50%.  The actual percentage of base salary earnedas bonus compensation is based upon the achievement of the specificpre-established financial and strategic performance objectives.

 
|   | THE  BOARD OF DIRECTORS     |
|--------|-----------------------------|
|   |                        |
|   | Charles  E. Moran, Jr. |
|   | Thomas  A. Cooper           |
|   | William  R. Greiner         |
|   | William  J. Bissett         |

 

**ITEM 12****.  STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

 

**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.

 

31

----

 
| **Name of Beneficial Owner**                                             | ** ** | **Number of  Shares  Beneficially  Owned** | ** ** | **Percentage  of Class** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------|------------|
|                                                                     |       |                                       |       |                     |       |
| Delaware North Companies Gaming &  Entertainment, Inc. (1) |       | 500                                        |       | 100                      | %          |
| Ronald A. Sultemeier                                                     |       | 0                                          |       | 0                        |       |
| Geoffry P. Andres                                                        |       | 0                                          |       | 0                        |       |
| Eric H. Persson                                                          |       | 0                                          |       | 0                        |       |
| James J. Rafferty                                                        |       | 0                                          |       | 0                        |       |
| Michael D. Corbin                                                        |       | 0                                          |       | 0                        |       |
| Dean J. Lawrence                                                         |       | 0                                          |       | 0                        |       |
| William J. Bissett                                                       |       | 0                                          |       | 0                        |       |
| Charles E. Moran, Jr.                                               |       | 0                                          |       | 0                        |       |
| Thomas A. Cooper                                                         |       | 0                                          |       | 0                        |       |
| William R. Greiner                                                       |       | 0                                          |       | 0                        |       |
| All executive officers and directors as a  group (8 persons)             |       | 0                                          |       | 0                        |       |

 

----

 

(1)          The address for Delaware North Companies Gaming &Entertainment, Inc. is 40 Fountain Plaza, Buffalo, New York 14202.

 

DelawareNorth Companies Gaming & Entertainment, Inc. is our soleshareholder, and thus exercises control over all matters that require approvalby our shareholders, including the election of directors and the approval ofsignificant transactions.  There can beno assurance that the interests of Delaware North G&E will not conflictwith the interests of the holders of our debt.

 

**ITEM 13****.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

Uponthe closing of the $125.0 million of unsecured senior notes in December 2001,we entered into an administrative services agreement with Delaware NorthG&E and Delaware North.  Pursuant tothis administrative services agreement, Delaware North G&E receives anannual administrative services fee that is equal to the greater of 1.5% ofpreceding year total operating revenues or $1.2 million for certainadministrative support services provided to us by Delaware North G&E andDelaware North.  During 2004, 2003, and2002, we recorded administrative service fees of $1.7 million, $1.5 million,and $1.3 million, respectively, under this agreement.

 

Weinvest our excess cash in a segregated account administered by Delaware Northunder its centralized cash management program. At December 31, 2004 and December 31, 2003, we had $0.1million and $0.4 million invested with Delaware North, respectively.  During 2004, 2003 and 2002, we earned$11,000, $16,000 and $0.1 million on these invested cash balances,respectively.

 

Atax sharing agreement with Delaware North and Delaware North G&E providesfor payment by us to Delaware North of amounts representing not more than theamount of tax that would 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).

 

We participate in a comprehensive insurance program maintained by DelawareNorth.  Risk-based premiums charged byand reimbursed to Delaware North amounted to $1.6 million in 2004, $1.0 millionin 2003 and $0.6 million in 2002.

 

InDecember 2004, we paid a cash dividend of $12.5 million to Delaware NorthG&E.  A $12.0 million cash dividendwas paid to Delaware North G&E in 2003.

 

32

----

 

**ITEM 14****.  PRINCIPAL ACCOUNTING FEES ANDSERVICES**

 

*Audit Fees*

 

The following table summarizes fees billed to the Company for fiscal2004 and for the fiscal year ended December 31, 2003:

 
| ** **                                       | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** |
|--------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| Audit Fees-*Annual  Audit and Quarterly Reviews* |       | $               | 136,500    |            | $          | 139,500 |   |
| Audit-Related Fees                               |       | 0               |       | 20,000          |       |
| Tax Fees:-                                       |       | 0               |       | 0               |       |
| *Tax Consulting,  Advisory Services*             |       | 0               |       | 0               |       |
| *Tax Compliance, Planning  and Preparation*      |       | 0               |       | 0               |       |
| All Other Fees                                   |       | 0               |       | 0               |       |
| Total Fees                                       |       | $               | 136,500    |            | $          | 159,500 |   |

 

The audit fees in theabove table are related to the audit of our year-end financial statements andthe review of our interim financial statements. Audit related fees are those fees associated with a review of our vaultaccounting procedures and related internal controls in 2003.  All such accounting fees and services areapproved by the Audit Committee at the beginning of each respective year inaccordance with the Audit Committee’s pre-approval procedures.

 

33

----

 

**PART IV**

 

**ITEM 15.****                     ****EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

(a) Documents Filed as part of the Form 10-K

 

1.               The Consolidated Financial Statements of theCompany filed as part of this report are listed in the table of contents on page F-1.

 

2.               FinancialStatement Schedules

 

None.

 

3.               Exhibits

 

TheExhibits required by Item 601 of Regulation S-K and filed herewith are listedin the Index to Exhibits immediately preceding the Exhibits.

 

34

----

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

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

 

 

Pursuantto the requirements 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 31, 2005 |
| Ronald A. Sultemeier          |       | (principal executive officer)              |                      |     |
|                          |       |                                       |                      |     |
| /s/Michael D. Corbin          |       |                                       | Vice President of Finance |     | March 31, 2005 |
| Michael D. Corbin             |       | (principal financial officer and principal |                      |     |
|                          |       | accounting officer)                        |                      |     |
|                          |       |                                       |                      |     |
| /s/Charles E. Moran, Jr. |       |                                       | Chairman of the Board     |     | March 31, 2005 |
| Charles E. Moran, Jr.    |       |                                       |                      |     |
|                          |       |                                       |                      |     |
|                          |       |                                       |                      |     |
| /s/William J. Bissett         |       |                                       | Director                  |     | March 31, 2005 |
| William J. Bissett            |       |                                       |                      |     |
|                          |       |                                       |                      |     |
| /s/Thomas A. Cooper           |       |                                       | Director                  |     | March 31, 2005 |
| Thomas A. Cooper              |       |                                       |                      |     |
|                          |       |                                       |                      |     |
| /s/William R. Greiner         |       |                                       | Director                  |     | March 31, 2005 |
| William R. Greiner            |       |                                       |                      |     |
|                               |            |                                            |                           |          |  |  |  |

 

35

----

 

**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 of the Company’s  Registration Statement on Form S-4 (Registration No. 333-81778))                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2         |       | Restated By-laws of the Company (incorporated by reference to Exhibit 10.7  of the Company’s Annual Report on Form 10-K for fiscal year ended on December 31,  2002 (Registration No. 333-81778))                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 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 of 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 of 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 of 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 of 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  of 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 of 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 of 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 of 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                                                                                                                                                                                                     |

 

36

----

 
|   |   | Exhibit 10.5 of 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  of the Company’s Registration Statement on Form S-4 (Registration No. 333-81778)) |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.7   |   | Agreement dated as of September 1, 2001 between the Company and  Louis P. Ciminelli Construction Company, Inc. (incorporated by reference  to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for  fiscal year ended on December 31, 2002 (Registration No. 333-81778))                              |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 21.1   |   | List of subsidiaries of the Company (incorporated by reference to Exhibit 21.1  of the Company’s Registration Statement on Form S-4 (Registration No. 333-81778))                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Certification by Chief Executive Officer of the Company as required  by Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 31.2   |   | Certification by President of the Company as required by Section 302  of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 31.3   |   | Certification by Chief Financial Officer of the Company as required  by Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                                                                      |

 

----

 

*                                         Filedherewith.

 

37

----

 

**Report of Registered Public Accounting Firm**

 

 

Tothe Board of Directors and Shareholder of

WheelingIsland Gaming, Inc.

 

Inour opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of operations and of cash flows present fairly, in allmaterial respects, the financial position of Wheeling Island Gaming, Inc.and its subsidiaries at December 31, 2004 and 2003, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2004, in conformity with accounting principlesgenerally accepted in the United States of America.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with standards of thePublic Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used, and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/PricewaterhouseCoopersLLP

Buffalo,New York

 

March15, 2005

 

F-1

----

 

**WHEELING ISLAND GAMING, INC.**

 

**Consolidated****Balance Sheets**

**($000’s omitted)**

 
| ** **                                                                                                | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                | ** ** | **2004**              | ** ** | **2003** | ** ** |
| **Assets**                                                                                                | ** ** | ** **            | ** ** | ** ** | ** ** |
|                                                                                                      |       |                  |       |   |   |
| Current assets:                                                                                           |       |                  |       |   |   |
| Cash and cash equivalents                                                                                 |       | $                     | 10,509     |   | $ | 9,517 |   |
| Receivables                                                                                               |       | 3,547                 |       | 6,885 |   |
| Prepaid expenses and other assets                                                                         |       | 1,266                 |       | 1,190 |   |
| Prepaid income taxes                                                                                      |       | —                |       | 2,390 |   |
| Deferred income taxes                                                                                     |       | 1,914                 |       | 154 |   |
|                                                                                                      |       |                  |       |   |   |
| Total current assets                                                                                      |       | 17,236                |       | 20,136 |   |
|                                                                                                      |       |                  |       |   |   |
| Property and equipment, net                                                                               |       | 92,685                |       | 96,308 |   |
| Operating Licenses                                                                                        |       | 65,919                |       | 65,919 |   |
| Goodwill                                                                                                  |       | 32,221                |       | 32,221 |   |
| Non-compete covenant                                                                                      |       | 5,902                 |       | 8,902 |   |
| Other intangible assets                                                                                   |       | 2,209                 |       | 2,278 |   |
| Debt issuance costs                                                                                       |       | 3,914                 |       | 4,752 |   |
|                                                                                                      |       |                  |       |   |   |
| Total assets                                                                                              |       | 220,086               |       | 230,516 |   |
|                                                                                                      |       |                  |       |   |   |
| **Liabilities  and Shareholders’ Equity**                                                            |       |                  |       |   |   |
|                                                                                                      |       |                  |       |   |   |
| Current liabilities:                                                                                      |       |                  |       |   |   |
| Accounts payable - trade                                                                                  |       | 4,241                 |       | 3,391 |   |
| Accounts payable - affiliate                                                                              |       | 3,024                 |       | 1,192 |   |
| Accrued expenses                                                                                          |       | 9,201                 |       | 6,746 |   |
| Income taxes payable                                                                                      |       | 772                   |       | — |   |
|                                                                                                      |       |                  |       |   |   |
| Total current liabilities                                                                                 |       | 17,238                |       | 11,329 |   |
|                                                                                                      |       |                  |       |   |   |
| Long-term debt                                                                                            |       | 142,250               |       | 159,000 |   |
| Deferred income tax                                                                                       |       | 28,210                |       | 29,307 |   |
|                                                                                                      |       |                  |       |   |   |
| Total liabilities                                                                                         |       | 187,698               |       | 199,636 |   |
|                                                                                                      |       |                  |       |   |   |
| Shareholders’ equity:                                                                                |       |                  |       |   |   |
| Common stock, $1 par value, 500 shares  authorized, issued and outstanding in 2004 and 2003, respectively |       | 1                     |       | 1 |   |
| Additional paid-in capital                                                                                |       | 5,915                 |       | 5,915 |   |
| Retained earnings                                                                                         |       | 26,472                |       | 24,964 |   |
|                                                                                                      |       |                  |       |   |   |
| Total shareholders’ equity                                                                           |       | 32,388                |       | 30,880 |   |
|                                                                                                      |       |                  |       |   |   |
| Total liabilities and shareholder’s equity                                                           |       | 220,086               |       | $ | 230,516 |   |
|                                                                                                           |            |                       |            |  |  |  |  |

 

The accompanying notes are an integral part of these financialstatements

 

F-2

----

 

**WHEELING ISLAND GAMING, INC.**

 

**Consolidated Statement of Operations**

**($000’s omitted)**

 
| ** **                       | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                             |       |                             |       |   |   |   |   |
| Operating revenue:               |       |                             |       |   |   |   |   |
| Gaming revenue                   |       | $                                | 100,378    |   | $ | 88,634 |   | $ | 78,550 |   |
| Pari-mutuel revenue              |       | 6,841                            |       | 7,704 |   | 8,639 |   |
| Food & beverage revenue |       | 7,782                            |       | 6,066 |   | 4,913 |   |
| Lodging revenue                  |       | 2,468                            |       | 1,542 |   | — |   |
| Other revenue                    |       | 1,947                            |       | 1,357 |   | 790 |   |
|                             |       | 119,416                          |       | 105,303 |   | 92,892 |   |
|                             |       |                             |       |   |   |   |   |
| Operating expenses:              |       |                             |       |   |   |   |   |
| Purse expense                    |       | 21,473                           |       | 20,147 |   | 18,799 |   |
| Gaming costs                     |       | 7,440                            |       | 7,025 |   | 4,397 |   |
| Pari-mutuel costs                |       | 3,521                            |       | 3,772 |   | 4,049 |   |
| Food & beverage costs   |       | 8,444                            |       | 6,857 |   | 5,617 |   |
| Lodging expenses                 |       | 1,239                            |       | 810 |   | — |   |
| Other expenses                   |       | 739                              |       | 339 |   | — |   |
| Marketing and promotions         |       | 8,258                            |       | 6,568 |   | 6,046 |   |
| Facilities and maintenance       |       | 9,704                            |       | 7,309 |   | 5,176 |   |
| General and administrative       |       | 6,404                            |       | 5,117 |   | 3,909 |   |
| Depreciation and amortization    |       | 11,693                           |       | 9,630 |   | 7,483 |   |
|                             |       |                             |       |   |   |   |   |
|                             |       | 78,915                           |       | 67,574 |   | 55,476 |   |
|                             |       |                             |       |   |   |   |   |
| Operating income                 |       | 40,501                           |       | 37,729 |   | 37,416 |   |
| Interest expense, net            |       | (14,338                          | )          | (14,013 | ) | (13,939 | ) |
| Casualty loss                    |       | (4,308                           | )          | — |   | — |   |
| Other income (expense), net      |       | (254                             | )          | 1 |   | (333 | ) |
| Income before income tax         |       | 21,601                           |       | 23,717 |   | 23,144 |   |
| Income tax expense               |       | 7,593                            |       | 8,325 |   | 8,303 |   |
|                             |       |                             |       |   |   |   |   |
| Net Income                       |       | $                                | 14,008     |   | $ | 15,392 |   | $ | 14,841 |   |

 

The accompanying notes are an integral part of these financialstatements

 

F-3

----

 

**WHEELING ISLAND GAMING, INC.**

 

**Consolidated Statements of Cash Flows**

**($000’s omitted)**

 
| ** **                                                                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                |       |                              |       |   |   |   |   |
| Cash flows relating to operating  activities:                                       |       |                              |       |   |   |   |   |
|                                                                                |       |                              |       |   |   |   |   |
| Net Income                                                                          |       | $                                 | 14,008     |   | $ | 15,392 |   | $ | 14,841 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities - |       |                              |       |   |   |   |   |
| Depreciation and amortization                                                       |       | 11,693                            |       | 9,630 |   | 7,483 |   |
| Deferred income tax                                                                 |       | (2,857                            | )          | 5,715 |   | (1,718 | ) |
| Other                                                                               |       | 1,148                             |       | 838 |   | 1,144 |   |
| Change in assets and liabilities:                                                   |       |                              |       |   |   |   |   |
| Receivables                                                                         |       | 3,338                             |       | (4,446 | ) | (1,259 | ) |
| Prepaid expenses and other assets                                                   |       | (76                               | )          | (711 | ) | (39 | ) |
| Prepaid income taxes                                                                |       | 2,390                             |       | (1,323 | ) | (1,024 | ) |
| Accounts payable - trade                                                            |       | (224                              | )          | 1,883 |   | (1,009 | ) |
| Accrued expenses - affiliate                                                        |       | 1,832                             |       | (1,249 | ) | 2,441 |   |
| Accrued expenses                                                                    |       | 2,455                             |       | 2,473 |   | 1,557 |   |
| Income taxes payable                                                                |       | 772                               |       | — |   | — |   |
|                                                                                |       |                              |       |   |   |   |   |
| Net cash provided by operating activities                                           |       | 34,479                            |       | 28,202 |   | 22,417 |   |
|                                                                                |       |                              |       |   |   |   |   |
| Cash flows relating to investing  activities:                                       |       |                              |       |   |   |   |   |
| Payments for capital expenditures                                                   |       | (4,993                            | )          | (47,052 | ) | (25,381 | ) |
|                                                                                |       |                              |       |   |   |   |   |
| Cash flows relating to financing  activities:                                       |       |                              |       |   |   |   |   |
| Change in cash overdrafts                                                           |       | 756                               |       | — |   | — |   |
| Proceeds from long-term borrowings                                                  |       | —                            |       | 32,500 |   | 1,500 |   |
| Repayment of long-term borrowings                                                   |       | (16,750                           | )          | — |   | — |   |
| Debt issuance costs and other                                                       |       | —                            |       | — |   | (572 | ) |
| Dividends paid                                                                      |       | (12,500                           | )          | (12,000 | ) | — |   |
| Net cash provided by (used) financing  activities                                   |       | (28,494                           | )          | 20,500 |   | 928 |   |
|                                                                                |       |                              |       |   |   |   |   |
| Net (decrease) increase in cash                                                     |       | 992                               |       | 1,650 |   | (2,036 | ) |
|                                                                                |       |                              |       |   |   |   |   |
| Cash balances:                                                                      |       |                              |       |   |   |   |   |
| Beginning of period                                                                 |       | 9,517                             |       | 7,867 |   | 9,903 |   |
|                                                                                |       |                              |       |   |   |   |   |
| End of period                                                                       |       | $                                 | 10,509     |   | $ | 9,517 |   | $ | 7,867 |   |
|                                                                                |       |                              |       |   |   |   |   |
| Supplemental disclosure:                                                            |       |                              |       |   |   |   |   |
| Cash paid during the period for -                                                   |       |                              |       |   |   |   |   |
| Income taxes                                                                        |       | $                                 | 7,288      |   | $ | 3,933 |   | $ | 11,045 |   |
|                                                                                |       |                              |       |   |   |   |   |
| Interest                                                                            |       | $                                 | 13,473     |   | $ | 13,579 |   | $ | 12,750 |   |

 

The accompanying notes are an integral part of these financialstatements

 

F-4

----

 

**WHEELING ISLAND GAMING, INC.**

 

**Notes to Consolidated Financial Statements**

**($000’s omitted)**

 

**1.****                         ****Significant accountingpolicies**

 

## **Businessand ownership**

 

WheelingIsland Gaming, Inc. (the Company) owns and operates Wheeling IslandRacetrack & Gaming Center, a premier gaming and entertainment complexlocated in Wheeling, West Virginia. Business operations are comprised of slotmachine gaming, a greyhound racetrack, pari-mutuel wagering on live greyhoundracing and simulcast greyhound, thoroughbred and harness racing and variousdining venues.

 

TheCompany is a wholly owned subsidiary of Delaware North Companies Gaming &Entertainment, Inc. (DNC G&E). Prior to October 2004, DNC G&E was Sportsystems Corporation.  DNC G&E is a wholly owned subsidiary ofDelaware North Companies, Incorporated (DNC).

 

**Principles of consolidation**

 

Theconsolidated financial statements include the accounts of the Company and allof its wholly owned subsidiaries, which consist of WDRA Food Service, Inc.and Wheeling Land Development Corp.  Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

 

**Cash and cash equivalents**

 

TheCompany considers short-term, highly liquid investments with an originalmaturity of three months or less to be cash equivalents.  Interest-bearing time deposits of $134 and$434 are included in cash and cash equivalents as of December 31, 2004 and2003, respectively.

 

**Fair value of financial instruments**

 

Thecarrying value of the Company’s cash and cash equivalents, trade and otherreceivables and trade payables approximates fair value primarily because of theshort maturities of these instruments. The fair market value of the Company’s Senior Notes at December 31,2004 is $135.0 million based on their trading value in the open market.  The Company’s Revolving Credit Facilityapproximates fair value based upon its market-based variable interest rate.

 

**Property and equipment**

 

Propertyand equipment are stated at cost. Expenditures that extend the useful lives of assets are capitalized,while repair and maintenance costs are charged to operations as incurred.  Depreciation is computed principally usingthe straight-line method over the estimated useful lives of the assets.

 

F-5

----

 

## **Intangibleassets**

 

Indefinite lived intangible assets consisting of licenses,trade name and goodwill are stated at cost which is equal to fair value attheir acquisition date.  In accordancewith SFAS 142, these assets are not subject to amortization for book or taxpurposes.  The Company assesses suchassets for impairment annually or more frequently if warranted by knowneconomic circumstances.  The non-competecovenant is being amortized over its term of five years and the value assignedto the Company’s customer relationships is amortized over its twenty yearestimated life.

 

**Impairment of long-lived assets, including goodwill and otherintangible assets**

 

Thecarrying value of long-lived assets, including goodwill and other intangibleassets, are reviewed for impairment whenever events or changes in circumstancesindicate 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.

 

Toassess goodwill and indefinite lived intangible assets for impairment, anassessment of the carrying value of the Company is performed on an annual basisor when events and changes in circumstances occur that would more likely thannot 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 our goodwill and indefinite-lived intangible assetsexceed its implied fair value.  The fairvalue is generally estimated through internal analysis, which utilizes anincome valuation approach through the application of the traditional discountedcash flow method.

 

TheCompany expects the introduction of slot machine gaming in the westernPennsylvania market to have an adverse effect on the fair value of theCompany.  Accordingly, the Companyperformed a review of the carrying value of the operating licenses and goodwillfor impairment as of September 26, 2004. Such review determined that the fair value of the Company’s operatinglicenses and goodwill exceeds their carrying value and therefore the Companyhas concluded that no impairment charge is required.

 

**Preferred Player Program**

 

TheCompany offers a program whereby participants can accumulate points for casinowagering that can currently be redeemed for cash, food and beverages, andretail offers.  A liability is recordedfor the estimate of unredeemed points based on the Company’s redemptionhistory.  Points redeemed for cash arerecognized as a reduction in revenues while points redeemed for food andbeverage and other retail offers are recognized as promotional expenses.  See further discussion in Note 2.

 

## **Advertisingcosts**

 

Advertisingcosts are charged to operations when incurred. During 2004, 2003 and 2002, respectively, advertising expense totaled$1,401, $1,116, and $703.

 

F-6

----

 

**Debt issuance costs**

 

Costsincurred in connection with the issuance of long-term debt are capitalized andamortized over the terms of the related debt agreements through periodiccharges to interest expense.

 

**Income tax**

 

TheCompany follows the asset and liability approach to account for incometaxes.  This approach requires the recognitionof deferred tax assets and liabilities for the expected future tax consequencesof temporary differences between the carrying amounts and tax bases of assetsand liabilities.

 

The federal taxable income ofthe Company is included in the consolidated federal income tax return of DNCand subsidiaries.  Pursuant to a taxsharing agreement, the portion of the consolidated federal income tax provisionallocated to the Company is that which would result if the Company filed afederal income tax return with its subsidiaries on a stand-alone basis.  Federal income taxes included in theaccompanying balance sheets at December 31, 2004 and December 31,2003 are due to DNC.

 

**Reclassification of balances**

 

Certainprior year amounts have been reclassified in order to conform to thepresentation used in the 2004 financial statements.

 

## **Useof estimates in the preparation of financial statements**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Such estimates are particularly important in theevaluation for impairment of goodwill and other intangible assets.  Actual results could differ from thoseestimates.

 

**2.****                         ****Revenues and costs**

 

Under annually renewable licenses granted by the State of West VirginiaLottery Commission, the Company operated 2,362 slot machines, 2,200 slotmachines and 1,623 slot machines at December 31, 2004, 2003 and 2002,respectively.

 

Gamingrevenues represent gross revenues from slot machine gaming, or total amountswagered, net of winning patron payouts (the “gross terminal income”) less (1) afee of up to 4% of gross terminal income paid to the Lottery Commission foradministering slot machine gaming at the licensee’s race track (the “administrationfee”), (2) a tax of 30% of net terminal income (gross terminal income lessthe administration fee) paid to the State’s general revenue fund and (3) anamount of 9% of net terminal income (NTI) to be paid to various state funds,including funds for tourism promotion, Ohio County, employee pension programsand other programs.

 

TheState deducts a 10% surcharge from all amounts of NTI above a predeterminedlevel, defined as the

 

F-7

----

 

NTIgenerated for the State’s fiscal year ended June 30, 2001.  The remainder of the excess NTI is divided asfollows: 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 depositedin a capital reinvestment account attributable to each racetrack.  The racetrack is entitled to recoup monies inthe capital reinvestment account for certain types of capital improvements madeat the racetrack on a dollar-for-dollar basis. All revenues derived from the operation of slot machines must initiallybe deposited with the Lottery Commission to be shared in accordance with theprovisions of the Lottery Act.

 

TheCompany accrues the expected surcharge amount 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 West VirginiaRacing Commission to be used for racetrack capital improvements, are includedin gaming revenues during the period in which they are earned and approvedqualifying expenditures made.  Excessqualifying expenditures may be carried forward for recoupment in futureperiods, subject to certain statutory limitations.  During 2004, the Company recognizedrecoupments of $4,517 as an element of reported gaming revenue.

 

Gamingpurse expense represents payments made to greyhound owners to supplementpari-mutuel purses, as required by law, which represent 14% of NTI up to thebase amount, and 8% of the excess NTI over the base amount after the 10%surcharge is applied.  The Companyaccrues gaming purse expense ratably during the year, based upon estimates ofthe actual amounts expected to be paid in each state fiscal year.

 

Underannually renewable licenses granted by the State of West Virginia RacingCommission, the Company conducts live racing events and simulcasts races fromother racetrack facilities.  The Companyoperated 383, 391 and 411 live racing events and simulcasted 719, 719 and 723events during 2004, 2003 and 2002, respectively.  The Commission has approved the Company’s 392live racing events for the 2005 meet.

 

Pari-mutuelrevenue represents the Company’s 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. 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 $304, $380 and $435 in 2004, 2003 and 2002, respectively.  At December 31, 2004 the Company hadmade unreimbursed qualifying expenditures of $34,209, which are reimbursablefrom future restricted commissions earned.

 

Pari-mutuelpurse expense represents statutory and contractual percentages of pari-mutuelhandle paid by the Company to greyhound owners and kennel operators.

 

Foodand beverage and lodging revenue is recognized at the time of the sale tocustomers and does not

 

F-8

----

 

includethe retail value of food and beverage and lodging rooms provided gratuitouslyto customers.

 

**3.****                         ****Casualty Loss**

 

DuringSeptember 2004, the Company’s gaming and racing facilities were damaged asa result of the flooding of the Ohio River. As a consequence, the Company was forced to suspend all operations forseveral days.  The Company has recorded acasualty loss of $4,308 on the accompanying statement of operations, whichrepresents flood related repairs incurred in 2004.  In addition, the Company has recorded a $280loss included in other expense, which represents the net carrying value ofequipment assets lost during the flood. The equipment assets that were purchased to replace the lost equipmentwere recorded as capital expenditures and totaled $326.

 

Thesuspension of operations resulted in a loss of operating profits during theshut down period.  The Company expects asubstantial portion of the flood repair costs and the lost profits to berecovered pursuant to the Company’s insurance program.  Such proceeds will be recognized whenrealized.

 

**4.****                         ****Intangible assets**

 

Intangibleassets at December 31, 2004 and 2003 are comprised of the following:

 
| ** **                     | ** ** | **December, 31  2004** | ** ** | **December, 31  2003** | ** ** | **Estimated  Life** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|---------------------|------------|
|                           |       |                   |       |                   |       |                |       |
| Gaming license                 |       | $                      | 64,283     |                   | $          | 64,283              |       | Indefinite |   |
| Racing license                 |       | 1,636                  |       | 1,636                  |       | Indefinite          |       |
| Licenses                       |       | $                      | 65,919     |                   | $          | 65,919              |       |   |   |
| Goodwill                       |       | $                      | 32,221     |                   | $          | 32,221              |       | Indefinite |   |
| Non-compete covenant           |       | 15,000                 |       | 15,000                 |       | 5 years             |       |
| Less: accumulated amortization |       | (9,098                 | )          | (6,098                 | )          |                |       |
|                           |       | $                      | 5,902      |                   | $          | 8,902               |       |   |   |
| Trade name                     |       | $                      | 1,539      |                   | $          | 1,539               |       | Indefinite |   |
| Customer relationships         |       | 778                    |       | 778                    |       | 20 years            |       |
| Less: accumulated amortization |       | (118                   | )          | (79                    | )          |                |       |
| Other                          |       | 10                     |       | 40                     |       | Indefinite          |       |
| Other intangible assets        |       | $                      | 2,209      |                   | $          | 2,278               |       |   |   |

 

TheCompany amortizes its finite lived intangibles over their estimated lives on astraight line basis.  Amortizationexpense of $3,039 was recorded during each fiscal year of 2004, 2003, and2002.  Estimated amortization expense forthe next five years is $3,039 for 2005, $2,941 for 2006, and $39 for years2007, 2008 and 2009.

 

**5.****                         ****Property and equipment, net**

 
| ** **                     | ** ** | **Estimated life** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **in years**       | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                           |       |               |       |                  |       |   |   |
| Land                           |       | n/a                |       | $                     | 1,865      |   | $ | 1,865 |   |
| Land Improvements              |       | 10                 |       | 7,966                 |       | 7,966 |   |
| Buildings and improvements     |       | 40                 |       | 78,617                |       | 77,756 |   |
| Equipment                      |       | 3 - 10             |       | 37,093                |       | 34,476 |   |
| Construction in progress       |       | n/a                |       | 351                   |       | 90 |   |
|                           |       |               |       |                  |       |   |   |
|                           |       |               |       | 125,892               |       | 122,153 |   |
| Less: accumulated depreciation |       |               |       | (33,207               | )          | (25,845 | ) |
|                           |       |               |       | $                     | 92,685     |   | $ | 96,308 |   |

 

F-9

----

 

Depreciationexpense was $8,654, $6,589, and $4,444 for the years ended December 31,2004, 2003 and 2002, respectively.

 

**6.****                         ****Long-term debt**

 

In 2001,the Company issued $125,000 in unsecured Senior Notes.  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 theSenior Notes and are being amortized on a straight-line basis over the termthereof.  Amortization is included withinterest expense and amounted to $753, $753 and $726 for the years ended December 31,2004, 2003 and 2002 respectively.  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 inactiveduring 2004, 2003, and 2002.  At December 31,2004, aggregate total subsidiary assets totaled $673 and consisted of land.

 

Atany time after December 15, 2005, the Company may redeem all or a part ofthe Senior Notes at stipulated redemption prices.  The Company may also redeem the Senior Notesof any holder that is unable to comply with the provisions of any racing orgaming law.  Any holder can require theCompany to redeem its Senior Notes at 101% of the principal amount thereof uponthe occurrence of a change in control of the Company.

 

Also in2001, the Company executed a $40,000 secured Revolving Credit Facility(Revolver) with a bank group.  In 2003,the Company executed an increase in the available commitment under the Revolverfrom $40,000 to $50,000.  As of December 31,2004, the Company had drawn $17,250 against the Revolver.  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 December 31,2004, the lowest applicable rate was 4.53%. A commitment fee is payable quarterly on the unused balance.  The Revolver provides for quarterlyreductions of $3,125 to the commitment, which began in December 2003, andwill continue until the commitment is reduced to $25,000 at September 30,2005.  At December 31, 2004 thecommitment balance was $34,375.  TheRevolver 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 is included withinterest expense and amounted to $85 for 2004, $86 for 2003 and $85 for 2002.

 

TheCompany is in full compliance with all covenants.

 

F-10

----

 

**7.****                          Shareholder’sequity**

 
| ** **                        | ** ** | **Common** | ** ** | **Additional**       | ** ** | **Retained** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|----------------------|------------|--------------|------------|------------|------------|
| ** **                        |       | **Stock**  | ** ** | **Paid-in  capital** | ** ** | **Earnings** | ** ** | **Total**  |       |
|                              |       |       |       |                 |       |         |       |       |       |
| 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 |   |
|                              |       |       |       |                 |       |         |       |       |       |
| Net income                        |       |       |       |                 |       | 15,392       |       | 15,392     |       |
|                              |       |       |       |                 |       |         |       |       |       |
| Less: Dividends Paid              |       |       |       |                 |       | (12,000      | )          | (12,000    | )          |
|                              |       |       |       |                 |       |         |       |       |       |
| Balance at December 31, 2003 |       | $          | 1          |                 | $          | 5,915        |       | $          | 24,964     |   | $ | 30,880 |   |
|                              |       |       |       |                 |       |         |       |       |       |
| Net income                        |       |       |       |                 |       | 14,008       |       | 14,008     |       |
|                              |       |       |       |                 |       |         |       |       |       |
| Less: Dividends Paid              |       |       |       |                 |       | (12,500      | )          | (12,500    | )          |
|                              |       |       |       |                 |       |         |       |       |       |
| Balance at December 31, 2004 |       | $          | 1          |                 | $          | 5,915        |       | $          | 26,472     |   | $ | 32,388 |   |

 

**8.****                         ****Income tax expense (benefit)**

 

Theprovision for income taxes consists of the following:

 
| ** **                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |     |       |
| Current federal tax expense            |       | $        | 10,449     |     | $          | 2,610    |       | $ | 10,021 |   |
|                                   |       |     |       |     |       |     |       |
| Deferred federal tax expense (benefit) |       | (2,856   | )          | 5,715    |       | (1,718   | )          |
|                                   |       |     |       |     |       |     |       |
|                                   |       | $        | 7,593      |     | $          | 8,325    |       | $ | 8,303 |   |

 

During2004 the Internal Revenue Service (IRS) completed a review of the DNC’s federalincome tax return for 2002.  The reviewresulted in the extension of the depreciable lives of certain assets for incometax purposes and certain other adjustments. As a result of the review the Company recorded a current income taxexpense and deferred tax benefit of $1.0 million.  The future tax benefit of these income taxadjustments has been reflected as a component of deferred income taxes in theaccompanying balance sheets.

 

During2002 the IRS completed a review of the Company’s federal income tax returns for1999, 2000, and 2001.  As a result ofvarious income tax adjustments relating to the management incentive fees andthe depreciable lives of its gaming machines, the Company recorded a currenttax provision and a deferred tax benefit of $2,442 during 2002.

 

TheCompany is not subject to state income tax.

 

F-11

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Theprovision for income taxes differs from the amount of income tax determined byapplying the U.S. statutory rate to income before income tax as a result of thefollowing:

 
| ** **                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |     |       |
| Income tax at statutory rate |       | $        | 7,560      |     | $          | 8,301    |       | $ | 8,100 |   |
| Other adjustments            |       | 33       |       | 24       |       | 203      |       |
|                         |       |     |       |     |       |     |       |
| Income tax expense           |       | $        | 7,593      |     | $          | 8,325    |       | $ | 8,303 |   |

 

Deferredtax assets (liabilities) consist of the following:

 
| ** **                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Other intangibles              |       | $        | 1,353      |     | $          | 0 |   |
| Other                          |       | 2,054    |       | 260      |       |
| Gross deferred tax assets      |       | 3,407    |       | 260      |       |
|                           |       |     |       |     |       |
| Property and equipment         |       | (6,631   | )          | (5,358   | )          |
| Licenses                       |       | (23,072  | )          | (23,072  | )          |
| Other intangibles              |       | 0        |       | (783     | )          |
| Other                          |       | 0        |       | (200     | )          |
| Gross deferred tax liabilities |       | $        | (29,703    | )        | $          | (29,413 | ) |
|                           |       |     |       |     |       |
| Net deferred tax liabilties    |       | $        | (26,296    | )        | $          | (29,153 | ) |

 

**9.****                         ****Related party transactions**

 

In2001, the Company entered into an administrative services agreement and a taxsharing agreement with DNC G&E and DNC. Pursuant to the administrative services agreement, the Company pays anannual administrative services fee equal to the greater of 1.5% of thepreceding year’s total operating revenues or $1,200 for certain supportservices provided to the Company.  During2004, 2003 and 2002, the Company recorded administrative services fees of$1,741, $1,452 and $1,251, respectively. Pursuant to the tax sharing agreement, the Company pays DNC the amountof tax that would be payable by the Company if it had filed a separate consolidatedfederal income tax return on a stand alone basis.

 

TheCompany invests its excess cash in a segregated account administered by DNCunder its centralized cash management program. At December 31, 2004 and 2003, the Company had $134 and $434invested with DNC, respectively.  During2004, 2003 and 2002, respectively, the Company earned interest income of $11,$16 and $134.

 

TheCompany participates in a comprehensive insurance program maintained byDNC.  Risk-based premiums charged by andreimbursed to DNC amounted to $1,599 in 2004, $1,010 in 2003 and $572 in 2002.

 

OnDecember 30, 2004, the Company paid a cash dividend of $12,500 to DNCG&E.  A $12,000 cash dividend waspaid to DNC G&E in 2003.

 

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**10.****                  ****Retirement plans**

 

Allfull-time employees participate in a retirement savings plan administered byDNC.  Non-union employees are entitled toshare in a discretionary Company contribution to this plan.  Union employees also participate in aunion-sponsored defined contribution plan. Total expense relating to the retirement plans was $188 in 2004, $227 in2003, and $144 in 2002.

 

Pursuantto the Lottery Act, 0.5% of NTI is deposited to the retirement savings plan onbehalf of all employees.  Such amountsare not included as an element of the Company’s expenses.

 

**11.****                  ****Commitments**

 

Inconnection with its pari-mutuel operations, the Company leases totalisatorservices, video, and peripheral equipment under agreements expiring at variousdates through 2006.  Expense related tosuch services is determined primarily as a percentage of the pari-mutuel handleor stated amounts per performance. During 2004, 2003 and 2002, this expense totaled $716, $711 and $788,respectively.

 

Inconnection with its gaming operations, the Company leases 70 slot machines fromAutotote Systems, Inc.   Suchexpense was $184 in 2004.  In 2003 and2002 the Company leased slot machines and obtained maintenance services forthese and other slot machines from Autotote Systems, Inc.  Such expense was $1,008 in 2003 and $1,082 in2002.

 

**12.****                  ****Litigation**

 

Thekennels for some of the racing greyhounds, which participate in our racingmeets, were relocated to Brooke County, West Virginia during the 2002 calendaryear.  The County Commission of BrookeCounty, West Virginia, is now claiming an entitlement to a portion of therevenue generated by our gaming and pari-mutuel racing operations by virtue ofthe location of our kennel compound in Brooke County.  The Brooke County Commission threatened totake legal action to obtain those revenues, or in the alternative, to enjointhe continued operation of our kennels in Brooke County because of theirconstruction without prior approval in a local option election.  It is our position that Brooke County is notentitled to a share of our gaming and pari-mutuel racing revenues.  In addition, the construction and operationof our kennels was approved by the West Virginia Racing Commission.  On February 25, 2004, we commenced anaction in the Circuit Court of Kanawha County, West Virginia, which names theBrooke County Commission, the Ohio County Commission and the West VirginiaRacing Commission as defendants.  Theaction seeks a declaratory judgment to confirm that the West Virginia RacingCommission followed all lawful procedures and acted within the scope of itsauthority when the Racing Commission approved the construction and operation ofour kennels, that the local option election contended for by the Brooke CountyCommissioners was not required, and that Brooke County is only entitled to receivethe property tax revenue associated with the kennel facility.  This matter is in the litigation discoveryphase, and thepartieshave conducted some very preliminary exploration into possible settlement ofthis dispute.  The Company cannot predictthe outcome of this litigation matter or estimate the impact of such outcome onthe Company’s financial condition or results of operation.

 

TheCompany is also party to a number of pending legal proceedings in the ordinarycourse of business, although management does not expect that the outcome ofsuch proceedings, either individually or in the

 

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aggregate,will have a material effect on the Company’s financial condition or results ofoperations.

 

**13.****                  ****Risks and uncertainties**

 

TheCompany’s operations are subject to extensive government regulations and couldbe subjected at any time to additional or more restrictive regulations.  The Company is subject to the provisions ofthe West Virginia Racing Act, which governs the conduct of greyhound racing inWest Virginia, and the West Virginia Racetrack Video Lottery Act (the LotteryAct), which under the regulatory control of the West Virginia LotteryCommission, governs the operation of video lottery terminals in WestVirginia.  Specifically, the Lottery Actprovides that only licensed greyhound or horse racing facilities that werelicensed prior to January 1, 1994 and conduct a minimum number of days oflive racing may offer video lottery gaming. Accordingly, the Company must comply fully with regulations of theRacing Commission to qualify for its license under the Lottery Act and maintainits video lottery gaming operations.

 

TheCompany’s ability to remain in business depends upon its continued ability tooperate in compliance with all applicable gaming and racing laws andregulations, including the acquisition and maintenance of several licenses andpermits.  The Lottery Act requires thatthe Company be subject to a written agreement with the dog owners, breeders, andtrainers who race greyhounds at its facility. The Company is a party to therequisite agreements with the kennels that operate at its facility. The LotteryAct also requires that the Company be subject to an agreement with thepari-mutuel clerks who work at its facility. This requirement is satisfied by a letter sent to the Lottery Commissionannually, which states that such agreement exists.  The Company’s material licenses are subjectto annual or other periodic renewal and governmental authorities may refuse togrant the Company the licenses necessary to continue to operate its existingfacility.  In addition, the Company maybe investigated by either the Racing Commission or the Lottery Commission atany time.  Should either body considerthe Company to be in violation of any applicable laws or regulations, each hasthe plenary authority to suspend or rescind the Company’s licenses.  The Company believes that it is in fullcompliance with all relevant regulations.

 

**14.****                  ****Subsequent Event**

 

DuringJanuary 2005, the Company’s gaming and racing facilities were againdamaged and its operations interrupted by the flooding of the Ohio River.  Flood repairs were subsequently completed andoperations resumed.  The Company expectsa substantial portion of the flood repair costs and the lost profits to berecovered pursuant to the Company’s insurance program.  Such proceeds will be recognized whenrealized.

 

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