** **

**UNITEDSTATES**SECURITIES AND EXCHANGE COMMISSION

**Washington,D.C. 20549**

 

**FORM 10-K**

** **

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

** **
| **ý**                                       | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**      |
|--------------------------------------------------|------------------------------------------------------------------------------------------------|
|                                             |                                                                                           |
| **For the  fiscal year ended December 31, 2003** |
|                                             |                                                                                           |
| **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 registrantas specified in its charter)

 

| **DELAWARE**                                                                               |   | **16-1333214**                        |
|--------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                                                           |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                                                            |   |                                  |
|                                                                                       |   |                                  |
| **1 South  Stone Street  Wheeling, West Virginia**(Address of principal executive offices) |
|                                                                                       |
| **26003**                                                                                  |
| (Zip Code)                                                                                 |

 

**Registrant’s telephone number, including area code:  (304) 232-5050**

 

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

 

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

 

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

 

ý     Yes   o     No

 

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

 

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

 

o     Yes   ý     No

 

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

 

Indicate the number of shares outstanding of each ofthe registrant’s classes of common stock, as of the latest practicable date:

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

 

Documentsincorporated by reference:  None.

 

 

 

**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                                                                                   | 5 |
|         | Available Information                                                                       | 6 |
|         | Security & Controls                                                                     | 6 |
|         | Regulation and Licensing                                                                    | 6 |
|         |                                                                                        | 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                 | 11 |
|         |                                                                                        |   |
| **ITEM 6.**  | SELECTED  FINANCIAL DATA                                                                    | 11 |
|         |                                                                                        |   |
| **ITEM 7.**  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 15 |
|         | Recent Developments                                                                         | 15 |
|         | Overview                                                                                    | 15 |
|         | Critical Accounting Policies                                                                | 16 |
|         | Results of Operations                                                                       | 18 |
|         | 2003  Compared to 2002                                                                      | 18 |
|         | 2002  Compared to 2001                                                                      | 20 |
|         | Liquidity and Capital Resources                                                             | 23 |
|         | Contractual Obligations and Commitments                                                     | 23 |
|         |                                                                                        |   |
| **ITEM 7A.** | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 24 |
|         |                                                                                        |   |
| **ITEM 8.**  | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                | 24 |
|         |                                                                                        |   |
| **ITEM 9.**  | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       | 24 |
|         |                                                                                        |   |
| **ITEM 9A.** | CONTROLS  AND PROCEDURES                                                                    | 24 |

 

 
| **PART III**                      |                                                             |
|-----------------------------------|------------------------------------------------------------------|
|                              |                                                             |   |
| **ITEM 10.**                      | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT              | 26 |
|                              | Audit Committee of the Board of Directors                        | 27 |
|                              |                                                             |   |
| **ITEM 10A.**                     | CODE  OF ETHICS                                                  | 27 |
|                              |                                                             |   |
| **ITEM 11.**                      | EXECUTIVE  COMPENSATION                                          | 27 |
|                              | Remuneration of Directors                                        | 27 |
|                              | Compensation of Executive Officers                               | 28 |
|                              | Report of The Board of Directors on  Executive Compensation      | 29 |
|                              |                                                             |   |
| **ITEM 12.**                      | STOCK  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT     | 31 |
|                              | Principal  Shareholders                                          | 31 |
|                              |                                                             |   |
| **ITEM 13.**                      | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                  | 31 |
|                              |                                                             |   |
| **ITEM 14.**                      | PRINCIPAL  ACCOUNTING FEES AND SERVICES                          | 32 |
|                              |                                                             |   |
| **PART IV**                       |                                                             |
|                              |                                                             |   |
| **ITEM 15.**                      | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K | 33 |
|                              |                                                             |   |
| Signatures                        | 34                                                               |
|                              |                                                             |   |
| CONSOLIDATED FINANCIAL STATEMENTS |                                                             |
|                              |                                                             |   |
| INDEX TO EXHIBITS                 | 35                                                               |

 

 

**ITEM 1****.  BUSINESS**

 

Weown and operate Wheeling Island Racetrack & Gaming Center, or WheelingIsland, a premier gaming and entertainment complex located in Wheeling, WestVirginia.  Wheeling Island features2,200 slot machines, a hotel, showroom, greyhound racetrack, pari-mutuelwagering on live greyhound racing and simulcast greyhound, thoroughbred andharness racing and various dining venues. We are a wholly owned subsidiary of Sportsystems Corporation, orSportsystems.  Sportsystems is a whollyowned subsidiary of Delaware North Companies, Incorporated, or Delaware North.

 

Wedo not have operations other than 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, 2003,featured:

 

•                                          64,272 square feet of gaming area with 2,200slot machines;

 

•                                          151-room hotel;

 

•                                          550 seat showroom;

 

•                                          a1/4mile greyhound racetrack 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 2,200 gaming devices in three main gaming areas.  Other than 116 slot machines, which welease, we own all of the slot machines operating at our facility.  The Wheeling Island expansion, an annex toour existing gaming facility, contains 1,022 machines.  The Wheeling Island expansion opened forgaming on June 26, 2003.   The IslandRoom contains 622 slot machines.  TheFairgrounds Room, located in the original lower grandstand of the racetrack,contains 556 slot machines.  Our slotmachines include mechanical spinning reel slot machines and video lotteryterminals with either coin-out or voucher-out functionality.  Currently, 2,034 of the slot machines at ourfacility have the coin-out payment functionality, while the remainder pay outin vouchers redeemable at various cashier stations.  We offer one local progressive slot machine game, which linksmultiple machines playing for a single jackpot.  The West Virginia Lottery Commission, or the Lottery Commissionis currently evaluating statewide progressive slot machine games.  Such statewide progressive slot machinegames would link slot machine terminals located in all four West Virginiaracetracks, each contributing to a progressive statewide jackpot.

 

1

 

*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 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, fourconcession stands, four lounges and three bars.  The casual restaurant, fine dining restaurant, food court, onelounge and one bar were added with the opening of the Wheeling Islandexpansion.

 

*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 2003 the showroom hosted 75events.  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. Our spending for media and promotional programs principally targets themajor markets within a 150-mile radius around Wheeling, West Virginia,including the local regional area and the major cities of Akron, Canton andYoungstown, Ohio and Pittsburgh, Pennsylvania, and, in addition, Columbus,Ohio.

 

Ourprimary promotional tool used to develop customer loyalty is the PreferredPlayers Club, which we introduced in July 2000. The Preferred Players Clubprovides gaming customers with reward incentives for increased levels ofplay.  Beginning in October 2002, suchreward incentives were revised to provide Preferred Players Club members withclub points equal to a percentage for all gaming dollars played.  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 Players 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 Players Club as of December 31, 2003 exceeded249,000 members.  In the future, weexpect to strengthen the Preferred Players 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 ondeveloping our group sales business and the opening of the Wheeling Islandexpansion, the bus traffic at our facility has grown substantially.  For the year ended December 31, 2003,we had 3,213 bus groups visit our facility, as compared to 1,935 bus groupsthat visited our facility in the year 2001.

 

2

 

Ourother marketing efforts include:

 

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

 

•                                          cash and merchandise give-aways; and

 

•                                          food and beverage specials and 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 2003, we spent a total of$5.0 million on marketing and advertising programs.  Of this amount, $1.1 million was spent on media advertisingand $3.9 million was spent on promotional programs, including all rewardexpenditures related to the Preferred Players Club.  For the year ended December 31, 2003, the allocation of ourexpenditure for media advertising was 32.6% on direct mail, 23.5% on newspapers,14.4% on television, 22.3% on radio, and 7.2% on billboard 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 growing demand, in October2001 we began developing the Wheeling Island expansion, a gaming and hotelexpansion that is connected to our existing gaming facility.  On June 26, 2003, the Wheeling Islandexpansion was completed and opened for gaming. The opening of the Wheeling Island expansion increased the number ofslot machines from 1,630 to 2,200 while also adding the following amenities tothe Wheeling Island complex:

 

•                  a 151-room hotel;

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

•                  a 550-seat multi-purpose showroom; and

•                  180 covered parking spaces plus additionaloutdoor parking spaces.

 

The30,000 square feet of additional gaming space accommodates a total of 1,022slot machines.  Among other features,the 151-room hotel includes nine large suite-styled rooms.  The fine dining restaurant offers adistinctly different menu from our other dining areas in order to provide agreater variety of food choices for our patrons.  The new covered parking capacity has direct elevator access tothe gaming area and hotel, which provides greater security, comfort andconvenience for our customers. The multi-purpose showroom is used as anentertainment venue for acts presented at our facility.  The showroom is also used for large specialevents including conferences, banquets and other large catered events.  The addition of the meeting room spaceenables us to attract conferences and other catered events to the facility.

 

**Market**

 

Ourprimary market consists of the 150-mile radius area around Wheeling, WestVirginia, including the major cities of Akron, Canton and Youngstown, Ohio andPittsburgh, Pennsylvania, and, in addition, Columbus, Ohio.  Patrons from these major population areasenjoy convenient access to Wheeling Island via Interstate Route 70, a majorfour-lane highway adjacent to our property. According to Lottery Commission data, annual gaming revenues(representing gross terminal income) generated in West Virginia were $717.1million for the State’s fiscal year ended June 30, 2003, a 20.3% increaseover the prior year period.  Accordingto Lottery Commission data, during the most recent six-month period ended December 27,2003, gaming revenues were $401.2 million,

 

3

 

representingan increase of 19.1% 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, 2003 was 21.5%.  Our market share of gaming revenue during the period from July 1,2003 to December 27, 2003 was 22.9%.  Asof December 27, 2003, we had 20.7% of the total number of slot machinesoperating in West Virginia.  The 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 2003 was 1.1 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.  We also believe that the addition oflodging, entertainment and other amenities to our facility will attract newcustomers in the outlying areas of our primary market who will be willing to travelfurther to a gaming facility that offers an expanded variety of amenities and ahotel for overnight stays.

 

**Competition**

 

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

 

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.  Our principal direct competitor isMountaineer Park, located approximately 50 miles to the north in Chester, WestVirginia.  Mountaineer Park offers slotmachine gaming, pari-mutuel wagering on live thoroughbred racing and simulcastthoroughbred, harness and greyhound events. This gaming facility competes directly with us in attracting the westernPennsylvania market, including Pittsburgh, as well as the northern panhandlemarket of West Virginia and the feeder markets in northeastern Ohio.  Mountaineer Park currently offers moregaming machines and more entertainment amenities than we do, including an18-hole golf course, a 5,000-seat concert venue and a health spa.  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 impact of the expansion willbe complemented by our location and accessibility.  Wheeling Island is located in the City of Wheeling, one of themajor population centers of the northern panhandle market of West Virginia, whileMountaineer Park is located in the less populated Town of Chester.  Wheeling Island’s property is adjacent toInterstate Route 70, a major four-lane highway that provides customers witheasy access to our facility, while Mountaineer Park is located on a two-lanestate road.  Other than MountaineerPark, there are currently no facilities offering competitive pari-mutuel liveracing and slot machine gaming within a 150-mile radius of our facility.  In addition to our facility and MountaineerPark, there are two facilities located in West Virginia that offer slot machinegaming.  However, these facilities arelocated more than 150 miles away from our facility in Charleston and CharlesTown, West Virginia.  As a result, webelieve that we do not compete to any significant extent with these facilitiesfor customers.

 

Toa lesser extent, we compete with Thistledown, located approximately 143 milesto the northwest in Cleveland, Ohio, Northfield Park, located approximately 150miles to the north in Northfield, Ohio, The Meadows, located approximately 35miles to the east in Washington, Pennsylvania and Beulah Park and Scioto Downs,located approximately 135 miles to the west in Columbus, Ohio.  These facilities offer pari-mutuel wageringbut do not currently offer slot machine gaming.  If such facilities were to receive legislative approval to offerslot machine 

 

4

 

gaming,they would compete directly with us for customers in our primary market.

 

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.  Nomore than five slot machines are allowed in each establishment licensed to sellalcoholic beverages that have been approved to operate these slotmachines.  No more than ten slotmachines are allowed in each fraternal or veterans organization that has beenapproved to operate these slot machines. As of December 31, 2003, 6,115 of these slot machines are licensed andoperating in West Virginia.  We believethe existence of such slot machines has not had a material impact on our business,financial condition or results of operations.

 

Pennsylvaniaand Ohio currently do not permit any form of casino gaming, including slotmachine gaming.  However, as a result ofgreater budgetary pressures, states are increasingly looking to new sources ofadditional revenue, which may include gaming. In the past, bills have been introduced in the Pennsylvania legislatureto legalize slot machine gaming at racetracks, none of which has successfullypassed.  Currently, there are severalsuch bills pending in the Pennsylvania legislature.  We are uncertain at this time whether these bills, or any othersimilar bills, will be passed in Pennsylvania. To the extent that either Pennsylvania or Ohio legalizes any form ofcasino gaming, or if additional gaming were approved in West Virginia, our slotmachine gaming operations would compete with any new gaming facilities thatopened as a result of such legislation. For example, if gaming similar to that, which has been approved in WestVirginia, is approved in Pennsylvania and Ohio, there would be four racetracksin Pennsylvania and seven racetracks in Ohio that could potentially competewith us for gaming customers.  Inaddition, increased competition could result from other nearby statesallowing  expanded casino gaming, orgaming 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 statewide lotteries in West Virginia, Pennsylvania and Ohioand live and simulcast pari-mutuel wagering in Pennsylvania and Ohio.  In addition, we generally compete with otherentertainment options available to consumers.

 

**Intellectual Property Rights**

 

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

 

**Suppliers**

 

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

 

**Employees**

 

Asof December 31, 2003, we employed approximately 910 persons, 746 of whomwere full-time employees and 164 of whom were part-time employees.  The United Food and Commercial WorkersUnion, Local 23, represents approximately 293 employees in our pari-mutuel,maintenance, cleaning and slot machine gaming operations 

 

5

 

departments.  Our current agreement with the United Foodand Commercial Workers Union, Local 23 expires on February 28, 2006.  In September 2003 the United Food andCommercial Workers Union, Local 23 became the recognized bargainingrepresentative for 35 employees who serve as patrol judges, leadouts, boxmen,brakemen, veterinary assistants and starters. We are currently negotiating a separate collective bargaining agreementwith these employees.  The HotelEmployees and Restaurant Employees Union, Local 57 represent approximately 222employees in our food and beverage department and 40 employees in our securitydepartment under separate collective bargaining agreements.  The collective bargaining agreement with thefood and beverage employees expires on June 22, 2004 and the collectivebargaining agreement with the security department employees expires on April30, 2006.  We believe that we generallyhave satisfactory relations with our employees and with both unions.

 

**Available Information**

 

We make available free of charge through our Internet website,www.wheelingisland.com, our annual report on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K, and amendments to these reports filedor furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934as soon as reasonably practicable after we electronically file such materialswith, or furnish them to the Securities and Exchange Commission, or SEC.

 

Our principal executive offices are located at 1 South Stone Street,Wheeling, West Virginia, 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.

 

**Securityand 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 money transfers to andfrom the gaming money room.  Inaddition, we have designed and implemented a comprehensive program ofaccounting internal controls which further provide for the safeguarding ofcompany assets.

 

**Regulation and Licensing**

 

*General*

 

Ouroperations are subject to extensive state and local regulations.  Our ability to remain in business and to operateprofitably depends upon our continued ability to satisfy all applicable gaminglaws 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 Racing Commission include,among other things:  (i) grantingpermission annually to maintain racing licenses and schedule race meets; (ii)approving simulcasting activities; (iii) licensing all of our officers,directors, racing officials and certain other employees; and (iv) approving allof our contracts that affect our racing and pari-mutuel wageringoperations.  Such powers andresponsibilities extend to the approval and/or oversight of all aspects ofracing and pari-mutuel wagering operations. In order to conduct simulcast racing, we are required under WestVirginia law to hold a minimum of 

 

6

 

220live race days each year.  During 2003we conducted a total of 296 live race days. In addition, certain activities, such as simulcasting races, require theconsent of the representatives of a majority of the greyhound owners andtrainers at our facility.

 

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

 

*West Virginia Lottery Regulations*

 

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

 

TheLottery Act requires that we be subject to a written agreement with thegreyhound owners, breeders and trainers who race greyhounds at 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 ourfacility.  We are party to such anagreement, which we notify the Lottery Commission of annually.  The absence of an agreement with the kennelsor the pari-mutuel clerks, or the termination or non-renewal of suchagreements, would have a material adverse effect on our business, financialcondition 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 the absence of any criminalinvolvement.

 

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

 

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 

 

7

 

associations),business ability and experience of an applicant and the adequacy and source ofthe applicant’s financing arrangements. In addition, a racetrack applicant must hold a valid racing license andpost a bond or irrevocable letter of credit in such amount as the LotteryCommission shall determine.  No licensewill be granted until the Lottery Commission determines that each person whohas “control” of an applicant meets all of the applicable licensingqualifications.  Persons deemed to havecontrol of a corporate applicant include (i) any holding or parent company orsubsidiary of the applicant who has the ability to elect a majority of theapplicant’s board of directors or to otherwise control the activities of theapplicant and (ii) key personnel of an applicant, including any executiveofficer, employee or agent who has the power to exercise significant influenceover decisions concerning any part of the applicant’s business operations.

 

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

 

TheLottery Act imposes extensive operational controls relating to, among othermatters, security and supervision, access to the machines, hours of operation,general liability insurance coverage and machine locations.  In addition, the Lottery Act prohibits theextension of credit for video lottery play, and requires Lottery Commissionapproval before any advertising and promotional activities for video 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 amount equalto or greater than the gross terminal income to be remitted.  If a racetrack fails to maintain thisbalance, the Lottery Commission may disable all of the racetrack’s videolottery machines until full payment of all amounts due is made.

 

ByLottery Commission directive, all of our slot machines were required to beconnected to the SAMS 4.6 IGT central system maintained by the LotteryCommission.  If the operation of 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 gamingoperations and have a material adverse effect on our business, financialcondition and results 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.

 

*State and Federal SimulcastRegulation*

 

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.

 

8

 

*Compliance with Other Laws*

 

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

 

Ouroperations are subject to extensive government regulations and could besubjected at any time to additional or more restrictive regulations.

 

*Restrictions on Share Ownershipand 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 been pre-approved by the LotteryCommission.  Any transfer that does notcomply with this requirement voids the license.

 

**ITEM 2.****              ****PROPERTIES**

# ** **

WheelingIsland, which is owned by us, is situated on approximately 62 acres of land onWheeling Island on the Ohio River in Wheeling, West Virginia.  The entire Wheeling Island facility occupiesapproximately 270,000 square feet.

 

Wealso own 24 acres of land located at the northern limit of the Village of BeechBottom, Brooke County, West Virginia, approximately 13 miles from our WheelingIsland facility.  In July 2002, wecompleted construction of a new kennel facility on this property.

 

**ITEM 3****.****              ****LEGAL PROCEEDINGS**

 

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 in OhioCounty by virtue of the 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 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.

 

Weare a party to a number of other legal proceedings that have arisen in theordinary course of our business.  Webelieve that the outcome of such proceedings will not have a material adverseeffect on our operating results or financial condition.

 

9

 

The Supreme Court of Appealsof West Virginia, which is the State’s highest court, recently upheld theconstitutionality of the West Virginia Racetrack Lottery Act.  The West Virginia Racetrack Lottery Act isthe statute under which we conduct our video lottery gaming business.  In *StateEx Rel. City of Charleston v. West Virginia Economic Development Authority*,2003 W.Va. Lexis 104 (October 17, 2003), the plaintiffs alleged that the WestVirginia Racetrack Lottery Act authorized an illegal form of gambling inviolation of the West Virginia Constitution. The State of West Virginia and the West Virginia Racing Association, ofwhich we are a member, successfully defeated this challenge to the WestVirginia Lottery Act.

 

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

 

Notapplicable.

 

10

 

**PART II**

** **

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

 

Not applicable.

 

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

 

The selected financial data presented belowas of and for the five years ended December 31, 2003 has been derived fromour audited consolidated financial statements. The selected financial data should be read in conjunction with“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and those consolidated financial statements and related notesthereto which are included elsewhere herein.

 

 
|                                  |   | **Year Ended  December 31,**          |        |
|---------------------------------------|--------|--------------------------------------------|-------------|
|                                  |   | **(dollars  in thousands, except ratios)** |        |
|                                  |   | **2003**                                   |        | **2002** |   | **2001 (2)** |   | **2000** |   | **1999** |   |
|                                  |   |                                       |        |   |   |   |   |   |   |   |   |
| **Statement of  Operations Data:**    |   |                                       |        |   |   |   |   |   |   |   |   |
| Operating revenue:                    |   |                                       |        |   |   |   |   |   |   |   |   |
| Gaming revenue (1)                    |   | $                                          | 88,634      |   | $ | 78,550 |   | $ | 67,372 |   | $ | 46,224 |   | $ | 25,219 |   |
| Pari-mutuel revenue                   |   | 7,704                                      |        | 8,639 |   | 9,145 |   | 9,062 |   | 9,024 |   |
| Food & beverage revenue           |   | 6,066                                      |        | 4,913 |   | 4,502 |   | 3,875 |   | 2,541 |   |
| Lodging revenue                       |   | 1,542                                      |        | — |   | — |   | — |   | — |   |
| Other revenue                         |   | 1,357                                      |        | 790 |   | 800 |   | 726 |   | 613 |   |
|                                  |   |                                       |        |   |   |   |   |   |   |   |   |
| Total  operating revenue              |   | 105,303                                    |        | 92,892 |   | 81,819 |   | 59,887 |   | 37,397 |   |
|                                  |   |                                       |        |   |   |   |   |   |   |   |   |
| Operating  expenses:                  |   |                                       |        |   |   |   |   |   |   |   |   |
| Purse expense                         |   | 20,147                                     |        | 18,799 |   | 17,025 |   | 12,712 |   | 7,865 |   |
| Gaming costs                          |   | 7,025                                      |        | 4,397 |   | 3,755 |   | 3,819 |   | 3,705 |   |
| Pari-mutuel costs                     |   | 3,772                                      |        | 4,049 |   | 4,335 |   | 3,943 |   | 3,539 |   |
| Food & beverage costs             |   | 6,857                                      |        | 5,617 |   | 4,083 |   | 3,130 |   | 1,989 |   |
| Lodging expenses                      |   | 856                                        |        | — |   | — |   | — |   | — |   |
| Other expenses                        |   | 339                                        |        | — |   | — |   | — |   | — |   |
| Marketing and promotions              |   | 6,522                                      |        | 6,046 |   | 4,270 |   | 2,910 |   | 1,899 |   |
| Facilities and maintenance            |   | 7,309                                      |        | 5,176 |   | 4,790 |   | 3,782 |   | 2,831 |   |
| Management fees (3)                   |   | —                                     |        | — |   | 25,521 |   | 15,162 |   | 13,939 |   |
| General and administrative (4)        |   | 5,117                                      |        | 3,909 |   | 3,069 |   | 1,935 |   | 1,618 |   |
| Depreciation and amortization         |   | 9,630                                      |        | 7,483 |   | 3,703 |   | 2,566 |   | 875 |   |
|                                  |   |                                       |        |   |   |   |   |   |   |   |   |
| Total operating expenses              |   | 67,574                                     |        | 55,476 |   | 70,551 |   | 49,959 |   | 38,260 |   |
|                                  |   |                                       |        |   |   |   |   |   |   |   |   |
| Income (loss) from operations         |   | 37,729                                     |        | 37,416 |   | 11,268 |   | 9,928 |   | (863 | ) |
|                                  |   |                                       |        |   |   |   |   |   |   |   |   |
| Interest (expense) income, net        |   | (14,013                                    | )           | (13,939 | ) | (1,427 | ) | (458 | ) | 135 |   |
| Other income (expense), net           |   | 1                                          |        | (333 | ) | (69 | ) | — |   | — |   |
| Income (loss) before income tax       |   | 23,717                                     |        | 23,144 |   | 9,772 |   | 9,470 |   | (728 | ) |
| Income tax (benefit) expense          |   | 8,325                                      |        | 8,303 |   | 3,313 |   | 3,266 |   | (202 | ) |
|                                  |   |                                       |        |   |   |   |   |   |   |   |   |
| Net income  (loss)                    |   | $                                          | 15,392      |   | $ | 14,841 |   | $ | 6,459 |   | $ | 6,204 |   | $ | (526 | ) |
|                                  |   |                                       |        |   |   |   |   |   |   |   |   |
| **Operating Data:**                   |   |                                       |        |   |   |   |   |   |   |   |   |
| Gross terminal income (5)             |   | $                                          | 174,829,040 |   | $ | 149,137,640 |   | $ | 116,297,474 |   | $ | 77,512,872 |   | $ | 41,982,562 |   |
| Number of slot machines (6)           |   | 2,200                                      |        | 1,623 |   | 1,537 |   | 1,280 |   | 800 |   |
| Slot machine win per unit per day (7) |   | $                                          | 253.60      |   | $ | 267.87 |   | $ | 239.39 |   | $ | 220.76 |   | $ | 179.98 |   |
| Hotel occupancy % (8)                 |   | 81.5                                       | %           |   |   |   |   |   |   |   |   |
| Revenue per available room (9)        |   | $                                          | 54.04       |   |   |   |   |   |   |   |   |   |
|                                  |   |                                       |        |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**               |   |                                       |        |   |   |   |   |   |   |   |   |
| Cash and cash equivalents             |   | $                                          | 9,517       |   | $ | 7,867 |   | $ | 9,903 |   | $ | 5,020 |   | $ | 7,298 |   |
| Total assets                          |   | 230,516                                    |        | 185,740 |   | 168,107 |   | 37,843 |   | 24,994 |   |
| Total long term debt                  |   | 159,000                                    |        | 126,500 |   | 125,000 |   | 14,500 |   | — |   |
| Shareholder’s equity             |   | 30,880                                     |        | 27,488 |   | 12,647 |   | 18,817 |   | 12,613 |   |

 

11

 

 

----

(1)                                  Gaming revenues represent gross revenues fromslot machine gaming, or total amounts wagered, net of winning patron payouts(the “gross terminal income”) less (i) a fee of up to 4.0% of gross terminalincome paid to the Lottery Commission for administering slot machine gaming atthe licensee’s race track (the “administration fee”), (ii) a tax of 30.0% ofnet terminal income (gross terminal income less the administration fee, “NTI”)paid to the State’s general revenue fund and (iii) an amount of 9.0% of NTI tobe paid to various state funds, including funds for tourism promotion, OhioCounty, employee pension programs, and other programs.  All revenues derived from the operation ofslot machines must initially be deposited with the Lottery Commission to beshared in accordance with the provisions of the Lottery Act. Prior tolegislative changes, which became effective as of July 1, 2001, the State refundedthe portion of the administration fee in excess of the Lottery Commission’sadministrative expenses.  In April 2001,the West Virginia legislature adopted new legislation, effective as of July 1,2001, which authorized an increase in West Virginia’s share of NTI above apredetermined level, defined as the NTI generated for the State’s fiscal yearended June 30, 2001.  The State willdeduct a 10% surcharge from NTI in excess of the predetermined level.  The remainder of the excess NTI will bedivided as follows: 50.0% is returned to the racetrack (of which 8.0%represents supplemental purse expense), 41.0% is paid to the State’s generalrevenue fund and the remaining 9.0% is divided among various state funds.  Of the total 10.0% surcharge, 42.0% is depositedin a capital reinvestment account attributable to each racetrack.  The racetrack is entitled to recoup moniesin the capital reinvestment account for certain types of capital improvementsmade at the racetrack on a dollar-for-dollar basis.  This legislation also eliminated the refund of the portion of theadministration fee in excess of the Lottery Commission’s administrativeexpenses.

 

Weaccrue the expected surcharge amount ratably during the year based uponestimates of the actual amounts expected to be paid in each state fiscalyear.  The recoupment of amounts held inthe capital reinvestment account, and a similar fund held by the RacingCommission to be used for racetrack capital improvements, are included ingaming revenues during the period in which approved qualifying expenditures aremade.  Excess qualifying expendituresmay be carried forward for recoupment in future periods, subject to certainstatutory limitations.

 

(2)                              On December 19, 2001, we redeemed all of theequity interest of the company held by WHX Entertainment Corp. for totalconsideration of $105.0 million (the Stock Purchase Transaction).  Of the $105.0 million total consideration,$90.0 million is attributable to the purchase price of the shares and $15.0million is attributable to a non-compete covenant whereby WHX is prohibitedfrom engaging in any business, which is the same as, substantially similar to,or directly competitive with the business activities conducted, by us for aperiod 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 Sportsystems.  Pursuant to this agreement, Sportsystemsreceives a fee that is equal to the greater of 1.5% of preceding year totaloperating revenues or $1.2 million per year.

 

(5)                                  Gross terminal income represents grossrevenues from slot machine gaming, or total amounts wagered, 

 

12

 

netof winning patron payouts.

 

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

 

(7)                                  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.

 

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

 

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

 

13

 

**ITEM 7****.****                  ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

*Cautionary Note RegardingForward-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 statementsconcerning future financial results, product or service offerings or otherevents that have not yet occurred) are forward-looking statements that are madepursuant to the 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.

 

**Recent Developments**

 

On March 24, 2004, DelawareNorth entered into a letter agreement with Merrill Lynch & Co. pursuant towhich Merrill Lynch has been engaged as Delaware North’s exclusive financialadvisor in connection with exploring strategic alternatives and potentialtransactions involving Wheeling Island Gaming.

 

# **Overview**

 

*General*

 

Weown and operate Wheeling Island Racetrack & Gaming Center, or WheelingIsland, a premier gaming and entertainment complex located in Wheeling, WestVirginia.  Wheeling Island features2,200 slot machines, a hotel, showroom, greyhound racetrack, pari-mutuelwagering on live greyhound racing and simulcast greyhound, thoroughbred andharness racing and various dining venues.

 

Ourgaming operation is comprised of 2,200 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 2,034 slotmachines that dispense coins and 166 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 consists 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.

 

*Stock Purchase Transaction*

 

Weare formerly an equally owned subsidiary of Sportsystems and WHX EntertainmentCorp., or WHX.  On December 19, 2001, weredeemed WHX’s entire equity interest for total consideration of $105,000, theStock Purchase Transaction.  Of the$105,000 total consideration, $90,000 is attributable to the purchase price ofthe shares and $15,000 is attributable to a non-compete covenant whereby WHX isprohibited from engaging in any business which is the same as, substantiallysimilar to, or directly competitive with our business activities for a periodof five years.

 

14

 

*Administrative Services Agreements*

 

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

 

*Wheeling Island Expansion*

 

On June 26, 2003, the Wheeling Islandexpansion was completed and opened for gaming. The gaming and hotel expansion is connected to our existing gamingfacility.  The opening of the WheelingIsland expansion increased the number of slot machines from 1,630 to 2,200while also adding the following amenities to the Wheeling Island complex:

 

•                  a 151-room hotel;

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

•                  a 550-seat multi-purpose showroom; and

•                  180 covered parking spaces plus additionaloutdoor parking spaces.

 

Thetotal cost of designing, developing, constructing and equipping the WheelingIsland expansion was approximately $68.4 million, including architectfees.  During 2003, 2002, and 2001, weincurred capital expenditures relating to the Wheeling Island expansion of$44.6 million, $21.6 million, and $2.2 million, respectively.

 

**CriticalAccounting Policies**

 

Our accounting policies are described in thenotes to the Consolidated Financial Statements.  We believe the following represent our critical accountingpolicies.

 

*Revenue Recognition*

 

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

 

InApril 2001, the West Virginia legislature adopted new legislation, effective asof July 1, 2001, which authorized an increase in West Virginia’s share of NTIabove a predetermined level, defined as the NTI generated for the State’sfiscal year ended June 30, 2001.  TheState deducts a 10.0% surcharge from NTI in excess of the predetermined level.  The remainder of the excess NTI is dividedas follows: 50.0% is returned to the racetrack (of which 8.0% representssupplemental purse expense), 41.0% is paid to the State’s general revenue fundand the remaining 9.0% is divided among various state funds.  Of the total 10.0% surcharge, 42.0% isdeposited in a capital reinvestment account attributable to eachracetrack.  The racetrack is entitled to

 

15

 

recoup monies in the capital reinvestment account for certain types ofcapital improvements made at the racetrack on a dollar-for-dollar basis.  This legislation also eliminated the refundof the portion of the administration fee in excess of the Lottery Commission’sadministrative expenses.

 

Theexpected surcharge amount is accrued ratably during the year based uponestimates 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 Racing Commissionto be used for racetrack capital improvements, are included in gaming revenuesduring the period in which approved qualifying expenditures are made.  Excess qualifying expenditures may becarried forward for recoupment in future periods, subject to certain statutorylimitations.  During 2003, statesurcharges of $7,109 and recognized recoupments of $3,681 were included aselements of reported gaming revenue.

 

*Valuation 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.  Fair value is determined through theperformance of internal analysis of discounted cash flows.  The undiscounted and discounted cash flowanalyses are based on a number of estimates and assumptions, including theexpected period over which the asset will be utilized, projected futureoperating results of the assets, discount rate and long-term cash flow growthrate.

 

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 our goodwill and indefinite-lived intangible assets exceedits implied fair value.  The fair valueis estimated through internal analysis, which utilizes an income valuationapproach through the application of the traditional discounted cash flowmethod.  The cash flows associated withthe traditional discounted cash flow method are based on a number of estimatesand assumptions, including the determination of reporting units, the projectedfuture operating results of the reporting unit, discount rate, long-term growthrate and appropriate market comparables.

 

*Preferred Player Program*

 

Many of ourcustomers are members of our frequent player program called the PreferredPlayers Club. The Preferred Players Club is a promotional tool used to developcustomer loyalty by providing customers with reward incentives for increasedlevels of play.  Club members canaccumulate points for casino wagering that can be redeemed for cash, food andbeverages, 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.

 

16

 

# **Resultsof Operations**

 

**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 theWheeling Island expansion and the expanded use of the Preferred Players Club,offset partially by a $1.9 million increase in the accrued share of netterminal income and surcharge amount (net of recoupments) owed to the state ofWest Virginia and a $1.9 million increase in the redemption of Preferred Players Club points and couponsfor cash.  On June 26, 2003, theWheeling Island expansion was opened for gaming.  Such expansion increased the number of slot machines from 1,630to 2,200 and added new lodging, food and beverage and entertainment amenitiesto the Wheeling Island complex.  InOctober 2002, the Preferred Players Club rewards were revised to providegreater incentives for higher levels of play. Such revisions combined with the opening of the Wheeling Islandexpansion resulted in higher levels of gaming activity and increased clubmembership from 167,405 at December 31, 2002 to 249,298 at December 31,2003.  The state of West Virginia’sshare of net terminal income above a predetermined level increases from 30.0%to 41.0% during a state fiscal year.  Inaddition, the state retains a 10.0% surcharge from all net terminal income inexcess of the predetermined level for the state fiscal year.  Of the total 10% surcharge, 42% can berecouped for certain types of capital investments made at the facility.  We accrue for the state’s share of netterminal income and the expected surcharge amount (net of recoupments) ratablythroughout the state fiscal year.  Thestate’s percentage share of net terminal income increased during 2003 due tolarge increases in net terminal income that were subject to the higherpercentage paid to the state (41%) and the 10.0% surcharge (net ofrecoupments).  As a result, gamingrevenue derived from slot machines as a percentage of net terminal incomedecreased from 57.6% to 56.3%.  All cashredemptions 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 increasein cash redemptions is due to the increase in Players Club membership from167,405 at 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 handle wasdue 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 new finedining restaurant, a casual dining restaurant, a food court, lounge and bar inconnection with the Wheeling Island expansion, offset partially by the increasein the number of food and beverage complimentaries provided to PreferredPlayers Club members through point redemptions and coupons.

 

Lodgingrevenues were $1.5 million for the year ended December 31, 2003.  Lodging revenues represent all 

 

17

 

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.  The state of WestVirginia’s share of net terminal income above a predetermined level increasesfrom 30.0% to 41.0% during a state fiscal year.  In addition, the state deducts a 10.0% surcharge from all netterminal income in excess of the predetermined level for the state fiscalyear.  The purse share of all excess netterminal income amounts remaining after the surcharge deduction is 8% ascompared to 14% for all net terminal income before the predeterminedlevel.  We accrued for the expecteddecrease in the purse share of net terminal income ratably throughout the statefiscal year.  The purse share of netterminal income decreased during 2003, due to large increases in net terminalincome that were subject to the 10.0% surcharge and the lower percentage paidto purses (8%) after the surcharge deduction. As a result, gaming purse expense as a percentage of net terminal incomedecreased from 11.8% to 11.0%.  The $0.2million decrease in pari-mutuel purse expense is due primarily to a $5.0million 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 expensesis due 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 $0.9 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.

 

18

 

Otherexpenses were $0.4 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 $6.5 million for the year ended December 31, 2003,an increase of $0.5 million, or 7.9%, 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 increasein facilities and maintenance expense is due primarily to a $0.7 millionincrease in security and cleaning payroll costs, a $0.4 million increase ininsurance premiums paid for liability and property coverage, a $0.4 millionincrease in utilities expense and a $0.4 million increase in real property andpersonal property taxes related to the opening of the Wheeling Islandexpansion.

 

Generaland administrative, or G&A, expenses were $5.1 million for the year endedDecember 31, 2003, an increase of $1.2 million, or 30.9%, from $3.9 million forthe year ended December 31, 2002.  Theincrease in G&A expense was due primarily to a $0.5 million increase inpayroll costs related to staff additions associated with the opening of theWheeling Island expansion, a $0.3 million increase in other professionalservices costs and a $0.2 million increase in administrative services fees paidto 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 tothe increased 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 assets relatedto 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 such expense 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.

 

**2002 Compared to 2001**

 

Gamingrevenues were $78.6 million for the year ended December 30, 2002, an increaseof $11.2 million, or 16.6%, from $67.4 million for the year ended December 31,2001.  The increase was due to anexpansion of our gaming operations in December 2001 and further increases inthe number of slot machines during 2002. In 

 

19

 

December2001, we increased the number of slot machines from 1,400 to 1,537.  During 2002, the number of machines wasincreased from 1,537 at December 31, 2001 to 1,623 at December 31, 2002.  In addition, during 2002 we continued toincrease spending on our marketing and promotions initiatives, including theexpanded use of promotional programs and increased spending on the PreferredPlayers Club.  The increase in gamingrevenues during 2002 was achieved despite the loss of reimbursement of aportion of the administrative fee paid to the Lottery Commission.  Such reimbursement equaling $1.8 million in2001 became non-recurring as a result of new legislation eliminating thereimbursement, which became effective July 1, 2001.  In addition, such legislation allowed the state to deduct a 10.0%surcharge from all net terminal income that exceeds a predetermined level andincreased the state’s share of such excess net terminal income.  As a result of the legislation, gamingrevenue derived from slot machines as a percentage of net terminal incomedecreased from 60.1% to 57.6%.  Withoutsuch legislation, gaming revenues would have increased an additional $5.5million.

 

Pari-mutuelrevenues for the year ended December 31, 2002 were $8.6 million, a decrease of$0.6 million, or 5.5%, from $9.2 million for the prior fiscal year.  The decrease in pari-mutuel revenues was dueto a $3.3 million decrease in wagering handle on our live races.

 

Foodand beverage revenues were $4.9 million for the year ended December 31, 2002,an increase of $0.4 million, or 9.1%, from $4.5 million for the year endedDecember 31, 2001.  The increase in foodand beverage revenues can be attributed to a 14.5% increase in attendanceduring 2002 as compared to 2001.

 

Otherrevenues of $0.8 million for the year ended December 31, 2002 were unchangedfrom the year ended December 31, 2001.

 

Purseexpenses were $18.8 million for the year ended December 31, 2002, an increaseof $1.8 million, or 10.4%, from $17.0 million for the year ended December 31,2001.  The $1.8 million increase was dueto a $1.9 million increase in gaming purse expense offset partially by a $0.1million decrease in pari-mutuel purse expense. The $1.9 million increase in gaming purse expense was directlyattributable to the increase in net terminal income to $143.2 million for theyear ended December 31, 2002 from $111.7 million for the year ended December31, 2001.  The increase in gaming purseexpense during 2002 occurred despite the loss of the purse distributionrepresenting a portion of the administration fee reimbursement received fromthe Lottery Commission.  Such pursedistribution equaling $0.4 million in 2001 became non-recurring as a result ofnew legislation eliminating the administration fee reimbursement, which becameeffective July 1, 2001.  In addition,such legislation allowed the state to deduct a 10.0% surcharge from all netterminal income that exceeds a predetermined level and decreased the purseshare of all excess net terminal income amounts remaining after the surchargededuction.  As a result of the legislation,gaming purse expense as a percentage of net terminal income decreased from13.1% to 11.8%.  Without suchlegislation, gaming purse expense would have increased by an additional $2.2million.  The $0.1 million decrease inpari-mutuel purse expense was due primarily to a $3.3 million decrease inwagering handle on our live races.

 

Gamingexpenses were $4.4 million for the year ended December 31, 2002, an increase of$0.6 million, or 17.1%, from $3.8 million for the year ended December 31,2001.  The increase is due primarily tohigher gaming payroll costs relating to the increased number of slot machinesand increased level of play.

 

Pari-mutuelexpenses were $4.0 million for the year ended December 31, 2002, a decrease of$0.3 million or 6.6% from $4.3 million for the year ended December 31, 2001.  The decrease was due primarily to lowerexpenses associated with a $3.3 million decrease in wagering handle on our liveraces.

 

Foodand beverage expenses for the year ended December 31, 2002 were $5.6 million,an increase of $1.5 million, or 37.6%, from $4.1 million for the prioryear.  Food and beverage expenses as apercentage of food and beverage revenues was 114.4% for the year ended December31, 2002, which is higher than the prior year 

 

20

 

percentageof 90.7%.  Such increase was due to theexpanded use of food and beverage price discounts and the complimentary drinkservice as promotional tools and a $0.2 million increase in payroll costsassociated with management staff additions.

 

Marketingand Promotions expenses were $6.0 million for the year ended December 31, 2002,an increase of $1.7 million, or 41.6%, from $4.3 million for the year endedDecember 31, 2001.  The increase inmarketing and promotions expense was due to increased promotions efforts,including increased spending on the Preferred Players Club.  The increase in Preferred Players Clubspending resulted from increasing the rewards provided to the Players and anincrease in player membership from 107,876 at December 31, 2001 to 167,405 atDecember 31, 2002.

 

Facilitiesand Maintenance expenses were $5.2 million for the year ended December 31,2002, an increase of $0.4 million, or 8.1%, from $4.8 million for the yearended December 31, 2001.  The increasewas due primarily to a $0.2 million increase in insurance premiums paid forliability and property coverage and a $0.1 million increase in property taxes.

 

For the fiscal year ended December 31, 2001management fee expense of $25.5 million was recorded and no such expense wasrecorded for the year ended December 31, 2002. Prior to the consummation of the stock purchase transaction on December19, 2001, management fees were calculated and paid in accordance with servicesagreements with the shareholders.  Suchagreements were terminated upon completion of the stock purchase transaction,thereby discontinuing this expense.

 

G&Aexpenses were $3.9 million for the year ended December 31, 2002, an increase of$0.8 million or 27.3% from $3.1 million for the year ended December 31,2001.  The increase in G&A expensewas due to a $0.7 million increase in administrative services fees paid to theshareholders, a $0.5 million increase in payroll costs, and a $0.2 millionincrease in legal costs, offset by $0.5 million of non-recurring employmentcosts incurred in 2001 and a $0.1 million decrease in consulting costs.  The $0.5 million increase in payroll costswas due primarily to the addition of management personnel needed to accommodatethe anticipated growth of the gaming operation and other amenity offeringsassociated with the opening of the Wheeling Island expansion.

 

Depreciationand amortization expenses were $7.5 million for the year ended December 31,2002, an increase of $3.8 million from the prior year.  The increase in depreciation and amortizationexpenses was due to $3.0 million of increased amortization expense attributableto the full year impact of a $15.0 million non-compete agreement with a priorshareholder and a $0.8 million increase in depreciation expense.  The $15.0 million non-compete agreementrepresents a portion of the total consideration paid for the stock purchasedfrom that shareholder in the stock purchase transaction.  The stock purchase transaction was completedon December 19, 2001.  During the twelvemonths ended December 31, 2002, $8.7 million of assets were added to ourbuildings, improvements and equipment accounts.  These assets are directly responsible for the $0.8 millionincrease in depreciation expense.

 

Interestexpense was $13.9 million for the year ended December 31, 2002, an increase of$12.5 million from $1.4 million for the year ended December 31, 2001.  The increase in interest expense was due toa $12.9 million increase in interest expense and amortization of debt issuancecosts associated with the full year impact of the December 2001 issuance of the$125.0 million of unsecured senior notes, $0.3 million of interest expenserelated to a 2002 review of our 1999, 2000 and 2001 federal income tax returnsand $0.2 million of commitment fees associated with our $40.0 million revolvingcredit facility.  This was offsetpartially by $1.0 million of interest expense and amortization of debt issuancecosts recorded in 2001 relating to borrowings under a previous $20.0 millionrevolving credit facility, which were fully repaid from the proceeds of theissuance of the $125.0 million of unsecured senior notes.

 

21

 

Otherexpense for the year ended December 31, 2002 was $0.3 million and represents aloss on the disposition of assets due to the demolition of building assets inconnection with the Wheeling Island expansion.

 

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

 

**Liquidityand Capital Resources**

 

Asof December 31, 2003, we had cash and cash equivalents of $9.5 million.  Our principal sources of liquidity duringthe year ended December 31, 2003 consisted of cash provided by operatingactivities and borrowings from our $50.0 million revolving creditfacility.  As of December 31, 2002, wehad cash and cash equivalents of $7.9 million. Our principal source of liquidity during the year ended December 31,2002 consisted of cash provided by operating activities.

 

Cashprovided by operating activities for the year ended December 31, 2003 was $28.2million as compared to $22.4 million for the year ended December 31, 2002.  The $5.8 million increase was due to (i) a$7.4 million increase in the change of our deferred income tax liabilityresulting from an increased differential between our book and tax basisdepreciation, (ii) a $0.6 million increase in net income, and (iii) a $1.8million increase in non-cash depreciation and amortization and other non-cashadjustments, offset partially by a $4.0 million increase in the change inworking capital due primarily to a $4.4 million increase in receivablesrelating primarily to the timing of the receipt of various capital expenditureand marketing recoupments from the state of West Virginia and higher prepaidexpenses.

 

Cashused in investing activities for the years ended December 31, 2003 and 2002 was$47.1 million and $25.4 million, respectively. The $21.7 million increase in cash used for investing activities was dueprimarily to a $23.0 million increase in capital expenditures relating to the WheelingIsland expansion from $21.6 million for the year ended December 31, 2002 to$44.6 million for the year ended December 31, 2003.  With the completion of the Wheeling Island expansion in 2003, itis expected that the cash used in investing activities will decreasesubstantially in 2004.

 

Cashprovided by financing activities for the year ended December 31, 2003 andDecember 31, 2002 was $20.5 million and $0.9 million, respectively.  The $19.6 million increase in cash providedby (used in) financing activities is due to a $32.5 million increase inborrowings under the $50 million revolving credit facility during the yearended December 31, 2003 and the incurrence of $0.6 million of debt issuancecosts during 2002 which relate to the issuance and registration of theunsecured senior notes, offset partially by a $12.0 million dividend paid tothe shareholder during 2003.  The debtproceeds resulting from the $32.5 million increase in borrowings under the $50million revolving credit facility were used to fund the increased capitalexpenditures relating to the Wheeling Island expansion and the payment of the$12.0 million dividend to the shareholder.

 

**ContractualObligations and Comm**itments

 

Thefollowing table reflects our contractual obligations and commitments:

 
|                                           |   | **Payments  Due by Period  (in thousands)** |    |
|------------------------------------------------|--------|--------------------------------------------------|---------|
| **($000)**                                     |   | **Total**                                        |    | **Less than  1 Year** |   | **1-3  Years** |   | **4-5  Years** |   | **After 5  Years** |   |
|                                           |   |                                             |    |   |   |   |   |   |   |   |   |
| Long Term Debt                                 |   | $                                                | 159,000 |   | $ | 0 |   | $ | 34,000 |   | $ | 0 |   | $ | 125,000 |   |
| Total Contractual Obligations and  Commitments |   | $                                                | 159,000 |   | $ | 0 |   | $ | 34,000 |   | $ | 0 |   | $ | 125,000 |   |

 

22

 

Our ability to service our debt depends onour ability to generate significant cash flow in the future.  This, to some extent, is subject to generaleconomic, financial, competitive, legislative and regulatory factors, as wellas other factors that are beyond our control. In addition, the ability to borrow funds under our $50.0 millionrevolving credit facility in the future depends on our meeting the financial covenantsin such credit agreement, including a minimum fixed charge coverage ratio testand a maximum leverage ratio test.  Wecannot assure you that our business will generate cash flow from operations, orthat future borrowings will be available to use under our $50.0 millionrevolving credit facility or otherwise, in an amount sufficient to enable us toservice our long-term debt or to fund other liquidity needs.

 

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

# ** **

None.

 

**ITEM 8****.****                      ****FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

** **

TheConsolidated Financial Statements and accompanying footnotes are set forth onpages F-1 through F-21 of this report.

 

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

 

None.

 

**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 significant changes in ourinternal control over financial reporting that occurred during our mostrecently completed fiscal quarter that materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

*Vault Accounting and Gaming Control*

 

During 2003 we reviewed our vault accounting procedures and relatedinternal controls.  A reconciliation ofcash on hand in the third quarter revealed a shortfall of $0.6 million to theexpected balance, and a second reconciliation in the fourth quarter revealed anadditional shortfall of $0.1 million. As a result, a provision of an aggregate $0.7 million has been made togaming expense for the year ended December 31, 2003 in the accompanyingconsolidated financial statements. Management is evaluating, and continuing to implement procedural changesto, its vault accounting process and has expanded its internal control reviewto further enhance our gaming controls.

 

23

 

**PART III**

 

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

 

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

 
| **Name**              |   | **Age** |   | **Position  and Office Held**          |
|-----------------------|--------|---------|--------|----------------------------------------|
|                  |   |    |   |                                   |
| Dennis  J. Szefel     |   | 57      |   | Chairman  of the Board                 |
| Thomas  A. Cooper     |   | 67      |   | Director,  Chairman of Audit Committee |
| William  R. Greiner   |   | 69      |   | Director,  Member of Audit Committee   |
| Richard  T. Stephens  |   | 61      |   | Director                               |
| William  J. Bissett   |   | 55      |   | Director                               |
| Ronald  A. Sultemeier |   | 55      |   | Chief  Executive Officer               |
| Geoffry  P. Andres    |   | 37      |   | President                              |
| Michael  D. Corbin    |   | 42      |   | Vice  President of Finance             |

 

***Dennis J. Szefel****.*  Mr. Szefel was appointed as a director inDecember 2001 and was named Chairman of the Board in January 2003.  Since January 2002, Mr. Szefel has served asPresident of the Hospitality and Entertainment Group of Delaware North. FromOctober 1993 to January 2002, Mr. Szefel held the position of President ofDelaware North Parks Services, Inc., a subsidiary of Delaware North.  Mr. Szefel originally joinedSportservice Corporation, another Delaware North subsidiary, in January 1969.  Since joining Delaware North in 1969, he hasheld a number of senior management positions within Delaware North’s variousbusiness units.

 

***Thomas A. Cooper****. *Mr. Cooper wasappointed as a director and named Chairman of the Audit Committee.  In addition, Mr. Cooper is Chairman of TACAssociates, 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.Greiner was appointed as a director and named a member of the Audit Committeein January 2003.  Mr. Greiner is a lawprofessor at the University at Buffalo, the State University of New York.  From 1991 to 2003, Mr. Greiner served as theUniversity’s President and from 1984 through 1991 Mr. Greiner served as theUniversity’s Provost.  From 1980 throughAugust 1984, Mr. Greiner served as the University’s Associate Vice Presidentfor Academic Affairs and Chief Academic Officer for the Division of AcademicAffairs.

 

***Richard T. Stephens****. *Mr. Stephenswas appointed as a director in January 2003. In January 2004, Mr. Stephens was appointed Vice Chairman of DelawareNorth.  From 1991 to 2003, Mr. Stephensserved as President and Chief Operating Officer of Delaware North.  From 1985 to 1991, Mr. Stephens served asPresident of Delaware North Companies, International, Ltd., a subsidiary ofDelaware North.  Mr. Stephens joinedDelaware North in 1976 as Vice President of Finance.

 

***William J.Bissett****.* Mr. Bissett has served as a director since October 1994.  Mr. Bissett has served as VicePresident, Government Affairs and Community Relations for Delaware North sinceMarch 1995, overseeing all government relations activities, including interactionwith legislative and regulatory agencies at all levels of government.  From June 1992 to March 1995,Mr. Bissett served as President of Sportsystems Corporation.

 

***Ronald A.Sultemeier***  Mr.Sultemeier was appointed as our Chief Executive Officer in March 2003.  From 

 

October 1994 to November 2001, Mr. Sultemeierserved as our Vice President and Treasurer. Mr. Sultemeier also served as a director from October 1994 throughJanuary 2003.  Mr. Sultemeier joinedSportsystems Corporation 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.

 

***Geoffry P. Andres***  Mr. Andres was appointed as our President inJanuary 2004.  From 1988 to 2003, Mr.Andres worked for Harrah’s Entertainment, Inc. in various management positions,including Vice President of Casino Operations for their New Orleans Casino andtheir Shreveport Casino Hotel.  From1998 to 2001, Mr. Andres served as Director of Table Games for Harrah’s LasVegas Casino and from 1997 to 1998 served as Director of Slot Operations forHarrah’s Lake Tahoe Casino.

 

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

 

24

 

 

**Audit Committee of the Board of Directors**

 

The Board of Directors has an Audit Committee, which held six meetingsin fiscal 2003.  The Audit Committeecurrently consists 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 the Securitiesand Exchange Commission.  Both Mr.Cooper and Mr. Greiner qualify as “independent” as such term is used in Item7(d)(3)(iv) of Schedule 14A under the Exchange Act assuming the listingstandards of the National Association of Securities Dealers, Inc. applied.

 

The Audit Committee oversees our financial reporting process andinternal audit functions on behalf of the Board of Directors.  In fulfilling its responsibility, the AuditCommittee recommends to the Board of Directors the selection of our independentcertified public accountants.  The AuditCommittee also reviews our consolidated financial statements and the adequacyof our internal controls.  The AuditCommittee meets at least quarterly with management and the independentcertified public accountants to discuss the results of their audit of theconsolidated financial statements, their evaluation of our internal controls,the overall quality of our financial reporting, our critical accountingpolicies and to review and approve any related party transactions.  Periodically the Audit Committee meetsseparately with the independent certified public accountants.

 

# **ITEM 10A**.  CODE OF ETHICS

# ** **

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 our Internet website atwww.wheelingisland.com.  In the futurewe intend to disclose any amendment to, or waiver of, a provision of the Codeof Ethics that applies to our President, Chief Executive Officer or VicePresident of Finance on our website.

 

# **ITEM 11**.  EXECUTIVE COMPENSATION

# ** **

**REMUNERATION OF DIRECTORS**

 

Directorsare compensated for their services as follows: 

 

•                  An annual retainer fee of $25,000, payable inequal quarterly installments for serving on the Board of Directors.

 

•                  An annual retainer fee of $15,000, payable inequal quarterly installments for each director who serves on the AuditCommittee.

 

•                  A fee of $1,000 for each Board of Directorsmeeting and each Audit Committee Meeting attended.  If the Board of Directors meeting and Audit Committee Meeting areheld on the same day then a $1,000 fee is paid for participation at bothmeetings.

 

The reasonable expenses incurred by eachdirector in connection with his duties as a director are also reimbursed byus.  A Board member who is also anemployee of the Company or Delaware North does not receive compensation forservice as a director.

 

25

 

**COMPENSATION OF EXECUTIVE OFFICERS**

 

SUMMARY COMPENSATION TABLE

 

The following table setsforth for our fiscal years ended December 31, 2001, December 31, 2002 andDecember 31, 2003, in prescribed format, the compensation awarded, paid to orearned by our chief executive officer and the other four most highlycompensated “executive officers” whose compensation exceeded $100,000 atDecember 31, 2003 (the “Named Executive Officers”):

 
|                            |   | **Annual  Compensation** |   |
|---------------------------------|--------|--------------------------|--------|
| **Name and Principal Position** |   | **Year**                 |   | **Salary ($)** |   | **Bonus ($)** |   |
|                            |   |                     |   |   |   |   |   |
| Ronald A. Sultemeier (1)        |   | 2003                     |   | 245,000 |   | 0 |   |
| Chief Executive Officer         |   | 2002                     |   | 240,000 |   | 100,000 |   |
|                            |   | 2001                     |   | 235,000 |   | 80,000 |   |
|                            |   |                     |   |   |   |   |   |
| Scott L. Cooper (2)             |   | 2003                     |   | 235,000 |   | 0 |   |
| President                       |   | 2002                     |   | 230,000 |   | 61,000 |   |
|                            |   | 2001                     |   | 188,204 |   | 10,000 |   |
|                            |   |                     |   |   |   |   |   |
| Geoffry P. Andres (3)           |   | 2003                     |   | — |   | — |   |
| President                       |   | 2002                     |   | — |   | — |   |
|                            |   | 2001                     |   | — |   | — |   |
|                            |   |                     |   |   |   |   |   |
| James J. Rafferty (4)           |   | 2003                     |   | 144,615 |   | 12,532 |   |
| Vice President of Marketing     |   | 2002                     |   | — |   | — |   |
|                            |   | 2001                     |   | — |   | — |   |
|                            |   |                     |   |   |   |   |   |
| Michael D. Corbin (5)           |   | 2003                     |   | 97,916 |   | 0 |   |
| Vice President - Finance        |   | 2002                     |   | 92,375 |   | 9,400 |   |
|                            |   | 2001                     |   | 89,250 |   | 13,100 |   |
|                            |   |                     |   |   |   |   |   |
| Alex M. Tucker (6)              |   | 2003                     |   | 103,000 |   | 10,300 |   |
| Director of Slot Operations     |   | 2002                     |   | 100,000 |   | 17,000 |   |
|                            |   | 2001                     |   | 90,000 |   | 0 |   |
|                            |   |                     |   |   |   |   |   |
| Joel M. Daum                    |   | 2003                     |   | 94,500 |   | 5,670 |   |
| Controller                      |   | 2002                     |   | 90,000 |   | 4,498 |   |

 

----

(1)   RonaldA. Sultemeier is compensated by Sportsystems in his capacity as President ofthat company.

 

(2)   Scott L.Cooper resigned as our President in January of 2004.

 

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

 

(4)   James J.Rafferty became our Vice President of Marketing in January of 2003. His annualsalary is $165,000.

 

(5)   MichaelD. Corbin is compensated by Sportsystems in his capacity as Controller of thatcompany.

 

(6)   Alex M.Tucker resigned as Director of Slot Operations in February 2004.

 

26

 

**REPORT OF THE BOARD OF DIRECTORS ON****EXECUTIVE COMPENSATION**

 

Compensation of executiveofficers and the Chief Executive Officer is governed by the executivecompensation philosophy, policy and procedures of Delaware North.  Annual base salary and variable compensationfor, each named executive officer, is reviewed and approved by the compensationcommittee of the Delaware North Board of Directors, or the CompensationCommittee.  Annual based salary andvariable compensation of the Chief Executive Office is reviewed and approvedannual by both the Compensation Committee and the Board of Directors ofWheeling Island Gaming.

 

**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:

 

•                  Compensation policies, procedures andpractices are designed to attract and retain top quality management.

 

•                  Total compensation must reflect a competitiveand performance-oriented environment that motivates executives to set andachieve aggressive goals in their respective areas of responsibility.

 

•                  Incentive based compensation is contingentupon the performance of each executive against pre-established annual financialand strategic performance objectives.

 

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

 

**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 earned as bonus compensationis based upon the achievement of the specific pre-established financial andstrategic 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.

 

Oncereviewed and approved by Delaware North or the Compensation Committee, allexecutive officer compensation is subject to approval by the Wheeling IslandGaming Board of Directors.

 

**Chief Executive Officer Compensation**

 

Thesalary compensation of the Chief Executive Officer is reviewed annually by theChairman of the Board in conjunction with a performance evaluation. TheChairman of the Board will make a recommendation in salary adjustment to theCompensation Committee for approval.

 

Thebonus compensation of the Chief Executive Officer is computed as a percentage ofbase 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.

 

Oncereviewed and approved by the Compensation Committee, the Chief ExecutiveOfficer compensation is subject to approval by the Wheeling Island Gaming Boardof Directors.

 
|   | THE  BOARD OF DIRECTORS |
|--------|-------------------------|
|   |                    |
|   | Dennis  J. Szefel       |
|   | Thomas  A. Cooper       |
|   | William  R. Greiner     |
|   | Richard  T. Stephens    |
|   | William  J. Bissett     |

 

27

 

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

 

# **PrincipalShar**eholders

 

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.

 
| **Names And Addresses**                                      |   |   | **Number of  Shares  Beneficially  Owned** |   | **Percentage  of Class** |   |
|--------------------------------------------------------------|--------|--------|--------------------------------------------|--------|--------------------------|--------|
|                                                         |   |   |                                       |   |                     |
| Sportsystems Corporation(1)                                  |   | 500    |                                       | 100%   |                     |
| Ronald A. Sultemeier                                         |   | 0      |                                       | 0      |                     |
| Geoffry P. Andres                                            |   | 0      |                                       | 0      |                     |
| Michael D. Corbin                                            |   | 0      |                                       | 0      |                     |
| William J. Bissett                                           |   | 0      |                                       | 0      |                     |
| Dennis J. Szefel                                             |   | 0      |                                       | 0      |                     |
| Thomas A. Cooper                                             |   | 0      |                                       | 0      |                     |
| William R. Greiner                                           |   | 0      |                                       | 0      |                     |
| Richard T. Stephens                                          |   | 0      |                                       | 0      |                     |
| All executive officers and directors as a  group (8 persons) |   | 0      |                                       | 0      |                     |

 

----

(1)                                  The address for Sportsystems Corporation is40 Fountain Plaza, Buffalo, New York 14202.

 

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

 

# **ITEM 13**.  CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS

 

Uponthe closing of the $125.0 million of unsecured senior notes in December 2001,we entered into an administrative services agreement with Sportsystems andDelaware North.  Pursuant to thisadministrative services agreement, Sportsystems receives an annualadministrative services fee that is equal to the greater of 1.5% of precedingyear total operating revenues or $1.2 million for certain administrativesupport services provided to us by Sportsystems and Delaware North.  During 2003, 2002, and 2001, we recordedadministrative service fees of $1.5 million, $1.3 million, and $39,000,respectively, under this agreement.

 

Priorto the closing of the $125.0 million of unsecured senior notes in December2001, Sportsystems and Delaware North provided cash management services to us,whereby we invested our excess cash balances and earned interest atSportsystems’ reinvestment rate.  Sincethe closing of the Stock Purchase Transaction in December 2001 we have investedour excess cash in a segregated account administered by Delaware North underits centralized cash management program. At December 31, 2003 and December 31, 2002, we had $0.4 million 

 

28

 

and$2.0 million invested with Delaware North, respectively.  During 2003, 2002 and 2001, we earned$16,000, $0.1 million and $0.1 million on these invested cash balances,respectively.

 

Weentered into a tax sharing agreement, effective as of December 20, 2001, withDelaware North and Sportsystems providing for the payment by us to DelawareNorth of amounts representing not more than the amount of tax that would bepayable by us had we and our subsidiaries filed a separate consolidated orcombined tax return as a Subchapter C corporation for the relevant taxingjurisdiction (less any tax directly paid by such persons with respect to suchperiod).

 

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

# ** **

*Audit Fees*

 

The following table summarizes fees billed to theCompany for fiscal 2003 and for the fiscal year ended December 31, 2002:

 
|                                             |   | **Fiscal  2003** |    | **Fiscal  2002** |   |
|--------------------------------------------------|--------|------------------|---------|------------------|--------|
| Audit Fees-*Annual Audit and Quarterly Reviews*  |   | $                | 139,500 |             | $      | 79,000 |   |
| Audit-Related Fees                               |   | 20,000           |    | 0                |   |
| Tax Fees:-                                       |   | 0                |    | 0                |   |
| *Tax Consulting, Advisory Services*              |   | 0                |    | 0                |   |
| *Tax Compliance, Planning and  Preparation* |   | 0                |    | 0                |   |
| All Other Fees                                   |   | 0                |    | 0                |   |
| Total Fees                                       |   | $                | 159,500 |             | $      | 79,000 |   |

 

The audit fees in the above table are related to the audit of ouryear-end financial statements and the review of our interim financialstatements.  Audit related fees arethose fees associated with a review of our vault accounting procedures andrelated internal controls.  Since 2003,all such accounting fees and services are approved by the Audit Committee atthe beginning of each respective year in accordance with the Audit Committee’spre-approval procedures.

 

29

 

**PART IV**

 

**ITEM 15****.****            ****EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM8-K**

 

## **(a)  Documents Filedas part of the Form 10-K**

## ** **

1.                                       The Consolidated Financial Statements of theCompany filed as part of this report are listed on the Index beginning on pageF-1.

 

2.                                       Financial Statement Schedules

 

None.

 

3.                                       Exhibits

 

The Exhibits required byItem 601 of Regulation S-K and filed herewith are listed in the Index toExhibits immediately preceding the Exhibits.

 

## **(b)   Reportson Form 8-K**

 

The Company filed a Form 8-K dated November 11, 2003to report the issuance of a press release announcing its financial results forthe quarter ended September 28, 2003.

 

30

 

**SIGNATURES**

 

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

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

 

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 
| **Signature**            |                                                            | **Capacity**              |           | **Date** |
|--------------------------|-----------------------------------------------------------------|---------------------------|----------------|----------|
|                     |                                                            |                      |
| /s/ Ronald A. Sultemeier |                                                            | Chief Executive Officer   | March 29, 2004 |
| Ronald A. Sultemeier     | (principal executive officer)                                   |                      |
|                     |                                                            |                      |
| /s/ Michael D. Corbin    |                                                            | Vice President of Finance | March 29, 2004 |
| Michael D. Corbin        | (principal financial officer and principal  accounting officer) |                      |           |
|                     |                                                            |                      |
| /s/ Dennis J. Szefel     |                                                            | Chairman of the Board     | March 29, 2004 |
| Dennis  J. Szefel        |                                                            |                      |
|                     |                                                            |                      |
| /s/ Thomas A. Cooper     |                                                            | Director                  | March 29, 2004 |
| Thomas  A. Cooper        |                                                            |                      |
|                     |                                                            |                      |
| /s/ William R. Greiner   |                                                            | Director                  | March 29, 2004 |
| William  R. Greiner      |                                                            |                      |
|                     |                                                            |                      |
| /s/ Richard T. Stephens  |                                                            | Director                  | March 29, 2004 |
| Richard T. Stephens      |                                                            |                      |
|                     |                                                            |                      |
|                     |                                                            | Director                  | March 29, 2004 |
| William J. Bissett       |                                                            |                      |
|                          |                                                                 |                           |                |          |  |

 

31

 

**INDEX TOEXHIBITS**

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                          |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                     |
| 3.1              |   | Certificate  of Incorporation of Wheeling Island Gaming, Inc. (the “Company”)**                                                                                                                                                                |
|             |   |                                                                                                                                                                                                                                                     |
| 3.2              |   | Restated  By-laws of the Company **                                                                                                                                                                                                                      |
|             |   |                                                                                                                                                                                                                                                     |
| 4.1              |   | Indenture,  dated as of December 19, 2001, by and among the Company, the Guarantors (as  defined therein) and U.S. Bank, N.A., as trustee**                                                                                                              |
|             |   |                                                                                                                                                                                                                                                     |
| 4.2              |   | Notation  of Guarantee, WDRA Food Service, Inc. (“WDRA”) as Guarantor**                                                                                                                                                                        |
|             |   |                                                                                                                                                                                                                                                     |
| 4.3              |   | Notation  of Guarantee, Wheeling Land Development Corp. (“Wheeling Land”) as  Guarantor**                                                                                                                                                      |
|             |   |                                                                                                                                                                                                                                                     |
| 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**                                    |
|             |   |                                                                                                                                                                                                                                                     |
| 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** |
|             |   |                                                                                                                                                                                                                                                     |
| 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**                                               |
|             |   |                                                                                                                                                                                                                                                     |
| 10.3             |   | Stock  Redemption Agreement, dated as of November 16, 2001, by and among the  Company, WHX Entertainment Corp. and Sportsystems Corporation**                                                                                                            |
|             |   |                                                                                                                                                                                                                                                     |
| 10.4             |   | Advisory  Services Agreement, dated as of November 16, 2001, by and between the Company  and Delaware North Companies, Incorporated**                                                                                                                    |
|             |   |                                                                                                                                                                                                                                                     |
| 10.5             |   | Administrative  Services Agreement, effective as of December 19, 2001, by and among the  Company, Sportsystems Corporation and Delaware North Companies,  Incorporated**                                                                                 |
|             |   |                                                                                                                                                                                                                                                     |
| 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**                                                             |
|             |   |                                                                                                                                                                                                                                                     |
| 10.7             |   | Agreement dated as of September  1, 2001 between the Company and Louis P. Ciminelli Construction Company, Inc.  **                                                                                                                                       |
|             |   |                                                                                                                                                                                                                                                     |
| 21.1             |   | List  of subsidiaries of the Company**                                                                                                                                                                                                                   |
|             |   |                                                                                                                                                                                                                                                     |
| 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 *                                                                                                                                 |
|             |   |                                                                                                                                                                                                                                                     |
|                  |
| *                |   | Filed herewith.                                                                                                                                                                                                                                          |
| **               |   | Previously filed with the Securities and  Exchange Commission.                                                                                                                                                                                           |

 

32

----

 

**Report of Independent Auditors**

 

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, 2003 and 2002, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2003, in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are the responsibility of the Company’smanagement; our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with auditing standardsgenerally accepted in the United States of America, which require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used, and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

PricewaterhouseCoopersLLP

Buffalo,New York

 

March15, 2004

 

F-1

 

**WHEELING ISLAND GAMING, INC.**

 

**Consolidated Balance Sheets**

**($000’s omitted)**

 
|                                                                                                      |   | **December  31,** |    |
|-----------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                      |   | **2003**          |    | **2002** |   |
|                                                                                                      |   |              |    |   |   |
| **Assets**                                                                                                |   |              |    |   |   |
| Current assets:                                                                                           |   |              |    |   |   |
| Cash and cash equivalents                                                                                 |   | $                 | 9,517   |   | $ | 7,867 |   |
| Receivables                                                                                               |   | 6,885             |    | 2,439 |   |
| Prepaid expenses and other assets                                                                         |   | 1,190             |    | 479 |   |
| Prepaid income taxes                                                                                      |   | 2,390             |    | 1,067 |   |
| Deferred income taxes                                                                                     |   | 154               |    | 92 |   |
|                                                                                                      |   |              |    |   |   |
| Total current assets                                                                                      |   | 20,136            |    | 11,944 |   |
|                                                                                                      |   |              |    |   |   |
| Property and equipment, net                                                                               |   | 96,308            |    | 55,845 |   |
| Operating licenses                                                                                        |   | 65,919            |    | 65,919 |   |
| Goodwill                                                                                                  |   | 32,221            |    | 32,221 |   |
| Non-compete covenant                                                                                      |   | 8,902             |    | 11,902 |   |
| Other intangible assets                                                                                   |   | 2,278             |    | 2,318 |   |
| Debt issuance costs                                                                                       |   | 4,752             |    | 5,591 |   |
|                                                                                                      |   |              |    |   |   |
| Total assets                                                                                              |   | $                 | 230,516 |   | $ | 185,740 |   |
|                                                                                                      |   |              |    |   |   |
| **Liabilities and  Shareholder’s Equity**                                                            |   |              |    |   |   |
|                                                                                                      |   |              |    |   |   |
| Current liabilities:                                                                                      |   |              |    |   |   |
| Accounts payable                                                                                          |   | $                 | 4,583   |   | $ | 3,949 |   |
| Accrued expenses                                                                                          |   | 6,746             |    | 4,273 |   |
|                                                                                                      |   |              |    |   |   |
| Total current liabilities                                                                                 |   | 11,329            |    | 8,222 |   |
|                                                                                                      |   |              |    |   |   |
| Long-term debt                                                                                            |   | 159,000           |    | 126,500 |   |
| Deferred income tax                                                                                       |   | 29,307            |    | 23,530 |   |
|                                                                                                      |   |              |    |   |   |
| Total liabilities                                                                                         |   | 199,636           |    | 158,252 |   |
|                                                                                                      |   |              |    |   |   |
| Shareholder’s equity:                                                                                |   |              |    |   |   |
| Common stock, $1 par value, 500 shares  authorized, issued and outstanding in 2002 and 2001, respectively |   | 1                 |    | 1 |   |
| Additional paid-in capital                                                                                |   | 5,915             |    | 5,915 |   |
| Retained earnings                                                                                         |   | 24,964            |    | 21,572 |   |
|                                                                                                      |   |              |    |   |   |
| Total shareholder’s equity                                                                           |   | 30,880            |    | 27,488 |   |
|                                                                                                      |   |              |    |   |   |
| Total liabilities and shareholder’s equity                                                           |   | $                 | 230,516 |   | $ | 185,740 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

F-2

 

**WHEELING ISLAND GAMING, INC.**

 

**Consolidated Statement ofOperations**

**($000’s omitted)**

 
|                          |   | **Years  ended December 31,** |   |
|-------------------------------|--------|-------------------------------|--------|
|                          |   | **2003**                      |   | **2002** |   | **2001** |   |
|                          |   |                          |   |   |   |   |   |
| Operating revenue:            |   |                          |   |   |   |   |   |
| Gaming revenue                |   | $                             | 88,634 |   | $ | 78,550 |   | $ | 67,372 |   |
| Pari-mutuel revenue           |   | 7,704                         |   | 8,639 |   | 9,145 |   |
| Food & beverage revenue   |   | 6,066                         |   | 4,913 |   | 4,502 |   |
| Lodging revenue               |   | 1,542                         |   | — |   | — |   |
| Other revenue                 |   | 1,357                         |   | 790 |   | 800 |   |
|                          |   |                          |   |   |   |   |   |
|                          |   | 105,303                       |   | 92,892 |   | 81,819 |   |
|                          |   |                          |   |   |   |   |   |
| Operating expenses:           |   |                          |   |   |   |   |   |
| Purse expense                 |   | 20,147                        |   | 18,799 |   | 17,025 |   |
| Gaming costs                  |   | 7,025                         |   | 4,397 |   | 3,755 |   |
| Pari-mutuel costs             |   | 3,772                         |   | 4,049 |   | 4,335 |   |
| Food & beverage costs     |   | 6,857                         |   | 5,617 |   | 4,083 |   |
| Lodging expenses              |   | 856                           |   | — |   | — |   |
| Other expenses                |   | 339                           |   | — |   | — |   |
| Marketing and promotions      |   | 6,522                         |   | 6,046 |   | 4,270 |   |
| Facilities and maintenance    |   | 7,309                         |   | 5,176 |   | 4,790 |   |
| Management fees               |   | —                        |   | — |   | 25,521 |   |
| General and administrative    |   | 5,117                         |   | 3,909 |   | 3,069 |   |
| Depreciation and amortization |   | 9,630                         |   | 7,483 |   | 3,703 |   |
|                          |   |                          |   |   |   |   |   |
|                          |   | 67,574                        |   | 55,476 |   | 70,551 |   |
|                          |   |                          |   |   |   |   |   |
| Operating income              |   | 37,729                        |   | 37,416 |   | 11,268 |   |
| Interes, net                  |   | (14,013                       | )      | (13,939 | ) | (1,427 | ) |
| Other income (expense), net   |   | 1                             |   | (333 | ) | (69 | ) |
| Income before income tax      |   | 23,717                        |   | 23,144 |   | 9,772 |   |
| Income tax expense            |   | 8,325                         |   | 8,303 |   | 3,313 |   |
|                          |   |                          |   |   |   |   |   |
| Net income                    |   | $                             | 15,392 |   | $ | 14,841 |   | $ | 6,459 |   |

 

The accompanying notes are an integral partof these financial statements

 

F-3

 

**WHEELING ISLAND GAMING, INC.**

 

**Consolidated Statements of CashFlows**

**($000’s omitted)**

 
|                                                                                |   | **Years ended December 31,** |   |
|-------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                |   | **2003**                     |   | **2002** |   | **2001** |   |
| Cash flows relating to operating activities:                                        |   |                         |   |   |   |   |   |
|                                                                                |   |                         |   |   |   |   |   |
| Net Income                                                                          |   | $                            | 15,392 |   | $ | 14,841 |   | $ | 6,459 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities - |   |                         |   |   |   |   |   |
| Depreciation and amortization                                                       |   | 9,630                        |   | 7,483 |   | 3,703 |   |
| Deferred income taxes                                                               |   | 5,715                        |   | (1,718 | ) | 605 |   |
| Other                                                                               |   | 838                          |   | 1,144 |   | 313 |   |
| Change in assets and liabilities:                                                   |   |                         |   |   |   |   |   |
| Receivables                                                                         |   | (4,446                       | )      | (1,259 | ) | (279 | ) |
| Prepaid expenses and other assets                                                   |   | (711                         | )      | (39 | ) | (134 | ) |
| Prepaid income taxes                                                                |   | (1,323                       | )      | (1,024 | ) | 584 |   |
| Accounts payable                                                                    |   | 634                          |   | 1,432 |   | (34 | ) |
| Accrued expenses                                                                    |   | 2,473                        |   | 1,557 |   | 946 |   |
|                                                                                |   |                         |   |   |   |   |   |
| Net cash provided by operating activities                                           |   | 28,202                       |   | 22,417 |   | 12,163 |   |
|                                                                                |   |                         |   |   |   |   |   |
| Cash flows relating to investing activities:                                        |   |                         |   |   |   |   |   |
| Payments for capital expenditures                                                   |   | (47,052                      | )      | (25,381 | ) | (6,752 | ) |
| Stock Purchase Transaction                                                          |   | —                       |   | — |   | (105,000 | ) |
| Net cash used in investing activities                                               |   | (47,052                      | )      | (25,381 | ) | (111,752 | ) |
|                                                                                |   |                         |   |   |   |   |   |
| Cash flows relating to financing activities:                                        |   |                         |   |   |   |   |   |
| Proceeds from long-term borrowings                                                  |   | 32,500                       |   | 1,500 |   | 125,000 |   |
| Repayment of long-term borrowings                                                   |   | —                       |   | — |   | (14,500 | ) |
| Debt issuance costs and other                                                       |   | —                       |   | (572 | ) | (6,028 | ) |
| Dividends paid                                                                      |   | (12,000                      | )      | — |   | — |   |
| Net cash provided by financing activities                                           |   | 20,500                       |   | 928 |   | 104,472 |   |
|                                                                                |   |                         |   |   |   |   |   |
| Net (decrease) increase in cash                                                     |   | 1,650                        |   | (2,036 | ) | 4,883 |   |
|                                                                                |   |                         |   |   |   |   |   |
| Cash balances:                                                                      |   |                         |   |   |   |   |   |
| Beginning of period                                                                 |   | 7,867                        |   | 9,903 |   | 5,020 |   |
|                                                                                |   |                         |   |   |   |   |   |
| End of period                                                                       |   | $                            | 9,517  |   | $ | 7,867 |   | $ | 9,903 |   |
|                                                                                |   |                         |   |   |   |   |   |
| Supplemental disclosure:                                                            |   |                         |   |   |   |   |   |
| Cash paid during the period for -                                                   |   |                         |   |   |   |   |   |
| Income taxes                                                                        |   | $                            | 3,933  |   | $ | 11,045 |   | $ | 2,125 |   |
|                                                                                |   |                         |   |   |   |   |   |
| Interest                                                                            |   | $                            | 13,579 |   | $ | 12,750 |   | $ | 870 |   |

 

The accompanying notes are an integral part of these financialstatements

 

F-4

 

**WHEELING ISLAND GAMING, INC.**

 

**Notes to Consolidated FinancialStatements**

**($000’s omitted)**

 

**1.****                                     ****Significant accounting policies**

 

## **Businessand ownership**

## ** **

Wheeling Island Gaming, Inc. (the Company) owns andoperates Wheeling Island Racetrack & Gaming Center, a premier gaming andentertainment complex located in Wheeling, West Virginia. Business operationsare comprised of slot machine gaming, a greyhound racetrack, pari-mutuelwagering on live greyhound racing and simulcast greyhound, thoroughbred andharness racing and various dining venues.

 

The Company was formerly equally owned bySportsystems Corporation (Sportsystems) and WHX Entertainment Corp. (WHX).  On December 19, 2001, the Company redeemedall outstanding shares of its common stock held by WHX (Stock PurchaseTransaction).  Thereafter, the Companyis a wholly owned subsidiary of Sportsystems. Sportsystems is a wholly owned subsidiary of Delaware North Companies,Incorporated (DNC).

 

**Principlesof consolidation**

 

The consolidated financial statements include theaccounts of the Company and all of its wholly owned subsidiaries, which consistof WDRA Food Service, Inc. and Wheeling Land Development Corp.  All significant intercompany balances andtransactions have been eliminated in consolidation.

 

**Cash andcash 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 $434 and$2,007 are included in cash and cash equivalents as of December 31, 2003 and2002, 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, 2003is $133.8 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.

 

**Propertyand 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, includinggoodwill and other intangible assets**

 

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

 

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

 

**Preferred Player Program**

 

The Company offers a program whereby participants canaccumulate points for casino wagering that can currently be redeemed for cash,food and beverages, lodging, entertainment, and retail offers.  A liability is recorded for the estimate ofunredeemed points based on the Company’s redemption history.  Points redeemed for cash are recognized as areduction in revenues while points redeemed for food and beverage and otherretail offers are recognized as promotional expenses.  See further discussion in Note 3.

 

## **Advertisingcosts**

## ** **

Advertisingcosts are charged to operations when incurred. During 2003, 2002 and 2001, respectively, advertising expense totaled$1,116, $703, and $980.

 

**Debtissuance 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**

 

The Company follows the asset and liability approachto account for income taxes.  Thisapproach 

 

F-6

 

requires the recognition of deferred tax assets andliabilities for the expected future tax consequences of temporary differencesbetween the carrying amounts and tax bases of assets and liabilities.

 

Beginning December 20, 2001, 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 sheet at December 31, 2003 and December 31, 2002 are dueto DNC.

 

**Reclassification of balances**

 

Certain prior year amounts have been reclassified inorder to conform to the presentation used in the 2003 financial statements.

 

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

## ** **

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

**2.****                                     ****Stock Purchase Transaction**

 

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

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

 

F-7

 

The Company funded the Stock Purchase Transactionusing proceeds from the issuance of $125,000 in 10.125% Senior Notes.

 

**3.****                                 ****Revenues and costs**

 

# **Under annually renewable licensesgranted by the State of West Virginia Lottery Commission, the Company operated2,200 slot machines, 1,623 slot machines and 1,537 slot machines at December31, 2003, 2002 and 2001, respectively.**

# ** **

Gaming revenues represent gross revenues from slotmachine gaming, or total amounts wagered, net of winning patron payouts (the“gross terminal income”) less (1) a fee of up to 4% of gross terminal incomepaid to the Lottery Commission for administering slot machine gaming at thelicensee’s race track (the “administration fee”), (2) a tax of 30% of netterminal income (gross terminal income less the administration fee) paid to theState’s general revenue fund and (3) an amount of 9% of net terminal income(NTI) to be paid to various state funds, including funds for tourism promotion,Ohio County, employee pension programs and other programs.  All revenues derived from the operation ofslot machines must initially be deposited with the Lottery Commission to beshared in accordance with the provisions of the Lottery Act.  Prior to legislative changes which becameeffective as of July 1, 2001, the State refunded the portion of theadministration fee in excess of the Lottery Commission’s administrativeexpenses.

 

In April 2001, the West Virginia legislature adoptednew legislation, effective as of July 1, 2001, which authorized an increase inWest Virginia’s share of NTI above a predetermined level, defined as the NTIgenerated for the State’s fiscal year ended June 30, 2001.  The State deducts a 10% surcharge from NTIin excess of the predetermined level. The remainder of the excess NTI is divided as follows: 50% is returnedto the racetrack (of which 8% represents supplemental purse expense), 41% ispaid to the State’s general revenue fund and the remaining 9% is divided amongvarious state funds.  Of the total 10%surcharge, 42% is deposited in a capital reinvestment account attributable toeach racetrack.  The racetrack isentitled to recoup monies in the capital reinvestment account for certain typesof capital improvements made at the racetrack on a dollar-for-dollarbasis.  This legislation also eliminatedthe refund of the portion of the administration fee in excess of the LotteryCommission’s administrative expenses.

 

The Company accrues the expected surcharge amountratably during the year based upon estimates of the actual amounts expected tobe paid in each state fiscal year.  Therecoupment of amounts held in the capital reinvestment account, and a similarfund held by the West Virginia Racing Commission to be used for racetrackcapital improvements, are included in gaming revenues during the period inwhich approved qualifying expenditures are made.  Excess qualifying expenditures may be carried forward forrecoupment in future periods, subject to certain statutory limitations.  During 2003, the Company has recognizedstate surcharges of $7,109 and recoupments of $3,681 as elements of reportedgaming 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.

 

F-8

 

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 391, 411 and 422 live racing events and simulcasted 719, 723 and 724events during 2003, 2002 and 2001, respectively.  The Commission has approved the Company’s 396 live racing eventsfor the 2004 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 commissionsamounted to $380, $435 and $469 in 2003, 2002 and 2001, respectively.  At December 31, 2003 the Company had madeunreimbursed qualifying expenditures of $30,543, which are reimbursable fromfuture restricted commissions earned.

 

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

 

Food and beverage and lodging revenue is recognizedat the time of the sale to customers and does not include the retail value offood and beverage and lodging rooms provided gratuitously to customers.

 

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

 

Intangible assets at December 31, 2003 and 2002 arecomprised of the following:

 
|                                  |   | **December  31,  2003** |   | **December  31,  2002** |   | **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 |   | (6,098                  | )      | (3,098                  | )      |                |   |
|                                  |   | $                       | 8,902  |                    | $      | 11,902              |   |   |   |
| Trade name                            |   | $                       | 1,539  |                    | $      | 1,539               |   | Indefinite |   |
| Customer relationships                |   | 778                     |   | 778                     |   | 20 years            |   |
| Less:   accumulated amortization |   | (79                     | )      | (39                     | )      |                |   |
| Other                                 |   | 40                      |   | 40                      |   | Indefinite          |   |
| Other intangible assets               |   | $                       | 2,278  |                    | $      | 2,318               |   |   |   |

 

TheCompany amortizes its finite lived intangibles over their estimated lives on astraight line basis.  Amortizationexpense of $3,039, $3,039, and $99 was recorded during 2003, 2002, and 2001,respectively.  Estimated amortizationexpense for the next five years is $3,039 for years 2004  and 2005, $2,941 for 2006 and $39 for 2007and 2008.

 

F-9

 

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

 
|                                  |   | **Estimated life** |   | **December 31,** |   |
|---------------------------------------|--------|--------------------|--------|------------------|--------|
|                                  |   | **in years**       |   | **2003**         |   | **2002** |   |
|                                  |   |               |   |             |   |   |   |
| Land                                  |   | n/a                |   | $                | 1,865  |   | $ | 1,865 |   |
| Land Improvements                     |   | 15                 |   | 7,966            |   | 3,027 |   |
| Buildings and improvements            |   | 10 - 31            |   | 77,756           |   | 30,339 |   |
| Equipment                             |   | 3 - 10             |   | 34,476           |   | 21,178 |   |
| Construction in progress              |   | n/a                |   | 90               |   | 18,692 |   |
|                                  |   |               |   |             |   |   |   |
|                                  |   |               |   | 122,153          |   | 75,101 |   |
| Less:   accumulated depreciation |   |               |   | 25,845           |   | 19,256 |   |
|                                  |   |               |   |             |   |   |   |
|                                  |   |               |   | $                | 96,308 |   | $ | 55,845 |   |

 

Depreciationexpense was $6,589, $4,444, and $3,598 for the years ended December 31, 2003,2002 and 2001, respectively.

 

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

 

OnDecember 19, 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 the SeniorNotes and are being amortized on a straight-line basis over the termthereof.  Amortization is included withinterest expense and amounted to $753 in 2003 and $726 in 2002.  The related debt agreement requires theCompany to comply with certain covenants, which include limitations onadditional debt, restrictions on distributions to, and other transactions with,affiliates and certain investments.  TheSenior Notes are fully and unconditionally guaranteed by all of the Company’ssubsidiaries on a joint and several basis. The subsidiaries, WDRA Food Service, Inc. and Wheeling Land DevelopmentCorp., were inactive during 2003, 2002, and 2001.  At December 31, 2003, aggregate total subsidiary assets totaled$673 and consisted of land.

 

Atany time prior to December 15, 2004, the Company may elect to redeem up to 20%of the Senior Notes at a redemption price of 110.125% of the principal amountusing the proceeds of another equity offering. After December 15, 2005, the Company may redeem all or a part of theSenior Notes at stipulated redemption prices. The Company may also redeem the Senior Notes of any holder that isunable to comply with the provisions of any racing or gaming law.  Any holder can require the Company to redeemits Senior Notes at 101% of the principal amount thereof upon the occurrence ofa change in control of the Company.

 

Alsoin December 2001, the Company executed a $40,000 secured Revolving CreditFacility (Revolver) with a bank group. On August 29, 2003, the Company executed an increase in the availablecommitment under the Revolver from $40,000 to $50,000.  As of December 31, 2003, the Company haddrawn $34,000 against the Revolver.  TheRevolver includes a $5,000 letter of credit component, and is secured by theassets of the Company.  Interest isbased on LIBOR plus a stated percentage or, at the Company’s option, the leadbank’s commercial base rate plus a stated percentage.  At December 31, 2003, the lowest applicable rate was 3.87%.  A commitment fee is payable quarterly on theunused balance.  The Revolver providesfor quarterly reductions of $3,125 to the commitment beginning in December 2003and continuing until the commitment is reduced to $25,000 at September 30,2005.  At December 31, 2003 thecommitment balance was $46,875.  TheRevolver matures in December 2006.  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, a maximum leverage ratio, a minimumcash flow coverage ratio and limitations on certain investments.  Issuance costs totaling $427 were incurredin connection with the Revolver and are being amortized over 

 

F-10

 

itsterm.  Amortization, including amountsassociated with the Company’s prior Revolving Credit Facility, totaling $86 for2003, $85 for 2002 and $246 for 2001, is included with interest expense.

 

TheCompany is in full compliance with all covenants.

 

F-11

 

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

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

 

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

 

Theprovision for income taxes consists of the following:

 
|                          |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                          |   |     |   |     |   |     |   |
| Current federal tax  expense  |   |     |   |     |   |     |   |
| (benefit)                     |   | $        | 2,610  |     | $      | 10,021   |   | $ | 2,708 |   |
|                          |   |     |   |     |   |     |   |
| Deferred federal tax  expense |   |     |   |     |   |     |   |
| (benefit)                     |   | 5,715    |   | (1,718   | )      | 605      |   |
|                          |   |     |   |     |   |     |   |
|                          |   | $        | 8,325  |     | $      | 8,303    |   | $ | 3,313 |   |

 

During2002 the Internal Revenue Service (IRS) completed a review of the Company’sfederal income tax returns for 1999, 2000, and 2001.  For income tax purposes, the Company agreed to capitalize aportion of the management incentive fees previously deducted in those years andwhich the IRS considered to be attributable to various projects of a long-termnature.  Such amounts will be amortizedover periods of up to seven years.  Inaddition, the Company agreed to extend the depreciable life of its gamingmachines, for tax purposes only, from five to seven years. As a result of theseadjustments, the Company recorded a current tax provision and a deferred taxbenefit of $2,442 during 2002.  Thefuture tax benefit of these income tax adjustments has been reflected as acomponent of deferred income taxes in the accompanying balance sheets.

 

TheCompany is not subject to state income tax.

 

F-12

 

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:

 
|                          |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                          |   |     |   |     |   |     |   |
| Income tax at statutory  rate |   | $        | 8,301  |     | $      | 8,100    |   | $ | 3,322 |   |
| Other adjustments             |   | 24       |   | 203      |   | (9       | )      |
|                          |   |     |   |     |   |     |   |
| Income tax expense            |   | $        | 8,325  |     | $      | 8,303    |   | $ | 3,313 |   |

 

Deferredtax assets (liabilities) consist of the following:

 
|                                      |   | **2003** |    | **2002** |   |
|-------------------------------------------|--------|----------|---------|----------|--------|
|                                      |   |     |    |     |   |
| Current deferred tax  assets              |   | $        | 154     |     | $      | 92 |   |
|                                      |   |     |    |     |   |
| Property and equipment                    |   | (5,358   | )       | 459      |   |
| Licenses                                  |   | (23,072  | )       | (23,072  | )      |
| Other intangibles                         |   | (783     | )       | (797     | )      |
| Other                                     |   | (94      | )       | (120     | )      |
| Net non-current deferred  tax liabilities |   | (29,307  | )       | (23,530  | )      |
|                                      |   |     |    |     |   |
| Net deferred tax  liabilities             |   | $        | (29,153 | )        | $      | (23,438 | ) |

 

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

 

ThroughDecember 19, 2001, pursuant to service agreements between the Company andSportsystems and WHX that terminated upon consummation of the Stock PurchaseTransaction, Sportsystems and WHX provided various administrative andmanagement services for which they were compensated, primarily in the form of amanagement incentive fee.  Themanagement incentive fee was calculated based upon operating revenues for thepreceding year, and was not subject to a stated minimum or maximum amount.  Expenses totaling $25,521 are presented asmanagement fees in 2001.

 

Effective December 20, 2001, the Company enteredinto an administrative services agreement and a tax sharing agreement withSportsystems and DNC.  Pursuant to theadministrative services agreement, the Company pays an annual administrativeservices fee equal to the greater of 1.5% of the preceding year’s totaloperating revenues or $1,200 for certain support services provided to theCompany.  During 2003, 2002 and 2001,the Company recorded administrative services fees of $1,452, $1,251 and $39,respectively.  Pursuant to the taxsharing agreement, the Company pays DNC the amount of tax that would be payableby the Company if it had filed a separate consolidated federal income taxreturn on a stand alone basis.

 

The Company invests its excess cash in a segregatedaccount administered by DNC under its centralized cash management program.  At December 31, 2003 and 2002, the Companyhad $434 and $2,007 invested with DNC, respectively.  During 2003, 2002 and 2001, respectively, the Company earnedinterest income of $16, $134, and $81.

 

On September 26, 2003, the Company paid a cashdividend of $12,000 to Sportsystems.

 

F-13

 

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

 

All employees participate in a retirement savings planadministered by DNC.  Non-unionemployees are entitled to share in a discretionary Company contribution to thisplan.  Union employees also participatein a union-sponsored defined contribution plan.  Total expense relating to the retirement plans was $286 in 2003,$144 in 2002, and $227 in 2001.

 

Pursuant to the LotteryAct, 0.5% of NTI is deposited to the retirement savings plan on behalf of allemployees.  Such amounts are notincluded as an element of the Company’s expenses.

 

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

 

In connection with its pari-mutuel operations, theCompany leases totalisator services, video, and peripheral equipment underagreements expiring at various dates through 2006.  Expense related to such services is determined primarily as apercentage of the pari-mutuel handle or stated amounts per performance.  During 2003, 2002 and 2001, this expensetotaled $711, $788 and $835, respectively.

 

Inconnection with its gaming operations, the Company leases 116 slot machines andobtains maintenance services for these and other gaming machines from AutototeSystems, Inc.   Such expense was $1,008in 2003, $1,082 in 2002, and $1,230 in 2001.

 

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

 

The Company is party to a number of pending legalproceedings in the ordinary course of business, although management does notexpect that the outcome of such proceedings, either individually or in theaggregate, will have a material effect on the Company’s financial condition orresults of operations.

 

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

 

The Company’s operations are subject to extensivegovernment regulations and could be subjected at any time to additional or morerestrictive regulations.  The Company issubject to the provisions of the West Virginia Racing Act, which governs the conductof greyhound racing in West Virginia, and the West Virginia Racetrack VideoLottery Act (the Lottery Act), which under the regulatory control of the WestVirginia Lottery Commission, governs the operation of video lottery terminalsin West Virginia.  Specifically, theLottery Act provides that only licensed greyhound or horse racing facilitiesthat were licensed prior to January 1, 1994 and conduct a minimum number ofdays of live racing may offer video lottery gaming.  Accordingly, the Company must comply fully with regulations ofthe Racing Commission to qualify for its license under the Lottery Act andmaintain its video lottery gaming operations.

 

The Company’s ability to remain in business dependsupon its continued ability to operate in compliance with all applicable gamingand racing laws and regulations, including the acquisition and maintenance ofseveral licenses and permits.  TheLottery Act requires that the Company be subject to a written agreement withthe dog owners, breeders, and trainers who race greyhounds at its facility. TheCompany is a party to the requisite agreements with the kennels that operate atits facility. The Lottery Act also requires that the Company be subject to anagreement with the pari-mutuel clerks who work at its 

 

F-14

 

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 subject to annual or otherperiodic renewal and governmental authorities may refuse to grant the Companythe licenses necessary to continue to operate its existing facility.  In addition, the Company may be investigatedby either the Racing Commission or the Lottery Commission at any time.  Should either body consider the Company tobe in violation of any applicable laws or regulations, each has the plenaryauthority to suspend or rescind the Company’s licenses.  The Company believes that it is in fullcompliance with all relevant regulations.

 

**14.****                              ****Business segments**

 

In prior years, under SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” the Company hadrecognized three reportable operating segments:  (i) gaming, (ii) pari-mutuel and (iii) food and beverage.  The Company has modified its approach and nolonger considers any portion of its business to be managed independently.  Accordingly, beginning in fiscal 2003, theCompany no longer reports segment information under SFAS No. 131.

 

F-15