**UnitedStates Securities and Exchange Commission**

**Washington, D.C. 20549**

 

**Form10-K/A**

**(Amendment No. 1)**

 

**AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For thefiscal year ended December 31, 2004**

 

**Commission file number   1-16791**

 

**DoverDowns Gaming & Entertainment, Inc.**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                    | ** ** | **51-0414140**                           |
|-------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of incorporation) |       | (I.R.S. Employer  Identification Number) |

 

 

**1131 North DuPont Highway, Dover,Delaware 19901**

(Address of principalexecutive offices)

 

**(302) 674-4600**

(Registrant’s telephonenumber, including area code)

 

**Securities registered pursuant to Section 12(b) ofthe Act:**

 

| **Title  of Class**           | ** ** | **Name of  Exchange on Which Registered** |
|-------------------------------|------------|-------------------------------------------|
| Common Stock, $.10 Par  Value |       | New York Stock Exchange                   |

 

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes  ý         No  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act). Yes  ý          No  o

 

The aggregate market value of common stock held bynon-affiliates of the registrant was $108,642,263 as of June 30, 2004 (the lastday of our most recently completed second quarter).

 

As of February 28, 2005, the number of shares of eachclass of the registrant’s common stock outstanding is as follows:

 

| Common Stock -         |   | 9,564,163 shares  |
|------------------------|--------|-------------------|
| Class A Common Stock - |   | 14,339,687 shares |

 

**Documents Incorporated byReference**

 

Portions of the registrant’s Proxy Statement inconnection with the Annual Meeting of Stockholders held April 27, 2005 areincorporated by reference into Part III, Items 10 through 14 of this report.

 

 

 

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**Explanatory Note**

 

Dover Downs Gaming & Entertainment, Inc. (the “Company”)is filing this Amendment No. 1 (the “Amendment”) to its Annual Report on Form10-K for the fiscal year ended December 31, 2004, as filed with the Securitiesand Exchange Commission on March 10, 2005 (the “Annual Report”) to amend andrestate Items 7 and 8 to the Annual Report to reflect the following changes:

 

•                                          Expand our discussion of the Company’sresults from its other operating activities. This discussion is in the “Resultsof Operations” section of Part I, Item 7. Management’s Discussion And AnalysisOf Financial Condition And Results Of Operation,

 

•                                          Expand our discussion of and clarify theimpact on the Company’s future operations as a result of our decision not to renewour management agreement with Caesars World Gaming Development Corporation.This discussion is in the “Liquidity and Capital Resources” section of Part I,Item 7. Management’s Discussion And Analysis Of Financial Condition And ResultsOf Operation,

 

•                                          Expand our disclosure of the Company’scritical accounting policies to include the quantitative effects on accruedpension expense that would result from a change in our discount rateassumption. This discussion is in the “Critical Accounting Policies” section ofPart I, Item 7. Management’s Discussion And Analysis Of Financial Condition AndResults Of Operation,

 

•                                          Expand our disclosure of the Company’sother operating activities. This discussion is in NOTE 3-Summary of SignificantAccounting Policies to the consolidated financial statements in Part I, Item 8.Financial Statements and Supplementary Data,

 

•                                          Expand our disclosure of the Company’spolicy for evaluating property and equipment for impairment. This discussion isin NOTE 3-Summary of Significant Accounting Policies to the consolidatedfinancial statements in Part I, Item 8. Financial Statements and SupplementaryData,

 

•                                          Expand our disclosure of the Company’sdeferred income tax assets and liabilities to include a tabular presentation ofthe tax effect of each type of temporary difference that gives rise to asignificant portion of deferred tax assets and liabilities. This discussion isin NOTE 7-Income Taxes to the consolidated financial statements in Part I, Item8. Financial Statements and Supplementary Data,

 

•                                          Expand our disclosure of the Company’spension plans to include our matching contributions to our 401(k) plan. Thisdiscussion is in NOTE 8-Pension Plans to the consolidated financial statementsin Part I, Item 8. Financial Statements and Supplementary Data,

 

•                                          Expand our disclosure of a controlrelationship with respect to the Company’s outstanding common stock and otherrelationships with related parties. This discussion is in NOTE 10-Related PartyTransactions to the consolidated financial statements in Part I, Item 8.Financial Statements and Supplementary Data.

 

The complete text of Items 7 and 8 are included inthis Amendment pursuant to Rule 12b-15 promulgated under the Securities andExchange Act of 1934, as amended (the “Exchange Act”).

 

In addition, Item 15 includes the certificationsrequired pursuant to Rules 13a-14(a)/15d-14(a) and Rules 13a-14(b)/15d-14(b) ofthe Exchange Act, which have been re-executed and re-filed as of the date ofthis Amendment.

 

With the exception of the changes discussed above,this Amendment continues to speak as of the date of the Annual Report and wehave not updated the disclosure contained herein to reflect events that haveoccurred since the filing of the Annual Report.

 

 

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**Part I**

 

References in this document to “the Company,” “Gaming& Entertainment,” “we,” “us,” and “our” mean Dover Downs Gaming &Entertainment, Inc. and its wholly owned subsidiaries.

 

**Item 7.****    Management’s Discussion AndAnalysis Of Financial Condition And Results Of Operation**

 

The following discussion is based upon and should beread in conjunction with the consolidated financial statements and notesthereto included elsewhere in this Annual Report on Form 10-K.

 

Dover Downs Gaming & Entertainment, Inc. is adiversified gaming and entertainment company whose operations consist of DoverDowns Slots — a 91,000 square foot video lottery (slots) casino complex; theDover Downs Hotel and Conference Center — featuring luxury accommodations withconference, banquet, fine dining, ballroom and concert hall facilities; andDover Downs Raceway — a harness racing track with pari-mutuel wagering on liveand simulcast horse races.

 

More than 80% of the Company’s gross revenue isderived from video lottery (slot) machine win (as defined below). Severalfactors contribute to the video lottery (slot) machine win for any gamingcompany, including, but not limited to:

 

•              Proximityto major population bases,

•              Competitionin the company’s market,

•              Thequantity and types of slot machines available,

•              Thequality of the physical property,

•              Otheramenities offered on site,

•              Customerservice levels, and

•              Marketingprograms.

 

The Company believes that it holds a strong positionin each of these areas. Our entertainment complex is located in Dover, thecapital of the State of Delaware. We draw patrons from several majormetropolitan areas. Philadelphia, Baltimore and Washington, D.C. are all withina 2 hour drive. According to the 2000 United States Census, approximately 32.8million people live within 150 miles of the complex. There are significantbarriers to entry related to the gaming business in Delaware, such as thestatutory limitation of gaming licenses to the three existing horse racingfacilities. The Company’s property, designed and developed with the assistanceof Caesars, is similar to properties found in the country’s largest gamingmarkets. The Company offers the only luxury hotel in the Delaware gamingmarket, providing a strong marketing tool, especially to higher-end players. TheCompany also utilizes its recently improved slot marketing system to allow forthe most efficient marketing programs and the highest levels of customerservice.

 

Because all of our operations are located at one facility,we face the risk of increased competition from the legalization of new oradditional gaming venues. The Company has therefore focused on creating theregion’s premier gaming destination and building and rewarding customer loyaltythrough innovative marketing efforts and unparalleled customer service.

 

**Results of Operations**

 

Gaming revenues represent (i) the net win from videolottery (slot) machine wins and losses and (ii) commissions from pari-mutuelwagering. Other operating revenues consist of hotel rooms revenue, food andbeverage sales and other miscellaneous income.

 

For the video lottery operations, the differencebetween the amount wagered by bettors and the amount paid out to bettors isreferred to as the win. The win is included in the amount recorded in theCompany’s financial statements as gaming revenue. The Delaware State LotteryOffice sweeps the win from the video lottery operations, collects the State’sshare of the win and the amount due to the vendors under contract with theState who provide the video

 

 

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lottery (slot) machines and associated computer systems, collects theamount allocable to purses for harness horse racing and remits the remainder tothe Company as its commission for acting as a Licensed Agent. Gaming expensesinclude the amounts collected by the State (i) for the State’s share of thewin, (ii) for remittance to the providers of the video lottery (slot) machinesand associated computer systems, and (iii) for harness horse racing purses. TheCompany recognizes revenues from pari-mutuel commissions earned from liveharness horse racing and importing of simulcast signals from other race trackswhen the race occurs. Revenues from hotel rooms, food and beverage sales and othermiscellaneous income are recognized at the time the service is provided.

 

The retail value of hotel rooms, food, beverage andother items that are provided to customers without charge has been included ingross revenues and a corresponding amount has been deducted as promotionalallowances. The estimated direct cost of providing these items has been chargedto the casino through interdepartmental allocations and is included in gamingexpenses in the consolidated statement of earnings.

 

*Year Ended December 31, 2004 vs. Year EndedDecember 31, 2003*

 

Gaming revenues increased by $18,899,000, or 10.8%, to$193,922,000 in 2004, entirely the result of increased play in our casino. Duringthe first quarter of 2004, we added 500 new video lottery (slot) machines whichincreased our average number of machines from 2,000 in 2003 to 2,432 in 2004. Additionally,we have redirected our marketing efforts to attract more profitable casinocustomers by providing additional complimentary and discounted rooms in ourhotel. We believe that our marketing efforts have been effective at attractingcustomers to our casino and consequently increasing slot win.

 

Other operating revenues were $33,795,000 and$32,476,000, respectively, for 2004 and 2003 and included $19,973,000 and $18,667,000,respectively, related to promotional items provided to customers withoutcharge. The increase in promotional allowances is primarily due to the Company’sexpanded marketing efforts to attract more casino customers to the hotel byproviding additional complimentary and discounted hotel rooms. Other operatingrevenues, net of promotional allowances and excluding the non-recurring chargenoted below, were $13,822,000 in 2004 as compared to $13,809,000 in 2003. Foodand beverage revenues, net of promotional allowances, increased by $922,000 to$9,098,000 from $8,176,000 in 2003, primarily due to an increase in cash salesand a reduction in the amount of complimentary beverages being offered topatrons. Additionally, the Company promoted an outdoor concert for the firsttime in 2004 that generated revenues of $840,000. Partially offsetting theseincreases was the receipt of $1,300,000 in 2003 related to the settlement of abusiness interruption insurance claim and a decrease in hotel rooms revenue,net of promotional allowances, due to the change in the Company’s marketingefforts which focused on providing a higher percentage of its hotel rooms tocustomers on a complimentary basis.

 

The Company currently has a point loyalty program forits video lottery customers which allows them to earn points based on thevolume of their video lottery activity. Prior to December 2004, the pointscould be redeemed for various services and merchandise throughout the gamingfacility; however, they were not redeemable for cash or casino play. EffectiveDecember 2004, the Company changed its policy relating to its point loyaltyprogram to allow points earned by customers to be redeemed for cash undercertain circumstances. As a result, the Company recorded a non-recurring chargein the fourth quarter of 2004 to record the net impact of the program change. Theestimated amount of points redeemable for cash was recorded as a reduction ofrevenue and the estimated amount of points redeemable for services andmerchandise was recorded as gaming expense. The total estimated liability atDecember 31, 2004 was $2,678,000. All reward points earned by customers are nowexpensed in the period earned.

 

Gaming expenses increased by $14,302,000, or 10.3%,reflecting the higher gaming revenues. Amounts retained by the State ofDelaware and the amount collected by the State for payment to the vendors undercontract with the State who provide the video lottery (slot) machines andassociated computer systems increased by $7,096,000 and $1,475,000,respectively. Amounts allocated from the video lottery operation for harnesshorse racing purses increased from $20,143,000 in 2003 to $22,269,000 in 2004. Collectively,these statutory costs increased as a percentage of gaming revenues in 2004 ascompared to 2003 in part due to a 1.25% surcharge imposed by the State on theCompany’s share of the video lottery (slot) proceeds that took effect in Juneof 2003. The remaining $3,605,000 increase in gaming expenses relates primarilyto higher payroll and benefits, primarily as a result of our casino expansion,and increased marketing costs.

 

 

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Other operating expenses increased by $3,114,000, or31.5%. Expenses related to our food and beverage operations were $9,669,000 in2004 as compared to $7,350,000 in 2003. The increase resulted primarily fromhigher payroll and related costs and food costs necessary to support addedamenities at the Company’s facility and the addition of higher quality menuitems. Additionally, less food and beverage expenses were allocated to thegaming operations through interdepartmental charges in 2004 since a lowerpercentage of food and beverages were provided to gaming customers on acomplimentary basis. Concert promotion expenses of $1,212,000, relating to alarge outdoor concert promoted by the Company in the third quarter of 2004,represented the remainder of the increase in other operating expenses. Partiallyoffsetting these increases was a decrease in expenses for the Company’s hotelrooms operation as a result of cost savings in the housekeeping department anda larger portion of rooms expense being allocated to the gaming operationsthrough interdepartmental charges since a higher percentage of rooms wereprovided to gaming customers on a complimentary basis in 2004.

 

General and administrative expenses increased by$286,000 to $4,603,000 from $4,317,000 in 2003 primarily the result of higherpayroll and related costs, legal costs, and audit and consulting expensesrelated to the Company’s compliance with the Sarbanes-Oxley Act of 2002.

 

Depreciation expense increased by $504,000, primarilydue to the construction of 11,000 additional square feet of gaming space toaccommodate the installation of 500 video lottery (slot) machines within ourexisting casino complex during the first quarter of 2004 and the purchase of anew customer management and slot data system that was placed into service inApril 2004.

 

Interest expense decreased by $80,000, primarily dueto the decrease in outstanding borrowings under our credit facility for thefirst 11 months of 2004, partially offset by an increase in the Company’saverage interest rate from 2.07% during 2003 to 2.33% during 2004.

 

The Company’s effective income tax rates were 40.6%and 40.7% for the years ended December 31, 2004 and 2003, respectively.

 

Net earnings were $16,381,000 in 2004 as compared to$17,237,000 in 2003, a decrease of $856,000, or 5.0%.

 

Net earnings for 2004 included a net, non-recurringcharge of $2,250,000 ($1,338,000 after income tax benefit) relating to thechange in the Company’s point loyalty program. Additionally, net earnings for2003 included proceeds of $1,300,000 ($771,000 after income taxes) relating tothe settlement of a business interruption insurance claim. The Company believesthat excluding the impact of these items will enhance comparative analysis ofits results. The following table reconciles and compares results reported inaccordance with Generally Accepted Accounting Principles (GAAP) for 2004 and2003 with results excluding the impact of the change in our point loyaltyprogram in 2004 and receipt of insurance proceeds in 2003: 

 

| ** **                                                       | ** ** | **2004**  | ** ** | **2003** | ** ** |
|------------------------------------------------------------------|------------|-----------|------------|----------|------------|
| GAAP net earnings                                                |       | $         | 16,381,000 |     | $          | 17,237,000 |   |
| Non-recurring charge for points, net of income taxes of $912,000 |       | 1,338,000 |       | —   |       |
| Insurance proceeds, net of income taxes of $529,000              |       | —    |       | (771,000 | )          |
| Pro forma net earnings                                           |       | $         | 17,719,000 |     | $          | 16,466,000 |   |

 

                Excluding the net,non-recurring charge for the 2004 change in our point loyalty program and 2003receipt of insurance proceeds from the settlement of a business interruptionclaim, pro forma net earnings in 2004 increased $1,253,000, or 7.6%, to$17,719,000 compared to 2003 pro forma net earnings of $16,466,000.

 

*Year Ended December 31, 2003 vs. Year EndedDecember 31, 2002*

 

                Gaming revenuedecreased by $18,700,000, or 9.7%, to $175,023,000, primarily the result of theenactment in November 2002 of the Delaware Clean Indoor Air Act (the “Act”) andto a lesser extent from severe weather in February 2003 and Hurricane Isabel inSeptember 2003. From January 2002 through November 2002, slot win grew eachmonth at an average rate of 12.7%. On November 27, 2002, the Delaware CleanIndoor Air Act became effective. The Act prohibits smoking inside the Company’scasino, hotel and conference center, restaurants, harness track indoorgrandstands and simulcasting facilities, provided that smoking is permitted inup to 25% of the rooms in the hotel. Prior to the effective date of the Act, wederived significant revenues from designated smoking areas.

 

 

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During the first year of the smoking ban, the Company’s slot windeclined approximately 11.3% compared to the previous year. In December 2003,slot win increased for the first time in 2003 versus the same month in 2002; byapproximately 7%.

 

                In an effort toincrease the revenues from its three video lottery agents, the State passedlegislation in June 2003 which extended the operating hours for video lotteryagents and permitted the Lottery Director to authorize 500 additional videolottery (slot) machines at each licensed facility. During the first quarter of2004, the Company constructed 11,000 additional square feet of gaming space andinstalled 500 machines within its existing casino complex. This brings theCompany’s total number of video lottery (slot) machines to 2,500 (the maximumnumber allowed by the Lottery Director) at December 31, 2004.

 

                Other operatingrevenues were $32,476,000 and $26,083,000, respectively, for 2003 and 2002 andincluded $18,667,000 and $13,331,000, respectively, related to promotionalitems provided to customers without charge. The increase in promotionalallowances is primarily due to the Company’s expanded marketing efforts toattract more casino customers to the hotel by providing additionalcomplimentary and discounted hotel rooms and the result of the Dover DownsHotel and Conference Center being open for all of 2003 compared with only aportion of 2002. Other operating revenues, net of promotional allowances, were$13,809,000 in 2003 as compared to $12,752,000 in 2002. Food and beveragerevenues, net of promotional allowances, increased by $196,000 to $8,176,000from $7,980,000 in 2002 due to higher occupancy levels at the Dover Downs Hoteland Conference Center and the result of the hotel being open for all of 2003compared with only a portion of 2002. Additionally, the Company received$1,300,000 in the fourth quarter of 2003 from its insurance carrier to settle abusiness interruption insurance claim related to the opening of the Dover DownsHotel and Conference Center. Partially offsetting these increases was thereceipt of $250,000 in the fourth quarter of 2002 related to the aforementionedinsurance claim and a decrease in hotel rooms revenue, net of promotionalallowances, due to the Company providing more complimentary hotel rooms to itscustomers.

 

                Gaming expensesdecreased by $10,394,000, or 7.0%, reflecting the lower gaming revenues.Amounts retained by the State of Delaware and the amount collected by the Stateof Delaware for payment to the vendors under contract with the State whoprovide the video lottery (slot) machines and associated computer systemsdecreased by $7,291,000, or 10.9%, and $184,000, or 2.0%, respectively. Amountsallocated from the video lottery operation for harness horse racing pursesdecreased from $22,307,000 in 2002 to $20,143,000 in 2003. These decreases wereoffset by a $2,326,000 increase in the cost of advertising and promotions in2003. All other gaming expenses decreased $3,081,000 compared with 2002.

 

                Other operatingexpenses decreased by $452,000, or 4.4%. Expenses related to our food andbeverage operations were $7,350,000 in 2003 as compared to $8,464,000 in 2002. Thedecrease resulted primarily from a larger interdepartmental allocation to thecasino operations for the estimated cost of providing the increased promotionalallowances. Partially offsetting this decrease was an increase in expenses forthe Company’s hotel rooms operation as a result of the Dover Downs Hotel andConference Center being open for all of 2003 compared with only a portion of2002.

 

                Depreciationexpense increased by $1,111,000 primarily due to the Dover Downs Hotel andConference Center being open for all of 2003 compared with only a portion of2002 and information system upgrades in the casino and administrativedepartments.

 

                General andadministrative expenses decreased by $744,000 to $4,317,000 from $5,061,000 in2002, primarily due to cost cutting measures implemented to offset the effectsof the decrease in gaming revenues, including reducing headcount and otheradministrative costs.

 

                Interest expensewas $842,000 in 2003, none of which was capitalized. The Company incurred$1,254,000 of interest in 2002 of which $351,000 was capitalized. The Company’saverage interest rate decreased from 2.95% during 2002 to 2.07% during 2003.

 

                The Company’seffective income tax rate was 40.7% for the years ended December 31, 2003 and2002.

 

 

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                Net earnings were$17,237,000 in 2003 compared to $21,442,000 in 2002. The decrease of$4,205,000, or 19.6%, was primarily due to lower gaming revenues resulting fromthe enactment of the Delaware Clean Indoor Air Act and inclement weather andincreased depreciation expense from the opening of the Dover Downs Hotel andConference Center in April 2002, offset by increases in other operatingrevenues, lower general and administrative expenses and the receipt of$1,300,000 ($771,000 after income taxes) relating to the settlement of abusiness interruption insurance claim.

 

**Liquidity and Capital Resources**

 

                Net cash providedby operating activities was $27,807,000 for the year ended December 31, 2004compared to $24,178,000 for the year ended December 31, 2003. The increase wasprimarily due to the increase in net earnings before depreciation andamortization and non-recurring charges (which did not require the use of cash)from $23,555,000 in 2003 to $25,551,000 in 2004, and the timing of payments tovendors.

 

                Net cash used ininvesting activities remained consistent at $6,329,000 for the year endedDecember 31, 2004 compared to $6,383,000 for the year ended December 31, 2003. The2004 additions primarily consisted of the construction of 11,000 additionalsquare feet of gaming space to accommodate the installation of 500 newlyauthorized video lottery (slot) machines within our existing casino complex andthe purchase of a new customer management and slot data system.

 

                Net cash used infinancing activities was $17,928,000 for the year ended December 31, 2004compared to $16,493,000 for the year ended December 31, 2003. The increase innet cash used in financing activities in 2004 was primarily due to therepurchase of 2,691,321 shares of the Company’s outstanding common stock andClass A common stock for $32,555,000 during 2004 as compared to 169,945 sharesfor $1,523,000 during 2003. The Company increased its dividend in the secondquarter of 2004 and paid $6,098,000 and $5,305,000 in cash dividends during2004 and 2003, respectively. These increases were partially offset by highernet borrowings under our credit facility in 2004 in order to finance theaforementioned stock repurchases.

 

                On January 26,2005, the Company’s Board of Directors declared a quarterly cash dividend onboth classes of common stock of $.06 per share. The dividend is payable onMarch 10, 2005 to stockholders of record at the close of business on February10, 2005.

 

                On October 23,2002, the Company’s Board of Directors authorized the repurchase of up to2,000,000 shares of the Company’s outstanding common stock. The purchases maybe made in the open market or in privately negotiated transactions asconditions warrant. The repurchase authorization does not obligate the Company toacquire any specific number of shares and may be suspended at any time. During2004, Gaming & Entertainment purchased and retired 50,900 shares of itsoutstanding common stock pursuant to this plan at an average purchase price of$9.95 per share, not including nominal brokerage commissions. During 2003, theCompany purchased and retired 169,945 shares of its outstanding common stock atan average purchase price of $8.90 per share, not including nominal brokeragecommissions.

 

                On November 5,2004, the Company’s Board of Directors authorized the Company to commence atender offer to purchase up to 1,040,421 shares of its common stock and up to1,607,506 shares of its Class A common stock at a fixed price of $12.00 pershare. The offer commenced on Wednesday, November 10, 2004 and expired at 5:00P.M., eastern standard time, on Friday, December 10, 2004. The Companypurchased 1,040,421 shares of its common stock and 1,600,000 shares of itsClass A common stock for $32,045,000, including expenses, in connection withthe tender offer.

 

                Based on currentbusiness conditions, the Company expects to make capital expenditures ofapproximately $5,500,000 during 2005. These expenditures primarily relate tocasino renovations, harness track lighting and the continued conversion ofvideo lottery (slot) machines to ticket-in, ticket-out (cashless) technology. Additionally,the Company expects to contribute approximately $500,000 to its pension plansin 2005.

 

                Since our videolottery (slot) machine casino opened in 1995, we have been party to amanagement agreement with Caesars, under which Caesars was our agent tosupervise, manage and operate our video lottery (slot) machine casino. EffectiveDecember 28, 2004, that management agreement expired and we opted not to renewthe

 

 

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agreement. During the year ended December 31, 2004, although weremained contractually obligated to pay a management fee to Caesars, Caesarsdid not have any of its personnel physically assigned to our facility and wedid not rely on any Caesars personnel or any Caesars systems or procedures inconnection with our operations. Accordingly, we do not expect to incur anymaterial costs to replace functions for which Caesars had responsibility underthis agreement. Beginning in 2005, we will no longer be required to pay toCaesars a management fee. Caesars’ performance-based fees were $4,448,000 forthe year ended December 31, 2004.

 

                We have a$57,500,000 unsecured revolving line of credit agreement, as amended effectiveNovember 5, 2004. At December 31, 2004, $51,950,000 was outstanding under thefacility. Based on current business trends, we believe that our cash flows fromoperations and the funds available pursuant to our revolving credit facilitywill be sufficient to meet our short and long-term cash needs. Any significantexpansion of our gaming facility that we may decide to undertake, anysignificant acquisitions, or any material adverse change in our operationscould cause the need for additional financing. The Company expects that its netcash flows from operating activities and funds available from its creditfacility will be sufficient to provide for its working capital needs andcapital spending requirements at least through the next twelve months, as wellas any cash dividends the Company’s Board of Directors may declare. We expectcash flows from operating activities and funds available from our creditfacility to also provide for long-term liquidity.

 

                The introductionor expansion of gaming in and around our market area could have a materialadverse effect on our cash flows and results of operations. See Part I, Item 1 —Business included elsewhere in this Annual Report on Form 10-K for furtherdiscussion.

 

**Contractual Obligations**

 

                At December 31,2004, the Company had the following contractual obligations:

 
| ** **             | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|------------------------|------------|------------|------------|----------------------------|------------|
| ** **             | ** ** | **Total**  | ** ** | **2005**                   | ** ** | **2006 — 2007** | ** ** | **2008 — 2009** | ** ** | **Thereafter** | ** ** |
| Notes payable to banks |       | $          | 51,950,000 |                       | $          | — |   | $ | 51,950,000 |   | $ | — |   | $ | — |   |
| Purchase obligation    |       | 1,195,000  |       | 1,195,000                  |       | — |   | — |   | — |   |
|                   |       | $          | 53,145,000 |                       | $          | 1,195,000 |   | $ | 51,950,000 |   | $ | — |   | $ | — |   |

 

                We have a$57,500,000 unsecured revolving line of credit agreement. At December 31, 2004,$51,950,000 was outstanding under the facility.

 

                At December 31,2004, we have a purchase obligation related to the installation of astate-of-the-art customer management and slot data system. Installation wascompleted in the first quarter of 2004, though payments for the system extendinto 2005.

 

**Related Party Transactions**

 

                See NOTE 10 —Related Party Transactions of the consolidated financial statements includedelsewhere in this Annual Report on Form 10-K for a full description of relatedparty transactions.

 

**Critical Accounting Policies**

 

                The accountingpolicies described below are those the Company considers critical in preparingits consolidated financial statements and/or include significant estimates madeby management using information available at the time the estimates are made.However, as described below, these estimates could change materially ifdifferent information or assumptions were used.

 

*Points Program*

 

                The Companycurrently has a point loyalty program for its video lottery customers whichallows them to earn points based on the volume of their video lottery activity.Prior to December 2004, the points could be redeemed for various services andmerchandise throughout the gaming facility; however, they were not redeemablefor cash or casino play. Effective December 2004, the Company changed itspolicy relating to its point loyalty program to

 

 

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allow points earned by customers to be redeemed for cash under certaincircumstances. As a result, the Company recorded a non-recurring charge in thefourth quarter of 2004 to record the net impact of the program change. Allpoints earned by customers are now expensed in the period they are earned. Theestimated amount of points redeemable for cash is recorded as a reduction ofrevenue and the estimated amount of points redeemable for services andmerchandise is recorded as gaming expense. In estimating the amount of theliability, which was $2,678,000 at December 31, 2004, the Company estimates aredemption rate, a cost of rewards to be offered and the mix of cash, goods andservices for which reward points will be redeemed. We use historical data toestimate those amounts.

 

*Accrued Pension Cost*

 

                The benefitsprovided by the Company’s defined-benefit pension plans are based on years ofservice and employee’s remuneration over their employment with the Company. TheCompany establishes accrued pension costs in accordance with the provisions ofFinancial Accounting Standards Board Statement No. 87, Employers’ Accountingfor Pensions. Accrued pension costs are developed using actuarial principlesand assumptions which consider a number of factors, including estimates for thediscount rate, assumed rate of compensation increase, and expected long-termrate of return on assets. We evaluate these assumptions annually. The discountrate is the most significant assumption and is necessary to state expectedfuture benefit payments at a present value on the measurement date. Thediscount rate assumption is based upon the yields on high quality bond ratesfor bonds with maturities that match our projected benefit payments. A lowerdiscount rate increases the present value of benefit obligations and increasespension expense. A 1% reduction in the discount rate used would increase ourpension expense by approximately $300,000.

 

*Property and Equipment*

 

                Property andequipment are recorded at cost. Depreciation is provided for financialreporting purposes using the straight-line method over estimated useful livesranging from 5 to 10 years for furniture, fixtures and equipment and up to 40years for facilities. These estimates require assumptions that are believed tobe reasonable. Long-lived assets are evaluated for impairment when an eventoccurs that indicates an impairment may exist.

 

**Recent Accounting Pronouncements**

 

                See NOTE 3—Summaryof Significant Accounting Policies of the consolidated financial statementsincluded elsewhere in this Annual Report on Form 10-K for a full description ofrecent accounting pronouncements including the respective expected dates ofadoption and effects on results of operations and financial condition.

 

**Factors That May Affect Operating Results;Forward-Looking Statements**

 

                In addition tohistorical information, this Annual Report on Form 10-K includesforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended, relating to our financial condition,profitability, liquidity, resources, business outlook, proposed acquisitions,market forces, corporate strategies, consumer preferences, contractualcommitments, legal matters, capital requirements and other matters. The PrivateSecurities Litigation Reform Act of 1995 provides a safe harbor forforward-looking statements. To comply with the terms of the safe harbor, wenote that a variety of factors could cause our actual results and experience todiffer substantially from the anticipated results or other expectationsexpressed in our forward-looking statements. When words and expressions suchas: “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,”“goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,”“might,” “likely,” “enable” or similar words or expressions are used in thisdocument, as well as statements containing phrases such as “in our view,” “therecan be no assurance,” “although no assurance can be given” or “there is no wayto anticipate with certainty,” forward-looking statements are being made.

 

                Various risks anduncertainties may affect the operation, performance, development and results ofour business and could cause future outcomes to differ materially from thoseset forth in our forward-looking statements, including the following factors:

 

•              successof or changes in our growth strategies;

 

 

9

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•              ourdevelopment and potential acquisition of new facilities;

 

•              anticipatedtrends in the gaming industry;

 

•              patrondemographics;

 

•              generalmarket and economic conditions, including consumer and corporate spendingsentiment;

 

•              ourability to finance future business requirements;

 

•              ourability to effectively compete in the marketplace;

 

•              theavailability of adequate levels of insurance;

 

•              ourability to successfully integrate acquired companies and businesses;

 

•              managementretention and development;

 

•              changesin Federal, state, and local laws and regulations, including environmental,gaming license and tax legislation;

 

•              theeffect of weather conditions or travel on attendance at our facilities;

 

•              militaryor other government actions; and

 

•              nationalor local catastrophic events.

 

                We undertake noobligation to publicly update or revise any forward-looking statements as aresult of future developments, events or conditions. New risk factors emergefrom time to time and it is not possible for us to predict all such riskfactors, nor can we assess the impact of all such risk factors on our businessor the extent to which any factor, or combination of factors, may cause actualresults to differ significantly from those forecast in any forward-lookingstatements. Given these risks and uncertainties, stockholders should not overlyrely or attach undue weight to our forward-looking statements as an indicationof our actual future results.

 

*Our Gaming Activities Compete Directly With OtherGaming Facilities And Other Entertainment Businesses*

 

                We compete inlocal and regional markets with horse tracks, off-track betting parlors, staterun lotteries, casinos and other gaming facilities. We cannot be certain thatwe will maintain our market share or compete more effectively with ourcompetitors. The introduction or expansion of gaming in neighboringjurisdictions, particularly Maryland, Virginia, Washington, D.C., Pennsylvaniaor New Jersey, or the legalization of additional gaming venues in Delaware,could have a material adverse effect on our cash flows and results ofoperations. From time to time legislation is proposed for adoption in thesejurisdictions which if enacted, would further expand state gambling andwagering opportunities, including video lottery (slot) machines at racetracks.Enactment of such legislation could increase our competition and couldadversely affect our business, financial condition and overall profitability. Forexample, in 2005, the Maryland Senate passed a bill providing for variousgaming venues for the third straight year. The Maryland House responded bypassing its own bill which differs as to permissible venues, numbers ofmachines authorized, tax structure and siting approvals. No consensus has yetbeen reached on compromise legislation capable of passing both the House andthe Senate. Approximately 70% of our customers come from Maryland,Pennsylvania, Virginia and the District of Columbia. In July 2004, Pennsylvaniaadopted legislation which authorizes up to 61,000 slot machines at variousexisting and proposed venues throughout the state. It is difficult for us topredict the effect that such legislation will have on us, but we estimate thatone or more facilities in Pennsylvania are likely to begin operations during2006. Pennsylvania will have one of the highest effective tax rates on slotmachine gaming in the country and will charge an up front $50,000,000 licensefee to the horse racing

 

 

10

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and casino venues that are granted a gaming license. Management hasestimated that slot win from Pennsylvania patrons represents approximately 7%of our total slot win.

 

*All Of Our Facilities Are In One Location*

 

                Our facilities arelocated adjacent to one another at a single location in Dover, Delaware. Anyprolonged disruption of operations at these facilities due to destruction of ormaterial damage to the facilities or other reasons could adversely affect ourfinancial condition and results of operations. We maintain property andbusiness interruption insurance to protect against such types of disruption,but there can be no assurance that the proceeds of such insurance would beadequate to repair or rebuild our facilities in such event or to compensate usfor lost profit during the period of any such disruption.

 

*The Revocation, Suspension Or Modification Of OurGaming Licenses Would Adversely Affect Our Gaming Business*

 

                The Delaware StateLottery Office and the Delaware Harness Racing Commission regulate our gamingoperations. Our license from the Commission must be renewed on an annual basis.To keep our license for video lottery (slot) machine gaming, we must remainlicensed for harness horse racing by the Commission and conduct at least 80live race days each racing season, subject to the availability of harness racehorses. The Commission has broad discretion to reject any application for alicense or suspend or revoke a license once it is issued. The Lottery Directorhas broad discretion to revoke, suspend or modify the terms of a video lotterylicense. Any modification or termination of existing licensing regulations orany revocation, suspension or modification of our licenses could adverselyaffect our business, financial condition and overall profitability.

 

*Our Gaming Activities Are Subject To ExtensiveGovernment Regulation And Any Additional Government Regulation Or Taxation OfGaming Activities Could Substantially Reduce Our Revenue Or Profit*

 

                Video lottery(slot) machine gaming, harness horse racing and pari-mutuel wagering aresubject to extensive government regulation. Delaware law regulates the win weare entitled to retain and the percentage of commission we are entitled toreceive from our gaming revenues, which comprises a significant portion of ouroverall revenues. The State granted us a license to conduct video lottery(slot) machine operations and a license to conduct harness horse races andpari-mutuel wagering. The laws under which these licenses are granted could bemodified or repealed at any time and we could be required to terminate ourgaming operations. If we are required to terminate our gaming operations or ifthe amount of the commission we receive from the State for conducting ourgaming operations is decreased, our business operations and overall profitabilitywould be significantly impaired.

 

                We believe thatthe prospect of significant additional tax revenue is one of the primaryreasons why jurisdictions have legalized gaming. As a result, gaming operatorsare typically subject to significant taxes and fees in addition to normalfederal and state corporate income taxes. These taxes and fees are subject toincrease at any time. We pay substantial taxes and fees with respect to ouroperations and will likely incur similar burdens in any other jurisdiction inwhich we may conduct gaming operations in the future. Any material increase intaxes or fees, or the adoption of additional taxes or fees, may have a materialadverse effect on our future financial results.

 

                We are subject tovarious federal, state and local laws and regulations in addition to gamingregulations. These laws and regulations include, but are not limited to,restrictions and conditions concerning alcoholic beverages, environmentalmatters, employees, currency transactions, taxation, zoning and building codes,and marketing and advertising. Such laws and regulations are always subject tochange, can be interpreted differently in the future, and new laws andregulations may be enacted which could adversely affect the tax, regulatory, operationalor other aspects of the gaming industry and our company. Furthermore,noncompliance with one or more of these laws and regulation could result in theimposition of substantial penalties against us.

 

*We Do Not Own Or Lease Our Video Lottery (Slot)Machines And Related Technology*

 

                We do not own orlease the video lottery (slot) machines or computer systems used by the Statein connection with its video lottery gaming operations. The Lottery Directorenters into contracts directly with the providers of the video lottery (slot)machines and computer systems. The State purchases or leases all equipment andthe Lottery

 

 

11

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Director licenses all technology providers. Our operations could bedisrupted if a licensed technology provider violates its agreement with theState or ceases to be licensed for any reason. Such an event would be outsideof our control and could adversely affect our gaming revenues.

 

**Item 8.****    Financial Statements AndSupplementary Data**

 

                Gaming &Entertainment’s consolidated financial statements and the Report of IndependentRegistered Public Accounting Firm included in this report are shown on theIndex to Consolidated Financial Statements on page 16.

 

**Part IV**

 

**Item 15.****Exhibits, Financial StatementSchedules**

 
| (a)(1) |   | Financial Statements — See accompanying Index to Consolidated Financial  Statements on page 16.                                                                                                                                                                                                                                                                                              |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                              |
| (2)    |   | Financial Statement Schedules — None.                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                              |
| (3)    |   | Exhibits:                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1    |   | Amended and Restated Agreement Regarding Distribution  and Plan of Reorganization, dated as of February 15, 2002, by and between  Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) and Dover  Downs Gaming & Entertainment, Inc. (incorporated herein by reference to  Exhibit 2.1 to the Form 10 filed on February 26, 2002, which was declared  effective on March 7, 2002). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.1    |   | Certificate of Incorporation of Dover Downs Gaming  & Entertainment, Inc. (incorporated herein by reference to Exhibit 3.1 to  the Form 10 filed on November 21, 2001, which was declared effective on March  7, 2002).                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.2    |   | Amended and Restated By-laws of Dover Downs Gaming  & Entertainment, Inc. dated March 1, 2002 (incorporated herein by  reference to Exhibit 3.2 to the Form 10 filed on March 7, 2002).                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.1    |   | Form of Common Stock Certificate of Dover Downs  Gaming & Entertainment, Inc. (incorporated herein by reference to Exhibit  4.1 to the Form 10 filed on November 21, 2001, which was declared effective  on March 7, 2002).                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.2    |   | Rights Agreement dated as of January 2, 2002 between  Dover Downs Gaming & Entertainment, Inc. and Mellon Investor Services, as  Rights Agent (incorporated herein by reference to Exhibit 4.2 to the Form 10  filed on January 16, 2002, which was declared effective on March 7, 2002).                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1   |   | Employee Benefits Agreement, dated as of January 15,  2002, by and between Dover Motorsports, Inc. (f/k/a Dover Downs  Entertainment, Inc.) and Dover Downs Gaming & Entertainment, Inc.  (incorporated herein by reference to Exhibit 10.2 to the Form 10 filed on January  16, 2002, which was declared effective on March 7, 2002).                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | Transition Support Services Agreement, dated as of  January 15, 2002, by and between Dover Motorsports, Inc. (f/k/a Dover Downs  Entertainment, Inc.) and Dover Downs Gaming & Entertainment, Inc.  (incorporated herein by reference to Exhibit 10.3 to the Form 10 filed on  January 16, 2002, which was declared effective on March 7, 2002).                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3   |   | Tax Sharing Agreement, dated as of January 15, 2002,  by and between Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment,  Inc.) and Dover Downs Gaming & Entertainment, Inc. (incorporated herein  by reference to Exhibit 10.4 to the Form 10 filed on January 16, 2002, which  was declared effective on March 7, 2002).                                                              |

 

 

12

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| 10.4   |   | Real Property Agreement dated as of January 15,  2002, by and between Dover Motorsports, Inc. (f/k/a Dover Downs  Entertainment, Inc.) and Dover Downs Gaming & Entertainment, Inc.  (incorporated herein by reference to Exhibit 10.5 to the Form 10 filed on  January 16, 2002, which was declared effective on March 7, 2002).                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.5   |   | Project Consulting and Management Agreement between  Dover Downs, Inc. and Caesars World Gaming Development Corporation dated May  10, 1995 (incorporated herein by reference to the Registration Statement of  Dover Downs Entertainment, Inc., Number 333-8147, on Form S-1 dated July 15,  1996, which was declared effective on October 3, 1996). |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.6   |   | First Amendment to Project Consulting and Management  Agreement between Dover Downs, Inc. and Caesars World Gaming Development  Corporation dated October 25, 1996 (incorporated herein by reference to the  Form 10-K of Dover Downs Entertainment, Inc. (Commission file number 1-11929)  dated February 27, 2001).                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.7   |   | Second Amendment to Project Consulting and  Management Agreement between Dover Downs, Inc. and Caesars World Gaming  Development Corporation dated December 2, 2000 (incorporated herein by  reference to the Form 10-K of Dover Downs Entertainment, Inc. (Commission file  number 1-11929) dated February 27, 2001).                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.8   |   | Agreement between Dover Downs, Inc. and Delaware  Standardbred Owners Association, Inc. dated October 22, 2003 (incorporated  herein by reference to Exhibit 10.9 to the Form 10-K filed on March 9, 2004).                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.9   |   | Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, dated as of January 15,  2002 (incorporated herein by reference to Exhibit 10.10 to the Form 10 filed  on January 16, 2002, which was declared effective on March 7, 2002).                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.10  |   | Amended and Restated Credit Agreement among Dover  Downs Gaming & Entertainment, Inc. and Wilmington Trust Company, as  agent, dated as of March 25, 2002 (incorporated herein by reference to  Exhibit 10.6 to the Form 10-Q filed on May 10, 2002).                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.11  |   | Amended and Restated Guaranty and Suretyship  Agreement by and between Dover Downs, Inc. and Wilmington Trust Company, as  agent, dated as of March 25, 2002 (incorporated herein by reference to  Exhibit 10.7 to the Form 10-Q filed on May 10, 2002).                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.12  |   | Amendment to Amended and Restated Credit Agreement  among Dover Downs Gaming & Entertainment, Inc. and Wilmington Trust  Company, as agent, dated as of August 12, 2002 (incorporated herein by  reference to Exhibit 10.1 to the Form 10-Q filed on November 4, 2002).                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.13  |   | Second Amendment to Amended and Restated Credit  Agreement among Dover Downs Gaming & Entertainment, Inc. and Wilmington  Trust Company, as agent, dated as of February 19, 2004 (incorporated herein  by reference to Exhibit 10.14 to the Form 10-K filed on March 9, 2004).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.14  |   | Third Amendment to Amended and Restated Credit  Agreement among Dover Downs Gaming & Entertainment, Inc. and Wilmington  Trust Company, as agent, dated as of November 5, 2004 (incorporated herein by  reference to Exhibit 10.14 to the Form 10-K filed on March 10, 2005).                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.15  |   | Non-Compete Agreement between Dover Downs Gaming  & Entertainment, Inc. and Patrick J. Bagley dated June 16, 2004  (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q filed on  August 6, 2004).                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10.16  |   | Employment and Non-Compete Agreement between Dover  Downs Gaming & Entertainment, Inc. and Klaus M. Belohoubek dated June 16,  2004 (incorporated herein by reference to Exhibit 10.2 to the Form 10-Q filed  on August 6, 2004).                                                                                                                 |

 

 

13

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| 10.17  |   | Employment and Non-Compete Agreement between Dover  Downs Gaming & Entertainment, Inc. and Timothy R. Horne dated June 16,  2004 (incorporated herein by reference to Exhibit 10.3 to the Form 10-Q filed  on August 6, 2004).                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                 |
| 10.18  |   | Non-Compete Agreement between Dover Downs Gaming  & Entertainment, Inc. and Melvin L. Joseph dated June 16, 2004  (incorporated herein by reference to Exhibit 10.4 to the Form 10-Q filed on  August 6, 2004).                                  |
|   |   |                                                                                                                                                                                                                                                 |
| 10.19  |   | Employment and Non-Compete Agreement between Dover  Downs Gaming & Entertainment, Inc. and Denis McGlynn dated June 16, 2004  (incorporated herein by reference to Exhibit 10.5 to the Form 10-Q filed on  August 6, 2004).                      |
|   |   |                                                                                                                                                                                                                                                 |
| 10.20  |   | Employment and Non-Compete Agreement between Dover  Downs Gaming & Entertainment, Inc. and Edward J. Sutor dated June 16,  2004 (incorporated herein by reference to Exhibit 10.6 to the Form 10-Q filed  on August 6, 2004).                    |
|   |   |                                                                                                                                                                                                                                                 |
| 10.21  |   | Non-Compete Agreement between Dover Downs Gaming  & Entertainment, Inc. and Henry B. Tippie dated June 16, 2004  (incorporated herein by reference to Exhibit 10.7 to the Form 10-Q filed on  August 6, 2004).                                   |
|   |   |                                                                                                                                                                                                                                                 |
| 10.22  |   | Dover Downs Gaming & Entertainment, Inc. 2002  Stock Incentive Plan, as Amended and Restated (incorporated herein by  reference to Exhibit A to the Company’s Proxy Statement filed on March 29,  2004).                                    |
|   |   |                                                                                                                                                                                                                                                 |
| 10.23  |   | Form of Incentive Stock Option Agreement Used with  Dover Downs Gaming & Entertainment, Inc. 2002 Stock Incentive Plan, as  Amended and Restated (incorporated herein by reference to Exhibit 10.1 to the  Form 10-Q filed on November 3, 2004). |
|   |   |                                                                                                                                                                                                                                                 |
| 10.24  |   | Form of Restricted Stock Grant Agreement Used with  Dover Downs Gaming & Entertainment, Inc. 2002 Stock Incentive Plan, as  Amended and Restated (incorporated herein by reference to Exhibit 10.2 to the  Form 10-Q filed on November 3, 2004). |
|   |   |                                                                                                                                                                                                                                                 |
| 21.1   |   | List of Subsidiaries of Dover Downs Gaming &  Entertainment, Inc. (incorporated herein by reference to Exhibit 21.1 to the  Form 10-K filed on March 10, 2005).                                                                                  |
|   |   |                                                                                                                                                                                                                                                 |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                 |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                 |
| 32.1   |   | Certification of Chief Executive Officer Pursuant to  18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                     |
|   |   |                                                                                                                                                                                                                                                 |
| 32.2   |   | Certification of Chief Financial Officer Pursuant to  18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                     |
|   |   |                                                                                                                                                                                                                                                 |
| 99.1   |   | Information Statement dated as of March 7, 2002  (incorporated herein by reference to Exhibit 99.1 to the Form 10 filed on  March 7, 2002).                                                                                                          |
|   |   |                                                                                                                                                                                                                                                 |
| 99.2   |   | Audit Committee Charter of Dover Downs Gaming &  Entertainment, Inc. (incorporated herein by reference to Exhibit B to the  Company’s Proxy Statement filed on March 29, 2004).                                                             |

 

 

14

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**Signatures**

 

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

 
| DATED: May 20, 2005 | Dover Downs Gaming & Entertainment, Inc. |
|---------------------|----------------------------------------------|
|                | Registrant                                   |   |
|                | BY:                                          | /s/ Denis McGlynn |   |
|                |                                         | Denis McGlynn |
|                |                                         | President and Chief Executive Officer |
|                |                                         | and Director |
|                     |                                              |  |  |

 

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

 
| /s/ Timothy R. Horne      |   | Sr. Vice President-Finance,           |   | May 20, 2005 |
|---------------------------|--------|---------------------------------------|--------|--------------|
| Timothy R. Horne          |   | Treasurer and Chief Financial Officer |   |         |
| /s/ Henry B. Tippie       |   | Chairman of the Board                 |   | May 20, 2005 |
| Henry B. Tippie           |   |                                  |   |         |
| /s/ Kenneth K. Chalmers   |   | Director and Chairman                 |   | May 20, 2005 |
| Kenneth K. Chalmers       |   | of the Audit Committee                |   |         |
| /s/ R. Randall Rollins    |   | Director                              |   | May 20, 2005 |
| R. Randall Rollins        |   |                                  |   |         |
| /s/ Patrick J. Bagley     |   | Director                              |   | May 20, 2005 |
| Patrick J. Bagley         |   |                                  |   |         |
| /s/ John W. Rollins,  Jr. |   | Director                              |   | May 20, 2005 |
| John W. Rollins, Jr.      |   |                                  |   |         |
| /s/ Jeffrey W. Rollins    |   | Director                              |   | May 20, 2005 |
| Jeffrey W. Rollins        |   |                                  |   |         |

 

 

15

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**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
|                                                                                                                 | Page   |
|----------------------------------------------------------------------------------------------------------------------|--------|
| Statement of  Management Responsibility                                                                              | 17     |
|                                                                                                                 |   |
| Report  of Independent Registered Public Accounting Firm                                                             | 18     |
|                                                                                                                 |   |
| Consolidated  Statement of Earnings and Comprehensive Earnings for the years ended December  31, 2004, 2003 and 2002 | 19     |
|                                                                                                                 |   |
| Consolidated Balance Sheet  at December 31, 2004 and 2003                                                            | 20     |
|                                                                                                                 |   |
| Consolidated  Statement of Cash Flows for the years ended December 31, 2004, 2003 and 2002                           | 21     |
|                                                                                                                 |   |
| Notes to  the Consolidated Financial Statements                                                                      | 22     |

 

 

16

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**STATEMENT OF MANAGEMENTRESPONSIBILITY**

 

                Dover Downs Gaming& Entertainment, Inc. and subsidiaries (the “Company’s”) management isresponsible for the preparation, integrity and objectivity of the consolidatedfinancial statements and other financial information included in the Company’s2004 Annual Report on Form 10-K. The consolidated financial statements havebeen prepared in conformity with U.S. generally accepted accounting principlesand reflect the effects of certain estimates and judgments made by management.

 

                The Company’smanagement maintains an effective system of internal controls designed toprovide reasonable assurance that assets are safeguarded and transactions areproperly recorded and executed in accordance with management’s authorization.The system is regularly monitored by direct management review and by internalauditors who conduct an extensive program of audits throughout the Company. TheDirector of Internal Audit reports directly to the Audit Committee of the Boardof Directors. We have confidence in our financial reporting, the underlyingsystem of internal controls, and our people, who are objective in theirresponsibilities and operate under the Company’s Code of Business Conduct andthe highest level of ethical standards. These standards are a key element ofthe Company’s control system.

 

                The Companyconducted an evaluation of the effectiveness of its internal control overfinancial reporting based on the framework in *InternalControl - Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on the Company’s evaluationunder the framework in *Internal Control - IntegratedFramework*, management of the Company has assessed the Company’sinternal control over financial reporting to be effective as of December 31,2004. There have not been any changes in the Company’s internal control overfinancial reporting identified in the fourth quarter of 2004 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

                The AuditCommittee of the Board of Directors, which is composed entirely of independentdirectors, has direct and private access to and meets regularly withmanagement, the internal auditors and the independent auditors to reviewaccounting, reporting, auditing and internal control matters.

 
| /s/ Denis McGlynn             |                               | /s/ Timothy R. Horne |   |
|-------------------------------|------------------------------------|----------------------|--------|
| Denis McGlynn                 | Timothy R. Horne                   |
| President and Chief Executive | Sr. Vice President — Finance, |
| Officer and Director          | Treasurer and                      |
|                          | Chief Financial Officer            |

 

 

17

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

The Board of Directors and Stockholders

Dover Downs Gaming & Entertainment, Inc.:

 

                We have auditedthe accompanying consolidated balance sheets of Dover Downs Gaming &Entertainment, Inc. and subsidiaries (the Company) as of December 31, 2004 and2003, and the related consolidated statements of earnings and comprehensiveearnings and cash flows for each of the years in the three-year period endedDecember 31, 2004. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

 

                We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

                In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Dover Downs Gaming &Entertainment, Inc. and subsidiaries as of December 31, 2004 and 2003, and theresults of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2004, in conformity with U.S. generallyaccepted accounting principles.

 

                We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of Dover Downs Gaming &Entertainment, Inc.’s internal control over financial reporting as of December31, 2004, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 8,2005 expressed an unqualified opinion on management’s assessment of, and theeffective operation of, internal control over financial reporting.

 

KPMG LLP

 

Philadelphia, Pennsylvania

March 8, 2005

 

 

18

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**DOVER DOWNS GAMING & ENTERTAINMENT, INC.**

** **

**CONSOLIDATED STATEMENT OFEARNINGS**

**ANDCOMPREHENSIVE EARNINGS**

 
| ** **                              | ** ** | **Years ended December 31,** | ** **  |
|-----------------------------------------|------------|------------------------------|-------------|
| ** **                              | ** ** | **2004**                     | ** **  | **2003** | ** ** | **2002** | ** ** |
| Revenues:                               |       |                         |        |   |   |   |   |
| Gaming                                  |       | $                            | 193,922,000 |   | $ | 175,023,000 |   | $ | 193,723,000 |   |
| Other operating                         |       | 33,795,000                   |        | 32,476,000 |   | 26,083,000 |   |
| Gross revenues                          |       | 227,717,000                  |        | 207,499,000 |   | 219,806,000 |   |
| Less — promotional allowances      |       | 19,973,000                   |        | 18,667,000 |   | 13,331,000 |   |
| — non-recurring gaming charge      |       | 448,000                      |        | — |   | — |   |
|                                    |       | 207,296,000                  |        | 188,832,000 |   | 206,475,000 |   |
| Expenses:                               |       |                         |        |   |   |   |   |
| Gaming                                  |       | 152,725,000                  |        | 138,423,000 |   | 148,817,000 |   |
| Non-recurring gaming charge             |       | 1,802,000                    |        | — |   | — |   |
| Other operating                         |       | 13,013,000                   |        | 9,899,000 |   | 10,351,000 |   |
| General and administrative              |       | 4,603,000                    |        | 4,317,000 |   | 5,061,000 |   |
| Depreciation                            |       | 6,791,000                    |        | 6,287,000 |   | 5,176,000 |   |
|                                    |       | 178,934,000                  |        | 158,926,000 |   | 169,405,000 |   |
| Operating earnings                      |       | 28,362,000                   |        | 29,906,000 |   | 37,070,000 |   |
| Interest expense                        |       | 762,000                      |        | 842,000 |   | 903,000 |   |
| Earnings before income taxes            |       | 27,600,000                   |        | 29,064,000 |   | 36,167,000 |   |
| Income taxes                            |       | 11,219,000                   |        | 11,827,000 |   | 14,725,000 |   |
| Net earnings                            |       | 16,381,000                   |        | 17,237,000 |   | 21,442,000 |   |
| Change in minimum pension liability     |       | —                       |        | 127,000 |   | (127,000 | ) |
| Comprehensive earnings                  |       | $                            | 16,381,000  |   | $ | 17,364,000 |   | $ | 21,315,000 |   |
| Net earnings per common share (Note 3): |       |                         |        |   |   |   |   |
| Basic                                   |       | $                            | 0.62        |   | $ | 0.65 |   | $ | 0.80 |   |
| Diluted                                 |       | $                            | 0.62        |   | $ | 0.65 |   | $ | 0.80 |   |

 

The Notes to theConsolidated Financial Statements are an integral part of these consolidatedstatements.

 

 

19

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**DOVER DOWNS GAMING & ENTERTAINMENT, INC.**

** **

**CONSOLIDATED BALANCE SHEET**

 
| ** **                                                                                                                                            | ** ** | **December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|-------------|
| ** **                                                                                                                                            | ** ** | **2004**         | ** **  | **2003** | ** ** |
| **ASSETS**                                                                                                                                            |       |             |        |   |   |
| Current assets:                                                                                                                                       |       |             |        |   |   |
| Cash                                                                                                                                                  |       | $                | 17,688,000  |   | $ | 14,138,000 |   |
| Accounts receivable                                                                                                                                   |       | 2,919,000        |        | 1,914,000 |   |
| Due from State of Delaware                                                                                                                            |       | 10,080,000       |        | 8,670,000 |   |
| Inventories                                                                                                                                           |       | 2,147,000        |        | 1,801,000 |   |
| Prepaid expenses and other                                                                                                                            |       | 2,220,000        |        | 2,414,000 |   |
| Receivable from Dover Motorsports, Inc.                                                                                                               |       | 2,000            |        | — |   |
| Deferred income taxes                                                                                                                                 |       | 2,168,000        |        | 878,000 |   |
| Total current assets                                                                                                                                  |       | 37,224,000       |        | 29,815,000 |   |
| Property and equipment, net                                                                                                                           |       | 123,076,000      |        | 122,344,000 |   |
| Total assets                                                                                                                                          |       | $                | 160,300,000 |   | $ | 152,159,000 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                         |       |             |        |   |   |
| Current liabilities:                                                                                                                                  |       |             |        |   |   |
| Accounts payable                                                                                                                                      |       | $                | 6,801,000   |   | $ | 6,516,000 |   |
| Purses due horsemen                                                                                                                                   |       | 9,082,000        |        | 7,957,000 |   |
| Accrued liabilities                                                                                                                                   |       | 11,990,000       |        | 6,015,000 |   |
| Payable to Dover Motorsports, Inc.                                                                                                                    |       | —           |        | 96,000 |   |
| Income taxes payable                                                                                                                                  |       | 651,000          |        | 53,000 |   |
| Deferred revenue                                                                                                                                      |       | 195,000          |        | 261,000 |   |
| Total current liabilities                                                                                                                             |       | 28,719,000       |        | 20,898,000 |   |
| Notes payable to banks                                                                                                                                |       | 51,950,000       |        | 31,225,000 |   |
| Deferred income taxes                                                                                                                                 |       | 6,861,000        |        | 5,061,000 |   |
| Commitments and contingencies (see Notes to the Consolidated  Financial Statements)                                                                   |       |             |        |   |   |
| Stockholders’ equity:                                                                                                                            |       |             |        |   |   |
| Preferred stock, $.10 par value; 1,000,000 shares authorized; issued  and outstanding: none                                                           |       | —           |        | — |   |
| Common stock, $.10 par value; 74,000,000 shares authorized; issued  and outstanding: December 31, 2004-9,363,791 and 2003-10,333,112 shares           |       | 936,000          |        | 1,033,000 |   |
| Class A common stock, $.10 par value; 50,000,000 shares authorized;  issued and outstanding: December 31, 2004-14,475,059 and 2003-16,145,059  shares |       | 1,448,000        |        | 1,615,000 |   |
| Additional paid-in capital                                                                                                                            |       | 35,764,000       |        | 67,454,000 |   |
| Retained earnings                                                                                                                                     |       | 35,156,000       |        | 24,873,000 |   |
| Deferred compensation                                                                                                                                 |       | (534,000         | )           | — |   |
| Total stockholders’ equity                                                                                                                       |       | 72,770,000       |        | 94,975,000 |   |
| Total liabilities and stockholders’ equity                                                                                                       |       | $                | 160,300,000 |   | $ | 152,159,000 |   |

 

The Notes to theConsolidated Financial Statements are an integral part of these consolidatedstatements.

 

 

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**DOVER DOWNS GAMING & ENTERTAINMENT, INC.**

** **

**CONSOLIDATED STATEMENT OF CASH FLOWS**

 
| ** **                                                                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Operating activities:                                                                |       |                         |       |   |   |   |   |
| Net earnings                                                                         |       | $                            | 16,381,000 |   | $ | 17,237,000 |   | $ | 21,442,000 |   |
| Adjustments to reconcile net earnings to net cash provided by  operating activities: |       |                         |       |   |   |   |   |
| Depreciation                                                                         |       | 6,791,000                    |       | 6,287,000 |   | 5,176,000 |   |
| Amortization of credit facility origination fees                                     |       | 62,000                       |       | 31,000 |   | 60,000 |   |
| Amortization of deferred compensation                                                |       | 67,000                       |       | — |   | — |   |
| Deferred income taxes                                                                |       | 165,000                      |       | 1,116,000 |   | 2,642,000 |   |
| Changes in assets and liabilities:                                                   |       |                         |       |   |   |   |   |
| Accounts receivable                                                                  |       | (1,005,000                   | )          | 1,077,000 |   | (415,000 | ) |
| Due from State of Delaware                                                           |       | (1,410,000                   | )          | 954,000 |   | (1,480,000 | ) |
| Inventories                                                                          |       | (346,000                     | )          | (647,000 | ) | (288,000 | ) |
| Prepaid expenses and other                                                           |       | 132,000                      |       | (1,068,000 | ) | 136,000 |   |
| Receivable from/payable to Dover Motorsports, Inc.                                   |       | (98,000                      | )          | 371,000 |   | (793,000 | ) |
| Accounts payable                                                                     |       | (909,000                     | )          | (575,000 | ) | (3,870,000 | ) |
| Purses due horsemen                                                                  |       | 1,125,000                    |       | (1,709,000 | ) | 2,097,000 |   |
| Accrued liabilities                                                                  |       | 5,975,000                    |       | 62,000 |   | 1,001,000 |   |
| Income taxes payable/prepaid income taxes                                            |       | 943,000                      |       | 912,000 |   | (1,975,000 | ) |
| Deferred revenue                                                                     |       | (66,000                      | )          | 130,000 |   | 99,000 |   |
| Net cash provided by operating activities                                            |       | 27,807,000                   |       | 24,178,000 |   | 23,832,000 |   |
| Investing activities:                                                                |       |                         |       |   |   |   |   |
| Capital expenditures                                                                 |       | (6,329,000                   | )          | (6,383,000 | ) | (20,652,000 | ) |
| Net cash used in investing activities                                                |       | (6,329,000                   | )          | (6,383,000 | ) | (20,652,000 | ) |
| Financing activities:                                                                |       |                         |       |   |   |   |   |
| Borrowings from revolving debt                                                       |       | 226,905,000                  |       | 158,480,000 |   | 171,178,000 |   |
| Repayments of revolving debt                                                         |       | (206,180,000                 | )          | (168,145,000 | ) | (130,288,000 | ) |
| Repayment of debt to Dover Motorsports, Inc.                                         |       | —                       |       | — |   | (45,000,000 | ) |
| Credit facility origination fees                                                     |       | —                       |       | — |   | (137,000 | ) |
| Dividends paid                                                                       |       | (6,098,000                   | )          | (5,305,000 | ) | (3,333,000 | ) |
| Repurchase of common stock                                                           |       | (32,555,000                  | )          | (1,523,000 | ) | — |   |
| Proceeds from stock options exercised                                                |       | —                       |       | — |   | 73,000 |   |
| Change in payable to/receivable from Dover Motorsports, Inc.                         |       | —                       |       | — |   | 1,730,000 |   |
| Net cash used in financing activities                                                |       | (17,928,000                  | )          | (16,493,000 | ) | (5,777,000 | ) |
| Net increase (decrease) in cash                                                      |       | 3,550,000                    |       | 1,302,000 |   | (2,597,000 | ) |
| Cash, beginning of year                                                              |       | 14,138,000                   |       | 12,836,000 |   | 15,433,000 |   |
| Cash, end of year                                                                    |       | $                            | 17,688,000 |   | $ | 14,138,000 |   | $ | 12,836,000 |   |
| Supplemental information:                                                            |       |                         |       |   |   |   |   |
| Interest paid                                                                        |       | $                            | 650,000    |   | $ | 980,000 |   | $ | 630,000 |   |
| Income taxes paid                                                                    |       | $                            | 10,112,000 |   | $ | 10,325,000 |   | $ | 14,081,000 |   |

** **

The Notes to theConsolidated Financial Statements are an integral part of these consolidatedstatements.

 

 

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**DOVER DOWNS GAMING & ENTERTAINMENT, INC.**

** **

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

 

**NOTE 1—Business Operations**

 

                References inthese footnotes to “the Company,” “Gaming & Entertainment,” “we,” “us,” and“our” mean Dover Downs Gaming & Entertainment, Inc. and its wholly ownedsubsidiaries.

 

                Dover Downs Gaming& Entertainment, Inc. is a diversified gaming and entertainment companywhose operations consist of Dover Downs Slots — a 91,000 square foot videolottery (slots) casino complex; the Dover Downs Hotel and Conference Center —featuring luxury accommodations with conference, banquet, fine dining, ballroomand concert hall facilities; and Dover Downs Raceway — a harness racing trackwith pari-mutuel wagering on live and simulcast horse races.

 

                Gaming &Entertainment has two wholly owned subsidiaries: Dover Downs, Inc. and DoverDowns Management Corp. Dover Downs, Inc. was incorporated in 1967 and beganmotorsports and harness racing operations in 1969. In June of 1994, legislationauthorizing video lottery operations in the State of Delaware (the “State”) wasadopted. The Company’s video lottery (slots) casino operations began onDecember 29, 1995. As a result of several restructurings, Dover Downs, Inc.became a wholly owned subsidiary of Dover Motorsports, Inc. (f/k/a Dover DownsEntertainment, Inc.) (“DVD”), and became the operating entity for all of DVD’sgaming operations.

 

                Dover Downs Gaming& Entertainment, Inc. was incorporated in the State in December of 2001 asa wholly owned subsidiary of DVD. Effective March 31, 2002, DVD completed atax-free spin-off of its gaming operations by contributing 100% of the issuedand outstanding common stock of Dover Downs, Inc. to the Company, andsubsequently distributing 100% of the issued and outstanding common stock ofthe Company to DVD stockholders. Immediately following the spin-off, DoverDowns Gaming & Entertainment, Inc. became an independent public company.

 

                The Company isauthorized to conduct video lottery operations as a “Licensed Agent” under theDelaware State Lottery Code. Pursuant to Delaware’s Horse Racing RedevelopmentAct, enacted in 1994, the Delaware State Lottery Office administers andcontrols the operation of the video lottery.

 

                The Company’slicense from the Delaware Harness Racing Commission (the “Commission”) to holdharness race meetings on our premises and to offer pari-mutuel wagering on liveand simulcast horse races must be renewed on an annual basis. In order tomaintain its license to conduct video lottery operations, the Company isrequired to maintain its harness horse racing license. The Company has receivedan annual license from the Commission for the past 36 consecutive years andmanagement believes that its relationship with the Commission remains good.

 

                Our entertainmentcomplex is located in Dover, the capital of the State of Delaware. Approximately70% of our customers come from Maryland, Pennsylvania, Virginia and theDistrict of Columbia. In July 2004, Pennsylvania adopted legislation whichauthorizes up to 61,000 slot machines at various existing and proposed venuesthroughout the state. It is difficult for us to predict the effect that suchlegislation will have on us, but we estimate that one or more facilities inPennsylvania are likely to begin operations in 2006. Management has estimatedthat slot win from Pennsylvania patrons represents approximately 7% of ourtotal slot win.

 

                Due to the natureof the Company’s business activities, it is subject to various federal, stateand local regulations.

 

 

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**NOTE 2—Dover Motorsports, Inc. Spin-off Of ItsGaming Business**

 

                Dover Motorsports,Inc. (“DVD”), formerly Dover Downs Entertainment, Inc., completed its tax-freespin-off of Dover Downs, Inc., its gaming business, effective March 31, 2002. Toaccomplish the spin-off, DVD contributed 100 percent of the issued andoutstanding common stock of Dover Downs, Inc. to the Company, and thendistributed all of the capital stock of the Company to DVD stockholders.Holders of DVD common stock or Class A common stock received 0.7 shares ofGaming & Entertainment common stock or Class A common stock for each shareof DVD common stock or Class A common stock owned at the close of business onMarch 18, 2002, the record date for the spin-off. Each share of common stock orClass A common stock distributed was accompanied by one stock purchase right.Based on an Internal Revenue Service Private Letter Ruling, the spin-off istax-free to DVD and its stockholders, except for cash received for anyfractional shares.

 

                Immediatelyfollowing the spin-off, DVD owned no shares of the Company, and Gaming &Entertainment became an independent public company. A total of 9,998,976 sharesof Gaming & Entertainment common stock and 16,638,359 shares of Gaming& Entertainment Class A common stock were distributed in connection withthe spin-off. Also as part of the spin-off, a $9.5 million payable to DVD wascancelled.

 

                In conjunctionwith the spin-off, the Company and DVD entered into various agreements thataddressed the allocation of assets and liabilities between the two companiesand that define the companies’ relationship after the separation. These are theAgreement Regarding Distribution and Plan of Reorganization, the Real PropertyAgreement, the Employee Benefits Agreement, the Transition Support ServicesAgreement and the Tax Sharing Agreement.

 

                The AgreementRegarding Distribution and Plan of Reorganization set forth the principalcorporate transactions required to effect the separation of the gaming businessfrom the motorsports business, and the continuation of the gaming businessfollowing such separation, including the allocation between the Company and DVDof certain assets and liabilities, and the distribution of shares of the Company’scommon stock and Class A common stock. As a result of the spin-off, all assetsand liabilities relating to the gaming business were assumed and are owned bythe Company or its subsidiaries, and all assets and liabilities relating to themotorsports business were assumed and are owned by DVD or its subsidiaries.

 

                The Real PropertyAgreement governs certain real property transfers, leases and easementsaffecting the Company’s Dover, Delaware facility.

 

                The EmployeeBenefits Agreement provided for the transfer of Company employees from employeebenefits under plans or programs sponsored by DVD to those sponsored by theCompany. In connection with the spin-off and pursuant to the terms of theEmployee Benefits Agreement, DVD arranged for the transfer of the assets andliabilities associated with DVD’s defined-benefit pension plan and the 401(k)plan sponsored by DVD with respect to employees who became employees of theCompany (or remain employed by Dover Downs, Inc.) after the spin-off to theCompany.

 

                The TransitionSupport Services Agreement provides for each of the Company and DVD to provideeach other with certain administrative and operational services. The partyreceiving the services is required to pay for them within 30 business daysafter receipt of an invoice at rates agreed upon by the Company and DVD. Theagreement may be terminated in whole or in part 90 days after the request ofthe party receiving the services or 180 days after the request of the partyproviding the services.

 

                The Tax SharingAgreement provides for, among other things, the treatment of income tax mattersfor periods beginning before and including the date of the spin-off and anytaxes resulting from transactions effected in connection with the spin-off.With respect to any period ending on or before the spin-off or any tax periodin which the spin-off occurs, DVD:

 

**•**              continuesto be the sole and exclusive agent for the Company in all matters relating tothe income, franchise, property, sales and use tax liabilities of the Company;

 

 

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•              subjectto the Company’s obligation to pay for items relating to its gaming business,bears any costs relating to tax audits, including tax assessments and anyrelated interest and penalties and any legal, litigation, accounting orconsulting expenses;

 

•              continuesto have the sole and exclusive responsibility for the preparation and filing ofconsolidated federal and consolidated state income tax returns; and

 

•              subjectto the right and authority of the Company to direct DVD in the defense orprosecution of the portion of a tax contest directly and exclusively related toany Gaming & Entertainment tax adjustment, generally has the powers, in DVD’ssole discretion, to contest or compromise any claim or refund on the Company’sbehalf.

 

Refer to NOTE 10—Related Party Transactions forfurther discussion.

 

**NOTE 3—Summary of Significant Accounting Policies**

 

*                Basisof consolidation and presentation*—The consolidated financial statements include theaccounts of Gaming & Entertainment and its wholly owned subsidiaries. Intercompanytransactions and balances have been eliminated. The consolidated financialstatements for periods prior to the effective date of the spin-off have beenprepared on the historical cost basis and present the Company’s results ofoperations and cash flows directly related to DVD’s gaming operations.

 

                The consolidatedfinancial statements included herein may not necessarily be indicative of theresults of operations, financial position and cash flows of Gaming &Entertainment in the future or had it operated as a separate, independentcompany for periods prior to the effective date of the spin-off. Theconsolidated financial statements included herein for periods prior to the effectivedate of the spin-off on March 31, 2002 do not reflect any changes in thefinancing and operations of Gaming & Entertainment that occurred as aresult of the spin-off.

 

*                Inventories*—Inventories, primarily food and beverageitems, are stated at the lower of cost or market with cost being determined onthe first-in, first-out basis.

 

                *Property and equipment*—Property and equipment is stated atcost. Depreciation is provided for financial reporting purposes using thestraight-line method over the following estimated useful lives:

 

| Facilities                         |   | 10-40 years |
|------------------------------------|--------|-------------|
| Furniture, fixtures and  equipment |   | 5-10 years  |

 

                The Companyperforms reviews for impairment of long-lived assets whenever events or changesin circumstances indicate that the carrying value of an asset may not berecoverable. No such events or changes in circumstances have occurred to date.An impairment loss would be measured as the amount by which the carrying amountof the asset exceeds its fair value. Generally, fair value will be determinedusing valuation techniques such as the present value of future cash flows.

 

*                Interestcapitalization*—Interestis capitalized in connection with the construction of major facilities. Thecapitalized interest is amortized over the estimated useful life of the assetto which it relates. During the year ended December 31, 2004, the Companyincurred $779,000 of interest cost, of which $17,000 was capitalized. Duringthe year ended December 31, 2003, the Company incurred $842,000 of interestcost, none of which was capitalized. During the year ended December 31, 2002,the Company incurred $1,254,000 of interest cost, of which $351,000 wascapitalized.

 

*                Incometaxes*—Deferredincome taxes are provided in accordance with the provisions of FinancialAccounting Standards Board (“FASB”) Statement No. 109, *Accountingfor Income Taxes*, on all differences between the tax bases of assetsand liabilities and their reported amounts in the consolidated financialstatements based upon enacted statutory tax rates in effect at the balancesheet date.

 

 

24

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                *Point loyalty program*—The Company currently has a pointloyalty program for its video lottery customers which allows them to earnpoints based on the volume of their video lottery activity. Prior to December2004, the points could be redeemed for various services and merchandisethroughout the gaming facility; however, they were not redeemable for cash orcasino play.                EffectiveDecember 2004, the Company changed its policy relating to its point loyaltyprogram to allow points earned by customers to be redeemed for cash undercertain circumstances. As a result, the Company recorded a non-recurring chargein the fourth quarter of 2004 to record the net impact of the program change. Allpoints earned by customers are now expensed in the period they are earned. Theestimated amount of points redeemable for cash is recorded as a reduction ofrevenue and the estimated amount of points redeemable for services andmerchandise is recorded as gaming expense. In estimating the amount of theliability, which was $2,678,000 at December 31, 2004, the Company estimates aredemption rate, a cost of rewards to be offered and the mix of cash, goods andservices for which reward points will be redeemed. We use historical data toestimate those amounts.

 

                *Revenue and expense recognition*—Gaming revenues represent(i) the net win from video lottery (slot) machine wins and losses and (ii)commissions from pari-mutuel wagering. Other operating revenues consist ofhotel rooms revenue, food and beverage sales and other miscellaneous income.

 

                For the videolottery operations, which account for more than 80% of gross revenues for allperiods presented, the difference between the amount wagered by bettors and theamount paid out to bettors is referred to as the win. The win is included inthe amount recorded in the Company’s consolidated financial statements asgaming revenue. The Delaware State Lottery Office sweeps the win from the videolottery operations, collects the State’s share of the win and the amount due tothe vendors under contract with the State who provide the video lottery (slot)machines and associated computer systems, collects the amount allocable topurses for harness horse racing and remits the remainder to the Company as itscommission for acting as a Licensed Agent. Gaming expenses include the amountscollected by the State (i) for the State’s share of the win, (ii) forremittance to the providers of the video lottery (slot) machines and associatedcomputer systems, and (iii) for harness horse racing purses. The Companyrecognizes revenues from pari-mutuel commissions earned from live harness horseracing and importing of simulcast signals from other race tracks when the raceoccurs. Revenues from hotel rooms, food and beverage sales and othermiscellaneous income are recognized at the time the service is provided.

 

                The retail valueof hotel rooms, food, beverage and other items that are provided to customerswithout charge has been included in gross revenues, and a corresponding amounthas been deducted as promotional allowances. The estimated direct cost ofproviding these items has been charged to the casino through interdepartmentalallocations and is included in gaming expenses in the consolidated statement ofearnings. The Company’s operating margin for other operating activities iscomputed by netting promotional allowances against other operating revenuesless other operating expenses.

 

                *Advertising costs*—The cost of general advertising is chargedto operations as incurred.

 

                *Earnings per share*—Basic and diluted earnings per share (“EPS”)are calculated in accordance with FASB Statement No. 128, *Earnings PerShare*. Weighted average shares used in computing basic and dilutedEPS are as follows:

 

| ** **                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Basic EPS                     |       | 26,339,000                   |       | 26,511,000 |   | 26,643,000 |   |
| Effect of dilutive securities |       | 75,000                       |       | 26,000 |   | 82,000 |   |
| Diluted EPS                   |       | 26,414,000                   |       | 26,537,000 |   | 26,725,000 |   |

 

                Dilutivesecurities include stock options and unvested restricted stock awards.

 

                For the yearsended December 31, 2004, 2003 and 2002, options to purchase an average of280,180, 667,960 and 243,639 shares of common stock, respectively, wereoutstanding, but were not included in the computation of diluted EPS becausethe options’ exercise prices were greater than the average market price of thecommon stock during the period.

 

 

25

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                Earnings per shareamounts and weighted average shares outstanding for periods prior to April 1,2002, the day after the effective date of the spin-off from DVD, are presentedon a pro forma basis to reflect such spin-off.

 

                The pro formaaverage outstanding common shares and Class A common shares were derived fromDVD’s common shares and Class A common shares outstanding for the periodspresented using the distribution ratio of 0.7 shares of Gaming &Entertainment common stock and Class A common stock for each share of DVDcommon stock and Class A common stock, respectively. Outstanding stock optionsof Gaming & Entertainment were calculated assuming the stock optionsrelated to each individual who became a Gaming & Entertainment employee orboth a DVD and a Gaming & Entertainment employee subsequent to the spin-offwere outstanding Gaming & Entertainment options during each periodpresented.

 

                *Accounting for stock-based compensation*—The Company has astock incentive plan which provides for the grant of stock options and/orrestricted stock to officers and key employees. The Company accounts for stockoptions in accordance with FASB Statement No. 123, *Accountingfor Stock-Based Compensation*, as amended by FASB Statement No.148, *Accounting for Stock-Based Compensation* —*Transition and Disclosure* — *an amendment of FASB Statement No. 123*. Statement No. 123defines a fair-value based method of accounting for stock-basedcompensation plans; however, it allows the continued use of the intrinsic valuemethod under Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations. The Company has elected to continue to use the intrinsic valuemethod and based on this method did not record any stock-based compensationexpense related to its stock options during the years ended December 31, 2004,2003 and 2002. The Company’s restricted stock vests based on continuedemployment with the Company. Restricted stock awards result in compensationexpense as discussed in NOTE 9—Stockholders’ Equity.

 

                The followingtable illustrates the effect on net earnings and net earnings per common shareif the Company had applied the fair-value recognition provisions of StatementNo. 123 to stock-based employee compensation related to its stock options andawards:

 
| ** **                                                                                                                                   | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net earnings, as reported                                                                                                                    |       | $                            | 16,381,000 |   | $ | 17,237,000 |   | $ | 21,442,000 |   |
| Add: Stock-based employee compensation expense included in reported  net earnings, net of related tax effects                                |       | 67,000                       |       | — |   | — |   |
| Deduct: Total stock-based employee compensation expense determined  under fair-value based method for all awards, net of related tax effects |       | (641,000                     | )          | (608,000 | ) | (285,000 | ) |
| Pro forma net earnings                                                                                                                       |       | $                            | 15,807,000 |   | $ | 16,629,000 |   | $ | 21,157,000 |   |
| Net earnings per common share:                                                                                                               |       |                         |       |   |   |   |   |
| Basic — as reported                                                                                                                     |       | $                            | 0.62       |   | $ | 0.65 |   | $ | 0.80 |   |
| Basic — pro forma                                                                                                                       |       | $                            | 0.60       |   | $ | 0.63 |   | $ | 0.79 |   |
| Diluted — as reported                                                                                                                   |       | $                            | 0.62       |   | $ | 0.65 |   | $ | 0.80 |   |
| Diluted — pro forma                                                                                                                     |       | $                            | 0.60       |   | $ | 0.63 |   | $ | 0.79 |   |

 

                For disclosurepurposes, the Company determined compensation expense for its stock optionsbased upon the fair value at the grant date using the Black-Scholesoption-pricing model with the following assumptions:

 

| ** **               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free interest rate  |       | n/a      |       | 3.73     | %          | 4.68     | %          |
| Volatility               |       | n/a      |       | 45       | %          | 45       | %          |
| Expected dividend yield  |       | n/a      |       | 2.10     | %          | 1.10     | %          |
| Expected life (in years) |       | n/a      |       | 7.50     |       | 6.25     |       |

 

                Theweighted-average fair value of options granted during the years ended December31, 2003 and 2002 was $4.02 and $4.33, respectively.  No stockoptions were granted during the year ended December 31, 2004. The fair value ofrestricted stock awards granted during the year ended December 31, 2004 was$11.62 per share.

 

 

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*                Useof estimates*—Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

                *Fair value of financial instruments*—The carrying amountreported in the balance sheet for current assets and current liabilitiesapproximates their fair value because of the short maturity of theseinstruments. The carrying value of long-term debt at December 31, 2004 and 2003approximates its fair value based on the interest rates available on similarborrowings.

 

                *Segment information*—The Company accounts for its operatingsegment in accordance with FASB Statement No. 131, *DisclosuresAbout Segments of an Enterprise and Related Information*. StatementNo. 131 establishes guidelines for public companies in determining operatingsegments based on those used for internal reporting to management. Based onthese guidelines, the Company reports information under a single gaming andentertainment segment.

 

                *Recent accounting pronouncements*—In December 2004, the FASBissued Statement No. 123 (Revised 2004) *Share-Based Payment*.Statement No. 123R addresses all forms of share-based payment awards, includingshares issued under employee stock purchase plans, stock options, restrictedstock and stock appreciation rights. It will require companies to recognize inthe statement of earnings the grant-date fair value of stock options and otherequity-based compensation issued to employees, but expresses no preference fora type of valuation model. The statement eliminates the intrinsic value-basedmethod prescribed by APB Opinion No. 25, *Accounting for StockIssued to Employees*, and related interpretations, that the Companycurrently uses. The Company is required to adopt Statement No. 123R beginningin the third quarter of 2005. The Company has not yet determined the impact ofapplying the various provisions of the statement; however, adoption of thestatement is expected to increase the amount the Company records ascompensation expense in 2005.

 

**NOTE 4—Property and Equipment**

 

                Property andequipment consists of the following as of December 31:

 

| ** **                        | ** ** | **2004**    | ** **  | **2003**    | ** ** |
|-----------------------------------|------------|-------------|-------------|-------------|------------|
| Land                              |       | $           | 1,842,000   |        | $          | 1,842,000 |   |
| Casino facility                   |       | 32,014,000  |        | 28,132,000  |       |
| Hotel facility                    |       | 65,602,000  |        | 65,974,000  |       |
| Harness racing facilities         |       | 7,977,000   |        | 7,930,000   |       |
| General facilities                |       | 14,856,000  |        | 14,224,000  |       |
| Furniture, fixtures and equipment |       | 34,304,000  |        | 28,973,000  |       |
| Construction in progress          |       | 499,000     |        | 3,068,000   |       |
|                              |       | 157,094,000 |        | 150,143,000 |       |
| Less accumulated depreciation     |       | (34,018,000 | )           | (27,799,000 | )          |
|                              |       | $           | 123,076,000 |        | $          | 122,344,000 |   |

 

                Depreciationexpense was $6,791,000, $6,287,000 and $5,176,000 for the years ended December31, 2004, 2003 and 2002, respectively.

 

                At December 31,2004, we have a $1,195,000 purchase obligation related to the installation of astate-of-the-art customer management and slot data system. Installation wascompleted in the first quarter of 2004, though payments for the system extendinto 2005. Capital expenditures and the change in accounts payable in theCompany’s consolidated statement of cash flows for the year ended December 31,2004 have been adjusted accordingly.

 

 

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**NOTE 5—Accrued Liabilities**

 

                Accruedliabilities consist of the following as of December 31:

 

| ** **                               | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|------------------------------------------|------------|-----------|------------|-----------|------------|
| Point loyalty program                    |       | $         | 2,678,000  |      | $          | — |   |
| Payroll and related items                |       | 1,874,000 |       | 1,455,000 |       |
| Win due to Delaware State Lottery Office |       | 3,559,000 |       | 1,810,000 |       |
| Pension                                  |       | 1,603,000 |       | 931,000   |       |
| Other                                    |       | 2,276,000 |       | 1,819,000 |       |
|                                     |       | $         | 11,990,000 |      | $          | 6,015,000 |   |

 

**NOTE 6—Indebtedness**

 

                The Company has a$57,500,000 credit facility, as amended effective November 5, 2004, thatexpires on October 31, 2007. Interest is based, at the Company’s option, upon(i) LIBOR plus 0.75% or (ii) the base rate (the greater of the prime rate orthe federal funds rate plus 0.5%) minus 1%. The terms of the credit facilitycontain, among others, minimum net worth, interest coverage and maximumleverage covenant requirements. Material adverse changes in the Company’sresults of operations could impact its ability to maintain financial ratiosnecessary to satisfy these requirements. The facility is for seasonal fundingneeds, capital improvements and other general corporate purposes. At December31, 2004, the Company was in compliance with all terms of the facility andthere was $51,950,000 outstanding at a weighted average interest rate of 3.25%.At December 31, 2004, $5,550,000 was available pursuant to the facility.

 

**NOTE 7—Income Taxes**

 

                The current anddeferred income tax provisions are as follows:

 

| ** **         | ** ** | **Years ended December 31,** | ** ** |
|--------------------|------------|------------------------------|------------|
| ** **         | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current:           |       |                         |       |   |   |   |   |
| Federal            |       | $                            | 8,691,000  |   | $ | 8,450,000 |   | $ | 9,491,000 |   |
| State              |       | 2,363,000                    |       | 2,261,000 |   | 2,592,000 |   |
|               |       | 11,054,000                   |       | 10,711,000 |   | 12,083,000 |   |
| Deferred:          |       |                         |       |   |   |   |   |
| Federal            |       | 127,000                      |       | 849,000 |   | 2,066,000 |   |
| State              |       | 38,000                       |       | 267,000 |   | 576,000 |   |
|               |       | 165,000                      |       | 1,116,000 |   | 2,642,000 |   |
| Total income taxes |       | $                            | 11,219,000 |   | $ | 11,827,000 |   | $ | 14,725,000 |   |

 

                A reconciliationof the effective income tax rate with the applicable statutory federal incometax rate is as follows: 

 

| ** **                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Federal tax at statutory rate       |       | 35.0                         | %          | 35.0 | % | 35.0 | % |
| State taxes, net of federal benefit |       | 5.7                          | %          | 5.7 | % | 5.7 | % |
| Other                               |       | (0.1                         | )%         | — | % | — | % |
| Effective income tax rate           |       | 40.6                         | %          | 40.7 | % | 40.7 | % |

 

 

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                The components ofdeferred income tax assets and liabilities are as follows as of December 31:

 

| ** **                                            | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax assets:                                  |       |       |       |       |       |
| Point loyalty program                                 |       | $          | 1,089,000  |       | $          | — |   |
| Accrued expenses                                      |       | 1,026,000  |       | 832,000    |       |
| Other                                                 |       | 103,000    |       | 294,000    |       |
| Total deferred tax assets                             |       | 2,218,000  |       | 1,126,000  |       |
| Deferred tax liabilities:                             |       |       |       |       |       |
| Depreciation — property and equipment            |       | (6,911,000 | )          | (5,309,000 | )          |
| Total deferred tax liabilities                        |       | (6,911,000 | )          | (5,309,000 | )          |
| Net deferred tax liabilities                          |       | $          | (4,693,000 | )          | $          | (4,183,000 | ) |
| Amounts recognized in the consolidated balance sheet: |       |       |       |       |       |
| Current deferred tax assets                           |       | $          | 2,168,000  |       | $          | 878,000 |   |
| Noncurrent deferred tax liabilities                   |       | (6,861,000 | )          | (5,061,000 | )          |
|                                                  |       | $          | (4,693,000 | )          | $          | (4,183,000 | ) |

 

                Deferred incometaxes relate to the temporary differences between financial accounting incomeand taxable income. During the year ended December 31, 2004, current deferredincome tax assets increased primarily due to the change in how the Companyaccounts for its point loyalty program. All reward points earned by customersare now expensed in the period earned in determining financial accountingincome; however, they continue to be expensed when redeemed in determining taxableincome.

 

                Prior to thespin-off, the Company was included as part of DVD’s consolidated federal incometax return; however, the income tax expense presented in the consolidatedfinancial statements has been computed on a separate return basis. The Companyand DVD have entered into a Tax Sharing Agreement to reflect each company’srights and obligations relating to payments and refunds of taxes that areattributable to periods beginning before and including the date of the spin-offdescribed in NOTE 2—Dover Motorsports, Inc. Spin-off Of Its Gaming Business.The agreement provides for payments between the companies to reflect taxliabilities that may arise before, after and because of the spin-off. Duringthe third quarter of 2002, pursuant to the Tax Sharing Agreement, the Companypaid DVD $2.7 million for its portion of DVD’s 2002 consolidated federal incometax liability. Since the spin-off of the Company from DVD was effective onMarch 31, 2002, DVD’s 2002 federal income tax return included the operations ofthe Company for the first quarter of the year.

 

                For the year endedDecember 31, 2003, DVD reported a net operating loss for federal income taxpurposes. The loss was carried back to 2001, a period prior to the spin-off,which generated an alternative minimum tax credit carryforward, a portion ofwhich is required to be paid to DVD under the Tax Sharing Agreement; therefore,during the fourth quarter of 2003 Gaming & Entertainment recorded a$330,000 payable to DVD for the Company’s portion of the carryforward. Gaming& Entertainment paid the amount in the first quarter of 2004.

 

**NOTE 8—Pension Plans**

 

                The Companymaintains a non-contributory, tax qualified defined benefit pension plan. Allof Gaming & Entertainment’s full time employees are eligible to participatein the pension plan. Benefits provided by the Gaming & Entertainmentpension plan are based on years of service and employees’ remuneration overtheir term of employment. Pension costs are funded in accordance with theprovisions of the Internal Revenue Code. The Company also maintains anon-qualified, non-contributory defined benefit pension plan for certainemployees to restore pension benefits reduced by federal income taxregulations. The cost associated with the plan is determined using the sameactuarial methods and assumptions as those used for the Company’s qualifiedpension plan.

 

 

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                The followingtable sets forth the plans’ funded status and amounts recognized in the Company’sconsolidated balance sheet as of December 31:

 

| ** **                                       | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|
| Change in benefit obligation:                    |       |       |       |       |       |
| Benefit obligation at beginning of period        |       | $          | 4,305,000  |       | $          | 3,415,000 |   |
| Service cost                                     |       | 895,000    |       | 714,000    |       |
| Interest cost                                    |       | 258,000    |       | 206,000    |       |
| Actuarial gain                                   |       | (151,000   | )          | (30,000    | )          |
| Benefit obligation at end of period              |       | 5,307,000  |       | 4,305,000  |       |
| Change in plan assets:                           |       |       |       |       |       |
| Fair value of plan assets at beginning of period |       | 2,297,000  |       | 1,081,000  |       |
| Actual gain on plan assets                       |       | 150,000    |       | 241,000    |       |
| Employer contribution                            |       | 300,000    |       | 975,000    |       |
| Fair value of plan assets at end of period       |       | 2,747,000  |       | 2,297,000  |       |
| Unfunded status                                  |       | (2,560,000 | )          | (2,008,000 | )          |
| Unrecognized net loss                            |       | 889,000    |       | 1,000,000  |       |
| Unrecognized prior service cost                  |       | 68,000     |       | 77,000     |       |
| Net amount recognized                            |       | $          | (1,603,000 | )          | $          | (931,000 | ) |

 

                The liabilitiesrecognized in the Company’s consolidated balance sheet as of December 31, 2004and 2003 were $1,603,000 and $931,000, respectively.

 

                The projectedbenefit obligation, accumulated benefit obligation and fair value of planassets for pension plans with accumulated benefit obligations in excess of planassets were $5,307,000, $4,048,000 and $2,747,000 respectively, as of December31, 2004, and $4,305,000, $3,069,000 and $2,297,000, respectively, as of December31, 2003.

 

                The Company plansto contribute approximately $500,000 to its pension plans in 2005.

 

                Benefit payments,which reflect expected future service, as appropriate, are expected to be paidas follows:

 

| 2005      |   | $ | 71,000    |
|-----------|--------|---|-----------|
| 2006      |   | $ | 89,000    |
| 2007      |   | $ | 114,000   |
| 2008      |   | $ | 137,000   |
| 2009      |   | $ | 166,000   |
| 2010-2014 |   | $ | 1,773,000 |

 

The Company was required to record a minimum pensionliability in its consolidated balance sheet at December 31, 2002, which isrequired when the actuarial present value of accumulated benefits exceeds planassets and accrued pension liabilities. The effect of this adjustment was toincrease pension liabilities by $300,000, increase intangible assets by$85,000, increase deferred income tax assets by $88,000 and recognize othercomprehensive loss of $127,000. In 2003, the Company was required to reversethis minimum pension liability. Because these adjustments had no cash impact,the effect has been excluded from the accompanying consolidated statement ofcash flows.

 

 

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                The components ofnet periodic pension cost are as follows:

 

| ** **                         | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Service cost                       |       | $                            | 895,000    |   | $ | 714,000 |   | $ | 429,000 |   |
| Interest cost                      |       | 258,000                      |       | 206,000 |   | 132,000 |   |
| Expected return on plan assets     |       | (225,000                     | )          | (146,000 | ) | (63,000 | ) |
| Recognized net actuarial loss      |       | 35,000                       |       | 51,000 |   | 28,000 |   |
| Amortization of prior service cost |       | 9,000                        |       | 9,000 |   | 6,000 |   |
|                               |       | $                            | 972,000    |   | $ | 834,000 |   | $ | 532,000 |   |

 

                The principalassumptions used to determine the net periodic pension cost for the years endedDecember 31, 2004, 2003 and 2002, and the actuarial value of the projectedbenefit obligation at December 31, 2004 and 2003 (the measurement dates) forthe Company’s pension plans are as follows:

 
| ** **                                       | ** ** | **Net Periodic Pension Cost** | ** ** | **Projected Benefit Obligation** | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **2004**                      | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted-average discount rate                   |       | 6.25                          | %          | 6.5                              | %          | 7.0 | % | 6.25 | % | 6.25 | % |
| Weighted-average rate of compensation increase   |       | 5.0                           | %          | 5.0                              | %          | 5.0 | % | 5.0 | % | 5.0 | % |
| Expected long-term rate of return on plan assets |       | 9.0                           | %          | 9.0                              | %          | 9.0 | % | n/a |   | n/a |   |

 

                For 2004, theCompany assumed a long-term rate of return on plan assets of 9.0%. Indeveloping the 9.0% expected long-term rate of return assumption, the Companyreviewed asset class return expectations and long-term inflation assumptionsand considered its post spin-off and DVD’s pre spin-off historical compoundedreturn, which was consistent with our long-term rate of return assumption.

 

                The Company’spension plan asset allocation at December 31, 2004 and 2003, and targetallocation for 2005 are as follows: 

 

| ** **                        | ** ** | **Percentage of Plan**     | ** ** | **Target**     | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------|------------|
| ** **                        | ** ** | **Assets at December 31,** | ** ** | **Allocation** | ** ** |
| **Asset Category**                | ** ** | **2004**                   | ** ** | **2003**       | ** ** | **2005** | ** ** |
| Equity securities                 |       | 76                         | %          | 72             | %          | 70 | % |
| Debt securities                   |       | 23                         | %          | 19             | %          | 20 | % |
| Other (money market mutual funds) |       | 1                          | %          | 9              | %          | 10 | % |
| Total                             |       | 100                        | %          | 100            | %          | 100 | % |

 

                The Company’sinvestment goals are to maximize returns subject to specific risk managementpolicies. Its risk management policies permit investments in mutual funds, andprohibit direct investments in debt and equity securities and derivativefinancial instruments. The Company addresses diversification by the use ofmutual fund investments whose underlying investments are in domestic andinternational equity and fixed income securities. These mutual funds are readilymarketable and can be sold to fund benefit payment obligations as they becomepayable.

 

                Pursuant to theterms of the Employee Benefits Agreement, DVD arranged for the transfer of theassets and liabilities associated with the 401(k) plan sponsored by DVD withrespect to employees who are now Gaming & Entertainment employees to Gaming& Entertainment. Effective January 1, 2003, the Company maintains its owndefined contribution 401(k) plan which permits participation by substantiallyall employees. Prior to January 1, 2003, the Company participated in DVD’s401(k) plan. The Company’s matching contributions to the 401(k) plan wereapproximately $50,000 for each of the years ended December 31, 2004 and 2003.

 

 

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**NOTE 9—Stockholders’ Equity**

 

                Changes in thecomponents of stockholders’ equity are as follows (in thousands, except pershare data):

 
| ** **                                                       | ** ** | ** ** | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **     | ** ** | ** **       | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-------------|------------|----------------|------------|--------------|------------|-------------------|------------|----------------|------------|------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | **Class A** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Other**         | ** ** | **DVD**        | ** ** | ** **       | ** ** |
| ** **                                                       | ** ** | **Common** | ** ** | **Common**  | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Equity**     | ** ** | **Deferred**     | ** ** |
| ** **                                                       | ** ** | **Stock**  | ** ** | **Stock**   | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Loss**          | ** ** | **Investment** | ** ** | **Compensation** | ** ** |
| **Balance at Dec. 31, 2001**                                     |       | $          | —     |        | $          | —         |       | $            | —     |              | $          | —         |       | $                | —     |   | $ | 102,653 |   | $ | — |   |
| Net earnings from January 1, 2002 through March 31,  2002        |       | —     |       | —      |       | —         |       | —       |       | —            |       | 5,168          |       | —           |       |
| Cancellation of payable to DVD                                   |       | —     |       | —      |       | —         |       | —       |       | —            |       | 9,520          |       | —           |       |
| Spin-off transaction                                             |       | 1,000      |       | 1,664       |       | 114,677        |       | —       |       | —            |       | (117,341       | )          | —           |       |
| DVD debt paid down on April 1, 2002                              |       | —     |       | —      |       | (45,000        | )          | —       |       | —            |       | —         |       | —           |       |
| Net earnings from April 1, 2002 through December 31,  2002       |       | —     |       | —      |       | —         |       | 16,274       |       | —            |       | —         |       | —           |       |
| Proceeds from stock options exercised                            |       | 1          |       | —      |       | 72             |       | —       |       | —            |       | —         |       | —           |       |
| Dividends paid, $.125 per share                                  |       | —     |       | —      |       | —         |       | (3,333       | )          | —            |       | —         |       | —           |       |
| Transfer of pension liability from DVD                           |       | —     |       | —      |       | (789           | )          | —       |       | —            |       | —         |       | —           |       |
| Change in minimum pension liability, net of income  taxes of $88 |       | —     |       | —      |       | —         |       | —       |       | (127              | )          | —         |       | —           |       |
| Conversion of Class A common stock to common stock               |       | 49         |       | (49         | )          | —         |       | —       |       | —            |       | —         |       | —           |       |
| **Balance at Dec. 31, 2002**                                     |       | 1,050      |       | 1,615       |       | 68,960         |       | 12,941       |       | (127              | )          | —         |       | —           |       |
| Net earnings                                                     |       | —     |       | —      |       | —         |       | 17,237       |       | —            |       | —         |       | —           |       |
| Dividends paid, $.20 per share                                   |       | —     |       | —      |       | —         |       | (5,305       | )          | —            |       | —         |       | —           |       |
| Change in minimum pension liability, net of income  taxes of $88 |       | —     |       | —      |       | —         |       | —       |       | 127               |       | —         |       | —           |       |
| Repurchase and retirement of common stock                        |       | (17        | )          | —      |       | (1,506         | )          | —       |       | —            |       | —         |       | —           |       |
| **Balance at Dec. 31, 2003**                                     |       | 1,033      |       | 1,615       |       | 67,454         |       | 24,873       |       | —            |       | —         |       | —           |       |
| Net earnings                                                     |       | —     |       | —      |       | —         |       | 16,381       |       | —            |       | —         |       | —           |       |
| Dividends paid, $.22 per share                                   |       | —     |       | —      |       | —         |       | (6,098       | )          | —            |       | —         |       | —           |       |
| Issuance of restricted stock awards                              |       | 5          |       | —      |       | 596            |       | —       |       | —            |       | —         |       | (601             | )          |
| Amortization of deferred compensation                            |       | —     |       | —      |       | —         |       | —       |       | —            |       | —         |       | 67               |       |
| Conversion of Class A common stock to common stock               |       | 7          |       | (7          | )          | —         |       | —       |       | —            |       | —         |       | —           |       |
| Repurchase and retirement of common stock                        |       | (109       | )          | (160        | )          | (32,286        | )          | —       |       | —            |       | —         |       | —           |       |
| **Balance at Dec. 31, 2004**                                     |       | $          | 936        |        | $          | 1,448          |       | $            | 35,764     |              | $          | 35,156         |       | $                | —     |   | $ | — |   | $ | (534 | ) |

 

                Gaming &Entertainment has 125,000,000 shares of authorized capital stock which consistsof 74,000,000 shares of common stock, par value $.10 per share; 50,000,000shares of Class A common stock, par value $.10 per share; and 1,000,000 sharesof preferred stock, par value $.10 per share.

 

                The holders ofcommon stock are entitled to one vote per share and the holders of our Class Acommon stock are entitled to 10 votes per share. There is no cumulative voting.Shares of Class A common stock are convertible at any time into our shares ofcommon stock on a one-for-one basis at the option of the stockholder. Subjectto rights of any preferred stockholder, holders of our common stock and Class Acommon stock are entitled to receive on a

 

 

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pro rata basis such dividends, if any, as may be declared from time totime by the Board of Directors out of funds legally available for that purpose.At the discretion of the Company’s Board of Directors, it may pay to theholders of common stock a cash dividend greater than the dividend, if any, paidto the holders of Class A common stock.

 

                Under Delawarelaw, a change of ownership of a Licensed Agent will automatically terminate itslicense 90 days after the change of ownership occurs, unless the LotteryDirector determines after application to issue a new license to the new owners.Change of ownership may occur if any new individual or entity acquires,directly or indirectly, 10% or more of the Licensed Agent or if more than 20%of the legal or beneficial interest in the Licensed Agent is transferred,whether by direct or indirect means. The Commission may require extensivebackground investigations of any new owner acquiring a 10% or greater interestin a Licensed Agent, including criminal background checks. Accordingly, theCompany has a restrictive legend on its shares of common stock which requirethat (a) any holders of common stock found to be disqualified or unsuitable ornot possessing the qualifications required by any appropriate gaming authoritycould be required to dispose of such stock and (b) any holder of common stockintending to acquire 10% or more of the outstanding common stock of the Companymust first obtain prior written approval from the Delaware State LotteryOffice.

 

                The Companyadopted a stockholder rights plan in 2002 prior to the effective date of thespin-off from DVD. The rights are attached to and trade in tandem with ourcommon stock and Class A common stock. Each right entitles the registeredholder to purchase from the Company one share of common stock at a purchaseprice of $200 per share. The rights, unless earlier redeemed by our Board ofDirectors, will detach and trade separately from our common stock upon theoccurrence of certain events such as the unsolicited acquisition by a thirdparty of beneficial ownership of 10% or more of our outstanding combined commonstock and Class A common stock or the announcement by a third party of theintent to commence a tender or exchange offer for 10% or more of ouroutstanding combined common stock and Class A common stock. After the rightshave detached, the holders of such rights would generally have the ability topurchase such number of either shares of our common stock or stock of anacquirer of the Company having a market value equal to twice the exercise priceof the right being exercised, thereby causing substantial dilution to a person orgroup of persons attempting to acquire control of the Company. The rights mayserve as a significant deterrent to unsolicited attempts to acquire control ofGaming & Entertainment, including transactions involving a premium to themarket price of our stock. The rights expire on January 1, 2012, unless earlierredeemed.

 

                On January 26,2005, the Company’s Board of Directors declared a quarterly cash dividend onboth classes of common stock of $.06 per share. The dividend is payable onMarch 10, 2005 to stockholders of record at the close of business on February10, 2005.

 

                On October 23,2002, the Company’s Board of Directors authorized the repurchase of up to2,000,000 shares of the Company’s outstanding common stock. The purchases maybe made in the open market or in privately negotiated transactions asconditions warrant. The repurchase authorization does not obligate the Companyto acquire any specific number of shares and may be suspended at any time. Duringthe year ended December 31, 2004, Gaming & Entertainment purchased andretired 50,900 shares of its outstanding common stock at an average purchaseprice of $9.95 per share, not including nominal brokerage commissions. Duringthe year ended December 31, 2003, the Company purchased and retired 169,945shares of its outstanding common stock at an average purchase price of $8.90per share, not including nominal brokerage commissions. At December 31, 2004,the Company had remaining repurchase authority of 1,779,155 shares.

 

                On November 5,2004, the Company’s Board of Directors authorized the Company to commence atender offer to purchase up to 1,040,421 shares of its common stock and up to1,607,506 shares of its Class A common stock at a fixed price of $12.00 pershare. The offer commenced on Wednesday, November 10, 2004 and expired at 5:00P.M., eastern standard time, on Friday, December 10, 2004. The Companypurchased 1,040,421 shares of its common stock and 1,600,000 shares of itsClass A common stock for $32,045,000, including expenses, in connection withthe tender offer.

 

                The Company has astock incentive plan which provides for the grant of up to 1,500,000 shares ofstock to our officers and key employees through stock options and/or awardsvalued in whole or in part by reference to our common stock, such as restrictedstock awards. Under the plan, option grants must have an exercise price of notless than 100% of the fair market value of the underlying shares of commonstock at the date of the grant. The stock options have

 

 

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eight-year terms and generally vest equally over a period of six yearsfrom the date of grant. The restricted stock vests an aggregate of twentypercent each year beginning on the second anniversary date of the grant. Duringthe year ended December 31, 2004, the Company granted 52,000 shares ofrestricted stock to certain officers and key employees at a fair-market valueof $11.62 per share on the grant date and no shares were forfeited. Theaggregate market value of the restricted stock at the date of issuance has beenrecorded as deferred compensation, a separate component of stockholders’equity, and is being amortized on a straight-line basis over the six-yearservice period.

 

                Option activitywas as follows:

 

| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|------------------|------------|
| ** **                       | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Number of options:               |       |             |       |   |   |   |   |
| Outstanding at beginning of year |       | 862,360          |       | 612,160 |   | — |   |
| Spin-off issuances               |       | —           |       | — |   | 393,446 |   |
| Granted                          |       | —           |       | 309,000 |   | 277,000 |   |
| Exercised                        |       | —           |       | — |   | (10,781 | ) |
| Expired                          |       | (105,270         | )          | (58,800 | ) | (47,505 | ) |
| Outstanding at end of year       |       | 757,090          |       | 862,360 |   | 612,160 |   |
| Exercisable at end of year       |       | 267,535          |       | 254,116 |   | 173,091 |   |
| Weighted average exercise price: |       |             |       |   |   |   |   |
| Options granted                  |       | $                | —     |   | $ | 9.52 |   | $ | 12.05 |   |
| Options exercised                |       | $                | —     |   | $ | — |   | $ | 6.74 |   |
| Options outstanding              |       | $                | 10.32      |   | $ | 10.02 |   | $ | 10.27 |   |
| Options exercisable              |       | $                | 10.45      |   | $ | 9.24 |   | $ | 8.35 |   |

 

                As of December 31,2004, 2003 and 2002, there were 680,129, 626,859 and 877,059 shares,respectively, available under the stock incentive plan for granting options orstock awards.

 

                The followingtable summarizes information about the stock options outstanding under theCompany’s option plan as of December 31, 2004:

 
| ** **                   | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **      | ** ** | ** **   | ** ** |
|------------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|-----------------|------------|--------------|------------|
| ** **                   | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **      | ** ** | **Weighted** | ** ** |
| ** **                   | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | ** **      | ** ** | **Average**  | ** ** |
| ** **                   | ** ** | **Number**      | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Number**      | ** ** | **Exercise** | ** ** |
| **Range of Exercise Prices** | ** ** | **Outstanding** | ** ** | **Price**    | ** ** | **Life**        | ** ** | **Exercisable** | ** ** | **Price**    | ** ** |
| $6.74-$9.94                  |       | 479,383         |       | $            | 9.40       |            | 4.84  yrs  |            | 147,512    |         | $          | 9.38 |   |
| $11.16-$13.31                |       | 277,707         |       | $            | 11.92      |            | 4.65  yrs  |            | 120,023    |         | $          | 11.77 |   |
| $6.74-$13.31                 |       | 757,090         |       | $            | 10.32      |            | 4.77  yrs  |            | 267,535    |         | $          | 10.45 |   |

 

**NOTE 10—Related Party Transactions**

 

                During the yearsended December 31, 2004, 2003 and 2002, Gaming & Entertainment allocatedcosts of $1,241,000, $1,969,000 and $495,000, respectively, to DVD for certainadministrative and operating services. Additionally, DVD allocated costs of$116,000 to Gaming & Entertainment for the year ended December 31, 2004. Theallocations were based on an analysis of each company’s share of the costs. Inconnection with DVD’s 2004 and 2003 NASCAR event weekends at DoverInternational Speedway, Gaming & Entertainment provided certain cateringservices for which DVD was invoiced $933,000 and $443,000, respectively. Additionally,DVD invoiced Gaming & Entertainment $238,000 and $206,000, respectively,for tickets purchased to the 2004 and 2003 events and other services related tothe Dover events. As of December 31, 2004 and 2003, Gaming & Entertainment’sconsolidated balance sheet includes a $2,000 receivable from and $96,000payable to DVD, respectively, for the aforementioned items. The Companyreceived payment for the $2,000 receivable in the first quarter of 2005. Thenet costs incurred by each company for these services are not necessarilyindicative of the costs that would have been incurred if the companies had beenunrelated entities and/or had otherwise independently managed these functions;however, management believes that these costs are reasonable.

 

                For the year endedDecember 31, 2003, DVD reported a net operating loss for federal income taxpurposes. The loss was carried back to 2001, a period prior to the spin-off,which generated an alternative minimum tax credit carryforward, a portion ofwhich is required to be paid to DVD under the Tax Sharing Agreement; therefore,during the

 

 

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fourth quarter of 2003 Gaming & Entertainment recorded a $330,000payable to DVD for the Company’s portion of the carryforward. Gaming &Entertainment paid the amount in the first quarter of 2004.

 

                During the thirdquarter of 2002, pursuant to the Tax Sharing Agreement, the Company paid DVD$2.7 million for its portion of DVD’s consolidated federal income tax liabilityfor 2002. Since the spin-off of the Company from DVD was effective on March 31,2002, DVD’s 2002 federal income tax return included the operations of theCompany for the first quarter of the year.

 

                The Company’s useof DVD’s 5/8-mile harness racing track is pursuant to an easement granted tothe Company by DVD which does not require the payment of any rent. Under theterms of the easement, the Company has exclusive use of the harness trackduring the period beginning November 1 of each year and ending April 30 of thefollowing year, together with set up and tear down rights for the two weeksbefore and after such period. The harness track is located on property owned byDVD and is on the inside of DVD’s motorsports superspeedway. The Company’sindoor grandstands are used by DVD at no charge in connection with its motorsportsevents. DVD also leases its principal executive office space from the Company. Variouseasements and agreements relative to access, utilities and parking have alsobeen entered into between DVD and the Company relative to their respectiveDover, Delaware facilities.

 

                In conjunctionwith the Company’s spin-off from DVD, the two companies entered into variousagreements that addressed the allocation of assets and liabilities between thecompanies and that define the companies’ relationship after the separation. Theseare the Agreement Regarding Distribution and Plan of Reorganization, the RealProperty Agreement, the Employee Benefits Agreement, the Transition SupportServices Agreement and the Tax Sharing Agreement. The companies have severalcommon directors and officers. Refer to NOTE 2—Dover Motorsports, Inc. Spin-offOf Its Gaming Business for further discussion.

 

                Henry B. Tippie,the Chairman of the Company’s Board of Directors, controls in excess of fiftypercent of the voting power of the Company. This means that Mr. Tippie has theability to determine the outcome of the election of directors at the Companyand to determine the outcome of many significant corporate transactions, manyof which only require the approval of a majority of the Company’s voting power.

 

                Mr. Tippie’svoting control with respect to the Company emanates from his personal holdingsof Common Stock and Class A Common Stock, from his status as executor of theEstate of John W. Rollins, the Company’s largest stockholder, and from certainshares as to which he has voting rights pursuant to a voting agreement withanother one of our directors. As of March 8, 2005, Mr. Tippie has control overapproximately 51.1% of the voting power of the Company.

 

                Patrick J. Bagley,Kenneth K. Chalmers, Denis McGlynn, Jeffrey W. Rollins, John W. Rollins, Jr.,R. Randall Rollins and Henry B. Tippie are all Directors of the Company andDVD. Denis McGlynn is the President and Chief Executive Officer of bothcompanies, Klaus M. Belohoubek is the Senior Vice President — General Counseland Secretary of both companies and Patrick J. Bagley is the Senior VicePresident — Finance and Chief Financial Officer of DVD. Mr. Tippie alsocontrols in excess of fifty percent of the voting power of DVD.

 

**NOTE 11—Commitments and Contingencies**

 

                In May 1995, DoverDowns, Inc., a subsidiary of the Company, entered into a long-term managementagreement with Caesars World Gaming Development Corporation (“Caesars”) to actas our agent to manage our video lottery casino for which Caesars was paid amanagement fee based on the operating results of the casino. Effective December28, 2004, that management agreement expired and the Company opted not to renewthe agreement. These performance-based fees were $4,448,000, $5,042,000 and$7,440,000 for the years ended December 31, 2004, 2003 and 2002.

 

                The Company is aparty to ordinary routine litigation incidental to its business. Managementdoes not believe that the resolution of any of these matters is likely to havea serious adverse effect on our results of operations, financial condition orcash flows.

 

 

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                The Company hasemployment, severance and noncompete agreements with certain of its officersand directors under which certain change of control, severance and noncompetepayments and benefits might become payable in the event of a change in controlof the Company, defined to include a tender offer or the closing of a merger orsimilar corporate transactions. In the event of such a change in control of theCompany and the subsequent termination of employment of all employees coveredunder these agreements, the maximum contingent liability would be approximately$4,962,000.

 

**NOTE 12—Quarterly Results (unaudited)**

 
| ** **                       | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31 (a)** | ** ** |
|----------------------------------|------------|--------------|------------|-------------|------------|------------------|------------|---------------------|------------|
| **Year Ended December 31, 2004** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **       | ** ** | ** **          | ** ** |
| Net revenues                     |       | $            | 50,560,000 |        | $          | 50,527,000       |       | $                   | 54,945,000 |   | $ | 51,264,000 |   |
| Operating earnings               |       | $            | 7,629,000  |        | $          | 7,686,000        |       | $                   | 8,581,000  |   | $ | 4,466,000 |   |
| Net earnings                     |       | $            | 4,434,000  |        | $          | 4,458,000        |       | $                   | 4,982,000  |   | $ | 2,507,000 |   |
| Net earnings per share-basic     |       | $            | 0.17       |        | $          | 0.17             |       | $                   | 0.19       |   | $ | 0.10 |   |
| Net earnings per share-diluted   |       | $            | 0.17       |        | $          | 0.17             |       | $                   | 0.19       |   | $ | 0.10 |   |
| **Year Ended December 31, 2003** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **       | ** ** | ** **          | ** ** |
| Net revenues                     |       | $            | 44,199,000 |        | $          | 48,042,000       |       | $                   | 50,299,000 |   | $ | 46,292,000 |   |
| Operating earnings               |       | $            | 6,968,000  |        | $          | 7,643,000        |       | $                   | 8,256,000  |   | $ | 7,039,000 |   |
| Net earnings                     |       | $            | 4,007,000  |        | $          | 4,385,000        |       | $                   | 4,782,000  |   | $ | 4,063,000 |   |
| Net earnings per share-basic     |       | $            | 0.15       |        | $          | 0.17             |       | $                   | 0.18       |   | $ | 0.15 |   |
| Net earnings per share-diluted   |       | $            | 0.15       |        | $          | 0.17             |       | $                   | 0.18       |   | $ | 0.15 |   |

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| (a)    |   | Included in the Company’s 2004 fourth quarter  results is a net, non-recurring charge of $2,250,000 ($1,338,000 after income  tax benefit) relating to the change in the Company’s point loyalty program. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                |
|   |   | Included in the Company’s 2003 fourth quarter  results are proceeds of $1,300,000 ($771,000 after income taxes) relating to  the settlement of a business interruption insurance claim.                        |

 

                Per share dataamounts for the quarters have each been calculated separately. Accordingly,quarterly amounts may not add to the annual amounts because of differences inthe average common shares outstanding during each period.

 

 

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