**United States**

**Securities and Exchange Commission**

###### **Washington, D.C. 20549**

 

**Form 10-K**

 

**Annual Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**For thefiscal year ended December 31, 2009**

 

**Commission file number  1-16791**

 

**Dover Downs Gaming & Entertainment, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                   | ** ** | **51-0414140**                       |
|------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation) |       | (I.R.S. Employer Identification No.) |

 

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

(Address of principal executive offices)

 

**(302)674-4600**

(Registrant’stelephone number, including area code)

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

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

 

Securitiesregistered pursuant to Section 12(g) of the Act:  **None.**

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o No x

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o   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.  x

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or a smallerreporting company.  See the definitionsof “large accelerated filer,” “accelerated filer” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |   | Smaller reporting company o |
|---------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|

 

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

 

The aggregate market value of common stock held bynon-affiliates of the registrant was $62,326,261 as of June 30, 2009 (thelast day of our most recently completed second quarter).

 

As of February 26, 2010, the number of shares ofeach class of the registrant’s common stock outstanding is as follows:

 
|       |                                                                                                                               |       |
|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
|       | Common Stock -                  15,644,028  shares |       |
| ** ** | Class A Common  Stock -   16,603,173 shares                                                                         | ** ** |

** **

**Documents Incorporated by Reference**

 

Portions of the registrant’s Proxy Statement inconnection with the Annual Meeting of Stockholders to be held April 28,2010 are incorporated by reference into Part III, Items 10 through 14 ofthis report.

 

 

 

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**Part I**

 

References in this document to “we,” “us” and “our” mean Dover DownsGaming & Entertainment, Inc. and/or its wholly ownedsubsidiaries, as appropriate.

 

**Item 1.****                                  ****Business**

 

We are a diversified gaming and entertainment company whose operationsconsist of:

 

·                  Dover Downs Slots — a 165,000-square foot videolottery casino complex featuring the latest in slot machine offerings,multi-player electronic table games and a new Race & Sports Book.  Additionally, table games such as blackjack, poker,craps and roulette were recently authorized and are expected to be operationalby the third quarter of 2010;

 

·                  Dover Downs Hotel and Conference Center — a 500 roomAAA Four Diamond hotel with conference, banquet, ballroom and concert hallfacilities; and

 

·                  Dover Downs Raceway — a harness racing track withpari-mutuel wagering on live and simulcast horse races.

 

The casino facility includes the Dover Downs’ Fire &Ice Lounge, Doc Magrogan’s Oyster House, Frankie’s Italian restaurant, as wellas several bars, restaurants and four retail outlets.  All of our operations are located at ourentertainment complex in Dover, the capital of the State of Delaware.

 

During the third quarter of 2009, we opened our Race & SportsBook operation and Frankie’s Italian restaurant.  The Race & Sports Book featuresparlay sports wagering on National Football League (“NFL”) games andpari-mutuel wagering on live and simulcast horse races.  In January 2010, the Delawarelegislature authorized table games at the facilities of the State’s three videolottery agents.  The State is draftingregulations and we expect to have table games such as blackjack, poker, crapsand roulette operational during the third quarter of 2010.

 

Dover Downs Gaming & Entertainment, Inc. is a publicholding company that has two wholly owned subsidiaries: Dover Downs, Inc.and Dover Downs Gaming Management Corp. Dover Downs, Inc. was incorporated in 1967 and began motorsportsand harness racing operations in 1969. In June of 1994, legislation authorizing video lottery operationsin the State of Delaware (the “State”) was adopted. Our casino operations beganon December 29, 1995.  As a resultof several restructurings, Dover Downs, Inc. became a wholly ownedsubsidiary of Dover Motorsports, Inc. (formerly known as Dover DownsEntertainment, Inc.) (“DVD”), and became the operating entity for all ofDVD’s gaming operations.

 

Dover Downs Gaming & Entertainment, Inc. was incorporatedin the State in December of 2001 as a wholly owned subsidiary of DVD.  Effective March 31, 2002, DVD completeda tax-free spin-off of its gaming operations by contributing 100% of the issuedand outstanding common stock of Dover Downs, Inc. to Dover Downs Gaming &Entertainment, Inc., and subsequently distributing 100% of our issued andoutstanding common stock to DVD stockholders. Immediately following the spin-off, Dover Downs Gaming &Entertainment, Inc. became an independent public company.

 

Dover Downs, Inc. is authorized to conduct video lottery, sportswagering and table game operations as one of three “Licensed Agents” under theDelaware State Lottery Code. Pursuant to Delaware’s Horse Racing RedevelopmentAct, enacted in 1994, the Delaware State Lottery Office administers andcontrols these gaming operations.

 

Our license from the Delaware Harness Racing Commission to hold harnessrace meetings on our premises and to offer pari-mutuel wagering on live andsimulcast horse races must be renewed on an annual basis. In order to maintainour gaming license, we are required to maintain our harness horse racinglicense.  We have received an

 

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annual licensefrom the Harness Racing Commission for the past 41 consecutive years andmanagement believes that our relationship with the Commission remains good.

 

Due to the nature of our business activities, we are subject to variousfederal, state and local regulations.  Aspart of our license arrangements, we are subject to various taxes and feeswhich are subject to change by the Delaware legislature.

 

**DoverDowns Casino**

 

Ourcasino opened in December 1995 with approximately 500 slot machines.  Due to its popularity, the casino hasexpanded six times since its opening and the number of machines has increasedto 2,971  at December 31, 2009.  The mostrecent expansion, which was completed in September of 2008, addedapproximately 68,000 square-feet of space bringing our casino complex to165,000 square-feet.  We are now open for business 24 hours perday, seven days per week.  Ourfacilities are open every day of the year, except Christmas and Easter, and weestimate that the facility was visited by****approximately****2.8 million patrons in 2009.

 

Our slot machines range from our popular penny machines to $100machines in the Premium Slots area and include most popular games found in thecountry’s major gaming jurisdictions.  Wehave added multi-player electronic table games, such as Blackjack, Roulette andPoker, which accommodate up to five players in an interactive setting thatfeatures a virtual dealer.

 

In January 2010, the Delaware legislature authorized table gamesat the facilities of the State’s three video lottery agents.  The State is currently drafting regulationsand we expect to have table games such as blackjack, poker, craps and rouletteoperational during the third quarter of 2010.

 

Delaware reintroduced sports betting in 2009.  “Headto head” sports wagering (or wagering on the outcome of a single sportingevent), such as is offered in Las Vegas, is the most popular form of sportswagering — but it is not presently permitted in Delaware.  A 2009 decision by the United States Court ofAppeals for the Third Circuit ruled that under federal law sports bettingoperations in Delaware must be limited to parlay bets on NFL games.  The Stateof Delaware is appealing this decision to the United States Supreme Court butwe are unable to predict how the Supreme Court would rule if it agrees tohear the appeal.

 

The Delaware State Lottery Office administers and controls our gamingoperations. We are a Licensed Agentauthorized to conduct video lottery, sports wagering and table game operationsunder the Delaware State Lottery Code and are one of only three locationspermitted to do so in the State of Delaware. We are required by law to set thepayout on our slot machines to customers between 87% and 95%.

 

We use sophisticated database marketing to enable us to developlong-term relationships with our patrons and to target promotions to specificcustomer segments. Our Capital Club®,a slots players club and tracking system, allows us to identify customers andto reward their level of play through various marketing programs. Membership inthis club currently stands at approximately 160,000 active patrons.

 

We have implemented extensive procedures for financial and accountingcontrols, safekeeping and accounting of monies, and security provisions.Security over the gaming operations involves the integration of surveillancecameras, observation and oversight by employees, security and gaming staff, andvarious security features built into our equipment. The above, when combinedwith proper internal control procedures and daily monitoring by the DelawareState Lottery Office, are intended to maintain the security, integrity andaccountability of our gaming operations.

 

**DoverDowns Hotel**

 

Our luxury hotel facility, the Dover Downs Hotel and Conference Center,is the largest hotel in the State of Delaware and connects to our casino.  The facility includes 500 rooms, includingeleven luxury spa suites, a multi-purpose ballroom/concert hall, a fine diningrestaurant, swimming pool and a luxurious 6,000 square-foot full-servicespa.  When we built the original hotel wealso built a 425-seat buffet restaurant and renovated our enclosed harnessracing grandstand.  By offering a widerange of entertainment options to our patrons, including concerts 

 

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featuringprominent entertainers, live boxing, gourmet dining, spa facilities, tradeshows and conferences, we believe we are able to attract new patrons andlengthen the stay of current patrons. Since opening the Dover Downs Hotel in 2002, we have managed itsoperations ourselves.  In 2009, hoteloccupancy averaged 83% and the hotel was awarded the AAA Four Diamond Award forthe seventh consecutive year.

 

**DoverDowns Raceway**

 

Dover Downs Raceway has presented pari-mutuel harness racing events for41 consecutive years. Live harness races are conducted at Dover Downs Racewayfrom late October until April and are simulcast to more than 400tracks and other off-track betting locations across North America on each ofour more than 130 live race dates.  Theharness horse racing track is a 5/8-mile track and is lighted for nighttime operations.  The track is adjacent to our casino and hotelon land owned by DVD on the inside of DVD’s auto racing superspeedway.  Use of the track is pursuant to an easementgranted by DVD which does not require the payment of any rent. Additionalamenities include the Winners Circle® Restaurant overlooking the horse racing track.

 

Within our Race & Sports Book operation is the simulcastparlor where our patrons can wager on harness and thoroughbred races receivedby satellite into our facility year round from numerous tracks across NorthAmerica.  Television monitors throughoutthe area provide views of all races simultaneously and the betting windows areconnected to a central computer allowing bets to be received on all races fromall tracks.

 

Harness racing in the State of Delaware is governed by the DelawareHarness Racing Commission. We hold a license from the Harness Racing Commissionauthorizing us to hold harness race meetings on our premises and to offerpari-mutuel wagering on live and simulcast horse races.

 

In harness racing, competing horses are harnessed to a two-wheeledsulky, which carries the driver. Pari-mutuel wagering is pooled betting by which the wagering public, notthe track, determines the odds and the payoff. The track retains a commission,which is a percentage of the total amount wagered, or the “handle.”  Simulcasting is the transmission of livehorse racing by television, cable or satellite signal from one race track toanother with pari-mutuel wagering being conducted at the sending and receivingtrack and a portion of the handle being shared by the sending and receivingtracks.

 

The legislation authorizing our gaming operations under the DelawareLottery was initially adopted in June 1994, and is referred to as the “HorseRacing Redevelopment Act.” The Delaware General Assembly’s stated purpose inapproving the legislation was to (i) provide non-state supportedassistance in the form of increased economic activity and vitality for Delaware’sharness and thoroughbred horse racing industries, which activity and vitality willenable the industry to improve its facilities and breeding stock, and causeincreased employment; and (ii) restrict the location of gaming operationsto locations where wagering is already permitted and controls exist. A portionof the proceeds from our gaming operations is allocated to increase the pursesfor harness horse races held at Dover Downs Raceway and is intended to provideincreased vitality for Delaware’s horse racing industry.

 

Wehave an agreement with the Delaware Standardbred Owner’s Association, Inc.(“DSOA”) effective May 1, 2007 and continuing through July 31,2010.  DSOA’s membership consists ofowners, trainers and drivers of harness horses participating in harness racemeetings at our facilities and elsewhere in the United States and Canada. TheDSOA has been organized and exists for the purpose of promoting the sport ofharness racing; improving the lot of owners, drivers and trainers of harnessracing horses participating in race meetings; establishing health, welfare andinsurance programs for owners, drivers and trainers of harness racing horses;negotiating with harness racing tracks on behalf of owners, trainers, driversand grooms of harness racing horses; and generally rendering assistance to themwhenever and wherever possible. Under the DSOA agreement, we are required todistribute as purses for races conducted at our facilities a percentage of ourretained share of pari-mutuel revenues.

 

We enjoy a good relationship with representatives of DSOA andanticipate that this relationship will continue. We believe that the DSOAagreement is typical of similar agreements in the industry.

 

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**Licensingand Regulation by Gaming and Other Authorities**

 

## *General*

 

We are subject to extensive federal, state and local regulationsrelated to our operations, particularly our video lottery, sports wagering andtable game operations, live harness racing and pari-mutuel wagering. Theseoperations are contingent upon continued government approval of such operationsas forms of legalized gaming and could be subjected at any time to additionalor more restrictive regulations.  Thefollowing is a brief outline of some of the more significant regulationsaffecting our gaming operations and not intended as a recitation of allregulations applicable to our business.

 

Delaware law regulates the percentage of commission we are entitled toreceive from our gaming activities, which comprises a significant portion ofour overall revenues.  Our licenses toconduct video lottery, sports wagering and table game operations, harness horseraces and pari-mutuel wagering could be modified or repealed at any time and wecould be required to terminate our gaming operations.

 

## *Video Lottery, Sports Wageringand Table Game Operations*

 

*General. *Video lottery, sports wagering and tablegame operations are by statute operated and administered by the Director of theDelaware State Lottery Office (the “LotteryDirector”).  We are a LicensedAgent authorized to conduct these activities under the Delaware State LotteryCode.

 

TheLottery Director has discretion to adopt such rules and regulations as theLottery Director deems necessary or desirable for the efficient and economicaloperation and administration of the lottery, including (i) type and numberof games permitted, (ii) pricing of games, (iii) numbers and sizes ofprizes, (iv) manner of payment, (v) value of bills, coins or tokensneeded to play, (vi) requirements for licensing agents andservice providers, (vii) standards for advertising, marketing andpromotional materials used by Licensed Agents, (viii) procedures foraccounting and reporting, (ix) registration, kind, type, number andlocation of machines or equipment on a Licensed Agent’s premises, (x) securityarrangements for the gaming systems, and (xi) reporting and auditing offinancial information of Licensed Agents.

 

*Licensing Requirements*. We were granted a license on December 13, 1995.  Delaware gaming licenses do not have anexpiration date.

 

There are continuing licensure requirements for all officers,directors, key employees and persons who own directly or indirectly 10% or moreof a Licensed Agent, which licensure requirements shall include thesatisfaction of such security, fitness and background standards as the LotteryDirector may deem necessary relating to competence, honesty and integrity, suchthat a person’s reputation, habits and associations do not pose a threat to thepublic interest of the State or to the reputation of or effective regulationand control of the lottery; it being specifically understood that any personconvicted of any felony, a crime involving gambling, or a crime of moralturpitude within 10 years prior to applying for a license or at any timethereafter shall be deemed unfit.

 

There are similar licensure requirements for providers of equipment andcertain companies that seek to provide services to a Licensed Agent.

 

*Revocation, Suspension or Modification of License*. The Lottery Director may revoke or suspend the license of a LicensedAgent, such as ours, for “cause.”  “Cause”is broadly defined and could potentially include falsifying any application forlicense or report required by the rules and regulations, the failure toreport any information required by the rules and regulations, the materialviolation of any rules and regulations promulgated by the Lottery Directoror any conduct by the licensee which undermines the public confidence in thelottery or serves the interest of organized gambling or crime and criminals inany manner.  A license may be revoked foran unintentional violation of any federal, state or local law, rule orregulation provided that the violation is not cured within a reasonable time asdetermined by the Lottery Director.  Ahearing officer’s decision revoking or suspending the license shall beappealable to the Delaware Superior Court under the provisions of theAdministrative Procedures Act.  Allexisting or new officers, directors, key employees and owners of a LicensedAgent are subject to background investigation. Failure to satisfy the background investigation may constitute cause forsuspension or revocation of the License.

 

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*Ownership Changes*.  UnderDelaware law, a change of ownership of a Licensed Agent will automaticallyterminate its license 90 days after the change of ownership occurs, unless theLottery Director determines after application to issue a new license to the newowners.  Change of ownership may occur ifany new individual or entity acquires, directly or indirectly, 10% or more ofthe Licensed Agent or if more than 20% of the legal or beneficial interest inthe Licensed Agent is transferred, whether by direct or indirect means.  The Lottery Director may require extensivebackground investigations of any new owner acquiring a 10% or greater interestin a Licensed Agent, including criminal background checks.  Accordingly, we have a restrictive legend onour shares of common stock which require that (a) any holders of commonstock found to be disqualified or unsuitable or not possessing thequalifications required by any appropriate gaming authority could be requiredto dispose of such stock and (b) any holder of common stock intending toacquire 10% or more of our outstanding common stock must first obtain priorwritten approval from the Delaware State Lottery Office.

 

*Harness Racing Events*. In order to maintain our gaming license with the Delaware Lottery, weare required to maintain our license for harness horse racing with the HarnessRacing Commission and must conduct a minimum of 80 live race days each racingseason, subject to the availability of racing stock.

 

*Control Over Equipment and Technology*. We do not own or lease the video lottery machines or computer systemsused by the State in connection with our video lottery gaming operations.  The Lottery Director enters into contractsdirectly with the providers of the video lottery machines and computer systems(the “Technology Providers”).  Equipmentis provided to the State by sale or lease and all Technology Providers must belicensed by the Lottery Director.  Ouroperations could be disrupted in the event that a licensed Technology Providerin any way breaches its agreement with the State or ceases to be properlylicensed for any reason.  Such an eventwould be outside of our control.

 

### ***Harness Racing and Pari-MutuelWagering***

 

*Licensing Requirements. *Harness racing in the State of Delaware is governed bythe Delaware Harness Racing Commission. We hold a license from the Commission by which we are authorized to holdharness race meetings on our premises and to make, conduct and sell pools bythe use of pari-mutuel machines or totalizators.  The license must be renewed on an annualbasis.  The Commission may reject anapplication for a license for any cause which it deems sufficient and theaction of the Commission is final.  TheCommission may also suspend or revoke a license which it has issued and itsaction in that respect is final, subject to review, upon questions of law only,by the Superior Court of the County within which the license was granted.  The action of the Commission stands unlessand until reversed by the Court.  We havereceived an annual license from the Commission for the past 41 consecutiveyears and management believes that our relationship with the Commission remainsgood.  However, there can be noassurances that we will continue to be licensed by the Commission in thefuture.

 

Under the law, the Commission has broad powers of supervision andregulation.  The Commission may prescriberules, regulations and conditions under which all harness racing and bettingpools shall be conducted; may regulate the performance of any service or thesale of any article on the premises of a licensee; may compel the production ofbooks and documents of a licensee and require that books and records be kept insuch manner as the Commission may prescribe; may visit, investigate and placeaccountants or other persons as it deems necessary, at the expense of alicensee, in the office, track or place of business of a licensee; may summonwitnesses and administer oaths; and may require the removal of any employee orofficial employed by a licensee.  Allproposed extensions, additions or improvements to the property of a licenseeare subject to the approval of the Commission.

 

The Commission is required to inspect a licensee’s racing plant notless than five days prior to a race meeting and may withdraw the license forthe meeting if the racing plant is found to be unsafe for animals or persons oris not rendered safe prior to the opening of the meeting.  A licensee must deposit with the Commission,ten days before a race meeting, a policy of insurance against personal injuryliability in an amount to be approved by the Commission.

 

*USTA. *Any license granted by the Commission isalso subject to such reasonable rules and regulations as may be prescribedfrom time to time by the United States Trotting Association (“USTA”).  The USTA sets various rules relating tothe conduct of harness racing.  Accordingto its Articles of Incorporation, the purposes of the USTA shall include theimprovement of the breed of trotting and pacing horses, the establishment of rules regulatingstandards

 

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and the registrationof such horses thereunder, the advancement and promotion of the interest ofharness racing in the United States, the investigation, ascertainment andregistration of the pedigrees of such horses, the regulation and government ofthe conduct of the sport of harness racing, the establishment of rules forthe conduct thereof, not inconsistent with the laws of the various states, andthe sanctioning of the holding of exhibitions of such horses and meetings forthe racing thereof, the issuance of licenses to qualified persons to officiateat harness race meetings and exhibitions, the issuance of licenses to theowners of horses permitting the exhibition and racing of such horses and thequalification thereof, the issuance of licenses to drivers of horses participatingin such races or exhibitions, and providing for the enforcement of the rules promulgatedby the USTA, and providing for the fixing of penalties, fines, and thesuspension or expulsion from membership, or privileges or for any othermisconduct detrimental to the sport.

##  

## *Gaming Taxes and Fees*

 

We believe that the prospect of significant additional tax revenue isone of the primary reasons why jurisdictions have legalized gaming.  As a result, gaming operators are typicallysubject to significant taxes and fees in addition to normal federal and statecorporate income taxes.  These taxes andfees are subject to increase at any time. We pay substantial taxes and fees with respect to our operations andwould likely incur similar burdens in any other jurisdiction in which we mayconduct gaming operations in the future.

# ** **

Effective July 1, 2008, the State enacted legislation that (1) increasesthe existing surcharge on the portion of slot win that we retain, (2) requires thatwe pay the costs of all franchise games which were previously shared with theState, and (3) requires that we pay an additional annual amount to acertain horse racing industry organization previously funded bythe State.  That legislation also allowsus to operate all day on Sundays and eliminates the prior legislatively imposedlimit on our use of free promotional slot play.  In May of 2009, theState enacted legislation, which became effective May 28, 2009, thatfurther increased the gaming taxes paid to the State on the portion of slot winthat we retain.  As noted above, Delawarereintroduced sports betting as part of the 2009 legislation.

 

# ***Compliancewith Other Laws***

 

We are subject to various federal, state and locallaws and regulations in addition to gaming regulations. These laws andregulations include, but are not limited to, restrictions and conditionsconcerning alcoholic beverages, environmental matters, employees, currencytransactions, taxation, zoning and building codes, and marketing andadvertising.

 

The Internal Revenue Service (“IRS”) requires operators of casinoslocated in the United States to file information returns for United Statescitizens, including names and addresses of winners, for all winnings in excessof stipulated amounts. The IRS also requires operators to withhold taxes oncertain winnings.

 

Regulations adopted by the Financial Crimes Enforcement Network of theTreasury Department (“FinCEN”) require us to report currency transactions inexcess of stipulated amounts occurring within a gaming day, includingidentification of the patron by name and social security number. FinCEN hasalso established regulations that require us to file suspicious activityreports on all transactions that we know, suspect, or have reason to suspectfall into specific categories that are deemed to be suspicious. We believe ourprograms meet the requirements of the applicable regulations.

 

Laws and regulations are always subject to change, can be interpreteddifferently in the future, and new laws and regulations may be enacted whichcould adversely affect the tax, regulatory, operational or other aspects of thegaming industry and our company. Furthermore, noncompliance with one or more ofthese laws and regulation could result in the imposition of substantialpenalties against us.

 

**Competition**

 

The gaming industry in the United States is intensely competitive andfeatures many participants, including riverboat casinos, dockside casinos,land-based casinos, slot and poker machines, whether or not located in casinos,native American gaming, pari-mutuel wagering on live and simulcast horseracing, off-track betting, state run 

 

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lotteries,internet gambling and other forms of gambling. Gaming competition isparticularly intense in each of these sectors.

 

We compete in local and regional markets with horse tracks, off-trackbetting parlors, state run lotteries, casinos and other gaming facilities.  In a broader sense, our gaming operationsface competition from all manner of leisure and entertainment activities,including shopping, collegiate and professional athletic events, television andmovies, concerts and travel.  Most of ourgaming competitors are in jurisdictions with a lower tax burden.  As gambling opportunities in the regioncontinue to proliferate, there can be no assurance that we will maintain ourstate or regional market share or be able to compete effectively with ourcompetitors and this could adversely affect our business, financial conditionand overall profitability.  Approximately66% of our Capital Club® member slot win comes from out of state patrons.

 

The introduction or expansion of gaming in neighboring jurisdictions,particularly Maryland, Virginia, West 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.  Delaware is surrounded by jurisdictions which permit slotmachines, such as Pennsylvania, New Jersey, Maryland and West Virginia, and allof these jurisdictions — with the exception of Maryland — also permit tablegames.  Voters in Maryland adopted aConstitutional amendment in November 2008 that permits up to 15,000 slotmachines in five different specific locations throughout Maryland.  The establishment of any gaming locations inthe State remains subject to local zoning and may face further opposition.  As the number of machines and the specificlocations of the gaming establishments are fixed by the State’s Constitution,any changes to the number of machines or the locations would require furtheramendment to the State Constitution. Table games are not permitted in Maryland.  It is difficult for us to predict what typesof gaming establishments may ultimately be built in Maryland or when they arelikely to become operational but several are in the planning and developmentstages.  Management has estimated thatapproximately 41% of our total slot win comes from Maryland patrons.  Some of these patrons may prefer theconvenience of facilities closer to home.

 

In 2004, Pennsylvania adopted legislation which authorizes up to 61,000slot machines at various existing and proposed venues throughout thestate.  It is difficult for us to predictthe effect that such legislation will ultimately have on us, but severalfacilities in Pennsylvania began operations by the end of 2006 and more areplanned — including two in Philadelphia. In addition, Pennsylvania authorized table games in January 2010and it is expected that table game operations will begin by the third quarterof 2010.  Management has estimated thatslot win from Pennsylvania patrons currently represents approximately****3% of our total slot win which is the sameas the prior year.

 

All states in our geographic region have state-run lotteries. AtlanticCity, New Jersey is located approximately 100 miles from our facility andoffers a full range of gaming products. Virginia and Washington, D.C. do not currently permit slot machineoperations.

 

Competition in horse racing is varied since racetracks in thesurrounding area differ in many respects. Some tracks only offer thoroughbredor harness horse racing; others have both. Tracks have live racing seasons thatmay or may not overlap with neighboring tracks. Depending on the pursestructure, tracks that are farther apart may compete with each other more forquality horses than for patrons.

 

Live harness racing also competes with simulcasts of thoroughbred andharness racing. All racetracks in the region are involved with simulcasting. Inaddition, a number of off-track betting parlors compete with track simulcastingactivities. With respect to the simulcasting of our live harness races totracks and other locations, our simulcast signals are in direct competitionwith live races at the receiving track and other races being simulcast to thereceiving location.

 

Within the State of Delaware, we face little direct live competitionfrom the State’s other two tracks. Harrington Raceway, a south central Delawarefairgrounds track, conducts harness horse racing periodically between April andOctober. There is no overlap presently with our live race season. DelawarePark, a northern Delaware track, conducts thoroughbred horse racing from April throughmid-November. Its race season only overlaps with ours for approximately oneweek each year.

 

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We compete with harness and thoroughbred racing and simulcastingfacilities in the neighboring states of Pennsylvania, Maryland and New Jersey.  We also receive simulcast harness andthoroughbred races from approximately 80 race tracks.

 

Competition for our hotel varies and consists of local and regionalcompetition. With respect to hotel accommodations only, we compete with avariety of nearby hotels in the Dover area; however, none of these offer theluxury accommodations and amenities that we offer.  Our hotel is the only hotel in the Doverarea, and one of only three hotels in the State, to receive the AAA FourDiamond Award.  With respect to tradeshows, conferences, concerts and hotel room packages tied to these events ortied to our casino and other gaming offerings, we compete at a regional levelwith the other gaming operations referred to above and with convention centersand larger hotels in major cities such as Philadelphia, Washington, D.C.,Baltimore and Wilmington.

 

In addition, our activities compete with other leisure, entertainmentand recreational activities.

 

**GrowthStrategies**

 

We offer a unique gaming and entertainment experience and makeavailable to our patrons a number of different options: slot machine gaming,sports wagering, live harness horse racing, luxury hotel accommodations, finedining, full service spa, national recording and entertainment acts, nightclub, retail shopping, live boxing and simulcasting of thoroughbred and harnesshorse races from across North America. Our mission is simple: to provide all ofour customers a premier gaming and entertainment experience with a focus onunparalleled customer service.  Ourgrowth strategy is to foster customer loyalty by following this mission, focuson our most valuable customers, expand and improve the quality of our slotgaming positions, enhance our gaming products with additional entertainmentofferings and create an exciting gaming environment while focusing on areasthat we believe will increase our revenue and profitability. Our efforts inthis regard include the following:

 

*IncreaseThe Utilization Of Our Casino*

 

We use a sophisticated database marketing program to enable us todevelop long-term relationships with our patrons and to target promotions tospecific customer segments.  Our CapitalClub, a slots players club and tracking system, allows us to identify customersand to reward their level of play through various marketing programs.Membership in this club currently stands at approximately 160,000 activepatrons.  We attempt to increaseattendance at both our casino and hotel through effective promotional use ofour database and by making improvements to our facilities and gaming offeringsbased on what we learn from our Capital Club members. For example, wecontinually add the most popular machines, have added multi-player electronictable games and other amenities requested by our customers.

 

Delaware reintroduced sports betting in 2009.  “Headto head” sports wagering (or wagering on the outcome of a single sportingevent), such as is offered in Las Vegas, is the most popular form of sportswagering — but it is not presently permitted in Delaware.  A 2009 decision by the United States Court ofAppeals for the Third Circuit ruled that under federal law sports bettingoperations in Delaware must be limited to parlay bets on NFL games.  TheState of Delaware is appealing this decision to the United States Supreme Courtbut we are unable to predict how the Supreme Court would rule if it agreesto hear the appeal.

 

In January 2010, the Delaware legislature authorized table gamesat the facilities of the State’s three video lottery agents.  The State is drafting regulations and weexpect to have table games such as blackjack, poker, craps and rouletteoperational during the third quarter of 2010.

 

*CapitalizeOn Our Luxury Hotel*

 

Our luxury hotel facility, the Dover Downs Hotel, connects to ourcasino.  It is the only hotel in theDover area, and one of only three hotels in the State, to receive the AAA FourDiamond Award.  The facility includes 500rooms, including eleven luxury spa suites, a multi-purpose ballroom/concerthall, a fine dining restaurant, swimming pool and a luxurious 6,000 square-footspa.  When we built the original hotel wealso built a 425-seat buffet restaurant and renovated our enclosed harnessracing grandstand with state-of-the-art simulcasting facilities.  By offering a wide range of entertainmentoptions to our patrons, including concerts featuring prominent entertainers, 

 

9

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live boxing,gourmet dining, trade shows and conferences, we believe we are able to attractnew patrons and lengthen the stay of current patrons.

 

*IncreaseWagering On Live Harness Horse Racing Through Increased Purse Levels*

 

With a percentage of slot machine revenues supplementing the purses forthe horsemen, we have experienced dramatic increases in the amount of our purses.  By the end of our 2008-2009 season, ouraverage daily purse distribution increased to approximately $205,000 from$8,000 in 1995.  The result is that wecontinue to attract higher quality horses. We have prestigious events such as our annual “Progress Pace” with anestimated $400,000 purse, an event which attracts the country’s topthree-year-old horses.  Bettors areattracted to races with larger purses and typically wager more on the higherquality and more predictable horses.

 

*PursueManagement Agreements*

 

We entered into a letter of intent on October 14, 2008 with UGEntertainment LLC to provide management services for the operation of a videolottery facility at Underground Atlanta. UGE has made presentations to the Georgia Lottery relative to thepossibility of commencing video lottery operations at Underground Atlanta.  Such video lottery operations are notpresently authorized and would require regulatory action by the Georgia Lotteryand possibly legislative approval by the State of Georgia.  The letter of intent between us and UGEprovides for a five year management agreement and affords us two renewaloptions for two years each subject to the attainment of certain financialcriteria by the new facility. The letter of intent contemplates that theparties will negotiate and enter into an acceptable management agreement withterms and conditions comparable to management agreements of a similarnature.  Our compensation would consistof a management fee based on gross revenues and an incentive fee based on netearnings before taxes.  We have agreed tomake a $500,000 non-interest bearing loan to UGE subject to certain conditionsset forth in the letter of intent.  Theletter of intent also contemplates that we will have the right to purchase upto 10% of the equity of UGE.

 

We intend to pursue similar management opportunities in otherjurisdictions.

 

**Seasonality**

 

Our quarterly operating results are affected by weather and the generaleconomic conditions in the United States. Our quarterly operating results are generally distributed evenlythroughout the year.  However, theresults for any quarter are not necessarily indicative of results to beexpected in any future period.

 

**Employees**

 

As of December 31, 2009, we had 744 full-time employees and 197 part-timeemployees. We engage temporary personnel to assist during our live harnessracing season. None of our employees are party to a collective bargainingagreement and we believe that our relationship with our employees is good.

#### ** **

#### **Available Information**

 

We file annual, quarterly and current reports, information statementsand other information with the United States Securities and Exchange Commission(the “SEC”). The public may read and copy any materials we file with the SEC atthe SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.20549. The public may obtain information on the operation of the PublicReference Room by calling the SEC at 1-800-SEC-0330. The SEC alsomaintains an Internet site that contains reports, proxy and informationstatements, and other information regarding issuers that file electronicallywith the SEC.  The address of that siteis http://www.sec.gov.

#### ** **

#### **Internet Address**

 

We maintain a website where additional information concerning ourbusiness and various upcoming events can be found.  The address of our Internet website is http://www.doverdowns.com.We provide a link on our website, under Investor Relations, to our filings withthe SEC, including our annual report on Form 10-K, proxy statement,

 

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Section 16reports, quarterly reports on Form 10-Q, current reports on Form 8-Kand all amendments to those reports.

 

**Item 1A.********                      ****Risk Factors**

 

In addition to historical information, this report includesforward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended, relating to our financialcondition, profitability, liquidity, resources, business outlook, proposedacquisitions, market forces, corporate strategies, consumer preferences,contractual commitments, legal matters, capital requirements and othermatters.  Documents incorporated byreference into this report may also contain forward-looking statements.  The Private Securities Litigation Reform Actof 1995 provides a safe harbor for forward-looking statements.  To comply with the terms of the safe harbor,we note that a variety of factors could cause our actual results and experienceto differ substantially from the anticipated results or other expectationsexpressed in our forward-looking statements.  When words and expressions such as: “believes,”“expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,”“aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,”“might,” “likely” or similar words or expressions are used, as well as phrasessuch as “in our view,” “there can be no assurance” or “there is no way toanticipate with certainty,” forward-looking statements may be involved.

 

In the section that follows below, in cautionary statements madeelsewhere in this report, and in other filings we have made with the SEC, welist important factors that could cause our actual results to differ from ourexpectations.  Our actual results coulddiffer materially from those anticipated in these forward-looking statements asa result of the risk factors described below and other factors set forth in orincorporated by reference in this report.

 

These factors and cautionary statements apply to all futureforward-looking statements we make.  Manyof these factors are beyond our ability to control or predict.  Do not put undue reliance on forward-lookingstatements or project any future results based on such statements or on presentor prior earnings levels.

 

Additional information concerning these, or other factors, which couldcause the actual results to differ materially from those in our forward-lookingstatements is contained from time to time in our other SEC filings.  Copies of those filings are available from usand/or the SEC.

 

*OurGaming Activities Compete Directly With Other Gaming Facilities And OtherEntertainment Businesses*

 

We compete in local and regional markets with horse tracks, off-trackbetting parlors, state run lotteries, casinos and other gaming facilities.  In a broader sense, our gaming operations facecompetition from all manner of leisure and entertainment activities, includingshopping, collegiate and professional athletic events, television and movies,concerts and travel.  Many of our gamingcompetitors are in jurisdictions with a lower tax burden.  As gambling opportunities in the regioncontinue to proliferate, there can be no assurance that we will maintain ourstate or regional market share or be able to compete effectively with ourcompetitors and this could adversely affect our business, financial conditionand overall profitability.  Approximately66% of our Capital Club® member slot win comes from out of state patrons.

 

The introduction or expansion of gaming in neighboring jurisdictions,particularly Maryland, Virginia, West 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.  Delaware is surrounded by jurisdictions which permit slot machines,such as Pennsylvania, New Jersey, Maryland and West Virginia, and all of thesejurisdictions — with the exception of Maryland — also permit table games.  Voters in Maryland adopted a Constitutionalamendment in November 2008 that permits up to 15,000 slot machines in fivedifferent specific locations throughout Maryland.  The establishment of any gaming locations inthe State remains subject to local zoning and may face further opposition.  As the number of machines and the specificlocations of the gaming establishments are fixed by the State’s Constitution,any changes to the number of machines or the locations would require furtheramendment to the State Constitution. Table games are not permitted in Maryland.  It is difficult for us to predict what typesof gaming establishments may ultimately be built in Maryland or when they arelikely to become operational but several are in the planning and developmentstages.  Management has estimated that

 

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approximately 41%of our total slot win comes from Maryland patrons.  Some of these patrons may prefer theconvenience of facilities closer to home.

 

In 2004, Pennsylvania adopted legislation which authorizes up to 61,000slot machines at various existing and proposed venues throughout thestate.  It is difficult for us to predictthe effect that such legislation will ultimately have on us, but severalfacilities in Pennsylvania began operations by the end of 2006 and more areplanned — including two in Philadelphia. In addition, Pennsylvania authorized table games in January 2010and it is expected that table game operations will begin during the thirdquarter of 2010.  Management hasestimated that slot win from Pennsylvania patrons currently represents approximately****3% of our total slot win which is the sameas the prior year.

 

*AllOf Our Facilities Are In One Location*

 

Our facilities are located adjacent to one another at a single locationin Dover, Delaware. Any prolonged disruption of operations at these facilitiesdue to damage or destruction, inclement weather, natural disaster, work stoppages orother reasons could adversely affect our financial condition and results ofoperations.  We maintain property andbusiness interruption insurance to protect against certain types of disruption,but there can be no assurance that the proceeds of such insurance would beadequate to repair or rebuild our facilities or to otherwise compensate us forlost profits.

 

*TheRevocation, Suspension Or Modification Of Our Gaming Licenses Would AdverselyAffect Our Gaming Business*

 

The Delaware State Lottery Office and the Delaware Harness RacingCommission regulate our gaming operations. Our license from the Commission mustbe renewed on an annual basis. To keep our gaming license with the Lottery, wemust remain licensed for harness horse racing by the Commission and conduct atleast 80 live race days each racing season, subject to the availability ofharness race horses. The Commission has broad discretion to reject any applicationfor a license or suspend or revoke a license once it is issued. The Director ofthe Delaware State Lottery Office (the “Lottery Director”) has broad discretionto revoke, suspend or modify the terms of our license. Any modification ortermination of existing licensing regulations or any revocation, suspension ormodification of our licenses could adversely affect our business, financialcondition and overall profitability.

 

*OurGaming Activities Are Subject To Extensive Government Regulation And Any AdditionalGovernment Regulation Or Taxation Of Gaming Activities Could SubstantiallyReduce Our Revenue Or Profit*

 

Slot machine gaming, sports betting, table games, harness horse racingand pari-mutuel wagering are subject to extensive government regulation.  Delaware law regulates the win we areentitled to retain and the percentage of commission we are entitled to receivefrom our gaming revenues, which comprises a significant portion of our overallrevenues.  The State granted us a licenseto conduct our gaming operations and a license to conduct harness horse racesand pari-mutuel wagering.  The laws underwhich these licenses are granted could be modified or repealed at any time andwe could be required to terminate our gaming operations.  If we are required to terminate our gamingoperations or if the amount of the commission we receive from the State forconducting our gaming operations is decreased, our business operations andoverall profitability would be significantly impaired.

 

We believe that the prospect of significant additional tax revenue isone of the primary reasons why jurisdictions have legalized gaming. As aresult, gaming operators are typically subject to significant taxes and fees inaddition to normal federal and state corporate income taxes.  These taxes and fees are subject to increaseat any time.  We pay substantial taxesand fees with respect to our operations and the State’s share of our gaming winhas been increased several times over the past few years.  We would likely incur similar burdens in anyother jurisdiction in which we may conduct gaming operations in thefuture.  Any material increase in taxesor fees, or the adoption of additional taxes or fees, may have a materialadverse effect on our future financial results.

 

We are subject to various federal, state and local laws and regulationsin addition to gaming regulations.  Theselaws and regulations include, but are not limited to, restrictions andconditions concerning alcoholic beverages, environmental matters, employees,currency transactions, taxation, zoning and building codes, and marketing andadvertising.  Laws and regulations governing the use anddevelopment of real estate may delay or complicate any improvements we chooseto make and/or increase the costs of any improvements or our costs ofoperating.

 

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If it is determined that damage to persons or property or contaminationof the environment has been caused or exacerbated by the operation or conductof our business or by pollutants, substances, contaminants or wastes used,generated or disposed of by us, or if pollutants, substances, contaminants orwastes are found on our property, we may be held liable for such damage and maybe required to pay the cost of investigation and/or remediation of suchcontamination or any related damage.

 

Laws and regulations are always subject to change, can be interpreteddifferently in the future, and new laws and regulations may be enacted whichcould adversely affect the tax, regulatory, operational or other aspects of ourgaming operations.  Furthermore,noncompliance with one or more of these laws and regulations could result inthe imposition of substantial penalties against us or adversely affect ourgaming license.

 

*We Have aSignificant Amount of Indebtedness*

 

As of December 31, 2009, we had total outstanding long-term debtof $95,125,000 under our credit facility. This indebtedness and any future increases in our outstanding borrowingscould:

 

·                  make it more difficult for us to satisfy our debtobligations;

·                  increase our vulnerability to general adverse economicand industry conditions or a downturn in our business;

·                  increase our costs or difficulties in refinancing orreplacing our outstanding obligations;

·                  require us to dedicate a substantial portion of ourcash flow from operations to payments on our indebtedness, thereby reducing theavailability of our cash flow to fund working capital, capital expenditures,dividends and other general corporate purposes;

·                  limit our flexibility in planning for, or reacting to,changes in our business and the industry in which we operate;

·                  subject us to the risks that interest rates and ourinterest expense will increase; and

·                  place us at a competitive disadvantage compared tocompetitors that have less debt.

 

In addition, our credit facility contains financial ratios that we arerequired to meet and other restrictive covenants that, among other things,limit or restrict our ability to borrow additional funds, make acquisitions,create liens on our properties and make investments.  Our ability to meet these financial ratiosand covenants can be affected by events beyond our control, and there can be noassurance that we will.  If there were anevent of default under our credit facility, the lenders could elect to declareall amounts outstanding to be immediately due and payable.

 

*WeDo Not Own Or Lease Our Slot Machines And Related Technology*

 

We do not own or lease the slot machines or computer systems used bythe State in connection with our video lottery gaming operations.  The Lottery Director enters into contractsdirectly with the providers of the slot machines and computer systems.  At our expense, the State purchases or leasesall equipment and the Lottery Director licenses all technology providers. Ouroperations could be disrupted if a licensed technology provider violates itsagreement with the State or ceases to be licensed for any reason.  Such an event would be outside of our controland could adversely affect our gaming revenues.

 

*****Due to Our Concentrated Stock Ownership, Stockholders May HaveNo Effective Voice In Our Management*****

 

We have elected to be treated as a “controlled corporation” as definedby New York Stock Exchange Rule 303A. We are a controlled corporation because a single person, Henry B.Tippie, the Chairman of our Board of Directors, controls in excess of fiftypercent of our voting power.  This meansthat he has the ability to determine the outcome of the election of directorsat our annual meetings and to determine the outcome of many significantcorporate transactions, many of which only require the approval of a majorityof our voting power.  Such aconcentration of voting power could also have the effect of delaying orpreventing a third party from acquiring us at a premium.  In addition, as a controlled corporation, weare not required to comply with certain New York Stock Exchange rules.

 

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*Our Success Depends on the Availability and Performanceof Key Personnel*

 

Our continued success depends upon the availability and performance ofour senior management team which possesses unique and extensive industryknowledge and experience.  Our inabilityto retain and attract key employees in the future, could have a negative effecton our operations and business plans.

 

We undertake no obligation to publicly update or revise anyforward-looking statements as a result of future developments, events orconditions.  New risk factors emerge fromtime to time and it is not possible for us to predict all such risk factors,nor can we assess the impact of all such risk factors on our business or theextent to which any factor, or combination of factors, may cause actual resultsto differ significantly from those forecast in any forward-lookingstatements.  Given these risks anduncertainties, stockholders should not overly rely or attach undue weight toour forward-looking statements as an indication of our actual future results.

 

**Item 1B.********                      ****Unresolved Staff Comments**

 

We have not received any written comments that were issued more than180 days before December 31, 2009, the end of the fiscal year covered bythis report, from the SEC staff regarding our periodic or current reports underthe Securities Exchange Act of 1934 that remain unresolved.

 

**Item 2.****                                  ****Properties**

 

We own our principal executive office located in Dover, Delaware; DoverDowns Slots — a 165,000-square foot video lottery casino complex featuring thelatest in slot machine offerings, multi-player electronic table games anda new Race & Sports Book; the Dover Downs Hotel and Conference Center —a 500 room AAA Four Diamond hotel with conference, banquet, ballroom andconcert hall facilities; and Dover Downs Raceway — a harness racing track withpari-mutuel wagering on live and simulcast horse races.  The casino facility includes the Dover Downs’Fire & Ice Lounge, Doc Magrogan’s Oyster House, Frankie’s Italianrestaurant, as well as several bars, restaurants and four retail outlets, allof which are located at our entertainment complex situated on approximately 69acres of land owned by us.

 

Prior to ourspin-off from DVD in 2002, both companies shared certain real property inDover, Delaware.  At the time of thespin-off, some of this real property was transferred to us to ensure that thereal property holdings of each company was aligned with its past uses andfuture business needs.  During ourharness racing season, we have historically used the 5/8-mile harness racingtrack that is located on DVD’s property and is on the inside of its one-milemotorsports superspeedway.  In order tocontinue this historic use, DVD granted a perpetual easement to the harnesstrack to us at the time of the spin-off. This perpetual easement allows us to have exclusive use of the harnesstrack during the period beginning November 1 of each year and ending April 30of the following year, together with set up and tear down rights for the twoweeks before and after such period.  Theeasement requires that we maintain the harness track but does not require thepayment of any rent.

 

Various easementsand agreements relative to access, utilities and parking have also been enteredinto between us and DVD relative to our respective Dover, Delawarefacilities.  DVD pays rent to us for thelease of its principal executive office space. We also allow DVD to use our indoor grandstands in connection with DVD’stwo annual motorsports weekends.  We donot assess rent for this nominal use and may discontinue the use at ourdiscretion.

 

**Intellectual Property**

 

We have various registered and common law trademark rights, including,but not limited to, “Dover Downs Gaming & Entertainment,” “DoverDowns,” “Capital Club,” “Capital Gold,” “Capital Platinum,” “Capital Elite,” “DoverDowns Hotel & Casino,” “Dover Downs is Cooking,” “Sweet Perks,” “GazeboBar,” “Winners Circle,” “Michele’s at Dover Downs,” “Michele’s,” “RollinsCenter,” “$1 Million Jackpot Slot,” “Come Play!.”  We also have limited rights to use thenames and logos of other businesses in connection with promoting ourfacilities and special events at those facilities.  Due to the valueof our intellectual property rights for promotional purposes, it is ourintention to vigorously protect these rights, through litigation, ifnecessary.

 

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**Item 3.****                                  ****Legal Proceedings**

 

We are a party to ordinary routine litigation incidental to ourbusiness.  Management does not believethat the resolution of any of these matters is likely to have a materialadverse effect on our results of operations, financial condition or cash flows.

 

**Item 4.****                                  ****Reserved**

 

**Executive Officers Of The Registrant**

 

See Part III, Item 10 of this Annual Report on Form 10-K forinformation about our executive officers.

 

**Part II**

 

**Item 5.****                                  ****Market For Registrant’sCommon Equity, Related Stockholder Matters And Issuer Purchases Of EquitySecurities**

 

Ourcommon stock is listed on the New York Stock Exchange under the ticker symbol “DDE.”  Our Class A common stock is not publiclytraded but is freely convertible on a one-for-one basis into common stock atany time at the option of the holder thereof. As of February 26, 2010, there were 15,644,028 shares of commonstock and 16,603,173 shares of Class A common stock outstanding.  There were 935 holders of record for commonstock and 22 holders of record for Class A common stock.

 

The high and low sales prices for our common stock onthe New York Stock Exchange and the dividends declared per share for the yearsended December 31, 2009 and 2008 are detailed in the following table.

 
| **Quarter Ended:**      | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends  Declared** | ** ** |
|-------------------------|------------|----------|------------|---------|------------|-------------------------|------------|
| December 31, 2009  |       | $        | 6.12       |    | $          | 3.47                    |       | $ | 0.05 |   |
| September 30, 2009 |       | $        | 7.45       |    | $          | 4.25                    |       | $ | 0.05 |   |
| June 30, 2009      |       | $        | 7.25       |    | $          | 2.80                    |       | $ | 0.05 |   |
| March 31, 2009     |       | $        | 5.15       |    | $          | 2.56                    |       | $ | 0.05 |   |
|                    |       |     |       |    |       |                    |       |
| December 31, 2008  |       | $        | 8.09       |    | $          | 2.27                    |       | $ | 0.05 |   |
| September 30, 2008 |       | $        | 9.49       |    | $          | 6.03                    |       | $ | 0.05 |   |
| June 30, 2008      |       | $        | 9.32       |    | $          | 6.38                    |       | $ | 0.05 |   |
| March 31, 2008     |       | $        | 11.34      |    | $          | 8.00                    |       | $ | 0.05 |   |

 

On October 23, 2002, our Board of Directors authorized therepurchase of up to 3,000,000 shares of our outstanding common stock.  The purchases may be made in the open marketor in privately negotiated transactions as conditions warrant.  The repurchase authorization has noexpiration date, does not obligate us to acquire any specific number of sharesand may be suspended at any time.  Norepurchases were made in the fourth quarter of 2009 and we had remainingpurchase authority of 1,653,333 shares.

 

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**CommonStock Performance**

 

The graph below compares the cumulative total return of the following:

 

·                  our Common Stock;

 

·                  the Russell 2000 Index; and

 

·                  an index of peer companies.

 

The peer index we selected consists of the following companies engagedin the gaming business:  Dover DownsGaming & Entertainment, Inc., MTR Gaming Group, Inc.,Ameristar Casinos, Inc., Penn National Gaming, Inc., Churchill Downs, Inc.,Pinnacle Entertainment, Inc., and Magna Entertainment Corp.  The graph assumes that the value of theinvestment in our Common Stock and each index was 100 at December 31, 2004and all dividends were reinvested.  Thecomparisons in this table are required by the Securities and ExchangeCommission and, therefore, are not intended to forecast or be necessarilyindicative of any future return on our Common Stock.

 

**COMPARISONOF 5 YEAR CUMULATIVE TOTAL RETURN***

**AMONGDOVER DOWNS GAMING & ENTERTAINMENT, INC., THE RUSSELL 2000 INDEX**

**AND APEER GROUP**

 

 

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*                    $100 invested on December 31, 2004 in stock orindex—including reinvestment of dividends. Fiscal year ending December 31.

 

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**Item 6.****                                  ****Selected Financial Data**

 

The table below summarizes certain selected consolidated financial dataand should be read together with *Management’s Discussionand Analysis of Financial Condition and Results of Operations* andour consolidated financial statements and notes contained elsewhere in thisdocument.

 

**Five YearSelected Financial Data**

 
| ** **                                                                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                              | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Consolidated  Statement of Earnings Data****(in thousands, except  per share data):** | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                               |       |                              |       |   |   |   |   |   |   |   |   |
| Gaming                                                                                  |       | $                                 | 213,855    |   | $ | 219,878 |   | $ | 224,760 |   | $ | 220,412 |   | $ | 202,372 |   |
| Other operating                                                                         |       | 18,944                            |       | 19,254 |   | 17,606 |   | 16,039 |   | 14,480 |   |
|                                                                                    |       | 232,799                           |       | 239,132 |   | 242,366 |   | 236,451 |   | 216,852 |   |
| Expenses:                                                                               |       |                              |       |   |   |   |   |   |   |   |   |
| Gaming                                                                                  |       | 175,785                           |       | 169,360 |   | 166,040 |   | 163,288 |   | 151,973 |   |
| Other operating                                                                         |       | 14,758                            |       | 16,101 |   | 15,268 |   | 14,202 |   | 13,167 |   |
| General and  administrative                                                             |       | 6,678                             |       | 6,317 |   | 6,319 |   | 5,905 |   | 4,765 |   |
| Impairment charge (a)                                                                   |       | 2,177                             |       | — |   | — |   | — |   | — |   |
| Depreciation                                                                            |       | 11,939                            |       | 10,849 |   | 7,843 |   | 7,146 |   | 6,998 |   |
|                                                                                    |       | 211,337                           |       | 202,627 |   | 195,470 |   | 190,541 |   | 176,903 |   |
|                                                                                    |       |                              |       |   |   |   |   |   |   |   |   |
| Gain on sale of  shopping center (b)                                                    |       | —                            |       | — |   | — |   | — |   | 5,837 |   |
| Operating earnings                                                                      |       | 21,462                            |       | 36,505 |   | 46,896 |   | 45,910 |   | 45,786 |   |
| Interest expense                                                                        |       | 2,376                             |       | 3,484 |   | 2,741 |   | 2,943 |   | 1,875 |   |
| Earnings before income  taxes                                                           |       | 19,086                            |       | 33,021 |   | 44,155 |   | 42,967 |   | 43,911 |   |
| Income taxes                                                                            |       | 7,809                             |       | 13,510 |   | 18,070 |   | 17,639 |   | 17,871 |   |
| Net earnings                                                                            |       | $                                 | 11,277     |   | $ | 19,511 |   | $ | 26,085 |   | $ | 25,328 |   | $ | 26,040 |   |
| ** **                                                                              | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings per common  share (c) :                                               |       |                              |       |   |   |   |   |   |   |   |   |
| Basic                                                                                   |       | $                                 | 0.35       |   | $ | 0.61 |   | $ | 0.80 |   | $ | 0.78 |   | $ | 0.73 |   |
| Diluted                                                                                 |       | $                                 | 0.35       |   | $ | 0.61 |   | $ | 0.79 |   | $ | 0.77 |   | $ | 0.72 |   |
|                                                                                    |       |                              |       |   |   |   |   |   |   |   |   |
| Dividends declared per  common share                                                    |       | $                                 | 0.20       |   | $ | 0.20 |   | $ | 0.19 |   | $ | 0.175 |   | $ | 0.16 |   |
| ** **                                                                              |       |                              |       |   |   |   |   |   |   |   |   |
| **Selected  Consolidated Operating Data (unaudited):**                                  |       |                              |       |   |   |   |   |   |   |   |   |
| Average number of slot  machines                                                        |       | 3,036                             |       | 2,888 |   | 2,719 |   | 2,599 |   | 2,500 |   |
| Casino square-footage  (at year end)                                                    |       | 165,000                           |       | 165,000 |   | 97,000 |   | 97,000 |   | 91,000 |   |

 
| ** **                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Consolidated  Balance Sheet Data (in thousands):** |       |                  |       |   |   |   |   |   |   |   |   |
| Working capital                                      |       | $                     | 18,393     |   | $ | 13,890 |   | $ | 6,499 |   | $ | 11,413 |   | $ | 8,650 |   |
| Total assets                                         |       | 234,007               |       | 241,720 |   | 225,568 |   | 173,415 |   | 153,849 |   |
| Long-term debt (b)                                   |       | 95,125                |       | 108,325 |   | 92,425 |   | 59,425 |   | 24,075 |   |
| Total stockholders’  equity (c)                 |       | 107,239               |       | 100,519 |   | 89,033 |   | 76,693 |   | 92,704 |   |
|                                                      |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)          We recorded an impairment charge of $2,177,000 in thethird quarter of 2009 related to the impairment of long-lived assets.

 

(b)         On December 28, 2005, weclosed on the sale of a shopping center we owned in Dover, Delaware.  The sales price was $12,450,000 and we recognizeda gain on the sale of $5,837,000 ($3,461,000 after income taxes).

 

(c)         On December 19, 2005, we commenced a tender offerto purchase up to 1,595,906 shares of our common stock and up to 1,988,202shares of our Class A common stock at a fixed price of $9.67 pershare.  The offer expired on January 19,2006. We purchased 1,595,906 shares of our common stock and 1,987,500 shares ofour Class A common stock for $34,996,000, including expenses, inconnection with the tender offer.

 

17

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On October 23, 2002,our Board of Directors authorized the repurchase of up to 3,000,000 shares ofour outstanding common stock. The purchases may be made in the open market orin privately negotiated transactions as conditions warrant.  The repurchase authorization has noexpiration date, does not obligate us to acquire any specific number of sharesand may be suspended at any time.  Nopurchases of our equity securities were made pursuant to this authorizationduring the year ended December 31, 2009. During the year ended December 31, 2008, we purchased and retired98,500 shares of our outstanding common stock pursuant to this plan at anaverage purchase price of $9.09 per share, not including nominal brokeragecommissions.  During the year ended December 31,2007, we purchased and retired 916,900 shares of our outstanding common stockpursuant to this plan at an average purchase price of $10.72 per share, notincluding nominal brokerage commissions. No purchases of our equity securities were made pursuant to thisauthorization during the years ended December 31, 2006 and 2005.

 

### **Item 7.**                                   Management’s Discussion And Analysis Of FinancialCondition And Results Of Operations

 

The following discussion is based upon and should be read together withthe consolidated financial statements and notes thereto included elsewhere inthis document.

 

Dover Downs Gaming & Entertainment, Inc. is a diversifiedgaming and entertainment company whose operations consist of:

 

·                  Dover Downs Slots — a 165,000-square foot videolottery casino complex featuring the latest in slot machine offerings,multi-player electronic table games and a new Race & Sports Book.  Additionally, table games such as blackjack,poker, craps and roulette were recently authorized and are expected to beoperational by the third quarter of 2010;

 

·                  Dover Downs Hotel and Conference Center — a 500 roomAAA Four Diamond hotel with conference, banquet, ballroom and concert hallfacilities; and

 

·                  Dover Downs Raceway — a harness racing track withpari-mutuel wagering on live and simulcast horse races.

 

The casino facility includes the Dover Downs’ Fire &Ice Lounge, Doc Magrogan’s Oyster House, Frankie’s Italian restaurant, as wellas several bars, restaurants and four retail outlets.  All of our operations are located at ourentertainment complex in Dover, the capital of the State of Delaware.

 

Approximately 90% of our revenue is derived from slot machine win.  Several factors contribute to the slotmachine win for any gaming company, including, but not limited to:

 

·                  Proximity to major population bases,

·                  Competition in the market,

·                  The quantity and types of slot machines available,

·                  The quality of the physical property,

·                  Other amenities offered on site,

·                  Customer service levels,

·                  Marketing programs, and

·                  General economic conditions.

 

Webelieve that we hold a strong position in each of these areas.  Our entertainment complex is located inDover, the capital of the State of Delaware. We draw patrons from several majormetropolitan areas. Philadelphia, Baltimore and Washington, D.C. are all withina two hour drive. According to the 2000 United States Census, approximately32.8 million people live within 150 miles of our complex.  There are significant barriers to entry relatedto the gaming business in Delaware.  Bylaw, only the three existing horse racing facilities in the State are allowedto have a gaming license.  Our propertyis similar to properties found in the country’s largest gaming markets.  Our recently expanded luxury hotel is theonly casino-hotel in Delaware, providing a strong marketing 

 

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tool, especially to higher-end players. We also utilize our slot marketing system to allow for more efficientmarketing programs and the highest levels of customer service.

 

Because all of our operations are located at one facility, we face therisk of increased competition from the legalization of new or additional gamingvenues.  We have therefore focused oncreating the region’s premier gaming destination and building and rewardingcustomer loyalty through innovative marketing efforts, unparalleled customerservice and a variety of amenities.

 

**Resultsof Operations**

 

Gaming revenues represent (i) the net win from slot machine winsand losses (ii) our portion of the net win from sports wagering and (iii) commissionsfrom pari-mutuel wagering.  Otheroperating revenues consist of hotel rooms revenue, food and beverage sales andother miscellaneous income.  Revenues donot include the retail amount of hotel rooms, food and beverage and othermiscellaneous goods and services provided without charge to customers aspromotional items. The estimated direct cost of providing these items has beencharged to the casino through interdepartmental allocations and is included ingaming expenses in the consolidated statement of earnings.

 

For the video lottery operations, the difference between the amountwagered by bettors and the amount paid out to bettors is referred to as thewin. The win is included in the amount recorded in our consolidated financialstatements as gaming revenue. The Delaware State Lottery Office sweeps the winfrom the video lottery operations, collects the State’s share of the win andthe amount due to the vendors under contract with the State who provide theslot machines and associated computer systems, collects the amount allocable topurses for harness horse racing and remits the remainder to us as ourcommission 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 slot machines and associated computersystems, and (iii) for harness horse racing purses.  We recognize revenues from sports wageringcommissions when the event occurs.  We recognizerevenues from pari-mutuel commissions earned from live harness horse racing andimporting of simulcast signals from other race tracks when the race occurs.Revenues from hotel rooms, food and beverage sales and other miscellaneousincome are recognized at the time the service is provided.

 

*YearEnded December 31, 2009 vs. Year Ended December 31, 2008*

 

Gaming revenues decreased by $6,023,000, or 2.7%, to$213,855,000 in 2009 primarily as a result of decreased play in ourcasino.  We believe that the decrease incasino play can be attributed to increased regional competition, the generaldownturn in economic conditions and the related impact on consumerspending.  We believe that the decreasewould have been more significant but for the opening of our Phase VI casinoexpansion in the third quarter of 2008 and our efforts to provide our customerswith enhanced casino products and other amenities.  Our average number of machines was 3,036 in2009 as compared to 2,888 in 2008.  As aresult of our hotel expansion, our average number of available rooms increased4.9% compared with 2008.

 

Other operating revenues were $18,944,000 in 2009 ascompared to $19,254,000 in 2008.  Netfood and beverage revenues decreased $429,000 to $12,142,000 from $12,571,000in 2008 due primarily to lower banquet sales and lower revenues in our buffet,deli and fine dining restaurant.  Thesedecreases were partially offset by the opening of the Dover Downs’ Fire &Ice Lounge and our Sweet Perks Too coffee shop in July 2008, and to theopening of our Race & Sports Book restaurant and Frankie’s Italianrestaurant in September 2009.  Cashrooms revenue increased $117,000 in 2009 mainly due to an increase in sales toour casino customers.  Other operatingrevenues do not include the retail amount of promotional allowances which areprovided to customers on a complimentary basis of $18,255,000 and $17,758,000in 2009 and 2008, respectively.

 

Gaming expenses increased by $6,425,000, or 3.8%, primarily as a resultof increased gaming taxes and slot machine fees that resulted from legislationpassed in June of 2008 and May of 2009.  The combined impact of these legislativeinitiatives resulted in an increase in our gaming taxes and slot machine feesof approximately $10,000,000 in 2009. Partially offsetting these increases were decreases in our gaming taxes,computer system fees and harness horse racing purses due to the lower gamingrevenues.

 

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Other operating expenses decreased by $1,343,000, or 8.3%.  Expenses related to our food and beverageoperations were lower primarily from the lower revenues.  Additionally, we instituted cost cuttingmeasures that allowed us to improve our profit margin on our otheroperations.  These decreased expenseswere partially offset by expenses related to our new Race & SportsBook restaurant and Frankie’s Italian restaurant in September 2009.  Additionally, we experienced lower expensesas a result of promoting fewer concerts in 2009.  We also incurred approximately $500,000 inexpenses during the fourth quarter of 2008 related to the termination of tworestaurant leases on our property.

 

General and administrative expenses increased to$6,678,000 in 2009 as compared to $6,317,000 in 2008, primarily due toincreased pension costs and reserving for a $100,000 loan to UG EntertainmentLLC related to the Underground Atlanta project.

 

Impairment charges during 2009 related to the writeoff of $2,177,000 of capitalized costs that were for future expansion projectsthat we will no longer pursue.

 

Depreciation expense was $11,939,000 in 2009 ascompared to $10,849,000 in 2008.  Theincrease resulted primarily from a full year of depreciation related to ourPhase VI casino expansion that opened during the third quarter of 2008.

 

Interest expense decreased by $1,108,000 due to alower average interest rate on our credit facility as well as lower averageoutstanding borrowings on our credit facility. We capitalized interest of $567,000 in 2008 related to our hotel andcasino expansions.  No interest wascapitalized in 2009.

 

Our effective income tax rate was 40.9% for the yearsended December 31, 2009 and 2008, respectively.

 

*YearEnded December 31, 2008 vs. Year Ended December 31, 2007*

 

Gaming revenues decreased by $4,882,000, or 2.2%, to$219,878,000 in 2008 primarily as a result of decreased play in ourcasino.  We believe that the decrease incasino play can be attributed to the general downturn in economic conditionsand the related impact on consumer spending. We believe that the decrease would have been more significant but forthe opening of our Phase VI casino expansion in the third quarter of 2008, theopening of our hotel expansion during the latter part of 2007, targetedmarketing efforts using our player database and our efforts to provide ourcustomers with enhanced casino products and other amenities.  Our average number of machines increased from2,719 in 2007 to 2,888 in 2008 due to our Phase VI casino expansion.

 

Other operating revenues were $19,254,000 in 2008 ascompared to $17,606,000 in 2007.  Netfood and beverage revenues increased $448,000 to $12,571,000 from $12,123,000in 2007 primarily due to the opening of the Dover Downs’ Fire & IceLounge and our Sweet Perks Too coffee shop in July 2008 and increasedsales at our renovated Michele’s fine dining restaurant.  Additionally, cash rooms revenue increased$980,000 in 2008 mainly due to the hotel expansion.  All other operating revenues increased$220,000 primarily due to an increase in concert and other miscellaneousrevenues.  Other operating revenues donot include the retail amount of promotional allowances which are provided tocustomers on a complimentary basis of $17,758,000 and $15,770,000 in 2008 and2007, respectively.

 

Gaming expenses increased by $3,320,000, or 2.0%,primarily as a result of legislation enacted by the State effective July 1,2008 that (1) increasesthe existing surcharge on the portion of slot win that we retain, (2) requires thatwe pay the costs of all franchise games which were previously shared with theState, and (3) requires that we pay an additional annualamount to a certain horse racing industry organizationpreviously funded by the State. That legislation also allows us to operate all day on Sundays.  Prior legislation enacted by the Stateeffective May 10, 2007 established a one-time increase in the amountremitted to the State by its three video lottery agents and a tax on promotional slot play in excess of a legislative limit forthe period ended June 30, 2008 which also contributed to theincreased gaming expenses.  The increasedsurcharge and fees were approximately $2,100,000 for the year ended December 31,2008.  Higher marketing costs, realestate taxes and utility expenses were primarily responsible for the remainderof the increase.

 

Other operating expenses increased by $833,000, or 5.5%, reflecting thehigher revenues.  Expenses related to ourfood and beverage operations were $12,873,000 in 2008 and $12,552,000 in2007.  These increased expenses included

 

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initial costs ofoperations related to our new Dover Downs’ Fire & Ice Lounge and SweetPerks Too coffee shop which opened in the third quarter of 2008.  Expenses related to our rooms operationsincreased $312,000 in 2008 primarily due to the hotel expansion.  We also incurred approximately $500,000 inexpenses during the fourth quarter of 2008 related to the termination of tworestaurant leases on our property.

 

General and administrative expenses remainedconsistent at $6,317,000 in 2008 as compared to $6,319,000 in 2007.

 

Depreciation expense was $10,849,000 in 2008 ascompared to $7,843,000 in 2007.  Theincrease resulted primarily from the opening of our hotel expansion during thesecond half of 2007 and our Phase VI casino expansion during the third quarterof 2008.

 

Interest expense increased by $743,000 due to higheraverage outstanding borrowings on our credit facility used to fund our hotelexpansion which was completed in October 2007, our casino expansion whichwas completed in the third quarter of 2008 and repurchases of our outstandingcommon stock at the end of 2007 and beginning of 2008.  Additionally, the amount of interest wecapitalized decreased to $567,000 during 2008 from $1,539,000 during 2007.  The interest expense associated with theborrowings for our hotel and casino expansions was being capitalized as part ofthe project cost.  Partially offsettingthese increases was a decrease in our average interest rate on our creditfacility.

 

Our effective income tax rate was 40.9% for yearsended December 31, 2008 and 2007.

 

**Liquidityand Capital Resources**

 

Net cash provided by operating activities was $27,737,000 for the yearended December 31, 2009 compared to $26,808,000 for the year ended December 31,2008.  The increase was primarily due tothe timing of payments to the Delaware State Lottery Office for its portion ofthe slot win, partially offset by lower earnings excluding the non-cashimpairment charge.

 

Net cash used in investing activities was $4,537,000 for the year endedDecember 31, 2009 compared to $40,266,000 for the year ended December 31,2008 and was primarily related to capital improvements.  Capital expenditures for 2009 relatedprimarily to final payments made for our Phase VI casino expansion and our newRace & Sports Book operation. Capital expenditures for 2008 also related primarily to the Phase VIcasino expansion, as well as the completion of our hotel expansion.

 

Net cash used in financing activities was $19,674,000 for the yearended December 31, 2009 compared to net cash provided by financingactivities of $8,891,000 for the year ended December 31, 2008.  During 2009, we repaid $13,200,000 of ourcredit facility.  During 2008, weborrowed an additional $15,900,000 under our credit facility to fund thesignificant capital projects in 2008.  Werepurchased and retired $59,000 of our outstanding common stock during 2009compared to $1,040,000 during 2008.  Wepaid $6,415,000 and $6,360,000 in cash dividends during 2009 and 2008,respectively.

 

On January 27, 2010, our Board of Directorsdeclared a reduced quarterly cash dividend on both classes of common stock of$0.03 per share.  The dividend is payableon March 10, 2010 to shareholders of record at the close of business on February 10,2010.

 

On October 23, 2002, our Board of Directors authorized therepurchase of up to 3,000,000 shares of our outstanding common stock.  The purchases may be made in the open marketor in privately negotiated transactions as conditions warrant.  The repurchase authorization has noexpiration date, does not obligate us to acquire any specific number of sharesand may be suspended at any time.  Nopurchases of our equity securities were made pursuant to this authorizationduring 2009.  During the year ended December 31,2008, we purchased and retired 98,500 shares of our outstanding common stockpursuant to this plan at an average purchase price of $9.09 per share, notincluding nominal brokerage commissions. At December 31, 2009, we had remaining repurchase authority of1,653,333 shares.

 

Based on current business conditions, we expectto make capital expenditures (excluding table games) of approximately$2,000,000 to $2,500,000 during 2010.  In January 2010, Delaware authorizedtable games at the facilities of video lottery agents.  The State is drafting regulations and weexpect to have table games such as

 

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blackjack, poker,craps and roulette operational during the third quarter of 2010.  We expect to make additional capitalexpenditures of approximately $4,500,000 related to table games in 2010.Additionally, we expect to contribute approximately $1,000,000 to our pensionplans in 2010.

 

At December 31, 2009, we had a $125,000,000 credit facility with abank group.  The maximum borrowing limitunder the facility reduced to $100,000,000 on January 1, 2010.  Interest was based, at our option, upon LIBORplus a margin that varied between 75 and 125 basis points (125 basis points at December 31,2009) depending on the ratio of funded debt to earnings before interest, taxes,depreciation and amortization (the “leverage ratio”) or the base rate (thegreater of the prime rate or the federal funds rate plus 0.5%) less a marginthat varied between 50 and 100 basis points (50 basis points at December 31,2009) depending on the leverage ratio. The credit facility has minimum net worth, interest coverage and maximumleverage requirements.  Material adversechanges in our results of operations could impact our ability to satisfy theserequirements.  In addition, the creditagreement also includes a material adverse change clause.  The facility is for seasonal funding needs,capital improvements and other general corporate purposes.  At December 31, 2009, we were incompliance with all terms of the facility and there was $95,125,000 outstandingat a weighted average interest rate of 1.57%. At December 31, 2009, $29,875,000 was available pursuant to the facilitywhich reduced to $4,875,000 on January 1, 2010; however, in order tomaintain compliance with the required quarterly debt covenant calculations asof December 31, 2009 only $2,700,000 could have been borrowed as of thatdate.

 

We amended our credit facility effective February 19, 2010 toextend the agreement to January 1, 2013, increase the maximum borrowinglimit to $105,000,000, revise certain financial covenants and change themargins used to determine interest rates. The facility reduces to $95,000,000 on April 1, 2011 and to$82,500,000 on April 1, 2012.

 

Effective January 15, 2009, we entered into aninterest rate swap agreement that effectively converts $35,000,000 of ourvariable-rate debt to a fixed-rate basis, thereby hedging against the impact ofpotential interest rate changes.  Theagreement terminates on April 17, 2012. Pursuant to this agreement, we pay a fixed interest rate of 1.74%, plusa margin that varies between 75 and 125 basis points depending on our leverageratio (125 basis points at December 31, 2009).  In return, the issuing lender refunds to usthe variable-rate interest paid to the bank group under our revolving creditagreement on the same notional principal amount, excluding the margin.  Our latest amendment to our credit facilityon February 19, 2010 increased the margins used to determine the interestrate on our interest rate swap.

 

Effective July 1, 2008, the State enacted legislation that (1) increasedthe existing surcharge on the portion of slot win that we retain, (2) required thatwe pay the costs of all franchise games which were previously shared with theState, and (3) required that we pay an additional annualamount to a certain horse racing industry organizationpreviously funded by the State. That legislation also allowed us to operate all day on Sundays andeliminated the prior legislatively imposed limit on our use of free promotionalslot play.  In May of 2009, the State enacted legislation, whichbecame effective May 28, 2009, that further increased the gaming taxespaid to the State on the portion of slot win that we retain.   The combined impact of these legislative initiatives and theadditional machine fees were approximately $10,000,000 for 2009.  Additionally,in connection with the latest tax increases, Delaware reintroducedsports betting in 2009.  “Head to head” sports wagering (or wagering onthe outcome of a single sporting event), such as is offered in Las Vegas, isthe most popular form of sports wagering — but it is not presently permitted inDelaware.  A 2009 decision by the UnitedStates Court of Appeals for the Third Circuit ruled that under federal lawsports betting operations in Delaware must be limited to parlay bets on NFLgames.  The State of Delaware is appealing this decision to the UnitedStates Supreme Court but we are unable to predict how the Supreme Court would rule ifit agrees to hear the appeal.  We areunable to predict whether increased revenues from additional gamingopportunities (and associated incremental slot play) will offset the recent taxincreases.

 

We expect that our net cash flows from operating activities and fundsavailable from our credit facility will be sufficient to provide for ourworking capital needs and capital spending requirements at least through thenext twelve months, as well as any cash dividends our Board of Directors maydeclare.  We expect cash flows fromoperating activities and funds available from our credit facility to alsoprovide for long-term liquidity.

 

The introduction or expansion of gaming in and around our market areacould have a material adverse effect on our cash flows and results ofoperations.  See Part I, Item 1 —Business included elsewhere in this document for further discussion.

 

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#### **Contractual Obligations**

 

At December 31, 2009, we had the following contractualobligations:

 
| ** **                                                  | ** ** | ** ** | ** **  | **Payments Due by Period** | ** ** |
|-------------------------------------------------------------|------------|------------|-------------|----------------------------|------------|
| ** **                                                  | ** ** | **Total**  | ** **  | **2010**                   | ** ** | **2011 – 2012** | ** ** | **2013 – 2014** | ** ** | **Thereafter** | ** ** |
| Revolving line of  credit(a)                                |       | $          | 95,125,000  |                       | $          | — |   | $ | 12,625,000 |   | $ | 82,500,000 |   | $ | — |   |
| Estimated interest  payments on revolving line of credit(b) |       | 9,135,000  |        | 3,408,000                  |       | 5,727,000 |   | — |   | — |   |
| Pension  contributions(c)                                   |       | 1,000,000  |        | 1,000,000                  |       | — |   | — |   | — |   |
|                                                        |       | $          | 105,260,000 |                       | $          | 4,408,000 |   | $ | 18,352,000 |   | $ | 82,500,000 |   | $ | — |   |

 

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(a) Payments due under our revolving line of credit were based onthe latest amendment to our revolving credit agreement dated February 19,2010.

 

(b) The future interest payments on our revolving credit agreementwere estimated using the current outstanding principal or the maximum borrowinglimit as of December 31, 2009, as applicable.  For $35,000,000 of our outstandingborrowings, we used the fixed interest rate per the interest rate swapagreement.  For the remaining $60,125,000of our outstanding borrowings, we used the interest rates that became effectivewith our latest amendment to our revolving credit agreement dated February 19,2010.

 

(c) We expect to contribute approximately $1,000,000 to ourpension plans for 2010.  For yearssubsequent to 2010, we are unable to estimate what our pension contributionswill be.

 

#### **Related PartyTransactions**

 

See NOTE 11 — Related Party Transactions to our consolidated financialstatements included elsewhere in this document for a full description ofrelated party transactions.

#### ** **

#### **Critical AccountingPolicies**

 

The accounting policies described below are those considered criticalby us in preparing our consolidated financial statements and/or includesignificant estimates made by management using information available at thetime the estimates are made.  Asdescribed below, these estimates could change materially if differentinformation or assumptions were used.

 

*Propertyand Equipment*

 

Property and equipment are recorded at cost. Depreciation is providedfor financial reporting purposes using the straight-line method over estimateduseful lives ranging from 3 to 10 years for furniture, fixtures and equipmentand up to 40 years for facilities.  Theseestimates require assumptions that are believed to be reasonable.  We perform reviews for impairment oflong-lived assets whenever events or changes in circumstances indicate that thecarrying value of an asset may not be recoverable.  An impairment loss would be measured as theamount by which the carrying amount of the asset exceeds its fair value.  Generally, fair value will be determinedusing valuation techniques such as the present value of future cash flows.

 

*AccruedPension Cost*

 

The benefits provided by our defined-benefit pension plans are based onyears of service and employee’s remuneration over their employment withus.  Accrued pension costs are developedusing actuarial principles and assumptions which consider a number of factors,including estimates for the discount rate, assumed rate of compensationincrease, and expected long-term rate of return on assets.  Changes in these estimates would impact theamounts that we record in our consolidated financial statements and our fundingcontributions to the plans.

 

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**RecentAccounting Pronouncements**

 

SeeNOTE 2—Summary of Significant Accounting Policies****toour consolidated financial statements included elsewhere in this document for adescription of recent accounting pronouncements including the expected dates ofadoption and effects on results of operations, financial condition and cashflows.

 

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

 

This report and the documents incorporated byreference may contain forward-looking statements.  In Item 1A of this report, we disclose theimportant factors that could cause our actual results to differ from ourexpectations.

 

**Item 7A.****         Quantitative AndQualitative Disclosure About Market Risk**

 

We are exposed to financial market risk resulting from changes ininterest rates.  We do not engage inspeculative or leveraged transactions, nor hold or issue financial instrumentsfor trading purposes.

 

At December 31, 2009, we have marketablesecurities of $125,000.  Thesesecurities, which consist of mutual funds, are classified as available-for-saleand reported at fair-value in our consolidated balance sheet.  Fair-value is determined based on the currentmarket values.

 

At December 31, 2009, there was $95,125,000outstanding under our revolving credit agreement.  The credit agreement bears interest at ouroption, upon LIBOR plus a margin that varies between 75 and 125 basis points(125 basis points at December 31, 2009) depending on the ratio of fundeddebt to earnings before interest, taxes, depreciation and amortization (the “leverageratio”) or the base rate (the greater of the prime rate or the federal fundsrate plus 0.5%) less a margin that varies between 50 and 100 basis points (50basis points at December 31, 2009) depending on the leverage ratio.  Therefore, we are subject to interest raterisk on the variable component of the interest rate.  Historically, we managed our mix of fixed andvariable rate debt by structuring the terms of our debt agreements.  Effective January 15, 2009, we enteredinto an interest rate swap agreement that effectively converted $35,000,000 ofour variable-rate debt to a fixed-rate basis, thereby hedging against theimpact of potential interest rate changes on future interest expense.  Pursuant to this agreement, we pay a fixedinterest rate of 1.74%, plus a margin that varies between 75 and 125 basispoints depending on our leverage ratio (125 basis points at December 31,2009).  In return, the issuing lenderrefunds to us the variable-rate interest paid to the bank group under ourrevolving credit agreement on the same notional principal amount, excluding themargin.  The agreement terminates on April 17,2012.  As of December 31, 2009, theinterest rate swap had a negative fair value of $186,000.  An increase in interest rates of one percentwould result in the interest rate swap having a fair value of approximately$581,000 at December 31, 2009.  Adecrease in interest rates of one percent would result in the interest rateswap having a negative fair value of approximately $972,000 at December 31,2009. A change in interest rates will have no impact on the interest expenseassociated with the $35,000,000 of borrowings under the revolving creditagreement that are subject to the interest rate swap agreement.  A change in interest rates of one percent onthe outstanding borrowings under the revolving credit agreement at December 31,2009 not subject to the interest rate swap would cause a change in total annualinterest costs of $601,000.  Theborrowings under our revolving credit agreement bear interest at the variablerate described above and therefore approximate fair value at December 31,2009.

 

#### **Item 8.**            FinancialStatements And Supplementary Data

 

Our consolidated financial statements and the Reportof Independent Registered Public Accounting Firm included in this report areshown on the Index to Consolidated Financial Statements on page 33.

 

**Item 9.****                                  ****Changes In AndDisagreements With Accountants On Accounting And Financial Disclosure**

 

None.

 

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**Item 9A.****         Controls andProcedures**

 

*(a) Evaluationof Disclosure Controls and Procedures*

 

We have established disclosure controls and procedures to ensure thatmaterial information relating to us, including our consolidated subsidiaries,is made known to the officers who certify our financial reports and to othermembers of senior management and the Board of Directors.

 

Based on their evaluation as of December 31, 2009, our ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) are effective toensure that the information we are required to disclose in the reports that wefile or submit under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms.

 

*(b) Changesin Internal Control Over Financial Reporting*

 

There have been no changes in our internal control over financialreporting during the fiscal quarter ended December 31, 2009 that havematerially affected, or that are reasonably likely to materially affect, ourinternal control over financial reporting.

 

*(c) Management’sReport on Internal Control Over Financial Reporting*

 

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting. We conducted an evaluation of the effectiveness of our internal controlover financial reporting based on the framework in *InternalControl — Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation, managementconcluded that our internal control over financial reporting was effective asof December 31, 2009.  KPMG LLPindependently assessed the effectiveness of our internal control over financialreporting as of December 31, 2009. KPMG LLP has issued their report which is included herein.

 

# ***(d) Reportof Independent Registered Public Accounting Firm***

# ** **

The Board ofDirectors and Stockholders

Dover Downs Gaming &Entertainment, Inc.:

 

We have audited Dover Downs Gaming & Entertainment, Inc.’s(the Company’s) internal control over financial reporting as of December 31,2009, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting,included in the accompanying *Management’s Report onInternal Control Over Financial Reporting (Item 9A(c))*. Ourresponsibility is to express an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk. Our audit also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable

 

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assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In our opinion, Dover Downs Gaming & Entertainment, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2009, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated balancesheets of Dover Downs Gaming & Entertainment, Inc. andsubsidiaries as of December 31, 2009 and 2008, and the relatedconsolidated statements of earnings and comprehensive earnings and cash flowsfor each of the years in the three-year period ended December 31, 2009,and our report dated March 5, 2010 expressed an unqualified opinion onthose consolidated financial statements.

 

## KPMG LLP

 

Philadelphia,Pennsylvania

March 5, 2010

 

**Item 9B.****         Other Information**

 

None.

 

 

**Part III**

 

**Item 10.****         Directors, ExecutiveOfficers And Corporate Governance**

 

Except as presented below, biographical information relating to ourdirectors and executive officers, information regarding our audit committeefinancial experts and information on Section 16(a) BeneficialOwnership Reporting Compliance called for by this Item 10 are incorporated byreference to our Proxy Statement to be filed pursuant to Regulation 14A for theAnnual Meeting of Stockholders to be held on April 28, 2010.

 

We have a Code of Business Conduct applicable to all of our employees,including our Chief Executive Officer and Chief Financial Officer.  We also have a Code of Business Conduct andEthics for Directors and Executive Officers and Related Party TransactionsPolicy applicable to all directors and executive officers.  Copies of these Codes and other corporategovernance documents are available on our website at http://www.doverdowns.comunder the heading Investor Relations. We will post on our website anyamendments to, or waivers from, these Codes as required by law.

 

26

----

 

Executive Officersof the Registrant.  As of December 31, 2009, our executiveofficers were:

 
| **Name**            | ** ** | **Position**                                                       | ** ** | **Age**    | ** ** | **Term of Office** |
|---------------------|------------|--------------------------------------------------------------------|------------|------------|------------|--------------------|
| ** **          | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** **         |
| Denis McGlynn       |       | President and Chief  Executive Officer                             |       | 63         |       | 11/79 to date      |
|                |       |                                                               |       |       |       |               |
| Edward J. Sutor     |       | Executive Vice  President and Chief Operating Officer              |       | 60         |       | 3/99 to date       |
|                |       |                                                               |       |       |       |               |
| Timothy R. Horne    |       | Sr. Vice  President-Finance, Treasurer and Chief Financial Officer |       | 43         |       | 11/96 to date      |
|                |       |                                                               |       |       |       |               |
| Klaus M. Belohoubek |       | Sr. Vice  President-General Counsel and Secretary                  |       | 50         |       | 7/99 to date       |

 

Our Chairman of the Board, Henry B. Tippie, is a non-employee directorand, therefore, not an executive officer. Mr. Tippie has served as Chairman of the Board since our initialpublic offering in 2002.  Mr. Tippiealso serves as Chairman of the Board to DVD as a non-employee director.

 

Denis McGlynn has served as our President and Chief Executive Officerfor 30 years.  Mr. McGlynn alsoserves as President and Chief Executive Officer to DVD.

 

Edward J. Sutor has been Executive Vice President and Chief OperatingOfficer since 1999.  Previously, Mr. Sutorserved as Senior Vice President of Finance at Caesars Atlantic City from 1983until 1999.

 

Timothy R. Horne has been Sr. Vice President-Finance, Treasurer andChief Financial Officer since November 1996.  Mr. Horne also serves as Sr. VicePresident-Finance and Chief Financial Officer to DVD.

 

Klaus M. Belohoubek has been Sr. Vice President-General Counsel andSecretary since 1999 and has provided us legal representation in various capacitiessince 1990.  Mr. Belohoubek alsoserves as Sr. Vice President-General Counsel and Secretary to DVD.

 

**Item 11.****         Executive Compensation**

 

The information called for by this Item 11 isincorporated by reference to our Proxy Statement to be filed pursuant toRegulation 14A for the Annual Meeting of Stockholders to be held on April 28,2010.

 

**Item 12.****                           ****Security Ownership OfCertain Beneficial Owners And Management And Related Stockholder Matters**

 

The information called for by this Item 12 isincorporated by reference to our Proxy Statement to be filed pursuant toRegulation 14A for the Annual Meeting of Stockholders to be held on April 28,2010.

 

27

----

 

 

###### **Equity Compensation Plan Information**

 

We have a stock incentive planwhich provides for the grant of up to 2,250,000 shares of common stock to ourofficers and key employees through stock options and/or awards valued in wholeor in part by reference to our common stock, such as restricted stockawards.  Refer to NOTE 9 — Stockholders’ Equity to ourconsolidated financial statements included elsewhere in this document forfurther discussion.  Securitiesauthorized for issuance under equity compensation plans at December 31,2009 are as follows:

 
| **Plan Category**                                           | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options, warrants  and rights** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                               | ** ** | **(b)**                                                                             | ** ** | **(c)**                                                                                                                                               | ** ** |
| Equity compensation  plans approved by security holders     |       | 634,526                                                                                               |       | $                                                                                   | 7.02       |                                                                                                                                                  | 616,380    |   |
|                                                        |       |                                                                                                  |       |                                                                                |       |                                                                                                                                                  |       |
| Equity compensation  plans not approved by security holders |       | —                                                                                                |       | —                                                                              |       | —                                                                                                                                                |       |
| Total                                                       |       | 634,526                                                                                               |       | $                                                                                   | 7.02       |                                                                                                                                                  | 616,380    |   |

 

**Item 13.****         Certain RelationshipsAnd Related Transactions, And Director Independence**

 

The information called for by this Item 13 isincorporated by reference to our Proxy Statement to be filed pursuant toRegulation 14A for the Annual Meeting of Stockholders to be held on April 28,2010.

 

**Item 14.****         Principal AccountingFees And Services**

 

The information called for by this Item 14 isincorporated by reference to our Proxy Statement to be filed pursuant toRegulation 14A for the Annual Meeting of Stockholders to be held on April 28,2010.

 

**Part IV**

 

**Item 15.****         Exhibits, FinancialStatement Schedules**

 
| (a)(1) |   | Financial Statements — See accompanying Index to Consolidated Financial  Statements on page 33.                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (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. (formerly known as 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).                                                                                                                                                                                                                                  |

 

28

----

 
| 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. (formerly  known as 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. (formerly  known as 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. (formerly known as 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).                 |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4       |   | Real Property Agreement dated as of January 15,  2002, by and between Dover Motorsports, Inc. (formerly known as 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       |   | Agreement between Dover Downs, Inc. and  Delaware Standardbred Owners Association, Inc. dated May 1, 2007  (incorporated herein by reference to Exhibit 10.5 to the Form 10-K  filed on March 7, 2008).                                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6       |   | Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, as agent, 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).                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7       |   | 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).                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.8       |   | 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).                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.9       |   | 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).                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.10           |   | 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).                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.11           |   | 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).                                                                                               |

 

29

----

 
| 10.12  |   | Fourth Amendment to Amended and Restated Credit  Agreement among Dover Downs Gaming & Entertainment, Inc. and  Wilmington Trust Company, as agent, dated as of December 14, 2005  (incorporated herein by reference to Exhibit 10.1 to the Form 8-K  filed on December 16, 2005). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.13  |   | Fifth Amendment to Amended and Restated Credit  Agreement among Dover Downs Gaming & Entertainment, Inc. and  Wilmington Trust Company, as agent, dated as of April 18, 2006  (incorporated herein by reference to Exhibit 10.1 to the Form 8-K  filed on April 21, 2006).        |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.14  |   | Sixth Amendment to Amended and  Restated Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of  March 30, 2007 (incorporated  herein by reference to Exhibit 10.2 to the Form 8-K filed on  March 30, 2007).       |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.15  |   | Seventh Amendment to Amended  and Restated Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of  January 15, 2009 (incorporated  herein by reference to Exhibit 10.15 to the Form 10-K filed on  March 6, 2009).  |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.16  |   | Eighth Amendment to Amended and  Restated Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of  February 27, 2009 (incorporated herein by reference to Exhibit 10.16 to the  Form 10-K filed on March 6, 2009).   |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.17  |   | Ninth Amendment  to Amended and Restated Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, as agent, dated as of  February 19, 2010 (incorporated herein by reference to  Exhibit 10.1 to the Form 8-K filed on February 25, 2010).  |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.18  |   | Amended and Restated Employment and Non-Compete  Agreement between Dover Downs Gaming & Entertainment, Inc. and  Denis McGlynn dated February 13, 2006 (incorporated herein by reference  to Exhibit 10.1 to the Form 8-K filed on February 17, 2006).                            |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.19  |   | Amended and Restated Employment and Non-Compete  Agreement between Dover Downs Gaming & Entertainment, Inc. and  Edward J. Sutor dated February 13, 2006 (incorporated herein by  reference to Exhibit 10.2 to the Form 8-K filed on February 17,  2006).                         |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.20  |   | Amended and Restated Employment and Non-Compete  Agreement between Dover Downs Gaming & Entertainment, Inc. and  Timothy R. Horne dated February 13, 2006 (incorporated herein by  reference to Exhibit 10.3 to the Form 8-K filed on February 17,  2006).                        |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.21  |   | Amended and Restated Employment and Non-Compete  Agreement between Dover Downs Gaming & Entertainment, Inc. and  Klaus M. Belohoubek dated February 13, 2006 (incorporated herein by  reference to Exhibit 10.4 to the Form 8-K filed on February 17,  2006).                     |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.22  |   | Amendment to certain agreements between Dover Downs  Gaming & Entertainment, Inc. and selected executives and  directors (incorporated herein by reference to Exhibit 10.1 to the  Form 10-Q filed on November 3, 2008).                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.23  |   | 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).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.24  |   | Dover Downs Gaming & Entertainment, Inc.  2002 Stock Incentive Plan, as Amended and Restated (incorporated herein by  reference to Exhibit A to our Proxy Statement filed on March 29,  2004).                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.25  |   | 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).                                  |

 

30

----

 
| 10.26      |   | 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). |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                               |
| 10.27      |   | Description of Annual Salary and Certain  Discretionary Incentives to Executive Officers (incorporated herein by  reference to the Current Report on Form 8-K dated January 4, 2010).                                                                                    |
|       |   |                                                                                                                                                                                                                                                                               |
| 10.28      |   | Letter of Intent dated October 14, 2008 between Dover  Downs Gaming Management Corp. and UG  Entertainment, LLC(incorporated herein by reference to Exhibit 10.1 to the Current  Report on Form 8-K filed on January 14, 2009).                                |
|       |   |                                                                                                                                                                                                                                                                               |
| 21.1  |   | List of Subsidiaries of Dover Downs  Gaming & Entertainment, Inc.                                                                                                                                                                                                    |
|       |   |                                                                                                                                                                                                                                                                               |
| 24.1  |   | Powers of Attorney for Directors                                                                                                                                                                                                                                                   |
|       |   |                                                                                                                                                                                                                                                                               |
| 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 our Proxy Statement filed on March 30, 2010).                                                                                      |

 

31

----

 

**Signatures**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| DATED: | March 5, 2010 |                                                                                                                                                                                     | Dover Downs Gaming &  Entertainment, Inc. |
|--------|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------|
|   |               |                              Registrant |
|   |               |                                                                                                                                                                                     |                                                    |
|   |               |                                                                                                                                                                                     |                                                    |
|   |               | BY:                                                                                                                                                                                      | /s/ Denis McGlynn                                       |
|   |               |                                                                                                                                                                                     | Denis McGlynn                                           |
|   |               |                                                                                                                                                                                     | *President  and Chief Executive Officer and Director*   |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated:

 
| /s/ Denis McGlynn    |   | *President and Chief Executive Officer and  Director* |   | March 5, 2010 |
|----------------------|--------|-------------------------------------------------------|--------|--------------------|
| Denis McGlynn        |   | (Principal Executive Officer)                         |   |               |
|                 |   |                                                  |   |               |
| /s/ Timothy R. Horne |   | *Sr. Vice President — Finance,*                  |   | March 5, 2010 |
| Timothy R. Horne     |   | *Treasurer and Chief Financial Officer*               |   |               |
|                 |   | (Principal Financial and Accounting Officer)          |   |               |

 

The Directors of the registrant (listed below)executed a power of attorney appointing Denis McGlynn and Timothy R. Hornetheir attorneys-in-fact, empowering either of them to sign this report, or anyamendments, on their behalf.

 
| /s/ Henry B. Tippie           | * * | *Chairman of the Board*                        |   | March 5, 2010 |
|-------------------------------|----------|------------------------------------------------|--------|--------------------|
| Henry B. Tippie               |     |                                           |   |               |
|                          |     |                                           |   |               |
| /s/ Kenneth K. Chalmers       | * * | *Director and Chairman of the Audit Committee* |   | March 5, 2010 |
| Kenneth K. Chalmers           | * * |                                           |   |               |
|                          |     |                                           |   |               |
| /s/ R. Randall Rollins        | * * | *Director*                                     |   | March 5, 2010 |
| R. Randall Rollins            |     |                                           |   |               |
|                          |     |                                           |   |               |
| /s/ Patrick J. Bagley         | * * | *Director*                                     |   | March 5, 2010 |
| Patrick J. Bagley             |     |                                           |   |               |
|                          |     |                                           |   |               |
| /s/ John W. Rollins, Jr. | * * | *Director*                                     |   | March 5, 2010 |
| John W. Rollins, Jr.     |     |                                           |   |               |
|                          |     |                                           |   |               |
| /s/ Jeffrey W. Rollins        | * * | *Director*                                     |   | March 5, 2010 |
| Jeffrey W. Rollins            |     |                                           |   |               |
|                          |     |                                           |   |               |
| /s/ Denis McGlynn             | * * | *As Attorney-in-Fact and Director*             |   | March 5, 2010 |
| Denis McGlynn                 | * * |                                           |   |               |

 

32

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**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

** **
| ** **                                                                                                                | **Page** |
|---------------------------------------------------------------------------------------------------------------------------|----------|
| Statement of Management Responsibility                                                                                    | 34       |
|                                                                                                                      |     |
| Report of Independent Registered Public Accounting  Firm                                                                  | 35       |
|                                                                                                                      |     |
| Consolidated Statements of Earnings and Comprehensive  Earnings for the years ended December 31, 2009, 2008 and 2007 | 36       |
|                                                                                                                      |     |
| Consolidated  Balance Sheets at December 31, 2009 and 2008                                                           | 37       |
|                                                                                                                      |     |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2009, 2008 and 2007                          | 38       |
|                                                                                                                      |     |
| Notes to the Consolidated Financial Statements                                                                            | 39       |

 

33

----

 

**STATEMENT OF MANAGEMENT RESPONSIBILITY**

 

Dover Downs Gaming & Entertainment, Inc. and subsidiaries’(the “Company”) management is responsible for the preparation, integrity andobjectivity of the consolidated financial statements and other financialinformation included in the Company’s 2009 Annual Report on Form 10-K. Theconsolidated financial statements have been prepared in conformity with U.S.generally accepted accounting principles and reflect the effects of certainestimates and judgments made by management.

 

The Company’s management also is responsible for establishing andmaintaining a system of internal controls designed to provide reasonableassurance that assets are safeguarded and transactions are properly recordedand executed in accordance with management’s authorization. The system isregularly monitored by direct management review and by internal auditors whoconduct an extensive program of audits throughout the Company.  The Director of Internal Audit reportsdirectly to the Audit Committee of the Board of Directors.  We have confidence in our financial reporting,the underlying system of internal controls, and our people, who are objectivein their responsibilities and operate under the Company’s Code of BusinessConduct and with the highest level of ethical standards.  These standards are a key element of theCompany’s control system.

 

The Company conducted an evaluation of the effectiveness of itsinternal control over financial reporting based on the framework in *Internal Control - Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  Based on the Company’s evaluation, managementof the Company concluded that the Company’s internal control over financialreporting was effective as of December 31, 2009.

 

The Audit Committee of the Board of Directors, which is comprisedentirely of independent directors, has direct and private access to and meetsregularly with management, the internal auditors and the independent registeredpublic accounting firm to review accounting, reporting, auditing and internalcontrol 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 |

 

34

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

The Board ofDirectors and Stockholders

Dover Downs Gaming &Entertainment, Inc.:

 

We have audited the accompanying consolidated balance sheets of DoverDowns Gaming & Entertainment, Inc. and**subsidiaries(the Company) as of December 31, 2009 and 2008, and the relatedconsolidated statements of earnings and comprehensive earnings and cash flowsfor each of the years in the three-year period ended December 31, 2009.These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of Dover DownsGaming & Entertainment, Inc. and subsidiaries as of December 31,2009 and 2008, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2009, inconformity with U.S. generally accepted accounting principles.

 

As discussed in Note 2 to the consolidated financial statements, theCompany changed its method of evaluating participating securities under thetwo-class method of computing earnings per share due to the adoption ofFinancial Accounting Standards Board Staff Position No. EITF 03-6-1, “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities” (incorporated into Accounting Standards CodificationTopic 260, “Earnings Per Share”), effective January 1, 2009 on aretrospective basis.

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), Dover Downs Gaming &Entertainment, Inc.’s internal control over financial reporting as of December 31,2009, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 5,2010 expressed an unqualified opinion on the effectiveness of the Company’sinternal control over financial reporting.

 
|                       | KPMG LLP |
|----------------------------|----------|
|                       |     |
| Philadelphia, Pennsylvania |     |
| March 5, 2010         |     |

 

35

----

 

**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

**CONSOLIDATED STATEMENTS OFEARNINGS AND COMPREHENSIVE EARNINGS**

**(inthousands, except per share data)**

 
| ** **                                                                                            | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                            | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                                                             |       |                              |       |   |   |   |   |
| Gaming                                                                                                |       | $                                 | 213,855    |   | $ | 219,878 |   | $ | 224,760 |   |
| Other operating                                                                                       |       | 18,944                            |       | 19,254 |   | 17,606 |   |
|                                                                                                  |       | 232,799                           |       | 239,132 |   | 242,366 |   |
| Expenses:                                                                                             |       |                              |       |   |   |   |   |
| Gaming                                                                                                |       | 175,785                           |       | 169,360 |   | 166,040 |   |
| Other operating                                                                                       |       | 14,758                            |       | 16,101 |   | 15,268 |   |
| General and  administrative                                                                           |       | 6,678                             |       | 6,317 |   | 6,319 |   |
| Impairment charge                                                                                     |       | 2,177                             |       | — |   | — |   |
| Depreciation                                                                                          |       | 11,939                            |       | 10,849 |   | 7,843 |   |
|                                                                                                  |       | 211,337                           |       | 202,627 |   | 195,470 |   |
|                                                                                                  |       |                              |       |   |   |   |   |
| Operating earnings                                                                                    |       | 21,462                            |       | 36,505 |   | 46,896 |   |
|                                                                                                  |       |                              |       |   |   |   |   |
| Interest expense                                                                                      |       | 2,376                             |       | 3,484 |   | 2,741 |   |
|                                                                                                  |       |                              |       |   |   |   |   |
| Earnings before income  taxes                                                                         |       | 19,086                            |       | 33,021 |   | 44,155 |   |
|                                                                                                  |       |                              |       |   |   |   |   |
| Income taxes                                                                                          |       | 7,809                             |       | 13,510 |   | 18,070 |   |
|                                                                                                  |       |                              |       |   |   |   |   |
| Net earnings                                                                                          |       | 11,277                            |       | 19,511 |   | 26,085 |   |
|                                                                                                  |       |                              |       |   |   |   |   |
| Unrealized loss on  interest rate swap, net of income taxes                                           |       | (110                              | )          | — |   | — |   |
|                                                                                                  |       |                              |       |   |   |   |   |
| Unrealized gain (loss)  on available-for-sale securities, net of income taxes                         |       | 10                                |       | (19 | ) | — |   |
|                                                                                                  |       |                              |       |   |   |   |   |
| Reclassification  adjustment for loss realized on available-for-sale securities, net of income  taxes |       | 16                                |       | — |   | — |   |
|                                                                                                  |       |                              |       |   |   |   |   |
| Change in pension net  actuarial loss and prior service cost, net of income taxes                     |       | 1,186                             |       | (1,995 | ) | 210 |   |
|                                                                                                  |       |                              |       |   |   |   |   |
| Comprehensive earnings                                                                                |       | $                                 | 12,379     |   | $ | 17,497 |   | $ | 26,295 |   |
|                                                                                                  |       |                              |       |   |   |   |   |
| Net earnings per common  share (Note 2):                                                              |       |                              |       |   |   |   |   |
| Basic                                                                                                 |       | $                                 | 0.35       |   | $ | 0.61 |   | $ | 0.80 |   |
| Diluted                                                                                               |       | $                                 | 0.35       |   | $ | 0.61 |   | $ | 0.79 |   |

 

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

 

36

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**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

**(inthousands, except share and per share data)**

** **
| ** **                                                                                                                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **ASSETS**                                                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                   |       |                  |       |   |   |
| Cash                                                                                                                                              |       | $                     | 21,415     |   | $ | 17,889 |   |
| Accounts receivable                                                                                                                               |       | 2,636                 |       | 2,661 |   |
| Due from State of  Delaware                                                                                                                       |       | 11,069                |       | 10,870 |   |
| Inventories                                                                                                                                       |       | 2,170                 |       | 2,025 |   |
| Prepaid expenses and  other                                                                                                                       |       | 2,151                 |       | 2,029 |   |
| Receivable from Dover  Motorsports, Inc.                                                                                                     |       | 5                     |       | — |   |
| Income taxes receivable                                                                                                                           |       | 129                   |       | — |   |
| Deferred income taxes                                                                                                                             |       | 1,209                 |       | 1,705 |   |
| Total current assets                                                                                                                              |       | 40,784                |       | 37,179 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Property and equipment,  net                                                                                                                      |       | 192,360               |       | 203,522 |   |
| Other assets                                                                                                                                      |       | 863                   |       | 1,019 |   |
| Total assets                                                                                                                                      |       | $                     | 234,007    |   | $ | 241,720 |   |
|                                                                                                                                              |       |                  |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                              |       |                  |       |   |   |
| Accounts payable                                                                                                                                  |       | $                     | 3,078      |   | $ | 4,842 |   |
| Purses due horsemen                                                                                                                               |       | 10,219                |       | 10,186 |   |
| Accrued liabilities                                                                                                                               |       | 8,788                 |       | 7,419 |   |
| Payable to Dover  Motorsports, Inc.                                                                                                          |       | —                |       | 11 |   |
| Income taxes payable                                                                                                                              |       | —                |       | 619 |   |
| Deferred revenue                                                                                                                                  |       | 306                   |       | 212 |   |
| Total current liabilities                                                                                                                         |       | 22,391                |       | 23,289 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Revolving line of  credit                                                                                                                         |       | 95,125                |       | 108,325 |   |
| Liability for pension  benefits                                                                                                                   |       | 4,900                 |       | 6,099 |   |
| Other liabilities                                                                                                                                 |       | 186                   |       | — |   |
| Deferred income taxes                                                                                                                             |       | 4,166                 |       | 3,488 |   |
| Total liabilities                                                                                                                                 |       | 126,768               |       | 141,201 |   |
|                                                                                                                                              |       |                  |       |   |   |
| Commitments and contingencies  (see Notes to the Consolidated Financial Statements)                                                               |       |                  |       |   |   |
|                                                                                                                                              |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                        |       |                  |       |   |   |
| Preferred stock, $.10  par value; 1,000,000 shares authorized; shares issued and outstanding: none                                                |       | —                |       | — |   |
| Common stock, $.10 par  value; 74,000,000 shares authorized; shares issued and outstanding:  15,461,219 and 15,209,544, respectively              |       | 1,546                 |       | 1,521 |   |
| Class A common  stock, $.10 par value; 50,000,000 shares authorized; shares issued and  outstanding: 16,603,173 and 16,603,173, respectively |       | 1,660                 |       | 1,660 |   |
| Additional paid-in  capital                                                                                                                       |       | 1,664                 |       | 933 |   |
| Retained earnings                                                                                                                                 |       | 103,559               |       | 98,697 |   |
| Accumulated other  comprehensive loss                                                                                                             |       | (1,190                | )          | (2,292 | ) |
| Total stockholders’  equity                                                                                                                  |       | 107,239               |       | 100,519 |   |
| Total liabilities and  stockholders’ equity                                                                                                  |       | $                     | 234,007    |   | $ | 241,720 |   |

 

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

 

37

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

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

** **
| ** **                                                                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                           | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating activities:                                                                |       |                              |       |   |   |   |   |
| Net earnings                                                                         |       | $                                 | 11,277     |   | $ | 19,511 |   | $ | 26,085 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                              |       |   |   |   |   |
| Depreciation                                                                         |       | 11,939                            |       | 10,849 |   | 7,843 |   |
| Amortization of credit  facility origination fees                                    |       | 39                                |       | 40 |   | 40 |   |
| Stock-based  compensation                                                            |       | 952                               |       | 998 |   | 895 |   |
| Deferred income taxes                                                                |       | 187                               |       | (316 | ) | (333 | ) |
| Impairment charge                                                                    |       | 2,177                             |       | — |   | — |   |
| Changes in assets and  liabilities:                                                  |       |                              |       |   |   |   |   |
| Accounts receivable                                                                  |       | 25                                |       | 1,899 |   | (235 | ) |
| Due from State of  Delaware                                                          |       | (199                              | )          | (340 | ) | 442 |   |
| Inventories                                                                          |       | (145                              | )          | (167 | ) | (93 | ) |
| Prepaid expenses and  other                                                          |       | 42                                |       | (768 | ) | (453 | ) |
| Receivable from/payable  to Dover Motorsports, Inc.                             |       | (16                               | )          | (7 | ) | 9 |   |
| Income taxes  receivable/payable                                                     |       | (653                              | )          | 193 |   | 469 |   |
| Accounts payable                                                                     |       | (184                              | )          | (610 | ) | (65 | ) |
| Purses due horsemen                                                                  |       | 33                                |       | (294 | ) | 790 |   |
| Accrued liabilities                                                                  |       | 1,369                             |       | (4,521 | ) | 742 |   |
| Deferred revenue                                                                     |       | 94                                |       | 114 |   | 61 |   |
| Other liabilities                                                                    |       | 800                               |       | 227 |   | 223 |   |
| Net cash provided by  operating activities                                           |       | 27,737                            |       | 26,808 |   | 36,420 |   |
|                                                                                 |       |                              |       |   |   |   |   |
| Investing activities:                                                                |       |                              |       |   |   |   |   |
| Capital expenditures                                                                 |       | (4,535                            | )          | (40,166 | ) | (52,134 | ) |
| Proceeds from the sale  of available-for-sale securities                             |       | 102                               |       | — |   | — |   |
| Purchase of  available-for-sale securities                                           |       | (104                              | )          | (100 | ) | — |   |
| Net cash used in  investing activities                                               |       | (4,537                            | )          | (40,266 | ) | (52,134 | ) |
|                                                                                 |       |                              |       |   |   |   |   |
| Financing activities:                                                                |       |                              |       |   |   |   |   |
| Borrowings from  revolving line of credit                                            |       | 157,875                           |       | 186,725 |   | 177,255 |   |
| Repayments of revolving  line of credit                                              |       | (171,075                          | )          | (170,825 | ) | (144,255 | ) |
| Dividends paid                                                                       |       | (6,415                            | )          | (6,360 | ) | (6,036 | ) |
| Repurchase of common  stock                                                          |       | (59                               | )          | (1,040 | ) | (9,990 | ) |
| Proceeds from stock  options exercised                                               |       | —                            |       | 366 |   | 1,114 |   |
| Excess tax benefit on  stock awards                                                  |       | —                            |       | 25 |   | 62 |   |
| Net cash (used in)  provided by financing activities                                 |       | (19,674                           | )          | 8,891 |   | 18,150 |   |
|                                                                                 |       |                              |       |   |   |   |   |
| Net increase (decrease)  in cash                                                     |       | 3,526                             |       | (4,567 | ) | 2,436 |   |
| Cash, beginning of year                                                              |       | 17,889                            |       | 22,456 |   | 20,020 |   |
| Cash, end of year                                                                    |       | $                                 | 21,415     |   | $ | 17,889 |   | $ | 22,456 |   |
|                                                                                 |       |                              |       |   |   |   |   |
| Supplemental  information:                                                           |       |                              |       |   |   |   |   |
| Interest paid                                                                        |       | $                                 | 2,801      |   | $ | 3,204 |   | $ | 2,564 |   |
| Income taxes paid                                                                    |       | $                                 | 8,275      |   | $ | 13,606 |   | $ | 17,870 |   |
| Change in accounts  payable for capital expenditures                                 |       | $                                 | (1,581     | ) | $ | (8,093 | ) | $ | 5,275 |   |

 

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

 

38

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**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE1—Business Operations**

 

References in this document to “we,” “us” and “our” mean Dover DownsGaming & Entertainment, Inc. and/or its wholly owned subsidiaries,as appropriate.

 

We are a diversified gaming and entertainment company whose operationsconsist of:

 

·                 Dover Downs Slots — a 165,000-square foot videolottery casino complex featuring the latest in slot machine offerings,multi-player electronic table games and a new Race & Sports Book;

 

·                 Dover Downs Hotel and Conference Center — a 500 roomAAA Four Diamond hotel with conference, banquet, ballroom and concert hallfacilities; and

 

·                 Dover Downs Raceway — a harness racing track withpari-mutuel wagering on live and simulcast horse races.

 

The casino facility includes the Dover Downs’ Fire &Ice Lounge, Doc Magrogan’s Oyster House, Frankie’s Italian restaurant, as wellas several bars, restaurants and four retail outlets.  All of our operations are located at ourentertainment complex in Dover, the capital of the State of Delaware.

 

During the third quarter of 2009, we opened our Race & SportsBook operation and Frankie’s Italian restaurant.  The Race & Sports Book featuresparlay sports wagering on National Football League (“NFL”) games andpari-mutuel wagering on live and simulcast horse races.  In January 2010, the Delawarelegislature authorized table games at the facilities of the State’s three videolottery agents.  The State is draftingregulations and we expect to have table games such as blackjack, poker, crapsand roulette operational during the third quarter of 2010.

 

Dover Downs Gaming & Entertainment, Inc. is a publicholding company that has two wholly owned subsidiaries: Dover Downs, Inc.and Dover Downs Gaming Management Corp. Dover Downs, Inc. was incorporated in 1967 and began motorsportsand harness racing operations in 1969. In June of 1994, legislation authorizing video lottery operationsin the State of Delaware (the “State”) was adopted. Our casino operations beganon December 29, 1995.  As a resultof several restructurings, Dover Downs, Inc. became a wholly ownedsubsidiary of Dover Motorsports, Inc. (formerly known as Dover DownsEntertainment, Inc.) (“DVD”), and became the operating entity for all ofDVD’s gaming operations.

 

Dover Downs Gaming & Entertainment, Inc. was incorporatedin the State in December of 2001 as a wholly owned subsidiary of DVD.  Effective March 31, 2002, DVD completeda tax-free spin-off of its gaming operations by contributing 100% of the issuedand outstanding common stock of Dover Downs, Inc. to Dover Downs Gaming &Entertainment, Inc., and subsequently distributing 100% of our issued andoutstanding common stock to DVD stockholders. Immediately following the spin-off, Dover Downs Gaming &Entertainment, Inc. became an independent public company.

 

Dover Downs, Inc. is authorized to conduct video lottery, sportswagering and table game operations as one of three “Licensed Agents” under theDelaware State Lottery Code. Pursuant to Delaware’s Horse Racing RedevelopmentAct, enacted in 1994, the Delaware State Lottery Office administers andcontrols these gaming operations.

 

Our license from the Delaware Harness Racing Commission to hold harnessrace meetings on our premises and to offer pari-mutuel wagering on live andsimulcast horse races must be renewed on an annual basis. In order to maintainour gaming license, we are required to maintain our harness horse racinglicense.  We have received an annuallicense from the Harness Racing Commission for the past 41 consecutive yearsand management believes that our relationship with the Commission remains good.

 

39

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Due to the nature of our business activities, we are subject to variousfederal, state and local regulations.  Aspart of our license arrangements, we are subject to various taxes and feeswhich are subject to change by the Delaware legislature.

 

**NOTE2—Summary of Significant Accounting Policies**

 

*Basis of consolidation—*The consolidated financial statementsinclude the accounts of Dover Downs Gaming & Entertainment, Inc. andits wholly owned subsidiaries. Intercompany transactions and balances have beeneliminated.

** **

*Investments—*Investments, which consist of mutual funds, areclassified as available-for-sale and reported at fair-value in other assets inour consolidated balance sheets.  Changesin fair value are reported in other comprehensive income (loss).  See NOTE 9 — Stockholders’ Equity and NOTE 10— Financial Instruments for further discussion.

 

*Derivative Instruments and Hedging Activities*—We are subject to interest rate risk onthe variable component of the interest rate under our revolving creditagreement.  Effective January 15,2009, we entered into a $35,000,000 interest rate swap agreement.  We have designated the interest rate swap asa cash flow hedge.  Changes in the fairvalue of the effective portion of the interest rate swap are recognized inother comprehensive income (loss) until the hedged item is recognized inearnings.  See NOTE 6 — Credit Facilityand NOTE 10 — Financial Instruments for further discussion.

 

*Inventories—*Inventories are stated at the lower of cost or marketwith cost being determined on the first-in, first-out basis.

 

*Property and equipment—*Property and equipment is stated atcost.  Depreciation is provided forfinancial reporting purposes using the straight-line method over the followingestimated useful lives:

 

| Facilities                         |   | 10-40 years |   |
|------------------------------------|--------|-------------|--------|
| Furniture, fixtures and  equipment |   | 3-10 years  |   |

 

Weperform reviews for impairment of long-lived assets whenever events or changesin circumstances indicate that the carrying value of an asset may not berecoverable.  An impairment loss would bemeasured as the amount by which the carrying amount of the asset exceeds itsfair value.  Generally, fair value willbe determined using valuation techniques such as the present value of futurecash flows.

 

*Interest capitalization—*Interest is capitalized in connectionwith the construction of major facilities. The capitalized interest isamortized over the estimated useful life of the asset to which it relates.  During the year ended December 31, 2009,no interest was capitalized.  During theyears ended December 31, 2008 and 2007, we incurred $4,051,000 and$4,280,000 of interest cost, of which $567,000 and $1,539,000 was capitalized,respectively.

 

*Income taxes—*Deferred income taxes are provided on all differencesbetween the tax basis of assets and liabilities and their reported amounts inthe consolidated financial statements based upon enacted statutory tax rates ineffect at the balance sheet date.  Taxyears after 2005 remain open to examination for federal income taxpurposes.  Tax years after 2004 remainopen to examination for state income tax purposes.

 

*Point loyalty program—*We currently have a point loyalty programfor our customers which allows them to earn points based on the volume of theirgaming activity.  All reward pointsearned by customers are expensed in the period they are earned.  The estimated amount of points redeemable forcash is recorded as a reduction of gaming revenue and the estimated amount ofpoints redeemable for services and merchandise is recorded as gaming expense.In determining the amount of the liability, which was $1,936,000 and$1,838,000, respectively, at December 31, 2009 and 2008, we estimate 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 to estimate thoseamounts.

 

40

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*Revenue and expense recognition—*Gaming revenues represent (i) thenet win from slot machine wins and losses, (ii) our portion of the net winfrom sports wagering and (iii) commissions from pari-mutuel wagering.  Other operating revenues consist of hotelrooms revenue, food and beverage sales and other miscellaneous income.  Revenues do not include the retail amount ofhotel rooms, food and beverage and other miscellaneous goods and servicesprovided without charge to customers as promotional items of $18,255,000,$17,758,000 and $15,770,000 for the years ended December 31, 2009, 2008and 2007, respectively.  The estimateddirect cost of providing these items has been charged to the casino throughinterdepartmental allocations and is included in gaming expenses in theconsolidated statements of earnings.

 

For the video lottery operations, which account for approximately 90%of revenues for all periods presented, the difference between the amountwagered by bettors and the amount paid out to bettors is referred to as thewin. The win is included in the amount recorded in our consolidated financialstatements as gaming revenue. The Delaware State Lottery Office sweeps the winfrom the video lottery operations, collects the State’s share of the win andthe amount due to the vendors under contract with the State who provide theslot machines and associated computer systems, collects the amount allocable topurses for harness horse racing and remits the remainder to us as ourcommission 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 slot machines and associated computersystems, and (iii) for harness horse racing purses.  We recognize revenues from sports wageringcommissions when the event occurs.  Werecognize 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 other miscellaneousincome are recognized at the time the service is provided.

 

*Advertising costs—*The cost of general advertising is charged tooperations as incurred.

 

*Net earnings per common share—*Basic and diluted net earnings per commonshare (“EPS”) are calculated in accordance with the provisions of FinancialAccounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)Topic 260, “*Earnings Per Share*.”  In June 2008, the FASB issued guidancestating that nonvested share-based payment awards that include rights todividends or dividend equivalents, whether paid or unpaid, are consideredparticipating securities, and the two-class method of computing EPS is requiredfor all periods presented. We adopted the provisions of ASC Topic 260 relatingto the two-class method of computing EPS effective January 1, 2009.

 

Our restricted stock awards include the right to dividends with respectto nonvested shares. The nonvested shares of our restricted stock grants areconsidered participating securities and must be included in our computation ofEPS. Accordingly, we have computed EPS to include the impact of outstandingnonvested shares of restricted stock in the calculation of basic EPS effectiveas of the first quarter of 2009 and have adjusted prior periods EPS retrospectivelyfor the inclusion of such outstanding nonvested restricted shares. The adoptionof the provisions of ASC Topic 260 relating to the two-class method ofcomputing EPS reduced our basic and diluted EPS by $0.01 for the years ended December 31,2008 and 2007.

 

The following table sets forth the computation of basic and diluted EPSfor the years ended December 31, 2009, 2008 and 2007 (in thousands, exceptper share amounts):

 
| ** **                                                   | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net earnings per common  share — basic:                 |       |     |       |     |       |     |       |
| Net earnings                                                 |       | $        | 11,277     |     | $          | 19,511   |       | $ | 26,085 |   |
| Net earnings allocated  to nonvested restricted stock awards |       | 203      |       | 230      |       | 242      |       |
| Net earnings available  to common stockholders               |       | $        | 11,074     |     | $          | 19,281   |       | $ | 25,843 |   |
|                                                         |       |     |       |     |       |     |       |
| Weighted-average shares  outstanding                         |       | 31,492   |       | 31,436   |       | 32,239   |       |
|                                                         |       |     |       |     |       |     |       |
| Net earnings per common  share — basic                  |       | $        | 0.35       |     | $          | 0.61     |       | $ | 0.80 |   |

 

41

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| ** **                                                   | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net earnings per common  share — diluted:               |       |     |       |     |       |     |       |
| Net earnings                                                 |       | $        | 11,277     |     | $          | 19,511   |       | $ | 26,085 |   |
| Net earnings allocated  to nonvested restricted stock awards |       | 203      |       | 230      |       | 240      |       |
| Net earnings available  to common stockholders               |       | $        | 11,074     |     | $          | 19,281   |       | $ | 25,845 |   |
|                                                         |       |     |       |     |       |     |       |
| Weighted-average shares  outstanding                         |       | 31,492   |       | 31,436   |       | 32,239   |       |
| Dilutive stock options                                       |       | —   |       | 91       |       | 290      |       |
| Weighted-average shares  and dilutive shares outstanding     |       | 31,492   |       | 31,527   |       | 32,529   |       |
|                                                         |       |     |       |     |       |     |       |
| Net earnings per common  share — diluted                |       | $        | 0.35       |     | $          | 0.61     |       | $ | 0.79 |   |

 

For the years ended December 31, 2009 and 2008, options topurchase 634,526 and 666,630 shares of common stock were outstanding but notincluded in the computation of diluted EPS because they would have beenanti-dilutive.  There were noanti-dilutive securities excluded from the calculation of diluted EPS for theyear ended December 31, 2007.

 

*Accounting for stock-based compensation—*We recorded total stock-basedcompensation expense for our restricted stock awards and stock options of$952,000, $998,000 and $895,000 as general and administrative expenses for theyears ended December 31, 2009, 2008 and 2007, respectively.  We recorded income tax benefits of $386,000,$319,000 and $231,000 for the years ended December 31, 2009, 2008 and2007, respectively, related to our restricted stock awards.

 

*Use of estimates—*The preparation of the accompanying consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions about future events. These estimates and the underlying assumptions affect the reportedamounts of assets and liabilities, disclosures about contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. Theseestimates and assumptions are based on our best estimates and judgment.  We evaluate our estimates and assumptions onan ongoing basis using historical experience and other factors, including thecurrent economic environment, which we believe to be reasonable under thecircumstances.  We adjust such estimatesand assumptions when facts and circumstances dictate.  Illiquid credit markets, volatile equitymarkets and declines in consumer spending have combined to increase theuncertainty inherent in such estimates and assumptions.  As future events and their effects cannot bedetermined with precision, actual results could differ from theseestimates.  Changes in those estimatesresulting from continuing changes in the economic environment will be reflectedin the consolidated financial statements in future periods.

 

*Segment information*—We account for our operating segment in accordancewith ASC Topic 280, *Segment Reporting*.  ASC Topic 280 establishes guidelines forpublic companies in determining operating segments based on those used forinternal reporting to management.  Basedon these guidelines, we report information under a single gaming andentertainment segment.

 

*Recent accounting pronouncements—*In June 2009, the FASB issuedguidance now codified as FASB ASC Topic 105, “*GenerallyAccepted Accounting Principles*,” as the single source ofauthoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”).  ASC Topic 105 does not change current U.S.GAAP, but is intended to simplify user access to all authoritative U.S. GAAP byproviding all authoritative literature related to a particular topic in oneplace. All existing accounting standard documents were superseded and all otheraccounting literature not included in the FASB ASC will be considerednon-authoritative.  These provisions ofASC Topic 105 are effective for interim and annual periods ending after September 15,2009 and, accordingly, are effective for the current fiscal reporting period.The adoption of this pronouncement did not have an impact on our financialcondition or results of operations, but did impact our financial reportingprocess by eliminating all references to pre-codification standards. On theeffective date of this Statement, the ASC superseded all then-existing non-SECaccounting and reporting standards, and all other non-grandfathered non-SECaccounting literature not included in the ASC became non-authoritative.

 

42

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In September 2006, the FASB issued Statement No. 157,*Fair Value Measurements*, now codified asFASB ASC Topic 820, *Fair Value Measurement andDisclosure,*which establishes a framework for measuring fair valueand expands disclosures about fair value measurements. ASC Topic 820 appliesunder other accounting pronouncements that require or permit fair valuemeasurements and, accordingly, ASC Topic 820 does not require any new fairvalue measurements. ASC Topic 820 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years, for financial assets and liabilities that are measured atfair value on a recurring basis.  In February 2008,the FASB issued FASB Staff Position 157-2, *Effective Date of FASBStatement No. 157*, which delayed the effective date ofStatement No. 157’s fair value measurement requirements for non-financialassets and liabilities that are not required or permitted to be measured atfair value on a recurring basis to fiscal years beginning after November 15,2008.  The impact of adoption of ASCTopic 820 for financial assets and liabilities is discussed in NOTE 7 —Financial Instruments.  The adoption ofASC Topic 820 for non-financial assets and liabilities did not have asignificant impact on our consolidated financial statements.

 

*Adjustments—*During the fourth quarter of 2009, we determined thatwe had understated our liability associated with the amount of purses we owefor harness racing events in years preceding 2007.  As a result, wehave corrected our consolidated balance sheet as of December 31,2008.  The cumulative effect of thisadjustment, net of tax effects, is a reduction of retained earnings of $566,000as of the beginning of 2007.  Noadjustment has been made to historical results of operations or net cash flowsfrom operating, investing or financing activities for the years ended December 31,2008 or 2007.  See NOTE 9 — Stockholders’Equity.

 

Following is a summary of the effects of these changes on ourconsolidated balance sheet as of December 31, 2008 (in thousands):

 
| ** **                                       | ** ** | **Previously********Reported** | ** ** | **Adjustments** | ** ** | **Adjusted** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|-----------------|------------|--------------|------------|
| Deferred income taxes                            |       | $                              | 1,317      |            | $          | 388          |       | $ | 1,705 |   |
| Total current assets                             |       | 36,791                         |       | 388             |       | 37,179       |       |
| Total assets                                     |       | 241,332                        |       | 388             |       | 241,720      |       |
| Accounts payable                                 |       | 4,679                          |       | 163             |       | 4,842        |       |
| Purses due horsemen                              |       | 9,395                          |       | 791             |       | 10,186       |       |
| Total current  liabilities                       |       | 22,335                         |       | 954             |       | 23,289       |       |
| Total liabilities                                |       | 140,247                        |       | 954             |       | 141,201      |       |
| Retained earnings                                |       | 99,263                         |       | (566            | )          | 98,697       |       |
| Total stockholders’  equity                 |       | 101,085                        |       | (566            | )          | 100,519      |       |
| Total liabilities and  stockholders’ equity |       | $                              | 241,332    |            | $          | 388          |       | $ | 241,720 |   |

 

**NOTE 3 — Impairment Charge**

 

We had previously completed architectural andengineering work related to a Phase 7 casino expansion that would haveincluded, among other things, a new sports book facility and a parkinggarage.  Given the decision by the USCourt of Appeals for the Third Circuit to limit the extent of sports wageringin Delaware and the higher gaming tax rates that were legislated in the thirdquarter of 2009, we decided not to proceed with these projects.  During the third quarter of 2009, we wroteoff $2,177,000 of capitalized costs related to these expansion projects.

 

43

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**NOTE4—Property and Equipment**

 

Propertyand equipment consists of the following as of December 31:

 
| ** **                         | ** ** | **2009**    | ** **  | **2008**    | ** ** |
|------------------------------------|------------|-------------|-------------|-------------|------------|
| Land                               |       | $           | 785,000     |        | $          | 785,000 |   |
| Casino facility                    |       | 75,131,000  |        | 75,643,000  |       |
| Hotel facility                     |       | 112,962,000 |        | 112,875,000 |       |
| Harness racing  facilities         |       | 10,966,000  |        | 10,005,000  |       |
| General facilities                 |       | 15,745,000  |        | 15,552,000  |       |
| Furniture, fixtures and  equipment |       | 52,798,000  |        | 50,871,000  |       |
| Construction in  progress          |       | 100,000     |        | 2,323,000   |       |
|                               |       | 268,487,000 |        | 268,054,000 |       |
| Less accumulated  depreciation     |       | (76,127,000 | )           | (64,532,000 | )          |
|                               |       | $           | 192,360,000 |        | $          | 203,522,000 |   |

 

**NOTE5—Accrued Liabilities**

 

Accrued liabilities consist of the following as of December 31:

 
| ** **                                | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|-------------------------------------------|------------|-----------|------------|-----------|------------|
| Point loyalty program                     |       | $         | 1,936,000  |      | $          | 1,838,000 |   |
| Payroll and related  items                |       | 1,844,000 |       | 2,004,000 |       |
| Win due to Delaware  State Lottery Office |       | 2,861,000 |       | 2,367,000 |       |
| Other                                     |       | 2,147,000 |       | 1,210,000 |       |
|                                      |       | $         | 8,788,000  |      | $          | 7,419,000 |   |

#### ** **

#### **NOTE 6—Credit Facility**

 

At December 31, 2009, we had a $125,000,000 credit facility with abank group.  The maximum borrowing limitunder the facility reduced to $100,000,000 on January 1, 2010.  Interest was based, at our option, upon LIBORplus a margin that varied between 75 and 125 basis points (125 basis points at December 31,2009) depending on the ratio of funded debt to earnings before interest, taxes,depreciation and amortization (the “leverage ratio”) or the base rate (thegreater of the prime rate or the federal funds rate plus 0.5%) less a marginthat varied between 50 and 100 basis points (50 basis points at December 31,2009) depending on the leverage ratio. The credit facility has minimum net worth, interest coverage and maximumleverage requirements.  Material adversechanges in our results of operations could impact our ability to satisfy theserequirements.  In addition, the creditagreement also includes a material adverse change clause.  The facility is for seasonal funding needs,capital improvements and other general corporate purposes.  At December 31, 2009, we were incompliance with all terms of the facility and there was $95,125,000 outstandingat a weighted average interest rate of 1.57%. At December 31, 2009, $29,875,000 was available pursuant to thefacility which reduced to $4,875,000 on January 1, 2010; however, in orderto maintain compliance with the required quarterly debt covenant calculationsas of December 31, 2009 only $2,700,000 could have been borrowed as of thatdate.

 

We amended our credit facility effective February 19, 2010 toextend the agreement to January 1, 2013, increase the maximum borrowinglimit to $105,000,000, revise certain financial covenants and change themargins used to determine interest rates. The facility reduces to $95,000,000 on April 1, 2011 and to$82,500,000 on April 1, 2012.

 

Effective January 15, 2009, we entered into aninterest rate swap agreement that effectively converts $35,000,000 of ourvariable-rate debt to a fixed-rate basis, thereby hedging against the impact ofpotential interest rate changes on future interest expense.  The agreement terminates on April 17,2012.  Pursuant to this agreement, we paya fixed interest rate of 1.74%, plus a margin that varies between 75 and 125basis points depending on our leverage ratio (125 basis points at December 31,2009).  In return, the issuing lenderrefunds to us the variable-rate interest paid to the bank group under ourrevolving credit agreement on the same notional principal amount, excluding themargin.  Our latest amendment to ourcredit facility on February 19, 2010 increased the margins used todetermine the interest rate on our interest rate swap.

 

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**NOTE 7—Income Taxes**

 

The current and deferred income tax provisions are as follows:

 
| ** **         | ** ** | **Years ended December 31,** | ** ** |
|--------------------|------------|-----------------------------------|------------|
| ** **         | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Current:           |       |                              |       |   |   |   |   |
| Federal            |       | $                                 | 6,010,000  |   | $ | 10,845,000 |   | $ | 14,556,000 |   |
| State              |       | 1,612,000                         |       | 2,981,000 |   | 3,938,000 |   |
|               |       | 7,622,000                         |       | 13,826,000 |   | 18,494,000 |   |
| Deferred:          |       |                              |       |   |   |   |   |
| Federal            |       | 126,000                           |       | (227,000 | ) | (364,000 | ) |
| State              |       | 61,000                            |       | (89,000 | ) | (60,000 | ) |
|               |       | 187,000                           |       | (316,000 | ) | (424,000 | ) |
| Total income taxes |       | $                                 | 7,809,000  |   | $ | 13,510,000 |   | $ | 18,070,000 |   |

 

A reconciliation of the effective income tax rate with the applicablestatutory federal income tax rate is as follows:

 
| ** **                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Federal tax at  statutory rate       |       | 35.0                              | %          | 35.0 | % | 35.0 | % |
| State taxes, net of  federal benefit |       | 5.7                               | %          | 5.7 | % | 5.7 | % |
| Other                                |       | 0.2                               | %          | 0.2 | % | 0.2 | % |
| Effective income tax  rate           |       | 40.9                              | %          | 40.9 | % | 40.9 | % |

 

The components of deferred income tax assets and liabilities are asfollows as of December 31:

 
| ** **                                             | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred income tax  assets:                           |       |       |       |       |       |
| Point loyalty program                                  |       | $          | 787,000    |       | $          | 747,000 |   |
| Accrued expenses                                       |       | 1,931,000  |       | 2,626,000  |       |
| Other                                                  |       | 686,000    |       | 909,000    |       |
| Total deferred income  tax assets                      |       | 3,404,000  |       | 4,282,000  |       |
|                                                   |       |       |       |       |       |
| Deferred income tax  liabilities:                      |       |       |       |       |       |
| Depreciation — property  and equipment            |       | (6,361,000 | )          | (6,065,000 | )          |
| Total deferred income tax  liabilities                 |       | (6,361,000 | )          | (6,065,000 | )          |
| Net deferred income tax  liabilities                   |       | $          | (2,957,000 | )          | $          | (1,783,000 | ) |
|                                                   |       |       |       |       |       |
| Amounts recognized in  the consolidated balance sheet: |       |       |       |       |       |
| Current deferred income  tax assets                    |       | $          | 1,209,000  |       | $          | 1,705,000 |   |
| Noncurrent deferred  income tax liabilities            |       | (4,166,000 | )          | (3,488,000 | )          |
|                                                   |       | $          | (2,957,000 | )          | $          | (1,783,000 | ) |

 

**NOTE8—Pension Plans**

 

We maintain a non-contributory, tax qualified defined benefit pensionplan. All of our full time employees are eligible to participate in this qualifiedpension plan.  Benefits provided by ourqualified pension plan are based on years of service and employees’remuneration over their term of employment. We also maintain a non-qualified, non-contributory defined benefitpension plan for certain employees.  Thisexcess plan provides benefits that would otherwise be provided under thequalified pension plan but for maximum benefit and compensation limitsapplicable under federal tax law.  Thecost associated with the excess plan is determined using the same actuarialmethods and assumptions as those used for our qualified pension plan.

 

45

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The following table sets forth the plans’ fundedstatus and amounts recognized in our consolidated balance sheets as of December 31:

 
| ** **                                      | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
| Change in benefit  obligation:                  |       |       |       |       |       |
| Benefit obligation at  beginning of year        |       | $          | 11,506,000 |       | $          | 9,052,000 |   |
| Service cost                                    |       | 1,408,000  |       | 1,277,000  |       |
| Interest cost                                   |       | 683,000    |       | 583,000    |       |
| Actuarial (gain) loss                           |       | (1,116,000 | )          | 732,000    |       |
| Benefits paid                                   |       | (173,000   | )          | (138,000   | )          |
| Benefit obligation at  end of year              |       | 12,308,000 |       | 11,506,000 |       |
|                                            |       |       |       |       |       |
| Change in plan assets:                          |       |       |       |       |       |
| Fair value of plan  assets at beginning of year |       | 5,407,000  |       | 6,542,000  |       |
| Actual gain (loss) on  plan assets              |       | 1,174,000  |       | (2,047,000 | )          |
| Employer contribution                           |       | 1,000,000  |       | 1,050,000  |       |
| Benefits paid                                   |       | (173,000   | )          | (138,000   | )          |
| Fair value of plan  assets at end of year       |       | 7,408,000  |       | 5,407,000  |       |
|                                            |       |       |       |       |       |
| Unfunded status                                 |       | $          | (4,900,000 | )          | $          | (6,099,000 | ) |

 

Amounts recognized in accumulated other comprehensiveloss that have not yet been recognized as components of net periodic benefitcost at December 31 are as follows:

 
| ** **         | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Net actuarial loss |       | $        | 1,806,000  |     | $          | 3,797,000 |   |
| Prior service cost |       | 25,000   |       | 33,000   |       |
|               |       | $        | 1,831,000  |     | $          | 3,830,000 |   |

 

The accumulated benefit obligation for all defined benefit pensionplans was $10,082,000 and $9,146,000, respectively, as of December 31,2009 and 2008.

 

The components of net periodic pension cost for theyears ended December 31, 2009, 2008 and 2007 are as follows:

 
| ** **                      | ** ** | **2009** | ** ** | **2008** | ** ** | **2007**  | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Service cost                    |       | $        | 1,408,000  |     | $          | 1,277,000 |       | $ | 1,218,000 |   |
| Interest cost                   |       | 683,000  |       | 583,000  |       | 497,000   |       |
| Expected return on plan  assets |       | (501,000 | )          | (601,000 | )          | (502,000  | )          |
| Recognized net  actuarial loss  |       | 202,000  |       | 9,000    |       | 11,000    |       |
| Recognized prior  service cost  |       | 8,000    |       | 9,000    |       | 9,000     |       |
|                            |       | $        | 1,800,000  |     | $          | 1,277,000 |       | $ | 1,233,000 |   |

 

Forthe year ending December 31, 2010, we expect to recognize the followingamounts as components of net periodic benefit cost which are included inaccumulated comprehensive loss as of December 31, 2009:

 
| Actuarial loss     |   | $     | 48,000 |   |
|--------------------|--------|-------|--------|--------|
| Prior service cost |   | 9,000 |   |
|               |   | $     | 57,000 |   |

 

Theprincipal assumptions used to determine the net periodic pension cost for theyears ended December 31, 2009, 2008 and 2007, and the actuarial value ofthe benefit obligation at December 31, 2009 and 2008 (the measurementdates) for our pension plans are as follows:

 
| ** **                                        | ** ** | **Net Periodic Pension Cost** | ** ** | **Benefit Obligation** | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **2009**                      | ** ** | **2008**               | ** ** | **2007** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Weighted-average  discount rate                   |       | 6.10                          | %          | 6.50                   | %          | 6.15 | % | 6.50 | % | 6.10 | % |
| Weighted-average rate  of compensation increase   |       | 5.00                          | %          | 5.00                   | %          | 5.00 | % | 5.00 | % | 5.00 | % |
| Expected long-term rate  of return on plan assets |       | 8.50                          | %          | 8.50                   | %          | 8.50 | % | n/a |   | n/a |   |

 

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For2009, we assumed a long-term rate of return on plan assets of 8.5%.  In developing the 8.5% expected long-termrate of return assumption, we reviewed asset class return expectations andlong-term inflation assumptions and considered our historical compounded return,which was consistent with our long-term rate of return assumption.

 

Our investment goals are to achieve a combination ofmoderate growth of capital and income with moderate risk.  Acceptableinvestment vehicles will include mutual funds, exchange-traded funds (ETFs),limited partnerships, and individual securities. Our target allocations forplan assets are 60% equities and  40% fixed income. Of the equity portion,50% will be invested in passively managed securities using ETFs and the other50% will be invested in actively managed investment vehicles. We addressdiversification by investing in large, mid and small capitalization U.S.stocks, international (non-U.S.) equity, REITS, and real assets (consisting ofinflation-linked bonds, real estate and natural resources).  A sufficientpercentage of investments will be readily marketable in order to be sold tofund benefit payment obligations as they become payable.

 

The fair values of our pension assets as of December 31, 2009 byasset category are as follows (refer to NOTE 10 — Financial Instruments for adescription of Level 1, Level 2 and Level 3 categories):

 
| **Asset Category**   | ** ** | **Total** | ** ** | **Quoted Prices in  Active Markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|----------------------|------------|-----------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|
| Mutual funds/ETFs:   |       |      |       |                                                                  |       |                                           |       |                                             |       |
| Equity-large cap     |       | $         | 1,224,000  |                                                                  | $          | 1,224,000                                      |       | $                                                | —     |   | $ | — |   |
| Equity-small cap     |       | 395,000   |       | 395,000                                                               |       | —                                         |       | —                                           |       |
| Equity-international |       | 1,724,000 |       | 1,724,000                                                             |       | —                                         |       | —                                           |       |
| Fixed income         |       | 3,266,000 |       | 3,266,000                                                             |       | —                                         |       | —                                           |       |
| Real estate          |       | 416,000   |       | 416,000                                                               |       | —                                         |       | —                                           |       |
| Money market         |       | 307,000   |       | 307,000                                                               |       | —                                         |       | —                                           |       |
| Other                |       | 76,000    |       | 76,000                                                                |       | —                                         |       | —                                           |       |
| Total                |       | $         | 7,408,000  |                                                                  | $          | 7,408,000                                      |       | $                                                | —     |   | $ | — |   |

 

The fair values of our pension assets as of December 31, 2008 byasset category are as follows (refer to NOTE 10 — Financial Instruments for adescription of Level 1, Level 2 and Level 3 categories):

 
| **Asset Category**   | ** ** | **Total** | ** ** | **Quoted Prices in  Active Markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|----------------------|------------|-----------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|
| Mutual funds:        |       |      |       |                                                                  |       |                                           |       |                                             |       |
| Equity-large cap     |       | $         | 1,674,000  |                                                                  | $          | 1,674,000                                      |       | $                                                | —     |   | $ | — |   |
| Equity-mid cap       |       | 273,000   |       | 273,000                                                               |       | —                                         |       | —                                           |       |
| Equity-small cap     |       | 549,000   |       | 549,000                                                               |       | —                                         |       | —                                           |       |
| Equity-international |       | 749,000   |       | 749,000                                                               |       | —                                         |       | —                                           |       |
| Fixed income         |       | 1,544,000 |       | 1,544,000                                                             |       | —                                         |       | —                                           |       |
| Real estate          |       | 566,000   |       | 566,000                                                               |       | —                                         |       | —                                           |       |
| Money market         |       | 52,000    |       | 52,000                                                                |       | —                                         |       | —                                           |       |
| Total                |       | $         | 5,407,000  |                                                                  | $          | 5,407,000                                      |       | $                                                | —     |   | $ | — |   |

 

Weexpect to contribute approximately $1,000,000 to our pension plans in 2010.

 

47

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Benefit payments, which reflect expected future service, asappropriate, are expected to be paid as follows:

 
| 2010      |   | $ | 205,000   |   |
|-----------|--------|---|-----------|--------|
| 2011      |   | $ | 294,000   |   |
| 2012      |   | $ | 394,000   |   |
| 2013      |   | $ | 468,000   |   |
| 2014      |   | $ | 523,000   |   |
| 2015-2019 |   | $ | 4,015,000 |   |

 

Wemaintain a defined contribution 401(k) plan which permits participation bysubstantially all employees. Our matching contributions to the 401(k) planwere $98,000, $86,000 and $80,000 for the years ended December 31, 2009,2008 and 2007, respectively.

 

**NOTE9—Stockholders’ Equity**

 

Changes in the components of stockholders’ equity are as follows:

 
| ** **                                                                                                      | ** ** | **Common  Stock** | ** ** | **Class A  Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|
| **Balance  at December 31, 2006, as previously reported**                                                  |       | $                 | 1,542      |                            | $          | 1,700                            |       | $                      | 769        |                                        | $          | 73,736 |   | $ | (488 | ) |
| Prior period adjustment  (see NOTE 2)                                                                           |       | —            |       | —                          |       | —                           |       | (566                   | )          | —                                      |       |
| **Balance  at December 31, 2006, as adjusted**                                                             |       | 1,542             |       | 1,700                           |       | 769                              |       | 73,170                 |       | (488                                        | )          |
| Net earnings                                                                                                    |       | —            |       | —                          |       | —                           |       | 26,085                 |       | —                                      |       |
| Dividends paid, $.185  per share                                                                                |       | —            |       | —                          |       | —                           |       | (6,036                 | )          | —                                      |       |
| Repurchase and  retirement of common stock                                                                      |       | (92               | )          | —                          |       | (2,753                           | )          | (7,145                 | )          | —                                      |       |
| Proceeds from stock  options exercised                                                                          |       | 16                |       | —                          |       | 1,098                            |       | —                 |       | —                                      |       |
| Issuance of nonvested  stock awards, net of forfeitures                                                         |       | 8                 |       | —                          |       | (8                               | )          | —                 |       | —                                      |       |
| Stock-based  compensation                                                                                       |       | —            |       | —                          |       | 895                              |       | —                 |       | —                                      |       |
| Excess tax benefit on  stock awards                                                                             |       | —            |       | —                          |       | 62                               |       | —                 |       | —                                      |       |
| Amortization of prior  service costs and unrealized losses on pension plans, net of income tax  expense of $143 |       | —            |       | —                          |       | —                           |       | —                 |       | 210                                         |       |
| **Balance  at December 31, 2007**                                                                          |       | 1,474             |       | 1,700                           |       | 63                               |       | 86,074                 |       | (278                                        | )          |
| Net earnings                                                                                                    |       | —            |       | —                          |       | —                           |       | 19,511                 |       | —                                      |       |
| Dividends paid, $.20  per share                                                                                 |       | —            |       | —                          |       | —                           |       | (6,360                 | )          | —                                      |       |
| Proceeds from stock  options exercised                                                                          |       | 6                 |       | —                          |       | 360                              |       | —                 |       | —                                      |       |
| Issuance of nonvested  stock awards, net of forfeitures                                                         |       | 12                |       | —                          |       | (12                              | )          | —                 |       | —                                      |       |
| Stock-based  compensation                                                                                       |       | —            |       | —                          |       | 998                              |       | —                 |       | —                                      |       |
| Excess tax benefit on  stock awards                                                                             |       | —            |       | —                          |       | 25                               |       | —                 |       | —                                      |       |
| Change in pension net  actuarial loss and prior service cost, net of income tax benefit of $1,367               |       | —            |       | —                          |       | —                           |       | —                 |       | (1,995                                      | )          |
| Unrealized loss on  available-for-sale securities, net of income tax benefit of $12                             |       | —            |       | —                          |       | —                           |       | —                 |       | (19                                         | )          |
| Repurchase and  retirement of common stock                                                                      |       | (11               | )          | —                          |       | (501                             | )          | (528                   | )          | —                                      |       |
| Conversion of  Class A common stock to common stock                                                        |       | 40                |       | (40                             | )          | —                           |       | —                 |       | —                                      |       |
| **Balance  at December 31, 2008**                                                                          |       | 1,521             |       | 1,660                           |       | 933                              |       | 98,697                 |       | (2,292                                      | )          |
|                                                                                                                 |            |                   |            |                                 |            |                                  |            |                        |            |                                             |            |  |  |  |  |  |

 

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| ** **                                                                                                         | ** ** | **Common  Stock** | ** ** | **Class A  Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|
| Net earnings                                                                                                       |       | —            |       | —                          |       | —                           |       | 11,277                 |       | —                                      |       |
| Dividends paid, $.20  per share                                                                                    |       | —            |       | —                          |       | —                           |       | (6,415                 | )          | —                                      |       |
| Issuance of nonvested stock  awards, net of forfeitures                                                            |       | 27                |       | —                          |       | (27                              | )          | —                 |       | —                                      |       |
| Stock-based  compensation                                                                                          |       | —            |       | —                          |       | 952                              |       | —                 |       | —                                      |       |
| Tax shortfall from  stock awards                                                                                   |       | —            |       | —                          |       | (137                             | )          | —                 |       | —                                      |       |
| Unrealized loss on  interest rate swap, net of income tax benefit of $76                                           |       | —            |       | —                          |       | —                           |       | —                 |       | (110                                        | )          |
| Change in pension net  actuarial loss and prior service cost, net of income tax expense of $813                    |       | —            |       | —                          |       | —                           |       | —                 |       | 1,186                                       |       |
| Unrealized gain on  available-for-sale securities, net of income tax expense of $7                                 |       | —            |       | —                          |       | —                           |       | —                 |       | 10                                          |       |
| Reclassification  adjustment for loss realized on available-for-sale securities, net of income  tax benefit of $11 |       | —            |       | —                          |       | —                           |       | —                 |       | 16                                          |       |
| Repurchase and  retirement of common stock                                                                         |       | (2                | )          | —                          |       | (57                              | )          | —                 |       | —                                      |       |
| **Balance  at December 31, 2009**                                                                             |       | $                 | 1,546      |                            | $          | 1,660                            |       | $                      | 1,664      |                                        | $          | 103,559 |   | $ | (1,190 | ) |
|                                                                                                                    |            |                   |            |                                 |            |                                  |            |                        |            |                                             |            |  |  |  |  |  |

 

As of December 31, 2009 and 2008, accumulated other comprehensiveloss consists of the following:

 
| ** **                                                                                                                                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net actuarial loss and  prior service cost not yet recognized in net periodic benefit cost, net of  income tax benefit of $744,000 and $1,557,000, respectively |       | $        | (1,087,000 | )        | $          | (2,273,000 | ) |
| Unrealized loss on  interest rate swap, net of income tax benefit of $76,000                                                                                    |       | (110,000 | )          | —   |       |
| Accumulated unrealized  gain (loss) on available-for-sale securities, net of income tax (expense)  benefit of ($6,000) and $12,000, respectively                |       | 7,000    |       | (19,000  | )          |
| Accumulated other  comprehensive loss                                                                                                                           |       | $        | (1,190,000 | )        | $          | (2,292,000 | ) |

 

We have 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 1,000,000shares of preferred stock, par value $.10 per share.

 

The holders of common stock are entitled to one vote per share and theholders of our Class A common stock are entitled to 10 votes pershare.  There is no cumulativevoting.  Shares of Class A commonstock are convertible at any time into our shares of common stock on aone-for-one basis at the option of the stockholder. Subject to rights of anypreferred stockholder, holders of our common stock and Class A commonstock are entitled to receive on a pro rata basis such dividends, if any, asmay be declared from time to time by the Board of Directors out of fundslegally available for that purpose. At the discretion of our Board ofDirectors, we may pay to the holders of common stock a cash dividend greaterthan the dividend, if any, paid to the holders of Class A common stock.

 

Under Delaware law, a change of ownership of a Licensed Agent willautomatically terminate its license 90 days after the change of ownershipoccurs, unless the Director of the Delaware State Lottery Office determinesafter application to issue a new license to the new owners.  Change of ownership may occur if any newindividual or entity acquires, directly or indirectly, 10% or more of theLicensed Agent or if more than 20% of the legal or beneficial interest in theLicensed 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, we have a restrictive legend onour shares of common stock which require that (a) any holders of commonstock found to be disqualified or unsuitable or not possessing the qualificationsrequired by any appropriate gaming authority could be required to dispose ofsuch stock and (b)

 

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any holder ofcommon stock intending to acquire 10% or more of our outstanding common stockmust first obtain prior written approval from the Delaware State LotteryOffice.

 

We adopted a stockholder rights plan in 2002. The rights are attachedto and trade in tandem with our common stock and Class A common stock.Each right entitles the registered holder to purchase from us one share ofcommon stock at a purchase price of $200 per share. The rights, unless earlierredeemed by our Board of Directors, will detach and trade separately from ourcommon stock upon the occurrence of certain events such as the unsolicitedacquisition by a third party of beneficial ownership of 10% or more of ouroutstanding combined common stock and Class A common stock or theannouncement by a third party of the intent to commence a tender or exchangeoffer for 10% or more of our outstanding combined common stock and Class Acommon stock. After the rights have detached, the holders of such rights wouldgenerally have the ability to purchase such number of either shares of ourcommon stock or stock of an acquirer of ours having a market value equal totwice the exercise price of the right being exercised, thereby causingsubstantial dilution to a person or group of persons attempting to acquirecontrol of us. The rights may serve as a significant deterrent to unsolicitedattempts to acquire control of us, including transactions involving a premiumto the market price of our stock.  Therights expire on January 1, 2012, unless earlier redeemed.

 

On January 27, 2010, our Board of Directorsdeclared a reduced quarterly cash dividend on both classes of common stock of$.03 per share.  The dividend is payableon March 10, 2010 to stockholders of record at the close of business on February 10,2010.

 

On October 23, 2002, our Board of Directors authorized therepurchase of up to 3,000,000 shares of our outstanding common stock.  The purchases may be made in the open marketor in privately negotiated transactions as conditions warrant.  The repurchase authorization has noexpiration date, does not obligate us to acquire any specific number of sharesand may be suspended at any time.  Nopurchases of our equity securities were made pursuant to this authorizationduring 2009.  During the year ended December 31,2008, we purchased and retired 98,500 shares of our outstanding common stockpursuant to this plan at an average purchase price of $9.09 per share, notincluding nominal brokerage commissions. During the year ended December 31, 2007, we purchased and retired916,900 shares of our outstanding common stock pursuant to this plan at an averagepurchase price of $10.72 per share, not including nominal brokeragecommissions.  At December 31, 2009,we had remaining repurchase authority of 1,653,333 shares.

 

During the years ended December 31, 2009, 2008 and 2007, wepurchased and retired 15,325, 13,881 and 8,288 shares of our outstanding commonstock for $59,000, $139,000 and $112,000, respectively.  These purchases were made from employees inconnection with the vesting of restricted stock awards under our stockincentive plan and were not pursuant to the aforementioned repurchaseauthorization. Since the vesting of a restricted stock award is a taxable eventto our employees for which income tax withholding is required, the plan allowsemployees to surrender to us some of the shares that would otherwise havevested in satisfaction of their tax liability. The surrender of these shares is treated by us as a purchase of theshares.

 

                           We have a stock incentive planwhich provides for the grant of up to 2,250,000 shares of common stock to ourofficers and key employees through stock options and/or awards valued in wholeor in part by reference to our common stock, such as nonvested stockawards.  Under the plan, option grantsmust have an exercise price of not less than 100% of the fair market value ofthe underlying shares of common stock at the date of the grant.  The stock options have eight-year terms andgenerally vest equally over a period of six years from the date of grant.  Once the options are exercised, our planrequires that the common stock be held for a minimum of one year.  The nonvested stock vests an aggregate oftwenty percent each year beginning on the second anniversary date of thegrant.  As of December 31, 2009,there were 616,380 shares available for granting options or stock awards.

 

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Stock option activity for the year ended December 31, 2009 was asfollows:

 
| ** **                             | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (in yrs)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  December 31, 2008 |       | 666,630               |       | $                                          | 6.97       |                                                         |       |                            |       |   |
| Expired                                |       | (32,104               | )          | $                                          | 6.11       |                                                         |       |                            |       |   |
| Outstanding at  December 31, 2009 |       | 634,526               |       | $                                          | 7.02       |                                                         | .69        |                            | $          | — |   |
| Exercisable at  December 31, 2009 |       | 634,317               |       | $                                          | 7.02       |                                                         | .69        |                            | $          | — |   |

 

No stock options were granted during the three year period ending December 31,2009.  No stock options were exercisedduring the year ended December 31, 2009. The total intrinsic value of stock options exercised during the yearsended December 31, 2008 and 2007 was $165,000 and $1,089,000,respectively, on the exercise date.

 

Nonvested stock option activity for the year ended December 31,2009 was as follows:

 
| ** **                           | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|--------------------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|
| Nonvested at  December 31, 2008 |       | 76,253                |       | $                                             | 2.67       |   |
| Vested                               |       | (76,044               | )          | $                                             | 2.67       |   |
| Nonvested at  December 31, 2009 |       | 209                   |       | $                                             | 2.60       |   |

 

The total fair value of stock options vested during the years ended December 31,2009, 2008 and 2007 was $203,000, $385,000 and $407,000, respectively.  We recorded, within general and administrativeexpenses, compensation expense of $4,000, $214,000 and $326,000 related tostock options for the years ended December 31, 2009, 2008 and 2007,respectively.  As of December 31,2009, there was no unrecognized compensation cost related to nonvested stockoptions granted to employees under our stock incentive plan.

 

Nonvestedrestricted stock activity for the year ended December 31, 2009 was asfollows:

 
| ** **                           | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------------------------------------------------|------------|
| Nonvested at  December 31, 2008 |       | 370,000               |       | $                                                  | 10.54      |   |
| Granted                              |       | 267,000               |       | $                                                  | 3.68       |   |
| Vested                               |       | (68,300               | )          | $                                                  | 9.97       |   |
| Nonvested at  December 31, 2009 |       | 568,700               |       | $                                                  | 7.38       |   |

 

The aggregate market value of the nonvestedrestricted stock at the date of issuance is being amortized on a straight-linebasis over the six-year service period.  The total fair value of shares vestedduring the years ended December 31, 2009, 2008 and 2007 was $681,000,$451,000 and $247,000, respectively.  Thegrant-date fair value of restricted stock awards granted during the years endedDecember 31, 2009, 2008 and 2007 was $3.68, $10.51 and $13.54,respectively.  We recorded, withingeneral and administrative expenses, compensation expense of $948,000, $784,000and $569,000 related to restricted stock awards for the years ended December 31,2009, 2008 and 2007, respectively.  As ofDecember 31, 2009, there was $2,745,000 of total deferred compensationcost related to nonvested restricted stock awards granted to employees underour stock incentive plan.  That cost isexpected to be recognized over a weighted-average period of 3.7****years.

 

**NOTE10—Financial Instruments**

 

Our financial instruments are classified and disclosedin one of the following three categories:

 

Level 1: Unadjustedquoted prices in active markets that are accessible at the measurement date foridentical, unrestricted assets or liabilities;

 

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Level 2: Quoted prices inmarkets that are not active, or inputs which are observable, either directly orindirectly, for substantially the full term of the asset or liability;

 

Level 3: Prices orvaluation techniques that require inputs that are both significant to the fairvalue measurement and unobservable (i.e., supported by little or no marketactivity).

 

The following table summarizes the valuation of ourfinancial instrument pricing levels as of December 31, 2009:

 
| ** **                     | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|--------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|-------------|------------|
| Available-for-sale  securities |       | $         | 125,000    |        | $          | 125,000     |       | $           | —     |   | $ | — |   |
| Interest rate swap             |       | (186,000  | )          | —      |       | (186,000    | )          | —      |       |
|                                |            |           |            |             |            |             |            |             |            |  |  |  |  |

 

Our investments in available-for-sale securitiesconsist of mutual funds.  Theseinvestments are included in other non-current assets on our consolidatedbalance sheets.

 

At December 31, 2009 and 2008, there was $95,125,000 and$108,325,000, respectively, outstanding under our revolving creditagreement.  The borrowings under ourrevolving credit agreement bear interest at the variable rate described in NOTE6 — Credit Facility and therefore we believe approximate fair value.  We are subject to interest rate risk on thevariable component of the interest rate. Our risk management objective is tolock in the interest cash outflows on a portion of our debt.  As a result, as described in NOTE 6 — CreditFacility, we entered into an interest rate swap agreement effectively convertinga portion of the outstanding borrowings under the revolving credit agreement toa fixed-rate, thereby hedging against the impact of potential interest ratechanges on future interest expense.  At December 31,2009, the interest rate swap had a negative fair value of $186,000 which isrecorded in other liabilities.  The fairvalue of the interest rate swap was based on quotes from the issuer of the swapand represents the estimated amounts that we would expect to pay to terminatethe swap.  We recognized $110,000, net ofincome taxes, in unrealized losses on our interest rate swap during 2009.

 

The carrying amounts of other financial instruments reported in thebalance sheet for current assets and current liabilities approximates theirfair values because of the short maturity of these instruments.

 

**NOTE11—Related Party Transactions**

 

During the yearsended December 31, 2009, 2008 and 2007, we allocated costs of  $1,983,000, $2,104,000 and $1,873,000,respectively to DVD, a company related through common ownership, for certainadministrative and operating services, including leased space.  DVD allocated certain administrative andoperating service costs of $225,000, $295,000 and $229,000, respectively, to usfor the years ended December 31, 2009, 2008 and 2007.  The allocations were based on an analysis ofeach company’s share of the costs. Additionally, in connection with DVD’s 2009, 2008 and 2007 NASCAR eventweekends at Dover International Speedway, we provided certain services,primarily catering, for which DVD was invoiced $999,000, $1,237,000 and$1,207,000, respectively.  Additionally,DVD invoiced us $375,000, $434,000 and $429,000, respectively, for our rentalof a skybox suite, tickets and other services during DVD’s 2009, 2008 and 2007NASCAR event weekends at Dover International Speedway.  As of December 31, 2009 and 2008, ourconsolidated balance sheets included a $5,000 receivable from and $11,000payable to DVD, respectively, for the aforementioned items.  We settled these items in January of 2010and 2009, respectively.  The net costsincurred by each company for these services are not necessarily indicative ofthe costs that would have been incurred if the companies had been unrelatedentities and/or had otherwise independently managed these functions; however,management believes that these costs are reasonable.

 

Prior to ourspin-off from DVD in 2002, both companies shared certain real property inDover, Delaware.  At the time of thespin-off, some of this real property was transferred to us to ensure that thereal property holdings of each company was aligned with its past uses andfuture business needs.  During ourharness racing season, we have historically used the 5/8-mile harness racingtrack that is located on DVD’s property and is on the inside of its one-milemotorsports superspeedway.  In order tocontinue this historic use, DVD granted a perpetual easement to the harnesstrack to us at the time of the spin-off. This perpetual easement allows us to have exclusive use of the harnesstrack during the period beginning November 1 of each year and ending April 30of the following year, together with set up and tear down rights for the twoweeks before and after such period.  Theeasement requires that we maintain the harness track but does not require thepayment of any rent.

 

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Various easementsand agreements relative to access, utilities and parking have also been enteredinto between us and DVD relative to our respective Dover, Delaware facilities.  DVD pays rent to us for the lease of itsprincipal executive office space.  Wealso allow DVD to use our indoor grandstands in connection with DVD’s twoannual motorsports weekends.  We do notassess rent for this nominal use and may discontinue the use at our discretion.

 

In conjunction with the spin-off from DVD, we and DVDentered into various agreements that addressed the allocation of assets andliabilities between the two companies and that define the companies’relationship after the separation.  Amongthese are the Real Property Agreement and the Transition Support ServicesAgreement.

 

The Real Property Agreement governs certain realproperty transfers, leases and easements affecting our Dover, Delawarefacility.

 

The Transition Support Services Agreement provides foreach of us and DVD to provide each other with certain administrative andoperational services.  The partyreceiving the services is required to pay for them within 30 business daysafter receipt of an invoice at rates agreed upon by us and DVD.  The agreement may be terminated in whole orin part 90 days after the request of the party receiving the services or 180days after the request of the party providing the services.

 

Henry B. Tippie, Chairman of our Board of Directors, controlsin excess of fifty percent of our voting power. Mr. Tippie’s voting control emanates from his direct and indirectholdings of common stock and Class A common stock, from his status astrustee of the RMT Trust, our largest stockholder, and from certain shares asto which he has voting rights pursuant to a voting agreement with R. RandallRollins, one of our directors.  Thismeans that Mr. Tippie has the ability to determine the outcome of ourelection of directors and to determine the outcome of many significantcorporate transactions, many of which only require the approval of a majorityof our voting power.

 

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 ours and DVD. Denis McGlynn is the President andChief Executive Officer of both companies, Klaus M. Belohoubek is the SeniorVice President — General Counsel and Secretary of both companies and Timothy R.Horne is the Senior Vice President — Finance and Chief Financial Officer ofboth companies.  Mr. Tippie controlsin excess of fifty percent of the voting power of DVD.

 

**NOTE12—Commitments and Contingencies**

 

We are a party to ordinary routine litigation incidental to ourbusiness.  Management does not believethat the resolution of any of these matters is likely to have a materialadverse effect on our results of operations, financial position or cash flows.

 

We have employment, severance and noncompeteagreements with certain of our officers and directors under which certainchange of control, severance and noncompete payments and benefits might becomepayable in the event of a change in our control, defined to include a tenderoffer or the closing of a merger or similar corporate transactions.  In the event of such a change in our controland the subsequent termination of employment of all employees covered underthese agreements, we estimate that the maximum contingent liability would rangefrom $8,800,000 to $9,200,000 depending on the tax treatment of the payments.

 

To the extent that any of the potential payments orbenefits due under the agreements constitute an excess “parachute payment”under the Internal Revenue Code and result in the imposition of an excise tax,each agreement requires that we pay the amount of such excise tax plus anyadditional amounts necessary to place the officer or director in the sameafter-tax position as he would have been had no excise tax been imposed. Weestimate that the tax gross ups that could be paid under the agreements in theevent the agreements were triggered due to a change of control could bebetween $1,100,000 and $1,500,000 and these amounts have been included in themaximum contingent liability disclosed above. This maximum tax gross upassumes that none of the payments made after the hypothetical change in controlwould be characterized as reasonable compensation for services rendered. Eachagreement with an executive officer provides that fifty percent of the monthlyamount paid during the term is paid in consideration of the executive officer’snon-compete covenants. The exclusion of these amounts would reduce thecalculated amount of excess parachute payments subject to tax. We are unable toconclude whether the Internal 

 

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Revenue Service would characterize all or some of these non-competepayments as reasonable compensation for services rendered.

 

**NOTE13—Quarterly Results (unaudited)**

 
| ** **                             | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30****(a)** | ** ** | **December 31** | ** ** |
|----------------------------------------|------------|-------------------|------------|------------------|------------|------------------------------|------------|----------------------|------------|
| **Year  Ended December 31, 2009** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **                   | ** ** | ** **           | ** ** |
| Revenues                               |       | $                 | 59,080,000 |             | $          | 58,530,000                   |       | $                    | 59,814,000 |   | $ | 55,375,000 |   |
| Operating earnings                     |       | $                 | 7,906,000  |             | $          | 7,308,000                    |       | $                    | 2,632,000  |   | $ | 3,616,000 |   |
| Net earnings                           |       | $                 | 4,293,000  |             | $          | 3,938,000                    |       | $                    | 1,231,000  |   | $ | 1,815,000 |   |
| Net earnings per  share-basic          |       | $                 | 0.13       |             | $          | 0.12                         |       | $                    | 0.04       |   | $ | 0.06 |   |
| Net earnings per  share-diluted        |       | $                 | 0.13       |             | $          | 0.12                         |       | $                    | 0.04       |   | $ | 0.06 |   |
| ** **                             | ** ** | ** **        | ** ** | ** **       | ** ** | ** **                   | ** ** | ** **           | ** ** |
| **Year  Ended December 31, 2008** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **                   | ** ** | ** **           | ** ** |
| Revenues                               |       | $                 | 59,789,000 |             | $          | 59,971,000                   |       | $                    | 63,929,000 |   | $ | 55,443,000 |   |
| Operating earnings                     |       | $                 | 9,934,000  |             | $          | 10,271,000                   |       | $                    | 9,458,000  |   | $ | 6,842,000 |   |
| Net earnings                           |       | $                 | 5,321,000  |             | $          | 5,698,000                    |       | $                    | 4,996,000  |   | $ | 3,496,000 |   |
| Net earnings per  share-basic          |       | $                 | 0.17       |             | $          | 0.18                         |       | $                    | 0.16       |   | $ | 0.11 |   |
| Net earnings per  share-diluted        |       | $                 | 0.17       |             | $          | 0.18                         |       | $                    | 0.16       |   | $ | 0.11 |   |

 

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(a)          During the third quarter of 2009, werecorded a non-cash impairment charge of $2,177,000 related to the impairmentof long-lived assets.  See NOTE 3 —Impairment Charge.

 

Per share data amounts for the quarters have each beencalculated 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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