**United States**

**Securities and Exchange Commission**

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

###### ** **

**Form 10-K**

** **

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

 

**For the fiscal year ended December 31, 2005**

 

**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’s telephone number, including area code)

 

Securities registeredpursuant 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                   |

 

Securities registeredpursuant to Section 12(g) of the Act: **None.**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.Yes o  No ý

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or 15(d) of the Act.Yes o  No ý

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý  No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.Large accelerated filer o  Accelerated filer ý   Non-accelerated filer o

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o  No ý

 

Theaggregate market value of common stock held by non-affiliates of the registrantwas $117,875,566 as of June 30, 2005 (the last day of our most recentlycompleted second quarter).

 

As of February 28,2006, the number of shares of each class of the registrant’s common stockoutstanding is as follows:

 
| Common Stock -               |   | 9,681,437 shares  |
|------------------------------|--------|-------------------|
| Class A  Common Stock - |   | 11,899,687 shares |

 

**Documents Incorporated by Reference**

 

Portionsof the registrant’s Proxy Statement in connection with the Annual Meeting ofStockholders to be held April 26, 2006 are incorporated by reference into Part III,Items 10 through 14 of this report.

 

 

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**Part I**

 

Referencesin this document to “the Company,” “Gaming & Entertainment,” “we,” “us”and “our” mean Dover Downs Gaming & Entertainment, Inc. and/orits wholly owned subsidiaries, as appropriate.

 

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

 

DoverDowns Gaming & Entertainment, Inc. is a diversified gaming andentertainment company whose operations consist of Dover Downs Slots – a 91,000square foot video lottery (slot) casino complex; the Dover Downs Hotel –featuring luxury accommodations with conference, banquet, fine dining, ballroom andconcert hall facilities; and Dover Downs Raceway – a harness racing track withpari-mutuel wagering on live and simulcast horse races.

 

Gaming &Entertainment is a public holding company that has two wholly ownedsubsidiaries: Dover Downs, Inc. and Dover Downs Management Corp. DoverDowns, Inc. was incorporated in 1967 and began motorsports and harnessracing operations in 1969. In June of 1994, legislation authorizing videolottery operations in the State of Delaware (the “State”) was adopted. TheCompany’s video lottery (slot) casino operations began on December 29,1995. As a result of several restructurings, Dover Downs, Inc. became awholly owned subsidiary of Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.)(“DVD”), and became the operating entity for all of DVD’s gaming operations.

 

DoverDowns Gaming & Entertainment, Inc. was incorporated in the Statein December of 2001 as a wholly owned subsidiary of DVD. Effective March 31,2002, DVD completed a tax-free spin-off of its gaming operations bycontributing 100% of the issued and outstanding common stock of Dover Downs, Inc.to the Company, and subsequently distributing 100% of the issued andoutstanding common stock of the Company to DVD stockholders. Immediatelyfollowing the spin-off, Dover Downs Gaming & Entertainment, Inc.became an independent public company.

 

TheCompany is authorized to conduct video lottery operations as a “Licensed Agent”under the Delaware State Lottery Code. Pursuant to Delaware’s Horse RacingRedevelopment Act, enacted in 1994, the Delaware State Lottery Officeadministers and controls the operation of the video lottery.

 

TheCompany’s license from the Delaware Harness Racing Commission (the “Commission”)to hold harness race meetings on our premises and to offer pari-mutuel wageringon live and simulcast horse races must be renewed on an annual basis. In orderto maintain its license to conduct video lottery operations, the Company isrequired to maintain its harness horse racing license. The Company has receivedan annual license from the Commission for the past 37 consecutive years andmanagement believes that its relationship with the Commission remains good.

 

Ourentertainment complex is located in Dover, the capital of the State ofDelaware. Approximately 70% of our customers come from Maryland, Pennsylvania,Virginia and the District of Columbia.

 

Due tothe nature of the Company’s business activities, it is subject to variousfederal, state and local regulations.

 

**DoverDowns Slots**

 

Our video lottery(slot) machine casino opened in December 1995 with approximately 500 videolottery (slot) machines. Due to its popularity, the video lottery (slot)machine casino has expanded four times since its opening and the number ofmachines has increased steadily to 2,500 (the maximum number allowed by theDirector of the Delaware State Lottery Office (the “Lottery Director”)) at December 31, 2005. The most recent expansion occurred in the firstquarter of 2004 with the construction of 11,000 additional square feet ofgaming space and the installation of 500 machines within the existing casinocomplex.

 

Ourvideo lottery (slot) machines range from our popular penny machines to $100machines in the Premium Slots area and include many popular franchise gamesfound in the country’s major gaming jurisdictions. Additional

 

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amenities include theGarden Cafe, which becomes a lounge with live entertainment several nights aweek. The Las Vegas style video lottery casino housing the gaming equipment wasdesigned and built using expertise from Caesars World Gaming DevelopmentCorporation (“Caesars”), a leader in the gaming industry. Our facilities areopen every day of the year, except Christmas and Easter, and were visited by anestimated 3 million patrons in 2005.

 

TheDelaware State Lottery Office administers and controls our video lottery (slot)machine operations. We are a Licensed Agentauthorized to conduct video lottery operations under the Delaware State LotteryCode and one of only three locations permitted to do so in the State ofDelaware. We are permitted by law to set the payout to customers between 87%and 95%. Since the introduction of our video lottery (slot) machine operations,we have maintained an average payout of approximately 91.5%. We believe thatthis represents a competitive payout percentage.

 

Since our video lottery (slot) machine casino opened in 1995, we hadbeen party to a management agreement with Caesars, under which Caesars was ouragent to supervise, manage and operate our video lottery (slot) machine casino. EffectiveDecember 28, 2004, that management agreement expired and we opted not torenew the agreement. As a result, we are no longer required to pay to Caesars amanagement fee. We have not had and do not expect to incur any material coststo replace functions for which Caesars had responsibility under this agreement.

 

We usesophisticated database marketing to develop long-term relationships with ourpatrons and to target promotions to specific 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 150,000 activepatrons. During 2004, we installed a new state-of-the-art customer managementand slot data system. This system allows us to market our property moreeffectively and has allowed for the conversion of a majority of our casinofloor to ticket-in, ticket-out (cashless) technology. As of December 31,2005, we have converted 1,923 of our 2,500 video lottery (slot) machines toticket-in, ticket-out technology and we expect to have the remainder of ourvideo lottery (slot) machines using the ticket-in/ticket-out technology by theend of 2006.

 

Wehave implemented extensive procedures for financial and accounting controls,safekeeping and accounting of monies, and security provisions. Security overthe gaming operations involves the integration of surveillance cameras,observation and oversight by employees, security and gaming staff, and varioussecurity features built into the video lottery (slot) machines. The above, whencombined with proper internal control procedures and daily monitoring of eachvideo lottery (slot) machine by the Delaware State Lottery Office, are intendedto maintain the security, integrity and accountability of the video lotteryoperations.

 

On May 30, 2003, a committee created by theDelaware House of Representatives (the “Committee”) issued a favorableassessment as to the merits of conducting sports wagering in the State throughits video lottery agents. The Committee concluded that sports gaming isfeasible in the State, outlined proposed structures for its implementation andprovided various financial projections. The report has been provided to theDelaware General Assembly for consideration. By Federal law, Delaware is theonly state east of Montana, and one of only four states in the United States,where sports betting is legally permitted. Enabling legislation would need tobe passed by the Delaware General Assembly to establish sports gamingoperations at our property.

 

TheState of Delaware recently passed legislation which allows the Company toexpand its operating hours, add additional slot machines and provide freepromotional play through its recently enhanced slots marketing system. Theincreased operating hours will begin with 24 hour gaming on Friday nights andtwo additional hours on Saturday nights, and may be expanded in thefuture. The legislation increased the number of allowable slot machines foreach of the three licensed facilities in Delaware from 2,500 to 4,000. Eachslot machine in excess of 2,500 will require payment of an annual fee of $1,100per machine for the first 500 machines added, $700 per machine for the next 500machines added, and $300 per machine for the last 500 machines added.

 

**DoverDowns Hotel**

 

Ourluxury hotel facility, the Dover Downs Hotel, is located adjacent to our casino. Thefacility was partially opened in the first quarter of 2002 and was completed inApril 2002. The hotel includes 232 rooms, a multi-purpose ballroom/concerthall, a fine dining restaurant, swimming pool and health spa. Construction thatoccurred

 

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simultaneously withbuilding the hotel included, among other things, building a 425-seat buffetrestaurant, renovating the enclosed harness racing grandstand withstate-of-the-art simulcasting facilities and building an HVAC plant. Thisfacility has allowed us to offer a wider range of entertainment options to ourpatrons, including concerts featuring prominent entertainers, live boxing,gourmet dining, trade shows and conferences. The facility allows us to attractnew patrons and lengthen the stay of current patrons. Since opening the DoverDowns Hotel, we have managed its operations ourselves. In 2005, hotel occupancyaveraged almost 94% and the hotel was awarded the AAA Four Diamond Award forthe third consecutive year.

 

The Company is exploring the possibility of an expansionto the Dover Downs Hotel and has hired architects, engineers and otherprofessionals to prepare drawings and cost estimates. The total cost of thispreliminary work is estimated at $1,750,000 and is expected to be completed bythe end of the first quarter of 2006.

 

**DoverDowns Raceway**

 

DoverDowns Raceway has presented pari-mutuel harness racing events for 37consecutive years. Live harness races are conducted at Dover Downs Racewaybetween November and April and are simulcast to tracks and otheroff-track betting locations across North America on each of the Company’s morethan 130 live race dates. Our races currently are transmitted to more than 400tracks and off-track betting locations. The harness horse racing track is a5/8-mile track and is lighted for nighttime operations. The track is adjacentto our casino and hotel on land owned by DVD on the inside of DVD’s auto racingsuperspeedway. Use of the track is pursuant to an easement granted by DVD.

 

Withinour main grandstand is the simulcast parlor where our patrons can wager onharness and thoroughbred races received by satellite into Dover Downs Racewayyear round from numerous tracks across North America. Television monitorsthroughout the parlor area provide views of all races simultaneously and theparlor’s betting windows are connected to a central computer allowing bets tobe received on all races from all tracks. Additional amenities include theWinners Circle Restaurant.

 

Harnessracing in the State of Delaware is governed by the Delaware Harness RacingCommission. We hold a license from the Commission authorizing us to holdharness race meetings on our premises and to offer pari-mutuel wagering on liveand simulcast horse races.

 

Harnessracing refers to any racing of horses in which the horses competing orparticipating are harnessed to a two-wheeled sulky, which carries the driver.Pari-mutuel wagering refers to 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 (“handle”). Simulcastingrefers to the transmission of live horse racing by television, cable orsatellite signal from one race track to another with pari-mutuel wagering beingconducted at the sending and receiving track and a portion of the handle beingshared by the sending and receiving tracks.

 

Thelegislation authorizing video lottery operations in the State of Delaware wasadopted in June 1994, and is referred to as the “Horse RacingRedevelopment Act.” The Delaware General Assembly’s stated purpose in approvingthe legislation was to (i) provide non-state supported assistance in the form ofincreased economic activity and vitality for Delaware’s harness andthoroughbred horse racing industries, which activity and vitality will enablethe industry to improve its facilities and breeding stock, and cause increasedemployment; and (ii) restrict the location of such lottery to locationswhere wagering is already permitted and controls exist. A portion of theproceeds from the wagering on the video lottery (slot) machines is allocated toincrease the purses for harness horse races held at Dover Downs Raceway and isintended to provide increased vitality for Delaware’s horse racing industry.

 

We have an agreement with the Delaware Standardbred Owner’s Association, Inc.(“DSOA”) effective August 1, 2003 and continuing through July 31,2007. DSOA’s membership consists of owners, trainers and drivers of harnesshorses participating in harness race meetings at our facilities and elsewherein the United States and Canada. The DSOA has been organized and exists for thepurpose of promoting the sport of harness racing; improving the lot of owners,drivers and trainers of harness racing horses participating in race meetings;establishing health, welfare and insurance programs for owners, drivers andtrainers of harness racing horses; negotiating with harness racing tracks onbehalf of owners, trainers, drivers and grooms of harness racing horses; andgenerally rendering assistance 

 

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to them whenever and wherever possible. Under the DSOA agreement, weare required to distribute as purses for races conducted at our facilities, apercentage of our retained share of pari-mutuel revenues, depending on thelevel of the average daily dollar handle.

 

Weenjoy a good relationship with representatives of DSOA and anticipate that thisrelationship will continue. We believe that the DSOA agreement is typical ofsimilar agreements in the industry.

 

**Licensingand Regulation by Gaming and Other Authorities**

 

*General*

 

We aresubject to extensive federal, state and local regulations related to ouroperations, particularly our video lottery (slot) operations, live harnessracing and pari-mutuel wagering. These operations are contingent upon continuedgovernment approval of such operations as forms of legalized gaming and couldbe subjected at any time to additional or 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.

 

Delawarelaw regulates the percentage of commission we are entitled to receive from ourgaming activities, which comprises a significant portion of our overallrevenues. Our licenses to conduct video lottery (slot) machine operations,harness horse races and pari-mutuel wagering could be modified or repealed atany time and we could be required to terminate our gaming operations.

 

*Video Lottery (Slot) Operations*

 

*General.*Videolottery (slot) operations are by statute operated and administered by theLottery Director. We are a Licensed Agent authorized to conduct video lottery(slot) operations under the Delaware State Lottery Code.

 

A “videolottery (slot) machine” is defined by law as any machine in which bills, coinsor tokens are deposited in order to play in a game of chance in which theresults, including options available to the player, are randomly andimmediately determined by the machine. A machine may use spinning reels orvideo displays or both, and may or may not dispense coins or tokensdirectly to winning players. A machine shall be considered a video lottery(slot) machine notwithstanding (i) the use of an electronic credit systemmaking the deposit of bills, coins or tokens unnecessary, or (ii) the factthat the video lottery (slot) machine has employed dual function terminaltechnology. Various video lottery (slot) machines are in use at our casino. Allaccept $5, $10, $20, $50 and $100 bills.

 

The Lottery Director has discretion to adopt such rules andregulations as the Lottery Director deems necessary or desirable for theefficient and economical operation and administration of the system, including (i) typeand number of games permitted, (ii) pricing of games, (iii) numbersand sizes of prizes, (iv) manner of payment, (v) value of bills,coins or tokens needed 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 video lottery (slot) machines on a Licensed Agent’s premises, (x)security arrangements for the video lottery system, and (xi) reporting andauditing of financial information of Licensed Agents.

 

*LicensingRequirements*. We were granted a license on December 13,1995.

 

Thereare continuing licensure requirements for all officers, directors, keyemployees and persons who own directly or indirectly 10% or more of a LicensedAgent, which licensure requirements shall include the satisfaction of suchsecurity, fitness and background standards as the Lottery Director may deemnecessary relating to competence, honesty and integrity, such that a person’sreputation, habits and associations do not pose a threat to the public interestof the State or to the reputation of or effective regulation and control of thevideo lottery; it being specifically understood that any person convicted ofany felony, a crime involving gambling, or a crime of moral turpitude within 10years prior to applying for a license or at any time thereafter shall be deemedunfit.

 

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Thereare similar licensure requirements for providers of the video lottery (slot)machines and certain companies that seek to provide services to a LicensedAgent.

 

*Revocation,Suspension or Modification of License*. The Lottery Director may revokeor suspend the license of a Licensed Agent, such as ours, for “cause.”  “Cause” is broadly defined and couldpotentially include falsifying any application for license or report requiredby the rules and regulations, the failure to report any informationrequired by the rules and regulations, the material violation of any rules andregulations promulgated by the Lottery Director or any conduct by the licenseewhich undermines the public confidence in the video lottery system or servesthe interest of organized gambling or crime and criminals in any manner. Alicense may be revoked for an unintentional violation of any federal,state or local law, rule or regulation provided that the violation is notcured within a reasonable time as determined by the Lottery Director. A hearingofficer’s decision revoking or suspending the license shall be appealable tothe Delaware Superior Court under the provisions of the Administrative ProceduresAct. All existing or new officers, directors, key employees and owners of aLicensed Agent are subject to background investigation. Failure to satisfy thebackground investigation may constitute cause for suspension or revocationof the License.

 

*OwnershipChanges*. Under Delaware law, a change of ownership of aLicensed Agent will automatically terminate its license 90 days after thechange of ownership occurs, unless the Lottery Director determines afterapplication to issue a new license to the new owners. Change of ownership may occurif any new individual or entity acquires, directly or indirectly, 10% or moreof the Licensed Agent or if more than 20% of the legal or beneficial interestin the Licensed Agent is transferred, whether by direct or indirect means. TheCommission may require extensive background investigations of any newowner acquiring a 10% or greater interest in a Licensed Agent, includingcriminal background checks. Accordingly, the Company has a restrictive legendon its 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 the outstanding common stock of the Company must firstobtain prior written approval from the Delaware State Lottery Office.

 

*HarnessRacing Events*. In order to maintain our license for videolottery (slot) machine gaming, we are required to maintain our license forharness horse racing with the Commission and must conduct a minimum of 80 liverace days each racing season, subject to the availability of racing stock.

 

*ControlOver Equipment and Technology*. The Company does not own orlease the video lottery (slot) machines or computer systems used by the Statein connection with its video lottery gaming operations. The Lottery Directorenters into contracts directly with the providers of the video lottery (slot) machinesand computer systems (the “Technology Providers”). Equipment is provided to theState by sale or lease and all Technology Providers must be licensed by theLottery Director. There are also limitations on the number of video lottery(slot) machines that may be used at any one facility that are supplied bythe same Technology Provider. The operations of the Company could be disruptedin the event that a licensed Technology Provider in any way breaches itsagreement with the State or ceases to be properly licensed for any reason. Suchan event would be outside of the control of the Company.

 

*HarnessRacing and Pari-Mutuel Wagering*

 

*LicensingRequirements.*Harness racing in the State of Delaware isgoverned by the Delaware Harness Racing Commission. The Company holds a licensefrom the Commission by which it is authorized to hold harness race meetings onits premises and to make, conduct and sell pools by the use of pari-mutuelmachines or totalizators. The license must be renewed on an annual basis. The Commissionmay reject an application for a license for any cause which it deemssufficient and the action of the Commission is final. The Commission may alsosuspend or revoke a license which it has issued and its action in that respectis final, subject to review, upon questions of law only, by the Superior Courtof the County within which the license was granted. The action of theCommission stands unless and until reversed by the Court. The Company hasreceived an annual license from the Commission for the past 37 consecutiveyears and management believes that its relationship with the Commission remainsgood. However, there can be no assurances that the Company will continue to belicensed by the Commission in the future.

 

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Underthe law, the Commission has broad powers of supervision and regulation. TheCommission may prescribe rules, regulations and conditions under which allharness racing and betting pools shall be conducted; may regulate theperformance of any service or the sale of any article on the premises of alicensee; may compel the production of books and documents of a licenseeand require that books and records be kept in such manner as the Commission may prescribe;may visit, investigate and place accountants or other persons as it deemsnecessary, at the expense of a licensee, in the office, track or place ofbusiness of a licensee; may summon witnesses and administer oaths; and may requirethe removal of any employee or official employed by a licensee. All proposedextensions, additions or improvements to the property of a licensee are subjectto the approval of the Commission.

 

TheCommission is required to inspect a licensee’s racing plant not less than fivedays prior to a race meeting and may withdraw the license for the meetingif the racing plant is found to be unsafe for animals or persons or is notrendered safe prior to the opening of the meeting. A licensee must deposit withthe Commission, ten days before a race meeting, a policy of insurance againstpersonal injury liability in an amount to be approved by the Commission.

 

*USTA.*Anylicense granted by the Commission is also subject to such reasonable rules andregulations as may be prescribed from time to time by the United States TrottingAssociation (“USTA”). The USTA sets various rules relating to the conductof harness racing. According to its Articles of Incorporation, the purposes ofthe USTA shall include the improvement of the breed of trotting and pacinghorses, the establishment of rules regulating standards and theregistration of such horses thereunder, the advancement and promotion of theinterest of harness racing in the United States, the investigation,ascertainment and registration of the pedigrees of such horses, the regulationand government of the conduct of the sport of harness racing, the establishmentof rules for the conduct thereof, not inconsistent with the laws of thevarious states, and the sanctioning of the holding of exhibitions of suchhorses and meetings for the racing thereof, the issuance of licenses toqualified persons to officiate at harness race meetings and exhibitions, theissuance of licenses to the owners of horses permitting the exhibition andracing of such horses and the qualification thereof, the issuance of licensesto drivers of horses participating in such races or exhibitions, and providingfor the enforcement of the rules promulgated by the USTA, and providingfor the fixing of penalties, fines, and the suspension or expulsion from membership,or privileges or for any other misconduct detrimental to the sport.

 

*Gaming Taxes and Fees*

 

Webelieve that the prospect of significant additional tax revenue is one of theprimary reasons why jurisdictions have legalized gaming. As a result, gamingoperators are typically subject to significant taxes and fees in addition tonormal federal and state corporate income taxes. These taxes and fees aresubject to increase at any time. We pay substantial taxes and fees with respectto our operations and would likely incur similar burdens in any otherjurisdiction in which we may conduct gaming operations in the future.

 

*Compliance with Other Laws*

 

We aresubject to various federal, state and local laws and regulations in addition togaming regulations. These laws and regulations include, but are not limited to,restrictions and conditions concerning alcoholic beverages, environmentalmatters, employees, currency transactions, taxation, zoning and building codes,and marketing and advertising.

 

TheInternal Revenue Service (“IRS”), requires operators of casinos located in theUnited States to file information returns for United States citizens, includingnames and addresses of winners, for all winnings in excess of stipulatedamounts. The IRS also requires operators to withhold taxes on certain winnings.

 

Regulationsadopted by the Financial Crimes Enforcement Network of the Treasury Department(“FinCEN”) require us to report currency transactions in excess of stipulatedamounts occurring within a gaming day, including identification of the patronby name and social security number. FinCEN has also established regulationsthat require us to file suspicious activity reports on all transactions that weknow, suspect, or have reason to suspect fall into specific categories that aredeemed to be suspicious. We believe our programs meet the requirements of theapplicable regulations.

 

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Lawsand regulations are always subject to change, can be interpreted differently inthe future, and new laws and regulations may be enacted which couldadversely 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**

 

Thegaming industry in the United States is intensely competitive and features manyparticipants, including riverboat casinos, dockside casinos, land-basedcasinos, video lottery (slot) and poker machines, whether or not located incasinos, native American gaming, pari-mutuel wagering on live and simulcasthorse racing, off track betting, state run lotteries, internet gambling andother forms of gambling. Gaming competition is particularly intense in each ofthese markets.

 

We compete in local and regional markets with horsetracks, off-track betting parlors, state run lotteries, casinos and othergaming facilities. We cannot be certain that we will maintain our market shareor compete more effectively with our competitors. The introduction orexpansion of gaming in neighboring jurisdictions, particularly Maryland,Virginia, Washington, D.C., Pennsylvania or New Jersey, or the legalization ofadditional gaming venues in Delaware, could have a material adverse effect onour cash flows and results of operations. Approximately 70% of our customerscome from Maryland, Pennsylvania, Virginia and the District of Columbia. In July 2004, Pennsylvania adoptedlegislation which authorizes up to 61,000 slot machines at various existing andproposed venues throughout the state. It is difficult for us to predict theeffect that such legislation will have on us, but we estimate that one or morefacilities in Pennsylvania may begin operations in the latter half of2006. Pennsylvania will have one of the highest effective tax rates on slotmachine gaming in the country and will charge an up front $50,000,000 licensefee to the horse racing and casino venues that are granted a gaming license.Management has estimated that slot win from Pennsylvania patrons representsapproximately 6% of our total slot win.

 

Pennsylvania,Maryland and New Jersey all have state-run lotteries. Atlantic City, New Jerseyis located approximately 100 miles from our entertainment facility and offers afull range of gaming products. Maryland, Virginia and Washington, D.C. do notpermit video lottery (slot) machine operations

 

Competitionin horse racing is varied since racetracks in the surrounding area differ inmany respects. Some tracks only offer thoroughbred or harness horse racing;others have both. Tracks have live racing seasons that may or may notoverlap with neighboring tracks. Depending on the purse structure, tracks thatare farther apart may compete with each other more for quality horsesthan for patrons.

 

Liveharness racing also competes with simulcasts of thoroughbred and harnessracing. 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.

 

Withinthe State of Delaware, we face little direct live competition from the State’sother two tracks. Harrington Raceway, a south central Delaware fairgroundstrack, conducts harness horse racing periodically between May andNovember. 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 sixweeks each year.

 

Wecompete with harness and thoroughbred racing and simulcasting facilities in theneighboring states of Pennsylvania, Maryland and New Jersey. We also receivesimulcast harness and thoroughbred races from approximately 80 race tracks.

 

Competitionfor our hotel varies and consists of local and regional competition. Withrespect to hotel accommodations only, we compete with a variety of nearbyhotels in the Dover area; however, few of these offer the luxury accommodationsthat we offer. Our hotel is the only hotel in the Dover area, and one of onlythree hotels in the State, to receive the AAA Four Diamond Award. With respectto trade shows, conferences, concerts and hotel room packages tied tothese events or tied to our casino and other gaming offerings, we compete at aregional level 

 

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with the other gamingoperations referred to above and with convention centers and larger hotels inmajor cities such as Philadelphia, Washington, D.C., Baltimore and Wilmington.

 

Inaddition, our activities compete with other leisure, entertainment andrecreational activities.

 

**GrowthStrategies**

 

Weoffer a unique gaming and entertainment experience and make available to ourpatrons a number of different options: slot machine gaming, live harness horseracing, fine dining, national recording and entertainment acts, live boxing andsimulcasting of thoroughbred and harness horse races from across the UnitedStates. Our mission is simple: to provide all of our customers a premier gamingand entertainment experience with a focus on quality 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 usea sophisticated database marketing program to develop long-term relationshipswith our patrons and to target promotions to specific customer segments. OurCapital Club, a slots players club and tracking system, allows us to identifycustomers and to reward their level of play through various marketing programs.Membership in this club currently stands at approximately 150,000 activepatrons. During 2004, we installed a new state-of-the-art customer managementand slot data system. This system allows us to market our property moreeffectively and has allowed for the conversion of a majority of our casinofloor to ticket-in, ticket-out (cashless) technology. As of December 31,2005, we have converted 1,923 of our 2,500 video lottery (slot) machines toticket-in, ticket-out technology and we expect to have the remainder of ourvideo lottery (slot) machines using the ticket-in/ticket-out technology by theend of 2006. We expect to increase attendance at both our casino and hotelthrough effective promotional use of our database and by making improvements toour facilities and gaming offerings based on what we learn from our CapitalClub members. For example, we continue to add machines with differingdenominations and progressive slot machines with large jackpot sizes becausethey offer patrons a more exciting gaming experience.

 

On May 30, 2003, a committee created by theDelaware House of Representatives issued a favorable assessment as to themerits of conducting sports wagering in the State through its video lotteryagents. The Committee concluded that sports gaming is feasible in the State,outlined proposed structures for its implementation and provided variousfinancial projections. The report has been provided to the Delaware GeneralAssembly for consideration. By Federal law, Delaware is the only state east ofMontana, and one of only four states in the United States, where sports bettingis legally permitted. Enabling legislation would need to be passed by theDelaware General Assembly to establish sports gaming operations at ourproperty.

 

TheState of Delaware recently passed legislation which allows the Company toexpand its operating hours, add additional slot machines and provide freepromotional play through its recently enhanced slots marketing system. Theincreased operating hours will begin with 24 hour gaming on Friday nights andtwo additional hours on Saturday nights, and may be expanded in thefuture. The legislation increased the number of allowable slot machines foreach of the three licensed facilities in Delaware from 2,500 to 4,000. Eachslot machine in excess of 2,500 will require payment of an annual fee of $1,100per machine for the first 500 machines added, $700 per machine for the next 500machines added, and $300 per machine for the last 500 machines added. TheCompany is currently examining its need for additional machines and otheramenities.

 

*CapitalizeOn Our Luxury Hotel*

 

Ourluxury hotel facility, the Dover Downs Hotel, is located adjacent to our casino. Itis the only hotel in the Dover area, and one of only three hotels in the State,to receive the AAA Four Diamond Award. The facility was partially opened in thefirst quarter of 2002 and was completed in April 2002. The hotel includes232 rooms, a multi-purpose ballroom/concert hall, a fine dining restaurant,swimming pool and health spa. Construction that occurred simultaneously withbuilding the hotel included, among other things, building a new 425-seat buffetrestaurant, renovating the enclosed harness racing grandstand withstate-of-the-art simulcasting facilities and building an 

 

9

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HVAC plant. This facilityhas allowed us to offer a wider range of entertainment options to our patrons,including concerts featuring prominent entertainers, live boxing, gourmetdining, trade shows and conferences. The facility allows us to attract newpatrons and lengthen the stay of current patrons.

 

The Company is exploring the possibility of an expansionto the Dover Downs Hotel and has hired architects, engineers and otherprofessionals to prepare drawings and cost estimates. The total cost of thispreliminary work is estimated at $1,750,000 and is expected to be completed bythe end of the first quarter of 2006.

 

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

 

With apercentage of video lottery (slot) machine revenues supplementing the pursesfor the horsemen, we have experienced dramatic increases in the amount of ourpurses. As of the end of our 2004-2005 season, our average daily pursedistribution had increased to approximately $200,000 from $8,000 in 1995. Theresult is that we continue to attract higher quality horses. We haveprestigious events such as our annual “Progress Pace” with an estimated$400,000 purse, an event which attracts the country’s top three-year-oldhorses. Bettors are attracted to races with larger purses and typically wagermore on the higher quality and more predictable horses. We have also completedvarious upgrades to enhance the harness horse racing facilities, includingrenovations to the track and grounds, receiving barn and paddock areas and,more recently, our simulcast parlor which has state-of-the-art facilities thatallow year round wagering. We continue to focus on improvements that we believeallow us to increase attendance and wagering, including wagering on our eventsfrom other tracks and off track wagering facilities that receive our racingsignal during our race season.

 

**Seasonality**

 

Gaming &Entertainment’s quarterly operating results are affected by weather and thegeneral economic conditions in the United States. Our quarterly operatingresults are generally distributed evenly throughout the year. However, theresults for any quarter are not necessarily indicative of results to beexpected in any future period.

 

**Employees**

 

As of December 31,2005, Gaming & Entertainment had approximately 778 full-time employeesand 144 part-time employees. We engage temporary personnel to assist during ourlive harness racing season. None of our employees are party to a collectivebargaining agreement and we believe that our relationship with our employees isgood.

 

#### **Available Information**

#### ** **

Wefile annual, quarterly and current reports, information statements and otherinformation with the United States Securities and Exchange Commission (the “SEC”).The public may read and copy any materials we file with the SEC at the SEC’sPublic Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Thepublic may obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site thatcontains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC. The address of thatsite is http://www.sec.gov.

 

#### **Internet Address**

#### ** **

Wemaintain a website where additional information concerning our business andvarious 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, quarterly reports on Form 10-Q,current reports on Form 8-K and all amendments to those reports.

 

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**Item 1A.****  RiskFactors**

 

Disclosureregarding the most significant factors that may adversely affect ourbusiness, operations, industry or financial position or our future financialperformance is set forth under the section entitled, “Factors That May AffectOperating Results; Forward-Looking Statements,” beginning on page 21.

 

**Item 1B.****  UnresolvedStaff Comments**

 

Wehave not received any written comments that were issued more than 180 daysbefore December 31, 2005, the end of the fiscal year covered by thisreport, from the SEC staff regarding our periodic or current reports under theSecurities Exchange Act of 1934 that remain unresolved.

 

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

 

We ownour principal executive office located in Dover, Delaware; Dover DownsSlots—our 91,000 square foot casino; the Dover Downs Hotel—featuring luxuryaccommodations with conference, banquet, fine dining, ballroom and concerthall facilities; and the Dover Downs Raceway—indoor grandstands, betting andsimulcasting parlors, all of which are located at our entertainment complexsituated on approximately 69 acres of land owned by us.

 

TheCompany’s use of DVD’s 5/8-mile harness racing track is pursuant to an easementgranted to the Company by DVD which does not require the payment of any rent.Under the terms of the easement, the Company has 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. The harness track is located on propertyowned by DVD and is on the inside of DVD’s motorsports superspeedway. TheCompany’s indoor grandstands are used by DVD at no charge in connection withits motorsports events. DVD also leases its principal office space from theCompany. Various easements and agreements relative to access, utilities andparking have also been entered into between DVD and the Company relative totheir respective Dover, Delaware facilities.

 

**Item 3.****           LegalProceedings**

 

We area party to ordinary routine litigation incidental to our business. Managementdoes not believe that the resolution of any of these matters is likely to havea serious negative effect on our financial condition, cash flows orprofitability.

 

**Item 4.****           SubmissionOf Matters To A Vote Of Security Holders**

 

Nomatters were submitted during the fourth quarter of the fiscal year covered bythis report to a vote of security holders.

 

**Part II**

 

**Item 5.****           MarketFor Registrant’s Common Equity, Related Stockholder Matters And IssuerPurchases Of Equity Securities**

 

Gaming & Entertainment’s common stock is listed on the NewYork Stock Exchange under the ticker symbol “DDE.”  Gaming & Entertainment Class Acommon stock is not publicly traded but is freely convertible into Gaming &Entertainment common stock at any time at the option of the holder thereof. Asof February 28, 2006, there were 9,681,437 shares of common stock and11,899,687 shares of Class A common stock outstanding. There were 1,044holders of record for common stock and 15 holders of record for Class Acommon stock.

 

11

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Thehigh and low sales prices for the Company’s common stock on the New York StockExchange and the dividends declared per share for the years ended December 31,2005 and 2004 are detailed in the following table.

 

| **Quarter Ended:** | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends  Declared** | ** ** |
|-------------------------|------------|----------|------------|---------|------------|-------------------------|------------|
| December 31, 2005  |       | $        | 14.45      |    | $          | 11.96                   |       | $ | 0.06 |   |
| September 30, 2005 |       | $        | 15.14      |    | $          | 13.00                   |       | $ | 0.06 |   |
| June 30, 2005      |       | $        | 13.80      |    | $          | 11.51                   |       | $ | 0.06 |   |
| March 31, 2005     |       | $        | 14.58      |    | $          | 11.60                   |       | $ | 0.06 |   |
|                    |       |     |       |    |       |                    |       |
| December 31, 2004  |       | $        | 13.10      |    | $          | 9.38                    |       | $ | 0.06 |   |
| September 30, 2004 |       | $        | 11.29      |    | $          | 8.86                    |       | $ | 0.06 |   |
| June 30, 2004      |       | $        | 11.99      |    | $          | 10.50                   |       | $ | 0.06 |   |
| March 31, 2004     |       | $        | 11.05      |    | $          | 9.40                    |       | $ | 0.05 |   |

 

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

 

The Company has a stock incentive plan which providesfor the grant of up to 1,500,000 shares of common stock to our officers and keyemployees through stock options and/or awards valued in whole or in part byreference to our common stock, such as restricted stock awards. Refer toNOTE 8—Stockholders’ Equity of the consolidated financial statements includedelsewhere in this Form 10-K for further discussion. Securities authorizedfor issuance under equity compensation plans at December 31, 2005 are asfollows:

 
| **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     |       | 684,256                                                                                                                                  |       | $                                                                                                       | 10.32      |                                                                                                                                                                                                         | 697,252    |   |
|                                                        |       |                                                                                                                                     |       |                                                                                                    |       |                                                                                                                                                                                                         |       |
| Equity compensation plans not approved by security  holders |       | —                                                                                                                                   |       | —                                                                                                  |       | —                                                                                                                                                                                                       |       |
| Total                                                       |       | 684,256                                                                                                                                  |       | $                                                                                                       | 10.32      |                                                                                                                                                                                                         | 697,252    |   |

 

On October 23,2002, the Company’s Board of Directors authorized the repurchase of up to2,000,000 shares of the Company’s outstanding common stock. The purchases may bemade in the open market or in privately negotiated transactions as conditionswarrant. The repurchase authorization does not obligate the Company to acquireany specific number of shares and may be suspended at any time. At December 31,2005, the Company had remaining repurchase authority of 1,779,155 shares.

 

On December 19,2005, the Company commenced a tender offer to purchase up to 1,063,937 sharesof its common stock and up to 1,325,468 shares of its Class A common stockat a fixed price of $14.50 per share. The offer expired on January 19,2006. The Company purchased 1,063,937 shares of its common stock and 1,325,000shares of its Class A common stock for $35,006,000, including expenses, inconnection with the tender offer.

 

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**Item 6.****    SelectedFinancial Data**

 

Thefollowing table summarizes certain selected consolidated financial data ofGaming & Entertainment, which has been derived from its consolidatedfinancial statements for the years ended December 31, 2005, 2004, 2003,2002 and 2001. This information set forth below should be read in conjunctionwith management’s discussion and analysis of financial condition and results ofoperations, the consolidated financial statements and the notes thereto,included elsewhere in this document.

 

**Five Year Selected Financial Data**

 
| ** **                                                                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Consolidated Statement of Earnings Data (in  thousands, except per share data):** | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                           |       |                                        |       |   |   |   |   |   |   |   |   |
| Gaming                                                                              |       | $                                           | 202,372    |   | $ | 193,922 |   | $ | 175,023 |   | $ | 193,723 |   | $ | 175,065 |   |
| Other operating                                                                     |       | 14,480                                      |       | 13,822 |   | 13,809 |   | 12,752 |   | 6,228 |   |
|                                                                                |       | 216,852                                     |       | 207,744 |   | 188,832 |   | 206,475 |   | 181,293 |   |
| Less – non-recurring gaming charge (a)                                         |       | —                                      |       | 448 |   | — |   | — |   | — |   |
|                                                                                |       | 216,852                                     |       | 207,296 |   | 188,832 |   | 206,475 |   | 181,293 |   |
| Expenses:                                                                           |       |                                        |       |   |   |   |   |   |   |   |   |
| Gaming                                                                              |       | 151,973                                     |       | 152,725 |   | 138,423 |   | 148,817 |   | 132,587 |   |
| Non-recurring gaming charge (a)                                                     |       | —                                      |       | 1,802 |   | — |   | — |   | — |   |
| Other operating                                                                     |       | 13,167                                      |       | 13,013 |   | 9,899 |   | 10,351 |   | 5,205 |   |
| General and administrative                                                          |       | 4,765                                       |       | 4,603 |   | 4,317 |   | 5,061 |   | 4,676 |   |
| Depreciation                                                                        |       | 6,998                                       |       | 6,791 |   | 6,287 |   | 5,176 |   | 2,211 |   |
|                                                                                |       | 176,903                                     |       | 178,934 |   | 158,926 |   | 169,405 |   | 144,679 |   |
| Operating earnings                                                                  |       | 39,949                                      |       | 28,362 |   | 29,906 |   | 37,070 |   | 36,614 |   |
| Gain on sale of shopping center (b)                                                 |       | 5,837                                       |       | — |   | — |   | — |   | — |   |
| Interest expense, net                                                               |       | (1,875                                      | )          | (762 | ) | (842 | ) | (903 | ) | (1,020 | ) |
| Earnings before income taxes                                                        |       | 43,911                                      |       | 27,600 |   | 29,064 |   | 36,167 |   | 35,594 |   |
| Income taxes                                                                        |       | 17,871                                      |       | 11,219 |   | 11,827 |   | 14,725 |   | 14,499 |   |
| Net earnings                                                                        |       | $                                           | 26,040     |   | $ | 16,381 |   | $ | 17,237 |   | $ | 21,442 |   | $ | 21,095 |   |

 
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(unaudited)** | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-----------------|------------|
| Net earnings per common share (c) :               |       |       |       |       |       |       |       |       |       |            |       |
| Basic                                                  |       | $          | 1.09       |       | $          | 0.62       |       | $          | 0.65       |            | $          | 0.80 |   | $ | 0.79 |   |
| Diluted                                                |       | $          | 1.09       |       | $          | 0.62       |       | $          | 0.65       |            | $          | 0.80 |   | $ | 0.79 |   |
|                                                   |       |       |       |       |       |       |       |       |       |            |       |
| Dividends declared per common share                    |       | $          | 0.24       |       | $          | 0.23       |       | $          | 0.20       |            | $          | 0.125 |   |   |   |
|                                                   |       |       |       |       |       |       |       |       |       |            |       |
| **Selected Consolidated Operating Data  (unaudited):** |       |       |       |       |       |       |       |       |       |            |       |
| Avg. number of slot machines                           |       | 2,500      |       | 2,432      |       | 2,000      |       | 2,000      |       | 2,000           |       |
| Casino square footage                                  |       | 91,000     |       | 91,000     |       | 80,000     |       | 80,000     |       | 80,000          |       |

 
| ** **                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Consolidated Balance Sheet Data (in thousands):** |       |                  |       |   |   |   |   |   |   |   |   |
| Working capital (deficit)                           |       | $                     | 9,216      |   | $ | 8,505 |   | $ | 8,917 |   | $ | 7,117 |   | $ | (3,173 | ) |
| Total assets                                        |       | 153,461               |       | 160,300 |   | 152,159 |   | 152,506 |   | 135,650 |   |
| Long-term debt (b)                                  |       | 24,075                |       | 51,950 |   | 31,225 |   | 40,890 |   | — |   |
| Total stockholders’ equity (d)                 |       | 93,270                |       | 72,770 |   | 94,975 |   | 84,439 |   | 102,653 |   |
|                                                     |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)   Effective December 2004,the Company changed its policy relating to its point loyalty program to allowpoints earned by customers to be redeemed for cash under certain circumstances.As a result, the Company recorded a non-recurring charge of $2,250,000($1,338,000 after income tax benefit) in the fourth quarter of 2004 to recordthe net impact of the program change. The estimated amount of points redeemablefor cash was recorded as a reduction of revenue and the estimated amount ofpoints redeemable for services and merchandise was recorded as gaming expense.

 

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(b)   On December 28, 2005, the Company’swholly-owned subsidiary, Dover Downs, Inc., closed on the sale of ashopping center it owned in Dover, Delaware. The shopping center consisted ofapproximately 7.7 acres of real property with a one-story building ofapproximately 95,700 square feet. The sales price was $12,450,000 and theCompany recognized a gain on the sale of $5,837,000 ($3,461,000 after incometaxes). The proceeds from the sale were used to pay down outstanding amounts onthe Company’s credit facility.

 

(c)   Net earnings percommon share information for periods prior to April 1, 2002, the day afterthe effective date of the spin-off from DVD, was calculated using the pro formaaverage outstanding common shares and Class A common shares for Gaming &Entertainment. The pro forma average outstanding common shares and Class Acommon shares were derived from DVD’s common shares and Class A commonshares outstanding for the periods presented using the distribution ratio of0.7 shares of Gaming & Entertainment common stock and Class Acommon stock for each share of DVD common stock and Class A common stock,respectively. Outstanding stock options of Gaming & Entertainment werecalculated assuming the stock options related to each individual who became aGaming & Entertainment employee or both a DVD and a Gaming &Entertainment employee subsequent to the spin-off were outstanding Gaming &Entertainment options during each period presented.

 

(d)   On April 1,2002 in connection with our spin-off from DVD, Gaming & Entertainmentpaid down $45 million of the amounts outstanding under DVD’s credit facility.This payment was recorded as a charge to stockholders’ equity.

 

On November 10,2004, the Company commenced a tender offer to purchase up to 1,040,421 sharesof its common stock and up to 1,607,506 shares of its Class A common stockat a fixed price of $12.00 per share. The offer expired on December 10,2004. The Company purchased 1,040,421 shares of its common stock and 1,600,000shares of its Class A common stock for $32,045,000, including expenses, inconnection with the tender offer.

 

### **Item 7.**    Management’sDiscussion And Analysis Of Financial Condition And Results Of Operations

### ** **

Thefollowing discussion is based upon and should be read in conjunction with theconsolidated financial statements and notes thereto included elsewhere in thisAnnual Report on Form 10-K.

 

DoverDowns Gaming & Entertainment, Inc. is a diversified gaming andentertainment company whose operations consist of Dover Downs Slots – a 91,000square foot video lottery (slots) casino complex; the Dover Downs Hotel –featuring luxury accommodations with conference, banquet, fine dining, ballroom andconcert hall facilities; and Dover Downs Raceway – a harness racing track withpari-mutuel wagering on live and simulcast horse races.

 

Approximately90% of the Company’s revenue is derived from video lottery (slot) machine win(as defined below). Several factors contribute to the video lottery (slot)machine win for any gaming company, including, but not limited to:

 

•      Proximityto major population bases,

•      Competitionin the company’s market,

•      Thequantity and types of slot machines available,

•      Thequality of the physical property,

•      Otheramenities offered on site,

•      Customerservice levels, and

•      Marketingprograms.

 

The Companybelieves that it holds a strong position in each of these areas. Ourentertainment complex is located in Dover, the capital of the State ofDelaware. We draw patrons from several major metropolitan areas. Philadelphia,Baltimore and Washington, D.C. are all within a 2 hour drive. According to the2000 United States Census, approximately 32.8 million people live within 150miles of the complex. There are significant barriers to entry related to thegaming business in Delaware, such as the statutory limitation of gaminglicenses to the three

 

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existing horse racing facilities. The Company’s property, designed anddeveloped with the assistance of Caesars, is similar to properties found in thecountry’s largest gaming markets. The Company offers the only luxury hotel inthe Delaware gaming market, providing a strong marketing tool, especially tohigher-end players. The Company also utilizes its recently improved slotmarketing system to allow for the most efficient marketing programs and thehighest levels of customer service.

 

Becauseall of our operations are located at one facility, we face the risk ofincreased competition from the legalization of new or additional gaming venues.The Company has therefore focused on creating the region’s premier gamingdestination and building and rewarding customer loyalty through innovativemarketing efforts and unparalleled customer service.

 

**Resultsof Operations**

 

Gamingrevenues represent (i) the net win from video lottery (slot) machine winsand losses and (ii) commissions from pari-mutuel wagering. Other operatingrevenues consist of hotel rooms revenue, food and beverage sales and othermiscellaneous income. Revenues do not include the retail amount of hotel rooms,food and beverage and other miscellaneous goods and services provided withoutcharge to customers as promotional items. The estimated direct cost ofproviding these items has been charged to the casino through interdepartmentalallocations and is included in gaming expenses in the consolidated statement ofearnings.

 

Forthe video lottery operations, the difference between the amount wagered bybettors and the amount paid out to bettors is referred to as the win. The winis included in the amount recorded in the Company’s 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 thevideo lottery (slot) machines and associated computer systems, collects theamount allocable to purses for harness horse racing and remits the remainder tothe Company as its commission for acting as a Licensed Agent. Gaming expensesinclude the amounts collected by the State (i) for the State’s share ofthe win, (ii) for remittance to the providers of the video lottery (slot)machines and associated computer systems, and (iii) for harness horseracing purses. The Company recognizes revenues from pari-mutuel commissionsearned from live harness horse racing and importing of simulcast signals fromother race tracks when the race occurs. Revenues from hotel rooms, food andbeverage sales and other miscellaneous income are recognized at the time theservice is provided.

 

*YearEnded December 31, 2005 vs. Year Ended December 31, 2004*

 

Gamingrevenues increased by $8,450,000, or 4.4%, to $202,372,000 in 2005, primarilythe result of increased play in our casino. During the first quarter of2004, we added 500 new video lottery (slot) machines which increased ouraverage number of machines from 2,432 in 2004 to 2,500 in 2005.

 

Otheroperating revenues were $14,480,000 in 2005 as compared to $13,822,000 in 2004.Net rooms revenue increased $542,000 in 2005 as compared to 2004 primarily dueto an increase in cash sales and fewer rooms being provided to customers on acomplimentary basis. Net food and beverage revenues increased $680,000 to$9,778,000 from $9,098,000 in 2004 primarily due to higher casino attendance.Partially offsetting these increases was a decrease in concert revenues as aresult of the Company promoting fewer shows in 2005 as compared to 2004,including a large outdoor concert promoted in 2004 that generated revenues of$840,000 which was not promoted in 2005. Other operating revenues do notinclude the retail amount of promotional allowances which are provided tocustomers on a complimentary basis of $15,103,000 and $19,973,000 in 2005 and2004, respectively. The decrease in promotional allowances was primarily due toa decrease in retail room rates. Promotional allowances represented 51%and 59% of gross other operating revenues in 2005 and 2004, respectively.

 

Gamingexpenses decreased by $752,000 primarily due to the fact that we no longerincur expenses associated with a management agreement with Caesars that expiredon December 28, 2004. During 2004, the Company expensed $4,448,000 ingaming expenses pursuant to this agreement. Additionally, the Company reducedits marketing and advertising costs in 2005 as compared to 2004. Amountsretained by the State of Delaware and the amount collected by the State forpayment to the vendors under contract with the State who provide the videolottery (slot) machines and associated computer systems increased by $3,279,000and $979,000, respectively. Amounts allocated from the

 

15

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video lottery operationfor harness horse racing purses increased from $22,269,000 in 2004 to$23,292,000 in 2005. These expenses increased as a result of our increased slotwin.

 

Otheroperating expenses increased by $154,000, or 1.2%. Expenses related to our foodand beverage operations were $10,999,000 in 2005 as compared to $9,669,000 in2004. The increase resulted primarily from higher payroll and related employeecosts and food costs necessary to support added amenities at the Company’sfacility, the increase in food and beverage sales and the addition of higherquality menu items. Additionally, fewer expenses were allocated to the gamingoperations through interdepartmental charges in 2005 since a lower percentageof gross revenues represent promotional items provided to gaming customers on acomplimentary basis as compared to 2004. Partially offsetting these increaseswas a decrease in concert expenses of $2,599,000 as a result of the Companypromoting fewer shows in 2005 as compared to 2004, including a large outdoorconcert promoted in 2004 that was not promoted in 2005.

 

Generaland administrative expenses increased by $162,000 to $4,765,000 from $4,603,000in 2004 primarily the result of higher wages and benefits and pension costs.

 

Depreciationexpense increased to $6,998,000 in 2005 from $6,791,000 in 2004 primarily dueto assets being placed in service related to the continued conversion of videolottery (slot) machines to ticket-in, ticket-out (cashless) technology.

 

Interestexpense increased by $1,113,000, primarily due to the increase in averageoutstanding borrowings during the year under our credit facility resulting fromour self tender in the fourth quarter of 2004 and an increase in the Company’saverage interest rate from 2.33% during 2004 to 4.23% during 2005.

 

TheCompany’s effective income tax rates were 40.7% and 40.6% for the years ended December 31,2005 and 2004, respectively.

 

Netearnings were $26,040,000 in 2005 as compared to $16,381,000 in 2004, anincrease of $9,659,000, or 59.0%.

 

On December 28, 2005, Dover Downs, Inc. closedon the sale of a shopping center it owned in Dover, Delaware. The shoppingcenter consisted of approximately 7.7 acres of real property with a one-storybuilding of approximately 95,700 square feet. The sales price was $12,450,000and the Company recognized a gain on the sale of $5,837,000 ($3,461,000 afterincome taxes). Additionally, effective December 2004, the Companychanged its policy relating to its point loyalty program to allow points earnedby customers to be redeemed for cash under certain circumstances. As a result,the Company recorded a non-recurring charge of $2,250,000 ($1,338,000 afterincome tax benefit) in the fourth quarter of 2004 to record the net impact ofthe program change. The Company believes that excluding the impact of theseitems will enhance comparative analysis of its results.

 

Thefollowing table reconciles and compares results reported in accordance withGenerally Accepted Accounting Principles (“GAAP”) for 2005 and 2004 withresults excluding the impact of the sale of the shopping center in 2005 and thechange in our point loyalty program in 2004: 

 

| ** **                                                              | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| GAAP net earnings                                                       |       | $          | 26,040,000 |       | $          | 16,381,000 |   |
| Gain on sale of shopping center, net of income taxes  of $2,376,000     |       | (3,461,000 | )          | —     |       |
| Non-recurring charge for points, net of income tax  benefit of $912,000 |       | —     |       | 1,338,000  |       |
| Pro forma net earnings                                                  |       | $          | 22,579,000 |       | $          | 17,719,000 |   |
| ** **                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| GAAP net earnings per common share – diluted                       |       | $          | 1.09       |       | $          | 0.62 |   |
| Gain on sale of shopping center, net of income taxes  of $0.10          |       | (0.15      | )          | —     |       |
| Non-recurring charge for points, net of income tax  benefit  of $0.03   |       | —     |       | 0.05       |       |
| Pro forma net earnings per common share – diluted                  |       | $          | 0.94       |       | $          | 0.67 |   |

 

Excludingthe gain on sale of the shopping center in 2005 and the net, non-recurringcharge for the 2004 change in our point loyalty program, pro forma net earningsin 2005 increased $4,860,000, or 27.4%, to $22,579,000 compared to 2004 proforma net earnings of $17,719,000. The increase was primarily due to theimproved results

 

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for our gaming operationsthat resulted from an increase in slot win and the elimination of the Caesars’management fee, partially offset by increased general and administrative,depreciation and interest expenses.

 

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

 

Gamingrevenues increased by $18,899,000, or 10.8%, to $193,922,000 in 2004, entirelythe result of increased play in our casino. During the first quarter of2004, we added 500 new video lottery (slot) machines which increased ouraverage number of machines from 2,000 in 2003 to 2,432 in 2004. Additionally,we have redirected our marketing efforts to attract more profitable casinocustomers by providing additional complimentary and discounted rooms in ourhotel. We believe that our marketing efforts have been effective at attractingcustomers to our casino and consequently increasing slot win.

 

Otheroperating revenues were $13,822,000 and $13,809,000 in 2004 and 2003,respectively. Net food and beverage revenues increased by $922,000 to$9,098,000 from $8,176,000 in 2003, primarily due to an increase in cash salesand a reduction in the amount of complimentary beverages being offered topatrons. Additionally, the Company promoted an outdoor concert for the firsttime in 2004 that generated revenues of $840,000. Partially offsetting theseincreases was the receipt of $1,300,000 in 2003 related to the settlement of abusiness interruption insurance claim and a decrease in net rooms revenue dueto the change in the Company’s marketing efforts which focused on providing ahigher percentage of its hotel rooms to customers on a complimentary basis.Other operating revenues do not include the retail amount of promotionalallowances which are provided to customers on a complimentary basis of$19,973,000 and $18,667,000 in 2004 and 2003, respectively.

 

Gamingexpenses increased by $14,302,000, or 10.3%, reflecting the higher gamingrevenues. Amounts retained by the State of Delaware and the amount collected bythe State for payment to the vendors under contract with the State who providethe video lottery (slot) machines and associated computer systems increased by$7,096,000 and $1,475,000, respectively. Amounts allocated from the videolottery operation for harness horse racing purses increased from $20,143,000 in2003 to $22,269,000 in 2004. Collectively, these statutory costs increased as apercentage of gaming revenues in 2004 as compared to 2003 in part due to a1.25% surcharge imposed by the State on the Company’s share of the videolottery (slot) proceeds that took effect in June of 2003. The remaining$3,605,000 increase in gaming expenses relates primarily to higher payroll andbenefits, primarily as a result of our casino expansion, and increasedmarketing costs.

 

Otheroperating expenses increased by $3,114,000, or 31.5%. Expenses related to ourfood and beverage operations were $9,669,000 in 2004 as compared to $7,350,000in 2003. The increase resulted primarily from higher payroll and related costsand food costs necessary to support added amenities at the Company’s facilityand the addition of higher quality menu items. Additionally, less food andbeverage expenses were allocated to the gaming operations throughinterdepartmental charges in 2004 since a lower percentage of food andbeverages were provided to gaming customers on a complimentary basis. Concertpromotion expenses of $1,212,000, relating to a large outdoor concert promotedby the Company in the third quarter of 2004, represented the remainder of theincrease in other operating expenses. Partially offsetting these increases wasa decrease in expenses for the Company’s hotel rooms operation as a result ofcost savings in the housekeeping department and a larger portion of rooms expensebeing allocated to the gaming operations through interdepartmental chargessince a higher percentage of rooms were provided to gaming customers on acomplimentary basis in 2004.

 

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

 

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

 

Interestexpense decreased by $80,000, primarily due to the decrease in outstandingborrowings under our credit facility for the first 11 months of 2004, partiallyoffset by an increase in the Company’s average interest rate from 2.07% during2003 to 2.33% during 2004.

 

17

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

 

Netearnings were $16,381,000 in 2004 as compared to $17,237,000 in 2003, adecrease of $856,000, or 5.0%.

 

TheCompany currently has a point loyalty program for its video lottery customerswhich allows them to earn points based on the volume of their video lotteryactivity. Prior to December 2004, the points could be redeemed for variousservices and merchandise throughout the gaming facility; however, they were notredeemable for cash or casino play. Effective December 2004, the Companychanged its policy relating to its point loyalty program to allow points earnedby customers to be redeemed for cash under certain circumstances. As a result,the Company recorded a non-recurring charge of $2,250,000 ($1,338,000 afterincome tax benefit) in the fourth quarter of 2004 to record the net impact ofthe program change. The estimated amount of points redeemable for cash wasrecorded as a reduction of revenue and the estimated amount of pointsredeemable for services and merchandise was recorded as gaming expense. Allreward points earned by customers are now expensed in the period earned.Additionally, net earnings for 2003 included proceeds of $1,300,000 ($771,000after income taxes) relating to the settlement of a business interruptioninsurance claim. The Company believes that excluding the impact of these itemswill enhance comparative analysis of its results.

 

Thefollowing table reconciles and compares results reported in accordance withGAAP for 2004 and 2003 with results excluding the impact of the change in ourpoint loyalty program in 2004 and receipt of insurance proceeds in 2003: 

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

 

Excludingthe net, non-recurring charge for the 2004 change in our point loyalty programand 2003 receipt of insurance proceeds from the settlement of a businessinterruption claim, pro forma net earnings in 2004 increased $1,253,000, or7.6%, to $17,719,000 compared to 2003 pro forma net earnings of $16,466,000.

 

**Liquidityand Capital Resources**

 

Netcash provided by operating activities was $29,521,000 for the year ended December 31,2005 compared to $27,807,000 for the year ended December 31, 2004. Theincrease was primarily due to the increase in net earnings before gain on saleof shopping center and non-recurring charges (which did not require the use ofcash) from $17,719,000 in 2004 to $22,579,000 in 2005, and the timing ofpayments to vendors. The increase in earnings was partially offset by increasedcontributions to our pension plan and income tax payments.

 

Netcash provided by investing activities was $6,406,000 for the year ended December 31,2005 compared to net cash used in investing activities of $6,329,000 for theyear ended December 31, 2004. Proceeds from the sale of a shopping centerowned by Dover Downs, Inc., net of transaction costs, were $11,918,000 forthe year ended December 31, 2005. Capital expenditures for 2005 relatedprimarily to the continued conversion of video lottery (slot) machines toticket-in, ticket-out (cashless) technology, payments related to our customermanagement and slot data system and the addition of new harness track lighting.Capital expenditures for 2004 related primarily to the construction of 11,000 additional square feet of gaming space toaccommodate the installation of 500 then newly authorized video lottery (slot)machines within our existing casino complex and the purchase of the newcustomer management and slot data system.

 

Netcash used in financing activities was $33,629,000 for the year ended December 31,2005 compared to $17,928,000 for the year ended December 31, 2004. Theincrease in net cash used in financing activities in 2005 compared to 2004 wasdue to higher net repayments of borrowings under our credit facility in 2005.These net repayments in 2005 were higher than in 2004 primarily because of theuse of $11,918,000 of proceeds from the sale of a shopping center owned by theCompany to repay our credit facility and the fact that during 2004, the Companyrepurchased 2,691,321 shares of its outstanding common stock and Class Acommon stock for $32,555,000 using the credit facility and the Company paiddown a portion of these borrowings during 2005 using cash from

 

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operations. The Companypaid $5,737,000 and $6,098,000 in regular quarterly cash dividends during 2005and 2004, respectively.

 

On January 25, 2006, the Company’s Board ofDirectors declared a quarterly cash dividend on both classes of common stock of$0.06 per share. The dividend is payable on March 10, 2006 to shareholdersof record at the close of business on February 10, 2006.

 

On October 23,2002, the Company’s Board of Directors authorized the repurchase of up to2,000,000 shares of the Company’s outstanding common stock. The purchases may bemade in the open market or in privately negotiated transactions as conditionswarrant. The repurchase authorization does not obligate the Company to acquireany specific number of shares and may be suspended at any time. Nopurchases were made during the year ended December 31, 2005. During the yearended December 31, 2004, the Company purchased and retired 50,900 sharesof its outstanding common stock pursuant to this plan at an average purchaseprice of $9.95 per share, not including nominal brokerage commissions. At December 31,2005, the Company had remaining repurchase authority of 1,779,155 shares.

 

Basedon current business conditions, the Company expects to make capitalexpenditures of approximately $4,500,000 during 2006, not including the$1,625,000 discussed below, or any additional amounts, related to the possiblehotel expansion. These expenditures primarily relate to casino renovations,improvements in our food & beverage departments and the continuedconversion of video lottery (slot) machines to ticket-in, ticket-out (cashless)technology. Additionally, the Company expects to contribute approximately $1,000,000to its pension plans in 2006.

 

On December 15,2005, the Company’s Board of Directors authorized the Company to commence atender offer to purchase up to 1,063,937 shares of its common stock and up to1,325,468 shares of its Class A common stock at a fixed price of $14.50per share. The offer commenced on December 19, 2005 and expired at 5:00 P.M.,eastern standard time, on January 19, 2006. The Company purchased1,063,937 shares of its common stock and 1,325,000 shares of its Class Acommon stock for $35,006,000, including expenses, in connection with the tenderoffer. The tender offer was funded with borrowings on the Company’s unsecuredrevolving line of credit.

 

The Company is exploring the possibility of an expansionto the Dover Downs Hotel and has hired architects, engineers and otherprofessionals to prepare drawings and cost estimates. The total cost of thispreliminary work is estimated at $1,750,000, of which approximately $125,000was paid as of December 31, 2005, and is expected to be completed by theend of the first quarter of 2006.

 

Since our video lottery (slot) machine casino opened in 1995, we hadbeen party to a management agreement with Caesars, under which Caesars was ouragent to supervise, manage and operate our video lottery (slot) machine casino. EffectiveDecember 28, 2004, that management agreement expired and we opted not torenew the agreement. As a result, we are no longer required to pay to Caesars amanagement fee. We have not and do not expect to incur any material costs toreplace functions for which Caesars had responsibility under this agreement.Caesars’ performance-based fees were $4,448,000 for the year ended December 31,2004.

 

Wehave a $70,000,000 unsecured revolving line of credit agreement, as amendedeffective December 14, 2005. At December 31, 2005, $24,075,000 wasoutstanding under the facility. Based on current business trends, we believethat our cash flows from operations and the funds available pursuant to ourrevolving credit facility will be sufficient to meet our short and long-termcash needs. Any significant expansion of our hotel or gaming facility that we may decideto undertake, any significant acquisitions, or any material adverse change inour operations could cause the need for additional financing. The Companyexpects that its net cash flows from operating activities and funds availablefrom its credit facility will be sufficient to provide for its working capitalneeds and capital spending requirements at least through the next twelvemonths, as well as any cash dividends the Company’s Board of Directors may declare.We expect cash flows from operating activities and funds available from ourcredit facility to also provide for long-term liquidity.

 

Theintroduction or expansion of gaming in and around our market area could have amaterial adverse effect on our cash flows and results of operations. See Part I,Item 1 – Business included elsewhere in this Annual Report on Form 10-Kfor further discussion.

 

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#### **Contractual Obligations**

#### ** **

At December 31,2005, the Company had the following contractual obligations:

 
| ** **             | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **             | ** ** | **Total**  | ** ** | **2006**                                  | ** ** | **2007 – 2008** | ** ** | **2009 – 2010** | ** ** | **Thereafter** | ** ** |
| Notes payable to banks |       | $          | 24,075,000 |                                      | $          | — |   | $ | 24,075,000 |   | $ | — |   | $ | — |   |
| Purchase obligation    |       | 1,625,000  |       | 1,625,000                                 |       | — |   | — |   | — |   |
|                   |       | $          | 25,700,000 |                                      | $          | 1,625,000 |   | $ | 24,075,000 |   | $ | — |   | $ | — |   |

 

Wehave a $70,000,000 unsecured revolving line of credit agreement. At December 31,2005, $24,075,000 was outstanding under the facility.

 

At December 31,2005, we have a purchase obligation related to the possible expansion of the Dover Downs Hotel. The Company has hiredarchitects, engineers and other professionals to prepare drawings and costestimates. The total cost of this preliminary work is estimated at $1,750,000,of which approximately $125,000 was paid as of December 31, 2005, and isexpected to be completed by the end of the first quarter of 2006.

 

#### **Related PartyTransactions**

#### ** **

SeeNOTE 9 – Related Party Transactions of the consolidated financial statementsincluded elsewhere in this Annual Report on Form 10-K for a fulldescription of related party transactions.

 

#### **Critical AccountingPolicies**

#### ** **

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

 

*PointsProgram*

 

TheCompany currently has a point loyalty program for its video lottery customerswhich allows them to earn points based on the volume of their video lotteryactivity. Prior to December 2004, the points could be redeemed for variousservices and merchandise throughout the gaming facility; however, they were notredeemable for cash or casino play. Effective December 2004, the Companychanged its policy relating to its point loyalty program to allow points earnedby customers to be redeemed for cash under certain circumstances. As a result,all points earned by customers are now expensed in the period they are earned.The estimated amount of points redeemable for cash is recorded as a reductionof revenue and the estimated amount of points redeemable for services andmerchandise is recorded as gaming expense. In determining the amount of theliability, which was $2,289,000 and $2,678,000, respectively, at December 31,2005 and 2004, the Company estimates a redemption rate, a cost of rewards to beoffered and the mix of cash, goods and services for which reward points will beredeemed. We use historical data to estimate those amounts.

 

*Propertyand Equipment*

 

Propertyand equipment are recorded at cost. Depreciation is provided for financialreporting purposes using the straight-line method over estimated useful livesranging from 5 to 10 years for furniture, fixtures and equipment and up to 40years for facilities. These estimates require assumptions that are believed tobe reasonable. The Company performs reviews for impairment of long-lived assetswhenever events or changes in circumstances indicate that the carrying value ofan asset may not be recoverable. No such events or changes incircumstances have occurred to date. An impairment loss would be measured asthe amount by which the carrying amount of the asset exceeds its fair value.Generally, fair value will be determined using valuation techniques such as thepresent value of future cash flows.

 

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**RecentAccounting Pronouncements**

 

See NOTE 2—Summary of Significant Accounting Policies****of the consolidated financial statements included elsewherein this Annual Report on Form 10-K for a full description of recentaccounting pronouncements including the respective expected dates of adoptionand effects on results of operations and financial condition.

 

### **Factors That May AffectOperating Results; Forward-Looking Statements**

### ** **

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

 

Variousrisks and uncertainties may affect the operation, performance, developmentand results of our business and could cause future outcomes to differmaterially from those set forth in our forward-looking statements, includingthe following factors:

 

•      successof any expansion to or renovation of our existing facilities or changes in ourgrowth strategies;

 

•      ourdevelopment and potential acquisition of new facilities;

 

•      anticipatedtrends in the gaming industry;

 

•      patrondemographics;

 

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

 

•      ourability to finance future business requirements;

 

•      ourability to effectively compete in the marketplace;

 

•      theavailability of adequate levels of insurance;

 

•      ourability to successfully integrate acquired companies and businesses;

 

•      managementretention and development;

 

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

 

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

 

•      militaryor other government actions; and

 

•      nationalor local catastrophic events.

 

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Weundertake no obligation to publicly update or revise any forward-lookingstatements as a result of future developments, events or conditions. New riskfactors emerge from time to time and it is not possible for us to predict allsuch risk factors, nor can we assess the impact of all such risk factors on ourbusiness or the extent to which any factor, or combination of factors, may causeactual results to differ significantly from those forecast in anyforward-looking statements. Given these risks and uncertainties, stockholdersshould not overly rely or attach undue weight to our forward-looking statementsas an indication of our actual future results.

 

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

 

We compete in local and regional markets with horsetracks, off-track betting parlors, state run lotteries, casinos and othergaming facilities. We cannot be certain that we will maintain our market shareor compete more effectively with our competitors. The introduction orexpansion of gaming in neighboring jurisdictions, particularly Maryland,Virginia, Washington, D.C., Pennsylvania or New Jersey, or the legalization ofadditional gaming venues in Delaware, could have a material adverse effect onour cash flows and results of operations. Fromtime to time legislation is proposed for adoption in these jurisdictions whichif enacted, would further expand state gambling and wagering opportunities,including video lottery (slot) machines at racetracks. Enactment of suchlegislation could increase our competition and could adversely affect ourbusiness, financial condition and overall profitability. For example, in2005, the Maryland Senate passed a bill providing for various gaming venues forthe third straight year and for the third straight year could not reach anyconsensus with the Maryland House. Accordingly, no legislation was passed.Approximately 70% of our customers come from Maryland, Pennsylvania, Virginiaand the District of Columbia. In July 2004,Pennsylvania adopted legislation which authorizes up to 61,000 slot machines atvarious existing and proposed venues throughout the state. It is difficult forus to predict the effect that such legislation will have on us, but we estimatethat one or more facilities in Pennsylvania may begin operations in thelatter half of 2006. Pennsylvania will have one of the highest effective taxrates on slot machine gaming in the country and will charge an up front$50,000,000 license fee to the horse racing and casino venues that are granteda gaming license. Management has estimated that slot win from Pennsylvaniapatrons represents approximately 6% of our total slot win.

 

*All OfOur Facilities Are In One Location*

 

Ourfacilities are located adjacent to one another at a single location in Dover,Delaware. Any prolonged disruption of operations at these facilities due todestruction of or material damage to the facilities or other reasons couldadversely affect our financial condition and results of operations. We maintainproperty and business interruption insurance to protect against such types ofdisruption, but there can be no assurance that the proceeds of such insurancewould be adequate to repair or rebuild our facilities in such event or to compensateus for lost profit during the period of any such disruption.

 

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

 

TheDelaware State Lottery Office and the Delaware Harness Racing Commission regulateour gaming operations. Our license from the Commission must be renewed on anannual basis. To keep our license for video lottery (slot) machine gaming, 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 anyapplication for a license or suspend or revoke a license once it is issued. TheDirector of the Delaware State Lottery Office has broad discretion to revoke,suspend or modify the terms of a video lottery 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 AnyAdditional Government Regulation Or Taxation Of Gaming Activities CouldSubstantially Reduce Our Revenue Or Profit*

 

Videolottery (slot) machine gaming, harness horse racing and pari-mutuel wageringare subject to extensive government regulation. Delaware law regulates the winwe are entitled to retain and the percentage of commission we are entitled toreceive from our gaming revenues, which comprises a significant portion of ouroverall revenues. The State granted us a license to conduct video lottery(slot) machine operations and a license to conduct harness

 

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horse races and pari-mutuelwagering. The laws under which these licenses are granted could be modified orrepealed at any time and we could be required to terminate our gamingoperations. If we are required to terminate our gaming operations or if theamount of the commission we receive from the State for conducting our gamingoperations is decreased, our business operations and overall profitabilitywould be significantly impaired.

 

Webelieve that the prospect of significant additional tax revenue is one of theprimary reasons why jurisdictions have legalized gaming. As a result, gamingoperators are typically subject to significant taxes and fees in addition tonormal federal and state corporate income taxes. These taxes and fees aresubject to increase at any time. We pay substantial taxes and fees with respectto our operations and will likely incur similar burdens in any otherjurisdiction in which we may conduct gaming operations in the future. Anymaterial increase in taxes or fees, or the adoption of additional taxes or fees,may have a material adverse effect on our future financial results.

 

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

 

*We Do NotOwn Or Lease Our Video Lottery (Slot) Machines And Related Technology*

 

We donot own or lease the video lottery (slot) machines or computer systems used bythe State in connection with our video lottery gaming operations. The LotteryDirector enters into contracts directly with the providers of the video lottery(slot) machines and computer systems. The State purchases or leases allequipment 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 eventwould be outside of our control and could adversely affect our gaming revenues.

 

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

 

The Company does not utilize financial instruments for trading purposesand holds no derivative financial instruments which could expose it to marketrisk. Our exposure to market risks related to fluctuations in interest rates islimited to our variable rate borrowings of $24,075,000 at December 31,2005 under our revolving credit facility. A change in interest rates of onepercent on the balance outstanding at December 31, 2005 would cause achange in total annual interest costs of $241,000. The carrying values of theseborrowings approximate their fair values at December 31, 2005.

 

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

#### ** **

Gaming & Entertainment’s consolidatedfinancial statements and the Report of Independent Registered Public AccountingFirm included in this report are shown on the Index to Consolidated FinancialStatements on page 31.

 

**Item 9.****    Changes InAnd Disagreements With Accountants On Accounting And Financial Disclosure**

 

None.

 

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**Item 9A.****Controlsand Procedures**

 

*(a) Evaluationof Disclosure Controls and Procedures*

 

Wehave established disclosure controls and procedures to ensure that materialinformation relating to the Company, including its consolidated subsidiaries,is made known to the officers who certify the Company’s financial reports andto other members of senior management and the Board of Directors.

 

Basedon their evaluation as of December 31, 2005, the Chief Executive Officerand Chief Financial Officer of the Company have concluded that the Company’sdisclosure 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 required to be disclosed by the Company in thereports that it files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin SEC rules and forms.

 

*(b) Changesin Internal Control Over Financial Reporting*

 

Therehave been no changes in our internal control over financial reporting duringthe fiscal quarter ended December 31, 2005 that have materially affected,or that are reasonably likely to materially affect, our internal control overfinancial reporting.

 

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

 

TheCompany’s management is responsible for establishing and maintaining adequateinternal control over financial reporting. The Company conducted an evaluationof the effectiveness of its internal control over financial reporting based onthe framework in *Internal Control – Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission. Basedon the Company’s evaluation, management of the Company concluded that theCompany’s internal control over financial reporting was effective as of December 31,2005. Our management’s assessment of the effectiveness of our internal controlover financial reporting as of December 31, 2005 has been audited by KPMGLLP, an independent registered public accounting firm, as stated in theirreport which is included herein.

 

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*(d) Report of Independent Registered PublicAccounting Firm*

 

The Board of Directorsand Stockholders

Dover Downs Gaming &Entertainment, Inc.:

 

Wehave audited management’s assessment, included in the accompanying *Management’s Report on Internal Control Over Financial Reporting (Item9A(c)),*that Dover Downs Gaming & Entertainment, Inc.(the Company) maintained effective internal control over financial reporting asof December 31, 2005, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan 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, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in the circumstances.We believe that our audit provides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

 

In ouropinion, management’s assessment that Dover Downs Gaming &Entertainment, Inc. maintained effective internal control over financialreporting as of December 31, 2005, is fairly stated, in all materialrespects, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Also, in our opinion, DoverDowns Gaming & Entertainment, Inc. maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2005, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofDover Downs Gaming & Entertainment, Inc. and subsidiaries as of December 31,2005 and 2004, and the related consolidated statements of earnings andcomprehensive earnings and cash flows for each of the years in the three-yearperiod ended December 31, 2005, and our report dated March 9, 2006expressed an unqualified opinion on those consolidated financial statements.

 

KPMGLLP

 

Philadelphia, Pennsylvania

March 9, 2006

 

25

----

 

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

 

None.

 

**Part III**

 

**Item 10.****    DirectorsAnd Executive Officers Of The Registrant**

 

Exceptas presented below, biographical information relating to the Company’sdirectors and executive officers, information regarding the Company’s auditcommittee financial experts and information on Section 16(a) BeneficialOwnership Reporting Compliance called for by this Item 10 are incorporated byreference to the Gaming & Entertainment Proxy Statement to be filedpursuant to Regulation 14A for the Annual Meeting of Stockholders to be held onApril 26, 2006.

 

TheCompany has adopted a Code of Business Conduct applicable to the ChiefExecutive Officer, Chief Financial Officer, Chief Operating Officer, Controllerand other employees performing similar functions as designated by the Company’sChief Executive Officer. A copy of the Code of Business Conduct is available onthe Company’s website at http://www.doverdowns.com. The Company willpost on its website any amendments to, or waivers from, its Code of BusinessConduct as required by law.

 

Executive Officersof the Registrant. As of December 31, 2005, theexecutive officers of the registrant were:

 
| **Name**             | ** ** | **Position**                                                       | ** ** | **Age** | ** ** | **Term of Office** |
|----------------------|------------|--------------------------------------------------------------------|------------|---------|------------|--------------------|
|                 |       |                                                               |       |    |       |               |
| Denis McGlynn        |       | President and  Chief Executive Officer                             |       | 60      |       | 11/79 to date      |
|                 |       |                                                               |       |    |       |               |
| Edward J. Sutor      |       | Executive Vice  President and Chief Operating Officer              |       | 56      |       | 3/99 to date       |
|                 |       |                                                               |       |    |       |               |
| Timothy R. Horne     |       | Sr. Vice  President-Finance, Treasurer and Chief Financial Officer |       | 39      |       | 11/96 to date      |
|                 |       |                                                               |       |    |       |               |
| Klaus  M. Belohoubek |       | Sr.  Vice President-General Counsel and Secretary                  |       | 46      |       | 7/99  to date      |

 

OurChairman of the Board, Henry B. Tippie, is a non-employee director and,therefore, not an executive officer of the Company. Mr. Tippie has servedthe Company in that capacity, or as Vice Chairman of the Board, for over 9years. Mr. Tippie also serves as Chairman of the Board to DVD as anon-employee director.

 

DenisMcGlynn has served as the Company’s President and CEO for 26 years. Mr. McGlynnalso serves as President and Chief Executive Officer to DVD.

 

EdwardJ. Sutor joined the Company in March 1999. Prior to joining the Company, Mr. Sutorserved as Senior Vice President of Finance at Caesars Atlantic City from 1983until 1999. Mr. Sutor previously served as Executive Vice President toDVD, a position he held from 1999 to 2002.

 

TimothyR. Horne joined the Company in November 1996. Mr. Horne previouslyserved as Vice President-Finance and Chief Financial Officer to DVD, a positionhe held for over 5 years.

 

KlausM. Belohoubek has been Vice President-General Counsel and Secretary since 1999and has provided legal representation to the Company in various capacitiessince 1990. Mr. Belohoubek also serves as Sr. Vice President-GeneralCounsel and Secretary to DVD.

 

26

----

 

**Item 11.****    ExecutiveCompensation**

 

The information called for by this Item 11 isincorporated by reference to the Gaming & Entertainment ProxyStatement to be filed pursuant to Regulation 14A for the Annual Meeting ofStockholders to be held on April 26, 2006.

 

**Item 12.****    SecurityOwnership Of Certain Beneficial Owners And Management And Related StockholderMatters**

 

The information called for by this Item 12 isincorporated by reference to the Gaming & Entertainment Proxy Statementto be filed pursuant to Regulation 14A for the Annual Meeting of Stockholdersto be held on April 26, 2006.

 

**Item 13.****CertainRelationships And Related Transactions**

 

The information called for by this Item 13 isincorporated by reference to the Gaming & Entertainment ProxyStatement to be filed pursuant to Regulation 14A for the Annual Meeting ofStockholders to be held on April 26, 2006.

 

**Item 14.****PrincipalAccounting Fees And Services**

 

The information called for by this Item 14 isincorporated by reference to the Gaming & Entertainment ProxyStatement to be filed pursuant to Regulation 14A for the Annual Meeting ofStockholders to be held on April 26, 2006.

 

**Part IV**

 

**Item 15.****Exhibits,Financial Statement Schedules**

 
| (a)(1) |   | Financial  Statements – See accompanying Index to Consolidated  Financial Statements on page 31.                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (2)    |   | Financial  Statement Schedules – None.                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (3)    |   | Exhibits:                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.1    |   | Amended and Restated Agreement Regarding  Distribution and Plan of Reorganization, dated as of February 15, 2002,  by and between Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.)  and Dover Downs Gaming & Entertainment, Inc. (incorporated  herein by reference to Exhibit 2.1 to the Form 10 filed on February 26,  2002, which was declared effective on March 7, 2002). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1    |   | Certificate of  Incorporation of Dover Downs Gaming & Entertainment, Inc.  (incorporated herein by reference to Exhibit 3.1 to the Form 10  filed on November 21, 2001, which was declared effective on March 7,  2002).                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2    |   | Amended and Restated  By-laws of Dover Downs Gaming & Entertainment, Inc. dated March 1,  2002 (incorporated herein by reference to Exhibit 3.2 to the Form 10  filed on March 7, 2002).                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1    |   | Form of  Common Stock Certificate of Dover Downs Gaming & Entertainment, Inc.  (incorporated herein by reference to Exhibit 4.1 to the Form 10  filed on November 21, 2001, which was declared effective on March 7,  2002).                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2    |   | Rights Agreement  dated as of January 2, 2002 between Dover Downs Gaming &  Entertainment, Inc. and Mellon Investor Services, as Rights Agent  (incorporated herein by reference to Exhibit 4.2 to the Form 10  filed on January 16, 2002, which was declared effective on March 7,  2002).                                                                                                             |

 

27

----

 
| 10.1  |   | Employee  Benefits Agreement, dated as of January 15, 2002, by and between Dover  Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) and Dover  Downs Gaming & Entertainment, Inc. (incorporated herein by  reference to Exhibit 10.2 to the Form 10 filed on January 16,  2002, which was declared effective on March 7, 2002).           |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.2  |   | Transition  Support Services Agreement, dated as of January 15, 2002, by and between  Dover Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) and  Dover Downs Gaming & Entertainment, Inc. (incorporated herein  by reference to Exhibit 10.3 to the Form 10 filed on January 16,  2002, which was declared effective on March 7, 2002). |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.3  |   | Tax Sharing  Agreement, dated as of January 15, 2002, by and between Dover  Motorsports, Inc. (f/k/a Dover Downs Entertainment, Inc.) and Dover  Downs Gaming & Entertainment, Inc. (incorporated herein by  reference to Exhibit 10.4 to the Form 10 filed on January 16,  2002, which was declared effective on March 7, 2002).                 |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.4  |   | Real Property  Agreement dated as of January 15, 2002, by and between Dover Motorsports, Inc.  (f/k/a Dover Downs Entertainment, Inc.) and Dover Downs Gaming &  Entertainment, Inc. (incorporated herein by reference to Exhibit 10.5  to the Form 10 filed on January 16, 2002, which was declared effective  on March 7, 2002).                |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.5  |   | Agreement  between Dover Downs, Inc. and Delaware Standardbred Owners Association, Inc.  dated October 22, 2003 (incorporated herein by reference to Exhibit 10.9  to the Form 10-K filed on March 9, 2004).                                                                                                                                                         |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.6  |   | Credit Agreement among Dover Downs Gaming &  Entertainment, Inc. and Wilmington Trust Company, dated as of January 15,  2002 (incorporated herein by reference to Exhibit 10.10 to the Form 10  filed on January 16, 2002, which was declared effective on March 7,  2002).                                                                                 |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.7  |   | 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).                                                                                   |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 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      |   | 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).                                                                                                          |

 

28

----

 
| 10.14      |   | 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).     |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                            |
| 10.15      |   | 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).    |
|       |   |                                                                                                                                                                                                                                                                                            |
| 10.16      |   | 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). |
|       |   |                                                                                                                                                                                                                                                                                            |
| 10.17      |   | Amended and  Restated Non-Compete Agreement between Dover Downs Gaming &  Entertainment, Inc. and Patrick J. Bagley dated February 13, 2006  (incorporated herein by reference to Exhibit 10.5 to the Form 8-K  filed on February 17, 2006).                  |
|       |   |                                                                                                                                                                                                                                                                                            |
| 10.18      |   | 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).                                                |
|       |   |                                                                                                                                                                                                                                                                                            |
| 10.19      |   | Dover Downs  Gaming & Entertainment, Inc. 2002 Stock Incentive Plan, as  Amended and Restated (incorporated herein by reference to Exhibit A to  the Company’s Proxy Statement filed on March 29, 2004).                                                           |
|       |   |                                                                                                                                                                                                                                                                                            |
| 10.20      |   | Form of  Incentive Stock Option Agreement Used with Dover Downs Gaming &  Entertainment, Inc. 2002 Stock Incentive Plan, as Amended and Restated  (incorporated herein by reference to Exhibit 10.1 to the Form 10-Q  filed on November 3, 2004).             |
|       |   |                                                                                                                                                                                                                                                                                            |
| 10.21      |   | Form of  Restricted Stock Grant Agreement Used with Dover Downs Gaming &  Entertainment, Inc. 2002 Stock Incentive Plan, as Amended and Restated  (incorporated herein by reference to Exhibit 10.2 to the Form 10-Q  filed on November 3, 2004).             |
|       |   |                                                                                                                                                                                                                                                                                            |
| 21.1  |   | List of  Subsidiaries of Dover Downs Gaming & Entertainment, Inc.                                                                                                                                                                                                                 |
|       |   |                                                                                                                                                                                                                                                                                            |
| 31.1  |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)                                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                            |
| 31.2  |   | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a)                                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                            |
| 32.1  |   | Certification of  Chief Executive Officer Pursuant to 18 U.S.C. Sec. 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                           |
|       |   |                                                                                                                                                                                                                                                                                            |
| 32.2  |   | Certification of  Chief Financial Officer Pursuant to 18 U.S.C. Sec. 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                           |
|       |   |                                                                                                                                                                                                                                                                                            |
| 99.1  |   | Information  Statement dated as of March 7, 2002 (incorporated herein by reference to  Exhibit 99.1 to the Form 10 filed on March 7, 2002).                                                                                                                                 |
|       |   |                                                                                                                                                                                                                                                                                            |
| 99.2  |   | Audit Committee Charter of Dover Downs Gaming &  Entertainment, Inc. (incorporated herein by reference to Exhibit B  to the Company’s Proxy Statement filed on March 29, 2004).                                                                                    |

 

29

----

 

**Signatures**

 

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

 
| DATED: | March 9,  2006 |                                   | Dover Downs  Gaming & Entertainment, Inc. |   |
|--------|---------------------|----------------------------------------|---------------------------------------------------------|--------|
|   | Registrant          |                                   |
|   |                |
|   | BY:                 | /s/ Denis  McGlynn                     |                                                    |
|   |                | Denis McGlynn                          |
|   |                | President and  Chief Executive Officer |
|   |                | and Director                           |
|        |                     |                                        |                                                         |        |  |  |

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated:

 
| /s/ Timothy R.  Horne          |   | Sr. Vice  President-Finance,           | March 9,  2006 |
|--------------------------------|--------|----------------------------------------|---------------------|
| Timothy R. Horne               |   | Treasurer and  Chief Financial Officer |                |
|                           |   |                                   |                |
| /s/ Henry B.  Tippie           |   | Chairman of the  Board                 | March 9,  2006 |
| Henry B. Tippie                |   |                                   |                |
|                           |   |                                   |                |
| /s/ Kenneth K.  Chalmers       |   | Director and  Chairman                 | March 9,  2006 |
| Kenneth K.  Chalmers           |   | of the Audit  Committee                |                |
|                           |   |                                   |                |
| /s/ R. Randall  Rollins        |   | Director                               | March 9,  2006 |
| R. Randall  Rollins            |   |                                   |                |
|                           |   |                                   |                |
| /s/ Patrick J.  Bagley         |   | Director                               | March 9,  2006 |
| Patrick J.  Bagley             |   |                                   |                |
|                           |   |                                   |                |
| /s/ John W.  Rollins, Jr. |   | Director                               | March 9,  2006 |
| John W. Rollins, Jr.      |   |                                   |                |
|                           |   |                                   |                |
| /s/ Jeffrey W.  Rollins        |   | Director                               | March 9,  2006 |
| Jeffrey W.  Rollins            |   |                                   |                |

 

30

----

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
|                                                                                                                      | Page   |
|---------------------------------------------------------------------------------------------------------------------------|--------|
| Statement of Management Responsibility                                                                                    | 32     |
|                                                                                                                      |   |
| Report of Independent  Registered Public Accounting Firm                                                                  | 33     |
|                                                                                                                      |   |
| Consolidated Statement of  Earnings and Comprehensive Earnings for the years ended December 31,  2005, 2004 and 2003 | 34     |
|                                                                                                                      |   |
| Consolidated Balance Sheet at December 31,  2005 and 2004                                                            | 35     |
|                                                                                                                      |   |
| Consolidated Statement of  Cash Flows for the years ended December 31, 2005, 2004 and 2003                           | 36     |
|                                                                                                                      |   |
| Notes to the Consolidated  Financial Statements                                                                           | 37     |

 

31

----

 

**STATEMENT OF MANAGEMENT RESPONSIBILITY**

** **

DoverDowns Gaming & Entertainment, Inc. and subsidiaries’ (the “Company”)management is responsible for the preparation, integrity and objectivity of theconsolidated financial statements and other financial information included inthe Company’s 2005 Annual Report on Form 10-K. The consolidated financialstatements have been prepared in conformity with U.S. generally acceptedaccounting principles and reflect the effects of certain estimates andjudgments made by management.

 

TheCompany’s management also is responsible for establishing and maintaining asystem of internal controls designed to provide reasonable assurance thatassets are safeguarded and transactions are properly recorded and executed inaccordance with management’s authorization. The system is regularly monitoredby direct management review and by internal auditors who conduct an extensiveprogram of audits throughout the Company. The Director of Internal Auditreports directly to the Audit Committee of the Board of Directors. We haveconfidence in our financial reporting, the underlying system of internalcontrols, and our people, who are objective in their responsibilities andoperate under the Company’s Code of Business Conduct and with the highest levelof ethical standards. These standards are a key element of the Company’scontrol system.

 

TheCompany conducted an evaluation of the effectiveness of its internal control overfinancial reporting based on the framework in *InternalControl - Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on the Company’s evaluation,management of the Company concluded that the Company’s internal control overfinancial reporting was effective as of December 31, 2005.

 

TheAudit Committee of the Board of Directors, which is comprised entirely ofindependent directors, has direct and private access to and meets regularlywith management, the internal auditors and the independent registered publicaccounting firm to review accounting, reporting, auditing and internal controlmatters.

 

 
| /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            |

 

32

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

The Board of Directorsand Stockholders

Dover Downs Gaming &Entertainment, Inc.:

 

Wehave audited the accompanying consolidated balance sheets of Dover Downs Gaming &Entertainment, Inc. and**subsidiaries(the Company) as of December 31, 2005 and 2004, and the relatedconsolidated statements of earnings and comprehensive earnings and cash flowsfor each of the years in the three-year period ended December 31, 2005.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.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Dover Downs Gaming &Entertainment, Inc. and subsidiaries as of December 31, 2005 and2004, and the results of their operations and their cash flows for each of theyears in the three-year period ended December 31, 2005, in conformity withU.S. generally accepted accounting principles.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Dover DownsGaming & Entertainment, Inc.’s internal control over financialreporting as of December 31, 2005, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated March 9, 2006 expressed an unqualified opinion onmanagement’s assessment of, and the effective operation of, internal controlover financial reporting.

 

KPMGLLP

 

Philadelphia,Pennsylvania

March 9, 2006

 

33

----

 

**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 
| **CONSOLIDATED STATEMENT  OF EARNINGS** |
|-----------------------------------------|
| **AND  COMPREHENSIVE EARNINGS**         |

### ** **

 
| ** **                              | ** ** | **Years ended December 31,** | ** **  |
|-----------------------------------------|------------|---------------------------------------------|-------------|
| ** **                              | ** ** | **2005**                                    | ** **  | **2004** | ** ** | **2003** | ** ** |
| Revenues:                               |       |                                        |        |   |   |   |   |
| Gaming                                  |       | $                                           | 202,372,000 |   | $ | 193,922,000 |   | $ | 175,023,000 |   |
| Other operating                         |       | 14,480,000                                  |        | 13,822,000 |   | 13,809,000 |   |
|                                    |       | 216,852,000                                 |        | 207,744,000 |   | 188,832,000 |   |
| Less – non-recurring gaming charge |       | —                                      |        | 448,000 |   | — |   |
|                                    |       | 216,852,000                                 |        | 207,296,000 |   | 188,832,000 |   |
| Expenses:                               |       |                                        |        |   |   |   |   |
| Gaming                                  |       | 151,973,000                                 |        | 152,725,000 |   | 138,423,000 |   |
| Non-recurring gaming charge             |       | —                                      |        | 1,802,000 |   | — |   |
| Other operating                         |       | 13,167,000                                  |        | 13,013,000 |   | 9,899,000 |   |
| General and administrative              |       | 4,765,000                                   |        | 4,603,000 |   | 4,317,000 |   |
| Depreciation                            |       | 6,998,000                                   |        | 6,791,000 |   | 6,287,000 |   |
|                                    |       | 176,903,000                                 |        | 178,934,000 |   | 158,926,000 |   |
|                                    |       |                                        |        |   |   |   |   |
| Operating earnings                      |       | 39,949,000                                  |        | 28,362,000 |   | 29,906,000 |   |
|                                    |       |                                        |        |   |   |   |   |
| Gain on sale of shopping center         |       | 5,837,000                                   |        | — |   | — |   |
| Interest expense                        |       | (1,875,000                                  | )           | (762,000 | ) | (842,000 | ) |
|                                    |       |                                        |        |   |   |   |   |
| Earnings before income taxes            |       | 43,911,000                                  |        | 27,600,000 |   | 29,064,000 |   |
|                                    |       |                                        |        |   |   |   |   |
| Income taxes                            |       | 17,871,000                                  |        | 11,219,000 |   | 11,827,000 |   |
|                                    |       |                                        |        |   |   |   |   |
| Net earnings                            |       | 26,040,000                                  |        | 16,381,000 |   | 17,237,000 |   |
|                                    |       |                                        |        |   |   |   |   |
| Change in minimum pension liability     |       | —                                      |        | — |   | 127,000 |   |
|                                    |       |                                        |        |   |   |   |   |
| Comprehensive earnings                  |       | $                                           | 26,040,000  |   | $ | 16,381,000 |   | $ | 17,364,000 |   |
|                                    |       |                                        |        |   |   |   |   |
| Net earnings per common share (Note 2): |       |                                        |        |   |   |   |   |
| Basic                                   |       | $                                           | 1.09        |   | $ | 0.62 |   | $ | 0.65 |   |
| Diluted                                 |       | $                                           | 1.09        |   | $ | 0.62 |   | $ | 0.65 |   |

 

The Notes to the Consolidated Financial Statements are an integral part ofthese consolidated statements.

 

34

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**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

**CONSOLIDATED BALANCE SHEET**

 
| ** **                                                                                                                                        | ** ** | **December 31,** | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                                                        | ** ** | **2005**              | ** **  | **2004** | ** ** |
| **ASSETS**                                                                                                                                        | ** ** | ** **            | ** **  | ** ** | ** ** |
| Current assets:                                                                                                                                   |       |                  |        |   |   |
| Cash                                                                                                                                              |       | $                     | 19,986,000  |   | $ | 17,688,000 |   |
| Accounts receivable                                                                                                                               |       | 3,805,000             |        | 2,919,000 |   |
| Due from State of Delaware                                                                                                                        |       | 9,100,000             |        | 10,080,000 |   |
| Inventories                                                                                                                                       |       | 1,955,000             |        | 2,147,000 |   |
| Prepaid expenses and other                                                                                                                        |       | 2,000,000             |        | 2,220,000 |   |
| Receivable from Dover Motorsports, Inc.                                                                                                      |       | 15,000                |        | 2,000 |   |
| Deferred income taxes                                                                                                                             |       | 2,067,000             |        | 2,168,000 |   |
| Total current assets                                                                                                                              |       | 38,928,000            |        | 37,224,000 |   |
|                                                                                                                                              |       |                  |        |   |   |
| Property and equipment, net                                                                                                                       |       | 114,533,000           |        | 123,076,000 |   |
| Total assets                                                                                                                                      |       | $                     | 153,461,000 |   | $ | 160,300,000 |   |
|                                                                                                                                              |       |                  |        |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                     | ** ** | ** **            | ** **  | ** ** | ** ** |
| Current liabilities:                                                                                                                              |       |                  |        |   |   |
| Accounts payable                                                                                                                                  |       | $                     | 4,814,000   |   | $ | 6,801,000 |   |
| Purses due horsemen                                                                                                                               |       | 8,332,000             |        | 9,082,000 |   |
| Accrued liabilities                                                                                                                               |       | 12,748,000            |        | 11,990,000 |   |
| Income taxes payable                                                                                                                              |       | 3,706,000             |        | 651,000 |   |
| Deferred revenue                                                                                                                                  |       | 112,000               |        | 195,000 |   |
| Total current liabilities                                                                                                                         |       | 29,712,000            |        | 28,719,000 |   |
|                                                                                                                                              |       |                  |        |   |   |
| Notes payable to banks                                                                                                                            |       | 24,075,000            |        | 51,950,000 |   |
| Deferred income taxes                                                                                                                             |       | 6,404,000             |        | 6,861,000 |   |
|                                                                                                                                              |       |                  |        |   |   |
| 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: 10,639,874 and 9,363,791, respectively                |       | 1,064,000             |        | 936,000 |   |
| Class A common stock, $.10 par value;  50,000,000 shares authorized; shares issued and outstanding: 13,254,687 and  14,475,059, respectively |       | 1,326,000             |        | 1,448,000 |   |
| Additional paid-in capital                                                                                                                        |       | 36,461,000            |        | 35,764,000 |   |
| Retained earnings                                                                                                                                 |       | 55,459,000            |        | 35,156,000 |   |
| Deferred compensation                                                                                                                             |       | (1,040,000            | )           | (534,000 | ) |
| Total stockholders’ equity                                                                                                                   |       | 93,270,000            |        | 72,770,000 |   |
| Total liabilities and stockholders’ equity                                                                                                   |       | $                     | 153,461,000 |   | $ | 160,300,000 |   |

 

The Notes to the Consolidated Financial Statements are an integral part ofthese consolidated statements.

 

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**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

 

 
| ** **                                                                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Operating activities:                                                                |       |                                        |       |   |   |   |   |
| Net earnings                                                                         |       | $                                           | 26,040,000 |   | $ | 16,381,000 |   | $ | 17,237,000 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation                                                                         |       | 6,998,000                                   |       | 6,791,000 |   | 6,287,000 |   |
| Amortization of credit facility origination fees                                     |       | 41,000                                      |       | 62,000 |   | 31,000 |   |
| Amortization of deferred compensation                                                |       | 214,000                                     |       | 67,000 |   | — |   |
| Deferred income taxes                                                                |       | (356,000                                    | )          | 165,000 |   | 1,116,000 |   |
| Gain on sale of shopping ceneter                                                     |       | (5,837,000                                  | )          | — |   | — |   |
| Changes in assets and liabilities:                                                   |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                  |       | (886,000                                    | )          | (1,005,000 | ) | 1,077,000 |   |
| Due from State of Delaware                                                           |       | 980,000                                     |       | (1,410,000 | ) | 954,000 |   |
| Inventories                                                                          |       | 192,000                                     |       | (346,000 | ) | (647,000 | ) |
| Prepaid expenses and other                                                           |       | (40,000                                     | )          | 132,000 |   | (1,068,000 | ) |
| Receivable from/payable to Dover Motorsports, Inc                                    |       | (13,000                                     | )          | (98,000 | ) | 371,000 |   |
| Accounts payable                                                                     |       | (792,000                                    | )          | (909,000 | ) | (575,000 | ) |
| Purses due horsemen                                                                  |       | (750,000                                    | )          | 1,125,000 |   | (1,709,000 | ) |
| Accrued liabilities                                                                  |       | 758,000                                     |       | 5,975,000 |   | 62,000 |   |
| Income taxes payable/receivable                                                      |       | 3,055,000                                   |       | 943,000 |   | 912,000 |   |
| Deferred revenue                                                                     |       | (83,000                                     | )          | (66,000 | ) | 130,000 |   |
| Net cash provided by operating activities                                            |       | 29,521,000                                  |       | 27,807,000 |   | 24,178,000 |   |
|                                                                                 |       |                                        |       |   |   |   |   |
| Investing activities:                                                                |       |                                        |       |   |   |   |   |
| Capital expenditures                                                                 |       | (5,512,000                                  | )          | (6,329,000 | ) | (6,383,000 | ) |
| Proceeds from sale of shopping center, net                                           |       | 11,918,000                                  |       | — |   | — |   |
| Net cash provided by (used in) investing activities                                  |       | 6,406,000                                   |       | (6,329,000 | ) | (6,383,000 | ) |
|                                                                                 |       |                                        |       |   |   |   |   |
| Financing activities:                                                                |       |                                        |       |   |   |   |   |
| Borrowings from notes payable to banks                                               |       | 169,109,000                                 |       | 226,905,000 |   | 158,480,000 |   |
| Repayments of notes payable to banks                                                 |       | (196,984,000                                | )          | (206,180,000 | ) | (168,145,000 | ) |
| Dividends paid                                                                       |       | (5,737,000                                  | )          | (6,098,000 | ) | (5,305,000 | ) |
| Repurchase of common stock                                                           |       | —                                      |       | (32,555,000 | ) | (1,523,000 | ) |
| Proceeds from stock options exercised                                                |       | 4,000                                       |       | — |   | — |   |
| Other                                                                                |       | (21,000                                     | )          | — |   | — |   |
| Net cash used in financing activities                                                |       | (33,629,000                                 | )          | (17,928,000 | ) | (16,493,000 | ) |
|                                                                                 |       |                                        |       |   |   |   |   |
| Net increase in cash                                                                 |       | 2,298,000                                   |       | 3,550,000 |   | 1,302,000 |   |
| Cash, beginning of year                                                              |       | 17,688,000                                  |       | 14,138,000 |   | 12,836,000 |   |
| Cash, end of year                                                                    |       | $                                           | 19,986,000 |   | $ | 17,688,000 |   | $ | 14,138,000 |   |
|                                                                                 |       |                                        |       |   |   |   |   |
| Supplemental information:                                                            |       |                                        |       |   |   |   |   |
| Interest paid                                                                        |       | $                                           | 1,894,000  |   | $ | 650,000 |   | $ | 980,000 |   |
| Income taxes paid                                                                    |       | $                                           | 15,172,000 |   | $ | 10,112,000 |   | $ | 10,325,000 |   |

 

The Notes to the Consolidated Financial Statements are an integral part ofthese consolidated statements.

 

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**DOVERDOWNS GAMING & ENTERTAINMENT, INC.**

 

**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE1—Business Operations**

 

Referencesin this document to “the Company,” “Gaming & Entertainment,” “we,” “us”and “our” mean Dover Downs Gaming & Entertainment, Inc. and/orits wholly owned subsidiaries, as appropriate.

 

DoverDowns Gaming & Entertainment, Inc. is a diversified gaming andentertainment company whose operations consist of Dover Downs Slots – a 91,000square foot video lottery (slots) casino complex; the Dover Downs Hotel –featuring luxury accommodations with conference, banquet, fine dining, ballroom andconcert hall facilities; and Dover Downs Raceway – a harness racing track withpari-mutuel wagering on live and simulcast horse races.

 

Gaming &Entertainment is a public holding company that has two wholly ownedsubsidiaries: Dover Downs, Inc. and Dover Downs Management Corp. DoverDowns, Inc. was incorporated in 1967 and began motorsports and harnessracing operations in 1969. In June of 1994, legislation authorizing videolottery operations in the State of Delaware (the “State”) was adopted. TheCompany’s video lottery (slots) casino operations began on December 29,1995. As a result of several restructurings, Dover Downs, Inc. became awholly owned subsidiary of Dover Motorsports, Inc. (f/k/a Dover DownsEntertainment, Inc.) (“DVD”), and became the operating entity for all ofDVD’s gaming operations.

 

DoverDowns Gaming & Entertainment, Inc. was incorporated in the Statein December of 2001 as a wholly owned subsidiary of DVD. Effective March 31,2002, DVD completed a tax-free spin-off of its gaming operations bycontributing 100% of the issued and outstanding common stock of Dover Downs, Inc.to the Company, and subsequently distributing 100% of the issued andoutstanding common stock of the Company to DVD stockholders. Immediatelyfollowing the spin-off, Dover Downs Gaming & Entertainment, Inc.became an independent public company.

 

TheCompany is authorized to conduct video lottery operations as a “Licensed Agent”under the Delaware State Lottery Code. Pursuant to Delaware’s Horse RacingRedevelopment Act, enacted in 1994, the Delaware State Lottery Officeadministers and controls the operation of the video lottery.

 

TheCompany’s license from the Delaware Harness Racing Commission (the “Commission”)to hold harness race meetings on our premises and to offer pari-mutuel wageringon live and simulcast horse races must be renewed on an annual basis. In orderto maintain its license to conduct video lottery operations, the Company isrequired to maintain its harness horse racing license. The Company has receivedan annual license from the Commission for the past 37 consecutive years andmanagement believes that its relationship with the Commission remains good.

 

Ourentertainment complex is located in Dover, the capital of the State ofDelaware. Approximately 70% of our customers come from Maryland, Pennsylvania,Virginia and the District of Columbia. In July 2004,Pennsylvania adopted legislation which authorizes up to 61,000 slot machines atvarious existing and proposed venues throughout the state. It is difficult forus to predict the effect that such legislation will have on us, but we estimatethat one or more facilities in Pennsylvania may begin operations in thelatter half of 2006. Management has estimated that slot win from Pennsylvaniapatrons represents approximately 6% of our total slot win.

 

Due tothe nature of the Company’s business activities, it is subject to variousfederal, state and local regulations.

 

**NOTE2—Summary of Significant Accounting Policies**

 

*Basis ofconsolidation—*The consolidated financial statements includethe accounts of Gaming & Entertainment and its wholly ownedsubsidiaries. Intercompany transactions and balances have been eliminated.

 

37

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*Inventories—*Inventories,consisting primarily of food and beverage items, are stated at the lower ofcost or market with cost being determined on the first-in, first-out basis.

 

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

 

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

 

The Company performs reviews for impairment of long-lived assetswhenever events or changes in circumstances indicate that the carrying value ofan asset may not be recoverable. No such events or changes incircumstances have occurred to date. An impairment loss would be measured asthe amount by which the carrying amount of the asset exceeds its fair value.Generally, fair value will be determined using valuation techniques such as thepresent value of future cash flows.

 

*Interestcapitalization—*Interest is capitalized in connection with theconstruction of major facilities. The capitalized interest is amortized overthe estimated useful life of the asset to which it relates. During the yearended December 31, 2005, the Company incurred $1,875,000 of interest cost,none of which was capitalized. During the year ended December 31, 2004,the Company incurred $779,000 of interest cost, of which $17,000 wascapitalized. During the year ended December 31, 2003, the Company incurred$842,000 of interest cost, none of which was capitalized.

 

*Incometaxes—*Deferred income taxes are provided in accordance withthe provisions of Financial Accounting Standards Board (“FASB”) Statement No. 109,*Accounting for Income Taxes*, on alldifferences between the tax bases of assets and liabilities and their reportedamounts in the consolidated financial statements based upon enacted statutorytax rates in effect at the balance sheet date.

 

*Pointloyalty program—*The Company currently has a point loyaltyprogram for its video lottery customers which allows them to earn points basedon the volume of their video lottery activity. Prior to December 2004, thepoints could be redeemed for various services and merchandise throughout thegaming facility; however, they were not redeemable for cash or casino play.Effective December 2004, the Company changed its policy relating to itspoint loyalty program to allow points earned by customers to be redeemed forcash under certain circumstances. As a result, the Company recorded a non-recurringcharge of $2,250,000 in the fourth quarter of 2004 to record the net impact ofthe program change. All reward points earned by customers are now expensed inthe period they are earned. The estimated amount of points redeemable for cashis recorded as a reduction of revenue and the estimated amount of pointsredeemable for services and merchandise is recorded as gaming expense. Indetermining the amount of the liability, which was $2,289,000 and $2,678,000,respectively, at December 31, 2005 and 2004, the Company estimates aredemption rate, a cost of rewards to be offered and the mix of cash, goods andservices for which reward points will be redeemed. We use historical data toestimate those amounts.

 

*Revenueand expense recognition—*Gaming revenues represent (i) thenet win from video lottery (slot) machine wins and losses and (ii) commissionsfrom pari-mutuel wagering. Other operating revenues consist of hotel roomsrevenue, food and beverage sales and other 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 of $15,103,000, $19,973,000 and $18,667,000 for the yearsended December 31, 2005, 2004 and 2003, respectively. The estimated directcost of providing these items has been charged to the casino throughinterdepartmental allocations and is included in gaming expenses in theconsolidated statement of earnings.

 

Forthe video lottery operations, which account for at least 90% of revenues forall periods presented, the difference between the amount wagered by bettors andthe amount paid out to bettors is referred to as the win. The win is includedin the amount recorded in the Company’s consolidated financial statements asgaming revenue. The Delaware State Lottery Office sweeps the win from the videolottery operations, collects the State’s share of the win and the amount due tothe vendors under contract with the State who provide the video lottery (slot)

 

38

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machines and associatedcomputer systems, collects the amount allocable to purses for harness horseracing and remits the remainder to the Company as its commission for acting asa Licensed Agent. Gaming expenses include the amounts collected by the State (i) forthe State’s share of the win, (ii) for remittance to the providers of thevideo lottery (slot) machines and associated computer systems, and (iii) forharness horse racing purses. The Company recognizes revenues from pari-mutuelcommissions earned from live harness horse racing and importing of simulcastsignals from other race tracks when the race occurs. Revenues from hotel rooms,food and beverage sales and other miscellaneous income are recognized at thetime the service is provided.

 

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

 

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

 
| ** **                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Basic EPS                     |       | 23,787,000                                  |       | 26,339,000 |   | 26,511,000 |   |
| Effect of dilutive securities |       | 166,000                                     |       | 75,000 |   | 26,000 |   |
| Diluted EPS                   |       | 23,953,000                                  |       | 26,414,000 |   | 26,537,000 |   |

 

Dilutivesecurities include stock options and unvested restricted stock awards.

 

Forthe years ended December 31, 2005, 2004 and 2003, options to purchase15,000, 280,180 and 667,960 shares of common stock, respectively, were notincluded in the computation of diluted EPS because the options’ exercise priceswere greater than the average market price of the common stock during theperiod.

 

*Accountingfor stock-based compensation—*The Company has a stock incentive plan which provides for the grant ofstock options and/or restricted stock to officers and key employees. TheCompany accounts for stock options in accordance with FASB Statement No. 123,*Accounting for Stock-Based Compensation,*asamended by FASB Statement No. 148,*Accounting forStock-Based Compensation – Transition and Disclosure – an amendment of FASBStatement No. 123*. Statement No. 123 defines a fair-valuebased method of accounting for stock-based compensation plans; however, itallows the continued use of the intrinsic value method under AccountingPrinciples Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations. TheCompany has elected to continue to use the intrinsic value method and based onthis method did not record any stock-based compensation expense related to itsstock options during the years ended December 31, 2005, 2004 and 2003. TheCompany’s restricted stock vests based on continued employment with theCompany. Restricted stock awards result in compensation expense as discussed inNOTE 8 – Stockholders’ Equity.

 

Thefollowing table illustrates the effect on net earnings and net earnings percommon share if the Company had applied the fair-value recognition provisionsof Statement No. 123 to stock-based employee compensation related to itsstock options and awards:

 
| ** **                                                                                                                                    | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings, as reported                                                                                                                     |       | $                                           | 26,040,000 |   | $ | 16,381,000 |   | $ | 17,237,000 |   |
| Add: Stock-based employee compensation expense  included in reported net earnings, net of related tax effects                                 |       | 127,000                                     |       | 40,000 |   | — |   |
| Deduct: Total stock-based employee compensation  expense determined under fair-value based method for all awards, net of  related tax effects |       | (593,000                                    | )          | (614,000 | ) | (608,000 | ) |
| Pro forma net earnings                                                                                                                        |       | $                                           | 25,574,000 |   | $ | 15,807,000 |   | $ | 16,629,000 |   |
|                                                                                                                                          |       |                                        |       |   |   |   |   |
| Net earnings per common share:                                                                                                                |       |                                        |       |   |   |   |   |
| Basic – as reported                                                                                                                      |       | $                                           | 1.09       |   | $ | 0.62 |   | $ | 0.65 |   |
| Basic – pro forma                                                                                                                        |       | $                                           | 1.08       |   | $ | 0.60 |   | $ | 0.63 |   |
|                                                                                                                                          |       |                                        |       |   |   |   |   |
| Diluted – as reported                                                                                                                    |       | $                                           | 1.09       |   | $ | 0.62 |   | $ | 0.65 |   |
| Diluted – pro forma                                                                                                                      |       | $                                           | 1.07       |   | $ | 0.60 |   | $ | 0.63 |   |

 

39

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Fordisclosure purposes, the Company determined compensation expense for its stockoptions based upon the fair value at the grant date using the Black-Scholesoption-pricing model with the following assumptions:

 

| ** **               | ** ** | **2003** | ** ** |
|--------------------------|------------|----------|------------|
| Risk-free interest rate  |       | 3.73     | %          |
| Volatility               |       | 45       | %          |
| Expected dividend yield  |       | 2.10     | %          |
| Expected life (in years) |       | 7.50     |       |

 

Thefair value of restricted stock awards granted during the years ended December 31,2005 and 2004 was $12.91 and $11.62 per share, respectively. No stock optionswere granted during the years ended December 31, 2005 and 2004. Theweighted-average fair value of options granted during the year ended December 31,2003 was $4.02.

 

*Use ofestimates—*The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amountsof revenues and expenses during the reporting period. Actual results coulddiffer from those estimates.

 

*Fairvalue of financial instruments—*The carrying amounts reportedin the balance sheet for current assets and current liabilities approximatestheir fair values because of the short maturity of these instruments. Thecarrying value of long-term debt at December 31, 2005 and 2004approximates its fair value based on the interest rates available on similarborrowings.

 

*Reclassifications—*Certainreclassifications have been made to the prior period consolidated financialstatements to conform to the current period presentation. Thesereclassifications had no effect on consolidated financial condition, results ofoperations or cash flows.

 

*Segmentinformation*—The Company accounts for its operating segment inaccordance with FASB Statement No. 131, *DisclosuresAbout Segments of an Enterprise and Related Information*. Statement No. 131establishes guidelines for public companies in determining operating segmentsbased on those used for internal reporting to management. Based on theseguidelines, the Company reports information under a single gaming andentertainment segment.

 

*Recentaccounting pronouncements—*In May 2005, the FASB issuedStatement No. 154, *Accounting Changes andError Corrections,*which supersedes APB Opinion No. 20, *Accounting Changes* and FASB Statement No. 3, *Reporting Accounting Changes in Interim Financial Statements*.Statement No. 154 provides guidance on the accounting for and reporting ofaccounting changes and error corrections. It establishes, unless impracticable,retrospective application as the required method for reporting a change inaccounting principle in the absence of explicit transition requirementsspecific to the newly adopted accounting principle. The correction of an errorin previously issued financial statements is not an accounting change. However,the reporting of an error correction involves adjustments to previously issuedfinancial statements similar to those generally applicable to reporting anaccounting change retroactively. Therefore, the reporting of an error correctionby restating previously issued financial statements is also addressed by thestatement. Statement No. 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005. The Company does not expect the adoption of Statement No. 154 tohave an impact on our consolidated results of operations or financialcondition.

 

In December 2004,the FASB issued Statement No. 123 (Revised 2004) *Share-BasedPayment*. Statement No. 123R addresses all forms of share-basedpayment awards, including shares issued under employee stock purchase plans,stock options, restricted stock and stock appreciation rights. It will requirecompanies to recognize in the statement of earnings the grant-date fair valueof stock options and other equity-based compensation issued to employees, butexpresses no preference for a type of valuation model. The statement eliminatesthe intrinsic value-based method prescribed by APB Opinion No. 25 andrelated interpretations that the Company currently uses. The Company would havebeen required to adopt Statement No. 123R beginning in the third quarterof 2005; however, on April 14, 2005 the United States Securities andExchange Commission (“SEC”) announced that adoption of Statement No. 123Rwould be delayed until the first quarter of 2006 for calendar year companies.The Company

 

40

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has estimated that itsearnings per diluted share will be negatively impacted by approximately $0.02in 2006 as a result of applying the various provisions of Statement No. 123R.

 

**NOTE3—Property and Equipment**

 

Property and equipment consists of the following as of December 31:

 

| ** **                        | ** ** | **2005**    | ** **  | **2004**    | ** ** |
|-----------------------------------|------------|-------------|-------------|-------------|------------|
| Land                              |       | $           | 780,000     |        | $          | 1,842,000 |   |
| Casino facility                   |       | 32,153,000  |        | 32,014,000  |       |
| Hotel facility                    |       | 65,648,000  |        | 65,602,000  |       |
| Harness racing facilities         |       | 9,284,000   |        | 7,977,000   |       |
| General facilities                |       | 9,783,000   |        | 14,856,000  |       |
| Furniture, fixtures and equipment |       | 36,355,000  |        | 34,304,000  |       |
| Construction in progress          |       | 529,000     |        | 499,000     |       |
|                              |       | 154,532,000 |        | 157,094,000 |       |
| Less accumulated depreciation     |       | (39,999,000 | )           | (34,018,000 | )          |
|                              |       | $           | 114,533,000 |        | $          | 123,076,000 |   |

 

Depreciationexpense was $6,998,000, $6,791,000 and $6,287,000 for the years ended December 31,2005, 2004 and 2003, respectively.

 

On December 28, 2005, the Company’s wholly ownedsubsidiary, Dover Downs, Inc., closed on the sale of a shopping center itowned in Dover, Delaware. The shopping center consisted of approximately 7.7acres of real property with a one-story building of approximately 95,700 squarefeet. The sales price was $12,450,000 and the Company recognized a gain on thesale of $5,837,000.

 

At December 31,2004, the Company had a $1,195,000 purchase obligation related to theinstallation of a state-of-the-artcustomer management and slot data system. Installation was completed in the first quarter of 2004, thoughpayments for the system extended into 2005. Capital expenditures and the changein accounts payable in the Company’s consolidated statement of cash flows forthe year ended December 31, 2004 have been adjusted accordingly.

 

**NOTE4—Accrued Liabilities**

 

Accruedliabilities consist of the following as of December 31:

 

| ** **                               | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|------------------------------------------|------------|-----------|------------|-----------|------------|
| Point loyalty program                    |       | $         | 2,289,000  |      | $          | 2,678,000 |   |
| Payroll and related items                |       | 2,569,000 |       | 1,874,000 |       |
| Win due to Delaware State Lottery Office |       | 5,009,000 |       | 3,559,000 |       |
| Pension                                  |       | 1,706,000 |       | 1,603,000 |       |
| Other                                    |       | 1,175,000 |       | 2,276,000 |       |
|                                     |       | $         | 12,748,000 |      | $          | 11,990,000 |   |

#### ** **

#### **NOTE 5—Indebtedness**

#### ** **

TheCompany has a $70,000,000 credit facility, as amended effective December 14,2005, that expires on January 1, 2008. Interest is based, at the Company’soption, upon (i) LIBOR plus 0.75% or (ii) the base rate (the greaterof the prime rate or the federal funds rate plus 0.5%) minus 1%. The terms ofthe credit facility contain, among others, minimum net worth, interest coverageand maximum leverage covenant requirements. Material adverse changes in theCompany’s results of operations could impact its ability to maintain financialratios necessary to satisfy these requirements. The facility is for seasonalfunding needs, capital improvements and other general corporate purposes. At December 31,2005, the Company was in compliance with all terms of the facility and therewas $24,075,000 outstanding at a weighted average interest rate of 5.32%. At December 31,2005, $45,925,000 was available pursuant to the facility.

 

41

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On December 19,2005, the Company commenced a tender offer to purchase up to 1,063,937 sharesof its common stock and up to 1,325,468 shares of its Class A common stockat a fixed price of $14.50 per share. The offer expired on January 19,2006. The Company purchased 1,063,937 shares of its common stock and 1,325,000shares of its Class A common stock for $35,006,000, including expenses, inconnection with the tender offer. The tender offer was funded with borrowingson the Company’s unsecured revolving line of credit.

 

**NOTE 6—Income Taxes**

** **

Thecurrent and deferred income tax provisions are as follows:

 

| ** **         | ** ** | **Years ended December 31,** | ** ** |
|--------------------|------------|---------------------------------------------|------------|
| ** **         | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:           |       |                                        |       |   |   |   |   |
| Federal            |       | $                                           | 14,326,000 |   | $ | 8,691,000 |   | $ | 8,450,000 |   |
| State              |       | 3,901,000                                   |       | 2,363,000 |   | 2,261,000 |   |
|               |       | 18,227,000                                  |       | 11,054,000 |   | 10,711,000 |   |
| Deferred:          |       |                                        |       |   |   |   |   |
| Federal            |       | (280,000                                    | )          | 127,000 |   | 849,000 |   |
| State              |       | (76,000                                     | )          | 38,000 |   | 267,000 |   |
|               |       | (356,000                                    | )          | 165,000 |   | 1,116,000 |   |
| Total income taxes |       | $                                           | 17,871,000 |   | $ | 11,219,000 |   | $ | 11,827,000 |   |

 

Areconciliation of the effective income tax rate with the applicable statutoryfederal income tax rate is as follows: 

 

| ** **                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Federal tax at statutory rate       |       | 35.0                                        | %          | 35.0 | % | 35.0 | % |
| State taxes, net of federal benefit |       | 5.7                                         | %          | 5.7 | % | 5.7 | % |
| Other                               |       | —                                      | %          | (0.1 | )% | — | % |
| Effective income tax rate           |       | 40.7                                        | %          | 40.6 | % | 40.7 | % |

 

Thecomponents of deferred income tax assets and liabilities are as follows as of December 31:

 

| ** **                                             | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred income tax assets:                            |       |       |       |       |       |
| Point loyalty program                                  |       | $          | 931,000    |       | $          | 1,089,000 |   |
| Accrued expenses                                       |       | 1,067,000  |       | 1,026,000  |       |
| Other                                                  |       | 89,000     |       | 103,000    |       |
| Total deferred income tax assets                       |       | 2,087,000  |       | 2,218,000  |       |
|                                                   |       |       |       |       |       |
| Deferred income tax liabilities:                       |       |       |       |       |       |
| Depreciation – property and equipment             |       | (6,424,000 | )          | (6,911,000 | )          |
| Total deferred income tax liabilities                  |       | (6,424,000 | )          | (6,911,000 | )          |
|                                                   |       |       |       |       |       |
| Net deferred income tax liabilities                    |       | $          | (4,337,000 | )          | $          | (4,693,000 | ) |
|                                                   |       |       |       |       |       |
| Amounts recognized in the consolidated balance  sheet: |       |       |       |       |       |
| Current deferred income tax assets                     |       | $          | 2,067,000  |       | $          | 2,168,000 |   |
| Noncurrent deferred income tax liabilities             |       | (6,404,000 | )          | (6,861,000 | )          |
|                                                   |       | $          | (4,337,000 | )          | $          | (4,693,000 | ) |

 

Priorto the spin-off from DVD, the Company was included as part of DVD’sconsolidated federal income tax return; however, the income tax expensepresented in the consolidated financial statements for the periods prior to thespin-off was computed on a separate return basis. The Company and DVD haveentered into a Tax Sharing Agreement to reflect each company’s rights andobligations relating to payments and refunds of taxes that are attributable toperiods beginning before and including the date of the spin-off described inNOTE 1—Business

 

42

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Operations. The agreementprovides for payments between the companies to reflect tax liabilities that may arisebefore, after and because of the spin-off.

 

Forthe year ended December 31, 2003, DVD reported a net operating loss forfederal income tax purposes. The loss was carried back to 2001, a period priorto the spin-off, which generated an alternative minimum tax creditcarryforward, a portion of which was required to be paid to DVD under the TaxSharing Agreement; therefore, during the fourth quarter of 2003 Gaming &Entertainment recorded a $330,000 payable to DVD for the Company’s portion ofthe carryforward. Gaming & Entertainment paid the amount in the firstquarter of 2004.

 

**NOTE7—Pension Plans**

 

TheCompany maintains a non-contributory, tax qualified defined benefit pensionplan. All of Gaming & Entertainment’s full time employees are eligibleto participate in this qualified pension plan. Benefits provided by the Gaming &Entertainment qualified pension plan are based on years of service andemployees’ remuneration over their term of employment. Pension costs are fundedin accordance with the provisions of the Internal Revenue Code. The Companyalso maintains a non-qualified, non-contributory defined benefit pension planfor certain employees. This excess plan provides benefits that would otherwisebe provided under the qualified pension plan but for maximum benefit andcompensation limits applicable under federal tax law. The cost associated withthe excess plan is determined using the same actuarial methods and assumptionsas those used for the Company’s qualified pension plan.

 

Thefollowing table sets forth the plans’ funded status and amounts recognized inthe Company’s consolidated balance sheet as of December 31:

 

| ** **                                     | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|
| Change in benefit obligation:                  |       |       |       |       |       |
| Benefit obligation at beginning of year        |       | $          | 5,307,000  |       | $          | 4,305,000 |   |
| Service cost                                   |       | 1,014,000  |       | 895,000    |       |
| Interest cost                                  |       | 315,000    |       | 258,000    |       |
| Actuarial loss (gain)                          |       | 609,000    |       | (151,000   | )          |
| Benefits paid                                  |       | (38,000    | )          | —     |       |
| Other                                          |       | (152,000   | )          | —     |       |
| Benefit obligation at end of year              |       | 7,055,000  |       | 5,307,000  |       |
|                                           |       |       |       |       |       |
| Change in plan assets:                         |       |       |       |       |       |
| Fair value of plan assets at beginning of year |       | 2,747,000  |       | 2,297,000  |       |
| Actual gain on plan assets                     |       | 239,000    |       | 150,000    |       |
| Employer contribution                          |       | 999,000    |       | 300,000    |       |
| Benefits paid                                  |       | (38,000    | )          | —     |       |
| Other                                          |       | (152,000   | )          | —     |       |
| Fair value of plan assets at end of year       |       | 3,795,000  |       | 2,747,000  |       |
|                                           |       |       |       |       |       |
| Unfunded status                                |       | (3,260,000 | )          | (2,560,000 | )          |
| Unrecognized net loss                          |       | 1,495,000  |       | 889,000    |       |
| Unrecognized prior service cost                |       | 59,000     |       | 68,000     |       |
| Net amount recognized                          |       | $          | (1,706,000 | )          | $          | (1,603,000 | ) |

 

Theliabilities recognized in the Company’s consolidated balance sheet as of December 31,2005 and 2004 were $1,706,000 and $1,603,000, respectively.

 

The projected benefit obligation, accumulated benefit obligation andfair value of plan assets for pension plans with accumulated benefitobligations in excess of plan assets were $7,055,000, $5,483,000 and $3,795,000respectively, as of December 31, 2005, and $5,307,000, $4,048,000 and$2,747,000, respectively, as of December 31, 2004.

 

The Company plans to contribute approximately $1,000,000 to its pensionplans in 2006.

 

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Benefitpayments, which reflect expected future service, as appropriate, are expectedto be paid as follows:

 

| 2006      |   | $ | 89,000    |   |
|-----------|--------|---|-----------|--------|
| 2007      |   | $ | 114,000   |   |
| 2008      |   | $ | 137,000   |   |
| 2009      |   | $ | 167,000   |   |
| 2010      |   | $ | 204,000   |   |
| 2011-2015 |   | $ | 2,272,000 |   |

 

The Company was required to record a minimum pension liability in itsconsolidated balance sheet at December 31, 2002, which is required whenthe actuarial present value of accumulated benefits exceeds plan assets andaccrued pension liabilities. The effect of this adjustment was to increasepension liabilities by $300,000, increase intangible assets by $85,000,increase deferred income tax assets by $88,000 and recognize other comprehensiveloss of $127,000. In 2003, the Company was required to reverse this minimumpension liability. Because these adjustments had no cash impact, the effect hasbeen excluded from the accompanying consolidated statement of cash flows.

 

Thecomponents of net periodic pension cost are as follows:

 

| ** **                         | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost                       |       | $                                           | 1,014,000  |   | $ | 895,000 |   | $ | 714,000 |   |
| Interest cost                      |       | 315,000                                     |       | 258,000 |   | 206,000 |   |
| Expected return on plan assets     |       | (260,000                                    | )          | (225,000 | ) | (146,000 | ) |
| Recognized net actuarial loss      |       | 25,000                                      |       | 35,000 |   | 51,000 |   |
| Amortization of prior service cost |       | 9,000                                       |       | 9,000 |   | 9,000 |   |
|                               |       | $                                           | 1,103,000  |   | $ | 972,000 |   | $ | 834,000 |   |

 

The principal assumptions used to determine the net periodic pensioncost for the years ended December 31, 2005, 2004 and 2003, and theactuarial value of the projected benefit obligation at December 31, 2005and 2004 (the measurement dates) for the Company’s pension plans are asfollows:

 
| ** **                                       | ** ** | **Net Periodic Pension Cost** | ** ** | **Projected Benefit Obligation** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                     | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted-average discount rate                   |       | 6.25                                         | %          | 6.25                                       | %          | 6.50 | % | 5.85 | % | 6.25 | % |
| 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 |       | 9.00                                         | %          | 9.00                                       | %          | 9.00 | % | n/a |   | n/a |   |

 

For 2005, the Company assumed a long-term rate of return on plan assetsof 9%. In developing the 9% expected long-term rate of return assumption, theCompany reviewed asset class return expectations and long-term inflationassumptions and considered its post spin-off and DVD’s pre spin-off historicalcompounded return, which was consistent with our long-term rate of returnassumption.

 

The Company’s pension plan asset allocation at December 31, 2005and 2004, and target allocation for 2006 are as follows: 

 

| ** **                        | ** ** | **Percentage of Plan  Assets at December 31,** | ** ** | **Target  Allocation** | ** ** |
|-----------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------|------------|
| **Asset Category**           | ** ** | **2005**                                                                | ** ** | **2004**               | ** ** | **2006** | ** ** |
| Equity securities                 |       | 63                                                                      | %          | 76                     | %          | 70 | % |
| Debt securities                   |       | 22                                                                      | %          | 23                     | %          | 20 | % |
| Other (money market mutual funds) |       | 15                                                                      | %          | 1                      | %          | 10 | % |
| Total                             |       | 100                                                                     | %          | 100                    | %          | 100 | % |

 

TheCompany’s investment goals are to maximize returns subject to specific riskmanagement policies. Its risk management policies permit investments in mutualfunds, and prohibit direct investments in debt and equity securities andderivative financial instruments. The Company addresses diversification by theuse of mutual fund

 

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investments whoseunderlying investments are in domestic and international equity and fixedincome securities. These mutual funds are readily marketable and can be sold tofund benefit payment obligations as they become payable.

 

The Company maintains a defined contribution 401(k) plan which permitsparticipation by substantially all employees. The Company’s matchingcontributions to the 401(k) plan were approximately $64,000 for the year ended December 31,2005 and $50,000 for each of the years ended December 31, 2004 and 2003.

 

**NOTE8—Stockholders’ Equity**

 

Changesin the components of stockholders’ equity are as follows (in thousands, exceptper share data):

 
| ** **                                                       | ** ** | **Common  Stock** | ** ** | **Class A  Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Deferred  Compensation** | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|---------------------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|----------------------------|------------|
| **Balance at December 31, 2002**                            |       | $                 | 1,050      |                            | $          | 1,615                            |       | $                      | 68,960     |                                        | $          | 12,941                     |       | $ | (127 | ) | $ | — |   |
| Net earnings                                                     |       | —            |       | —                          |       | —                           |       | 17,237                 |       | —                                      |       | —                     |       |
| Dividends paid, $.20 per share                                   |       | —            |       | —                          |       | —                           |       | (5,305                 | )          | —                                      |       | —                     |       |
| Change in minimum pension liability, net of income  taxes of $88 |       | —            |       | —                          |       | —                           |       | —                 |       | 127                                         |       | —                     |       |
| Repurchase and retirement of common stock                        |       | (17               | )          | —                          |       | (1,506                           | )          | —                 |       | —                                      |       | —                     |       |
| **Balance at December 31, 2003**                            |       | 1,033             |       | 1,615                           |       | 67,454                           |       | 24,873                 |       | —                                      |       | —                     |       |
| Net earnings                                                     |       | —            |       | —                          |       | —                           |       | 16,381                 |       | —                                      |       | —                     |       |
| Dividends paid, $.22 per share                                   |       | —            |       | —                          |       | —                           |       | (6,098                 | )          | —                                      |       | —                     |       |
| Issuance of restricted stock awards                              |       | 5                 |       | —                          |       | 596                              |       | —                 |       | —                                      |       | (601                       | )          |
| Amortization of deferred compensation                            |       | —            |       | —                          |       | —                           |       | —                 |       | —                                      |       | 67                         |       |
| Conversion of Class A common stock to common  stock         |       | 7                 |       | (7                              | )          | —                           |       | —                 |       | —                                      |       | —                     |       |
| Repurchase and retirement of common stock                        |       | (109              | )          | (160                            | )          | (32,286                          | )          | —                 |       | —                                      |       | —                     |       |
| **Balance at December 31, 2004**                            |       | 936               |       | 1,448                           |       | 35,764                           |       | 35,156                 |       | —                                      |       | (534                       | )          |
| Net earnings                                                     |       | —            |       | —                          |       | —                           |       | 26,040                 |       | —                                      |       | —                     |       |
| Dividends paid, $.24 per share                                   |       | —            |       | —                          |       | —                           |       | (5,737                 | )          | —                                      |       | —                     |       |
| Issuance of restricted stock awards, net of  forfeitures         |       | 6                 |       | —                          |       | 714                              |       | —                 |       | —                                      |       | (720                       | )          |
| Proceeds from stock options exercised                            |       | —            |       | —                          |       | 4                                |       | —                 |       | —                                      |       | —                     |       |
| Amortization of deferred compensation, net of  forfeitures       |       | —            |       | —                          |       | —                           |       | —                 |       | —                                      |       | 214                        |       |
| Conversion of Class A common stock to common  stock         |       | 122               |       | (122                            | )          | —                           |       | —                 |       | —                                      |       | —                     |       |
| Other                                                            |       | —            |       | —                          |       | (21                              | )          | —                 |       | —                                      |       | —                     |       |
| **Balance at December 31, 2005**                            |       | $                 | 1,064      |                            | $          | 1,326                            |       | $                      | 36,461     |                                        | $          | 55,459                     |       | $ | — |   | $ | (1,040 | ) |

 

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

 

Theholders of common stock are entitled to one vote per share and the holders ofour Class A common stock are entitled to 10 votes per share. There is nocumulative voting. Shares of Class A common stock are convertible at anytime into our shares of common stock on a one-for-one basis at the option ofthe stockholder. Subject to rights of any preferred stockholder, holders of ourcommon stock and Class A common stock are entitled to receive on a prorata basis such dividends, if any, as may be declared from time to time bythe Board of Directors out of funds

 

45

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legally available forthat purpose. At the discretion of the Company’s Board of Directors, it may payto the holders of common stock a cash dividend greater than the dividend, ifany, paid to the holders of Class A common stock.

 

UnderDelaware law, a change of ownership of a Licensed Agent will automaticallyterminate its license 90 days after the change of ownership occurs, unless theDirector of the Delaware State Lottery Office determines after application toissue a new license to the new owners. 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. TheCommission may require extensive background investigations of any newowner acquiring a 10% or greater interest in a Licensed Agent, includingcriminal background checks. Accordingly, the Company has a restrictive legendon its 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 the outstanding common stock of the Company must firstobtain prior written approval from the Delaware State Lottery Office.

 

TheCompany adopted a stockholder rights plan in 2002 prior to the effective dateof the spin-off from DVD. The rights are attached to and trade in tandem withour common stock and Class A common stock. Each right entitles theregistered holder to purchase from the Company one share of common stock at apurchase price of $200 per share. The rights, unless earlier redeemed by ourBoard of Directors, will detach and trade separately from our common stock uponthe occurrence of certain events such as the unsolicited acquisition by a thirdparty of beneficial ownership of 10% or more of our outstanding combined commonstock and Class A common stock or the announcement by a third party of theintent to commence a tender or exchange offer for 10% or more of ouroutstanding combined common stock and Class A common stock. After therights have detached, the holders of such rights would generally have theability to purchase such number of either shares of our common stock or stockof an acquirer of the Company having a market value equal to twice the exerciseprice of the right being exercised, thereby causing substantial dilution to aperson or group of persons attempting to acquire control of the Company. Therights may serve as a significant deterrent to unsolicited attempts toacquire control of Gaming & Entertainment, including transactionsinvolving a premium to the market price of our stock. The rights expire on January 1,2012, unless earlier redeemed.

 

On January 25, 2006, the Company’s Board ofDirectors declared a quarterly cash dividend on both classes of common stock of$.06 per share. The dividend is payable on March 10, 2006 to stockholdersof record at the close of business on February 10, 2006.

 

On October 23,2002, the Company’s Board of Directors authorized the repurchase of up to2,000,000 shares of the Company’s outstanding common stock. The purchases may bemade in the open market or in privately negotiated transactions as conditionswarrant. The repurchase authorization does not obligate the Company to acquireany specific number of shares and may be suspended at any time. Nopurchases of the Company’s equity securities were made during the year ended December 31,2005. During the year ended December 31, 2004, Gaming &Entertainment purchased and retired 50,900 shares of its outstanding commonstock pursuant to this plan at an average purchase price of $9.95 per share,not including nominal brokerage commissions. During the year ended December 31,2003, the Company purchased and retired 169,945 shares of its outstandingcommon stock pursuant to this plan at an average purchase price of $8.90 pershare, not including nominal brokerage commissions. At December 31, 2005,the Company had remaining repurchase authority of 1,779,155 shares.

 

On November 10,2004, the Company commenced a tender offer to purchase up to 1,040,421 sharesof its common stock and up to 1,607,506 shares of its Class A common stockat a fixed price of $12.00 per share. The offer expired on December 10,2004. The Company purchased 1,040,421 shares of its common stock and 1,600,000shares of its Class A common stock for $32,045,000, including expenses, inconnection with the tender offer.

 

On December 19,2005, the Company commenced a tender offer to purchase up to 1,063,937 sharesof its common stock and up to 1,325,468 shares of its Class A common stockat a fixed price of $14.50 per share. The offer expired on January 19,2006. The Company purchased 1,063,937 shares of its common stock and 1,325,000shares of its Class A common stock for $35,006,000, including expenses, inconnection with the tender offer.

 

46

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The Company has a stock incentive plan which providesfor the grant of up to 1,500,000 shares of common stock to our officers and keyemployees through stock options and/or awards valued in whole or in part byreference to our common stock, such as restricted stock awards. Under the plan,option grants must have an exercise price of not less than 100% of the fairmarket value of the underlying shares of common stock at the date of the grant.The stock options have eight-year terms and generally vest equally over aperiod of six years from the date of grant. The restricted stock vests anaggregate of twenty percent each year beginning on the second anniversary dateof the grant. During the year ended December 31, 2005, the Company granted65,000 shares of restricted stock to certain officers and key employees at afair-market value of $12.91 per share on the grant date and 10,000 shares wereforfeited. During the year ended December 31, 2004, the Company granted52,000 shares of restricted stock to certain officers and key employees at afair-market value of $11.62 per share on the grant date and no shares wereforfeited. The aggregate market value of the restricted stock at the date ofissuance has been recorded as deferred compensation, a separate component ofstockholders’ equity, and is being amortized on a straight-line basis over thesix-year service period.

 

Optionactivity was as follows: 

 

| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Number of options:               |       |                  |       |   |   |   |   |
| Outstanding at beginning of year |       | 757,090               |       | 862,360 |   | 612,160 |   |
| Granted                          |       | —                |       | — |   | 309,000 |   |
| Exercised                        |       | (711                  | )          | — |   | — |   |
| Expired                          |       | (72,123               | )          | (105,270 | ) | (58,800 | ) |
| Outstanding at end of year       |       | 684,256               |       | 757,090 |   | 862,360 |   |
| Exercisable at end of year       |       | 346,970               |       | 267,535 |   | 254,116 |   |
| Weighted average exercise price: |       |                  |       |   |   |   |   |
| Options granted                  |       | $                     | —     |   | $ | — |   | $ | 9.52 |   |
| Options exercised                |       | $                     | 9.27       |   | $ | — |   | $ | — |   |
| Options outstanding              |       | $                     | 10.32      |   | $ | 10.32 |   | $ | 10.02 |   |
| Options exercisable              |       | $                     | 10.43      |   | $ | 10.45 |   | $ | 9.24 |   |

 

As of December 31, 2005, 2004 and 2003, there were697,252, 680,129 and 626,859 shares, respectively, available under the stockincentive plan for granting options or stock awards.

 

As of December 31, 2005, the range of exercise prices and theweighted average remaining contractual life of outstanding options was$8.98-$13.31 and 3.72 years, respectively.

 

**NOTE9—Related Party Transactions**

 

Duringthe years ended December 31, 2005, 2004 and 2003, Gaming &Entertainment allocated costs of $1,613,000, $1,241,000 and $1,969,000,respectively, to DVD for certain administrative and operating services.Additionally, DVD allocated costs of $113,000 and $116,000 to Gaming &Entertainment for the years ended December 31, 2005 and 2004,respectively. The allocations were based on an analysis of each company’s shareof the costs. In connection with DVD’s 2005, 2004 and 2003 NASCAR eventweekends at Dover International Speedway, Gaming & Entertainmentprovided certain catering services for which DVD was invoiced $938,000,$933,000 and $443,000, respectively. Additionally, DVD invoiced Gaming &Entertainment $113,000, $238,000 and $206,000, respectively, for tickets andother services related to the 2005, 2004 and 2003 Dover events. As of December 31,2005 and 2004, Gaming & Entertainment’s consolidated balance sheetincludes a $15,000 and $2,000 receivable from DVD, respectively, for theaforementioned items. The Company received payment for the $15,000 receivablein the first quarter of 2006. The net costs incurred by each company for theseservices are not necessarily indicative of the costs that would have beenincurred if the companies had been unrelated entities and/or had otherwiseindependently managed these functions; however, management believes that thesecosts are reasonable.

 

Forthe year ended December 31, 2003, DVD reported a net operating loss forfederal income tax purposes. The loss was carried back to 2001, a period priorto the spin-off, which generated an alternative minimum tax creditcarryforward, a portion of which was required to be paid to DVD under the TaxSharing Agreement (see below);

 

47

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

 

TheCompany’s use of DVD’s 5/8-mile harness racing track is pursuant to an easementgranted to the Company by DVD which does not require the payment of any rent.Under the terms of the easement, the Company has 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. The harness track is located on propertyowned by DVD and is on the inside of DVD’s motorsports superspeedway. TheCompany’s indoor grandstands are used by DVD at no charge in connection withits motorsports events. DVD also leases its principal office space from theCompany. Various easements and agreements relative to access, utilities andparking have also been entered into between DVD and the Company relative totheir respective Dover, Delaware facilities.

 

Inconjunction with the spin-off from DVD, the Company and DVD entered intovarious agreements that addressed the allocation of assets and liabilitiesbetween the two companies and that define the companies’ relationship after theseparation. Among these are the Real Property Agreement, the Transition SupportServices Agreement and the Tax Sharing Agreement.

 

TheReal Property Agreement governs certain real property transfers, leases andeasements affecting the Company’s Dover, Delaware facility.

 

TheTransition Support Services Agreement provides for each of the Company and DVDto provide each other with certain administrative and operational services. Theparty receiving the services is required to pay for them within 30 businessdays after receipt of an invoice at rates agreed upon by the Company and DVD.The agreement may be terminated in whole or in part 90 days after therequest of the party receiving the services or 180 days after the request ofthe party providing the services.

 

TheTax Sharing Agreement provides for, among other things, the treatment of incometax matters for periods beginning before and including the date of the spin-offand any taxes resulting from transactions effected in connection with thespin-off. With respect to any period ending on or before the spin-off or anytax period in which the spin-off occurs, DVD:

 

•                     continues to be the sole andexclusive agent for the Company in all matters relating to the income,franchise, property, sales and use tax liabilities of the Company;

 

•                     subject to the Company’sobligation to pay for items relating to its gaming business, bears any costsrelating to tax audits, including tax assessments and any related interest andpenalties and any legal, litigation, accounting or consulting expenses;

 

•                     continues to have the sole andexclusive responsibility for the preparation and filing of consolidated federaland consolidated state income tax returns; and

 

•                     subject to the right and authorityof the Company to direct DVD in the defense or prosecution of the portion of atax contest directly and exclusively related to any Gaming &Entertainment tax adjustment, generally has the powers, in DVD’s solediscretion, to contest or compromise any claim or refund on the Company’sbehalf.

 

HenryB. Tippie, the Chairman of the Company’s Board of Directors, controls in excessof fifty percent of the voting power of the Company. This means that Mr. Tippiehas the ability to determine the outcome of the election of directors at theCompany and to determine the outcome of many significant corporatetransactions, many of which only require the approval of a majority of theCompany’s voting power.

 

Mr. Tippie’svoting control with respect to the Company emanates from his direct andindirect holdings of Common Stock and Class A Common Stock, from hisstatus as executor of the estate of John W. Rollins, the Company’s largeststockholder, and from certain shares as to which he has voting rights pursuantto a voting agreement with another one of our directors. As of December 31,2005, Mr. Tippie has control over approximately 55.9% of the voting powerof the Company.

 

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PatrickJ. Bagley, Kenneth K. Chalmers, Denis McGlynn, Jeffrey W. Rollins, John W.Rollins, Jr., R. Randall Rollins and Henry B. Tippie are all Directors ofthe Company and DVD. Denis McGlynn is the President and Chief Executive Officerof both companies, Klaus M. Belohoubek is the Senior Vice President – GeneralCounsel and Secretary of both companies and Patrick J. Bagley is the SeniorVice President – Finance and Chief Financial Officer of DVD. Mr. Tippiecontrols in excess of fifty percent of the voting power of DVD.

 

**NOTE10—Commitments and Contingencies**

 

In May 1995,Dover Downs, Inc., a subsidiary of the Company, entered into a long-termmanagement agreement with Caesars World Gaming Development Corporation (“Caesars”)to act as our agent to manage our video lottery casino for which Caesars waspaid a management fee based on the operating results of the casino. EffectiveDecember 28, 2004, that management agreement expired and the Company optednot to renew the agreement. These performance-based fees were $4,448,000 and$5,042,000 for the years ended December 31, 2004 and 2003, respectively.

 

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

 

The Company has employment, severance and noncompeteagreements with certain of its officers and directors under which certainchange of control, severance and noncompete payments and benefits might becomepayable in the event of a change in control of the Company, defined to includea tender offer or the closing of a merger or similar corporate transactions. Inthe event of such a change in control of the Company and the subsequenttermination of employment of all employees covered under these agreements, themaximum contingent liability would be approximately $6,029,000.

 

**NOTE 11—QuarterlyResults (unaudited)**

 
| ** **                            | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31 (a)** | ** ** |
|---------------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|-------------------------------|------------|
| **Year Ended December 31, 2005** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **                    | ** ** |
| Revenues                              |       | $                 | 52,091,000 |             | $          | 54,674,000            |       | $                             | 56,072,000 |   | $ | 54,015,000 |   |
| Operating earnings                    |       | $                 | 8,824,000  |             | $          | 9,999,000             |       | $                             | 10,941,000 |   | $ | 10,185,000 |   |
| Net earnings                          |       | $                 | 4,979,000  |             | $          | 5,644,000             |       | $                             | 6,195,000  |   | $ | 9,222,000 |   |
| Net earnings per share-basic          |       | $                 | 0.21       |             | $          | 0.24                  |       | $                             | 0.26       |   | $ | 0.39 |   |
| Net earnings per share-diluted        |       | $                 | 0.21       |             | $          | 0.24                  |       | $                             | 0.26       |   | $ | 0.39 |   |
| ** **                            | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **                    | ** ** |
| **Year Ended December 31, 2004** | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **                    | ** ** |
| Revenues                              |       | $                 | 50,560,000 |             | $          | 50,527,000            |       | $                             | 54,945,000 |   | $ | 51,264,000 |   |
| Operating earnings                    |       | $                 | 7,629,000  |             | $          | 7,686,000             |       | $                             | 8,581,000  |   | $ | 4,466,000 |   |
| Net earnings                          |       | $                 | 4,434,000  |             | $          | 4,458,000             |       | $                             | 4,982,000  |   | $ | 2,507,000 |   |
| Net earnings per share-basic          |       | $                 | 0.17       |             | $          | 0.17                  |       | $                             | 0.19       |   | $ | 0.10 |   |
| Net earnings per share-diluted        |       | $                 | 0.17       |             | $          | 0.17                  |       | $                             | 0.19       |   | $ | 0.10 |   |

 

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(a)   Included in theCompany’s 2005 fourth quarter result is a gain on the sale of a shopping centerof $5,837,000.

 

Includedin the Company’s 2004 fourth quarter results is a net, non-recurring charge of$2,250,000 relating to the change in the Company’s point loyalty program.

 

Per share data amounts for the quarters have each been calculatedseparately. Accordingly, quarterly amounts may not add to the annualamounts because of differences in the average common shares outstanding duringeach period.

 

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